The LO Down - LO Comp Rule

The LO Comp Rule is one of those topics that comes up a lot in the mortgage industry, and unfortunately, it can be easy to misinterpret. Though it is always best to consult your company’s compliance department, we wanted to provide a brief run-down of what the LO Comp Rule is and how it can affect individual loan originators. 

Loan Originator Compensation Requirements fall under the Truth In Lending Act and were passed back in 2013.  This rule was enacted as a way to reduce steering, and to prevent originators from charging different fees or interest rates based on any term or condition of the loan.

A quick way to think about this rule is simply that an originator cannot be paid more or less than their typical, per-file compensation, based on any term of the loan.  

Specifically, those terms are:

• Product type (Fixed, ARM, Bond, etc)
• The interest rate or APR
• Loan origination fee
• The type of collateral 
• The existence of a prepayment penalty
• Or any Proxy for a term: a factor that consistently varies over a significant number of transactions (like which title company or appraiser is used),  or if the LO has the ability to add, drop or change a factor.

So, what compensation methods are permitted? This is where it can be a little confusing.  The most common methods of compensation include:  

1. An hourly pay rate based on the actual number of hours worked.
2. A payment or percentage that is fixed in advance and applies to every loan closed (for example; 100 basis points, or 1% of the loan amount with a minimum of $1000 and maximum of $5000).
3. A percentage of the total amount of closed loans. 
4. The originator’s overall loan volume (total dollar amount of credit extended, or total number of loans originated).
5. The long-term performance of the loans.
6. The quality of the originator’s files (accuracy, completeness, etc)

The main thing to remember is that compensation is fixed and cannot change, regardless of the type of property, the interest rate, or even how profitable the file was.  Basically, there should be no incentive for an originator to influence the transaction in any way.  This could be - steering borrowers to or away from certain products, turning away borrowers wanting small loan amounts, discouraging borrowers from loans on condos or manufactured homes, etc.

Let’s go through some examples:

• An originator cannot increase an interest rate in order to get paid more.  However, you could increase the rate, if you are applying any additional premium received, directly to the borrower's closing costs.

• If the interest rate is lowered during the process of the loan, the originator cannot be paid less because of that change. So if the LO typically gets paid 100 BPS per loan, they cannot be paid less than that, even if the lower interest rate means the company is technically taking a loss on the loan. 
• An originator can receive an additional monthly production bonus (like 50 BPS of the total volume originated in a month) as long as it is not based on any individual loan or term.

And for the record, the amount of credit is not a term or condition, so as long as the percentage that the originator is paid does not change, the actual dollar amount can fluctuate based on the loan balance. For example, paying the LO a compensation of 2% on smaller loans up to $300k, and paying 1% on anything above that, is not allowed. 

You may be asking, what happens if an originator is making a lot of mistakes on files or produces files that are not profitable for the company?  Things like that can affect an originator's Total Compensation, as long as it does not fluctuate based on any term of the loan. Typically this would show up in the form of bonuses, profit sharing, or retirement plans, but there are some specific guidelines for that as well. 

Bonuses based on company-wide profits from mortgage-related activities are generally not allowed unless they meet these exceptions:

• Based on the total production volume of multiple loan originators, not just one individual originator.
• The aggregate compensation does not exceed 10% of the individual LO’s total compensation.
• Or, the individual LO originated 10 or fewer transactions during the 12mo period preceding the bonus payment.

Basically, originators that are producing high-quality files with few errors, can receive a different compensation than their under-performing peers.  But it cannot be based on any of those terms mentioned earlier. 

In summation, though it can be a bit confusing, the LO Comp rule is there to protect both the consumer and the originator from unfair mortgage practices. That’s all for this week.  For more content like this, check out trythecoop.com.

Resources:

https://www.consumerfinance.gov/rules-policy/final-rules/loan-originator-compensation-requirements-under-truth-lending-act-regulation-z/

https://www.fdic.gov/regulations/resources/director/technical/lo/three.pdf

https://www.ncua.gov/regulation-supervision/letters-credit-unions-other-guidance/mortgage-loan-originator-compensation-requirements-consumer-financial-protection-bureau

https://www.wipfli.com/insights/articles/fi-loan-originator-compensation-it-is-complicated