The Unseen Risks of Open-Ended Loans

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WE'RE HEARING in terms of compensation plans, many lenders treat open-ended loans as a non-issue given their exemption from the compensation provisions of Dodd-Frank. Lenders, however, should consider carefully the potential for loan officers to steer borrowers from closed-end products into open-ended loans. This is particularly true in a rising interest rate environment.

Indeed, one can easily envision a lawsuit or Consumer Financial Protection Bureau action against a lender, who, without disclosing the financial incentive for a loan officer to close an open ended loan, advises a borrower to forego a fixed-rate closed-end loan.

Given the broad authority for the CFPB to define what constitutes an unfair or deceptive act or practice, hidden financial motives are highly problematic.

While disclosures are not required, per se, lenders should consider these and other alternatives to guard against after-the-fact hindsight claims. Lenders may wish to consider whether the frequency of open-ended loans justifies any change in compensation altogether or deserves a completely separate lending channel.

There are numerous possible solutions to protect lenders. What is most important is that lenders do not simply consider open-ended loans "safe" when it comes to compensation deviations.

Compensation, across the board, should be considered a material fact in the lending process as it pertains to the manner in which borrowers are advised.

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