Opinion

Why LO Comp 'Pick-A-Pay' gets Picked On (Part One)

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The so-called loan officer compensation pick-a-pay-plan is often at the center of controversy regarding its illegality. I believe the reason for this is not so much the concept as its implementation. In other words, depending on how the plan is set up and utilized its compliance level will dramatically change. This will be the first in a series explaining the serious mistakes being commonly made in connection with the use of these compensation strategies.

While there are compliant ways to institute these plans, many employers make the mistake of having several "buckets" that vary by a few basis points. Essentially each loan officer has a customized plan that they can change every quarter or so. These plans are truly designed for each loan officer and can change or vary from loan officer to loan officer by a few basis points.

Obviously, such a plan has problems. If employees can move only a few basis points every few months, then clearly they are incentivized strongly to push up their profitability a few basis points to set it higher the next change cycle. Alternatively they have to maintain it as high as possible or they could be adjusted downward. Thus, the ability for incremental adjustment coupled with employer and employee discretion over relatively short periods create substantial incentive on borrower pricing at the loan officer level. Moreover, the incremental adjustments are nearly impossible to explain or justify: “Why did loan officer X have his compensation adjusted down by 3.5 basis points and subsequently adjusted up by 4 basis points over a 9 month period?” Another question: “Why did loan officer X get paid 3.7 basis points more than loan officer Y and in turn why did loan officer Y get 4.3 basis points more than loan officer Z? Such incremental changes by a loan officer and among loan officers are difficult to justify on a legitimate basis.

Again, this is only one of a series of mistakes lenders make in connection with the implementation of pick-a-pay compensation. There are many more common mistakes we will discuss in the upcoming weeks.

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