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Thursday, October 2, 2014

Loan Officer Compensation based on Referral Sources


QUESTION
Can an MLO be paid different compensation for “Self Sourced” referrals (i.e., originated loans that the MLO obtained through his or her own relationships) and “Company Sourced” referrals (i.e., originated loans from a source in which the Company or an employee of the Company other than the MLO has a relationship, such as loans sourced through lead agreements, market servicing agreements or joint marketing agreements)?

ANSWER
While there is no direct answer to this question set forth in any of the relevant regulations, an examination of Regulation Z, as well as “unofficial” CFPB guidance, indicates that the answer is Yes. 

As we are all well aware by now, Regulation Z as codified by the Dodd-Frank Act prohibits loan origination compensation based on transaction terms, such as interest rate, or a proxy for transaction terms. [Section 1026.36(d)] 

A transaction term is any right or obligation of the parties to a credit transaction, except for the amount of credit extended. [Section 1026.36(d)(1)(ii)] Therefore, the referral source is not a transaction term.

A factor (which is not itself a transaction term) is a proxy for a transaction term if it meets two conditions:

  1. The factor consistently varies with a transaction term or terms over a significant number of transactions; and,
  2. The loan originator has the ability, directly or indirectly, to add, drop, or change the factor when originating the transaction.

Applying this definition to the issue presented reveals that the referral source is not a proxy for a transaction term, because the second condition is not satisfied. A loan originator does not have the ability to influence a referral source.

Noteworthy, this same question was posed to a CFPB presenter at the MBA’s 2014 Legal Issues & Regulatory Compliance Conference in San Diego. The CFPB representative concluded that MLOs could be paid differently based upon referral source, yet as we have seen all too often when it comes to the guidance of the CFPB, the Bureau’s presenter stated that his opinion was to be considered “unofficial” and not to be construed as official CFPB guidance.

Michael Barone
Director/Legal & Regulatory Compliance
Lenders Compliance Group