A Higher Standard for Bank HR Departments (Part 1)
With an additional overlay of state and federal regulation, employment law issues at financial institutions take on an additional level of complexity. Whether it is the new regulations affecting permissible compensation practices for mortgage loan originators, state and federal licensing requirements or complex rules applicable to insider transactions, human resource professionals who work in financial services need to be attuned to the special rules that apply to employees and executives at their institutions.
This article is the first installment in a six-part series on banking regulations that impact your financial institution’s Human Resources Department. These materials originally were presented to attendees of the 26th Annual Baird Holm Labor Law Forum.
Part 1: Mortgage Loan Originator Compensation
Regulation Z has been amended several times over the last few years to implement rules that restrict the types of compensation that may be paid to mortgage loan originators (MLOs).
These rules generally regulate how compensation is paid to an MLO in most closed-end mortgage transactions, including:
- Prohibiting an MLO’s compensation from being based on the terms of the transaction or a proxy for a transaction term.
- Permitting certain methods of compensating MLOs using bonuses, retirement plans, and other compensation plans that are based on mortgage-related profits.
- Prohibiting MLO’s in a transaction from being compensated by both the consumer and another person, such as a creditor.
Depository institutions (including credit unions) and other creditors must establish and maintain written policies and procedures to monitor compliance with the various new and existing rules applicable to individuals who are MLOs covered by the rule.
Scope of the MLO Compensation Rule
Under the rule, a “loan originator” generally includes individuals and entities that perform for compensation “loan origination activities,” such as:
- Taking an application.
- Arranging a credit transaction.
- Assisting a consumer in applying for credit. A loan originator assists a consumer in obtaining or applying for credit by advising on particular credit terms that are or may be available to the consumer based on the consumer’s financial characteristics.
- Offering or negotiating credit terms. Credit terms include rates, fees and other costs. Credit terms are selected based on the consumer’s financial characteristics when those terms are selected based on any factors that may influence a credit decision, such as debts, income, assets or credit history.
- Making an extension of credit.
- Referring a consumer to a loan originator or creditor. Referring is an activity included under each of the activities of offering, arranging, or assisting a consumer in obtaining or applying to obtain an extension of credit.
- Advertising or communicating to the public that you can or will perform any loan origination services.
You are not a loan originator simply because you perform the following activities:
- Provide general explanations, information, or descriptions of credit products in response to consumer queries.
- Describe other product-related services, such as optional monthly payment methods via telephone or via automatic account withdrawals, the availability and features of online account access, the availability of 24-hour customer support, or free mobile applications to access account information.
- As an employee of a creditor or loan originator, provide contact information of a loan originator or creditor for whom you work or of another person who works for that entity so long as you do not discuss particular credit terms with the consumer that are or may be available from a creditor or loan originator to that consumer selected based on the consumer’s financial characteristics, or direct the consumer to a particular loan originator or creditor seeking to originate credit transactions to consumers with the consumer’s financial characteristics based on the employee’s assessment of those characteristics.
- Perform loan-processing activities, such as compiling and assembling credit application packages and supporting documentation, for a loan originator or creditor.
- Persons who coordinate consummation of the credit transaction or other aspects of the credit transaction process, such as communicating with a consumer about process deadlines and documents needed at consummation, are not loan originators, provided that any communication that includes a discussion about credit terms available from a creditor to that consumer selected based on the consumer’s financial characteristics only confirms credit terms already agreed to by the consumer.
- Perform credit underwriting activities, so long as you do not communicate directly with the consumer about specific credit terms.
In addition, the following individuals do not qualify as a “loan originator” under the Compensation Rule:
- A person who performs purely administrative or clerical tasks on behalf of a loan originator or creditor, but does not take consumer credit applications or offer or negotiate credit terms available from a creditor to that consumer selected based on the consumer’s financial characteristics.
- A loan originator’s or creditor’s employee who provides a credit application from the entity for which the person works to the consumer for the consumer to complete is not an loan originator.
