It’s standard to use source of business as an income differentiator, industry professionals say, but a finance lawyer say it’s still best to play it safe when it comes to loan originator compensation requirements.
“On its face, it’s not prohibited, but regulators have discretion to decide,” David Tallman, partner at K&L Gates said.
Rob Chrisman, a 20-year veteran of the mortgage industry, has faced questions on compensation requirements from peers. An owner of a small mortgage brokerage recently asked Chrisman whether he could base his loan originator compensation on source of business by paying loan originators 'X' number of basis points on files they bring in the door and 'Y' basis points on loans that are provided 'by the house.’ Since the difference in originators’ pay would not be directly related to the terms of the loan, he didn’t see how this could be a violation of LO compensation rules.
Chrisman agreed, adding that there’s no reason to pay an originator the same when they are handed a lead from their employer as when they generate their own leads from referrals.
But on whether it’s always acceptable to define income by source of business, “the answer is a solid ‘it depends,’” Tallman said.
The CFPB provides a list of examples of permissible compensation mechanisms, which does include “whether the customer is existing or new,” but Tallman said originators need to be able to justify whatever distinctions they’re making and ensure there aren’t hidden differences that could be subject to challengeas a proxy. A factor is a proxy for a loan term if it consistently varies with a transaction term and the loan originator has the ability to add, drop or change the factor in originating the transaction.
“If you are varying based on source, loans from various sources have different terms and conditions, so in those circumstances the sourcing of the loans is a proxy and a violation could potentially be found,” Tallman said.