Section 1: General Principles for Compliance 1. Mission Statement
2. Summary of Truth‐in‐Lending Amendment 3. Definitions
4. Overview of Compensation Rules
5. Acceptable Forms of Compensation – Loan Pricing
6. Acceptable Forms of Compensation – Consumer Paid Compensation 7. Third Party Charges
Section 2: Loan Steering
1. Final Rule Prohibition on Steering 2. Presumptions under Steering Rule 3. Safe Harbor
4. Loan Options ‐ Type of Transaction 5. Loan Options Presented
Section 3: ESSEX’s Compensation Agreements
1. Agreement Terms for Compensation paid by ESSEX (Lender Compensation) 2. Agreement Terms for Compensation Paid by Consumers
3. Agreement Terms Prohibiting Steering 4. Disciplinary Action
THE BELOW MISSION STATEMENT AND FOLLOWING ESSEX POLICY IS TO BE COMPLIED WITH ON ALL LOANS SUBMITTED TO ESSEX. ESSEX’S POLICY SHOULD NOT BE USED AS LEGAL ADVICE AND OR LEGAL INTERPRETATION OF THE RULE. YOU MUST CONSULT WITH YOUR LEGAL COUNSEL TO SET YOUR OWN GUIDELINES AS IT RELATES TO ALL ASPECTS OF THE RULE.
S e c t i o n 1: General Principles for Compliance
Mission Statement
Essex Mortgage (“ESSEX” or “Company”), its directors, executives and managers recognize the importance and significance of an articulated compensation policy. The foregoing policy statement is considered to be a core element of the Company's Wholesale operational business plan. As appropriate and in accordance with the Company’s business model, the anti‐steering and compensation procedures described herein shall apply to all residential mortgage transactions and represent the full scope of products, property types, branches, and geographic locations.
The mission statement of the Company compels corporate‐wide awareness that discrimination in consumer credit transactions is prohibited. The Company obligates every employee and every business associate to a commitment to responsible lending. The Company considers its compensation practices as applicable to pre‐application disclosures and all procedures for advertising, soliciting, taking applications, and issuing commitments and lock‐in agreements. Summary of Truth‐in‐Lending Amendment
ESSEX shall comply with the laws established as an amendment of Section 226.36 of Regulation Z (the “Rule”), administered by the Federal Reserve Board. The law was extended to protect mortgage borrowers from unfair, abusive, or deceptive lending practices that can arise from loan originator compensation practices. The rules apply to all persons who originate loans, including mortgage brokers and the companies that employ them, as well as mortgage loan officers employed by depository institutions and other lenders.
The Rule applies to closed‐end loans secured by a consumer’s dwelling and, as of the effective date of the Rule, shall:
Prohibit payments to the loan originator that are based on the loan’s interest rate or other terms. Compensation that is based on a fixed percentage of the loan amount is permitted.
Prohibit a mortgage broker or loan officer from receiving payments directly from a consumer while also receiving compensation from the creditor or another person. Prohibit a mortgage broker or loan officer from “steering” a consumer to a lender offering less
favorable terms in order to increase the broker’s or loan officer’s compensation.
Provide a safe harbor to facilitate compliance with the anti‐steering rule. The safe harbor is met if: The consumer is presented with loan offers for each type of transaction in which the consumer expresses an interest, such as a fixed rate loan, adjustable rate loan or reverse mortgage; and the loan options presented to the consumer include the following
c) The lowest rate for which the consumer qualifies for a loan with no risky features, such as a prepayment penalty, negative amortization, or a balloon payment in the first seven years
Definitions
ESSEX shall comply with the definitions established under rule as follows: Loan Originator
A person who for direct or indirect compensation or gain: a) takes residential mortgage loan application; b) assists consumers in obtaining or applying to obtain residential mortgage loan; or c) offers or negotiates terms of residential mortgage loan (as well as any person who represents to public that it will provide any services).
