Offit 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.”
If 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 firstname.lastname@example.org. Mr. Karen is also the Founder and Director of C3 Compliance Consultants, Offit Kurman’s subsidiary mortgage compliance consulting business.