Wednesday, October 27, 2021

Audit Season: Loan Officer Comp Plans vs Loan Officer Employment Agreements

Questions Persist on the Meaning of "Employment Agreement" or "Compensation Plan"

With the onset of annual audit season, we have noticed a large increase in the number of requests we get for compensation plans and loan officer agreements. We need to set the record straight on some definitions so that you have clarity on what is required and what the regulator is requesting.

First, there are two different things at play. 
  • The need to establish the arrangement between the loan originator and the company as to employment. This item is referred to as an employment agreement. 
  • The need to establish the pay rate for the originator is referred to as a compensation plan
  • These two items are exclusive of each other, although an agreement may refer to a compensation plan. 

Employment Agreements are NOT Compensation Plans

Employment agreements define job duties, the terms of employment, and how employment will terminate. In other words - this is your job; do these things and don't do other things. If you do things we say not to do, we can terminate you. This is how we'll wrap matters up if you separate from the company voluntarily or involuntarily. 

One of the difficulties we face in providing compliance services is that we often get asked for advice. Largely, advice on compliance relates to understanding what regulatory rulemaking means. This is not interpretation or advice, it simply is a translation of the rules into a more easily understood or practical application. Employment agreements, on the other hand, are contracts. In order to draft a contract for a third party you need to be authorized to practice law: an attorney or lawyer. A compliance company should not provide this service. Instead, you should seek the advice of a competent advisor familiar with the employment laws of a state. 

When we provide this free sample loan originator employment agreement, we are actually calling it a comp plan, because it forms part of the comp plan. You may copy the text and use it as a model for drafting an agreement yourself. 

That said, we have some general, common-sense guidance for the creation of employment agreements:

1.) Separate compensation plans from the employment agreement by attaching the compensation plan as an exhibit which is SUBJECT TO CHANGE AT ANY TIME.
2.) An Employment Agreement states the general minimum job requirements of the position. You can augment that by having a very detailed job description such as that in our Loan OriginatorLoan ProcessorLoan Closer or Underwriting policies and procedures. 

Compensation Plans are NOT Legal Agreements

A compensation plan simply states the rate of pay for various services. In the case of the current regulatory scheme, we have to be aware of anti-steering rules. A compliant compensation plan defines how compensation to loan originators happens in a way that does not violate the anti-steering rules. 

Elements of a Compensation Plan

  • Loans Subject to the Rule
  • Definition of a Loan Originator
  • Exclusions from the LO Comp Rule
  • Dual Compensation, Upfront Points and Fees
  • Proxies for Loan Terms
  • Non-Loan-Term Items
  • Profits-Based Compensation
  • Pick-A-Pay Plans
  • Pooled Compensation
  • Compensation for LOs that Work as a Team
  • Pricing Concessions
  • Point Banks
  • Competition for LOs
  • SAFE Act Requirements
  • Anti-Steering Provisions/Safe Harbor
  • Record Retention
  • QMs and Double Counting
  • LO Qualifications
  • Written Policies and Procedures
  • Non-Cash Compensation Incentives
  • Splitting Comp Between LOs
  • Bonuses and Retirement Plans
  • Bonuses Based on Volume
  • Non-Producing Managers and Sales Executives
Our Compliance Module provides a policy and procedure that addresses all of these issues.