The Consumer Financial Protection Bureau (CFPB) released the Summer 2023 edition of its Supervisory Highlights this week, which included a section on loan originator (LO) compensation.
In describing some of its findings from recent examinations, the CFPB indicated that a lender that uses outside lenders for reverse mortgage products but offers in-house cash-out refinance mortgage products may not pay its LOs differently for originating brokered reverse mortgage products vs in-house cash-out refinance products.
Specifically, the CFPB indicated that a LO comp plan may potentially violate the LO Comp Rule if it “allowed a loan originator who originated both brokered-out and in-house loans to receive a different level of compensation for the brokered-out loans versus in-house loans.” The CFPB goes on to state that “by compensating differently for loan product types that were not offered in-house, the entities violated Regulation Z by basing compensation on the terms of a transaction.” See Section 2.8.1 Loan Originator Compensation below.
Additionally, the report also indicates the CFPB found that mortgage lenders violated the Equal Credit Opportunity Act (ECOA) and Regulation B by, among other things, discriminating in the incidence of granting pricing exceptions across a range of ECOA-protected characteristics, including race, national origin, sex, or age.
2.8.1 Loan originator compensation: Differentiations based on product type
Regulation Z generally prohibits compensating mortgage loan originators in an amount that is based on the terms of a transaction. It defines a term of a transaction as “any right or obligation of the parties to a credit transaction.” And it provides that a determination of whether compensation is “based on” a term of a transaction is made based on objective facts and circumstances indicating that compensation would have been different if a transaction term had been different. Accordingly, in the preamble to the CFPB’s 2013 Loan Originator Final Rule, the CFPB clarified that it is “not permissible to differentiate compensation based on credit product type, since products are simply a bundle of particular terms.”
As part of their business model, institutions brokered out certain mortgage products not offered in-house. For example, the institutions used outside lenders for reverse mortgage originations, but had their own in-house cash-out refinance mortgage product. Examiners determined that the institutions used a compensation plan that allowed a loan originator who originated both brokered-out and in-house loans to receive a different level of compensation for the brokered-out loans versus in-house loans. By compensating differently for loan product types that were not offered in-house, the entities violated Regulation Z by basing compensation on the terms of a transaction. In response to these findings, the entities have since revised their loan originator compensation plans to comply with Regulation Z.