April 10, 2014 at 9:50 am #5694
I thought I submitted this last night, but couldn’t find it this morning. I apologize if this is a duplicate entry.
Our current LO Comp plan is paid via a commission. The schedule of commissions is tiered according to the total dollar volume of the LO for the month.
Our Mortgage Division Manager would like to change the plan to provide two different schedule of commissions, depending upon the referral source. If the mortgage came from within the bank as a referral from a non-MLO employee, the commission payout would be less than the loans that came from networking efforts of the LO. It would still be based on total volume.
I believe this would be compliant under Reg Z as it would pass the test for not being a proxy: The LO would not have the ability to impact whether the customer came via a bank employee referral or not.
Do you agree? Would there be any compliance concerns that I may be missing with such a plan?
Thanks!April 14, 2014 at 9:58 am #5717rcooperKeymaster
The compensation is based on the LO’s total loan volume (and will be fixed – not changing based on loan terms of the transaction) and does not appear to be a proxy for a term, so I don’t see a problem with this type of arrangement.
I’ll ask Jack to chime-in if he sees a problem.April 14, 2014 at 10:18 am #5718
Thanks, Robin. One other issue has arisen along with the proxy question. The tiers for the percentage of commission varies per the monthly volume of the LO. For example, if an LO closes a total of $500,000 in a month, they will recieve 1.20% of $500,000. If they fall in the lower tier, of less than $500,000, say $300,000, they will receive 1.00% of $300,00. We are being questioned because of this portion of the commentary. I believe it does not apply because the compensation is based on total volume of all loans closed during the month, not the amount of an individual loan. Do you agree? (see below)
From the Commentary: 9. Amount of credit extended. A loan originator’s compensation may be based on the amount of credit extended, subject to certain conditions. Section 1026.36(d)(1) does not prohibit an arrangement under which a loan originator is paid compensation based on a percentage of the amount of credit extended, provided the percentage is fixed and does not vary with the amount of credit extended. However, compensation that is based on a fixed percentage of the amount of credit extended may be subject to a minimum and/or maximum dollar amount, as long as the minimum and maximum dollar amounts do not vary with each credit transaction. For example: i. A creditor may offer a loan originator 1 percent of the amount of credit extended for all loans the originator arranges for the creditor, but not less than $1,000 or greater than $5,000 for each loan. ii. A creditor may not offer a loan originator 1 percent of the amount of credit extended for loans of $300,000 or more, 2 percent of the amount of credit extended for loans between $200,000 and $300,000, and 3 percent of the amount of credit extended for loans of $200,000 or less.April 15, 2014 at 11:09 am #5728rcooperKeymaster
Bankoftn, this is a really good question.
Even though your compensation plan is based the total volume, I am concerned that because your compensation varies by the dollar amount it could be considered basing the compensation on a term of the transaction. For example, even though you are not technically paying varied rates for each transaction, in the end this policy provides incentive for the loan officer to increase the amount of each loan because he/she is indirectly compensated based on loan amount. The portion of the commentary referenced above states that it is acceptable to pay a loan originator based on a percentage of the amount of credit extended as long as the percentage is fixed and doesn’t vary with the amount of credit extended – it doesn’t say only for individual transactions. And although the example given involves a single transaction, I don’t think it was intended to be exclusive. If you look at Paragraph 36(d)(1)-2.iA, this is where it states compensation based on total volume is acceptable, but it also references 36(d)(1)-9, the paragraph you quoted above. In the plan you described the compensation does vary with the amount of credit extended so I would recommend a fixed percentage.
We’ll see if Jack has any additional thoughts.April 16, 2014 at 5:09 pm #5731
Thanks, Jack & Robin. I got Jack’s response about “dancing” close to the edge. We bankers tend not to be known for our dancing skills — at least for me! We are changing our plan to a flat % regardless of monthly volume.
I appreciate you keeping me from getting voted off Dancing with the Bankers!
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