This week the Consumer Financial Protection Bureau released correspondence clarifying (or rather correcting) the Federal Reserve Board's interpretation of the LO comp rules. In previous conference calls, various Federal Reserve employees stated that the LO comp rules prohibited profit of loans from having direct impact whatsoever on an LO's compensation. Specifically, the FRB stated that an LO could not participate in a bank's profit sharing plan, if any of the profits were derived from lending operations. Despite the overreaching nature of the FRB's interpretation, up to this point, it was the only guidance that existed.
Now, the CFPB has pulled back and stated that LO's can participate in Qualified Plans (employee stock ownership, 401K, and Profit Sharing plans) even if the lending operations contribute to the profits out of which such Qualified Plans are funded.
While this change is overdue and makes obvious sense, Lenders should take care not to stretch the import or intent of this change too far. Indeed, the terms "Qualified Plan" (although not defined or explained by the CFPB in its release) commonly refers to plans approved by and subject to strict constraints of the Employee Retirement Income Securities Act (ERISA). Moreover, the prohibitions in terms of creating proxies for compensation based upon loan terms remain intact. As such, Lenders who might consider using the CFPB's issuance to make a significant change to their compensation structures should not misinterpret it as a significant overall change capable of redefining the manner in which LO's can be paid. The change by the CFPB merely reflects and acknowledges the fact that it was inequitable to require employers to exclude certain groups of employees from qualified retirement plans. It does not re-write the compensation rules or provide a vehicle to create what employers could term "retirement accounts" that would not be considered as "qualified" under the strict rules of ERISA.