On April 1, 2011, new restrictions on mortgage originator compensation took effect. In general, the new rules, as outlined in Regulation Z, prohibit two practices: compensating a mortgage loan originator based on a mortgage loan’s terms and conditions, and steering a mortgage borrower to a particular creditor to increase lender compensation without being in the consumer’s interest. In this note, we highlight a few questions we have received several times (and include our answers).
Who is a mortgage loan originator?
Anyone who receives compensation to arrange, negotiate or obtain consumer mortgage credit for another person is a mortgage loan originator. In addition to lenders, this includes any staff members, such as tellers or new accounts personnel, for whom the bank pays a fee to refer a mortgage applicant to a lender or creditor. Under the rule, that referral fee cannot be based on a loan’s terms and conditions.
What compensation is prohibited based on terms and conditions, and what compensation is acceptable?
In general, compensating a mortgage originator based on a term, such as the annual percentage rate, or a condition, such as adding a prepayment penalty to a loan, is prohibited. Clearly, certain compensation arrangements are no longer valid under this rule, such as providing the lender or broker with a yield spread premium based on the loan’s interest rate or compensating a lender based on a loan’s loan-to-value ratio. Compensation includes salaries, commissions and any other financial or similar incentive.
Federal Reserve Board attorneys have indicated that, at least in their initial views, linking mortgage loan originator compensation to a branch’s or institution’s profitability is problematic because loan terms and conditions almost always contribute to profitability. This view was provided in the Federal Reserve System Outlook Live webinar titled Loan Originator Compensation. We encourage all compliance staff to listen to an archived version of the webinar available here. The Consumer Financial Protection Bureau will have responsibility for implementing Regulation Z going forward.
Your institution may continue to compensate mortgage loan originators based on criteria other than a loan’s terms and conditions, such as (1) the loan originator’s overall loan volume, (2) the long-term performance of the loan originator’s loans, (3) an hourly rate of pay based on hours worked, (4) a fixed payment amount for each loan originated, (5) the percentage of applications that resulted in originations, (6) the quality of the lender’s loan files, (7) legitimate business expenses or (8) a fixed percentage of the loan amount, assuming the percentage amount does not vary for different loan amounts.