1. New Mexico Housing Summit 2014 Trends In The Mortgage Industry That Will Profoundly Affect How Our Business is Done in 2014 Loan Originator Compensation, HMDA, Fair Lending Presented By: Tammy Butler, Master CMB LSS Black Belt Director of Fair lending and Compliance, Optimal Blue

2. THIS PRESENTATION AND THE WORDS THAT ARE EXPRESSED VERBALLY, ARE NOT TO BE CONSTRUED AS A LEGAL OPINION. NOR IS ANY LEGAL ADVICE OFFERED. ALL FINAL POLICY DECISIONS AND INTERPRETATIONS SHOULD BE REVIEWED AND APPROVED BY YOUR LEGAL COUNSEL. Disclaimer

3. CFPB

4. CFPB Mission The CFPB is consumer based. They care little about: How your recruiting is affected. How your originator’s income is affected. Or, your profit margins. What they do care about is the consumer and the consumer experience. Anything that harms the consumer (in their opinion) will harm you. Think of them as the consumer’s Momma! You do not mess with Momma’s children!

5. The Home Mortgage Disclosure Act (HMDA) was enacted by Congress in 1975 and was implemented by the Federal Reserve Board's Regulation C. On July 21, 2011, the rule-writing authority of Regulation C was transferred to the Consumer Financial Protection Bureau (CFPB). Regulation C, requires lending institutions to report public loan data. HMDA

6. HMDA-Before & After Data Collected Now Loan Number Date appl. Received Loan Type Property Type Loan Purpose Occupancy Loan Amount Pre-Approval Action Taken Type Action Taken Date MSA/MD State Code County Code Census Tract Applicant & Co-Applicant Ethnicity Applicant & Co-Applicant Race Applicant & Co-Applicant Sex Gross Annual Income Type of Purchaser Denial Reason HOEPA Status Lien Status Rate Spread Amortization Type Amortization Term Branch Code LO NMLS # Proposed Data Virtually every data field contained on the application, credit report and appraisal. With one added personal field……Religion. And another Latitude and Longitude.

7. National Mortgage Database Project AKA-FHFA & CFPB want all of the data on a file and more! This is a joint project and will be used to analyze housing issues…….but

8. “The FHFA and the CFPB are not going to keep the information they collect to themselves. The information will be provided to academic researchers subject to carefully designed parameters, but data leakage or unauthorized reverse engineering are likely to occur at some point. Moreover, the Federal Register notice identifies a long list of other outside parties that may get access to records in the database. Some of these make sense, but others such as regulated entities and "contract personnel, grantees, volunteers, interns, and others performing or working on a contract, service, grant, cooperative agreement, or project for FHFA,"

9. Loan Originator Compensation

10. Three Important Terms

11. LO Compensation-Highlights Now is not the time for creative compensation plans. LO’s are now liable just like the mortgage company. If the CFPB doesn’t like it, you will have to defend it as a company or individually! Branch manager’s override on a branch is limited to 10% of their total income for the year. It doesn’t matter what position you hold in a mortgage company. If you do more than 10 loans per year, you are a loan originator and subject to the restrictions on LO Comp. If the company offers trips, merchandise and other incentives, they fall into the 10% bucket mentioned above. It doesn’t matter how they label it, if it is of value it goes into your 10% bucket!

12. If you are offered ownership in a company, it must be a true ownership and your compensation cannot exceed the percentage of your ownership in the company. So, if the company made $1,000,000 and you own 1% then you can only receive up to $10,000 and that will not be included in the 10%. If you are offered award of stock, stock options or equity interest it is generally viewed as compensation and that will go into the 10% bucket. If there is any way that your compensation may be construed as a term of the transaction, it may be ruled as unacceptable. When this occurs all parties get fines and possible restitution. Salaries are okay and deferred income programs such as 401K’s are okay per the limitations in the guidelines. Pooled loan compensation programs are not okay. Point banks are not okay. LO Compensation cont.

13. Beware of compensation packages that offer you different compensation based on product or program type. This may be construed as “steering”. An LO can receive a bonus on performance criteria that is not tied to a term of the transaction. However, remember that goes into the 10% bucket too. Income for selling other products from an affiliate of the creditor is part of the 10% bucket. However, if the product is a non-loan origination product you can receive commission. If you are a Loan Originator Organization (broker, not a creditor) you may not receive compensation from the consumer and split it with the actual loan originator because this is viewed as a term of the transaction. If you are a broker and the wholesaler tells you that you can switch to borrower paid comp and reduce your comp., provided it doesn’t exceed the % of the lender paid comp, do not do it. Not only will this hurt you in a fair lending exam (and the wholesaler too), but it is considered a term of transaction. LO Compensation cont.

14. FAIR LENDING LAWS Tammy Butler, Master CMB Optimal Blue LLC. All Rights Reserved. 14 Regulators Are Combining Their Efforts!

