Paying Your Loan Officers a Commission

Do you pay any of your loan officers a commission when a loan is closed? Are you aware that state law may control the details of when a commission must be paid, whether you can deduct any costs or expenses from the commission, or what commissions, if any, are due to a loan officer who leaves your employ before the loan closes? In some states, you must pay their commissions no later than the last day of the month following the month in which these commissions are earned. In other states, such as California, commissions must be paid on the next regular payday after they have been earned and are "reasonably calculable." An employer has the flexibility to deem commissions earned either when the sale is made or when the customer pays for the service.

Some states, such as New York, generally prohibit an employer from deducting any sum from an employee's commissions and other wages, except for deductions for the benefit of the employee (e.g., pension, health benefits). Examples of prohibited deductions are deductions for spoilage or breakage, cash shortages or losses, and fines or penalties for lateness, misconduct, or quitting by an employee without notice. The reasoning is that the employer should bear the risk of such losses rather than the employee. This means that you may not deduct anything from a loan officer's commission if there is any reason that the full fee on a particular loan cannot be collected.

The largest source of conflict regarding the payment of commissions occur when a loan officer leaves before a loan closes. Certain states require you to pay the wages, including earned commissions, no later than the regular payday for the pay period during which the termination (voluntary or involuntary) occurred. In other states, employees who are discharged, or who resign with 72 hours' notice, are entitled to all wages due at the time of termination. If the resigning employee fails to provide notice, the employer has 72 hours after the resignation to make payment. In those states, an employer may not wait until the customary time for calculating the commissions of current employees, nor delay payment of earned commissions until the next regularly scheduled pay date.

You must have a policy as to when commissions are earned if the loan officer leaves your employ before the loan closes. The policy should be in writing and each new loan officer should be made aware of it. Remember, once a commission is earned, it cannot be forfeited, even if the loan officer was terminated for cause or left you with no notice.

If your policy is badly drafted, you will ultimately find yourself dealing with the Labor Department in your state. You will be answering the complaint of an unhappy ex-employee. In addition to awarding the commission that you disputed, the Labor Department can also assess penalties for your "willful misconduct." It can get very expensive if a complaint is filed against you. Subsequent complaints will be even more expensive.

You need to know what your state's law requires you to do when you create a compensation policy for your employees. You should have the assistance of a lawyer who is well-versed in employment law if you insist in drafting your own agreements. Make sure that you specify when and how a commission is earned and when that commission will be paid. Your agreement should also state when and how any draws against commissions earned will be reconciled, as well as how and when all commissions will be paid if the employee leaves. If you are doing business in more than one state, your agreements might differ in each state, depending upon the law in each state. One form of agreement may not be sufficient.

Post-Licensing Requirements

Although the licensing process is the one that all mortgage companies focus on in terms of compliance with state banking regulations, in many states, there are ongoing requirements to remain in compliance with state law and regulation.

Most states require the filing of an annual report each year. The report can be a simple one, asking only a few questions about number and total dollar volume of loans brokered, originated or serviced. Or it can be pages and pages of questions regarding information regarding the company’s financial situation, appraisers and title insurance companies used, and the license numbers of lenders who closed the brokered loans. Delaware requires a report twice a year. Massachusetts and New York require their licensed lenders to file quarterly reports. Failure to file the necessary reports can lead to fines and a refusal to renew a license.

Georgia raises money for its banking department budget by charging $6.50 for each loan closed. Typically, the lender pays the fee but both lenders and brokers are required to file the report stating how many loans were closed.

Those states that require a minimum net worth usually require that the licensees submit audited financial statements every year. Sometimes, it is part of the annual report process, in other states, the financials get submitted separately from the annual report.

Florida requires quarterly reporting of new loan officer hiring and firing. Many other states require annual updates of who your company’s loan officers are. This may be separate from the renewal of mortgage originator licenses.

And always keep in mind those continuing education requirements. Each state has a different number of required continuing education hours and a different timeframe within which they must be completed. If you are licensed in multiple states, you need to take the required number in each state and there is no overlap.

As you can see, getting your license is just the beginning of the work it takes to stay in compliance to keep the license.