What if the employer has a 20% bonus plan. 7% is purely based on profits from the organization. The remaining 13% is based on individual goals.

So total bonus is 20%, but only 7% is related to profits. Is this okay?

Does the answer change if total profits of the organization play into how much of the bonus the organization pays out? For example, if the organization only makes 50% of budget, then they may only pay out 50% of bonuses.

What are the individual goals based off of?

Overall loan growth (loan amounts or number of loans)? (there wouldbe no limits on this)

Profitability of the individual loan officer's loan portfolio? (this is prohibited)

Your 13% portion will depend on the basis of the individual goals.

I have been asked if it would be allowed to exceed the 10% cap for 2013 as long as it was paid out in 2013 since the final rules don't go into effect until January 2014. I don't feel good about it but is there anything in the regulation or guidance from regulatory agencies that suggest we would get in trouble for this type of philosophy? Anyone been examined by the FDIC recently? How did they address compensation plans for 2013? Any feedback would be greatly appreciated!

My read of the rules is that even if the bonus is paid in 2014, if it's based on calendar year 2013 profits, then it counts as calendar year 2013 compensation. Therefore, I would agree that the 10% limit doesn't come into play until calendar year 2014 compensation.

I am open to countering views, though.

I've been under the impression that profits-based bonuses are prohibitted under the current rule, but that the new final rule now allows them. The prohibition on non-deferred profits-based bonuses was something that was stated during an FRB call if I remember correctly.

ETA: With that understanding (that they are currently prohibitted) I did call our FDIC field office and asked if we could go ahead and follow the new rules for 2013, and their reply was yes, but there was no official guidance.

I'd have to dig around, but I seem to recall guidance stating that we could continue to pay non-deferred, profits-based bonuses until rules were issued.

The only guidance I remember was on 401ks and the like (qualified plans) issued by the CFPB. At the same time the CFPB had stated they would not rule at the time on non-deferred bonuses (non-qualified plans).

http://files.consumerfinance.gov/f/201204_cfpb_LoanOriginatorCompensationBulletin.pdf

The Bureau has also received questions about how the Compensation Rules apply to profit-sharing arrangements/plans that are not in the nature of Qualified Plans. Many of the questions have been fact-specific and the Bureau does not believe it is practical to provide guidance in this Bulletin about such plans. We anticipate providing greater clarity on these arrangements in connection with a proposed rule on the loan origination provisions in the Dodd-Frank Act.


Keep in mind that the only "guidance" I have on the non-deferred being currently prohibitted was the Fed call back on 3/17/2011, and it was a note I made where the presenter had stated "as a general rule-profitability is a "no" for basis of compensation." When I spoke with the FDIC field office a few weeks ago and posed my question, I got the impression that my field examiner was operating under the same understanding as me. That doesn't mean I'm right, just that my field examiner and I are on the same page.

Should also probably qualify that I have not had to test out my theory on non-deferred plans under the 2011 FRB rule as we don't do non-deferred profitability bonuses yet (looking at starting one this year or next).

Okay, trying to shore this one up.

Bonuses:

profit-based (assuming the LO makes >10 qualified loans:max 10% total bonus compensation.

Non-profit based established at beginning of financial year:
example: up to 5% attendance, up to 15% low pastdue ratio to portfolio. Unlimited to maximum established.

Is this correct?

I am unclear as to the 401K matching or bank paid portion of the compensation. I am not aware of any bank providing a match in 401K that is fully endowed in same year. Most have 5 year employment before fully endowed in retirement of bank match or would this be a separate 401K?

Here we are in March, nearly the end of the first quarter of the new year and yet, we have no real clear understanding of this rule. Just sat in on a trade association teleconference for two hours discussing this rule that covers over 500 pages. Two so called "expert" attorneys one from DC the other from LA kept reminding everyone of the liability and endless exposure to the consumer, yet when asked about this very question being discussed on this tread, the response was they would have to wait to see what comes out of the bureau to realy know the answer. We may be looking at up to nine months for any real answers to our questions, unless someone at the bureau throws the industry a bone. More confused now than before!

As long as the bonus is not based on terms and conditions of the loans (including profits from those loans) then there is no limit on the compensation. I would say your attendance and past due ratio bonus would not be subject to the 10% cap.

I think you are confusing vesting with matching. The rule only deals with the match, not the vesting schedule. If the bank makes a contribution to the originator's 401k plan, it has the option of adding that match to the compensation calculation to use for calculation the 10% profits-based bonus cap. The bank could decide not to count matches until after the employee is fully vested if they want to.

Thank you, Dani!

If you were on the same call I was (and I think you were), I was not impressed either. I am more confused now than when I started. Also disappointed they had only one page on bonus plans. I feel like that is a big section of the rule and deserved more attention.

<<<---stays away from most webinars and teleconferences for that very reason!

Learning from one's experiences. Fool me once...

Thanks, Dani.

Ditto!

Sorry, I've been on overload...

So to be clear, is this compensation paid out after January 10, 2014 or compensation paid based on transactions originated after January 10, 2014?

CFO is asking if we can use the following key performance indicators for paying the mortgage division their bonus:

Total production
Loan Fees
Gain on Sale & Other Income
Total Expenses
# loans closed
# days to close

Total production--yes provided it is not a proxy for pricing
Loan Fees--no, no, 100 times no
Gain on Sale & Other Income--if it is related to the pricing of the loan, no. If it is a true secondary market transaction, maybe, but I wouldn't go there.
Total Expenses--again is it a proxy for pricing? If so, NO.
# loans closed--yes provided it is not a proxy for pricing
# days to close--again is it a proxy for pricing? If so, NO.

This isn't a brand spanking new rule. The compensation portion is mostly a clarification of the 2011 rule. The only "new" parts regarding compensation are in regards to paying monies from bonus pools. Under the 2011 rule, the FRB didn't address those so it was interpretted by the FRB and other agencies that the bank could not pay any compensation out of bonus pools where mortgage profitability was connected. The CFPB came out and said 401k plans and the like were ok (last fall I believe), but declined to comment on non-tax advantaged bonus plans until later (ie this rule). Technically, non-deferred bonus pools are still prohibited if mortgage profits are included in the calculation; but I think the general consensus is that since the new rule is out and clarifies it, you can do it now so long as you follow the new rule.

What is these KPI are for the back office staff - processors, underwriters, shippers?

The mortgage loan officers would have their own commission.

Can we use loan fees and gain on sale & Other income for back office staff's annual bonus formula?

It will depend on if they meet the definition of loan originator in Reg Z. Are they compensated for referring covered loans (ie mortgage referrals)? If so, then they are an LO under Reg Z and all the restrictions will apply.

I have been reading this rule all day and I am still not clear. Sorry for having to ask.

We charge 1% loan fee on the loan amount for all RE loans, and a % of this fee income goes into our "bonus" formula (let's say back office for sake of discussion).

Our goal is 2 million in loan fee income. If we hit that number, it is weighted 25% on our KPI and it adds to the payout formula.

If we don't hit that number, nothing goes into the payout. If we exceed that number so a certain %, we get even bigger into the formula.

Is this prohibited? Again, let's just assume this is not for the loan officers.