The Compensation Plan That Pays More for a Higher Rate
Jordan originates loans for a mid-sized correspondent lender. The company introduces a new compensation plan: a base salary, plus 110 basis points on any loan priced at or below par, plus 175 basis points on any loan priced above par, plus a $250 partner bonus whenever the borrower uses the lender's affiliated title agency. Jordan's sales manager distributes a script that encourages borrowers to accept a rate 0.375% above par to keep closing costs low. One borrower, Mr. Alvarez, is a 68-year-old retired teacher living on Social Security and a small pension. He tells Jordan he wants the lowest possible monthly payment and has $9,000 available for closing costs, which would cover the discount points needed to reach par pricing. Jordan's manager says to present the above-par option first because it is easier to qualify, and reminds Jordan that the above-par loan pays $2,000 more in commission.
1. Identify the problems with the compensation plan under Regulation Z's loan originator compensation rule.
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Regulation Z, 12 C.F.R. 1026.36(d)(1), prohibits compensating a loan originator based on the terms of the transaction other than the amount of credit. Interest rate is a term of the transaction. A plan that pays 110 basis points at par and 175 basis points above par varies directly with the interest rate, which is exactly what the rule forbids. The fact that the plan is company-wide and written does not cure it; the rule reaches plans as designed, not just individual abuses.
Permitted structures look different: a flat percentage of the loan amount, a fixed dollar amount per loan, or an hourly rate. Adjustments are allowed for the loan amount, for quarterly or annual performance, and for a borrower's choice among a fixed set of loan options where the originator's compensation does not vary with the option chosen. A rate-based differential is not on that list.
The plan also creates a steering conflict under 1026.36(e). That provision prohibits directing a consumer to a loan that is not in the consumer's interest in order to increase the originator's compensation. A $2,000 commission differential between par and above-par pricing is a built-in steering incentive, and the manager's script converts the incentive into an instruction.
What should happen: the rate-tiered split should be eliminated and commissions restructured to a flat percentage or fixed amount. The arrangement should be reviewed by counsel; it is a design defect, not a training issue.
2. What must Jordan do when presenting options to Mr. Alvarez, and what risks does the manager's instruction create?
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Jordan must present the options for which Mr. Alvarez likely qualifies and let him choose based on his own interests. He should:
- Present par pricing with the points paid from the $9,000 available, showing the monthly payment, total closing costs, and break-even period.
- Present the above-par option with its lower upfront cost and higher monthly payment, so the trade-off is visible side by side.
- Ask about how long he intends to keep the loan and whether he has reserves after closing, since a fixed-income retiree with limited cash may genuinely need the lower upfront cost - but that must be his informed choice, not the default.
- Not lead with the above-par option because it pays more or is 'easier to qualify.' If he qualifies at par, the qualification argument is simply false.
The manager's instruction creates several risks: a steering violation under 1026.36(e); a UDAAP problem, because directing a fixed-income elderly borrower to a costlier structure to increase compensation is precisely the kind of conduct regulators examine; potential disparate impact exposure given the borrower's age; and individual liability for Jordan. If the loan cannot be justified as in Mr. Alvarez's interest, Jordan should not originate it.
Jordan should document the options presented, the borrower's stated goals, and the manager's directive, and escalate to compliance. Following the instruction is not a defense.
3. Does the $250 partner bonus create a separate legal problem? Explain.
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Yes, and it is independent of the rate-tier problem. A $250 payment to Jordan each time a borrower uses the affiliated title agency is a thing of value connected to the referral of settlement service business. RESPA Section 8(a) prohibits giving or receiving anything of value under an agreement that settlement service business will be referred. The affiliated business arrangement safe harbor in Section 8(c)(4) requires disclosure and does not authorize payments to individual originators for generating affiliate volume.
Two further points matter:
- The bonus is per-transaction and conditional on using the affiliate. It is not compensation for a service Jordan performs for the title agency. Paying originators for capture is the fact pattern regulators treat as a referral fee, and it also creates pressure to steer borrowers away from cheaper providers.
- It interacts with the loan originator compensation rule. Even if the payment came from the lender rather than the affiliate, compensation that varies based on whether the consumer uses an affiliate raises the same steering concern under 1026.36(e), and it is not a permitted adjustment to originator compensation.
The fix is to remove the affiliate-contingent bonus entirely. If the company wants to encourage title usage, it can market the affiliate on price and service. Jordan should not accept the bonus and should report the plan to compliance in writing, keeping a copy of the report.