| Copyright 2011 First National Compliance Solutions Inc. |
| First National Compliance Solutions Inc. |
_________________________
The Do’s and Don’ts of Complying with The FED’s
LO Comp Rule By Jonathan Pinard & Bonnie Nachamie
From the National Mortgage Professional Magazine June 2011 Issue
We are 60 days into the effective date of the Fed’s Rule on Loan Officer Compensation-why
are there still so many misunderstandings on how a loan officer can be compensated?
Limited Guidance and No Testing
Unlike other rules issued by HUD, State Banking Departments and other Federal Agencies the
Fed’s Rule is one page long, does not include model 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 loan officers can be compensated more on 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 Loan Originator’s commissions on brokered loans that were
“Borrower Paid Loans”. The guidance that was offered by the Fed specifically stated that
Loan Originators could only be paid hourly or by salary in a borrower paid transaction.
Don’t pay less on some deals because of YSP Limitations. Limitations on YSP’s for
specialty products that are brokered to banks have made some think that they can reduce a
loan officer’s compensation for those programs. This violates the provision that loan officer’s
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.
Do Figure out your expenses on an average loan. Calculate how an individual loan
originator has produced in the past and come up with a fixed basis point number that will fairly
compensate your loan originator without it being tied to profitability or loan type. For higher
producers or to encourage increased volume; use both 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
Do: The Fed’s Rule Requires that your compensation plan is in writing. The Rule
provides for steep penalties for non-compliance. Put your individual loan originators
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.
Do Have a written Pricing Policy and make sure its fair lending complaint. Now that your Loan
Originators 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.
Do Update your Fair Lending Plan. In those cases where some loan officers 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.
LO Comp Rule By Jonathan Pinard & Bonnie Nachamie
From the National Mortgage Professional Magazine June 2011 Issue
We are 60 days into the effective date of the Fed’s Rule on Loan Officer Compensation-why
are there still so many misunderstandings on how a loan officer can be compensated?
Limited Guidance and No Testing
Unlike other rules issued by HUD, State Banking Departments and other Federal Agencies the
Fed’s Rule is one page long, does not include model 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 loan officers can be compensated more on 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 Loan Originator’s commissions on brokered loans that were
“Borrower Paid Loans”. The guidance that was offered by the Fed specifically stated that
Loan Originators could only be paid hourly or by salary in a borrower paid transaction.
Don’t pay less on some deals because of YSP Limitations. Limitations on YSP’s for
specialty products that are brokered to banks have made some think that they can reduce a
loan officer’s compensation for those programs. This violates the provision that loan officer’s
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.
Do Figure out your expenses on an average loan. Calculate how an individual loan
originator has produced in the past and come up with a fixed basis point number that will fairly
compensate your loan originator without it being tied to profitability or loan type. For higher
producers or to encourage increased volume; use both 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
Do: The Fed’s Rule Requires that your compensation plan is in writing. The Rule
provides for steep penalties for non-compliance. Put your individual loan originators
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.
Do Have a written Pricing Policy and make sure its fair lending complaint. Now that your Loan
Originators 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.
Do Update your Fair Lending Plan. In those cases where some loan officers 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.