Whether to take advantage of the "managerial" exception for LO Compensation: Analyzed.
As you're probably aware, there is an exception from the Loan Originator compensation rules for managers, defined as persons who originate fewer than 10 transactions per year. The exception allows these persons to be paid based on profits, which is otherwise generally prohibited by the LO Rule. But is this actually helpful or more trouble than it's worth?
We're not so sure it is (worth it that is). Here's what we think...
General Rule is Problem for Sales Managers
The LO Rule prohibits term-based compensation. That extends so far as to cover terms of multiple originators and multiple transactions. In other words, an "originator" can't be paid based on the profitability of any one transaction, of numerous transactions, or even of the mortgage department overall.
This disrupts our world where managers often step in with an "assist" to help an originator with a transaction. This might be a sales manager, an operations manager, or department head, or even the president. And under the CFPB's new (broader) definition of "originator"- previously discussed here- it's extremely easier to cross the line and become an originator on any given transaction.
So if your manager is considered an "originator" (albeit only doing a handful of loans per year), they generally can't be paid based on the profitability of the mortgage department (or overall bank for that matter)! In many cases, that's just not practical--compensation plans need to reward profitable performance and structuring bonuses any other way can be time- consuming and distracting.
"Managerial" Exception
So, of course, a lot of managers groan when they hear this. But then they find this ... an exception for "managers" that originate 10 or fewer transactions per year! And it's true, those managers only acting as an "originator" on a handful of loans per year are not subject to most of the LO Rule's limitations ... they can be paid based on the profitability of the mortgage department overall.
It seems a common reaction from managers then is that, "I'm definitely an originator on fewer than 10 transactions per year, so I'm off the hook!"
I wish it was that easy.
How exactly are you going to prove this?
You might say, well, "my NMLS # will be listed on any transaction that I originate." After all, there can only be one originator per transaction! Wrong. Unfortunately, the regulators believe there can be multiple originators per transaction. Even if your NMLS # isn't listed on the loan documents because you were only helping the primary originator, if you cross the line and become an originator yourself, that counts as one of your ten transactions.
The CFPB's official commentary on this reads:
The definition of loan originator includes persons, including managers, who are employed by a creditor or loan originator organization and take an application, offer, arrange, assist a consumer with obtaining or applying to obtain, negotiate, or otherwise obtain or make a particular extension of credit for another person, even if such persons are also employed by the creditor or loan originator organization to perform duties that are not loan origination activities. Thus, such producing managers are loan originators.
This would change how we think about things ... it would force us to think on every transaction, am I an "originator"? And then to document that. Because what is an examiner going to say when you inform them that you received profit-based compensation because "I originated fewer than 10 transactions"? I think they're going to say "Okay, prove it."
I guess what we're trying to say is, as a practical matter, how can you safely and efficiently use this exception? A manager would have to spend time on every loan (every one of your employees, not just your own!) documenting your activities or lack thereof. Yikes!
So, what are your options?
Option A - Well, you could go ahead with using the managerial exception and just be really careful: document this in policies/procedures, provide training to your managers, adopt procedures to track and document this number. (But of course, the basic premise of the newsletter is to argue that this doesn't work for most organizations).
Option B - You could avoid using any exceptions at all and just treat anyone who might be considered a loan originator on any loan as fully subject to all the limitations in the LO Rule. This might mean no profit-based compensation for sales managers, department heads, and even bank presidents.
Option C - You could rely instead on other exceptions. For example, there is an exception for employees whose profit-based bonus is less than 10% of their income--this is permissible under the LO Rule and probably a good alternative to the managerial exception. There is also an exception for contributions to retirement accounts and other deferred compensation plans.
In other news:
The CFPB recently released a list of a number of examination issues they encountered last year. Do any of these apply to you?
Have you heard about the CFPB's new consumer complaint system?
Pretty interesting system when one person approves the investigation, agrees with the enforcement action, and also hears the appeal! Director Cordray takes his first appeal yesterday.
Hope to see everyone at the Massachusetts Advisory Board Symposium on Thursday at the Bank of Canton ... registration is free, to RSVP contact Donna Astuto at (781)356-2772 or DAstuto@scapartnering.com.
We've looked before at the statistics showing community banks losing market share to larger competitors, which is concerning. But many community banks are doing quite well, so it's worth asking, what advantages do they have? As summarized in Douglas Austin's "The Community Bank Survival Guide", (c) 1997, there is the following:
Knowledge of customers
Friendly, courteous service
Intimate knowledge of the community, its institutions, and its economy-and its foibles
Knowledge of character and creditworthiness of customers
Flexibility to meet customer needs without 100 pages of paperwork (*even in 2015?)
All-out participation by staff and officers, as well as directors, in the community served by the bank
Strong links to community development within areas served by the bank
Better products and services to people being served
"Good business leaders create a vision, articulate the vision, passionately own the vision, and relentlessly drive it to completion."
- Jack Welch
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.**