Chapter 26 — Exercises

Thirty-four items, graduated from recall to judgment. Items marked † have worked solutions in the answers appendix. Everything here is illustrative; compensation levels vary enormously and nothing in these exercises is an industry benchmark or legal advice.

Unless a problem says otherwise, use the Linden Street file: loan amount \$365,750.00, conventional 30-year fixed, rate 6.625% with a 0.500 discount point of \$1,828.75, origination charge \$3,657.50, closed day 51.

A. Recall and definition

26.1 State, in one sentence each, what the yield spread premium was and what replaced it.

26.2 † Write the two prongs of the proxy test from memory, in the order the rule states them, and say what happens when only one prong is satisfied.

26.3 What is a basis point, expressed as a decimal? How many basis points are in one percent?

26.4 Name the one basis for compensation that Regulation Z expressly permits and describe the structure the rule contemplates for it, including the two optional limits.

26.5 State the dual compensation prohibition in one sentence, then state its exception in one sentence.

26.6 † Regulation Z's definition of "loan originator" and the S.A.F.E. Act's definition of "mortgage loan originator" are not the same. Give three specific differences, and give one concrete example of a person covered by one and not the other.

26.7 List the three loan options the anti-steering safe harbor requires, for each type of transaction in which the consumer expressed an interest.

26.8 Define recoverable draw and non-recoverable draw in one sentence each.

26.9 What is the difference between a marginal tier and a retroactive tier?

26.10 In your own words: why is a discount point paid by the borrower not branch revenue?

B. Compensation computations

26.11 † Compute one basis point of the Linden Street loan to three decimal places. Then compute the compensation at 95, 110, and 137.5 basis points, rounding each to the cent as payroll would.

26.12 An originator is paid 125 basis points with a \$1,500.00 minimum** and a **\$9,000.00 maximum per closed loan. Compute the compensation on each of the following, and identify which files hit a limit:

26.13 † The Harlow Street file has a base loan of \$207,475.00 and a total loan of **\$211,105.81** after a financed upfront mortgage insurance premium of \$3,630.81. Compute compensation at 125 basis points on each basis and state the difference. Then answer: why does the rule permit paying on the total loan amount, and what incentive does that create?

26.14 An originator on a 50/50 split of 150 basis points closes four files in a month: \$365,750, \$218,400, \$512,900, and \$164,250. Compute the originator's compensation on each file and the month's total. Round each file to the cent before summing.

26.15 † Using the tiered plan from §26.7 — 100 basis points up to \$1,000,000, 115 basis points from \$1,000,000.01 to \$2,000,000, and 130 basis points above \$2,000,000 — compute a month with \$2,750,000 of funded volume under both a marginal structure and a retroactive structure. State the difference in dollars and the effective average rate in basis points under each.

26.16 An originator has funded \$1,940,000 on the twenty-eighth of the month under the retroactive tier in 26.15. A \$365,750 file is clear to close. Compute the originator's total month compensation if the file funds this month, and if it funds on the first of next month, assuming next month ends at \$1,200,000 of volume including this file. State the difference and then write two sentences on what that difference does to a person's judgment.

26.17 † Build the twelve-month recoverable-draw table for an originator on a \$5,000 monthly draw earning \$2,285.94 per file, closing one file a month for four months, two in months five and six, and three a month thereafter. Give: the peak cumulative amount owed, the month it reaches zero, total earned, total draw paid, and the amount paid above the draw across the year.

26.18 Using your table from 26.17, compute what the same originator would have been paid if the draw were non-recoverable. State the difference and prove it equals the peak cumulative balance.

26.19 † An originator wants \$185,000 of gross compensation. Their market's average loan is \$298,000 and their plan pays 135 basis points. Compute the required closings per year and per month. Then compute the required closings if the average loan falls to \$251,000 in a downturn while the target stays the same.

26.20 An originator's measured pull-through from application to closing is 64%, and their measured conversion from qualified conversation to application is 31%. They need 38 closings a year. Compute required applications and required conversations, annually and monthly. Round the final figures up to whole conversations and explain why rounding up is the honest direction.

C. Proxy analysis — classification

For each factor in 26.21 and 26.22, state (i) whether prong one is satisfied and why, (ii) whether prong two is satisfied and why, and (iii) your conclusion: expressly permitted, permitted, prohibited proxy, prohibited as a term, or contested. One sentence per part.

