Is anyone aware of a prohibition for either:
1. Increasing MLO compensation for loans originated for low-income borrowers [as an incentive]
OR
2. Increasing MLO compensation for loans to borrowers in low-income census tracts?

I can't think of any prohibitions, but there are reverse discrimination implications and potential for bad loan decisions. Anytime you offer compensation or incentives for something, you run the risk of employees making bad decisions in order to pad their wallet. In order to get more compensation under this scenario, you may have LOs that will seek fewer loans in non-low-income tracts, resulting in possible reverse discrimination (you'll have to determine if there is risk of someone actually suing you or a regulator actually testing for this) or you could have LOs who will make questionable loans (ie violate loan policy, make extraordinary exceptions, get creative to "make the deal work") in order to get the additional compensation.

If lower interest rates, or reduced fees, or both, are charged on loans to LMI individuals or loans in LMI census tracts (which is typical, as an incentive to make such loans, and to more easily qualify applicants), then it could be that the LO's compensation is based on a proxy for a term of the transaction, and thus run afoul of Reg Z. See comment #2 under 1026.36(d)(1).

From an older post:

From the following section of the Federal Register regarding MLO compensation, it seems as though paying more for a CRA loan is not permitted.

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 just wanted to point out that, despite the Official Comment regarding compensation based on loan type, the preamble to the Final LO Comp RuleFinal Rule (page 11326) states that compensation based on the income of the borrower "would . . . typically be neither compensation based on a term . . . nor . . .a proxy":

https://www.govinfo.gov/content/pkg/FR-2013-02-15/pdf/2013-01503.pdf

It seems that compensation based on whether a consumer is a low- to moderate-income borrower would not present any additional risk to an otherwise compliant compensation program.

I assume the initial question may have related to CRA credit. If so, I think the next question is whether there are other "characteristics" of loans that could help satisfy CRA obligations, but that likewise would not typically be based on a term or a proxy (likely based on the LO's inability to change it). Any thoughts?

I'm reviving this old thread to see if anyone has any newer information on this topic. I was asked the same question this morning.