An examiner recently told us that we should not pay more than a 10% bonus to an employee who holds a NMLS license. Does that apply to our bonuses? We set aside a pool at the beginning of the year for all employee bonuses, and the amount of the bonus pool is not based on the bank’s profits.

If your bank’s bonus pool is not based in any way on the bank’s profitability, then bonuses paid out of that pool may qualify for an exemption from the 10% limitation on loan originator bonuses.

Regulation Z does limit bonuses paid to individuals who qualify as “loan originators” when the bonuses are “based in whole or in part on the mortgage-related business profits.” In other words, if bonuses are paid out of a pool that is based on a bank’s overall profits, but “the profits are determined with reference to the creditor’s revenue from origination of closed-end consumer credit transactions secured by a dwelling,” those bonuses are subject to the 10% limitation.

However, your bank’s bonus pool may be exempt from the 10% limitation because it is not based on your bank’s profits or mortgage-related profits. As explained in the Official Interpretations for Regulation Z, “a retention bonus budgeted for in advance or a performance bonus paid out of a bonus pool set aside at the beginning of the company’s annual accounting period as part of the company’s operating budget” is not subject to the 10% limitation. Because your loan originators’ bonuses are paid from a bonus pool set aside at the beginning of the year, and importantly, because the bonus pool is unrelated to your bank’s profits or mortgage-related profits, we believe that bonuses paid to your loan originators may be exempt from the 10% limitation.

For resources related to our guidance, please see:

Regulation Z, 12 CFR 1026.36(d)(1)(iv) (The 10% limitation on loan originator bonuses applies to 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) . . . .”)

Official Interpretations, Regulation Z, Paragraph 36(d)(1), Comment 3(ii) (“As used in § 1026.36(d)(1)(iv), a ‘non-deferred profits-based compensation plan’ is any compensation arrangement where an individual loan originator may be paid variable, additional compensation based in whole or in part on the mortgage-related business profits of the person paying the compensation . . . . Compensation under a non-deferred profits-based compensation plan could include, without limitation, annual or periodic bonuses, or awards of merchandise, services, trips, or similar prizes or incentives where the bonuses, contributions, or awards are determined with reference to the profits of the person, business unit, or affiliate, as applicable. . . .”)

Official Interpretations, Regulation Z, Paragraph 36(d)(1), Comment 1(ii)(A) (“Assume that a creditor pays a bonus to an individual loan originator out of a bonus pool established with reference to the creditor’s profits and the profits are determined with reference to the creditor’s revenue from origination of closed-end consumer credit transactions secured by a dwelling. In such instance, the bonus is considered compensation that is based on the terms of multiple transactions by multiple individual loan originators. Therefore, the bonus is prohibited . . . unless it is otherwise permitted under [the 10% limitation established in] § 1026.36(d)(1)(iv).”)

Official Interpretations, Regulation Z, Paragraph 36(d)(1), Comment 3(ii) (“. . . . a retention bonus budgeted for in advance or a performance bonus paid out of a bonus pool set aside at the beginning of the company’s annual accounting period as part of the company’s operating budget does not violate the prohibition on payment of compensation based on the terms of multiple transactions by multiple individual loan originators under § 1026.36(d)(1)(i) . . . therefore, [the 10% limitation established in] § 1026.36(d)(1)(iv) does not apply to such bonuses.”)