Explanations should give originators a complete picture of the LO comp plan in question. Image: Fotolia.
Explanations should give originators a complete picture of the LO comp plan in question. Image: Fotolia.

Increasingly I have been called by clients frustrated at emails and other solicitations that offer loan officers "clearly illegal" compensation plans that these would-be employers claim have been blessed by counsel.

In many cases, after looking further into these plans, I have discovered that the compensation plans are in fact lawful, and that the less-than-complete explanation of the plan was inaccurate.

For instance, I looked into a plan that purportedly permitted loan officers to be paid based upon the profitability of the loans they closed. Of course, what the job solicitation did not mention was that it was a profit sharing plan subject to the 10% cap on the loan officers’ compensation.

Some lenders believe that as long as what they do is legal, it does not matter how they describe it. Such thinking is misdirected.

First, an employee who accepts a job as a result of an inaccurate description of their compensation may have strong claims for detrimental reliance and/or misrepresentation.

Moreover, given that lenders are increasingly blowing the whistle on one another, it is a safe bet that a regulator (including the Consumer Financial Protection Bureau) could take a keen interest in a lender who advertises a clearly illegal compensation plan as self-described.

Proving that one was not violating the law in a full-fledged audit (as could be expected) can become a highly invasive, disruptive and expensive exercise. Worse, it is likely that regulators will have a strong desire to fine lenders for multiple violations uncovered in such audits.

Moreover, to the extent any compensation plan is aggressive to begin with one can count on the fact that an explanation describing a plan as having an illegal intent, could easily cause regulators to use their interpretive authority unfavorably towards the lender. This would create a scenario where an otherwise legal plan was deemed illegal based upon the lender’s self-described intent to violate the law.

Thus, the old adage, “It's not what you say but what you do” may not apply so clearly in the world of loan officer compensation. In the case of loan officer compensation, both how you describe a plan and implement a plan can be highly important.