Small bank, has the typical broker/LO situation. Thankfully only one person - a little easier to mitigate. How would you interpret the following, inherently good or bad?

The MLO's in-house portfolio is a backup for those who cannot qualify on the secondary market. The goal is to earn commission from the secondary market.

Are secondary market loans always more expensive? Not sure. But I'd be willing to pay more for a 30 year fixed.

Is the compensation better for the MLO on the secondary market? Always. There is no in-house, per loan compensation. However, she will get a bigger bonus based on performance.

Inherently bad because its textbook. But it is the business plan, to do loans on the secondary market, which is inherently good because it is equally applied and it is what people come to the bank for. (Not usually a 5/1 ARM.) It's a clear cut policy for referring loans "upstairs".

I would love to hear your thoughts if you have a few minutes.

Thank you

Anti-steering rules/disclosures are followed and made. I'm just evaluating this from a risk perspective. Is this policy a fair lending (compensation risk) mitigate? I think so, but am not sure I can really take it that far. I'm trying, LOL!

"Is the compensation better for the MLO on the secondary market? Always. There is no in-house, per loan compensation."

That is a problem as I am sure the terms of the loans are different, which means you are paying MLO compensation based on the terms of the loan.

Wow, thank you. Yes, the bank only does ARM loans, no 30 year fixed loans. So just the mere process of referring to the secondary market, that has different loan products than the bank, renders the compensation based on the terms?

The factor of whether or not the loan gets sold on the secondary market does not consistently vary, based on any of the terms of the loan. The only factors are borrower qualification (not a term of a loan) and borrower requesting a product the bank does not have, (also not a term of a loan.) There are no terms of a loan that the MLO can add or remove that will result in a higher commission - borrowers either qualify or they don't. The commission is based on loan amount/volume of secondary market loans, not any terms of the brokered loan(s). So after analyzing your reply in relation to the 2-pronged proxy test, I think the bank is ok and that is why the FDIC has never had an issue with it.

But please, if you think my analysis is incorrect, tell/teach me! And thanks again!

I assume that the loans that you offer in-house are on different terms than those offered on the secondary market. This would cause a MLO to steer the consumer to the secondary market loans regardless of what their original request may have been.

36(d)(1) Payments Based on a Term of a Transaction

Comment 2 ii. Proxies for terms of a transaction. If the loan originator's compensation is based in whole or in part on a factor that is a proxy for a term of a transaction, then 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 a transaction if the factor consistently varies with a term or terms of the transaction over a significant number of transactions, and the loan originator has the ability, directly or indirectly, to add, drop, or change the factor when originating the transaction. For example:

A. Assume a creditor pays a loan originator a higher commission for transactions to be held by the creditor in portfolio than for transactions sold by the creditor into the secondary market. The creditor holds in portfolio only extensions of credit that have a fixed interest rate and a five-year term with a final balloon payment. The creditor sells into the secondary market all other extensions of credit, which typically have a higher fixed interest rate and a 30-year term. Thus, 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.

What must I be missing that is keeping this off the regulators radar then? They review the program all the time. The reason this came to my attention is, we were working on the Fair Lending Risk Assessment with the Senior Lender yesterday and when we started talking about his "clear policy for referring applicants", this was his answer. I felt good about it from a FL standpoint.

So, they need to re-evaluate their policy. Off the top of my head, start paying the same commission for all loans, or none at all. Just a year-end bonus. Every reason I can think of for referring up centers on interest rate risk and the fact the community bank simply does not have a 30 year fixed rate mortgage product.

This will be fun talking to their lender. If you're not sick of me yet, I'll take suggestions.

What must I be missing that is keeping this off the regulators radar then?

Because they have less of an understanding of the requirements than do the bankers

Gotta smile at that.

The regulators may be ignoring this because they think of conventional loans sold in the secondary market as inherently "best," and so are not concerned that your institution prefers secondary market loans to portfolio ARMs.