QUESTION
If one of loan officer needs to price a loan lower than what our
company normally requires in order for the officer to be eligible for
compensation, could an “internal referral” of the loan be made to a
non-commissioned loan officer/manager who then pays the originating loan
officer a referral fee? For example,
John Smith has a deal in which he is competing with a local credit union
offering a 4.5% rate. But to be paid his 2% commission under the company’s
compensation rules, Smith has to offer the client a rate of 4.75%. Could the loan be “referred internally” to a
non-commissioned manager who then gives the borrower the 4.5% rate to be
competitive, and pays the LO a flat referral fee?
ANSWER
Regulation X, the implementing regulation for the Real Estate
Settlement Procedures Act (“RESPA”) does
authorize payment of compensation for certain “internal referrals.” Thus, as an
exception to the anti-kickback provisions of RESPA Section 8, Regulation X [12
CFR §1024.14(g)(iv) and (vii)] specifically authorizes:
“(iv) A payment to
any person of a bona fide salary or compensation or other payment for goods or
facilities actually furnished or for services actually performed;” and
“(vii) An employer's
payment to its own employees for any referral activities.” (Emphasis
added.)
However, Regulation X is not the only regulation to consider. In that regard, for at least two (2) reasons,
I believe this arrangement, as you describe it, would probably violate the Loan
Officer Compensation Rules in Regulation Z, the implementing regulation of the
Truth in Lending Act:
First, the loan officer’s compensation appears to be based on term of
the loan, or a proxy for such a term. In
that regard, Regulation Z provides at 12 C.F.R. §1026.36(d)(1) that:
(i) Except as provided in paragraph
(d)(1)(iii) or (iv) of this section, in connection with a consumer credit
transaction secured by a dwelling, no loan originator shall receive and no
person shall pay to a loan originator, directly or indirectly,
compensation in an amount that is based on a term of a transaction, the
terms of multiple transactions by an individual loan originator, or the terms
of multiple transactions by multiple individual loan originators. If a loan
originator's compensation is based in whole or in part on a factor that is a
proxy for a term of a transaction, the loan originator's compensation is
based on a term of a transaction. A factor that is not itself a term of a
transaction is a proxy for a term of the transaction if the factor consistently
varies with that term over a significant number of transactions, and the loan
originator has the ability, directly or indirectly, to add, drop, or change the
factor in originating the transaction.” (Emphasis added.)
Under Section 1026.36(d)(ii) of Regulation Z, “[t]he amount of credit extended is not a term
of a transaction or a proxy for a term of a transaction, provided that
compensation received by or paid to a loan originator, directly or indirectly,
is based on a fixed percentage of the amount of credit extended…” (Emphasis
added.) However, the interest rate most
assuredly is a term of the
transaction. And the so-called “referral fee” is actually compensation to the
loan officer, the amount of which is indeed based on a term of the transaction
or a proxy for a term; i.e., the interest rate. As you have described it, the
loan officer is paid the referral fee only when the interest rate to the
borrower is adjusted below what is normally required by the company for the
loan officer to earn a commission.
Second, the arrangement at least appears to violate (or encourage violation
of) the “anti-steering” provisions of the Loan Officer Compensation Rules in
Regulation Z. In that regard, the loan
officer operating under the proposed arrangement would be dis-incentivized to
make an “internal referral” of loans at the lower interest rate since the flat
referral fee would presumably be less
than the amount of compensation the loan officer would ordinarily receive under
his or her regular compensation formula if the loan were made at the higher
interest rate. The applicable provisions of Regulation Z [12 C.F.R. §1026.36(e)]
read as follows:
“(1) General. In connection with a
consumer credit transaction secured by a dwelling, a loan originator shall not
direct or “steer” a consumer to consummate a transaction based on the fact that
the originator will receive greater compensation from the creditor in
that transaction than in other transactions the originator offered or could
have offered to the consumer, unless the consummated transaction is in
the consumer's interest.” (Emphasis added.)
Here, it is difficult to see
how the consummated transaction would be “in the consumer’s interest” since the
loan interest rate would be higher than what the consumer would have to pay
under the referral fee arrangement. In that regard, Section 1026.36(e) goes on
to state:
“(2) Permissible
transactions. A transaction does not violate paragraph (e)(1) of this
section if the consumer is presented with loan options that meet the conditions
in paragraph (e)(3) of this section for each type of transaction in which
the consumer expressed an interest. For purposes of paragraph (e) of this
section, the term “type of transaction” refers to whether:
(i) A loan has an
annual percentage rate that cannot increase after consummation;
(ii) A loan has an
annual percentage rate that may increase after consummation; or
(iii) A loan is a
reverse mortgage.
(3) Loan options
presented. A transaction satisfies paragraph (e)(2) of this section only
if the loan originator presents the loan options required by that paragraph
and all of the following
conditions are met:
(i) The loan
originator must obtain loan options from a significant number of the creditors
with which the originator regularly does business and, for each type of
transaction in which the consumer expressed an interest, must present the
consumer with loan options that include:
(A) The loan with
the lowest interest rate;
(B) The loan with
the lowest interest rate without negative amortization, a prepayment penalty,
interest-only payments, a balloon payment in the first 7 years of the life of
the loan, a demand feature, shared equity, or shared appreciation; or, in the
case of a reverse mortgage, a loan without a prepayment penalty, or shared
equity or shared appreciation; and
(C) The loan with
the lowest total dollar amount of discount points, origination points or
origination fees (or, if two or more loans have the same total dollar amount of
discount points, origination points or origination fees, the loan with the
lowest interest rate that has the lowest total dollar amount of discount
points, origination points or origination fees).
(ii) The loan
originator must have a good faith belief that the options presented to the
consumer pursuant to paragraph (e)(3)(i) of this section are loans for which
the consumer likely qualifies.
(iii) For each type
of transaction, if the originator presents to the consumer more than three
loans, the originator must highlight the loans that satisfy the criteria
specified in paragraph (e)(3)(i) of this section.” (Emphasis added.)
Here, there is no indication
that the terms of the above “options” exception have been satisfied. Accordingly,
I would not recommend this suggested method of loan officer compensation.
Michael Pfeifer
Director/Legal & Regulatory Compliance
Lenders Compliance Group &
Servicers Compliance Group
