Loan officer compensation rules for mortgage brokers: Reg Z §1026.36(d)

Who the rule reaches

The loan originator rules in Reg Z §1026.36 apply to closed-end consumer loans secured by a dwelling (§1026.36(b)); they don't apply to HELOCs. A "loan originator" is anyone who, for compensation, takes an application, offers, arranges, negotiates, or otherwise obtains a loan for someone else (§1026.36(a)(1)). That covers both the individual loan originator (the loan officer) and the loan originator organization (the broker shop). A mortgage broker, for a given loan, is any loan originator who isn't the creditor's employee (§1026.36(a)(2)). "Compensation" means salaries, commissions, and "any financial or similar incentive" (§1026.36(a)(3)).

The official interpretations say it plainly: payments a broker shop makes to its own loan officers are subject to the rule, and "a mortgage broker may not pay its employee more for a transaction with a 7 percent interest rate than for a transaction with a 6 percent interest rate" (comment 36(d)-2). So there are two layers to get right: how the lender or borrower pays the shop, and how the shop pays the loan officer.

Rule 1: no compensation based on loan terms

No one may pay a loan originator, and no loan originator may receive, compensation "based on a term of a transaction," the terms of several of that originator's transactions, or the terms of several originators' transactions (§1026.36(d)(1)(i)). A "term" is any right or obligation of the parties to the credit transaction (§1026.36(d)(1)(ii)): the rate, the APR, points and fees, a prepayment penalty, the collateral type, and so on (comment 36(d)(1)-2).

The test is objective. It doesn't matter what anyone intended; what matters is whether "compensation would have been different if a transaction term had been different" (comment 36(d)(1)-1.i). If you have a written compensation policy and follow it, the policy is what gets analyzed. If you don't, or don't follow it, an examiner compares the loans you originated with what you paid.

Proxies count too. A factor that isn't itself a term is treated as one if it "consistently varies with that term over a significant number of transactions" and the loan officer can add, drop, or change it (§1026.36(d)(1)(i)). The commentary's example: paying more for loans a lender keeps in portfolio, when portfolio loans are always the five-year balloon product, is a proxy for the term (comment 36(d)(1)-2.ii.A). Paying different amounts by state, when the loan officer can't choose the state, is not (2.ii.B).

What you can base pay on

The commentary lists methods that are not based on a term (comment 36(d)(1)-2.i):

A fixed percentage of the loan amount, which may have a minimum and maximum dollar amount (§1026.36(d)(1)(ii)). The percentage has to be the same for every loan: "1 percent of the amount of credit extended for all loans, but not less than $1,000 or greater than $5,000" is fine; 1 percent above $300,000, 2 percent between $200,000 and $300,000, and 3 percent below is not (comment 36(d)(1)-9).
A flat amount per loan, fixed in advance, including tiers by count ("$1,000 for the first 1,000 transactions and $500 for each additional").
Overall dollar volume or number of loans.
An hourly rate for hours actually worked.
The quality of the loan files (accuracy and completeness), the pull-through rate (applications that close), and the long-term performance of the loans.
Whether the borrower is a new or existing customer.

You can also revise a loan officer's compensation from time to time, prospectively. The example given is raising a flat per-loan payment from $3,000 to $3,250 as of July 1 after reviewing the officer's volume (comment 36(d)(1)-6). What you can't do is change it loan by loan.

Bonuses and profit sharing

A bonus paid out of the company's mortgage profits is treated as compensation based on the terms of many loans, so it's allowed only under two exceptions (§1026.36(d)(1)(iii) and (iv), explained in comment 36(d)(1)-3):

Contributions to a designated tax-advantaged plan (a 401(k) and the other plan types listed in §1026.36(d)(1)(iii)). A defined-contribution amount can't be based on that loan officer's own loan terms.
A non-deferred profits-based plan (cash bonus, bonus pool, trips, prizes), provided it isn't based on that officer's own loan terms and either stays within 10 percent of the officer's total compensation for the period, or the officer originated ten or fewer loans in the preceding twelve months (§1026.36(d)(1)(iv)(B)). The cash value of a trip or prize counts toward the 10 percent (comment 36(d)(1)-3.v.D).

A bonus that is budgeted in advance and owed regardless of loan terms (a guaranteed quarterly bonus for hitting a volume target, a retention bonus) is not a profits-based bonus and isn't subject to the 10 percent cap (comment 36(d)(1)-1.ii.B and 36(d)(1)-3.ii). Whether a given plan falls on one side or the other is a judgment that depends on how it's written and funded; get it reviewed.

Pooled commissions between loan officers who are paid differently and whose loans carry different terms are prohibited (comment 36(d)(1)-2.iii).

Rule 2: no dual compensation

If any loan originator is paid directly by the consumer on a loan, then no loan originator may be paid by anyone else on that loan, and no one who knows about the consumer payment may pay a loan originator on it (§1026.36(d)(2)(i)(A)). In practice every broker loan is one of two things:

Lender-paid: the wholesale lender pays the shop under the compensation plan the shop has on file with that lender. The borrower pays the shop nothing.
Borrower-paid: the borrower pays the shop's fee, in cash or out of the loan proceeds. The lender pays the shop nothing on that loan.

