Based on your description of the profit-sharing program, we do not believe you should pay your mortgage loan originators a bonus exceeding 10% of their total compensation (unless they originated ten or fewer covered transactions in the preceding year), even if the profits from your mortgage related business account for only a very small percentage of your profit-sharing program.

We believe that your bank’s bonus plan is a compensation plan limited by Regulation Z’s loan originator compensation rules. A compensation plan is covered by the rules “if compensation is paid, based in whole or in part, on the profits of the person paying the compensation” (emphasis added). Additionally, “profits from mortgage-related business” include the “proceeds of secondary market sales of such transactions.” Although secondary mortgage transactions accounted for a very small percentage of your bonus pool last year, we believe the inclusion of these mortgage-related profits is sufficient to subject your compensation plan to Regulation Z’s rules. We are not aware of any exceptions based on the weight given to mortgage-related profits.

For covered compensation plans, Regulation Z’s loan originator compensation rules generally prohibit you from paying bonuses or other compensation to loan originators (LOs) based on the terms of closed-end, dwelling-secured mortgage transactions originated at your bank. However, there is an exception to the general rule for bonuses determined with reference to a bank’s profits from mortgage-related business — provided that the LO’s compensation is not directly or indirectly based on the terms of an individual LO’s transactions, and one of the following two conditions is met: (1) the bonus does not exceed 10% of the LO’s total compensation for the time period for which the bonus is paid, or (2) the LO originated no more than ten covered transactions during the year preceding the date of the bonus determination.

Consequently, we believe that bonuses paid to your LO employees are subject to the 10% limitation — such bonuses cannot exceed 10% of an LO’s total compensation (with “total compensation” including the bonus itself, plus the LO’s salary, commissions, 401(k) contributions, and more). As the CFPB noted in the preamble to its loan originator compensation rules, it intended to establish a “bright-line approach setting a numerical threshold above which compensation under a non-deferred profits-based compensation plan is prohibited.” As such, we do not believe the rules provide any leeway with respect to the 10% limit.

For resources related to our guidance, please see:

• Regulation Z, Official Interpretations, 12 CFR 1026, Paragraph 36(d)(1)(iii) and (iv), Comment 3(v)(B) (“Under § 1026.36(d)(1)(iv), a plan is a non-deferred profits-based compensation plan if compensation is paid, based in whole or in part, on the profits of the person paying the compensation. As used in § 1026.36(d)(1)(iv), ‘profits of the person’ include, as applicable depending on where the non-deferred profits-based compensation plan is set, the profits of the person, the business unit to which the individual loan originators are assigned for accounting or other organizational purposes, or any affiliate of the person. Profits from mortgage-related business are profits determined with reference to revenue generated from transactions subject to § 1026.36(d). Pursuant to § 1026.36(b) and comment 36(b)-1, § 1026.36(d) applies to closed-end consumer credit transactions secured by dwellings. This revenue includes, without limitation, and as applicable based on the particular sources of revenue of the person, business unit, or affiliate, origination fees and interest associated with dwelling-secured transactions for which individual loan originators working for the person were loan originators, income from servicing of such transactions, and proceeds of secondary market sales of such transactions. If the amount of the individual loan originator’s compensation under non-deferred profits-based compensation plans paid for a time period does not, in the aggregate, exceed 10 percent of the individual loan originator’s total compensation corresponding to the same time period, compensation under non-deferred profits-based compensation plans may be paid under § 1026.36(d)(1)(iv)(B)(1) regardless of whether or not it was determined with reference to the profits of the person from mortgage-related business.”)

• Regulation Z, 12 CFR 1026.36(d)(1)(i) (“Except as provided in paragraph (d)(1)(iii) or (iv) of this section, in connection with a consumer credit transaction secured by a dwelling, no loan originator shall receive and no person shall pay to a loan originator, directly or indirectly, compensation in an amount that is based on a term of a transaction, the terms of multiple transactions by an individual loan originator, or the terms of multiple transactions by multiple individual loan originators. . . .”)

