Legal Blog

What Lenders should know about Open-Ended Loans

Open-Ended LoansOffit Kurman financial compliance attorney Ari Karen writes  a weekly blog, “Compensation and Compliance Matters,” on the National Mortgage News website. In one of his most recent posts, “Unseen Risk of Open-Ended Loans,” Mr. Karen explains what lenders should know about Open-Ended Loans.

The Loan Officer compensation rules only apply to closed end loans. So what happens when a lender has an opportunity to finance a consumer on an open end loan and pays differently on such loans?

“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,” explains Karen.

So what happens when a lender has a compensation plan that allows originators to make more money on an adjustable open-ended loan than a fixed rate closed end loan or vice versa? This could lead to lenders steering borrowers to the less appropriate loan.

“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,” said Karen.

Lenders should consider disclosures, which, while not required, could help guard against after-the-fact hindsight claims.

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

Open-Ended LoansIf you have questions about Open-Ended Loans, or , more broadly, any compliance issues for lenders, please contact Mr. Karen, a principal of Offit Kurman in the firm’s  Labor and Employment practice group, at Mr. Karen is also the Founder and Director of C3 Compliance Consultants, Offit Kurman’s subsidiary mortgage compliance consulting business.

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