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#2198083 - 11/13/18 03:51 PM Reducing MLO Comp to Benefit Constr. Loan Volume
Norman Paperman Offline
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Norman Paperman
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Good Morning Bankers,

We have a competitor in the area that is allowing MLOs to reduce their compensation rates on construction loans (to all new construction loans- not one particular builder) in order to give those borrowers incentive credits. The net effect, that competitor is gaining market share by doing this. I'm looking for the inherent risk or violation here, but since the benefit is offered to all new construction loans, I'm having trouble seeing it.

Thoughts on this practice?
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#2198100 - 11/13/18 04:55 PM Re: Reducing MLO Comp to Benefit Constr. Loan Volume Norman Paperman
Rocky P Online
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Norm, I had a question once presented to the FRB (for a client) about reduced compensation for an affordable housing loan - sounded like a win-win. FRB attycame back that it would probably have a negative effect, in that the LO's would shy away from that product because it would be earning them less, and steer the applicant to the normal product.

This is a different case, and since there is no alternate product, seems like it would work. The issues would be that it's documented as meeting local competition and that all loan officers follow suit. If they are not doing it and the one who does not play the game handles predominantly protected classes, then it could be viewed as discrimination.
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#2198118 - 11/13/18 07:52 PM Re: Reducing MLO Comp to Benefit Constr. Loan Volume Norman Paperman
Norman Paperman Offline
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Thanks for the info Rocky. We may just set, as an organization, a lower compensation for that product as a whole to offset the incentive. All MLOs, all borrowers, all builders. That seems to be what we are up against in this market.
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#2198159 - 11/14/18 12:46 PM Re: Reducing MLO Comp to Benefit Constr. Loan Volume Norman Paperman
Adam Witmer Offline
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Originally Posted By Norman Paperman
We have a competitor in the area that is allowing....
Thoughts on this practice?

I agree with Rocky on this, but would be concerned with the "allowing" part of your original post. They could absolutely have issues of comparative evidence of disparate treatment of lenders use discretion in reducing their commission.

Originally Posted By Norman Paperman
All MLOs, all borrowers, all builders.

I see no issues with your proposed approach as by applying this "as a whole" and to "all," you are eliminating discretion which essentially reduces your risk of comparative evidence of disparate treatment. Like Rocky said, if this is your only construction product, there won't be any steering issues either.
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#2198199 - 11/14/18 05:56 PM Re: Reducing MLO Comp to Benefit Constr. Loan Volume Norman Paperman
bigfish Offline
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trolling for the big one
My understanding is that the creditor needs to subsidize the cost of the concession and that the loan originator's compensation cannot be reduced to cover the creditor's costs. Loan originator compensation cannot vary based on the terms of the transaction. The CFPB has indicated that a product type is just a combination of terms, thus loan originator compensation cannot vary based upon product. Also, see the commentary to 1026.36 (d)(1)-5.

5. Effect of modification of transaction terms. Under § 1026.36(d)(1), a loan originator's compensation may not be based on any of the terms of a credit transaction. Thus, a creditor and a loan originator may not agree to set the loan originator's compensation at a certain level and then subsequently lower it in selective cases (such as where the consumer is able to obtain a lower rate from another creditor). When the creditor offers to extend credit with specified terms and conditions (such as the rate and points), the amount of the originator's compensation for that transaction is not subject to change (increase or decrease) based on whether different credit terms are negotiated. For example, if the creditor agrees to lower the rate that was initially offered, the new offer may not be accompanied by a reduction in the loan originator's compensation. Thus, while the creditor may change credit terms or pricing to match a competitor, to avoid triggering high-cost mortgage provisions, or for other reasons, the loan originator's compensation on that transaction may not be changed for those reasons. A loan originator therefore may not agree to reduce its compensation or provide a credit to the consumer to pay a portion of the consumer's closing costs, for example, to avoid high-cost mortgage provisions.

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#2198217 - 11/14/18 07:27 PM Re: Reducing MLO Comp to Benefit Constr. Loan Volume Norman Paperman
rlcarey Online
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That has nothing to do with compensating the loan officer X for construction loans and Y for permanent financing.
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