PERMISSIBLE PAYMENTS TO LOAN ORIGINATORS

Recently I received a question about appropriate methods of compensating loan originators. Section 1026.36(d) of Regulation Z prohibits payments to loan originators based on the terms of the transaction. Restrictions on compensation to loan originators have been in place for several years. The latest revisions to the rules are effective January 10, 2014.

While there are several significant issues resolved by the January 10th revisions, the question involved a less significant part of the rules. The bank with the question compensates some loan originators based on the amount of credit extended. The loan originator receives a commission in the amount of .5% of the amount of each loan closed. The bank was concerned that since the list of permissible compensation no longer included compensation based on the amount of credit extended that they would have to change how they compensated loan originators.

Existing comment 36(d)((1)-3 states, “The following are illustrative examples of compensation methods that are permissible (unless otherwise prohibited by applicable law), and not an exhaustive list. Compensation is not based on the transaction’s terms or conditions if it is based on, for example:

i.            The loan originator’s overall loan volume (i.e., total dollar amount of credit extended or total number of loans originated), delivered to the creditor.
ii.            The long-term performance of the originator’s loans.
iii.            An hourly rate of pay to compensate the originator for the actual number of hours worked.
iv            Whether the consumer is an existing customer of the creditor or a new customer.
v            A payment that is fixed in advance for every loan the originator arranges for the creditor (e.g., $600 for every loan arranged for the creditor, or $1,000 for the first 1000 loans arranged and $500 for each additional loan arranged).
vi            The percentage of applications submitted by the loan originator to the creditor that result in consummated transactions.
vii.            The quality of the loan originator’s loan files (e.g., accuracy and completeness of the loan documentation) submitted to the creditor.
A legitimate business expense, such as fixed overhead costs.
i.            Compensation that is based on the amount of credit extended, as permitted by § 1026.36(d)(1)(ii).”

The revised comment 36(d)((1)-2. states ” Compensation based on the following factors is not compensation based on a term of a transaction or a proxy for a term of a transaction:

  1. The loan originator’s overall dollar volume ( i.e., total dollar amount of credit extended or total number of transactions originated), delivered to the creditor. See comment 36(d)(1)-9 discussing variations of compensation based on the amount of credit extended.
  2. The long-term performance of the originator’s loans.
  3. An hourly rate of pay to compensate the originator for the actual number of hours worked.
  4. Whether the consumer is an existing customer of the creditor or a new customer.
  5. A payment that is fixed in advance for every loan the originator arranges for the creditor (e.g., $600 for every credit transaction arranged for the creditor, or $1,000 for the first 1,000 credit transactions arranged and $500 for each additional credit transaction arranged).
  6. The percentage of applications submitted by the loan originator to the creditor that results in consummated transactions.
  7. The quality of the loan originator’s loan files ( e.g., accuracy and completeness of the loan documentation) submitted to the creditor.”

While the highlighted item from the old list is not included on the new list the Consumer Financial Protection Bureau (CFPB) says we have nothing to worry about. The Supplemental Information that accompanied the final rule states, “The final rule list deletes the last example that allows for compensation based on the amount of credit extended.  The Bureau believes that this example  is unnecessary because, as the example itself notes, this exception is expressly set forth in § 1026.36(d)(1)(ii). Moreover, the corollary to “amount of credit extended” is embodied in the first example on the list that permits compensation based on the loan originator’s overall loan volume, which is further explained as either the “total dollar amount of credit extended or total number of loans originated.”

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