Loan originator compensation rule: why a loan officer cannot earn more on a higher rate

Since 2011 a loan officer or broker may not earn more by putting you in a pricier loan, and may not be paid by both you and the lender on the same transaction.

Before 2011, a loan officer or mortgage broker was commonly paid a yield spread premium: a bonus from the lender for closing the borrower at a rate above the one the borrower qualified for. The Federal Reserve’s loan originator compensation rule, effective April 2011, banned the practice, and the Dodd-Frank Act wrote a version into the Truth in Lending Act, with the CFPB’s implementing amendments effective January 2014. The rule is section 1026.36 of Regulation Z. It does not decide how much an originator may earn; it decides what that pay may depend on, who may pay it, and whether the originator may push you toward a loan that pays them more.

Scope

The compensation and anti-steering provisions cover closed-end consumer credit secured by a dwelling — purchase, refinance, home equity loan, on a principal residence, second home or a dwelling that is partly owner-occupied. Home equity lines of credit and timeshares are excluded, as are business-purpose loans, so a hard money broker arranging an investor loan is outside the rule. A loan originator is broad: any person who takes an application, offers, arranges or negotiates credit terms, or refers a consumer to a lender for compensation — the individual loan officer, the brokerage company, and a creditor that table-funds loans. A creditor funding from its own resources is not a loan originator for the rule’s purposes, but its employees are. Seller financers within the one-property or three-property exclusions, servicers modifying existing loans, and processors and underwriters who do not deal with consumers on terms are excluded.

No pay based on the terms of the loan

An originator may not receive compensation — directly or indirectly, in salary, commission, bonus or anything of value — based on a term of the transaction: the interest rate, the APR, the points, the fees, the presence of a prepayment penalty, the loan-to-value ratio, or any other term or condition. The one express exception is the loan amount: a fixed percentage of the amount, with an optional minimum and maximum dollar figure, is allowed because it does not reward a worse loan. The rule also bans proxies: any factor that consistently varies with a term over a significant number of transactions and that the originator can influence — for example, paying more for loans held in portfolio when those are priced differently. Compensation may vary by legitimate factors such as overall loan volume, long-term loan performance, the quality of files, or whether the property is in a particular state.

Profit-based bonuses and retirement contributions required careful treatment, since a company’s profits do depend on loan terms. The rule permits contributions to designated tax-advantaged plans, and non-deferred profit bonuses so long as they do not exceed 10% of the individual’s total compensation for the period or the individual originated ten or fewer transactions in the prior 12 months.

No dual compensation

If you pay the originator directly — a broker fee on your Loan Estimate — then no one else, including the lender, may also pay that originator for the same transaction. The brokerage company may still pay its own employees from the fee you paid. Conversely, if the lender pays the broker, you may not be charged a broker fee on top. Every transaction is therefore borrower-paid or lender-paid, never both, and the Loan Estimate shows which. A reduction in the originator’s compensation is allowed in one situation: to cover an unforeseen increase in a third-party settlement charge so that the loan stays within the TRID tolerances — a concession, never a systematic practice.

Anti-steering and the safe harbor

A loan originator may not steer you toward a loan because it pays the originator more than another loan the originator offered or could have offered, unless that loan is in your interest. Because intent is hard to prove, the rule offers a safe harbor: the originator is deemed compliant if it obtains loan options from a significant number of the creditors it regularly works with (at least three), and for each type of transaction you expressed interest in — fixed-rate, adjustable, reverse — presents you with options that include the loan with the lowest interest rate, the loan with the lowest rate without risky features (negative amortization, a prepayment penalty, interest-only payments, a balloon in the first seven years, a demand feature, shared equity or shared appreciation), and the loan with the lowest total dollar amount of discount points, origination points and origination fees. The originator must have a good-faith belief that you likely qualify for each option presented. The safe harbor matters mostly for brokers; a lender’s own loan officer offers only that lender’s products and is covered by the compensation ban instead.

Companion rules in the same section. Section 1026.36 also requires creditors and brokers to ensure that their originators are licensed or registered under the SAFE Act, with background checks and training for those not required to be licensed; requires the NMLS identifier on loan documents; bans mandatory arbitration clauses and waivers of federal claims in any dwelling-secured consumer loan, including HELOCs; and prohibits financing single-premium credit insurance. Compensation records must be kept for three years.

