The Price Match That Isn't: Cutting Compensation and Making It Back with a Borrower Fee
Marcus originates for a Georgia-licensed mortgage broker. On Thursday, June 5, he takes a full application from Lena for a $330,000 FHA purchase loan on an Atlanta condo (sales price $337,000, 3.5% down). He locks her at 6.375%, and the broker will be paid 2.25% of the loan amount by the lender; Lena also pays the broker a $1,200 processing fee. On Monday the pricing desk receives a written offer sheet from a competing lender at 6.125% on the same borrower and terms. The branch manager tells Marcus: "Drop your comp to 1.75% to match, then bill Lena another $900 administrative fee so your check doesn't change." Separately, the broker's affiliated title agency pays the broker $500 for every loan the broker closes and refers to it, supported by a one-page "desk space" invoice with no itemization and no evidence of any service performed.
1. May Marcus reduce his compensation to match the competing offer, and what has to be true for that reduction to be permissible?
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Yes, but only through a narrow exception. The general rule (12 CFR 1026.36(d)(1)) is that loan originator compensation may not be based on the terms of the transaction, and 1026.36(d)(2) prohibits changing compensation during the transaction or paying compensation in more than one form. The exception in 1026.36(d)(2)(ii) allows a reduction to match a competing offer, but the conditions matter:
- The competing offer must come from a different creditor and be documented in writing - the offer sheet dated Monday is exactly the evidence needed, and it must be retained in the file.
- It must be for the same transaction (same borrower, comparable terms); a better deal on a different loan does not work.
- The reduction must be tied to that documented offer, must be only a reduction, and must not be conditioned on any other term changing.
- It must be applied consistently under a documented policy, not case by case to win a deal after the fact.
What Marcus may not do is reduce his compensation and then rebuild it through another channel on the same loan. That is what the manager is proposing, and it converts a permitted price reduction into a prohibited compensation increase.
2. Evaluate the $900 "administrative fee" the manager wants to add. How does it interact with the loan originator compensation rule and with the qualified mortgage points-and-fees calculation?
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The fee is a disguised compensation increase and should be refused on two independent grounds.
Compensation rule. Compensation may not be increased during the transaction and may not be based on transaction terms. Here the broker's economics bounce back to exactly what they were before the match, and the mechanism is a borrower-paid fee. Marcus would be receiving compensation from the borrower in addition to what the lender pays the broker, which also implicates the dual-compensation prohibition. The fact that the money is labeled "administrative" changes nothing; substance controls.
Points and fees. Any fee paid to the broker or its affiliate is included in the points-and-fees total, so the $1,200 processing fee and the new $900 fee both count alongside paid compensation. Run the numbers: at 1.75% paid compensation ($5,775) plus $1,200 plus $900, the total is $7,875, or about 2.39% of the $330,000 loan amount; if the fee were restored at 2.25% compensation, the total is $9,525, or 2.89%. Both sit just under the 3% general qualified mortgage limit that applies to loans of this size - which is precisely the point. The cap does not catch this arrangement, so the compensation rule, not the fee cap, is the control. The scheme also creates fair lending and unfair-practice exposure because borrower-paid fees would vary depending on when the pricing desk gets beaten.
3. What is the problem with the affiliated title agency's $500 payments, and what should Marcus do?
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This is a classic Section 8 problem under RESPA. Section 8(a) prohibits giving or accepting a thing of value for the referral of settlement service business involving a federally related mortgage loan; Section 8(b) does the same for unearned fees on a split of charges. A flat $500 paid per loan closed and referred is a referral fee on its face. Calling it desk space does not save it.
The only permissible path is a payment for goods or services actually furnished or performed, at fair market value, that are not duplicative of services the broker already provides, supported by a written agreement and real documentation. An uninformized one-page invoice with no description of services or space occupied will not satisfy that test, and the per-closing pricing structure reveals referral compensation regardless of the paperwork. The affiliated-business-arrangement exception (Section 8(c)(4)) does not help either, because the affiliate needs the same documented fair-market-value services analysis, and the broker must disclose its affiliate relationship to the borrower.
Marcus should decline to participate, escalate in writing to compliance, assume the arrangement must be unwound and prior payments refunded, and expect that an examination of the broker will look at whether the payments also distorted the loan disclosures. Section 8 violations carry treble damages, class-action exposure, and state licensing consequences.