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Can Mortgage Loan Originators Be Paid By 1099 and W2
If a NMLS licensed loan officer works for a mortgage broker and is licensed in 30 states, can the loan officer be paid their commissions by 1099 on states that he is licensed in that allow 1099 compensation and be paid W2 on states that do not allow 1099 compensation>
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This discussion was modified 6 months, 3 weeks ago by
Gustan.
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This discussion was modified 6 months, 3 weeks ago by
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9 Replies
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Can Mortgage Loan Originators Be Paid By 1099 and W2 depending on the state?
Mortgage Loan Originators (MLOs) or loan officers are generally classified as W-2 employees across the United States, largely due to federal guidelines and the nature of their job duties. The classification as W-2 employees rather than 1099 independent contractors is primarily influenced by federal regulations, specifically the Fair Labor Standards Act (FLSA) and the rules outlined by the Internal Revenue Service (IRS).
Federal Regulations and Guidelines:
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FLSA and IRS Guidelines: The classification of workers under these guidelines is based on factors that consider the degree of control the employer has over the worker and the independence of the worker. Given that employers usually set MLOs’ hours, provide tools, and control how and when their work is done, MLOs are typically classified as employees rather than independent contractors.
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Consumer Financial Protection Bureau (CFPB) and Dodd-Frank Act: Regulations under the Dodd-Frank Act, enforced by the CFPB, provide specific rules about how MLOs can be compensated. These rules are designed to prevent conflicts of interest and biased financial advice based on the way loan officers are paid (e.g., they cannot be paid more for steering clients into higher-interest loans). These regulations support the employee model over the independent contractor model because they require detailed oversight and control of compensation methods.
State Specifics: While states do enforce these federal guidelines, there is no state where the law explicitly allows or disallows MLOs to be paid as 1099 independent contractors based solely on state law. However, some MLOs who own their brokerage might be classified differently if they truly operate their business independently from a larger lending institution.
Considerations for MLOs as Independent Contractors: It’s rare for an MLO to be properly classified as a 1099 contractor due to the nature of the work and regulatory environment. If an MLO were working as a 1099 independent contractor, it would require a high degree of independence that is uncommon in the mortgage industry, where compliance with strict lending regulations and oversight is required.
Advice for Employers and MLOs: For any lending institution or individual unsure about the appropriate classification, it’s advisable to consult with a labor attorney or a specialist in employment law to ensure compliance with all applicable laws and regulations. Misclassification can lead to significant penalties, including back taxes, fines, and damages for improperly classified workers.
In summary, while theoretically, it might be possible under very specific and controlled circumstances for an MLO to be classified as a 1099 independent contractor, practically and legally, they are almost always W-2 employees to comply with federal and state employment laws.
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The possibility of a mortgage loan officer (MLO) being paid as both a W-2 employee and a 1099 contractor depending on the state is a complex scenario that requires careful consideration of federal and state regulations. Here are the key points to consider:
Federal Regulations
Under federal law, particularly guidelines from the IRS and the Fair Labor Standards Act (FLSA), the classification of an employee versus an independent contractor is based on the nature of the work relationship, not the choice of the employer or the employee. The degree of control the employer has over the work, the financial control over the business aspects of the worker’s job, and the permanency of the relationship are among the factors considered.
Mortgage Industry Specific Regulations
The mortgage industry is also heavily regulated by the Consumer Financial Protection Bureau (CFPB), which implements regulations from the Dodd-Frank Act. These regulations include strict rules on how loan officers are compensated to avoid conflicts of interest, such as basing compensation on the terms of the loans they originate. These regulations tend to favor an employment (W-2) model over a contractor (1099) model because they require consistent oversight of compensation practices.
State Specifics and Dual Payment Structures
While state laws vary, most states follow federal guidelines closely, especially given the sensitivity and regulation of the mortgage lending industry. The primary issue with paying an MLO via both W-2 and 1099 depending on the state is the IRS’s criteria for what constitutes an independent contractor versus an employee. It is generally inconsistent to classify the same individual both ways in different jurisdictions for performing the same role under the same business model.
Practical Considerations
Practically, having an MLO work under both W-2 and 1099 tax classifications can be administratively challenging and legally risky. Misclassification can lead to penalties, including back taxes and fines. Additionally, since the role of an MLO requires consistent oversight and adherence to specific regulatory standards, maintaining the necessary level of control and compliance is more straightforward under a W-2 model.
Best Practices
For mortgage brokers and companies, it is safer and more compliant to classify MLOs consistently across all states as W-2 employees. This not only ensures compliance with IRS guidelines and CFPB regulations but also simplifies administration and reduces the risk of penalties for misclassification.
Conclusion
In summary, while the idea of differentiating compensation structure by state is theoretically possible, it is fraught with legal and practical challenges. Mortgage companies typically opt to classify MLOs as W-2 employees in all states to ensure compliance and manage risk effectively. For definitive guidance, consulting with a labor law attorney or a compliance expert specialized in the mortgage industry is advisable.
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Most states require mortgage loan officers to be paid as W-2 employees rather than as independent contractors paid on a 1099 basis. However, the exact number of states with this requirement can vary over time as state laws and regulations change.
As of 2023, it was estimated that around 40-45 states had laws or regulations in place that essentially required mortgage loan officers at non-bank lenders to be classified as employees and paid on a W-2 basis.
Some of the major states that required W-2 compensation for mortgage loan officers included California, Texas, Florida, New York, Illinois, Pennsylvania, Ohio, Georgia and North Carolina among others.
