Loan Officer Compensation Plans: Some Basic Concepts

May 18, 2017
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Question: We are in the process of reviewing our loan officer compensation plans, which means we are also looking closely at the employment agreements. I realize that the details in this area are very complicated, but would it be possible to offer some basic concepts that should be considered in our review analysis for the employment agreements?
 
Answer
Under the Truth in Lending Act and its implementing Regulation Z, the Fair Labor Standards Act and the Interagency Guidance on Incentive Compensation Plans, there are many factors that must be considered in such a review. These regulations, in particular, have all contributed to complicating the employment contract for a mortgage loan officer (MLO). State employment law also applies. In developing compensation plan guidelines for employment agreements, it is helpful to work with a risk management professional.
 
Here are some concepts every financial institution should consider when structuring an MLO employment agreement:
 
►Do not impose a monetary penalty on an MLO for failing to follow policy (i.e., collecting all required fees) on a per loan basis. That amounts to varying compensation based upon a term of the transaction. Instead, use a semi-annual review to adjust commission rates positively or negatively.
►If the commission rates paid to MLOs vary, make certain those differences in compensation are not reflected in the rates the borrowers are charged.
►Make sure that each MLO receives at least the minimum wage and that each MLO is paid for overtime appropriately. Require MLOs to submit records for hours worked. Maintain the records.
►Protect the institution’s financial records and intellectual property by incorporating strict confidentiality requirements and non-solicitation provisions into the employment agreement.
►Consider the inclusion of an arbitration clause to settle disputes, and in so doing minimize the potential for class action litigation.
►Incorporate qualitative factors into the employment agreement so that compensation is not tied exclusively to volume. Incentive compensation based exclusively on quantitative factors is subject to regulatory criticism.
 
In the review process, it is critically important not only to consider the applicable federal and state regulations, but also conduct a thorough review of their commentaries and supplementary information.

Jonathan Foxx is managing director of Lenders Compliance Group, the first and only full-service, mortgage risk management firm in the United States, specializing exclusively in outsourced mortgage compliance and offering a suite of services in residential mortgage banking for banks and non-banks. If you would like to contact him, please e-mail Compliance@LendersComplianceGroup.com.

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