Different LO Compensation for Brokered-Out vs In-House Loans Prohibited? Maybe, Says CFPB

In its Summer 2023 Supervisory Highlights report issued this July, the Consumer Financial Protection Bureau suggests that institutions paying different amounts for brokered transactions and in-house transactions violates the Loan Originator Compensation Rule (“LO Comp Rule”) in Regulation Z.  Or did it?

In the report, the CFPB gave an example of the context in which it found the practice objectionable.  The CFPB stated that certain institutions brokered out reverse mortgage products, but closed cash-out refinance loans in-house.  The institutions allegedly paid loan originators different amounts for these brokered vs. in-house products.  The Highlights report stated that by compensating loan originators differently for “loan product types that were not offered in-house,” the institutions violated the LO Comp Rule.    

The LO Comp Rule remains deceptively simple.  There are two overarching prohibitions pertinent here.  The rule, at a high level, prohibits payments to loan originators based on:  (i) terms of one or more loans, and (ii) proxies for terms of loans.  A “term” of a loan is generally defined as any right or obligation of the parties.  The CFPB noted in its Supervisory Highlight that the original LO Comp Rule’s preamble back in 2013 stated that a loan product type is a “bundle of particular terms.”

The CFPB declined to give any substantive analysis or guidance in the report.  This lack of analysis or guidance leaves unanswered questions: 

·       Does the agency take issue because the companies only brokered out reverse mortgage loans, and had a competing product in-house, which could raise issues of steering?  What if there were many different brokered scenarios, e.g., jumbo, renovation, open-end loans, etc.? 

·       How is the issue of whether a loan is “brokered” or “in-house” a “term” of a loan under the CFPB’s definition? 

·       If the CFPB thinks the fact of being a brokered loan rather than an in-house loan is a term, what other consequences does that interpretation have? 

·       If the fact of being brokered or in-house is a “term”, how does such an interpretation affect different payments to LOs based on geography (e.g., State 1 or State 2), or refinance versus purchase money loans, each of which the CFPB has suggested is permissible?

·       Will this interpretation result in fewer lenders brokering out loans, giving consumers less choice? 

The CFPB does not address these questions.  Perhaps if the CFPB promulgated these new and novel interpretations in official commentary in a notice and comment rulemaking, rather than through guidance, these issues could be fleshed out.     

One thing is sure.  Companies paying differently for brokered versus in-house loans should analyze the impact of these statements to ensure their structures fall within their risk tolerances, and determine how best to mitigate risks in this messier world. 

For more information on this matter, contact Troy Garris at troy@garrishorn.com.