QUESTION
As a mortgage broker, our company pays the loan originator the
same, irrespective of whether it is a lender paid or borrower paid transaction.
However, we are hearing that we may be able to pay the loan originator
differently on borrower paid transactions, which would allow us to be more
competitive. So, can we vary compensation based upon lender paid versus
borrower paid?
ANSWER
A conservative approach is that you cannot vary individual loan
originator compensation based upon whether it is borrower paid or lender
paid. However, in reliance on commentary to Regulation Z, some brokers and
lenders are assuming a more aggressive approach and permitting an individual loan
originator’s compensation on borrower paid loans to be based on the amount of
compensation paid directly by the consumer to the brokerage company. For
example, the individual loan originator earns 200 bps on lender paid transactions
and 70% of compensation received by broker on borrower paid. To date, we have
not seen any commentary from a regulator saying this practice is not
permissible. However, you need to check
with your lenders as some will not permit a variation in compensation based
upon borrower paid or lender paid.
Here are some citations to consider.
12 CFR 1026.36(d)(2)(i)(C)
If a loan originator organization
receives compensation directly from a consumer in connection with a
transaction, the loan originator organization may pay compensation to an
individual loan originator, and the individual loan originator may receive
compensation from the loan originator organization, subject to paragraph (d)(1)
of this section.
Official Commentary 36(d)(1)-2 [emphasis added]
“2. Compensation
that is or is not based on a term of a transaction or a proxy for a term of a
transaction. Section 1026.36(d)(1) does
not prohibit compensating a loan originator differently on different
transactions, provided the difference is not based on a term of a transaction
or a proxy for a term of a transaction. The rule prohibits compensation to a
loan originator for a transaction based on, among other things, that
transaction's interest rate, annual percentage rate, collateral type (e.g.,
condominium, cooperative, detached home, or manufactured housing), or the
existence of a prepayment penalty. The rule also prohibits compensation to a
loan originator that is based on any factor that is a proxy for a term of a
transaction. Compensation paid to a loan
originator organization directly by a consumer in a transaction is not
prohibited by §1026.36(d)(1) simply
because that compensation itself is a term of the transaction. Nonetheless,
that compensation may not be based on any other term of the transaction or a
proxy for any other term of the transaction. In addition, in a transaction where a loan originator organization is
paid compensation directly by a consumer, compensation paid by the loan
originator organization to individual loan originators is not prohibited by §1026.36(d)(1) simply because it is based on
the amount of compensation paid directly by the consumer to the loan originator
organization but the compensation to the individual loan originator may not be
based on any other term of the transaction or proxy for any other term of the
transaction.”
Joyce Wilkins Pollison, Esq.
Director/Legal and Regulatory
Compliance
Executive Director /
Lenders Compliance Group