Regulation Z’s loan originator compensation rules prohibit certain incentive payments to loan originators as to closed-end consumer loans secured by dwellings, but it also identifies several permissible compensation methods. Otherwise, we are not aware of any rules that would restrict incentive compensation for other types of loans.
Under Regulation Z, loan originators may not receive compensation that is based on the terms or conditions of the mortgages (specifically, closed-end consumer credit transactions secured by dwellings) they originate. 12 CFR 1026.36(d)(1)(i). Permissible forms of compensation can be based on the following (Comment 3, Official Staff Commentary, 12 CFR 1026.36(d)(1)):
- Total loan volume, in dollars or number of loans
- Loans’ long-term performance
- Hourly pay
- Whether consumers are existing customers or new customers
- Fixed payments for each loan originated, if payments are arranged in advance
- Percentage of applications that are consummated
- Quality of loan files (accuracy and completeness)
- Amount of credit extended, if percentage paid is fixed
If you do choose to pay loan originators based on a permissible compensation method, you will also be subject to the Regulation Z record retention requirements. Those requirements mandate that you “retain evidence of compliance” with any part of Regulation Z, including the loan originator compensation rules, for two years. 12 CFR 1026.25(a). The staff commentary notes that you would have maintain records of compensation paid to each loan originator “as well as the compensation agreement in effect” when the transaction’s interest rate is set. Comment 5, Official Staff Commentary, 12 CFR 1026.25(a).