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Thursday, February 26, 2015

Permissible Loan Originator Compensation

QUESTION
Our loan officer compensation plan has been approved by the Board of Directors. Over time, it seems that the factors used for adjusting compensation have changed. We want a core set of compensation factors that must always be applied. Is there a minimum set of compensation factors?

ANSWER
There is a set of factors, mostly in the form of illustrative examples; nevertheless, if these are to be used as a sort of core set of compensation methods, they can be relied on – unless otherwise prohibited by law. This list is not to be viewed as exhaustive.

Many compensation plans have at least the following nine compensation methods.
  1. The loan originator’s overall loan volume delivered to the creditor. This can be based on the total dollar amount of credit extended or the total number of originated loans.
  2. The long term performance of the originator’s loans.
  3. An hourly rate of pay to compensate the originator for the actual number of hours worked.
  4. Whether the consumer is an existing customer of the creditor or a new customer.
  5. A payment that is fixed in advance for every loan the originator arranges for the creditor. For illustration purposes, an example would be $600 for every originated loan or $1,000 for the first 1,000 arranged loans and $500 for each additional arranged loan.
  6. The percentage of applications submitted by the loan originator to the creditor that result in consummated transactions.
  7. The quality of the loan originator’s loan files submitted to the creditor. An example would be the accuracy and completeness of the loan documentation.
  8. A legitimate business expense, such as fixed overhead cost.
  9. Compensation that complies with the exception for compensation based on a fixed percentage of the transaction amount, which can be subject to a minimum and maximum dollar amount. 

[75 FR 58,509, 58,536, codified in 12 CFR Supplement I to Part 226-Official Staff Commentary § 226.36(d)(1)-3]

Jonathan Foxx
President & Managing Director
Lenders Compliance Group