• Regulation Z, 12 CFR 1026.36(d)(1)(iv) (“An individual loan originator may receive, and a person may pay to an individual loan originator, compensation under a non-deferred profits-based compensation plan (i.e., any arrangement for the payment of non-deferred compensation that is determined with reference to the profits of the person from mortgage-related business), provided that:

(A) The compensation paid to an individual loan originator pursuant to this paragraph (d)(1)(iv) is not directly or indirectly based on the terms of that individual loan originator's transactions that are subject to this paragraph (d); and

(B) At least one of the following conditions is satisfied:

• (1) The compensation paid to an individual loan originator pursuant to this paragraph (d)(1)(iv) does not, in the aggregate, exceed 10 percent of the individual loan originator’s total compensation corresponding to the time period for which the compensation under the non-deferred profits-based compensation plan is paid; or
• (2) The individual loan originator was a loan originator for ten or fewer transactions subject to this paragraph (d) consummated during the 12-month period preceding the date of the compensation determination.”)

• Loan Originator Compensation Requirements Under Regulation Z, 78 Fed. Reg. 11279, 11350 (February 15, 2013) (“The Bureau, additionally, believes that a bright-line approach setting a numerical threshold above which compensation under a non-deferred profits-based compensation plan is prohibited is preferable to a principles-based approach, which was suggested by some commenters. . . . Therefore, the Bureau is adopting, in § 1026.36(d)(1)(iv)(B)(1), a rule that permits an individual loan originator to receive, and a person to pay, compensation under a non-deferred profits-based compensation plan where the compensation is determined with reference to the profits of the person from mortgage-related business, provided that the compensation to the individual loan originator under non-deferred profits-based compensation plans does not, in the aggregate, exceed 10 percent of the individual loan originator's total compensation corresponding to the same time period. Section 1026.36(d)(1)(iv)(B)(1) permits this compensation even if it is directly or indirectly based on the terms of transactions of multiple individual loan originators, provided that, pursuant to § 1026.36(d)(1)(iv)(A), the compensation is not directly or indirectly based on the terms of the individual loan originator's transactions.”)

• Regulation Z, Official Interpretations, 12 CFR 1026, Paragraph 36(d)(1)(iii) and (iv), Comment 3(v)(F)(1) (“Assume that, during a given calendar year, a loan originator organization pays an individual loan originator employee $40,000 in salary and $125,000 in commissions, and makes a contribution of $15,000 to the individual loan originator's 401(k) plan. At the end of the year, the loan originator organization wishes to pay the individual loan originator a bonus based on a formula involving a number of performance metrics, to be paid out of a profit pool established at the level of the company but that is determined in part with reference to the profits of the company’s mortgage origination unit. Assume that the loan originator organization derives revenues from sources other than transactions covered by § 1026.36(d). In this example, the performance bonus would be directly or indirectly based on the terms of multiple individual loan originators’ transactions as described in § 1026.36(d)(1)(i), because it is being determined with reference to profits from mortgage-related business. Assume, furthermore, that the loan originator organization elects to include the bonus in the total compensation amount for the calendar year. Thus, the bonus is permissible under § 1026.36(d)(1)(iv)(B)(1) if it does not exceed 10 percent of the loan originator’s total compensation, which in this example consists of the individual loan originator’s salary and commissions, the contribution to the 401(k) plan (if the loan originator organization elects to include the contribution in the total compensation amount), and the performance bonus. Therefore, if the loan originator organization elects to include the 401(k) contribution in total compensation for these purposes, the loan originator organization may pay the individual loan originator a performance bonus of up to $20,000 (i.e., 10 percent of $200,000 in total compensation). If the loan originator organization does not include the 401(k) contribution in calculating total compensation, or the 401(k) contribution is actually made in January of the following calendar year (in which case it cannot be included in total compensation for the initial calendar year), the bonus may be up to $18,333.33. If the loan originator organization includes neither the 401(k) contribution nor the performance bonus in the total compensation amount, the bonus may not exceed $16,500.”)