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Thursday, August 29, 2013

Prohibitions on Loan Originator Compensation

QUESTION 
What is the salient prohibition pertaining to loan originator compensation? 

ANSWER 
Regulation Z, the implementing regulation of the Truth in Lending Act (TILA), prohibits a creditor or any other person from paying, directly or indirectly, compensation to a mortgage broker or any other loan originator that is based on a mortgage transaction's terms or conditions - the only exception being the correlation of compensation to the amount of credit extended.

A loan originator's compensation can neither be increased nor decreased based on the loan terms or conditions.

Once the creditor offers to extend a loan with specified terms and conditions (i.e., rate and points), the amount of the originator's compensation for that transaction may not change, based on either an increase or a decrease in the loan cost or any other change in the loan terms. For instance, if a consumer requests a lower interest and the creditor accepts that rate, the creditor is not permitted to reduce the amount it pays to the loan originator based on that change in loan terms. Similarly, any reduction in origination points paid by the consumer must be a cost borne by the creditor.

The amount of credit extended is deemed not to be a transaction term or condition of the loan for purposes of the Regulation Z prohibition, provided that the compensation payments to loan originators are based on a fixed percentage of the amount of credit extended. Such compensation may be subject to a minimum or maximum dollar amount; however, the minimum or maximum amount may not vary with each credit transaction.

Creditors may use other compensation methods to provide adequate compensation for smaller loans, such as basing compensation on an hourly rate, or on the number of loans originated in a given time period.

[See 12 CFR 226, §§ 226.36(d)(1) and (d)(2)]

*Jonathan Foxx
President & Managing Director
Lenders Compliance Group