As many know, the Consumer Financial Protection Bureau released its new LO compensation rule, which included a provision that loan officers could receive bonuses based upon the profit of their employer’s mortgage related business, so long as (1) the bonus did not exceed 10% of the individual loan originator’s compensation over the relevant time period and (2) the compensation was not paid based on the terms of the individual loan officer’s transactions. To explain it differently, the CFPB is now permitting a payment of up to 10% of a loan officer’s income in bonus of any sort, be it through a predetermined formula and/or a subjective assessment, so long as that bonus is not based upon the terms of the loans originated by the loan officer.
While this change does provide flexibility it is important to note that it is only a small percentage of a loan officer’s income and it cannot be used to pay a bonus on the terms of the loans closed by the originator. While many lenders will be tempted to use the bonus subjectively to “gross up” a loan officer based upon his/her loans, a better practice is to use a set of objective and subjective factors to prevent a pattern of conduct that would ultimately lead to the conclusion that the lender was using the bonus to improperly compensate based upon the terms of the loan. In other words, lenders should use an objective set of performance factors having no relation to profitability to determine eligibility to receive the bonus. Thereafter, subjective criteria—still not tied to the terms of the transaction—could be utilized without great concern that any patterns would correlate to loan terms. The fact that legitimate objective eligibility criteria first must be satisfied would essentially negate an accusation that the bonuses was merely being paid to gross up loan officers based upon the terms of loans closed.
Stay tuned, the new regulations provide a ton of changes and new clarifications. My weekly blog is going to be focusing on all of them in the coming weeks.