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]