Chapter 26 — Key Takeaways
Compensation: How Loan Officers Get Paid — Basis Points, Comp Plans, and the LO Comp Rule
The core claims
1. The rule exists because of a specific practice, not a general principle. Before April 2011, an originator could be paid a yield spread premium for placing a borrower above par. On the Linden Street file, one notch — 6.750% to 7.000% — would have paid the originator \$2,743.12 and cost the borrowers \$61.09 a month for 360 months, or \$21,992.40. Eight dollars out of the household for every one into the originator's pocket.
2. Disclosure was tried first and failed. The redesigned Good Faith Estimate put the payment in front of borrowers. The incentive was completely unaffected by being described. When a professional's financial interest opposes their client's, telling the client is not a remedy.
3. Compensation may not be based on a term of a transaction — or on a proxy for one. A term is any right or obligation of the parties: rate, points, fees, prepayment terms, escrow, maturity. The prohibition also reaches the terms of multiple transactions, so you cannot rebuild the incentive by averaging it.
4. The amount of credit extended is expressly permitted. As a fixed percentage, optionally with a dollar minimum or maximum. This is why the entire industry is paid in basis points.
5. You may generally not be paid by both the consumer and the creditor on the same transaction — the dual compensation prohibition — subject to the exception that a loan originator organization may pay its own individual originators even in a consumer-paid deal.
6. Anti-steering is a separate prohibition with a separate safe harbor, and it is not the fair-lending steering prohibition (Chapter 25). This one is about your own compensation.
7. Regulation Z's "loan originator" is not the S.A.F.E. Act's "mortgage loan originator." Different statutes, different purposes, imperfectly overlapping definitions.
8. A file can be profitable to the originator and unprofitable to the branch, from the same document, with both numbers correct. On the constructed model in §26.9, the originator earned \$4,571.88** and the branch lost **\$1,262.51.
9. The compensation rate you cannot change is the same size as the calendar you can. The fifteen-day lock extension cost \$914.38**. Twenty-five basis points of this loan is **\$914.375.
The key rule
THE TWO-PART PROXY TEST — memorize both prongs
A factor that is not itself a term of a transaction is a PROXY for a term if:
(1) it CONSISTENTLY VARIES with a term over a SIGNIFICANT NUMBER of
transactions, AND
(2) the loan originator has the ability, directly or indirectly, to
ADD, DROP, or CHANGE the factor in originating the transaction.
BOTH prongs. One prong alone is not a proxy.
Quick classification:
| Permitted | Prohibited proxy | Prohibited as a term |
|---|---|---|
| Amount of credit extended (fixed %) | Credit score | Interest rate |
| Number of loans / volume | Loan product type | Discount points, origination fee |
| Hours actually worked | Portfolio vs. sold | Prepayment penalty |
| Existing vs. new customer | Escrow waiver, maturity | |
| Pull-through, file quality | ||
| Geography (see Ch. 25) | ||
| Referral source (see RESPA §8, Ch. 24) |
Contested — get a written opinion: purchase vs. refinance.
The arithmetic
| Quantity | On the Linden Street loan (\$365,750.00) |
|---|---|
| One basis point | \$36.575 |
| 100 bps | \$3,657.50 |
| 125 bps | \$4,571.88 |
| 150 bps | \$5,486.25 |
| 25 bps | \$914.375 — the same as the lock extension |
| 50/50 split of 125 bps | \$2,285.94 |
| Branch net revenue (constructed) | \$8,229.37 |
| Total cost to make the loan (constructed) | \$9,491.88 |
| Branch result | (\$1,262.51) |
| Break-even loan amount at this cost structure | \$492,000.00 |
The income model:
$$\text{Annual compensation} = \text{closings} \times \text{average loan amount} \times \frac{\text{basis points}}{10{,}000}$$
You control closings, and closings are the output of Chapter 7's funnel. \$150,000 at 125 basis points on \$365,750 loans is 32.81 closings a year, which at a 70% pull-through and a 25% conversion rate is about four qualified conversations a week, every week.
Key terms
loan originator compensation rule · basis point (bp) · yield spread premium · term of a transaction · proxy · lender-paid compensation (LPC) · borrower-paid compensation (BPC) · dual compensation prohibition · anti-steering · anti-steering safe harbor · compensation plan · commission split · draw (recoverable / non-recoverable) · volume tier (marginal / retroactive) · W-2 vs. 1099 originator · branch profit and loss (P&L) · per-file cost · break-even loan amount · production goal
The four questions to ask before you sign anything
- What am I paid on — base or total loan amount, and is there a floor or a ceiling?
- When am I paid — funding, investor purchase, or a payroll cycle after one of those?
- What can be taken back — early payoff, early payment default, pricing concessions, and who absorbs a lock extension?
- Is the draw recoverable? One word. On the constructed first year in §26.7, it was worth \$6,856.25.
What you should be able to do Monday morning
Answer a borrower who asks how much you make, honestly, in under forty seconds, and turn it into the loan comparison you wanted to have. Read your own compensation plan and find the four paragraphs that matter. Run the two-prong proxy test on any factor a plan proposes to use. Compute your compensation on any file in your head, because a basis point is loan amount divided by ten thousand. And build the income model backward — from what you need to live on, through basis points and average loan size, to the number of conversations you owe your calendar this week.
And say the sentence. "I'm paid the same percentage on every loan I close, so I earn exactly the same whether you take the higher rate with a credit or the lower rate with a point." That sentence is true because of a rule that took a financial crisis to write, and it is the reason your advice is worth something.