ANALYSIS & ADVICE: How the New Federal Law Severly Restricting Payments of Referring Brokers Affects YOU

New federal law requires the registration of any person acting in the capacity of an MLO broker when arranging a loan for personal, family, or household purposes secured by a one-to-four-unit residential dwelling; and also severely restricts the payments of compensation, including commissions.

In a simple explanation, the law allows compensation to be paid to only one MLO in any federally related residential mortgage loan transaction.

Example: In the old world, before NMLS and additional recent amendments to applicable federal law, if a real estate broker got a phone call from a fellow broker to refer a loan transaction the brokers could agree to divide the commission; providing the requirements of RESPA were met that did not allow fee splitting except for services actually performed (as described in a written division of labor agreement). Of course, the fee split had to be disclosed to the borrower in the MLDS and in the HUD -1 or HUD-1a.

In today’s world, this practice is prohibited. Since compensation may only be paid to one MLO in a federally related residential mortgage loan transaction, the fee cannot be split.

Questions: Does the law only apply to MLOs acting as loan originators? Are Lenders/creditors (Lenders) subject to this limitation? Can a Lender impose an origination fee, compensate their W-2 employees on a salary basis, and in the same transaction pay an MLO broker?

The MLO acting as a broker for the borrower may be compensated by the Lender or by the borrower but not by both.

A Lender such as a bank, savings and loan, or consumer finance lender can pay compensation to a MLO broker, or the borrower can separately compensate the MLO broker, and in that same transaction the Lender can also charge a fee for its services. These supervised, licensed or chartered Lenders may impose an origination fee, compensate their W-2 employees on a salary basis, AND pay a fee to a MLO broker!

Questions: If one MLO broker is representing the Lender and another is separately representing the borrower, can each be compensated in the same federally related residential mortgage loan transaction? Does it make any difference if one fee is paid by the Private Lender and the other fee is paid by the Borrower?

No. Unfortunately the law does not work this way. The law allowing the Lender to charge a fee applies only to supervised, licensed, or chartered lenders, and no provision was made for private investors acting as lenders funding loans through a MLO broker. So, the rule limits the MLO broker to receiving only one fee in the transaction regardless of who pays it.

Questions: What if I set up an LLC that is licensed as CFL and then use a private placement memorandum to issue membership interests in the LLC to private investors?

This business plan has been frequently used by the industry in the past 15 to 20 years, whether in the form of a PPM issued pursuant to an exemption or through qualification and “registration” under the applicable securities law. We believe the regulators may intervene on future securities offerings coupling the CFL license with private investors. The coupling of a CFL license with private investors (with rare exception) is a circumvention of the Finance Lender Law that may result in an administrative action, and the burden of proof is on the licensee and issuer of the securities when applying the necessary definitions and exemptions. (Corporations Code Section 25163 and Financial Code Section 22053.)

If the LLC licensed as CFL were funded by a small static group, say seven to ten private investors, who were investing in the operations of the CFL, then it is possible for the licensee and issuer of the securities to carry the burden of proof and to proceed with this business plan with the advice of knowledgeable legal counsel and consultants. Unfortunately, some bad advice is being given, misleading brokers to think they can use the device of relying on the CFL law to fund individual loans with a large number of private investors. This operation is unlawful; take a look at California Financial Code Sections 22340 and 22600, which limits the persons to which a CFL can sell its loans.

So you cannot use a CFL as a device to originate loans, sell the loans to private investors and try to collect two fees in the transaction, one for the MLO broker and one for the “supervised” Lender.

Query: Can I license the managing member of the LLC as an REB and then obtain funds from a large number of private investors to make loans?

Yes, depending upon the fact situation. You would need the advice of knowledgeable legal counsel and consultants. However, two MLOs would be involved in the same transaction, one MLO broker representing the private investors as the managing member of the LLC and the second MLO broker representing the borrower.

Without amendments to applicable federal law, this would not solve the limitations imposed upon compensating more than one MLO broker in a federally related residential mortgage loan transaction.

Question: I have heard that if my company is paid a commission, then I cannot pay part of that commission to a licensed salesperson or broker associate in a residential mortgage loan transaction even when the associate licensees are also registered as MLOs. Is this true?

Yes. Without amendments to applicable federal law, you may only compensate your licensed salesperson and broker associates as W-2 employees and bonuses may not be paid on a per transaction or loan product basis.

Contact us if you need more information regarding this issue: info@the3wisemen.co

Tags: , , ,

Leave a Reply

Your email address will not be published. Required fields are marked *

*