26.21 † Classify all eight:

• a. The loan amount
• b. Whether the loan carries a prepayment penalty
• c. The representative credit score
• d. The number of loans the originator closed in the preceding calendar quarter
• e. Whether the loan is held in the creditor's portfolio or sold to an investor
• f. The state in which the subject property is located
• g. Whether the borrower is an existing customer of the creditor
• h. Whether the loan is a fixed-rate or an adjustable-rate mortgage

26.22 Classify all six:

• a. The hourly rate for hours the originator actually worked
• b. The average interest rate on the originator's production for the quarter
• c. The percentage of the originator's applications that closed
• d. Whether the loan is a purchase or a cash-out refinance
• e. The accuracy and completeness of the files the originator submitted
• f. Whether the borrower waived the escrow account

26.23 † A comp plan pays 10 additional basis points on files where the loan-to-value ratio is 80% or below. Run the proxy test. Then, separately, argue the strongest case you can on each side of prong two, and say what you would do if you were the originator being offered this plan.

26.24 A comp plan pays a flat \$500 bonus per file on any loan that closes within 30 days of application. Run the proxy test. Then identify a risk this plan creates that the proxy test does not capture at all.

D. Read the document and find the problem

26.25 † A compensation plan addendum contains the following clauses. Identify every problem, and for each one state whether it is a compensation-rule problem, a different legal problem, or simply a bad deal that is lawful.

COMPENSATION PLAN ADDENDUM (excerpt)              [constructed teaching example]
  1. Originator shall be paid 130 basis points of the total loan amount on
     conventional loans and 155 basis points on government loans.
  2. Compensation is increased by 15 basis points on any loan where the
     representative credit score exceeds 760.
  3. Originator may, with branch manager approval, reduce compensation on an
     individual transaction to resolve a pricing dispute with a borrower.
  4. Compensation is reduced by 25 basis points on any loan referred by the
     company's internet lead source.
  5. Draw of $6,000 per month, recoverable, balance due on separation.
  6. Company may amend this plan at any time, including as to loans already
     locked.

26.26 A branch manager sends this email: "Reminder — we need \$400K more to hit the tier by Friday. If you've got anything sitting at CTC, push the closer today. Also, if a borrower is fussing about rate, remember we'd rather you hold the price than lose the deal." Identify the two distinct risks in that message and write the reply you would actually send.

26.27 † An offer letter says "150 bps, no draw, you cover your own processing." A competing offer says "90 bps, dedicated processor, all leads provided, full benefits." Build the comparison a reasonable person would build. State the assumptions you must make explicit, and identify the single assumption that most changes the answer.

E. Build the branch P&L

26.28 † Rebuild the §26.9 branch P&L for a \$540,000 loan (the Cypress Court amount), holding every rate and every fixed-dollar cost line the same: gross revenue 250 basis points, a 25-basis-point lock extension, loan officer compensation 125 basis points, and \$4,920.00 of non-compensation cost. State the branch result, and compare it to the \$492,000.00 break-even the chapter derived.

26.29 Using the same model, find the compensation rate in basis points at which the Linden Street file breaks even, assuming no lock extension. Show the algebra.

26.30 † A branch closes 24 files a month with an average loan of \$310,000. Its monthly fixed cost pool is \$61,500.00 and its variable cost is \$2,870.00 per file. Loan officers are paid 120 basis points and the branch is credited 235 basis points of net revenue per file. Compute the branch's monthly profit or loss and its break-even file count at that average loan size. Then state the two levers that would most efficiently close a gap, if there is one.

26.31 The chapter shows that a quarter point of compensation and a fifteen-day lock extension were the same money on the Linden Street file — \$914.38 versus \$914.375. Prove that this is not a coincidence of this file by showing the general relationship, and then state the one thing that would break it.

F. Judgment, ethics, and communication

26.32 Write the borrower-facing script you would use when a first-time buyer asks how much you make on their loan. Fewer than 120 words. It must be true under both a lender-paid and a borrower-paid structure, and it must end by moving the conversation somewhere useful.

26.33 † An originator realizes on the day of closing that they quoted a fee incorrectly and the borrower is \$620 short. The branch manager is unreachable. The originator says, "Just take it out of my commission." Write a memo of no more than 250 words to the originator explaining what is wrong with that, what the narrow exception in the rule actually covers, and what to do in the next thirty minutes. Do not give legal advice; tell them who to ask.

26.34 Loan File extension. Using the Linden Street file, write a one-page compensation summary for your own records containing: the three compensation structures from the chapter's checkpoint and what you earned under each; the branch P&L result; the break-even loan amount; the dollar cost of the six-day overrun; and one sentence stating what your compensation would have been if the borrowers had chosen 6.750% at par instead of 6.625% with a half point, and why.