Topic: CFPB 2014 Mortgage Rules: Loan Originator Compensation
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We have a bank-wide incentive plan that all employees share in equally, with a pool based on the bank’s earnings, including income from secondary market mortgages. Last year, we had the potential to pay up to approximately 14% of an employee’s earned salary, with a very small percentage (less than 1% of the total) attributable to secondary market mortgages. Our outside compliance consultant has flagged this as a potential problem since mortgage loan originators are prohibited from receiving a bonus exceeding 10% of their total compensation. Is this a problem? Our regulators have never cited it.
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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…
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Currently, our loan originators receive the same flat commission for traditional closed-end mortgage loans as for closed-end home equity loans. Our traditional mortgage loans typically have 15 – 30 year terms, with higher closing costs and lower rates, and our home equity loans typically have shorter terms, at lower loan amounts, with no closing costs but higher interest rates. Can we reduce the commission for the home equity loans, since they often are not as profitable as traditional mortgage loans (due to the lower loan amounts and closing costs)?
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We do not recommend varying the compensation paid to loan originators based on the type of loan originated, due to Regulation Z’s prohibition on compensating a loan originator “based on a term of a transaction” or “a factor that is a proxy for a term of a transaction.” We believe that lowering the loan originator…
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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?
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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…
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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.
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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…
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If a loan originator (LO) receives a referral for a consumer mortgage loan from another bank employee, can we reduce the LO’s commission for the resulting mortgage loan? Also, if we make a pricing exception to offer a lower interest rate on a mortgage loan, can we reduce the LO’s commission to offset the lower interest rate? Currently, our commissions are based on loan volume only.
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Yes, we believe that you may reduce a loan originator’s compensation for loans that result from referrals from other bank employees, provided that those referred loans have similar loan terms as loans that come in from other referral sources or leads. However, we do not recommend reducing a loan originator’s compensation based on a loan’s…
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Can you clarify whether we can pay referral fees for mortgages to our own employees? Are there any other requirements or caps?
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Yes, you may pay mortgage referral fees to bank employees who refer mortgage business to your bank. RESPA prohibits most referral fees related to mortgages, but that prohibition does not apply when compensating bank employees for mortgage referrals. Any referral fees paid to bank employees who are loan originators for referrals also must comply with…
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We pay two employees commissions for the mortgage products that they sell. If we pay commissions for sales of closed-end mortgages, are we also required to pay the same commission for sales of home equity lines of credit (HELOCs)? Would the commission structures have to be identical?
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We do not recommend compensating sales of HELOCs differently than sales of closed-end mortgage loans, due to Regulation Z’s prohibition on compensating a loan originator “based on a term of a transaction.” Regulation Z’s restrictions on loan originator compensation do not apply to HELOCs, but they do apply to closed-end mortgage loans secured by a…
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We cap the amount of compensation a loan originator can earn for a loan that is held in portfolio, but we do not apply the cap for loans that are sold. Does this violate the loan originator compensation rules? Our loan originators do not have lending authority and do not decide whether loans are held in portfolio or sold on the secondary market.
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We believe that this policy would violate the loan originator compensation rules, as your institution is varying loan originator compensation based on a proxy for a term of the mortgage loan transactions. Regulation Z prohibits loan originator compensation in connection with a consumer credit transaction secured by a dwelling that is based on a “term…