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Can a bank compensate mortgage loan officers based on a percentage of loan amounts?

Our bank’s management has proposed a compensation program under which mortgage loan officers will receive a set percentage based on the loan amount. The percentage amount will differ depending on whether the loan is sold on the secondary market or held in our bank’s loan portfolio. Is this compliant with the loan officer compensation provisions of Regulation Z (Truth in Lending Act)?

It will depend on the specific factors.

Regulation Z generally prohibits compensation for loans secured by a dwelling based on either a term of a transaction or a proxy for a term of a transaction. Comment 2.ii.A to §1026.36(d)(1) provides as an example of a proxy for terms of a transaction. The example assumes that a creditor holds certain types of loans in portfolio and sells all others into the secondary market. The loans sold into the secondary market have a higher interest rate than those held in portfolio. It pays loan originators a higher commission for transactions held in portfolio than those sold into the secondary market. The comment explains:

Whether an extension of credit is held in portfolio or sold into the secondary market for this creditor consistently varies with the interest rate [which is a term of the transaction]… over a significant number of transactions…Therefore, under these circumstances, whether or not an extension of credit will be held in portfolio is a proxy for a term of a transaction.

Thus, because the interest rates and the compensation vary depending on whether the loan is held in portfolio or sold into the secondary market, the compensation is based on a term of the transaction (in this case a proxy), the compensation system would not be compliant.

That being said, depending on the circumstances, it may be possible to set up a compensation system whereby compensation might vary depending on whether the loans are held in portfolio or sold into the secondary market. (August 2019)

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