We believe that this policy would violate the loan originator compensation rules, as your institution is varying loan originator compensation based on a proxy for a term of the mortgage loan transactions. Regulation Z prohibits loan originator compensation in connection with a consumer credit transaction secured by a dwelling that is based on a “term of a transaction” or on a proxy for a term of the transaction. 12 CFR 1026.36(d)(1)(i). A factor is a “proxy” for a term of a transaction if it meets two conditions: (1) the factor consistently varies with a transaction term or terms over a significant number of transactions, and (2) the loan originator has the ability, whether directly or indirectly, to add, drop or change the factor when originating the transaction. 12 CFR 1026.36(d)(1)(i).

We believe that varying compensation by capping commissions based on whether a loan is sold or held in portfolio would be deemed to be based on a proxy for a term of the transaction. Both conditions (i.e., factors) of a proxy appear to be met here: (1) the terms of the loans held in portfolio consistently differ from those in the sold loans (such as loans with five-year terms that are held in portfolio compared to loans with thirty-year terms that are sold), and (2) the likelihood of a presumption that your lending officers (the loan originators) have the ability to encourage borrowers to take one set of terms over the other. This is very similar to an example in the Official Commentary of a proxy of a term of a transaction, in which the creditor pays a higher commission for loans that are kept in portfolio as opposed to loans sold in the secondary market. Official Interpretations, 12 CFR 1026.36, Paragraph (d)(1), Comment 2(ii)(A). In that example, “the loan originator has the ability to change the factor by, for example, advising the consumer to choose an extension of credit with a five-year term.” Official Interpretations, 12 CFR 1026.36, Paragraph (d)(1), Comment 2(ii)(A).

Even if your loan originators do not have underwriting authority and play no part in the decision as to whether a loan is sold or retained, it is likely that they will be deemed to have “the ability, whether directly or indirectly” to change this factor when working with borrowers. 12 CFR 1026.36(d)(1)(i). In fact, loan originators by definition do not have underwriting authority; if an employee makes underwriting decisions or sets credit terms, they are not considered to be loan originators. See Official Interpretations, 12 CFR 1026, Paragraph (a), Comment 4(iv). And even if your policy results in steering customers towards transactions with more favorable terms, the loan originator compensation rules still prohibit varying compensation based on a proxy for a term of such loans.