In the past, mortgage originators have often shared in bank-wide year-end bonuses along with all other employees. Perhaps based on some annual review, perhaps based on tenure, or perhaps just a fixed percentage based on number of total employees.
I was recently at a community bank and saw the following, for example. Bank paid out a year-end bonus to all eligible employees (including loan officers). The amount of the bonus was awarded depending on (A) bank performance, such as operating income, etc. and (B) individual factors, such as tenure, annual performance review, title, etc. In this case, the loan officer received a bonus that amounted to 8% of her annual earnings. She did well in part because of a strong annual performance review, where she was viewed favorably in terms of integrity and teamwork. The performance review also noted that she had a high purchase-to-refinance ratio (bringing in more purchases that the bank wanted) and was doing a good job of selling salable product (as opposed to portfolio).
Danger: CFPB’s Loan Originator Compensation Rule
The reason this is a story in a Compliance Blog is the CFPB’s Loan Originator Rule, which, in parts, limits how we can compensate loan officers.
General Rule = The LO Rule essentially says that we can’t pay loan officers based on any “term” of a transaction (including the terms of multiple transactions or multiple originators). In other words, we can’t compensate based on profitability.
This extends very broadly, to include the following impermissible factors (things that can’t affect compensation):
- Profit margin
- Interest rate
- Whether it is fixed or adjustable rate
- Whether it is salable or portfolio
- Whether it is a purchase or refinance
To be clear, it is still perfectly fine to compensate based on the following factors (there are many more, the following are just listed as an example):
- Volume (e.g. amount of credit extended)
- Number of loans
- Quality of loan files (Free of compliance errors? Accurate? Complete?)
- Long-term performance of loans
- Bank values (integrity, compassion, work ethic, etc.)
- Whether loan is to a “new” or “existing” customer
So, the example violates the general rule. The loan officer’s compensation is based in part on impermissible factors, in that she’s incentivized to do more salable product and more purchases. And that’s all it takes. It doesn’t matter that this is only a small part of their overall compensation. Note: There is, however, an exception below that prevents this from being an illegal compensation package.
Don’t Get Mad: No Major Changes Required!
So don’t be furious, there are simple ways to avoid any violation of the LO Rule. Here are a couple obvious ones:
- Restructure to Avoid Violation - You could simply clarify the factors that affect the bonus and, for originators, make sure only permissible factors are used. Problematically, this means you can’t adjust compensation for profitability of the mortgage department, which you would like to do because …. well, it’s obvious.
- 10% Exception - There is an exception to the general rule where a loan officer can receive a bonus based on overall profits of the mortgage department (not on her individual loans) where the bonus amounts to 10% or less of her annual compensation. Example: Loan officer receives $90,000 in salary and commission in 2014. She can receive up to a $10,000 bonus under this exception (10% = 10% of total aggregate amount).
- Managerial Exception (10 or Fewer) - There is another exception for managers. This works the same as #2′s 10% Exception except the 10% is replaced by a different requirement– the loan officer cannot originate more than 10 mortgages a year. This is intended for producing sales managers, who might originate a few loans a year to pick up the slack for someone on vacation, for privacy reasons where the borrower is an employee, or for any number of other reasons. Under this exception, the loan officer could receive a bonus based on overall mortgage department (or bank-wide) profits (but not on the terms of her individual loans).
Make sense? Yes? No? Please feel free to follow up on this issue by commenting on this blog, discussing it at our next SNECG meeting, or calling/e-mailing me beforehand to discuss.
Very happy to be helping out a little bit … I can post more if I get more questions from you all!
Ben Giumarra is a regulatory consultant for Spillane Consulting Associates, Inc. out of Braintree, MA. SCA has provided Consulting, Professional Staffing, and Quality Control services to New England financial institutions since 1991, with a primary focus in residential lending.