Loan originators need to understand that times have changed RADICALLY! It is not just a matter of who can pay you and support your business, but also a matter of who will keep you out of trouble and offer the security you need to thrive. This is just a short list of what you should consider. Make sure you read the guidelines because you are responsible too!
Making a move in today’s market requires more thought than ever before. Please consider the following:
- Will the company be offering QM and Non-QM loans come January? If they only offer QM loans will that affect your production?
- How are they paying you? If it sounds creative beware! Now is not the time for creative compensation plans. You are now liable just like the mortgage company. As I tell several of my top producing friends; just because an attorney gives you the opinion that you can, doesn’t mean you should. Why? If the CFPB doesn’t like it, you have to defend it!
- If you are being hired as a branch manager and you are offered override on your branch; this income is limited to 10% of your total income for the year.
- It doesn’t matter what position you hold in a mortgage company. If you do more than 10 loans per year, you are a loan originator and subject to the restrictions on LO Comp.
- If the company offers trips, merchandise and other incentives, they fall into that 10% bucket mentioned in #3. It doesn’t matter how they label it, if it is of value it goes into your 10% bucket!
- If you are offered ownership in a company, it must be a true ownership and your compensation cannot exceed the percentage of your ownership in the company. So, if the company made $1,000,000 and you own 1% then you can only receive up to $10,000 and that will not be included in the 10%. If you are offered award of stock, stock options or equity interest it is generally viewed as compensation and that will go into the 10% bucket.
- If there is any way that your compensation may be construed as a term of the transaction, it may be ruled as unacceptable. When this occurs all parties get fines and possible restitution.
- Salaries are okay and deferred income programs such as 401K’s are okay per the limitations in the guidelines.
- Pooled loan compensation programs are not okay.
- Point banks are not okay.
- Beware of compensation packages that offer you different compensation based on product or program type. This may be construed as “steering”.
- You can receive bonus on performance criteria that is not tied to a term of the transaction. However, remember that goes into the 10% bucket too.
- Do not accept income for selling other products from an affiliate of the creditor. However, if the product is a non-loan origination product you can receive commission.
- If you are a Loan Originator Organization (broker, not a creditor) you may not receive compensation from the consumer and split it with the actual loan originator because this is viewed as a term of the transaction.
- If you are a broker and the wholesaler tells you that you can switch to borrower paid comp and reduce your comp., provided it doesn’t exceed the % of the lender paid comp, do not do it. Not only will this hurt you in a fair lending exam (and the wholesaler too), but it is considered a term of transaction.
There is so much more to learn. Remember this is your career so stay informed. I strongly recommend you read the implementation guidelines.
Go to http://www.consumerfinance.gov/regulatory-implementation/. If you are still unsure, email the CFPB and they will answer the question for you.
These are my opinions and should not be construed as legal advice.
Join the discussion 11 Comments
Tammy – I see your #15 and wanted to find out more about the research from your meetings this past week.
Great post as usual.
Thanks Joe, citing references on the way. LinkedIn limits my characters so I can only pontificate for so long 🙂
Hi Joe, Okay, I believe this is what you will need
Pay particular attention to pgs. 50-54. This specifically addresses the payment from different sources. After reading it you will see why the large lenders are being conservative from an LO Comp issue and a Fair Lending issue (which I addressed to Rebecca on the LI group today)
Tammy, great post. I had two quick questions.
First, In number 5 you seem to indicate that trips or other awards of any kind are going to fall in the 10%. What if you have a clear documented contest that is based on documented performance metrics such as loan volume? I agree that without documentation of the contest results the default will be to include these in the 10%, but with the documentation I think they would be normal comp.
My second question was in regards to number 9 regarding pooled compensation. I agree that pooled comp is a problem if the individuals in the pool are compensated differently, but are you saying that pooled comp is a problem even if all individuals in the pool are compensated the same? I’m not seeing the direct statements on pooled comp in the rule that would prevent anything but circumstances where the originators are paid differently.
Thank you Brock, I will post the citing references for all shortly. However, a quick answer to Number 9. At the regulatory conference, the CFPB counsel, and two high profile attorneys were asked about “any kind of pool” and their response was quite clear. No type of pool is allowed and they wish lenders would understand that. They also said the same thing about point banks. They want things clean and completely transparent. If you originate Y, you get paid X on that file. So while they may not have an exact citing, it should be noted that if this is their opinion then you would need to pay legal counsel to defend your company’s interpretation which can be quite costly. Like most legal issues, it doesn’t necessarily matter who has the right view, it matters who has the deepest pockets.
Here is your reference to Number 5. It is first referred to on page 22 and later on page 44 on this link. Basically anything of value, no matter what it is called or defined is included in the 10%. If you read further you will see how they use the trips/incentive in their examples and most specifically on page 48.
Please let me know if this answers your questions.
This is very helpful Tammy!! The one thing I would say in response is that this confirms my stance that you can give trips and other awards and not have them be subject to the 10% rule, but only if you can demonstrate that those items are paid without regard to profits. For example you might set up a trip for the individual that closes the most loans in the year by unit volume as long as you can document that the person was bonused for that reason and that the bonus was not derived from a discretionary profit based pool of money. It definitely ups the game for documenation of these items though.
Tammy- I have not been able to reference anywhere the 10% max compensation to a Branch Manager for pre-determined and fixed override . Would you mind sending me your reference point on #5. We are a OB customer and I plan to schedule time with you to go over the OB tools in for Fair Lending . Thanks for help
Can you please tell me what #9 is.
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Please see page 41 of the link below. Essentially the CFPB does not want us to mix up production into a pool and then compensate from that pool. Some companies were doing that and as a result the CFPB issued guidelines for it. I hope this helps!
You will not find it under the language of a “branch manager” or any other title except mortgage loan originator or loan originator organization. The CFPB wanted to keep things simple so they determined that if you do more than 10 closings in a calendar year you are considered a loan originator and subject to LO comp rules. If you do less than 10 closings then you are not a loan originator. The CFPB counsel at the regulator conference made that very clear. He stated it didn’t matter what you call the position (since we are famous for lots of different names), if they close more than 10 loans (personally) then they are under LO Comp and the 10% applies for non-deferred compensation. I’m attaching the link below to the guidelines. Please let me know if you need anything else and I hope to schedule time with you regarding the real time fair lending software.