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Many mortgage lenders/brokers consider their loan officers (who are their salespeople) to be independent contractors. Those loan officers are paid on commission based on the successful funding of the loan. Mortgage lenders/brokers make payments to loan servicers either at the close of each transaction or on a periodic basis. There is no deduction for federal, state or local taxes on the amount paid to the loan officer. Often, the loan officer does not receive any benefits, such as company-paid health insurance or paid sick or vacation time. At the end of each year, mortgage lenders/brokers issue IRS Form 1099s to their loan officers.
As a mortgage lender/broker, you cannot classify whether your loan officers are independent contractors or employees. That task is delegated to the Internal Revenue Service, the US Department of Labor, your state’s unemployment insurance agency, your state’s labor department, and your state’s workers’ compensation insurance agency. Although each agency has its own guidelines, the determination generally depends on the degree of control that the mortgage lender/broker exercises and the degree of independence that the loan officer enjoys. While the mortgage lender/broker has the authority to dictate what will be done and how it will be done, then the loan officer is an employee. Government agencies look at factors such as behavioral control of the loan officer, financial control of the loan officer, and the relationship between the mortgage lender/broker and the loan officer. The Internal Revenue Service has a 20 factor test to determine whether an employer/employee relationship exists. Such factors include whether the loan officer must follow instructions, receive training from the mortgage lender/broker, work exclusively for the mortgage lender/broker, whether the loan officer can hire assistants independently whether the loan officer has set working hours, whether the relationship is ongoing, and whether regular reports must be made to the supervisor. It seems that the IRS has a bias towards finding employer-employee relationships. Even though the mortgage lender/broker has a written agreement with the loan servicer to classify you as an independent contractor, that is not binding on any federal or state agency.
What are the consequences if you are treating your loan officers as independent contractors when, in fact, they pass the 20 factor test as employees? If the Internal Revenue Service or the Department of Labor finds that you misclassified employees, they will require you to pay withholding taxes and interest, or they can assess penalties that could bankrupt a company. , or even file criminal charges against the owners. After the IRS comes in, other federal and state agencies follow right behind and assess their fines and penalties as well. If anything is left over, the loan officer can sue for unemployment compensation, retirement benefits, profit sharing, holiday pay, disability or any other benefits he would have received as an employee. Many mortgage companies have gone out of business because they treated many of their loan officers as independent contractors and did not comply with wage and hour laws.
How does the Internal Revenue Service or Department of Labor track you down? Typically, a dismissed loan officer will file for unemployment benefits or a disgruntled loan officer will make a telephone call to the agency. And the agency will always follow through.
You should also be aware that the agency that approved your lender/broker license considers loan officers to be employees because you are responsible for their actions. Although some states do not require that loan officers be W-2 employees, they will not care how you classify the loan officer that is in regulatory hot water. Banking departments are concerned that your company monitors people operating under the auspices of your license. This requires that you monitor the activities of your loan officers whether you hire them as paid employees or as independent contractors. Ultimately, you are responsible for any violations of mortgage lender/broker law, rules and policies by anyone, including a loan originator operating under your license. Therefore, it is in your best interest to monitor them.
This article is designed for general interest. The specific information discussed may not apply to you. Before acting on any matter contained herein, you should consult with your personal legal and accounting advisor.
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