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Tolerance Cures and Compensation

One of the pleasant surprises of the Consumer Financial Protection Bureau's final loan officer compensation rule was the acknowledgement that it is occasionally permissible to adjust a loan officer's compensation in the course of a loan. But no one should mistake the final regulations as a green light to impact loan officers' compensation whenever a lock-date is missed. To the contrary, the CFPB's final rule allows adjustments to compensation only where the events leading to the change were unforeseen. Hence, a loan officer who merely over-promised and under-performed cannot have his compensation adjusted on a particular loan. On the other hand, a loan officer whose borrower missed a lock date because of a natural disaster would be subject to an adjustment of compensation. The overriding concept is the CFPB is willing to allow banks to share a "loss" with loan officers when it is clear the problem was never expected or intended. However, the CFPB is concerned that permitting adjustments could lead to gamesmanship where "mistakes" could be utilized to pay loan officers on the terms of the loans they originate.

Specifically, the CFPB stated that adjustments to compensation would be viewed in their totality. A lender's mid-loan adjustments would be reviewed to ascertain whether a lender was abusing the practice—as opposed to permitting adjustments only where truly unforeseen events lead to the need for a reduction in compensation. A key, according to the CFPB, would be adherence to consistent policies and clear documentation supporting the unforeseen event warranting the compensation adjustment. In addition, the frequency and pattern of such adjustments will be scrutinized.

In the end, there will be fewer situations permitting changes to compensation than lenders would want and the situations where lenders would most desire impacting compensation do not fall within the parameters permitting mid-loan compensation change. Still, given that most lenders expected nothing of this sort, the fact that lenders don't have to take the financial hit all the time is a positive step in the right direction. It is not, however, open season where lenders can start using compensation adjustments mid-stream to address performance deficiencies of originators.

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