REGULATION Z – LOAN ORIGINATOR COMPENSATION RULES

Everyone seems aware that Regulation Z rules, which were effective on April 1, 2011, state that no loan originator shall receive and no person shall pay to a loan originator, directly or indirectly, compensation in an amount that is based on any of the transaction’s terms or conditions.

Everyone also seems aware that the term “compensation” includes salaries, commissions, and any financial or similar incentive provided to a loan originator that is based on any of the terms or conditions of the loan originator’s transactions, including an annual or other periodic bonus. That information comes directly from the regulation.

But everyone seems surprised that compensation includes annual or periodic profit sharing bonuses. The rule states that loan originator compensation can’t be based on the terms or conditions of the loan. The last time I checked bank profits include, in significant part, income from rates and fees on loans.

The doubters continue to demand proof, “From whence doth this foul interpretation originate?” The Official Staff Commentary specifically states that the term “compensation” includes an annual or other periodic bonus. A bonus is a bonus. As additional proof please listen to the Federal Reserve Board’s staff attorney’s own words. On March 17, 2011 the Fed conducted an Outlook Live Webinar on the Regulation Z Compensation Rules. A recording of the program is available at https://www.philadelphiafed.org/bank-resources/publications/consumer-compliance-outlook/outlook-live/2011/loan-originator-compensation.cfm.  You should listen to the whole recording, but the “proof” appears about 46:15 into the recording, when Paul Mondor, Senior Attorney, discusses profit sharing as compensation. The pertinent comments last for about two minutes.

2 thoughts on “REGULATION Z – LOAN ORIGINATOR COMPENSATION RULES

  1. Would this also apply to “profit sharing” programs that are not “bonuses” per se but are in connection with 401K plans and distributed to every employee of the bank?

    1. Kayla,

      The regulation does dot mention retirement plans, but some examiner’s are streching in that direction. Since there is no official interpretation on this issue, you should contact your examiner and follow their interpretation.

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