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.