The Problem with Open Ended Loans
It is clear that the LO compensation rules only apply to closed end loans. That poses a problem, however. What happens when a lender has an opportunity to finance a consumer on an open end loan (such as a HELOC or open ended HECM) and pays differently on such loans? Is it a violation of the comp laws or potentially steering concern?
Technically, no. Since open ended loans are not covered by the LO compensation laws, a lender could theoretically utilize a different compensation plan on such loans. Of course, this leads to another problem: Steering. What happens if a lender has a comp plan that would allow originators to make more money on an adjustable open-ended loan than a fixed rate closed end loan or vice versa? What if the borrower is steered into the less appropriate loan on which the lender paid the originator more compensation?
The fact is that it probably would not violate the LO comp laws (assuming the three loan steering disclosure was provided on a brokered loan) but how about an unfair deceptive act or practice? Could the CFPB use such a catch-all to go after a lender that had a comp plan undisclosed to borrowers that gave the bank and an originator a motive to put a customer in a loan that might not be the most appropriate under the circumstances? Since there is little guidance on the phrase “deceptive act or practice” and its open to the CFPB’s interpretation, there is a significant possibility such actions could create substantial risk for a lender.
The fact is there is a great deal of uncertainty about the compensation on open-end loan alternatives. For that reason, lenders should carefully assess whether it is worth the risk to compensate differently on open-end loans, even though technically they are not covered by the Dodd Frank compensation laws. The safest bet is to put plans in place that avoid strong incentives (legal or not) to steer a customer to a less appropriate loan because the loan officer can make more money. Failure to put such measures in place puts the lender at risk, while enriching a loan officer who will likely never have to answer to the government or the borrower.