In the past, we’ve heard and read about Lenders being fined and penalized for violations which relate to their LO compensation plan and/or for some method that they pay their loan originators. Based on recent DOJ settlements with FHA lenders, problems may also arise resulting from FHA Underwriter comp plans.
In the case of Franklin American Mortgage, of Franklin, TN, the fines were partly the result of how Franklin paid their FHA Underwriters. Each Underwriter was required to complete a minimum number of loan reviews per month. The Underwriters were subject to disciplinary actions up to and including dismissal for failure to meet their assigned quota.
However, if they met a certain monthly minimum, the Underwriter would be eligible to receive a bonus; some amount above their regular monthly salary. The bonus was determined based on the total number of loans underwritten, not the quality of the review. This could provide an incentive to an Underwriter toward quantity rather than quality. A very dangerous practice!
In addition, Franklin employed Junior Underwriters. Presumably less experienced, to assist in the loan review process, but, meant to increase the productivity of the experienced DE Underwriters. This would help the output of the higher paid DE Underwriters. Not a bad idea as long as these less experienced reviewers were monitored by more experienced underwriters and not used only to help them meet their quota and achieve their bonus.
Based on this settlement Lenders should look very carefully at their Underwriter compensation plans. FHA prohibits lenders from paying their Underwriters on a commission basis. This relates to both loan principal volume and/or loan count.
If lenders wish to provide some incentive to their underwriters, and processors, for that matter, they may explore doing so using some measure tied to quality, not quantity. This can be based on such things as loan defaults, pre and post-closing audit results, investor delivery suspensions and agency post purchase or post-endorsement review results. I strongly suggest that any plan, other than one paying a flat hourly rate or annual salary be carefully reviewed and approved by counsel.
Loan quality counts and it will definitely help keep a Lender out of trouble. Remember, in addition to the LO Comp rules and the Underwriter comp challenges, an FHA Lender must sign the required FHA annual and individual loan certification stating that their FHA loans do not have any material violations which may render the loan ineligible for the FHA insurance. FHA and DOJ have demonstrated that they will hold lenders to these certifications.
Any slip up may end up with the Lender facing FHA and/or DOJ fines and penalties, plus jeopardize their ability to continue to do FHA loan business. Be very careful how you choose to motivate your Underwriters…