Loan Officer Compensation Rules and Requirements

Loan officers are often compensated in a way that's tied to the performance of the loans they originate.

The Dodd-Frank Act established rules for loan officer compensation, requiring that a significant portion of compensation be deferred and tied to the performance of the loan.

Loan officers can receive a portion of their compensation upfront, but a significant portion must be deferred and tied to the performance of the loan.

The Consumer Financial Protection Bureau (CFPB) regulates loan officer compensation, ensuring that it's fair and does not create conflicts of interest.

The rule allows loan originators to receive a fixed payment for every covered loan they arrange, such as $500 for each completed transaction, or $750 for the first 500 transactions and $1,000 for each additional transaction.

To calculate total compensation, you need to add up all wages and tips paid during the relevant time period, regardless of when they were earned. This includes amounts reportable on a W-2 or 1099-MISC.

The total compensation amount is used to determine the 10% limit, which is calculated by multiplying the total amount by 0.10. However, if non-deferred, profits-based compensation is included, you need to account for it in both the numerator and denominator of the total compensation calculation.

Here's an example of how to calculate the 10% limit:

Loan originator compensation rules aim to prevent loan originators from pushing consumers toward specific credit products or features to increase their own compensation, regardless of consumer harm. The rules restrict compensating loan originators in certain closed-end, dwelling-secured mortgage transactions.

Loan originators can't receive compensation based on a term of a transaction, the terms of multiple transactions by an individual loan originator, or a proxy for a term of a transaction. This includes salaries, commissions, bonuses, and other forms of compensation.

Compensation can't be tied to mortgage-related profits, such as origination fees and interest associated with transactions. This includes proceeds of secondary market sales or income derived from servicing transactions.

To calculate the 10% limit, you must add up the total of all wages and tips paid during a relevant time period, regardless of when those amounts were earned. If the loan originator receives both W-2 and 1099-MISC income, you must add both amounts together.

Here's a breakdown of how to calculate total compensation:

When calculating the 10% limit, you must account for non-deferred, profits-based compensation earned during the relevant time period. This means you must include the amount of the non-deferred, profits-based bonus in both the numerator and denominator of the total compensation calculation.

Financial institutions are generally required to maintain sufficient records of all compensation paid to loan originators, along with loan originator compensation agreements, for three years after the date of payment.

Exceptions do exist to the loan officer compensation rules. Certain deferred tax-advantaged plans are exempt, allowing loan originators to receive compensation that qualifies for tax-advantaged status and is paid in the form of a defined contribution or defined benefit.

These plans must be carefully structured, as the contribution amount cannot be directly or indirectly based on the terms of an individual loan originator's transactions. For instance, a defined contribution plan cannot have a contribution amount tied to the loan originator's transactions.

There's also an exception for non-deferred, profits-based compensation plans if the payments are less than 10% of the total compensation paid during the relevant time period. This is a key exception to keep in mind when calculating total compensation.

Individuals who only occasionally act as loan originators aren't subject to the 10% cap if they have completed 10 or fewer covered transactions during the 12 months preceding the compensation determination date. This exception applies to those who don't meet the threshold of frequent loan origination activity.

Here are some examples of payment types that aren't prohibited or restricted:

These payments are considered budgeted or set aside in advance, so they aren't considered to be based on the profits of a mortgage-related business and are therefore not prohibited.

Enhanced Periodic Payments can take the form of a fixed payment for each covered loan arranged, such as $500 for each completed transaction.

Loan originators can also receive payments based on the amount of credit extended, as long as compensation is a fixed percentage of that amount.

This fixed percentage can have minimum and/or maximum dollar limits, but those limits can't change for each credit transaction.

For example, an originator might receive a fixed percentage of the total credit amount extended during the relevant time period.

The percentage must be based on the total credit amount extended, and not on individual transactions.

A loan originator might receive $750 for the first 500 transactions and $1,000 for each additional transaction completed during the relevant time period.

The fixed percentage can also have a maximum dollar limit, such as a maximum of $1,500 per transaction.

You can receive a fixed payment for each covered loan you arrange for the creditor, such as $500 for each completed transaction.

This payment type is permissible under the rule, allowing you to receive a set amount for each loan you originate.

You can also receive payments based on the amount of credit extended, as long as the compensation is a fixed percentage of the total credit amount.

This percentage can have minimum and/or maximum dollar limits, but those limits can't change for each credit transaction.

A retention bonus budgeted for in advance is not prohibited, regardless of whether it's based on the terms of a transaction or transactions by that individual loan originator.

A performance bonus paid out of a bonus pool set aside at the beginning of the company's annual accounting period as part of the company's operating budget is also not prohibited.

Here are some examples of acceptable payment types: