Better late than never! Yesterday the Consumer Financial Protection Bureau provided long-awaited guidance (CFPB Bulletin 2012-02) on the Regulation Z Loan Originator Compensation rules that were effective in April 2011.
The Compensation Rules provide that no loan originator may receive (and no person may pay to a loan originator), directly or indirectly, compensation that is based on any terms or conditions of a mortgage transaction. The Commentary to the Regulation clarifies that compensation includes salaries, commissions, and annual or periodic bonuses. The Commentary also states that the terms or conditions of a transaction include the interest rate, loan-to-value ratio, or prepayment penalty. Furthermore, the Commentary provides that compensation may not be based on a factor that is a proxy for a term or condition, such as a credit score, when the factor is based on a term or condition such as the interest rate on the loan. Finally, examples are also provided in the Commentary of when compensation is not based on a transaction’s term or condition, such as basing compensation on the long-term performance of the loan and whether the consumer is an existing customer of the creditor or a new customer.
Since the effective date questions have arisen about whether a financial institution can, consistent with the Compensation Rules, contribute to Qualified Plans for employees, including loan originators, if employer contributions to such plans are derived from profits generated by mortgage loan originations.
The Compensation Rules (including the Commentary) do not expressly address whether the loan origination provisions apply to contributions made to Qualified Plans. The CFPB’s view is that the Compensation Rules permit employers to contribute to Qualified Plans out of a profit pool derived from loan originations. That is, financial institutions may make contributions to Qualified Plans for loan originators out of a pool of profits derived from loans originated by employees under the Compensation Rules.
The CFPB choose not to provide answers at this time to questions about how the Compensation Rules apply to profit-sharing arrangements/plans that are not in the nature of Qualified Plans. The Federal Reserve Board previously provided unofficial guidance that profit sharing bonuses for loan originators was unacceptable.
The bulletin is available at: https://files.consumerfinance.gov/f/201204_cfpb_LoanOriginatorCompensationBulletin.pdf