Non-deferred profits-based loan originator compensation

A year-end bonus tied to mortgage-related profits can create a compensation issue even when no one adjusts an individual loan's rate or fees to increase the bonus. Regulation Z provides a specific rule for a non-deferred profits-based compensation plan.

What counts as a non-deferred profits-based plan

The official interpretation describes an arrangement under which an individual loan originator may receive variable, additional compensation based on mortgage-related business profits of the paying person, an affiliate, or a relevant business unit. Examples can include bonus pools, profits pools, bonus plans, and profit-sharing plans. Deferred compensation and designated tax-advantaged plans are analyzed under separate provisions.

The two-part test

First, the originator's compensation under the plan cannot be directly or indirectly based on the terms of that originator's own covered transactions. For example, the plan cannot increase an individual MLO's bonus because the MLO's loans had a higher interest-rate spread.

Second, at least one of two conditions must be satisfied: the plan compensation does not exceed 10% of the originator's total compensation for the corresponding period; or the MLO was a loan originator for ten or fewer covered transactions consummated in the 12 months before the compensation determination. These are alternatives, not cumulative requirements.

What the 10% calculation compares

The 10% test compares compensation paid under the non-deferred plan with the originator's total compensation corresponding to the same period, as calculated under the rule's definitions and accounting instructions. It is not 10% of the company's profits. Compensation earned in one period but paid later may require careful period alignment. The official interpretation explains how wages, eligible plan contributions, and plan compensation are treated.

Example

Assume an MLO receives $90,000 in other compensation for the relevant period and a $9,000 annual bonus under a company-wide mortgage profits pool. If the bonus is not based on the terms of that MLO's own loans and the rule's calculation places it at 10% of total compensation, the 10% route may be available. Compliance must use the precise regulatory calculation rather than a rough payroll comparison.

MLO exam checklist

1. Confirm the payment is under a non-deferred profits-based plan within §1026.36(d)(1)(iv).
2. Check that the individual MLO's own transaction terms do not drive the payment.
3. Determine whether the 10% total-compensation limit or the ten-or-fewer-transaction condition is met.
4. Apply the official definitions and calculation period; do not substitute company-wide profit share for the 10% ratio.
5. Check the current Regulation Z text and compliance interpretation before applying the rule to a live compensation plan.

The rule addresses closed-end consumer credit secured by a dwelling. It is separate from the basic prohibition on paying an originator based on an individual transaction's terms and from dual-compensation restrictions. When a scenario describes an annual company-profit bonus, test the special plan rule instead of treating every group-level profit metric as automatically prohibited.

The rule has two separate conditions

Regulation Z generally bars compensation based on the terms of a loan originator’s own transactions. A non-deferred profits-based compensation plan may be permitted when the originator’s compensation is not based on the terms of that originator’s own transactions and one of two additional tests is satisfied: the plan pays no more than 10 percent of the originator’s total compensation for the relevant period, or the originator was responsible for ten or fewer covered transactions during the preceding 12 months.

The 10-percent and ten-transaction tests are alternatives, not cumulative requirements. The own-transaction term restriction remains essential in either case. Passing the numerical test does not permit an individual originator to receive more compensation because their borrower accepted a higher rate or another transaction term.

Define the plan and measurement period

Identify what constitutes “profits-based” compensation, when it is earned or paid, how the plan defines total compensation, and the period used for the 10-percent calculation. A deferred payment has a separate regulatory treatment; do not use this non-deferred provision as a substitute for analyzing a deferred plan.

For the transaction-count route, identify transactions for which the originator was responsible during the preceding 12 months and confirm the defined count under the rule. Keep support showing the population, responsible originators, calculation period, and the plan’s payment formula.

Examples and boundaries

An originator receives a salary and a small year-end payment based on overall company profits. If that payment is not tied to the terms of the originator’s own loans and remains within the applicable 10-percent limit, it may meet the compensation condition, subject to the rule’s complete requirements. If the originator receives a larger share of profits but handled ten or fewer covered transactions in the preceding 12 months, the alternative test may apply.

A plan that increases an originator’s profit share when that originator closes higher-rate loans still raises the own-transaction terms restriction, even if the share is under 10 percent. Likewise, an employer cannot use “company profits” as a label when the formula tracks individual loan terms in practice.

Compliance controls and exam traps

Review written plans alongside payroll data and transaction-level results. Check whether discretionary bonuses or manager overrides introduce a term-based factor. Reconcile the stated plan to actual compensation, including incentives paid through an affiliate.

The exam traps are confusing deferred and non-deferred plans, treating the two thresholds as cumulative, and forgetting that compensation may not be based on the originator’s own transaction terms. State the base prohibition first, then identify the applicable alternative condition.

Additional boundary detail

Use a consistent measurement period and include compensation according to the governing rule rather than excluding an item simply because it is discretionary or paid through another entity. If total compensation changes during the period, recalculate the percentage using the appropriate denominator and retain the source records. For the transaction-count alternative, audit assignments and production records so “responsible for” is applied consistently across originators.