Ok, let me repeat it more clearly:
XP penalties based on quest entry are converted into a chance to not receive epic loot (which also prevents you from going on epic timer).
A character who joined late would have a significant chance for no epic loot (80%), and someone who was extremely late would have no chance for loot at all.
And here's another suggestion: A character who is on epic timer for a quest can still enter it, but can't get any epic loot.
Yes I can, as explained before.