Now is not the time for mortgage lenders to get creative around changing loan officer compensation programs, a panel at the Mortgage Bankers Association annual convention warned.
If anything, because regulators have not initiated any enforcement actions in this area since 2014, some might have been lured into a sense of complacency, said Joseph Dinolfo, a director at Treliant.
"Why are we talking about it — because there's some creativity to it right?" Dinolfo said. "And there's still some nuance to it, and as times change and the market changes even though the LO comp rules don't change, the agreements sometimes do."
Many lenders are trying to manage costs through compensation changes.
That makes right now the right time to have a conversation around what is permissible when it comes to loan officer comp, added H. Joshua Kotin, a partner at Cooley.
"We are in a period where I'd say there's a risk of taking aggressive approaches that later on we may regret," Kotin said. "So it's not to say we can't be creative."
But the rules still must be followed; lenders cannot vary a loan officer's remuneration based on the terms of the transaction, for example.
Regulatory examinations look at if the compensation is consistent across the terms of many transactions and the lead source.
"It's still absolutely front and center. And certainly to the extent that there are aggressive players out there, I think that that's where the regulatory focus will be," Kotin continued.
A long list of items based on terms are actually OK, he noted, including loan volume, where the agreement compensates on production for the month. Units originated and quality of the loan is fine, along with pull-through rates and long-term performance of the mortgage.
But the latter point is "where I'm getting a lot of questions that suggest some sort of mischief," Kotin said. "What does the quality of the loan file mean? Can I change comp for the LO's failure to comply with policy?"
And those questions make loan quality an area where some creativity might be attempted.
Lead source is another area where some creativity might be allowed, but once again, caution is warranted.
"You don't want to manipulate lead source, because you have to be competitive on a rate," said Daniella Casseres, a partner at Mitchell Sandler. Loan officers are typically compensated more for the leads they develop versus those that are company-supplied.
"So let's say it came in self-generated, but uh-oh, they have a competitor [for the origination], and now you need to change your price on that loan and you're not going to make margins," Casseres said. "You can't then all of a sudden go from a self-generated loan where you were paying them more to a company-generated loan where you're paying them less somewhere throughout the process."
So a strategy needs to be in place to be creative when it comes to compensation around lead sources.
"You have to work through the tasks and say, 'Okay, let's be creative, but really think about, what's the business strategy?'" said Kotin. "What are your expectations for pulling through and maybe start with a more creative approach."
Then, it should be revisited to see if it is working or creating risk in three months, and again in six months.
"The idea with quality, if you are seeing a lot of LO errors or someone's not following your policies, is to adjust compensation prospectively based on, for example, a quality scorecard or something that you look at on a monthly basis and then you adjust prospectively — not to go back and hit them for errors, low-level errors, which you can't do under the LO comp rules," Casseres said.
Lenders need to ensure that their compensation agreements align all the way through the commission statements to the pay stubs, because that is where an examiner is going to look, Dinolfo said.
"So if you're going to get creative, make sure everything is well documented and the money tells the story," Dinolfo declared.
