We pay two employees commissions for the mortgage products that they sell. If we pay commissions for sales of closed-end mortgages, are we also required to pay the same commission for sales of home equity lines of credit (HELOCs)? Would the commission structures have to be identical?

We do not recommend compensating sales of HELOCs differently than sales of closed-end mortgage loans, due to Regulation Z’s prohibition on compensating a loan originator “based on a term of a transaction.”

Regulation Z’s restrictions on loan originator compensation do not apply to HELOCs, but they do apply to closed-end mortgage loans secured by a dwelling. If your bank had a compensation system under which loan originators would be paid for selling closed-end loans but would not be paid for originating HELOCs, their compensation arguably would be “based on a term of a transaction” — the relevant loan term being the open-end or closed-end nature of the loan.

We believe that compensating loan originators for sales of closed-end loans, but not compensating them for sales of HELOCs, could create the type of “steering” incentive that the CFPB’s loan originator compensation rule is meant to prohibit. For example, the CFPB’s Official Interpretations for the rule state that it prohibits compensation based on whether a loan is held in portfolio, reasoning that a loan originator could steer customers to choose portfolio loans. Similarly, if a customer is seeking a home equity loan, it may be possible for a loan originator to steer that customer to a closed-end loan rather than a HELOC, simply because the loan originator would not receive a commission for originating a HELOC.

For resources related to our guidance, please see:

Truth in Lending Act, 15 USC 1639b(c) (“For any residential mortgage loan, no mortgage originator shall receive from any person and no person shall pay to a mortgage originator, directly or indirectly, compensation that varies based on the terms of the loan (other than the amount of the principal).”)

Regulation Z, 12 CFR 1026.36(d)(1) (“ . . . a ‘term of a transaction’ is any right or obligation of the parties to a credit transaction.”)

Regulation Z, 12 CFR 1026.36(b) (The loan originator compensation restrictions in paragraph (d) “apply to closed-end consumer credit transactions secured by a dwelling. This section does not apply to a home equity line of credit subject to § 1026.40 . . . .”)

Official Interpretations, Regulation Z, 12 CFR 1026, paragraph 36(d)(1), Comment 2(ii)(A) (“. . . whether an extension of credit is held in portfolio or sold into the secondary market for this creditor consistently varies with the interest rate and whether the credit has a five-year term or a 30-year term (which are terms of the transaction) over a significant number of transactions. Also, the loan originator has the ability to change the factor by, for example, advising the consumer to choose an extension of credit a five-year term. Therefore, under these circumstances, whether or not an extension of credit will be held in portfolio is a proxy for a term of a transaction.”)