Yes, we believe that you may reduce a loan originator’s compensation for loans that result from referrals from other bank employees, provided that those referred loans have similar loan terms as loans that come in from other referral sources or leads. However, we do not recommend reducing a loan originator’s compensation based on a loan’s interest rate.

Regulation Z’s loan originator compensation requirements prohibit compensation to a loan originator that is “based on a term of a transaction” or a “factor that is a proxy for a term of a transaction.” (This prohibition applies only to closed-end consumer transactions secured by dwellings.)

A compensation policy that reduces a loan originator’s compensation for loans that are referred by another bank employee would not violate these requirements, because that compensation structure is not based on a term of the transactions. But your bank should ensure that the loans are similar to loans referred by other sources — otherwise, the loan referral from another bank employee could be considered a “proxy for a term of a transaction,” which is an impermissible basis for reducing or altering a loan originator’s compensation.

On the other hand, a compensation policy that reduces a loan originator’s compensation based on the interest rate for a loan would squarely violate Regulation Z. The loan originator requirements prohibit basing compensation on a transaction’s interest rate or annual percentage rate.

For resources related to our guidance, please see:

• Regulation Z, 12 CFR 1026.36(d)(1)(i) (“ . . . in connection with a consumer credit transaction secured by a dwelling, no loan originator shall receive and no person shall pay to a loan originator, directly or indirectly, compensation in an amount that is based on a term of a transaction . . . .”)

• Regulation Z, 12 CFR 1026.36(d)(1)(i) (“ . . . If a loan originator’s compensation is based in whole or in part on a factor that is a proxy for a term of a transaction, the loan originator’s compensation is based on a term of a transaction. A factor that is not itself a term of a transaction is a proxy for a term of the transaction 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.”)

• Regulation Z, Official Interpretations, Paragraph 36(d)(1), Comment 2 (“ . . . 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. . . .”)

• Truth in Lending Act, 15 USC 1639b(c)(4) (“No provision of this subsection shall be construed as (A) permitting any yield spread premium or similar compensation that would, for any residential mortgage loan, permit the total amount of direct and indirect compensation from all sources permitted to a mortgage originator to vary based on the terms of the loan (other than the amount of the principal); . . .”)