QUESTION
If one of my loan officers recruits a new loan officer for us, is it
legal to bonus the existing loan officer ten (10) basis points for each of the
loans that the new loan officer brings in?
ANSWER
This is an interesting question because the bonus compensation is
linked to new loans brought in by another loan officer. This raises questions regarding compliance with
anti-kickback provisions of Section 8 of the Real Estate Settlement Procedures
Act (RESPA), and the Loan Officer Compensation rules of the Truth in Lending
Act (TILA).
The bonus plan probably does not violate RESPA §8, if both loan
officers are W-2 employees, because Regulation X, the implementing regulation
for RESPA, specifically permits the following:
“(iv) A payment to
any person of a bona fide salary or compensation or other payment for goods or
facilities actually furnished or for services actually performed;” and
“(vii) An employer's
payment to its own employees for any referral activities.” (Emphasis
added.) [i]
Also, assuming the bonus compensation is not paid by the consumer, so
that the loan officers are not paid “dual compensation” by both the loan
originator organization and the consumer in violation of Regulation Z, the
implementing regulation for TILA[ii], such a bonus may be permissible under the TILA Loan Officer Compensation
rules under certain conditions:
1. The compensation
plan does not result in any kind of “steering” of consumers into loans not in
their interest in order to increase the loan officer’s compensation. Such
“steering” is prohibited under Regulation Z.[iii]
2. The compensation
is not based on the term of a transaction or the profitability of a transaction
or pool of transactions under Section 36(d)(1) of Regulation Z.[iv]
In general, this section prohibits compensation based on “profits,” unless
profits are from business other than mortgage-related business. However, the
Rule adds two exceptions to this general prohibition: (1) mortgage-related
business profits can be used to make
contributions to certain tax advantaged retirement plans (which does not appear
to be the case here); and (2) mortgage-related business profits can be used to pay bonuses and
contributions under certain other plans if either the amount paid does not
exceed 10% of the individual loan originator’s total compensation or the loan
originator acts as an originator on 10 or fewer transactions over the preceding
12 months.[v] The operative language of Reg. Z is as
follows:
“(iv) An individual
loan originator may receive, and a person may pay to an individual loan
originator, compensation under a non-deferred profits-based compensation plan (i.e.,
any arrangement for the payment of non-deferred compensation that is determined
with reference to the profits of the person from mortgage-related business),
provided that:
(A) The
compensation paid to an individual loan originator pursuant to this paragraph
(d)(1)(iv) is not directly or indirectly based on the terms of that individual
loan originator's transactions that are subject to this paragraph (d); and
(B)
At least one of the following conditions
is satisfied:
(1) The
compensation paid to an individual loan originator pursuant to this paragraph
(d)(1)(iv) does not, in the aggregate, exceed 10 percent of the individual loan
originator's total compensation corresponding to the time period for which the
compensation under the non-deferred profits-based compensation plan is paid; or
(2) The
individual loan originator was a loan originator for ten or fewer transactions
subject to this paragraph (d) consummated during the 12-month period preceding
the date of the compensation determination.”
Under the scenario you have described, it is also possible that
the loan officer may not actually qualify as a “loan originator” on any of the
transactions you refer to, if he or she does not engage in any of the
activities on any of the subject transactions that are described in the
definition of “loan originator” under Regulation Z Section 1026.36(a). In that event
the limitations of the Rule would not apply. The applicable definition of “loan
originator” is as follows:
“(a)(i) For purposes
of this section, the term ‘loan originator’ means a person who, in expectation
of direct or indirect compensation or other monetary gain or for direct or
indirect compensation or other monetary gain, performs any of the following
activities: takes an application, offers, arranges, assists a
consumer in obtaining or applying to obtain, negotiates, or otherwise
obtains or makes an extension of consumer credit for another person; or
through advertising or other means of communication represents to the public
that such person can or will perform any of these activities. The term “loan
originator” includes an employee, agent, or contractor of the creditor or loan
originator organization if the employee, agent, or contractor meets this
definition. The term “loan originator” includes a creditor that engages in loan
origination activities if the creditor does not finance the transaction at
consummation out of the creditor's own resources, including by drawing on a
bona fide warehouse line of credit or out of deposits held by the creditor. All
creditors that engage in any of the foregoing loan origination activities are
loan originators for purposes of paragraphs (f) and (g) of this section. The
term does not include:
(A) A person who
does not take a consumer credit application or offer or negotiate credit terms
available from a creditor, but who performs purely administrative or clerical
tasks on behalf of a person who does engage in such activities.” (Emphasis
added.)
Since the terms “arranges,” “assists,” and
“otherwise obtains” are broad, it is theoretically possible that someone could construe the loan officer’s
recruiting activities of another loan officer as falling within those specified
activities, but that is not likely. Nevertheless, it is probably safest to assume
that the loan officer is an “originator” and to try to comply with the terms of
the exception to the L.O. Compensation Rule outlined above.
Michael Pfeifer
Director/Legal & Regulatory Compliance
Lenders Compliance Group &
Servicers Compliance Group
[i] 12
CFR §1024.14(g)(iv) and (vii)
[ii] 12
CFR §1026.36(d)(2)
[iii] With
certain specified exceptions, under 12 CFR 1026.36(e)(1) “[i]n connection with
a consumer credit transaction secured by a dwelling, a loan originator shall
not direct or “steer” a consumer to consummate a transaction based on the fact
that the originator will receive greater compensation from the creditor in that
transaction than in other transactions the originator offered or could have
offered to the consumer, unless the consummated transaction is in the
consumer's interest.
[iv] See
12 CFR §1026.36(d)(1)
[v] See
Section 1026.36(d)(1)(iii)-(iv)
