Loan Originator Compensation Redesign Across Retail and Wholesale

The clearest problem is the $2,000 spiff for pricing at least 25 bps above the posted rate. Regulation Z prohibits loan originator compensation based on the terms of the transaction other than the amount of credit, and interest rate is a term. The spiff directly rewards originators for charging a higher rate, which is also a steering and fair-lending risk. The 10 bps portfolio bonus is less clearly prohibited because it is based on loan volume rather than a loan term, but it can create a steering incentive toward portfolio products and must be reviewed for whether it functions as a proxy for product terms. The $1,500 marketing support payment to top originators must be included in compensation and cannot become a way to pay originators outside the plan or to create dual compensation; if it is based on production, it needs a documented business purpose and controls. The pull-through bonus is not term-based on its face, but it may encourage originators to discourage shopping or to lock loans prematurely, so it needs proxy-risk review. The five-day repricing practice is not compensation, but it creates investor, fair-lending, and lock-management risk. The plan should be restructured around permissible volume-based pay and quality metrics.

The redesign should separate compensation that is permitted from incentives that create legal risk. Retail originators could receive a flat percentage of loan amount, for example 75 bps, with no adjustment for rate, product, or terms. The portfolio bonus should be eliminated or converted into a volume-based component that applies equally to retained and sold loans, so it does not steer borrowers. The above-market pricing spiff must be eliminated outright and replaced with a quality bonus tied to measurable outcomes such as low error rates, low early payment default, and complaint-free files. The pull-through bonus should be removed unless the bank can document that it is not a proxy for loan terms and does not encourage discouraging borrowers from shopping. Marketing support should be converted into a documented business expense with receipts and a written business purpose, or included in compensation. The wholesale plan should use a flat basis-point payment on funded volume plus quality metrics, not rate-based spiffs. To remain competitive with nonbank offers, the bank can raise the flat volume component and quality bonus within the margin, while making clear that the total package is compliant.

The bank should establish a compensation committee with compliance, human resources, sales, and legal representation to approve plan changes and review exceptions. Monitoring should include quarterly tests for term-based compensation, including rate, product, and lock-period differences; a review of marketing-support payments and receipts; and a comparison of pricing and product mix by originator to detect steering. Fair-lending analysis should compare loan pricing, denial rates, and product selection across protected classes. The bank should also monitor complaints, repurchase requests, early payment defaults, and quality-control findings by originator, because those outcomes can reveal whether incentives are producing bad loans. Originators should attest annually that they understand the plan and do not receive prohibited third-party compensation. Internal audit should sample compensation calculations and review whether any off-plan payments exist. The board or its risk committee should receive a summary of findings and any corrective actions. These controls should be documented before the plan is launched, not added after a supervisory finding.