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How LO-to-LO Referrals Become Problems

APR 7, 2014 11:33am ET
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At a glance, it would seem that there should be no problem with one loan officer referring a loan to another loan officer in the same branch and/or for a branch manager to refer loans to his/her loan officers. In fact, such a situation could create significant regulatory problems for a lender.

In the comments on the LO compensation laws, the Consumer Financial Protection Bureau made a point to mention that actions aimed at circumventing the rules would not be permissible.

One example was a lender who created or permitted teams of LOs to share commissions. The CFPB believed such relationships could lead to loans being passed back-and-forth to achieve a tiered pricing or product allocation between two or more loan officers at different compensation levels.

The concept, therefore, is that lenders cannot permit loan officers to refer loans to one another in such a way that a company could utilize such referrals to circumvent the LO comp laws. For instance, a branch manager could not direct loans to different loan officers based upon their relative compensation and the type of loan the borrower needs.

Similarly, a branch manager could not send a loan to the most profitable loan officer as a reward for maintaining the highest average yield. This is true even if the particular loan officers’ compensation does not change. The simple fact is that referral practices which circumvent the LO compensation laws are not permissible.

Lenders must carefully consider the circumstances and controls in place to avoid internal referrals that could undermine the LO comp rules. This is particularly true where a lender has different comp plans in place corresponding to different pricing. In these contexts, the practice of internally referring loans amongst loan officers can be highly problematic.

Of course, this post should not be read as precluding all referrals. One branch in one state referring a loan to another branch in another state, or a referral when a loan officer is about to go on extended leave, may be completely permissible.

The key is for a lender to set forth clear rules to prevent referrals from becoming tools for circumvention. Lenders must realize that today’s laws requiring affirmative compliance mean implementing reasonable policies that prevent and prohibit foreseeable unlawful activities.

Ari Karen is an attorney at Offit Kurman.

Comments (4)
Just one more rule and all the world's problems will be solved. Or maybe 2. Or 102.
Posted by Zach L | Monday, April 07 2014 at 3:52PM ET
Oh and you have to wear your seatbelt and sign up for insurance too.
Posted by | Tuesday, April 08 2014 at 3:57PM ET
Tara Smith

Licensed Mortgage Loan Officer at East Coast Capital

I'm sure you have a banking account... So have you ever been to your bank (Chase,Citi, Wells, etc.) to make a deposit and a branch manager greets you? Then you go to the window to make a deposit and the teller wants you to sit down with Mr. Jones for a review of your mortgage to see what options may be available. After sitting down with Mr. Jones you decide not to do anything. Then on the way out the branch manager who welcomed you into the branch mentions maybe our top mortgage specialist Mr Smith will be more helpful to you and gives you Mr. Smith's number to call. The banks seem to get around all the regulations CFPB put in place, I could sit here all day to list but we all know whats really going on inside the bank. Lastly, why do loan officers in a bank need not be licensed?? Or responsible for hours of annual continuing education? CFPB implemented all the regulations with mortgage originators and the NMLS system and customers still head into their banks to speak to under educated loan officers, and CFPB wonders why there still seems to be problems in the mortgage industry. I am licensed (Hours of education w Federal and State rules, pay fees for background checks and fingerprints, and also fees for continuing education and license renewal annually) why are federally chartered banks exempt from this. Oh I know they are federally chartered!! I spend money on my education yearly and work very hard to do the right thing for referral business, no one walks into my office daily looking for a mortgage, so it blows my mind why customers continue to walk into banks ( that are paying out billions for their mistakes, and kicking people out of their homes) to discuss options for a mortgage. Thanks CFPB but your rules are broken!! I believe you covered only a fraction of the problems in the business of originating mortgages by not having everyone who wants to originate a mortgage go through the same process as someone like myself. Guess it would be too crazy for the CFPB to make their regulations uniform and mandatory for everyone mortgage originator. Like you hear in the market WellsFargo originates 1 out of every 4 mortgages, why are these people not licensed?? Oh I guess Wellsfargo paid the billions they needed to get around the rules of an honest, hardworking loan originator.
Posted by | Tuesday, April 08 2014 at 4:54PM ET
Good grief. Get off the LO's and start on the car dealers and real estate agents.
Posted by | Wednesday, April 09 2014 at 4:36PM ET
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