Some details from the commentary (comment 36(d)(2)(i)-1 and -2):

A fee paid out of loan proceeds is a direct consumer payment. Compensation funded through a higher interest rate is not.
Money from a seller, builder, or real estate agent toward closing costs, under an agreement with the borrower, counts as paid by the consumer if any of it ends up as broker compensation (§1026.36(d)(2)(i)(B)).
On a borrower-paid loan the lender may still provide a credit toward the borrower's other closing costs, as long as none of it goes to loan originator compensation.
The shop may pay its loan officer on a borrower-paid loan (§1026.36(d)(2)(i)(C)). That payment can be a share of the shop's fee, but it still can't be based on any other term of the loan (comment 36(d)(1)-2).
Affiliates are treated as one person (§1026.36(d)(3)), so a lender can't route a second payment through a sister company.

Pricing concessions and point banks

This is where most of the trouble in a broker shop happens. The commentary is strict: once compensation is set, it "is not subject to change (increase or decrease) based on whether different credit terms are negotiated." A lender can match a competitor's rate, but "the new offer may not be accompanied by a reduction in the loan originator's compensation" (comment 36(d)(1)-5). A loan officer may not give up compensation or fund a credit to keep a loan under the high-cost thresholds. And on a borrower-paid loan, the shop may not cut its own fee in selective cases either, with or without a matching cut to the loan officer.

The one permitted decrease is narrow (comment 36(d)(1)-7): a loan originator may reduce its compensation to cover an unforeseen increase in a settlement cost over what was estimated, or an unforeseen cost that wasn't estimated at all, as long as the estimate was consistent with the best information reasonably available at the time. The two examples are a rate-lock extension fee caused by an unexpected title problem, and a $70 tolerance cure. A rate the borrower found cheaper elsewhere is not unforeseen.

Point banks. Some shops keep a running balance of credits a loan officer can draw on to improve pricing for a borrower, often funded from the officer's own compensation. The regulation and the official interpretations don't use the term, so there's no safe harbor for the practice. Measured against the rule, the question is the same as for any other concession: does the loan officer's compensation on a loan change because the loan's terms changed? If the answer is yes, comment 36(d)(1)-5 is the problem, and only the unforeseen-cost exception in comment 36(d)(1)-7 helps. Treat any point-bank arrangement as something to put in front of compliance counsel before using it.

What a broker's comp plan looks like in practice

Wholesale lenders ask each broker to file a lender-paid compensation plan with them, usually a fixed percentage of the loan amount with a dollar floor and cap, which is the form §1026.36(d)(1)(ii) allows. The percentage can differ from lender to lender, because it's the broker's agreement with each creditor, but it can't vary by loan. Lenders set their own rules on how often a plan can change and with what notice; those are contract terms, not regulation, so check each lender's broker guide.

Changes should take effect on a date and apply to loans going forward. Backdating a plan change rewrites which plan governed loans already in process, which is exactly the loan-by-loan variation the rule prohibits.

Rule 3: keep the records for three years

A loan originator organization must keep "records sufficient to evidence all compensation it receives from a creditor, a consumer, or another person; all compensation it pays to any individual loan originator; and the compensation agreement that governs each such receipt or payment, for three years after the date of each such receipt or payment" (§1026.25(c)(2)(ii)). The creditor has a matching duty for what it pays you (§1026.25(c)(2)(i)).

Records are sufficient if they show the nature and amount of the compensation, who paid it, who received it, and when (comment 25(c)(2)-1). The agreements themselves must always be kept. The three years run from each payment, so a loan with several related payments has several clocks. For a broker shop that means, at minimum:

every comp plan filed with every lender, with its effective dates;
each loan's record of lender-paid or borrower-paid, and the amount received;
the loan officers' compensation agreements and bonus plans;
payroll and commission records for each payment to a loan officer.

This is separate from the TRID records in §1026.25(c)(1), which the creditor keeps for three years (five for the Closing Disclosure).

Common mistakes

Paying the loan officer a different split on borrower-paid loans than on lender-paid loans, where the split tracks the rate or fees rather than a fixed share.
Cutting compensation to win a deal. Matching a competitor by giving up part of the comp is the example the commentary uses for a violation.
A different percentage by loan size, or by product (FHA versus conventional, when the product consistently carries a different rate and the officer can steer between them).
A year-end bonus from the mortgage profit pool with no 10 percent calculation behind it.
Taking a lender credit on a borrower-paid loan that ends up covering part of the broker fee.
A seller credit on a borrower-paid loan applied to the broker fee without recognizing it counts as consumer-paid.
Keeping comp plans only in email with the lender. Three years after the last payment under a plan, you still need to produce it.

Some states add their own rules on broker fees and loan officer pay. Nothing here covers those; check your state regulator.

In OpenLOS

OpenLOS keeps the records that sit in the LOS, not payroll. For each wholesale lender you record a lender-paid comp plan: a fixed percentage of the loan amount in basis points, an optional minimum and maximum dollar amount, and an effective date. A plan can't be dated in the past, so a change can't rewrite loans already priced; a change is a new record and the history is kept. On each loan you record a single compensation election, lender-paid or borrower-paid with the amount, and only one type can apply, which is how the dual-compensation rule is enforced in pricing: a borrower-paid loan is priced with no lender compensation. Comp plans and elections are append-only in the database, and compensation is never used to rank lenders. Try it in the demo, or read how the records are protected. It doesn't calculate loan officer pay, bonuses, or the 10 percent test, and it doesn't record the payments themselves; keep those in your payroll and accounting records.

Not legal advice. The regulation and the official interpretations are linked above; read them, and have your compensation plans reviewed by compliance counsel.