Could the LO Comp Rule apply to your commercial lender?
On occasion, we see a regulation focused primarily on residential lenders bleed over into the commercial department. (Think HMDA). Another example, which is something you can fix right now, is with the CFPB's compensation rule for loan originators.
The commercial lenders at many of our clients count their lucky stars that the federal limitations on compensation from the LO Comp. Rule doesn't apply to them ... compensation based on profitability illegal? Bah! How could you do business?!
But not so fast ...
Scope of LO Comp Rule
The LO Comp. Rule applies to "consumer" loans secured by a dwelling. 1026.36(d). As we've discussed before, what a lender handles internally as "consumer" (a/k/a residential), as opposed to "commercial" (a/k/a business), may be different from how the regulators define consumer vs. commercial.
"Consumer" Defined
A consumer loan is defined as one "primarily for personal, family, or household purposes." 1026.2. There is no precise test to determine what the primary purpose is -- the regulatory commentary just gives us 5 general factors to consider (to help figure out what the primary purpose is). 1026.3. In certain circumstances there are special, so- called "bright line," rules to help.
A good example is investment properties.
With non-owner occupied properties, the rule is simple. It is a commercial loan. Note: and by the way, "owner"-occupied means that the borrower is living there at least 14 days out of the year.
But with owner-occupied investment properties it's a little more complex. A loan to purchase an owner-occupied property has a business purpose if there are 3 units or more, but not necessarily if there are 2 units or less. A loan to improve/maintain owner-occupied investment property is only certain to be for a business purpose if there are more than 4 units (I know, I know, "dwelling" is defined as 1-4 units anyway).
So let's say you have a commercial lender that does a 4-unit investment property on the Cape. The borrower intends to live there in July, and rent the rest of the year (more than 14 days = "owner- occupied"). The loan is to build a porch overlooking the water (= to"improve/maintain"). This might actually be a consumer loan (it depends on more specific facts), even though many lenders would treat it as a commercial loan. And as a consumer loan, the commercial lender would be limited by the requirements of the Federal LO Comp. Rule. That would make participation in a bank- wide bonus or other performance incentive, based on profitability, a problem unless an exception to the LO Comp Rule was found and used.
Bottom Line
If you have a commercial lender who does deals that qualify as "consumer" (as the regulators define it), then he/she should be being paid in accordance with the requirements and limitations of the CFPB's LO Comp. Rule. Note: Of course, you're free to keep the same compensation structure in place as to non- consumer loans.
In other news:
The CFPB has issued a major proposal to amend, among others, the ATR/QM Rule. If it takes effect (and it likely will), the definition of "Small Creditor" will be substantially expanded as of 2016--from 500 loans per year to 2,000! We've cited the benefits of the Small Creditor QM all along, but this would mean taking this more seriously than ever. Of course, this won't be much of a help to mortgage companies, as the Small Creditor QM has to be kept on the books for 3 years (unless sold to another Small Creditor). But this might, as we've intimated before, further spark a resurgence of activity on the private secondary market, with Small Creditors selling pools of loans between themselves.
Rates (according to Zillow) are lower than they've been in almost two years, dropping to 3.46% last Friday for 30-year fixed. Time to smile!
Do you not have a dedicated compliance officer, or one with specific expertise in such areas as BSA, lending, or servicing? In technical lingo, are you the chief cook and bottle washer? If so, please consider signing up with us for hourly compliance support - leverage our team of compliance people to get questions answered or jobs done on an as-needed basis.
Integrity. Leadership, technical skill, and other abilities aren't always enough. Peter Drucker once pointed out that the "three greatest leaders of the 20th century were Hitler, Stalin, and Mao." I read a book recently where Hector Ruiz recommended surrounding yourself with people with high integrity and then getting out of the way. He said that the right people will feel far more pressure to perform well when they're trusted. That sounds like a good litmus test on integrity to me ... "If I trust this person, will they feel more or less pressure to perform than if I tried to micromanage them?"
"People often say that motivation doesn't last. Well, neither does bathing ... that's why we recommend it daily."
- Zig Ziglar
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.**