United States
Hong KongLoan originator compensation rules
Compensation may not vary with a term of the transaction, under 12 CFR 1026.36(d)(1). An originator paid by the consumer may not also be paid by anyone else, under 12 CFR 1026.36(d)(2).
Two rules, both in Regulation Z, both aimed at the same problem: an originator being paid more for putting a borrower in a worse loan.
Rule one: no compensation based on terms
Compensation may not be based on a term of the transaction, under 12 CFR 1026.36(d)(1). Not the interest rate, not the presence of a prepayment penalty, not the product type.
It may be based on the loan amount, on the number of loans closed, on quality metrics, or on a fixed hourly or salaried arrangement. Those do not vary with the borrower's terms.
Rule two: no dual compensation
An originator paid directly by the consumer may not also receive compensation from any other person for that transaction, under 12 CFR 1026.36(d)(2).
One source of payment per transaction. Either the consumer pays you or the creditor does.
The yield spread premium as it used to work - an originator paid more by the lender for delivering a higher rate, while also charging the borrower. Both rules together close that door from each side.
Steering
Related and separately prohibited, at 12 CFR 1026.36(e). An originator may not direct a consumer to a transaction that pays the originator more and is not in the consumer's interest.
The safe harbor is presenting genuine options: for each type of transaction the consumer expresses interest in, the loan with the lowest interest rate, and the lowest rate without risky features.
What is permitted
- Compensation as a percentage of the loan amount
- A fixed salary or hourly rate
- Bonuses on volume or on quality measures
- Payment from the creditor rather than the consumer
The distinction is always the same. Pay linked to how much business, fine. Pay linked to what is in the loan, not fine.
Common questions
What is the loan originator compensation rule?
Compensation may not vary with a term of the transaction, under 12 CFR 1026.36(d)(1).
What is dual compensation?
Being paid by both the consumer and another party on the same transaction. It is prohibited under 12 CFR 1026.36(d)(2).
Can an originator be paid a percentage of the loan amount?
Yes. Loan amount is not a term of the transaction in the sense the rule prohibits.
What is steering?
Directing a consumer to a transaction that pays the originator more and is not in the consumer's interest, prohibited at 12 CFR 1026.36(e).
What ended yield spread premiums?
These two rules together, which prevented compensation varying with the rate and prevented payment from two sources at once.