Examining Mortgage Loan Officer Compensation

Two recent regulatory actions highlight the significance of reviewing how you compensate your Mortgage Loan Officers.

Two recent regulatory actions highlight the significance of reviewing how you compensate your Mortgage Loan Officers.  The first is a March 24, 2010 U.S. Department of Labor Administrator’s Interpretation.  The second is the final rule on Loan Originator Compensation and Steering from the Federal Reserve Board.

The Department o f Labor’s Administrator’s Interpretation stated that mortgage loan officers who have no duties other than loan origination, are non-exempt (must be paid minimum wage and overtime).  While the U.S. Department of Labor does not have the power to change Federal law, it does have the power to interpret the application of the Administrative Exemption of the Fair Labor Standards Act.  Administrator’s Interpretation No. 2010-1 deals with the issue.  In that Interpretation, the Administrator states:

Conclusion

Based upon a thorough analysis of the relevant factors, the Administrator has determined that mortgage loan officers who perform the typical duties described above have a primary duty of making sales for their employers and, therefore, do not qualify as bona fide administrative employees exempt under section 13(a)(1) of the Fair Labor Standards Act, 29 U.S.C. § 213(a)(1).

Credit unions will need to take a careful look at the primary duties of mortgage (and other) loan officers.  If the loan officers do not qualify for the Administrative Exemption of the Fair Labor Standards Act, then they could be non-exempt employees who would qualify for minimum wage and overtime.

To qualify for the Administrative Exemption the employee must meet the following criteria:

  1. The employee must be compensated on a salary or fee basis as defined in the regulations at a rate not less than $455 per week;
  2. The employee’s primary duty must be the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers; and
  3. The employee’s primary duty must include the exercise of discretion and independent judgment with respect to matters of significance. 29 C.F.R. § 541.200.

It is second test that is the key to the Administrator’s ruling.  Do your loan officer’s duties include internal management and general business operations of your credit union?  Do they provide advice regarding internal operations or marketing?  Do they service the loans and help with collections?  Or, are they “…an employee whose primary duty is selling financial products…”

There is no clear black and white answer to whether or not your mortgage loan officer qualifies for the Administrative Exemption.  You cannot rely on job title and will need to take a hard look at the job duties of your employees to determine if they qualify or not.

And while the Department of Labor has provided you a lot to think about, the Federal Reserve Board has issued a final rule making changes to Reg Z that places certain prohibitions on mortgage loan officer compensation.  The rule was enacted to protect mortgage borrowers from unfair, abusive, or deceptive lending practices that could arise from loan originator compensation practices.  These practices encouraged mortgage loan originators to push loans that provided the loan originator with the highest compensation, but which were not necessarily the best loan that that consumer could qualify for.  Credit unions normally do not condone these types of practices, but will need to review their mortgage loan officer compensation to ensure they are in compliance with the new rules by April 1, 2011.

The new rules:

  • Prohibit payments to the loan originator that are based on the loan’s interest rate or other terms.  Compensation that is based on a fixed percentage of the loan amount is permitted.
  • Prohibit a mortgage broker or loan officer from receiving payments directly from a consumer while also receiving compensation from the creditor or another person.
  • Prohibit a mortgage broker or loan officer from “steering” a consumer to a lender offering less favorable terms in order to increase the broker’s or loan officer’s compensation.
  • Provide a safe harbor to facilitate compliance with the anti-steering rule.  (While this would have little to do with a credit union mortgage loan officer who provides the members with what the credit union has to offer, it would apply to mortgage loan officers who work for CUSOs that look to multiple credit unions to see what loan offers are available for the member.)

Each credit union may have different policies and procedures for compensating mortgage loan officers.  You will need to exam how you compensate your mortgage loan officers to ensure you are in compliance with the new rule.

Two regulatory actions that require a look at compensation packages for credit union mortgage loan officers.  Makes you wonder, “What the Fed will they come up with next?”