I know that sounds outrageous but it could easily happen. Under the new Loan Originator (LO) Compensation rules, your state auditor and the Consumer Financial Protection Bureau (CFPB) will be looking to see if you have complied. The penalties are huge. The regulator could require you to give back three times the compensation or gain on the loan EVEN IF THERE ARE NO DAMAGES!
You are on the hook for three years so if you, as a broker, took in total fees of $300,000 or so and did things incorrectly, your liability could be a million dollars. You will have both the CFPB (if it ever gets off the ground) and State Attorneys General looking to enforce violations of loan originator compensation and other requirements.
If you are a lender the penalties are even worse. Lenders could have to refund all of the finance charges they have collected. Yes, all of the interest on the loan and any upfront fees. This is no trivial matter. Just because you are not the lender doesn’t mean that liability may not flow back to brokers. Almost every wholesale contract requires the broker to reimburse the lender for any losses for violations of law plus legal fees.
There are many facets where you can be in violation. Any form of dual compensation, compensation that is inconsistent with your agreement or irregular compensation can cause you to run afoul of the law. These are complicated issues that are being taken lightly but could turn into your worst nightmare. You should ask yourself whether you could fully document why you chose to give the borrower the loan product you did and why the loan was sent to a particular lender. Are your compensation agreements consistent?
Your regulators are gearing up to enforce this rule with lots of enthusiasm. It seems they like to find violations that carry big penalties. They have already developed a set of guides that define what they will be looking for. You can view it by clicking here.
It is a scary and complex document.
I would strongly advise you to attend in-person Federal law courses where you can ask questions such as the one at NAMB/WEST or your local NAMB chapter.
John Councilman, CMC, CRMS is president of AMC Mortgage Corporation and FHA Committee Chair and Treasurer of NAMB, The Association of Mortgage Professionals. John was named 2009 National Mortgage Broker of the Year and 1998 Maryland Mortgage Broker of the Year.