We have a broker (wholesale) lender who wants to give the customer/borrower a credit against their closing costs. We have a broker agreement for a max percentage/$ amount they can charge on each transaction brokered to us. The broker firm would be reducing their compensation if they give the borrower a credit against their closing costs. The loan officer who works for the broker firm would still receive the same compensation (per their compensation agreement based on production). In reading through the Reg. Z LO Compensation Rule, I am hazy on whether this would be allowed-Section 1026(c)(3)(d) prohibits a loan originator from reducing their compensation-"If you are a loan originator, you generally may not agree with another person to set your compensation at a certain level and then subsequently lower it in selective cases......"

The Rule does allow a loan originator to reduce compensation to cover unexpected costs.

I know that a broker firm is considered a loan originator-so, does this mean that they can not give a borrower a credit against their closing costs?

Sounds like you are paying this broker too much compensation. Why not reduce their compensation and lower your prices if that is what they want to do? Why play a shell game with the consumers whether you believe it is allowed or not? Even if allowed, how does this shake out under UDAAP? Have you sat down with your legal counsel that drafted your broker agreement on this issue?

Given how brokers tend to operate, I can almost guarantee you permitting this practice will result in fair lending issues, and possibly UDAAP issues as well. How will the broker decide when to offer closing cost credits? To whom will they offer them?

Very good point!