As many lenders know, the limitations on adjusting compensation on existing loans essentially leave lenders in the position of reducing commissions under very limited circumstances where the loan officer was completely without fault. Of course, it is the opposite situation—where a loan officer makes an inexcusable error or simply violates policies—in which lenders would typically want to have the mistake impact the loan officers’ commission. The Consumer Financial Protection Bureau’s position, however, is that by allowing such reductions it would create situations where loan officers and/or lenders could manipulate situations to have “mistakes” create a dual pricing structure with artificially high prices reduced for errors.
In response, some have suggested that a zero commission policy would be compliant because it would negate any incentive by a loan officer to make an error to justify a reduction since that mistake would prevent the loan officer from receiving any commission. However, one has to remember that the rule itself prevents any change in compensation based upon the terms of the loan. The allowance to adjust compensation as a response to unforeseen circumstances is an exception to the rule. As the Consumer Financial Protection Bureau has limited this exception to unforeseen circumstances, the exception to the general prohibition is not broad enough to encompass changes for intentional or reckless errors. From the Consumer Financial Protection Bureau’s perspective, it appears that the agency views the theoretical ability of lenders to utilize disciplinary methods and oversight to prevent or reduce these mistakes as negating the need for a broader exception. I would not be surprised if the CFPB’s perspective was also informed by an attitude that preventing such occurrences by loan officers would lead to additional oversight which could only be beneficial from a compliance perspective.
The bottom line, however, is that for the time being it does not appear that a no commission policy would provide greater latitude than a reduced commission policy in response to loan officer errors.