We would like to offer a cross sell where a mortgage borrower can reduce their discount points based on the amount of deposit balances they bring to the bank, and we want to pay LOs incentive compensation for this. Would it be allowed if we structure it as described below?

Borrower's would get a discount if their deposit relationship exceeds a certain minimum threshold (such as $15,000), and the amount of the discount would be based on the size of the deposits. The amount of compensation to the LO would also be based on the size of the deposits, but it would even be paid for deposits that are below the $15,000 threshold that provides a discount to the borrower.

Would the amount of the deposits be a proxy? They wouldn't necessarily vary consistently with the reduction in the borrower's discount points since the LO compensation would include deposits that are too small to provide any discount to the borrower.

Would it make any difference under the LO compensation rule if the deposit compensation was only paid to a certain percentage of the LOs who brought in the most deposit accounts for the month?

Thanks,

Larry

Sounds like you are compensating them for deposits and not mortgage loans. So I can bring in $25,000 and open a deposit account and get a discount on my loan and close the deposit account the day after loan closing - sweet

My concern is that above the $15,000 threshold the compensation to the LO would vary based on the amount of the deposits brought in, which directly impacts the reduction in the discount points for the borrower. Does anyone think that this creates a proxy, or does the fact that the LO would also receive compensation for smaller deposit amounts, which don't reduce the discount points mean that the deposits are not a proxy?

I am really confused over this set up. You are going to reduce the cost of the loan to the borrower and pay the LO more for the loan based on the amount of the totally liquid deposits brought in by the customer? What is in it for the bank? These complex compensation schemes always cause issues with all the tracking and people gaming the system. There must be a better way to increase your deposit base. If you are altering the pricing on the loan, then yes I think it is going to result in a proxy situation or at least it will put you in a position of trying to explain that it is not.

It's a cross sell to increase deposits. As with other cross sell programs, we pay incentive compensation to our employees. We also think it'll be more effective if we give the customers an incentive as well. It raised potential concern even though it doesn't seem that the LO compensation rule was designed to prohibit something like this.

Has anyone else considered something like this and determined whether or not it would be a proxy?

Is the LO the only one who earns off the deposit gain or are all employees paid for this program in some way based on the deposits? If the only way an employee is compensated is as a result of the loan then the proxy theory is stronger and at the root of the rule, loans may be made that would not otherwise be granted because the LO sees more income in this one. If other staff are compensated for deposit growth when there is no loan, it is more of a stand alone program and the LO is compensated regardless, the rate discount is purely a borrower benefit.

And you are not clear if this is new deposits, or the relationship that may have existed for years. One would assume it's new money, but as Randy noted, it can all leave the next day and the bank is at the mercy of the best rate available with nothing to bind the funds to the bank.

There are other employees who earn incentive compensation for bringing in new deposits. But their compensation plans aren't structured the same as what we're planning for mortgage LOs. Would the compensation for deposits need to be the same for LO's as it is for the other types of employees to fit what you're saying Andy?

Yes, it's for new deposits only. I agree with what you both have raised about customers withdrawing the next day, but that's a chance the bank is willing to take. If they see it happen on a significant number of loans they'll stop the program.

Thanks,

Larry