Federal regulating authorities may turn their attention to mortgage originators next as part of an ongoing review of incentive compensation practices at banking firms across the country. The Federal Reserve, the Office of the Comptroller of the Currency (OCC), the Office of Thrift Supervision (OTS) and the Federal Deposit Insurance Corp. (FDIC) issued final guidance for incentive compensation today that aims to ensure compensation practices at financial firms account for risk and keep consistent with safety and soundness practices. The Fed, coordinating with other agencies, already completed its first round of in-depth analysis of compensation practices at large, complex banking organizations as part of a horizontal review — or a coordinated review of practices across multiple firms. As the next stage of the ongoing compensation review, the agencies plan additional studies across specific business lines within these financial firms, like mortgage originators. “Banking organizations too often rewarded employees for increasing the organization’s revenue or short-term profit without adequate recognition of the risks the employees’ activities posed to the organization,” the agencies said in the guidance issued today (download here). In May, the Fed delivered assessments to financial firms detailing compensation analysis and some areas requiring prompt attention. “Many large banking organizations have already implemented some changes in their incentive compensation policies, but more work clearly needs to be done,” said Federal Reserve governor Daniel Tarullo. “The Federal Reserve expects firms to make material progress this year on the matters identified as we work toward the ultimate goal of ensuring that incentive compensation programs are risk appropriate and are supported by strong corporate governance.” As its review continues, the agencies will focus on areas also found lacking broadly among the financial firms. For example, according to the joint release, many firms need a way to identify which employees can expose the company to material risk. Firms are not weighing all the risks when determining risk-sensitive compensation for all employees, and instead are using a “one size fits all” approach to adjusting for risk. Additionally, the agencies found many firms lack a mechanism to evaluate the level of success in established risk-balancing practices. The news that the compensation review could extend to mortgage originators comes at a time when a wide overview is emerging of monetary compensation as being linked and having at least some responsibility for the poor performance of mortgage products after the housing bubble burst. For example, a House Resolution (HR) recently added to the Wall Street financial regulatory reform bill includes guidelines that dictate origination fees policy and holds individual loan officers accountable for compliance with the new law. Write to Diana Golobay.
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