Pub. 3 2013-2014 Issue 3

O V E R A C E N T U R Y : B U I L D I N G B E T T E R B A N K S - H E L P I N G C O L O R A D A N S R E A L I Z E D R E A M S November • December 2013 5 The Overlooked Rule It will have a permanent impact on the community banking model, yet the Mortgage Loan Compensation Rule (MLCR) within Dodd-Frank Act has garnered almost no attention from community bankers or the legions of consul- tants who cater to the banking industry. Yet MLCR forever alters a bank’s ability to align their lenders with the bank’s profit goals. THE RULE • Applies to all lenders who originate more than 10 (consumer closed end, in any lien position) one to four single family secured loans in a year. • Lenders who meet this threshold may not receive more than 10 percent of their cash compensation from profit- triggered plans like bonuses, stock options and stock appreciation rights. • In lieu of profits, these lenders may be paid production incentives as long as the incentives are not based on the terms of the loan. However, these commissions must be budgeted and paid whether or not the bank makes its profit goals. Certainly, the millions of toxic mortgage loans and the ill-conceived compensation plans that enriched mortgage originators at the expense of their customers needed to be addressed. However, like the Qualified Mortgage Rule (QM) and the Ability to Repay Rule (ATR), MLCRmay address the abusers, but arguably traditional banks which were not the problem, are impacted far more. THE IMPACT Community banks can only succeed by creating deep, and long-term relationships with their customers. By definition, this requires that the development and pricing of products, services and loans be fair to both the consumer and to the bank. Simply put, a community bank cannot afford to gouge customers as the entire relationship is at stake…not just the loan. Add the regulatory oversight already placed on the banking industry and there is simply no incentive for commu- nity banks to risk their reputation with valued customers or regulators by originating excessively priced mortgage loans. MLCR (alongwithQMandATR) undermines a community bank’s ability to differentiate itself through common sense lending. Community bank problem solvers (who arguably invented private banking long before it was a department in a large bank) often process multiple consumer and commercial loans simultaneously. The customer wins through one con- versation, one application and underwriting process and one closing. Unfortunately, MLCR puts that customer-friendly model at risk. To participate in company-wide profit plans, lenders may have no role in the negotiation, application, ap- proval, closing or servicing of a consumer loan secured by a one to four family property. THE IMPACT MLCR provides limited options for community banks, as detailed below: • Continue the consumer friendly model in which problem solving bankers provide all lending solutions to their customers. However, for banks who desire to align their entire team through one company-wide incentive plan, all profit based bonuses, stock option plans and stock appreciation rights are limited to 10 percent of each participant’s cash compensation. Profit based bonuses may exceed 10 percent of compensations if based only on profits not coming from mortgages, but excluding mortgage-based profits would misalign incentives and would pose an accounting nightmare. • Create a separate production based plan for the lenders. Isn’t this how we got into this mess? Credit quality is the number one reason banks fail. Eliminating “good of the whole” thinking from lenders seems a fool’s errand. • Segregate one to four family property consumer lending. This structure allows all but a select group of one to four family lenders to participate in profit-based plans. However, it is not consistent with the community bank problem solving model. Customers must be referred to a centralized group for both origination and servicing of consumer one to four family loans, which negatively impacts the customer centric community banking model. MLCR, combined with the QM and ATR, undermines the special relationship a community bank develops with its customers and its community. The Solution The real targets of MLCR are commission based lenders who sold toxic loans into the secondary market, not com- munity bankers who originate loans held in a bank’s own portfolio. To insure that banks can continue to serve as a source of credit for non-traditional borrowers, all bank held portfolio loans should be exempted from the new mortgage  Chairman’s Message  continued on page 11