The two-part test for a proxy in loan-originator compensation

The compensation rule bars paying a loan originator based on a transaction term or a proxy for one. A factor that is not itself an interest rate, APR, loan amount, or other transaction term can still function as a proxy. The CFPB’s official interpretation gives a two-part test that helps distinguish an intentional substitute from a factor that merely happens to correlate with loan characteristics.

Part one: consistent variation

Ask whether the factor consistently varies with one or more transaction terms over a significant number of transactions. One isolated loan or a small accidental correlation is not enough. The relationship must be sufficiently consistent across the relevant set of transactions to make the factor operate as a stand-in for the rate, term, collateral type, or another transaction feature.

Part two: originator ability to influence it

The loan originator must have the ability, directly or indirectly, to add, drop, or change the factor when originating the transaction. If the originator cannot influence the factor, the second condition may not be met even if the factor correlates with a loan term. Analyze actual control, including indirect influence through advising the consumer or selecting a loan product.

Work through the CFPB example

The CFPB describes a creditor that pays higher compensation for loans it keeps in portfolio than for loans sold into the secondary market. If portfolio loans consistently have a fixed rate and five-year term while sold loans typically have a higher rate and a 30-year term—and the originator can influence which product the consumer selects—portfolio status may act as a proxy for transaction terms. The analysis depends on both the pattern and the originator’s ability to change it.

A practical compliance sequence

1. Identify the compensation factor and the transaction terms with which it may vary.
2. Review a significant set of transactions for a consistent relationship.
3. Determine whether the originator can influence the factor directly or indirectly.
4. If both conditions are met, treat the factor as a proxy and prohibit compensation based on it.
5. Document the analysis and monitor the arrangement as products or channels change.

Key takeaway

A proxy requires both consistent variation with a transaction term and originator ability to influence the factor. Do not conclude “proxy” from correlation alone, and do not ignore a factor the originator can manipulate to change compensation.

Apply both parts of the proxy test

A factor that is not itself a term of the transaction is a proxy for a term when two conditions are met: it consistently varies with a transaction term over a significant number of transactions, and the loan originator can add, drop, or change the factor directly or indirectly when originating the transaction. Both parts are necessary. A relationship in one file or a small sample alone does not establish the test.

The rule prevents compensation plans from doing indirectly what they cannot do directly. A lender cannot avoid the transaction-term restriction simply by paying on a factor that reliably tracks interest rate, loan amount, or another term and is manipulable by the originator.

Part one: consistent variation across transactions

The first prong asks for a consistent relationship over a sufficiently large set of transactions. Look at actual data, not an anecdote. If a supposed factor moves with rate, loan amount, or another term only because the sample is tiny or unusual, the required consistency may not be shown. The regulation does not create a fixed numerical sample size; the facts and reliability of the pattern matter.

The analysis should define the factor, transaction term, sample period, population, and method. A compensation plan could be reviewed across originators or products to determine whether the factor reliably changes alongside the term. A one-time difference between two loans is not enough to establish consistent variation over a significant number of transactions.

Part two: ability to change the factor

The second prong concerns whether the loan originator has the ability, directly or indirectly, to add, drop, or change the factor while originating the loan. Formal authority is not the only issue. A workflow may give indirect control if the originator can steer the consumer into or away from the factor, select among options, or influence how it is recorded.

If the factor is fully determined by an external event and the originator cannot change it, the second prong may fail even if the factor correlates with a term. Conversely, a factor that appears neutral in policy may be changeable in practice. Review the actual system controls and behavior, not only the written job description.

Examples and safe review method

Suppose an originator's compensation rises when the borrower chooses a particular product feature, and the originator can steer or select that feature. If the feature consistently tracks a higher interest rate across many transactions, the two-part test may make it a proxy. By contrast, an originator's fixed fee for every transaction does not vary by rate and generally is not a proxy on that basis.

For an exam, state both prongs before reaching a conclusion. “It correlates with rate” is incomplete; “the originator can change it” is also incomplete. Keep this proxy analysis separate from other compensation rules, including dual compensation, percentage-of-principal restrictions, and permissible fixed bonuses.

Practical review points

A useful compliance test defines the proposed factor precisely and tests it on a meaningful transaction population. Compare the factor with the relevant transaction term, look for consistent variation, then determine how the originator can influence the factor in practice. Retain the data, method, sample scope, and conclusion. The analysis should not confuse correlation alone with a proxy: the originator’s ability to add, drop, or change the factor is also required by the two-part test.