The new loan originator rule prohibits compensation based on a term of the transaction or anything that is a proxy to a term of the transaction. Terms of the transaction includes factors such as the rate or collateral type. Proxies to a term of the transaction are factors that vary consistently over a significant number of transactions and which the loan originator has the ability to add, drop, or change. For example, if a LO is compensated more for loans held in portfolio than loans sold to the secondary market it would be a proxy if all 30 year fixed mortgages are sold – the term of the transaction varies consistently by whether or not it is sold and the LO has the ability to advise the borrower to choose one loan type over the other.
With this as the backdrop, is compensating LO’s differently for purchases vs. refis prohibited? This issue is not directly addressed in the regulation or commentary. The CFPB’s small business compliance guide states the following: “varying compensation to a loan originator based on the ‘product type’ often will violate the rule because many ‘products’ (which is not a defined term) in the market refer to different bundles of specific terms.”
That language, which is in guidance and not the regulation or commentary, is not abundantly clear. Is a refi a different ‘product type’ (its not defined after all)? What does ‘often’ mean? The lack of direct regulatory language combined with unclear guidance leaves this question unanswered. Based on what we know now, the conservative approach would be to assume that LO’s cannot be compensated differently for purchases and refis. Purchases and refis definitely have different transaction terms.
That conclusion does not make much logical sense, however. Prohibiting different compensation for different product types is consistent with the purpose of the rule in scenarios where the LO could steer a consumer to one product over another. Refis and purchase transactions are completely different product lines, however, with no real risk of LOs steering consumers to one or the other. When would a LO with a consumer seeking a refi ever be able to steer them into purchasing a home instead?
Logic doesn’t always always mesh with the law, however,so we are left with divining the meaning from a short excerpt out of a compliance guide. As stated above, based on that language, the conservative approach is to not compensate differently for purchases vs. refis.