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:
- The factor consistently varies with a transaction term or terms over a significant number of transactions; and,
- 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
