Many mortgage lenders / brokers treat their loan officers (who are their salespeople) like independent contractors. Those loan officers are paid a commission based on the successful financing of a loan. Mortgage lenders / brokers pay loan officers when each transaction closes or periodically. The amount paid to the loan officer does not contain any deductions for federal, state or local taxes. Often times, 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 1099 to their loan officers.
As a mortgage lender / broker, you cannot classify whether your loan officers are independent contractors or employees. That task has been entrusted to the Internal Revenue Service, the U.S. Department of Labor, the state unemployment insurance agency, the state department of labor, and the state workers’ compensation insurance agency. Although each agency has its own guidelines, generally the determination depends on the degree of control exercised by the mortgage lender / broker and the degree of independence enjoyed by the loan officer. When the mortgage lender / broker has the right to dictate what will be done and how it will be done, then the loan officer is an employee. Government agencies analyze the facts related to loan officer behavior control, loan officer financial control, and the relationship between the mortgage lender / broker and the loan officer. The Internal Revenue Service has a 20-factor test to determine if an employer / employee relationship exists. Such factors include whether the loan officer is required to follow instructions, receives training from the mortgage lender / broker, works exclusively for the mortgage lender / broker, whether the loan officer can hire assistants independently, whether the loan officer has established working hours, whether there is an ongoing relationship and whether periodic reports should be provided to a supervisor. The IRS appears to have a bias toward seeking an employer-employee relationship. Even if the mortgage lender / broker has a written agreement with the loan officer that classifies you as an independent contractor, that is not binding on any federal or state agency.
If you’ve treated your loan officers like independent contractors, when in fact they pass the 20-factor test as employees, what are the ramifications? If the Internal Revenue Service or Department of Labor finds that you have misclassified employees, they will ask you to return the tax withholdings plus interest, or they may impose penalties that can bankrupt a business, or even press charges. criminal charges against the owners. Once the IRS has entered, other federal and state agencies follow them and assess their fines and penalties as well. If anything remains, the loan officer can sue for unemployment compensation, retirement benefits, profit sharing, vacation pay, disability, or any other benefits you would have received as an employee. Many mortgage companies have gone bankrupt 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 the Department of Labor find out about you? Typically, a fired loan officer will file for unemployment benefits or a disgruntled loan officer will make a phone call to the agency. And the agency will always follow up.
You should also know 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 loan officers to be W-2 employees, they will not care how you classify the loan officer who is in regulatory trouble. Banking Departments are concerned that your company supervises the people who operate under the auspices of its license. This requires you to monitor the activities of your loan officers regardless of whether you pay them as employees or as independent contractors. After all, you are responsible for any violation of the law, rules, and mortgage lender / broker policies by anyone, including the loan originator, operating under your license. Therefore, it is in your best interest to monitor them.
This article is designed to be of general interest. The specific information discussed may not apply to you. Before acting on any matter contained in this document, you should consult with your personal legal and accounting advisor.