Do Not Pay Improper Bonuses

JAN 4, 2013 12:03pm ET

I am increasingly asked about whether subjective "performance" bonuses payable to loan officers are compliant.

In a word: NO! In theory, it is true that a truly subjective bonus paid to a loan officer having nothing to do with the terms of the loans closed would not violate LO comp rules.  In reality, no one will ever believe that a subjective bonus paid to a loan officer isn't somehow ultimately fueled by his or her profitability. Further anyone who believes that paying a "subjective" bonus somehow avoids the LO comp issues by labeling it as subjective is only fooling themselves.  First, remember that the rule specifically includes the proxy rules.  Hence, if subjective discretion is a proxy for profitability it is still a clear violation. Moreover, it is incredibly simple to demonstrate a pattern or correlation between comparative bonus amounts and the profitability of individual LOs. Indeed, all an examiner has to do is chart the bonuses and the HUD-1s to determine whether a trend exists. If such a correlation is identified a lender would quickly find itself in very hot water.

The fact if the matter is that examiners are well aware of the fact that improper bonus payments are common. This is and will remain a hot button issue for examiners. As such, for lenders who are still willing to take this “risk,” you cannot say no one warned you.