Creditor
A true creditor that closes a loan in its own name and funds the loan from a bona fide warehouse line of credit, its own money, or deposits held by the creditor is not a loan originator.
Mortgage Broker
A mortgage broker is considered a loan originator. Originators consist of both individuals and entities and an employee of a mortgage broker and/or creditor is a loan originator.
Table‐Funding Lender
The funding lender in a table‐funded transaction is a loan originator. Examples: Not Considered Loan Originators
Persons who are not considered loan originators are persons who:
a) Perform purely administrative or clerical tasks
b) An employee of a manufactured home retailer who does not advise consumers on loan terms
c) Real estate brokers and employees of licensed real estate brokers
d) Person, estate or trust that provides mortgage financing for sale of 3 properties in any 12‐month period provided loan is fully amortizing, where borrower has ability to repay and is either fixed or adjustable only after five years and meets other conditions;
e) Servicer or servicer employee, agent or contractor, including but not limited to those who offer or negotiate terms of residential mortgage loan for purposes of renegotiating, modifying, replacing and subordinating principal of existing mortgage where borrower is behind in payments, in default, or has reasonable likelihood of being in default or falling behind; and
f) Creditor except creditor in a table funded transaction under anti‐steering provisions.
ESSEX shall prohibit mortgage originators from receiving from any person, and prohibits any person from paying to a mortgage originator, directly or indirectly, compensation that varies based on the terms of the loan (other than the amount of the principal). This prohibition applies both to payments by ESSEX to independent mortgage brokers and payments by brokers or lenders to their employee sales force.
ESSEX prohibits a mortgage originator from receiving compensation from any person besides the consumer, even if the originator’s compensation is not based on the loan terms (is a flat fee or a percentage of the loan amount). Originators are prohibited from receiving compensation from any person, other than the consumer, or a person who does not know and has no reason to know that a consumer has directly compensated or will directly compensate a mortgage originator.
ESSEX shall consider compensation to include salaries, commissions, or any financial or similar incentive provided to a loan originator, such as merchandise and prizes. Compensation may be in the form of fees, such as a processing fee, paid to a loan originator. ESSEX shall draft compensation or Fee agreements relating to the amount of compensation ESSEX will pay the originator on all loans closed by ESSEX and originated by said originator (lender compensation). The agreements may be revised in a manner and in specified time periods as provided in the “Periodic Review” section of said agreement. The final rule prohibits ESSEX from entering into compensation agreements with originators that are based on the profits of a particular branch or operations center unless the profit is calculated in whole or in part based on an aggregate value of loans originated during a particular period.
Acceptable Forms of Compensation – Loan Pricing
ESSEX shall utilize the following permissible forms of compensation in structuring agreements with its loan originators:
The loan originator’s overall loan volume (dollar amount or units); or,
Compensation based on a fixed percentage of the amount of credit extended (which may be subject to a minimum or a maximum cap) in increments of .25 or 25 basis points. The available increment amounts may change from time to time and at ESSEX’s sole discretion; or,
in the form of incentive payments based on number of loans closed within a specified period of time; or,
any other agreed‐to amount subject to compliance with the Rule. Acceptable Forms of Compensation – Consumer Paid Compensation
ESSEX shall comply with the rule whereby a loan originator must choose between being paid by the consumer and being paid by ESSEX. If the loan originator receives compensation directly from a consumer, the loan originator may not receive compensation from ESSEX in connection with the transaction. This shall include payments from any person to the loan originator where the person knows (or has reason to know) that the consumer is paying the loan originator.
Originators may receive an origination fee or charge other than from the consumer if the originator does not receive any compensation directly from the consumer and the consumer does not make an
than bona fide third party charges not retained by the mortgage originator). ESSEX may accept the following forms of compensation paid by a consumer:
A flat fee, paid by the consumer;
A fee that varies based on the principal loan amount, paid by the consumer; or A fee, paid by the consumer, based on any factor other than the loan terms or loan
type.