15. Tammy Butler, Master CMB Optimal Blue LLC. All Rights Reserved. 15 The Laws

16. Mortgage lenders are severely under-equipped to handle these changes An ideology shift Culture Change A Business Model Shift Slimmer Profit Margins which will equate to Higher Efficiency if you are to survive and thrive. Monitoring & Controls Diversity in Lending

17. To Do This: You will need to add professional compliance managers, counsel and auditing (in house or outsourced) Put systems in place to monitor everything you do and provide statistical results. Train your staff more than ever before. Self-Audit Truly make the Customer King and Prove that you have. (complaint analysis, remediation) Develop new recruiting techniques and new ways to pay people. Employ Fair Lending Techniques that you never considered before. (MSA Diversity) Monitor Pricing Exceptions Improve Data Flow and Integrity Create policies, procedures and workflow diagrams that describe and monitor your work from start to finish (no more boiler plates)

19. Where Does Fair Lending Start? Tammy Butler, Master CMB Optimal Blue LLC. All Rights Reserved. 19 First Contact With Prospective Client! Marketing Outreach Your Material -Audience Appropriate? Represented Neutrally? Unintentionally or Intentionally Excluding on Prohibited Basis? Phone Call Not Returning Phone Calls Screening Calls Based on Voice Mail Email Not Returning Email Visit Stereotyping or Generalizing Not Offering All Program Options

20. WHY? Tammy Butler, Master CMB Optimal Blue LLC. All Rights Reserved. 20 35+ Settlements $1 Billion + in Fines & Penalties Since 2010 and they are just getting started!

21. Tammy Butler, Master CMB Optimal Blue LLC. All Rights Reserved. 21 If the CFPB Finds Problems, Very Broad Remedies: Rescission or reformation of contracts Refund of moneys Return of real property Restitution Disgorgement of profits Compensation for unjust enrichment Damages Public notification of violations (with costs to be borne by the violator) Limits on activities or functions, including suspension & termination Civil money penalties Up to $5,000/day (any violation) Up to $25,000/day (reckless) Up to $1 million/day (knowing)

22. Where HMDA & Fair Lending Software Fail Tammy Butler, Master CMB Optimal Blue LLC. All Rights Reserved. 22 HMDA Data and Fair Lending Software Misses: Pricing/Rate Trace (Memorialize each step for each loan) Pricing/Rate Start to LO Pricing Adjustments (Each loan level price adjustment defined) Pricing/Rate Final Results to consumer Re-Lock Audit Trail and Notation Trace as to Reason for Re-lock. Credits (Memorialize fees and credits and show the net affect) Seller Credits Lender Fees Grant/Subsidy credits Pricing Concession/Exception (Resolve with notation as to why) APR More definition on Property type (i.e. Condo, Coop, etc.) Income Type (Certain types of income require specialty investors or guidelines)

23. Developing Policy Tammy Butler, Master CMB Optimal Blue LLC. All Rights Reserved. 23 Is policy well thought-out and workflow diagrammed? Is policy applied consistently? How do you monitor policy? What happens when an employee doesn’t follow company policy? No program should roll without compliance overview as well. Look at the CFPB exam manual! Follow it to the “T”. 3 Rules for Every Process! Policy & Procedure Training Monitoring Policy needs to be thorough and very tight with red flags for deviation!

24. Fair Lending Trigger Points! 1. Pricing Disparity: Similar borrowers receive different rates/closing costs. 2. Pricing Exceptions: Given to some but not others. 3. Underwriting Disparity: Conditions or denials not consistent. 4. Underwriting Exceptions: Given to some but not others similarly situated. 5. Marketing Disparity & UDAAP Violations 6. Redlining 7. Steering 8. Disparate Impact 9. Data Integrity 10. Client Interaction & Client Parity Tammy Butler, Master CMB Optimal Blue LLC. All Rights Reserved. 24

25. Is This Your Current Marketing/SM Compliance Plan? Tammy Butler, Master CMB Optimal Blue LLC. All Rights Reserved. 25 The Problem With That Plan is That CFPB Sees It All… BEFORE They Even Contact You! The Problem With That Plan is That CFPB Sees It All… BEFORE They Even Contact You!

26. Marketing & UDAAP-The Unknown! Tammy Butler, Master CMB Optimal Blue LLC. All Rights Reserved. 26 Websites Facebook, Twitter, LinkedIn, et al Print Advertising and Marketing Lead Acquisition What is Your Compliance Management System? What is Your Policy? How is it Monitored? FTC Guidelines: http://ftc.gov/os/fedreg/2011/07/110719mortgagead- finalrule.pdfhttp://ftc.gov/os/fedreg/2011/07/110719mortgagead- finalrule.pdf

27. Pump The Brakes! Tammy Butler, Master CMB Optimal Blue LLC. All Rights Reserved. 27 ProductionStaff Compliance StaffProduction Old Way New Way Embrace Change!

28. Thank You! Tammy Butler, Master CMB LSS Black Belt Director of Fair Lending & Compliance tbutler@optimalblue.com 847-276-0399 Join in the Discussion on Linked In @ Group “Optimal Blue Fair Lending & Compliance or www.optimalbluefairlending.comwww.optimalbluefairlending.com