We pay a discretionary bonus at yearend to all officers, including our lenders. We accrue the bonus pool all year based on our estimates of the bank’s performance. Our board’s compensation committee approves allocations for each bonus in December each year. The 10% limit on bonuses for lenders has been especially limiting for our less tenured employees who are the most productive lenders. Can you confirm that our bonus payments are subject to the 10% limit?

Yes, we believe that these loan originator bonuses are subject to the 10% limitation, because the bonuses are pulled from a pool that is based on the bank’s estimated profits (including mortgage-related profits).

The 10% limitation on loan originator bonuses is an exception to the general rule, which is that loan originators cannot receive bonuses or other compensation based on the terms of closed-end, dwelling-secured mortgage transactions originated at your bank. Because your bank’s total profits include mortgage-related profits, which are determined by the terms of closed-end, dwelling-secured mortgage transactions, your bank cannot award bonuses that are based on its profits — unless the bonuses are limited to 10% of a loan originator’s total annual compensation.

However, your bank’s bonus pool would be exempt from the 10% limitation if it is set aside at the beginning of the year, provided that no changes are later made 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. If your loan originators’ bonuses are paid from a bonus pool set aside at the beginning of the year, and importantly, the bonus pool is unrelated to your bank’s profits or mortgage-related profits, loan originator bonuses pulled from that pool would be exempt from the 10% limitation.

For resources related to our guidance, please see:

Regulation Z, 12 CFR 1026.36(b) (“Scope. . . . Paragraphs (d) through (i) of this section apply to closed-end consumer credit transactions secured by a dwelling. . . .”)
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. . . .”)
Official Interpretations, Regulation Z, Paragraph 36(d)(1), Comment 1(ii) (“Compensation to an individual loan originator that is based upon profits determined with reference to a mortgage-related business is considered compensation that is based on the terms of multiple transactions by multiple individual loan originators. . . .”)
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 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).”)
Regulation Z, 12 CFR 1026.36(d)(1)(iv) (This exception requires that “(A) The compensation paid to an individual loan originator . . . 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 . . . does not, in the aggregate, exceed 10 percent of the individual loan originator’s total compensation . . . ; 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.”)
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.”)