ESSEX may permit payment of an origination fee or charge from someone other than the consumer, so long as the fee does not vary based on the terms of the loan (other than the amount of the principal), the originator receives no compensation from the consumer, and the consumer otherwise does not make an upfront payment for origination fees.
If the seller of the property pays the originator, the payment is deemed a payment by the consumer for purposes of the restriction against dual compensation under the Rule.
Third Party Charges
Originators are prohibited from paying some or all third party fees for a consumer (or crediting the consumer out of pocket) if the originator is being compensated by ESSEX.
ESSEX will allow originators to pass along bona fide third party charges that are not retained by ESSEX, the mortgage originator, or an affiliate of ESSEX or originator. Originators may receive an origination fee or charge other than from the consumer if the originator does not receive any compensation directly from the consumer; and the consumer does not make an upfront payment of discount points, origination points, or fees, however denominated (other than bona fide third party charges not retained by the mortgage originator).
Section 2: Loan Steering
Final Rule Prohibition on Steering
The originator shall comply with the Rule’s Prohibition on Steering Incentives which prohibit mortgage originators from steering. The rule defines steering as directing, advising, counseling, or otherwise influencing a consumer to accept a particular transaction. Originators may not steer a consumer to a loan based on the fact that the loan originator will be paid more on that loan (as opposed to other available loans), unless the loan is in the consumer’s interest.
ESSEX prohibits mortgage originators from:
1. Steering any consumer to a loan that (a) consumer lacks reasonable ability to repay, or (b) has predatory characteristics or effects such as equity stripping, excessive fees or abusive terms
2. Steering any consumer from a “qualified mortgage” to “not qualified” mortgage when consumer qualifies for ”qualified mortgage”
creditworthiness but of different race, ethnicity, gender, or age;
4. Mischaracterizing credit history of consumer or residential loans available to consumer
5. Mischaracterizing or inducing mischaracterization of appraised value of property securing extension of credit
6. If unable to suggest, offer or recommend to consumer loan that is not more expensive than loan for which consumer qualifies, discouraging consumer from seeking mortgage from another originator
Presumptions under the Steering Rule
ESSEX shall adhere to the presumptions that no steering has occurred if, after presenting the consumer with a significant number of available loan options:
1. The originator directs the consumer to consummate a transaction that results in the least amount of creditor paid compensation.
2. The originator directs the consumer to consummate a transaction that results in the highest amount of creditor paid compensation, but where the terms and conditions for all of the loan options for which the consumer qualifies are the same.
The above assumptions do not limit compensation to the originator based on the principal amount of the loan, nor do they restrict a person, other than the consumer, from receiving or paying origination fees or charges if: (a) the originator does not receive any compensation directly from the consumer; and (b) the consumer does not pay discount points, origination points or fees however denominated (other than third‐party charges not retained by originator.
Safe Harbor
The originator shall determine and attest if the transaction qualifies under the Safe Harbor exception established under the Fed final rule. The Safe Harbor exception is met if:
1. The consumer is presented with loan offers for each type of transaction in which the consumer expresses an interest (that is, a fixed rate loan, adjustable rate loan, or a reverse mortgage), and
2. The loan options presented to the consumer include the following:
a) The lowest interest rate for which the consumer qualifies, and
b) The lowest points and origination fees, and
c) The lowest rate for which the consumer qualifies for a loan with no risky features, such as a prepayment penalty, negative amortization, or a balloon payment in the first seven years.
