ABA Mortgage Markets Committee
FAQs: Loan Originator Compensation Rule
Can lenders still increase the interest rate of the loan in order to pay for certain closing costs and
origination charges?
Yes. The new rules do not prohibit creditors or loan originators from using the interest rate to cover
upfront closing costs. The new rule focuses its restrictions on how the loan originator is compensated,
not on how closing costs are financed. Financing costs through the interest rate is allowed so long as
creditor-paid compensation retained by the originator does not vary based on the transaction’s terms or
conditions (other than loan amount).
May loan originators be paid periodic bonuses on the basis of loan volume originated, or loans closed?
Yes. Note that the new rule defined the term “compensation” as inclusive of salaries, commissions and
any financial incentive that is tied to the transaction’s terms or conditions, including annual or periodic
bonuses, or awards of merchandise or other prizes. Lenders may therefore grant periodic bonuses on
number or dollar amount of loans closed, but the bonus or compensation may not change depending on
any measure of interest rates charged on those loans. The rules explicitly allow for payments that are
fixed in advance for every loan the originator arranges for the creditor (e.g., $600 for every loan
arranged for the creditor, or $1,000 for the first 1000 loans arranged and $500 for each additional loan
arranged).
May lenders allow a system whereby the loan originator voluntarily accepts less pay in order to
decrease the consumer’s interest rate and “win a deal” with a consumer that is actively shopping the
market?
No. The new rule restricts any variations, whether up or down, in loan originator compensation where
the compensation is tied to the loan rate. This rule applies even if the originator offers a price
concession to the consumer, and the consumer receives a direct benefit from the lowering of the LO’s
compensation. In the preamble to the rule, the Board clarifies that permitting creditors to decrease
loan originator compensation because of a change in terms favorable to the consumer poses the threat
of loopholes that could permit evasions of the final rule.
May a lender pay more for the origination of a CRA loan than for other loans?
No. The Board articulates the opinion that “allowing compensation to vary with loan type, such as loans
eligible for consideration under the Community Reinvestment Act, would permit unfair compensation
practices to persist in loan programs offered to consumers who may be more vulnerable to such
practices.” (Note, however, that a lender may take into consideration the difficulty or expertise
required on any particular loan, and therefore adjust compensation levels on that basis.)
May a lender pay more for the origination of FHA loans than for other loans?
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No. The Board’s restriction that compensation to LOs may not to vary in accordance to loan type would
seem to preclude the possibility of paying an LO more solely on the basis that loan is an FHA loan.
(Note, however, that a lender may take into consideration the difficulty or expertise required on any
particular loan, and therefore adjust compensation levels on that basis.)
May a lender compensate an LO more on the basis of actual work performed on a transaction?
Yes. The rule specifies that lenders may use hourly rate of pay to compensate the originator for the
actual number of hours worked.
Must all my loan officers be paid an identical amount, or an identical rate? Can lenders vary
compensation calculations from one LO to another?
Yes. The new rule does not prohibit varying compensation formulas, nor formulae that vary from one
LO to the next. The rule only prohibits that lenders cannot pay LOs on the basis of the terms or
conditions of the underlying loans. The preamble to the rule specifically clarifies that a creditor may
pay one loan officer more than it pays another loan officer, so long as each loan originator receives
compensation that is not based on the terms or conditions of the transactions delivered to the creditor.
For example, a creditor may pay loan officer A an amount equal to 1 percent of the amount of credit
extended for each loan, and loan officer B an amount equal to 1.25 percent of the amount of credit
extended for each loan.
Can different basis points be paid for a purchase versus a refinance transaction versus a streamlined
refinance?
No, the rule appears to preclude a creditor from varying compensation on the basis of loan type.
Although the term “loan type” is not defined, in proper context, it appears to be broad enough to cover
distinctions between “purchase” and “refinance” loans.
In determining “quality” of a loan originator’s loan file, is there any guidance on how “quality” is to be
determined or is this the lender’s discretion?
There is no comprehensive guidance on how the Board will view the application of the term “quality.”
The Board does use the example that “loan quality” may refer to accuracy and completeness of the loan
documentation. Neither the rule nor the preamble, however, restricts the determination of “quality” to
these two factors.
In the 6th slide, first bullet on Loan Originator Compensation Rules, the last phrase reads as follows:
however, such compensation may be subject to a minimum or maximum dollar amount…..What are
the conditions for which there “may be” a minimum or maximum dollar amount?
These conditions are generally left to the discretion of the lender, so long as the conditions are not
premised upon dollar amount limits that are tied to the interest rate. In addition, the rules clarify,
through commentary, that to prevent circumvention, the minimum or maximum amount may not vary
with each credit transaction. Creditors may, for instance, set a policy of providing a minimum pay of
$1,000/loan originated, regardless or interest rate, to ensure that LOs are adequately compensated for
smaller loans.
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May lenders change compensation levels on a periodic basis?
Yes. A creditor may periodically review factors such as loan performance, transaction volume, as well as
current market conditions for originator compensation, and “prospectively revise the compensation it
agrees to pay to a loan originator.”
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