Currently, our loan originators receive the same flat commission for traditional closed-end mortgage loans as for closed-end home equity loans. Our traditional mortgage loans typically have 15 – 30 year terms, with higher closing costs and lower rates, and our home equity loans typically have shorter terms, at lower loan amounts, with no closing costs but higher interest rates. Can we reduce the commission for the home equity loans, since they often are not as profitable as traditional mortgage loans (due to the lower loan amounts and closing costs)?

We do not recommend varying the compensation paid to loan originators based on the type of loan originated, due to Regulation Z’s prohibition on compensating a loan originator “based on a term of a transaction” or “a factor that is a proxy for a term of a transaction.”

We believe that lowering the loan originator compensation for home equity loans 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 traditional mortgage loan, simply because the loan originator would receive higher compensation for originating a traditional mortgage loan.

One alternative provided in the CFPB’s Official Interpretations is to vary loan originator compensation based on a fixed percentage of the total dollar amount of credit originated by each loan originator.

For resources related to our guidance, please see:

Regulation Z, 12 CFR 1026.36(d)(1) (“. . . 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.”)

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.”)

Regulation Z, Official Interpretations, 12 CFR 1026, Paragraph 36(d)(1), Comment 2(i) (“Permissible methods of compensation. 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: (A) 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. . . .”)

Regulation Z, Official Interpretations, 12 CFR 1026, Paragraph 36(d)(1), Comment 9 (“A loan originator’s compensation may be based on the amount of credit extended, subject to certain conditions. Section 1026.36(d)(1) does not prohibit an arrangement under which a loan originator is paid compensation based on a percentage of the amount of credit extended, provided the percentage is fixed and does not vary with the amount of credit extended. . . . .”)