Part 2 of How does your organization compensate loan originators?
In last week's newsletter we discussed your plans for loan originator compensation in light of new regulations to take effect in January 2014... please join us now for another discussion on this topic.
As noted last week, balancing the interests of attracting/retaining high- performing LOs and motivating them with sufficient incentives against the risks of noncompliance with heavy-handed and ever-changing regulations is causing our clients many sleepless nights!
Please allow us to respond to two additional concerns that have been presented to us since our last newsletter:
1. The first question was,"Is a compensation package based completely on total loan amount (which is permissible under 12 CFR 1026.36(d)(1)(ii)) an intelligent choice for my institution?"
It depends. First, note that the percentage must be fixed (although minimum and maximum amounts per loan may be implemented) -- that is, it is based on the total amount of credit extended and does not vary with individual loans. Second, beware of unintended consequences ... a compensation package based completely on total loan amount may encourage LOs to chase higher dollar loans and ignore others, thus leading to fair lending and CRA problems. Although many institutions currently base compensation on total loan amount, some in the industry believe there will be a shift away from this in part because of such unintended consequences. This is especially likely in light of new exceptions that take effect for the first time in January.
2. The second question we received was, "How broad is the ban on compensation based on terms? Does that essentially prohibit compensation based on profits? Are there any exceptions?"
The answers are extremely broad, yes, and yes!
General Rule. The ban on compensation based on terms of the transaction is so broad that it generally prohibits compensation determined by mortgage- related profits. Compensation cannot be based directly or indirectly on a term, nor can it be based on a "proxy" for a term, nor can it be based on the terms of multiple transactions by an individual or multiple individual LOs! What is a "proxy"? A proxy is not itself a term, but (1) consistently varies with a term and (2) is something that the LO has an ability to change. For example, it would likely be impermissible to compensate an LO more for portfolio loans than non-portfolio loans (depending on the specific facts) because whether or not a loan is portfolio is likely a proxy.
Exceptions! Luckily, the regulators backed off this general rule and the new rule (effective January 2014) adds three important exceptions that did not exist before. These exceptions can be found in 12 CFR 1026.36(d)(1)(iii) and (iv), and may be discussed in a future installment on LO compensation.
We here at SCA sympathize if you're confused or reluctant to make the changes necessary to bring your organization into compliance with the new rules. But unless you plan to retire before January, we recommend taking a page out of Jack Welch's playbook and remember to, "Control your own destiny or someone else will."
To anyone interested in the January 2014 changes to RESPA and TILA servicing, I'll be presenting on this topic for the Massachusetts Bankers Association on November 19 in Westborough, MA. Click here for more information.
Thanks so much for reading our weekly newsletters. We're not always going to be perfect, but because we always do our best and try not to overpromise, we hope that we're always going to be trustworthy. Your calls and e-mails are very helpful - please keep contributing.
**These are our opinions. We're not authorized, or willing, to express those of others.**