The CFPB’s final loan originator compensation rules, when effective, will allow financial institutions to pay loan originators bonuses based on the bank’s net return on assets (or other measures of profitability), subject to two provisos:
(1) bonuses would have to be limited to ten percent of each loan originator’s total compensation for the year, including any bonuses (but loan originators who originate ten or fewer mortgage loans in a year are not subject to the ten-percent total compensation limit) — see Final Rule, Loan Originator Requirements under the Truth in Lending Act, page 7, and
(2) an individual loan originator’s share of the bonus pool cannot be based on the terms of the transactions that he or she originated. But, an individual loan originator’s share could be based on permissible factors, which include the following (under both the current rule and the amended rule — see Comment 3, Official Staff Commentary, 12 CFR 1026.36(d)(1) and Official Interpretations, Loan Originator Requirements under the Truth in Lending Act, page 23):
- 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
As to the effective date of these rules, the CFPB takes the position that bonuses must be based on a profit pool from transactions that were initiated on or after the rules’ effective date of January 10, 2014 — meaning that the loan application for each transaction must have been received on or after January 10, 2014. The attorney we spoke to noted that this was subject to further guidance, but it is the CFPB’s current position. He also noted that until the new rules go into effect, the CFPB’s April 2, 2012 Bulletin will remain in effect, which states that financial institutions may contribute to a loan originator’s qualified profit sharing, 401(k), or employee stock ownership plan without violating the loan originator compensation rules.