New rules governing mortgage loan originator compensation have had bankers and lenders in a tizzy for months, and several industry executives at a recent American Bankers Association seminar decried the effects the rules would have on bank 401(k) and profit sharing plans.
Earlier this month, the Consumer Financial Protection Bureau (CFPB), issued a clarification in response to concerns, but for some, the effort doesn’t go far enough.
The new loan originator compensation rules were designed to prevent lenders from paying loan originators based on the terms and conditions of loan transactions.
According to the rules, compensation – including salaries, commissions and bonuses – cannot be tied to the interest rate, loan to value ratio or prepayment penalty included in home loan agreements. Originators also cannot be paid based on credit scores that could be used as a proxy for a term or condition, such as the interest rate.
With these rules in place, loan originators would not be incentivized by commissions to push terms or products on customers that are not in the customers’ best interest.
Massachusetts lending firms contacted recently by Banker & Tradesman said they are, or are considering, paying originators a regular salary rather than commission.
That’s the way it is. But the CFPB had been asked specifically whether lenders can contribute to employee 401(k) or profit sharing plans of originators if those contributions come from the profits of loan originations. On that point, the CFPB punted.
According to the CFPB, Dodd-Frank does not address whether the compensation rules can be applied to contributions to retirement and bonus plans, and neither do the CFPB’s compensation rules derived from the Dodd-Frank legislation.
Lingering Questions
The CFPB’s "view is that the Compensation Rules permit employers to contribute to qualified plans out of a profit pool derived from loan originations."
Massachusetts Bankers Association Executive Vice President Jon Skarin told Banker & Tradesman that’s just fine. But other parts of the guidance do virtually nothing to clarify industry questions. The CFPB must adopt final compensation rules by January 21 of next year, or the existing provisions become permanent. The bureau said it does not anticipate issuing a proposed rule for public comment in the near future.
And the CFPB said profit sharing plans "are not appropriate for the type of general guidance" the bureau issues. Such plans "will be dealt with in greater detail when the final rules are proposed."
Still, the clarification on 401(k) contributions was welcome, Skarin said.
"It’s helpful in the sense that it does deal with the 401(k) and qualified plans, but a lot of banks are already reconfiguring their compensation plans. I’m still concerned about the non-qualified-type bonus plans," Skarin said. "I would’ve hoped they would’ve addressed it in some way. Banks are scrambling now to figure out what they’re going to do, and unfortunately, this comes up right as a lot of these people are preparing to pay bonuses. It would’ve been nice for them to say, ‘Here’s how we’re going to deal with it, and here’s how we’re not going to deal with it.’ It’s going to be up to banks to sit down with counsel and figure it out on a bank-by-bank basis."
CFPB’s regulations will affect credit unions, but if the credit union is under $10 billion in assets, similar regulations will be written and enforced by the NCUA, explained Tim Garner, Digital Federal Credit Union (DCU) senior vice president of marketing and strategy.
Garner said it does not seem the clarification was necessary. The likelihood an employer would base 401(k) contribution to an individual employee on the specific terms of loans they wrote seems extremely remote, he said.
