I think that I had come across this in a thread before but is there any issue with a bank compensating MLO's based on product types and loan amounts? For example, FHA/VA loans would be compensated at 35 bps of the loan amounts, conventional home purchase loans 25 bps, and conventional refinances 15 bps (or something similar to this).

Fair lending/Steering would be my initial concern.

Federal Register /Vol. 75, No. 185 / Friday, September 24, 2010 /Rules and Regulations 58523

Compensation based on loan type or program.
Some commenters also urged the Board to permit higher compensation for certain loan types, for example, small loans, loans under special programs that assist first-time home-buyers and low- or moderate income consumers, and loans that satisfy the creditor’s obligations under the Community Reinvestment Act (CRA). As discussed above, creditors can encourage originators to make small loans as well as large loans by setting a minimum and maximum payment for each loan if they compensate loan originators a fixed percentage of the amount of credit extended. See comment 36(d)(1)–9. The Board believes, however, that allowing compensation to vary with loan type, such as loans eligible for consideration under the CRA, would permit unfair compensation practices to persist in loan programs offered to consumers who may be more vulnerable to such practices.

I wanted to revisit this. I passed along my concerns to management and they asked if we could document the file why the borrowers benefited more from the govt loan, would this alleviate the steering concern and allow us to pay more bps on those loans.

Thoughts?

I definitely see where they are coming from. If there is more work to a govt loan why shouldn't we be able to compensate the LO's more? I think there would be more risk in not compensating differently and LO's not using govt programs when they could (because they get paid the same either way) and put borrowers in PMI loans that may be more costly.

bump

I think the rule is pretty clear, you can't vary compensation based on product type, even if it appears to be in the interest of the customer.

From the guide: Varying compensation to a loan originator based on the “product type” often will violate the rule because many “products” (which is not a defined term) in the market refer to different bundles of specific transaction terms.

I tried to find this in the rule, but the language is just much clearer in the guide, even though it's just a guide.

Thanks for the response.

I'd like to add my 2 cents, if I may. We had someone ask if we can compensate differently based on whether the loan was a purchase or refi so we called the CFPB - and they actually called back 2 weeks later!! They said "no" you cannot compenstate differently for purchases vs. refis.

No, I do not believe you can. I had the same question (compensating differently based off FHA vs. conventional) and just passing along what one of my resources sent:

"From page 180 of 541 of original release:

During outreach before the proposal, the Bureau learned that historically loan originators and processers generally spend more time on certain credit products. The outreach participants also noted, however, that in the current market there is no consistent variation in the typical time needed to originate or process different credit products, such as an FHA loan or nonconventional loan versus a conventional loan. These participants explained that stricter underwriting requirements have caused many conventional loans to take as long as, or longer than, FHA loans or other government program credit products. For example, participants noted that processing conventional loans for consumers with a higher net worth but little income or a higher income with large amounts of debt often take longer than processing FHA or other nonconventional loans for low-to moderate-income consumers.

Permitting a creditor or loan originator organization to establish different levels of compensation for different types of products would create precisely the type of risk of steering that the Act seeks to avoid unless the compensation were so carefully calibrated to the level of work required as to make the loan originators more-or-less indifferent as to whether they
originated a product with a higher or lower commission. The Bureau believes, however, that periodic changes in the market and underwriting requirements and changing or unique consumer characteristics would likely lead to inaccurate estimates for the time a specific credit product takes to originate and thus lead to compensation structures that create steering incentives. The Bureau further believes that the accuracy of the estimates would be difficult to verify without recording the actual number of hours worked on particular credit products anyway. The Bureau believes that this information would be necessary not only to set the estimate initially but also to calibrate the estimate as market conditions and consumer characteristics rapidly evolve and to correct inaccuracies. The Bureau believes that the potential for inaccuracy or deliberate abuse and burdens of remedying and tracking inaccurate estimates outweighs any benefit gained by permitting estimates of the actual hours worked. These types of estimates are not currently covered by the exemption in comment 36(d)(1)-3.iii, and the Bureau is not amending the comment to permit them. If a loan originator’s compensation was calculated on an estimate of hours worked for a specific product, or by any other methodology to determine time worked other than accounting for actual hours worked, the methodology would be permissible only if it did not meet the definition of a proxy (and complied with other applicable laws)."

Further, from the Small Entity Compliance Guide page 28 “Varying compensation to a loan originator based on the “product type” often will violate the rule because many “products” (which is not a defined term) in the market refer to different bundles of specific transaction terms.”

Logically that makes no sense. If the prohibition on compensation based upon "product type" is to eliminate steering - which I get - what does loan PURPOSE have to do with steering? The borrower comes to the lender because he/she is EITHER purchasing or refinancing. I don't see how MLO steering comes into play. Yet I do not doubt that the guidance you received from the regulators is what we should follow.

Does "product type" include in house portfolio mortgages versus those that we will sell on the secondary market?

We have two departments that could both do a residential mortgage and from the consumers point of view both options are a mortgage with our bank (we fund the ones we intend to sell on the secondary market). However, the lenders in the two departments are paid differently. One department has salary plus annual bonus and the other is straight commission. The salary plus commission can also earn a referral basis point based on loans they refer to the other department.

I'm pretty sure that counts, pbnebriana. I think they outright say it in the small entity compliance guide.

Found it! Thanks!

Whew! Glad to see my brain is still working after reading all these changes.

Do you think paying differently for a reverse mortgage would be a proxy for a loan term?

Yes - IMHO based off the comments I posted above I would say that it would...

Any reason why you couldn't pay LO #1 20 bps and LO #2 30 bps as long as both are based on loan amount?

Having different pay plans/rates per individual LO is fine!

This is interesting. My understanding was that it is acceptable to vary compensation based on loan type (purchase vs. refi). There is no steering issue and if a company wants to make its refi product more competitive then they can make compensation changes to the refi program, not based on loan terms, while leaving the purchase program alone. This is worse than Sarbanes Oxley back in the day. Just hold the ball there, Lucy, hold the ball there.

Anybody think about varying compensation between permanent loans and unique loans like construction loans or bridge loans. My inclination is that these are probably in the same bucket as other products and we can't vary. Then again they have unique characteristics that that don't necessarily equate to transaction terms.

a previous poster refers to:
"Further, from the Small Entity Compliance Guide page 28 “Varying compensation to a loan originator based on the “product type” often will violate the rule because many “products” (which is not a defined term) in the market refer to different bundles of specific transaction terms.”

I can't find this - is there a link or something.
we are talking about different comp for different products and I would sure like to be able to use this.

I am not the poster, but in the June 7, 2013-- CFPB-2013 Loan Originator Guide. On page 28, the paragraph just before III is where the above reference came.