Only a handful of states still permitted mortgage loan officers to be classified as independent contractors paid on a 1099 basis in 2023. But even in those states, the lenders had to meet certain tests to properly classify the loan officers as contractors.
The rationale behind most states requiring W-2 status was to provide greater consumer protections by ensuring loan officers were directly supervised employees rather than independent contractors who might have misaligned incentives.
However, as state laws can change over time, the precise number requiring W-2 status for mortgage loan officers in May 2024 could be somewhat different than the 2023 estimate. But the majority of states have been trending towards the W-2 employee model for this role.
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The question of whether loan officers (MLOs) can be paid via a 1099 or must be classified as W2 employees is a common one in the mortgage industry. Let’s break down the issue step-by-step:
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State Laws: While there are various states that permit MLOs to be paid by 1099, it’s essential for mortgage bankers or brokers to properly classify MLOs according to IRS guidelines. Regardless of state law, misclassifying an individual as either an independent contractor or an employee can have significant ramifications.
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Federal Laws:
- Regulation Z: The Truth in Lending Act’s loan originator compensation rule covers both individual originators who are employees and those who are independent contractors. Some proponents argue that this rule allows paying MLOs via a 1099. However, the mortgage banker or broker is still responsible for accurately classifying the relationship.
- HUD Guidance: The Department of Housing and Urban Development (HUD) specifically prohibits FHA-approved Mortgagees from using non-employees as loan originators. In other words, W2 employees may only originate loans for FHA-approved mortgagees, not independent contractors.
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State-Specific Considerations:
In summary, while some states allow MLOs to be paid via a 1099, proper classification and adherence to federal and state laws are crucial. Mortgage professionals should consult legal experts and stay informed about their specific state’s regulations to ensure compliance.
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The compensation structure for mortgage loan originators (MLOs) can be complex due to varying state laws and federal regulations. Here’s a clearer breakdown of the key points regarding MLO compensation as W-2 employees or 1099 independent contractors:
Federal Regulations
- Dodd-Frank Act: Under Regulation Z of the Truth in Lending Act, compensation for loan originators can be as W-2 wages or as 1099 income. This regulation acknowledges both forms of compensation without a specific mandate for one over the other. More details can be found in the federal register documents linked in your message.
- HUD Requirements: Direct Endorsement (DE) lenders must compensate affiliated loan originators as W-2 employees for FHA loans. However, third-party originators who are not DE approved by HUD can be compensated as W-2 or 1099 contractors.
- IRS Rules: According to the IRS, the classification of an MLO as a W-2 employee or a 1099 contractor depends on the degree of control the employer has over the work and the worker’s independence. This affects how payroll taxes are handled.
State Requirements
- Varied Requirements: States differ in how MLOs must be compensated. For instance, New Jersey requires W-2 compensation for MLOs to align with employment standards and direct supervision by the licensed lender. Conversely, Florida allows MLOs to be either employees or independent contractors.
- Specific Regulations: Each state has specific regulations that must be directly verified for compliance, as the rules for MLO compensation under state laws vary significantly.
Practical Implications
- Flexibility in Classification: At the federal level, loan originators can be classified as employees or independent contractors, as evidenced by NMLS registration options that include W-2 and 1099 classifications.
- State Compliance: Lenders and MLOs must comply with the states’ laws to avoid legal complications.
In conclusion, while federal law does not mandate specific compensation for loan originators, state laws may impose specific requirements. MLOs and their employers must carefully check state and federal regulations to determine the appropriate compensation structure. This nuanced approach helps to navigate the complexities of MLO compensation across different jurisdictions.
See 12 CFR Part 1026 https://www.federalregister.gov/documents/2013/02/15/2013-01503/loan-originator-compensation-requirements-under-the-truth-in-lending-act-regulation-z#footnote-132-p11352, pg. 11352. See also https://files.consumerfinance.gov/f/201301_cfpb_final-rule_loan-originator-compensation.pdf, pgs. 262-63, 274, and 517. If 1099 compensation were not permissible under the Reg. Z it would have been stated therein. On the contrary, Reg. Z specifically refers to both W-2 and 1099 as types of compensation.
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This reply was modified 6 months, 3 weeks ago by Dawn.
federalregister.gov
Loan Originator Compensation Requirements Under the Truth in Lending Act (Regulation Z)
The Bureau of Consumer Financial Protection (Bureau) is amending Regulation Z to implement amendments to the Truth in Lending Act (TILA) made by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). The final rule implements requirements and … Continue reading
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Here are two resourceful links to fact check that loan officers are allowed to be compensated by 1099.
Under these rules the IRS considers the behavioral, financial and the type of relationship between the parties to determine whether a business can classify compensation as W-2 or 1099. See http://www.irs.gov/businesses/small-businesses-self-employed. The degree of control and independence are the factors considered in this analysis. Here classification is strictly relevant to which party is responsible for remitting payroll taxes. Where a business classifies a party as a W-2 under these rules, it must submit the payroll taxes on behalf of the employee. Where a business classifies a party as a 1099 independent contractor, the contractor becomes responsible for remitting payroll taxes.
See https://www.hud.gov/sites/documents/SFH_FAQ_PREVIEW.PDF, pg. 4. Consequently, if a mortgage lender or broker is a third party sponsor it does not fall under the DE W-2 requirement.
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More and more states are allowing commission wage earner loan officers become 1099 wager earner loan officers
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As a 1099 wage earner, you can not be told what or what not to do by a supervisor such as mandatory hours worked or mandatory meetings, or to abide by company policies.
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1099 for loan officers is huge.