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#2231909 - 02/27/20 04:35 PM Lender Incentive Pay for Commerical Loans
lrobbins Offline
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Joined: Sep 2013
Posts: 77
Would there be any regulatory issues (Fair Lending, UDAP, or other) with a bank paying an incentive to lenders that charge origination fees on commercial loans? The lender would receive 10% of the origination fee. There would be no limits as to the amount of the origination fee the lender could charge the borrower, so the higher the fee, the higher the incentive. Receiving incentive based on the fee amount would be prohibited for all consumer purpose loans.

Here is the scenario that would concern me, certain borrowers would be charged higher fees than others for the same loan amount, type, and complexity. Some borrowers would not be charged any fees because other banks would be competing for the same loan. Again, this would only be for business purpose loans.

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Lending Compliance
#2231912 - 02/27/20 04:45 PM Re: Lender Incentive Pay for Commerical Loans lrobbins
Inspector Offline
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Joined: Apr 2016
Posts: 254
Compensation to loan officers that varies on rates and fees is one of the risk factors noted in the FFIEC Interagency Fair Lending Examination Procedures and broad discretion is a second factor. The risk factors are described under residential lending but if you look at the section for commercial lending it makes reference to residential risk factors that would be relevant for commercial which includes P1-P3.

I wouldn't say this is a fair lending "issue" but it is fair lending risk that might be reviewed by examiners.

P1. Financial incentives for loan officers or brokers to charge higher prices (including
interest rate, fees and points). Special attention should be given to situations where
financial incentives are accompanied by broad pricing discretion (as in P2), such as
through the use of overages or yield spread premiums.

P2. Presence of broad discretion in loan pricing (including interest rate, fees and points),
such as through overages, underages or yield spread premiums. Such discretion may be
present even when institutions provide rate sheets and fees schedules, if loan officers or
brokers are permitted to deviate from those rates and fees without clear and objective
criteria.
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Opinions expressed are my own and do not reflect legal advice or the opinions of my employer.

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#2231914 - 02/27/20 04:53 PM Re: Lender Incentive Pay for Commerical Loans lrobbins
lrobbins Offline
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Joined: Sep 2013
Posts: 77
Thanks for your input. I knew that there would be regulatory issues with consumer purpose loans, especially residential mortgages, but I haven't been able to locate any specific guidance on this issue for commercial loans.

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#2231944 - 02/27/20 07:08 PM Re: Lender Incentive Pay for Commerical Loans lrobbins
Rocky P Online
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Joined: Jun 2003
Posts: 7,232
Florida
Any time there is discretion in pricing, opens up a fair lending risk. Some people are better at negotiating. If those negotiating better rates hypothetically are white males, then non while males and females have been potentially discriminated against!

Broad discretion is in the eyes of the beholder. I was in a rate and terms exam whew the eventual difference was 11 basis points (0.11%) just over one tenth of a percent!
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#2232110 - 03/02/20 02:50 PM Re: Lender Incentive Pay for Commerical Loans lrobbins
lrobbins Offline
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Joined: Sep 2013
Posts: 77
Thanks for your input Rocky P. Yes, the discretion in pricing concerns me, and I have relayed my concerns on to management.

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#2232118 - 03/02/20 03:25 PM Re: Lender Incentive Pay for Commerical Loans lrobbins
Dan Persfull Offline
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Dan Persfull
Joined: Aug 2002
Posts: 46,416
Bloomington, IN
I just completed a FDIC Compliance Exam. One of their main focus in the Fair Lending portion was pricing discretion. They even looked at pricing concessions from our rate sheets that were approved by the Board.
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The opinions expressed are mine and they are not to be taken as legal advice.

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#2232156 - 03/02/20 08:44 PM Re: Lender Incentive Pay for Commerical Loans Dan Persfull
lrobbins Offline
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Joined: Sep 2013
Posts: 77
Dan your comments will give me more ammunition to present to management. Thanks!

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