RSK.IQ Question of the Week 11/28/16

Mortgage Loan Originator Compensation and Loan Type


Is it acceptable for a Mortgage Loan Originator (“MLO”), who is paid a flat commission rate on all traditional first lien mortgage applications, to be paid a different commission rate on products, such as HELOCs and subordinate closed-end mortgage loans?

For example, could an MLO be paid a flat commission of 70 bps for first lien closed end residential mortgage production and be paid 35 bps for HELOCs and home equity loans? Would this meet the requirements of the Dodd-Frank compensation rule?

Response Summary

If the Bank varied the MLO’s commission based on the type of the loan, it would be doing so on the basis of a term of the transaction, which is prohibited by Regulation Z.

Response Detail

Regulation Z prohibits paying a loan originator compensation in an amount that is based on a term of a transaction or a proxy for a term of the transaction. A “term of a transaction” is any right or obligation of any of the parties to a credit transaction. This includes the rights and obligations memorialized in a promissory note or security instrument, such as a mortgage, and the payment of loan originator fees or any other fees charges. 12 CFR §1026.36(d)(1); Official Interpretations, 1026.36(d)(1) – 1.iii.

If the Bank varied the compensation of MLOs on the basis of loan types, as upon the term of the loan or the priority of the security, it would in doing so on the basis of a term of the transaction.

When the final rule regarding loan originator restrictions was published by the Federal Reserve Board, the commentary indicated that creditors can encourage originators to make both small and large loans by setting a minimum and maximum payment for each loan as long as the loan originators are compensated a fixed percentage of the amount of credit extended. However, the Board believed “that allowing compensation to vary with loan type, such as loans eligible for consideration under the CRA, would permit unfair compensation practices to persist in loan programs offered to consumers who may be more vulnerable to such practices.” Federal Register, Vol.75, No. 185, September 24, 2010.

The following would be permissible methods of compensation:

  • The loan originator’s overall dollar volume (i.e., total dollar amount of credit extended or total number of transactions originated) delivered to the creditor
  • The long-term performance of the originator’s loans
  • An hourly rate of pay to compensate the originator for the actual number of hours worked
  • Depending on if the consumer is an existing customer of the creditor or a new customer
  • A payment fixed in advance for every loan the originator arranges for the creditor (e.g., $600 for every credit transaction arranged for the creditor, or $1,000 for the first 1,000 credit transactions arranged and $500 for each additional credit transaction arranged)
  • The percentage of applications submitted by the loan originator to the creditor that results in  consummated transactions
  • The quality of the loan originator’s loan files (e.g., accuracy and completeness of the loan documentation submitted to the creditor). Official Interpretations, 1026.36(d)(1) – 2.i.

The compensation of the loan originator cannot be based on a factor that is a proxy for a term of the transaction. For example, if compensation was based on the loans maintained in the creditor’s portfolio rather than being sold on the secondary market, and the creditor held in its portfolio only loans that have a fixed interest rate and a five-year term with a final balloon payment, whether a loan is held in the portfolio or not and whether the loan originator receives a higher commission is a proxy for the terms of the transaction. Official Interpretations, 1026.36(d)(1) – 2.ii.A.

This entry was posted on Monday, November 28th, 2016 at 1:34 pm.

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