Bonus Plans under Reg. Z vs. Fair Lending

We had a bonus plan proposed that we believed was compliant under Reg. Z's MLO Comp rules. It was based on loan volume (dollar amount) and portfolio performance (good standing vs. default).

We were criticized for the plan from a Fair Lending perspective because basing bonuses on dollar amount of loans could encourage lenders to make high dollar loans only, creating a disparate impact on LMI individuals and protected groups under the FL laws.

I wanted to make others aware of this, as now we are going back to the drawing board to try and figure something else out. I am thinking we'll either have to tier out categories of loan amounts (to ensure smaller-amount loans aren't avoided)... or do it by number of loans instead.

Any thoughts or similar experiences would be appreciated!

Interesting. The ABA Newsbytes just brought up this very issue this morning. The ABA, along with trade groups, sent a letter to HUD asking for clear guidance because ATR “will tighten credit standards through facially neutral requirements that may lead to disparate outcomes"

The letter is here; I don't think you have to be a member to see it:

http://www.aba.com/Issues/LetterstoCongress/Documents/130604_joint_trade_ltr_re_disparate_impact.pdf

I saw that, thank you for the link. The same concerns were brought up at a recent conference, and the attending regulators had no answer for how the new rules will impact the market. We just don't know yet.

I'm speechless...

Manimal, who is your regulator / region?

I'd rather not say in the public forums.

Just got back from the ABA conferenc where I heard similar concerns from other bankers and industry groups. For example, they are worried that the new mortgage regs will constrict the credit market further and create a disparate impact on LMI individuals and protected classes.

I can't understand how the regulators didn't see that when they were putting pen to paper.

Prescience has never been their strong suit. They always seem to be fighting the previous war.

This is the only permissible loan-based compensation other than a flat rate per loan.

Can you show that you are still serving all your communities, including LMI and minorities?

The plan was in the proposal stages, so there wasn't anything to evaluate it against yet.

The confusion with these "new" mortgage rules is that the bureau themselves keep changing them with no guidance as to how not to violate some other rule at the same time as complying with the "new" rules. This creates a form of "gotcha" scenario much the same as BSA. The "new" rules seem to be set-up for much court-room "guidance" as banks will be caught in the cross-hairs of compliance vs fair lending, which as we all know is a losing hand.

I am very afraid of what the mortgage market will look like after January 2014.

The powers that be apparently would like it to be a very narrow one.

And poor CRA Exams to follow... just my opinion there.