Skip to main content

The Do’s and Don’ts of Complying With the Fed’s LO Comp Rule

Jonathan Pinard
Aug 12, 2011

We are 60 days into the effective date of the Federal Reserve Board’s rule on loan originator (LO) compensation … why are there still so many misunderstandings on how an LO can be compensated? Limited guidance and no testing Unlike other rules issued by the U.S. Department of Housing & Urban Development (HUD), state banking departments and other federal agencies, the Fed’s rule is one-page long, does not include model loan originator (LO) compensation plans, and the guidance that was issued by the Fed was, by and large, in direct response to questions that were designed to find a way around the rule. More importantly, the rule is unprecedented. The government has, for the first time, severely limited the ways in which an employer may pay an employee. Don’t compensate based on loan program Despite industry guidance to the contrary, many people think that LOs can be compensated more on Federal Housing Administration (FHA) loans than they can be on conventional financing. The argument that those loans may take longer to process or are harder to originate will ultimately fall on deaf ears especially if the borrower ends up paying more. Don’t pay your LOs commissions on brokered loans that were “Borrower-Paid Loans” The guidance that was offered by the Fed specifically stated that LOs could only be paid hourly or by salary in a borrower-paid transaction. Don’t pay less on some deals because of yield spread premium (YSP) limitations Limitations on YSPs for specialty products that are brokered to banks have made some think that they can reduce an LOs’ compensation for those programs. This violates the provision that an LOs’ compensation is not to vary based on loan product. Do be “mindful of your buckets” If you’ve chosen different compensation levels from your lenders, make sure you document the benefit for the borrower if you earned more than you would have from another lender. Figure out your expenses on an average loan Calculate how an individual LO has produced in the past and come up with a fixed basis point number that will fairly compensate your LO without it being tied to profitability or loan type. For higher producers or to encourage increased volume, use a tiered structure. Volume bonuses can even be done on a quarterly, semi-annual or annual basis to ensure that bonuses are only paid for consistent, rather than sporadic, increases in volume. Does the Fed’s rule require your compensation plan in writing The Rule provides for steep penalties for non-compliance. Put your individual LO compensation plan in writing. A compliant plan that is followed is the only defense for accusations of steering a borrower to a more expensive loan not in their best interest. Have a written pricing policy and make sure its fair lending-complaint Now that your LO compensation structure needs to be in writing, the obvious question from a regulator is how and why do you price loans the way you do and how might that impact your borrowers from a fair lending perspective? Update your fair lending plan In those cases where some LOs have higher commission structures that will result in higher pricing to their borrowers, a well-defined fair lending plan with a testing component to ensure that a fair lending violation related to disparate treatment or disparate impact is avoided. This article was co-authored by Bonnie Nachamie. Jonathan Pinard is president and Bonnie Nachamie is chief executive officer of First National Compliance Solutions Inc. in Merrick, N.Y. Jonathan may be reached by phone at (800) 400-4134 or e-mail [email protected] Bonnie may be reached by phone at (800) 400-4134 or e-mail [email protected]
Published
Aug 12, 2011
'A Long Road To Normal'

Nominated again to lead The Fed, Powell tells Senate committee to expect three rate hikes, but 'if we have to raise interest rates more over time, we will.'

Regulation and Compliance
Jan 11, 2022
CFPB: Complaint Response Worsens At Big 3 Credit Bureaus

Report claims Equifax, Experian, and TransUnion routinely failed to fully respond to consumers with errors.

Regulation and Compliance
Jan 10, 2022
The Fed Names Chairs, Deputy Chairs For 12 Reserve Banks

In recent years, the Federal Reserve System has worked to increase the overall diversity of the Reserve Bank and branch boards of directors and continues to build on those efforts.

Regulation and Compliance
Jan 06, 2022
The Fed: Rate Hike Likely Coming in June

Federal Open Market Committee's December minutes reveal discussion of first hike in federal funds rate in 2Q of 2022, as well as of ending asset purchases by March.

Regulation and Compliance
Jan 05, 2022
AARMR No Protection For Savanah Scares

Conference provides opportunity for regulators to interact, discuss common topics

Regulation and Compliance
Jan 04, 2022
McCargo Sworn In As Ginnie Mae President

Former HUD official becomes the first female to lead the Government National Mortgage Association.

Regulation and Compliance
Jan 04, 2022