For covered closed-end consumer loans secured by dwellings, a lender pays its loan originators 1.25% of the amount financed for fixed-rate loans and 1.75% for adjustable-rate loans. Does this product-based compensation schedule comply with Regulation Z?
Correct Answer
B) Prohibited: compensation may not vary with a term of the transaction
B. Compensation improperly varies with a transaction term. Whether the interest rate may adjust affects the parties' rights and obligations and is a transaction term. The higher percentage is directly tied to that term, regardless of whether a particular borrower was steered. Scope and exceptions: A fixed percentage of credit extended can be permissible under the specified conditions; this schedule instead varies by product. Compensation based on actual hours can differ from product-based compensation and must still comply with applicable rules. Source: Section 1026.36(d)(1)(i)–(ii); comments 36(d)(1)-3 and -9 — https://www.consumerfinance.gov/rules-policy/regulations/1026/36/
Why This Is the Correct Answer
B. Compensation improperly varies with a transaction term. Whether the interest rate may adjust affects the parties' rights and obligations and is a transaction term. The higher percentage is directly tied to that term, regardless of whether a particular borrower was steered. Scope and exceptions: A fixed percentage of credit extended can be permissible under the specified conditions; this schedule instead varies by product. Compensation based on actual hours can differ from product-based compensation and must still comply with applicable rules.
Why the Other Options Are Wrong
Option A: Permitted: the product type is a category rather than a loan term
Calling a term a product category does not avoid the rule.
Option C: Prohibited only where the originator steers a borrower to the ARM
Actual steering is not a prerequisite to this compensation violation.
Option D: Permitted where the 0.5% difference reflects the extra work on the ARM
An asserted workload difference does not validate this product-based schedule.
Exam Tip
Examine what determines compensation, not just what the lender calls it.
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