As lenders grapple with a shortage of qualified talent, many are turning to incentive compensation plans as a means of attracting and retaining best-in-class employees. But just how creative can lenders get while ensuring incentive compensation plans remain compliant with current regulations?
We asked Loretta Salzano, lending compliance attorney and founding partner of Franzen and Salzano, P.C., to shed light on lenders’ biggest areas of confusion surrounding loan originator (LO), branch manager and operations personnel compensation. Here is what she had to say:
1. Is it okay to pay loan originators differently based on referral source?
While lenders can pay LOs differently based on a loan’s referral source, it’s important that neither lenders nor LOs mischaracterize a loan’s referral source in an attempt to receive more favorable compensation. For example, if an LO ends up giving a price concession on a self-sourced loan, any attempt by the company to recoup expenses by recharacterizing the lead source as a house loan would be considered fraudulent.
2. Can an LO assistant’s pay be deducted from the LO’s pay?
Lenders can pay LOs less if the LO has an assistant, but they should avoid characterizing the pay differential as a direct “deduction” of the cost of the LOA. This will ensure lenders stay on the right side of HUD’s net branching prohibition. Further, LO compensation must remain consistent across loans; an LO cannot receive more compensation for some loans and less for others because of the presence or absence of an assistant, as such arrangements create an incentive for illegal steering.
3. Can the commission amount paid to a terminated LO be based on the status of the loan at time of termination?
The LO Comp Rule doesn’t specify a certain time in the pipeline when LOs are entitled to compensation. Instead, this matter is dictated by individual employment contracts. It is in a lender’s best interest to ensure all contracts clearly spell out when compensation is earned and how compensation is treated for pipeline loans at time of termination.
4. Can commission be recaptured for EPDs or EPOs?
The LO Comp Rule generally allows compensation to be determined based on the long-term performance of loans an LO originates, including early payment defaults (EPD) and early payoffs (EPO). However, employment laws often prohibit “claw backs.” A smart risk management strategy is to state in the employment contracts that a commission is not earned until the expiration of a defined EPO or EPD period.
5. What type of expenses can be deducted from LO commissions?
Lenders cannot deduct any expenses tied to a loan type or term, such as uncollected appraisal or credit report fees or expenses related to cures or expired locks. However, expenses that are not tied to a loan type or term — such as the cost of special marketing campaigns or event sponsorships — can be deducted from commissions under the LO Comp Rule.
6. Can minimum wage paid to a LO be treated as a draw against commissions?
Many lenders pay LOs a recoverable draw against future commissions. In recovering those draws, lenders must never touch the employee’s minimum wage or any overtime compensation to which they’re entitled. However, it is permissible to wait to pay incentive compensation until the earned commissions exceeds the minimum wage earned.
7. Can producing branch managers be paid incentive compensation for effective P&L management?
Lenders can incentivize for effective P&L management of non-loan term expenses like rent, salaries and overhead costs. Lock fees, uncollected appraisals or credit report fees or any other term-based expenses are off limits.
8. What about non-producing versus producing branch managers?
If a CFPB examiner observes a “non-producing” branch manager feeding loans to other LOs, it could mean a world of trouble for the lender. Setting up the right contracts, policies and procedures can help prevent this activity, and lenders should keep an eye on all of the people working under non-producing managers for anything suspicious.
9. What regulations do I need to follow when it comes to incentivizing operations and fulfillment personnel?
The LO Comp Rule applies to anyone involved in originator activities. It’s important that lenders establish clear job duties and restrict individuals from engaging in loan originator activity where they shouldn’t be.
State wage and hour laws, the federal Fair Labor Standards Act and investor guidelines may indirectly factor into compensation. Lenders should consult with their HR team, employment counsel and investors.
10. What type of quality and performance metrics can be used for incentive compensation structures?
It is permissible to incentivize based on pull-through rate and to pay differently based on customer satisfaction surveys or ratings. Lenders are also free to pay based on turn times, which encourages a clean, complete package that isn’t moving back and forth to underwriting. And of course, lenders can simply pay based on unit or loan volume or use tiered structures.
Disclaimer: The material discussed is presented for informational purposes only and is not intended to constitute legal advice.