SEP 27, 2013

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Compliance Matters

Compensating Nonproducing Managers

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I was inundated this week with questions pertaining to my statements recently that nonproducing branch managers will not be able to receive profitability after January of 2014. Rather than regurgitate what I have said before, consider the following: (1) the rules clearly and explicitly state that anyone who assists a consumer in applying for or obtaining a loan is an originator unless specifically excluded; (2) the Consumer Financial Protection Bureau excluded administrative and clerical tasks from the definition—not management; (3) the CFPB has stated that if you hold yourself out to the public as engaging in origination activities you are an originator regardless of whether you actually undertake such tasks; and (4) origination includes making referrals based upon characteristics relevant to a credit decision. 

Now, consider the real world: How many branch managers never assist consumers applying for a loan, never hold themselves out to the public as originating loans, and never refer clients to other loan officers in their branch after considering some factor of loan worthiness? If your answer is that branch managers never engage in the above activities, what is it that they do? The fact of the matter is that in the real world these things do go on from time to time and that renders a branch manager an originator under the LO comp rules. Certainly, when one considers the fact that the CFPB has specifically stated its intention to draw the lines of origination as broadly as possible, the likelihood of this agency concluding a branch manager is not an originator is exceedingly small.   Furthermore, in prior proposals—that have not been recanted—the CFPB expressly stated that a nonproducing branch manager was an originator.

On the other hand, the risk is immense. A branch manager improperly paid off of actual revenue could render all of the loans under his/her authority improper, subject to fines and/or borrower actions, and certainly subject to repurchase. Stated another way, a mistake on branch manager compensation can easily be considered an extinction level event. When examining the matter from that perspective, the question has to be posed: are you willing to take such a substantial risk on the small chance that the CFPB would see it your way? 

My advice is to put your energy into developing a branch manager comp plan that is compliant and results in the outcomes consistent with the parties’ intentions. Solutions do exist and are workable.  The alternative is simply not worth the risk.

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