Loan Options ‐ Type of Transaction
A transaction does not violate the Final Rule if the consumer is presented with loan options that meet the conditions for each type of transaction in which the consumer has expressed an interest. The term “type of transaction” refers to whether:
The loan is a fixed‐rate loan
The loan is an Adjustable Rate Mortgage (“ARM”) loan The loan is a reverse mortgage
Loan Options Presented
Compliance with the final rule is met if the loan originator presents the loan options required by that paragraph and all of the following conditions are met:
1. The loan originator must obtain loan options from a significant number of the creditors with which the originator regularly does business and, for each type of transaction in which the consumer expressed an interest, must present the consumer with loan options that include:
a. The loan with the lowest interest rate
b. The loan with the lowest interest rate without negative amortization, a prepayment penalty, interest‐only payments, a balloon payment in the first 7 years of the life of the loan, a demand feature, shared equity, or shared appreciation; or, in the case of a reverse mortgage, a loan without a prepayment penalty, or shared equity or shared appreciation; and
c. The loan with the lowest total dollar amount for origination points or fees and discount points.
2. The loan originator must have a good faith belief that the options presented to the consumer are loans for which the consumer likely qualifies.
3. For each type of transaction, if the originator presents to the consumer more than three loans, the originator must highlight the loans that satisfy the criteria specified by the final rule.
4. The loan originator can present fewer than three loans and comply with the final rule if the loan(s) presented to the consumer satisfy the criteria if the provisions of the final rule are otherwise met
Section 3: ESSEX’s Compensation Agreements
Agreement Terms for Compensation paid by ESSEX (Lender Compensation)
The Addendum to Wholesale Broker Agreement, as may be altered or amended from time to time, and the Exhibits attached thereto, provide the compensation or fee agreement between ESSEX and its originators that comply with the final rule. All compensation or fee agreements and related policies, as outlined below, are subject to review and modification at ESSEX’s sole discretion:
1. Specific terms of originators compensation paid by ESSEX shall be set by Exhibit A (“Fee Agreement”) to the Addendum, and may be altered or amended from time to time as provided therein, in the form of Exhibit B (“Broker Compensation Change Request”).
2. The Addendum and each Broker Compensation Change Request submitted by Broker must be signed by an authorized representative of the originator prior to the expiration of any existing compensation or fee agreement.
3. If the executed Addendum is not received by the time and date designated by ESSEX, Broker shall receive a Pre‐set Percent Compensation amount of 2.00% of the loan amount, or 200 basis points (“BPS”).
4. The Fee Agreement shall be valid until the effective date of a complete, properly submitted, and accepted Broker Compensation Change Request. Each accepted Broker Compensation Change Request shall be valid until the effective date of any subsequently accepted Broker Compensation Change Request.
5. All loan applications dated on or after the effective date of the Fee Agreement or any subsequent Broker Compensation Change Request will be subject to the terms and Pre‐set Percent Compensation amount provided in the Fee Agreement or Broker Compensation Change Request in effect at that time.
6. Compensation is based on established upfront terms negotiated between the originator and ESSEX.
7. The compensation will be based on a set percentage of the loan amount and cannot vary from one transaction to another within the time frame of the Agreement.
8. The consumer may pay discount points to reduce the interest rate.
9. The consumer may pay bona fide third party costs and Gateway fees by paying cash at closing, or by financing them through the loan principal or interest rate.
10. If lender paid compensation is chosen by Broker, the consumer cannot pay any compensation to the loan originator.
concessions or pay for tolerance violations.
Agreement Terms for Compensation Paid by Consumers
The originator must adhere to the final rule as outlined below if any of the originators compensation comes from the Consumer:
1. The loan officer will negotiate compensation directly with the consumer
2. The consumer may pay bona fide third party costs and ESSEX fees by paying cash at closing, or by financing them through the loan principal or interest rate
3. Premium pricing cannot be used to compensate the loan originator but may be used to pay allowable third party costs.
4. The originator may agree to reduce their compensation to pay for third party costs.
5. The consumer may pay discount points to reduce the interest rate
6. The consumer must pay compensation to the loan officer from their own funds or from the principal proceeds of the new loan
7. No other person (other than the borrower) may provide any compensation to a loan originator, directly or indirectly, in connection with the loan transaction
Agreement Terms Prohibiting Steering
Originator shall agree to comply with ESSEX’s principles for anti‐steering and exercise all steps and procedures required to support any safe harbor exceptions to the final rule.