What is the LO Comp Rule?
The loan originator compensation rule (LO Comp Rule) has its roots in the Truth in Lending Act (TILA), a federal law enacted in 1968 to help protect consumers in their dealings with lenders and creditors, as well as the set of regulations that puts TILA into action, known as Regulation Z. Regulation Z was originally implemented by the Federal Reserve Board and has been amended and expanded many times in the decades since. 2010’s landmark Dodd-Frank Wall Street Reform and Consumer Act (Dodd-Frank Act) transferred rulemaking authority for TILA and Regulation Z from the Federal Reserve Board to the Consumer Financial Protection Bureau (CFPB), where it remains today.
TILA’s LO Comp Rule was written into Regulation Z in 2010, on the heels of the housing crisis and associated financial meltdown, with an effective date of April 6, 2011. It prohibits compensation of a mortgage loan originator based on any term of a transaction (other than loan amount). The LO Comp Rule’s goal is to prevent the steering of consumers to loan offers with less favorable terms in order to increase compensation for the originator. It applies to every loan originator organization or in the United States, including independent mortgage companies, depository institutions, and individuals that originate loans.
Key Restrictions of the LO Comp Rule:
- Loan originators may not receive compensation based on the terms of a transaction, such as the interest rate, annual percentage rate (APR), collateral type, the existence of a prepayment penalty, origination points, or fees paid to a creditor or loan originator. However, payments based on a fixed percentage of the loan amount are excluded from this rule.
- Loan originators may not receive “dual compensation” — for example, the consumer and a third party such as the creditor try to incentify the loan officer.
- Loan originators may not steer borrowers to a loan type that results in more compensation for them. Loan officers are to guide borrowers to the best option for the borrower.
- Payment of a bonus from a bonus pool that takes into consideration profits received from a closed-end mortgage transaction secured by a dwelling is prohibited.
Recent Changes to LO Compensation Rules
The biggest change to the LO Comp Rule in recent memory came in 2013 when the CFPB issued final rules providing additional clarification on Regulation Z’s loan originator compensation restrictions. While certain elements of this so-called Final Rule went into effect June 1, 2013, the remaining provisions had an effective date of January 10, 2014.
For instance, to prevent evasion, the Final Rule gets more explicit than the original Truth in Lending Act regulation to specify that loan originators cannot be compensated based on a term of a transaction or on a “proxy” for a term of a transaction (i.e., a de facto loan term).
The Final Rule also clarifies the rule from the Truth in Lending Act (TILA) that prohibits loan originator compensation based on the profitability of a transaction or pool of transactions, specifying that this restriction also applies to various retirement and profit-sharing plans.
How to Remain Compliant Under the New Changes
The CFPB LO comp rule will always be susceptible to change, but here are seven generally safe and compliant methods of calculating a loan originator’s compensation:
- 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;
- A 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.
CompenSafe Makes LO Comp Rule Recordkeeping Requirements a Snap
All compensation paid to loan originators, whether direct or indirect compensation, bonuses, or straight commission, needs to be documented going back a minimum of three years from the date the compensation was paid. In the event of an audit, the CFPB should be able to find the who, what, where, why, and how a loan officer's compensation was calculated. It’s highly suggested that explicit records are kept of past and present compensation agreements that include all their terms or conditions, including the plan’s activation date, inactivation date, confirmation date, number of times used to calculate the compensation, minimum and maximum compensation amount, and tier-level breakdown.
Because compensation is often reliant on how many loans an originator closes and funds in a month, it’s also wise to keep a tidy record of all the loans each loan originator has participated in. The CFPB should be able to easily trace back how compensation was calculated for each individual loan originator and where each figure came from. Organized records let the CFPB find this compensation story in a snap.
This degree of recordkeeping quickly gets expensive and time-consuming, which is why lenders across the map are turning to CompenSafe. CompenSafe removes the hassle and headaches of manual documentation with automatic tracking and recording while also providing lenders greater flexibility in their compensation plans and automatic calculation of commission and bonus payouts.