Included within the CFPB’s potential amendments to the LO compensation rules was a proposal to better define the term “proxy.” As most know, anything that is used as a proxy for the terms of a loan cannot be considered in determining an originator’s compensation. Unfortunately, the Federal Reserve as well as the CFPB have provided no guidance on the definition of a proxy, leaving it an ambiguous phrase capable of a multitude of meanings. Indeed, the only examples provided to the industry of proxies, are credit score and debt to income ratio as these would correlate to differences in loan terms. Providing these examples, however, has been of limited utility to the industry as the question exists whether certain business practices amount to a proxy. For instance, is it a proxy to pay differently between a self-funded and brokered loan? Is it a proxy to differentiate pay based upon different origination streams if there is a correlation to the type of loan generated? Is it a proxy to pay differently based upon location if there is a correlation to loan terms? Is it a proxy to pay differently for portfolio loans? These are but a few examples of the uncertainty that currently exists when it comes to identifying a proxy for loan terms.
As a result, the CFPB—recognizing that they are not even sure what a proxy is—has proposed a definition that would consider something a proxy if (1) there is a direct correlation to loan terms and (2) it is something that a loan officer could steer a consumer into or out of. While this definition does make sense, a huge problem exists. Using this definition, the two items that the Federal Reserve identified as a proxy (DTI ratio and credit score) could not be considered a proxy. Indeed, neither credit score nor DTI ratio could be impacted by a loan officer’s discretion or advice. Hence, if the CFPB considers DTI ratio and credit score valid examples of a proxy (which the CFPB appears to adopt) it is wholly inconsistent with the very definition proposed by the CFPB.
This definitely falls into the wait and see category, as I cannot ascertain any way that the CFPB’s proxy illustrations gel with the proposed definition.
