DEC 23, 2013

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What We're Hearing

Origination-Related Reimbursements Hold Legal Risks

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WE’RE HEARING in an effort to create both production incentives and attract employees, many lenders have used a practice of reimbursing certain expenses, such as lead services, contingent on production levels.

This practice is, however, potentially unlawful. Indeed, the Department of Housing and Urban Development prohibits a lender’s employees from being forced to pay business expenses. When a lender reimburses an expense to an employee it is essentially taking the position that it is a business expense. Thus, when the lender renders reimbursement contingent upon hitting a certain production threshold, it is advising the employee it will not reimburse for those business expenses.

In addition, if the lender is only reimbursing those expenses sometimes and taking the position they are not always business expenses, they risk the possibility that the Internal Revenue Service could determine that the payments should have been subject to taxation as wages. This would be the same for state tax purposes.

Overall a far better approach is to set up an expense account where money gets deposited into based upon production levels. Then, the employee can use it for business expenses in accordance with tax guidelines. Since it is not a reimbursement, the employee would presumably not incur any expenses knowing no money was allocated in advance. In this regard there is no problem with HUD and Federal Housing Administration rules, and no inherent conflict with tax laws. Of course, like all forms compensation it has to be objective and in writing.

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