The Manager's Script and the Investor Premium
You originate for a brokerage licensed in the District. A 71-year-old widow wants to refinance her condo to consolidate $40,000 in credit card debt. Her loan would be $310,000. Two options are available to her: a 30-year fixed at 6.250% with about $3,900 in closing costs she would pay herself, or the same term at 7.125% with a $4,600 lender credit that covers nearly all costs. Payments are approximately $1,909 and $2,088 respectively. She has told you her goal is the lowest total cost, and she expects to move to assisted living in about four years. Your branch manager instructs you to present only the 7.125% option, describe it as "no closing costs," and add a $1,400 line item labeled "third-party processing." He also mentions that the branch receives a 75 basis point investor premium on the higher-rate product and that a portion of it funds the branch bonus pool. He tells you the widow "will never do the math" and that the script is what the top producer uses.
1. Analyze the manager's instruction against the steering and loan originator compensation rules.
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The instruction fails on multiple independent grounds.
Steering. A loan originator may not direct a consumer to a transaction that is not in the consumer's interest. The regulatory safe harbor contemplates presenting the consumer with the loans for which she likely qualifies, including the one with the lowest interest rate without risky features and the one with the lowest total dollar amount of points and origination fees. Presenting only the higher-rate option removes the comparison entirely.
The math confirms the harm. The payment difference is about $179 per month. Over her expected four-year horizon the higher-rate loan costs roughly $8,600 in extra interest to obtain a $4,600 credit - she is about $4,000 worse off, and the break-even is around 26 months only if she ignores that the credit is a one-time benefit against a recurring cost.
Compensation tied to terms. A 75 basis point investor premium that flows into the branch bonus pool and is tied to the rate on the loan is compensation based on transaction terms, which is prohibited. "Everybody does it" does not create a safe harbor; the top producer's script is evidence of a pattern, not a defense.
Vulnerability. She is 71, refinancing unsecured debt, and has stated a clear cost objective. Leveraging a script built on the assumption that she "will never do the math" is precisely the conduct elder-financial-exploitation scrutiny and unfair-or-deceptive-practices analysis are designed to catch.
2. What must you actually present and document for this borrower?
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Present both options, plainly, with numbers she can compare:
- 6.250% fixed: P&I $1,909; $3,900 in costs she pays.
- 7.125% fixed: P&I $2,088; $4,600 lender credit.
- Difference: $179 per month, break-even at roughly 26 months, and a four-year cost of about $8,600 in additional interest against a one-time $4,600 credit.
Explain the trade-off in her terms - lowest total cost over four years - rather than in terms of monthly payment alone. The lower-rate loan wins on her stated horizon.
Document: that both options were presented and when; the figures used; that she stated a four-year horizon and a lowest-total-cost objective; her eventual choice and the date. If she still chooses the higher-rate, no-cost option - a legitimate choice for someone who cannot fund closing costs - record her reason in her own words, such as preserving cash. A documented, informed choice by the borrower is what distinguishes advice from steering. What you may not do is bury the comparison, characterize the higher-rate loan as the only option, or let the branch's revenue considerations enter the presentation.
3. What is the problem with the $1,400 "third-party processing" line, and how should you respond to the manager?
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The label is false. If the fee is retained by your brokerage or an affiliate, it is a lender or broker charge and must be disclosed as such in the appropriate block, with correct tolerance treatment. Describing an in-house fee as third-party changes the borrower's ability to shop, changes how it is tested for good faith, and misstates who is being paid - a misrepresentation on a disclosure the borrower relies on. Layered on a script designed to suppress comparison, it is also strong evidence of intent.
Response to the manager:
- Decline to use the script and the mislabeled fee, in writing if necessary, stating the reason briefly and factually.
- Ask for confirmation in writing of the investor premium arrangement and whether any part of it reaches loan originators or is conditioned on rate or terms. A written request tends to clarify the answer quickly.
- Escalate to compliance if the instruction is repeated. Retaliation for refusing to misrepresent a fee or to steer a borrower is itself a problem worth documenting.
- Keep your own record of what you presented to the borrower and when.
The uncomfortable but correct position is that you do not need to prove the manager's motive. You need to be able to show that you presented the loan in the borrower's interest, disclosed every fee accurately, and did not accept compensation tied to the rate she was placed in.