CFPB: Compensation Cannot Vary for Brokered Out Loans
In the CFPB’s new Supervisory Highlights, the agency concludes that paying individual mortgage loan originators differently for loan products that are brokered out to another lender, as compared to loans that are originated in-house, is a violation of Regulation Z’s Loan Originator Compensation Rule.
The CFPB’s Highlights describe a lender that makes certain mortgage loan products (like cash-out refinancing loans), but does not make others (like reverse mortgages). If a consumer wants a reverse mortgage loan, the lender would broker that loan to another lender, and the loan originator would receive a different level of compensation for that work. The CFPB has stated previously that compensating loan originators differently for different mortgage products is prohibited, because a mortgage product is a bundle of loan terms. The CFPB relies on that reasoning here and concludes that paying a loan originator differently for brokered-out versus in-house loan products is prohibited.
The CFPB does not explain why that compensation factor – brokered-out versus originated in-house – is per se prohibited as loan term-based compensation, and not subject to the Rule’s next-level proxy analysis. Under the Rule, a compensation factor that is not based on loan terms is nonetheless prohibited 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. An example in the Rule’s Commentary is a creditor that pays differently for transactions that will be held in portfolio than for transactions to be sold into the secondary market. In the example, the creditor holds fixed-rate, 5-year balloon loans in portfolio, and sells all other products (including 30-year fixed-rate loans). The Commentary explains that since there is a correlation with loan terms, and the loan originator has the ability to advise the consumer to choose a 5-year balloon loan versus a 30-year loan, the compensation is based on a proxy for loan terms and is prohibited.
By contrast, the CFPB now treats a distinction for brokered-out loans as prohibited loan term-based compensation in the first instance, and as such does not allow a consideration of whether the loan originator can influence the consumer’s choice. One can imagine, for example, circumstances in which a consumer simply does not want or does not qualify for a loan offered in-house, and the loan originator’s only option is to broker out the loan (or to simply send the consumer away). According to the CFPB’s Highlights, that fact would be irrelevant to the analysis.
The Supervisory Highlights also do not address the fact that many reverse mortgage loans are open-end credit, and as such are not subject to the Loan Originator Compensation Rule. Accordingly, it is unclear from the Highlights how the CFPB analyzes a lender’s decision to pay differently on brokered-out open-end loans.
The CFPB notes that in response to its findings, the lenders have revised their loan originator compensation plans to comply with Regulation Z. It is clear, then, that although the CFPB has not brought a public enforcement action under the Loan Originator Compensation Rule in quite a while, its supervisory staff is not dormant on the issue.