- A loan originator’s or creditor’s employee who delivers the consumer’s credit application to the loan originator or creditor is not a loan originator – as long as the employee did not assist the consumer in completing the application, process or analyze information, or discuss particular credit terms that are or may be available from a creditor or a loan originator to that consumer selected based on the consumer’s financial characteristics.
- A servicer or a servicer’s employee, unless you perform loan origination activities on replacing an existing obligation with a new debt.
Finally, the provisions regarding compensation, qualification, identification, and the establishment and maintenance of written policies and procedures generally focus on closed-end mortgage products only. They do not apply to:
- Open-end credit plans including HELOCs
- Time-share plans
Restrictions on MLO Compensation Practices: Base Compensaton
Under Regulation Z’s Compensation Rule, MLOs generally may not receive compensation that is based on:
- A term of a single transaction.
- The terms of multiple transactions conducted by the same MLO.
- The terms of multiple transactions conducted by multiple MLOs, taken in the aggregate (which includes most profits-based compensation plans).
Examples of prohibited compensation practices include, but are not limited to:
- Higher compensation based on the transaction’s interest rate, such as receiving 2 percent of the loan amount if the interest rate is above 6 percent and 1 percent of the loan amount if the interest rate is 6 percent or less.
- Higher compensation based on whether the loan contract contains a prepayment penalty.
- Higher compensation for closing more than 10 transactions per month with an interest rate higher than 6 percent.
- An individual loan originator receiving additional compensation if the consumer buys creditor required title insurance from the originator’s employer or its affiliate, rather than a third party.
Compensation may not be tied to any “transaction term.” Furthermore, varying compensation to a loan originator based on the “product type” often will violate the rule because many “products” (which is not a defined term) in the market refer to different bundles of specific transaction terms. Examples of “transaction terms” include:
- The interest rate
- The annual percentage rate
- The collateral type (e.g., condominium, cooperative, detached home, or manufactured housing)
- The existence of a prepayment penalty
- The origination points or fees paid to the creditor or loan originator
- Fees for creditor-required title insurance
However, the Rule still permits financial institutions to incentivize MLOs based on loan production volume or the size of mortgage loans generated, so long as these amounts do not vary from loan to loan. The Rule provides the following examples of compensation methods that are not based on transaction terms or proxies for transaction terms:
- The loan originator’s overall dollar volume (total dollar amount of credit extended or total number of transactions originated), delivered to the creditor.
- The long-term performance of the originator’s loans.
- An hourly pay rate based on the actual number of hours worked.
- Loans made to new customers versus loans to existing customers.
- A payment that is fixed in advance for every loan the originator arranges for the creditor (for example, $600 for every credit transaction arranged for the creditor, or $1,000 for the first 1,000 credit transactions arranged and $500 for each additional credit transaction arranged).
- The percentage of the loan originator’s applications that close.
- The quality of the loan originator’s loan files (for example, accuracy and completeness of the loan documentation) submitted to the creditor.
Restrictions on MLO Compensation Practices: Performance Bonuses
MLO Compensation that is based on profits of mortgage-related business is considered compensation that is based on the terms of multiple transactions by multiple MLOs. As such, MLOs generally may not be paid from compensation pools or receive compensation that is determined with reference to profits from a mortgage-related business because such compensation could create an incentive for multiple loan originators to work collectively to steer consumers to less-advantageous loans.
However, the rule provides limited exceptions, including:
- Bonus compensation that is not based on profits, such as a retention bonus budgeted for in advance or a performance bonus paid out of a bonus pool set aside at the beginning of the company’s annual accounting period.
- Compensation paid to designated tax-advantaged plans that is not based on the terms of an individual MLO’s transactions (i.e., while the contribution may be based on an institution’s profits, the individual’s bonus amount may not be tied to his or her transactions).
- Compensation paid from “non-deferred profits-based compensation plans” (i.e., bonus or profits pools) if the compensation is not based on the terms of that individual MLO’s transactions and either:
- The compensation paid does not, in the aggregate, exceed 10 percent of the originator’s total compensation corresponding to the time period for which the compensation under the non-deferred profits-based compensation plan is paid, OR
- The individual was a loan originator for 10 or fewer transactions consummated during the 12-month period preceding the date of the compensation determination.