Limits, enforcement and remedies

It does not cap total originator pay, and a flat 1% of the loan amount is lawful however large the loan. It does not require an originator to find you the cheapest loan in the market, only not to steer you for its own gain. It does not apply to HELOCs, investor loans or business-purpose lending, and it does not regulate how a lender prices its own rate sheet, including lender credits and points, which remain the borrower’s to negotiate.

Enforcement. The CFPB and the banking agencies examine for compliance and have brought public actions over disguised term-based bonuses and dual compensation. Borrowers have a private right of action under TILA: for a violation of the compensation, steering or qualification rules, a consumer may recover actual damages plus statutory damages of up to three times the total direct and indirect compensation the originator received, with costs and attorney’s fees, within three years of the violation. Creditors can be liable for their originators’ violations in some circumstances.

Questions worth asking

Ask the originator how it is paid on your loan — borrower-paid or lender-paid — and confirm it matches the Loan Estimate. Ask a broker for the three-option comparison that the safe harbor describes, in writing, and compare the lowest-rate and lowest-fee options yourself. Ask whether a pricing concession is available if a third-party fee rises. Be alert to a loan officer who discourages you from asking about points, pushes a product with a prepayment penalty, or changes the recommended loan after you mention another lender’s quote. If you later learn that the originator was paid more because of your rate, or was paid twice, the statutory damages formula makes such claims worth a consumer attorney’s review. Our guides on points and buydowns and pre-approval explain the pricing levers that remain in your hands; the rule text is in the CFPB’s Regulation Z.

Key points

Federal Reserve rule effective April 2011, expanded under Dodd-Frank with CFPB amendments effective January 2014; Regulation Z 1026.36(d)–(i).
Covers closed-end consumer loans secured by a dwelling; HELOCs, timeshares and business-purpose loans are excluded.
No compensation based on the interest rate, APR, fees, LTV or any other term; a fixed percentage of the loan amount is the one permitted basis.
Proxies for loan terms are banned; profit-based bonuses capped at 10% of total pay unless the originator did 10 or fewer loans.
No dual compensation: a broker paid by the borrower may not also be paid by the lender on the same loan.
Anti-steering safe harbor: options from at least three creditors showing the lowest rate, the lowest rate without risky features, and the lowest points and fees.
Same section bans mandatory arbitration and financed single-premium credit insurance, and requires licensed or registered originators with NMLS IDs on documents.
Private remedy: actual damages plus up to three times the originator’s total compensation, attorney’s fees, three-year limitations period.

How LO compensation applies to you

Frequently asked questions

Can a mortgage broker get paid by both me and the lender?

No. On any closed-end consumer mortgage, if you pay the broker a fee, no other party, including the lender, may compensate the broker for that transaction; if the lender pays the broker, you may not be charged a broker fee. The brokerage may still pay its own loan officers from whichever source paid it. Your Loan Estimate identifies the transaction as borrower-paid or lender-paid in the origination charges section.

Does the rule mean my loan officer has no incentive to raise my rate?

That is its purpose. Compensation may not vary with the interest rate, points, fees or any other term, so the originator earns the same on a loan at 6.5% as at 7%. The lender itself still prices its rate sheet and may profit from a higher rate, which is why comparing Loan Estimates from several lenders remains the practical check; the rule removes the individual’s incentive, not the market’s.

What is the anti-steering safe harbor?

A procedure that protects a broker from a steering claim. The broker obtains options from at least three creditors it regularly works with and, for each loan type you are interested in, presents the loan with the lowest rate, the lowest rate without risky features such as prepayment penalties or balloon payments, and the lowest total points and origination fees. You may ask for this comparison in writing; a broker who cannot produce it is relying on good faith alone.

Does the compensation rule apply to hard money or investor loans?

Generally not. The rule covers closed-end consumer credit secured by a dwelling, and loans primarily for business purposes, including most loans to investors who will not occupy the property, fall outside Regulation Z. A broker on such a loan may be paid in ways the rule would forbid on a consumer loan. State broker licensing laws and the Equal Credit Opportunity Act still apply, and the loan documents should state the broker’s fee.