July 1, 1999
Suzanne Mason, Compliance Officer
Redstone Federal Credit Union
220 Wynn Drive
Huntsville, Alabama 35893
You have asked whether a mortgage company can
pay a federal credit union (FCU) a bonus based on the volume of
mortgage loans the FCU originates and sells to the mortgage company.
The FCU also plans on distributing a percentage of the bonus
to key employees involved in the origination of the loans. Payment
of the bonus to the FCU is permissible. Payment of the bonus
to the FCU employees may be permissible under NCUA's regulations
if it is solely an internal program of the FCU and not part of
the arrangement with the mortgage company.
BACKGROUND
The FCU wishes to engage in a program with
a mortgage company that provides for the mortgage company to pay
the FCU a bonus for the purchase of service-released 30-year fixed
rate loans originated by the credit union. The bonus would be
determined by the amount of delinquencies and the volume of loans
sold to the mortgage company. Volume would be calculated on Fixed-Rate
Agency, FHA/VA ARMS, and Jumbo Fixed-Rate loans that are closed
by the FCU and purchased each month by the mortgage company.
The FCU would not be eligible for the bonus if it has excessive
loan repurchases, outstanding documentation, serious delinquencies
or early payment defaults. The FCU also plans on distributing
a percentage of the bonus to key employees involved in the origination
of the loans. As we understand it, this latter distribution is
your FCU's proposal, not part of the arrangement with the mortgage
company.
ANALYSIS
NCUA's regulations permit an FCU to sell its
loans to any source, as long as the board of directors approves
the sale and the FCU retains a written agreement with the schedule
of the loans sold. 12 C.F.R. §701.23(c)(1). Although the
sale of loans to a mortgage company with a bonus component based
on sale volume is permissible, such an arrangement may present
safety and soundness
Suzanne Mason
Page 2
concerns. You may wish to contact your regional
office before you enter into this arrangement.
Regarding your desire to pass part of the bonus
to the FCU's employees involved in the loan origination, NCUA's
regulations provide that no employee of an FCU may receive, directly
or indirectly, any commission, fee, or other compensation in connection
with a loan made by the credit union. 12 C.F.R. §701.21(c)(8)(i).
The purpose of §701.21(c)(8)(i), called the prohibited fees
regulation, is to ensure that an individual, who is in a position
of authority at a credit union, does not put his or her self-interest
ahead of the credit union's interest in making good loans. If
the incentive to key employees to originate service-released 30-year
fixed rate loans instead of other types of real estate loans is
part of the arrangement with the mortgage company, then, the bonus
that an FCU employee would receive from the company - even though
paid through the FCU - would be considered compensation in connection
with a loan made by the credit union and would violate §701.21(c)(8).
The prohibition applies to both direct and indirect compensation.
12 C.F.R. §701.21(c)(8)(i). In other words, the mortgage
company and FCU would not be permitted to establish a bonus program
for credit union employees that is funded by the mortgage company
and passed through the FCU to the employees.
If, however, the proposal to pass a portion of the bonus on to FCU employees is solely the FCU's own internal incentive program and not an integral part of the mortgage company's program, then it may qualify under the bonus exception contained in
§ 701.21(c)(8)(iii)(C). It would be permissible
for the FCU to establish a loan bonus program for its employees
as long as the compensation was unrelated to the mortgage company
bonus program. The bonus should be based on the benefit of the
employee's services to the FCU.
Sincerely,
Sheila A. Albin
Associate General Counsel
GC/MJMcK:bhs
SSIC 3501
99-0245