The Federal Reserve Loan Officer Compensation Rule

The Federal Reserve
introduced their new “compensation” rule that took effect April 1, 2011.  The final rule amends Truth in Lending Act
(TILA) regulation (Reg Z).  The rule is intended
to remove any ability for a loan originator to up-sell or increase fees to a
borrower in order to increase to the originator’s compensation. The rule is
designed to accomplish this by mandating that loan originators, which also
includes broker companies, be compensated under agreements that require
consistent compensation be paid across all the loans they produce.

The final rules prohibit the
following:

1.  Basing loan originator compensation on the
loan terms, loan product, interest rate or any term or condition of a
particular loan is prohibited. Compensation will be based on a fixed percentage
of the amount of credit extended.

2.  Dual compensation is prohibited. A Loan
Originator can be paid by the Lender or the Borrower but not both.

3.  Loan originators who steer a Borrower to a
loan program or Creditor based solely on the amount of compensation that the
broker receives are prohibited, unless the transaction is in the consumer’s
interest. Loan originators will be required to present loan options so as to
avoid “Steering” a Consumer. Moreover, the Final Rule provides a ‘Safe Harbor”
to demonstrate compliance with the rule’s anti-steering provisions.

The Final Rule permits a
broker to receive compensation through two sources:

1.  Lender Paid Compensation – The Broker
compensation will be based on a percentage of the loan amount preset by your
company.

2.  Consumer Paid Compensation – The Broker
compensation will be determined and based on who pays it.

Each party can have only one
compensation agreement with the party they pay, and each party who receives
compensation can only have one agreement with a party who pays them. However,
agreements do not need to be consistent between different parties. For example,
a retail loan officer will only have one agreement with their employer.
However, the same employer could have different agreements with each of their
retail loan officers. A broker can only have one agreement with a particular
lender; however, the broker might have different compensation agreements with
different lenders, and lenders may have different agreements with different
brokers. Under the new rule, on a loan by loan basis, loan originator
compensation must come either 100% from the consumer or 100% from any other
source.

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