Ed. #95: The LO Comp Rule Is Brutal

And it still plagues industry and consumers alike

Back in early 2020, in just my third Mortgage Musing, I joked that the anti-consumer/anti-competition Loan Originator Compensation Rule under the Truth in Lending Act (“LO Comp Rule”), might be going away. I quickly admitted that wasn’t true and was only inspired by an industry request to the CFPB for modifications that went nowhere. But, that Musing got the attention of a lot of readers hearing the first salvo of a recurring theme about my frustration with the anti-consumer effects of the LO Comp Rule and the contortions it forces the industry undertake to enable pricing reductions at the point of sale.

Brutalism and change

The LO Comp Rule is like Brutalist[1] style architecture;[2] imposing, souless, inscrutable, lacking functionality, dystopic, ugly, and, most notably as a metaphor to the LO Comp Rule, highly suggestive of Soviet Communist influence. Many of these Brutalist buildings just need to be demolished, as there is no reason to preserve an ugly building that doesn’t meet the needs of a community.[3] Yet, government often places insurmountable obstacles in the way of getting rid of these ugly, nonfunctional relicts. With that frustration in mind, I’m not getting too excited yet, but there’s a little smile on my face about the CFPB’s notice on June 4 to the Office of Management and Budget (“CFPB’s LO Comp Rescission Notice”) indicating CFPB’s desire to rescind the LO Comp Rule. Right now, however, it’s still the “same as it ever was”.

An LO Comp lawsuit

Meanwhile, to appeal to a wider audience, I usually refrain from discussing lawsuits or case law unless it is a Supreme Court case that has wide impact or involves questions directly applicable to mortgage bankers and the laws and regulations impacting the industry. Still, this is a mortgage and legal blog,[4] so it’s Musing-worthy when the first LO Comp Rule class action lawsuit[5] in a decade gets filed. On July 15, 2025, a consumer class action complaint involving the LO Comp Rule (the “LD Lawsuit”) was filed in the US District Court of Maryland against the publicly traded mortgage banking company loanDepot (Case 1:25-cv-02294-JRR -Pacer ID required.).

So, with the LO Comp Rule back in the news, I again return to the morass that the LO Comp Rule has created for the mortgage industry (and consumers) with these latest twists offering more intrigue.

LO Comp Rule Rescission?

Since rescission of the LO Comp Rule is something I have directly advocated numerous times in this blog, (including my open letter to the new CFPB leadership in March), some of you may have been surprised that I haven’t bothered to mention the CFPB’s LO Comp Rescission Notice in my last two posts since that announcement. Simply put, that is because it is entirely unclear what the CFPB actually intends to do with the LO Comp Rule. The CFPB’s LO Comp Rescission Notice just said “Rescission” under the action tab and provided no other information,[6] so we don’t know if that means total rescission or something less.

Meanwhile, total rescission or even rescission of certain key provisions of the LO Comp Rule would likely require notice and comment under the Administrative Procedures Act (“APA”) since the LO Comp Rule was enacted after notice and comment under the APA to begin with.[7] Perhaps more importantly, even if CFPB successfully rescinds the LO Comp Rule, that rescission will require further Congressional legislative action to make the rescission work because the LO Comp Rule was required by amendments to the Truth in Lending Act (passed by Congress as part of the Dodd Frank Act). There has been some recent reporting about Republicans in the House of Representatives looking at Dodd-Frank rollback legislation, but whether that includes anything about the LO Comp Rule or, critically, whether any financial institution reform legislation could obtain the filibuster-proof majority required to clear the Senate is questionable.[8]

Discounting commissions under the LO Comp Rule

Perhaps the biggest frustration I have with the LO Comp Rule (echoed by many others in the industry) is that it increases consumer costs by thwarting discounts at the point of sale by lenders. The LO Comp Rule prohibits individual mortgage originators[9] from lowering their own compensation[10] on any transaction.[11] The LO Comp Rule became effective in 2014, and shortly thereafter, in 2015, CFPB issued 3 LO Comp Rule enforcement Consent Orders. Since then, CFPB has been remarkably quiet on LO Comp Rule enforcement. This led me to quip in my September 2024 Musing #82 challenge to former CFPB director Chopra to eliminate the LO Comp Rule, “If the lack of enforcement is any indication, CFPB doesn’t see much consumer harm in LO Comp violations. But if there’s no harm in violations, why have the rule?”

Still, many in the industry have sought to develop ways to compliantly enable consumer discounts by lowering compensation using lead sources and interpretation of the LO Comp Rule’s “proxy test”.[12] Early in 2024, Housing Wire reported on the issue of what it called ”pricing bucket manipulation” which Housing Wire alleged loan originators and their companies violated the LO Comp Rule by “enabling the practice of falsifying lead sources to lower loan officer pay.” Housing Wire also indicated that it learned of some of these practices from poaching lawsuits among mortgage company competitors. I wrote of my thoughts on what I termed “Bozo Buckets” in Musing #73 at the time, but perhaps the most important things I mentioned in that Musing were about understanding one’s compliant narrative under the LO Comp Rule and seeking legal counsel to get customized professional guidance on that topic.

LD Lawsuit

I’m not going to summarize the LD Lawsuit or analyze the allegations in any detail, but I do want to highlight a few noteworthy items.[13] The LD Lawsuit’s liability theory of consumer harm and LO Comp Rule violations is convoluted, but among other things it alleges that loanDepot sought to create “a false narrative”[14] for reducing compensation on some borrowers which resulted in steering the plaintiffs to higher priced loans. Specifically, the plaintiffs allege in Par. #3 of thier Complaint,

“…, loanDepot created a system of sham internal transfers, requiring loan officers who failed to push borrowers into higher rate loans to transfer (on paper only) the borrower’s loan file to a purported “Internal Loan Consultant” or “ILC.” However, there was no actual transfer of the loans to ILCs—the ILC assumed no additional duties—and the original loan officer continued to perform the same duties, but at a reduced commission rate.” [15]

Each of the class plaintiffs named in the LD Lawsuit claims they did not receive a discount while other borrowers did. So, while the plaintiffs’ particular transaction may have been compliant (the originator did not impermissibly reduce their compensation), plaintiffs were allegedly harmed by the LO Comp Rule violations on other loans causing plaintiffs’ loans to be overpriced (i.e., plaintiffs were “steered” to higher price loans). Ironically, borrowers who did get a discount (arising from claimed impermissible reductions in compensation), might have a harder time claiming they were harmed in any way by the alleged violations since they directly benefitted from lower costs despite any violations on those particular transactions.[16]

Switching teams?

The LD Lawsuit was filed on behalf of 4 individual consumer plaintiffs by the well-known and respected mortgage industry attorney, Ari Karen[17], partner at the Washington, DC based firm, Mitchell Sandler. This was quite surprising because over the past 20 years or so I have observed Mr. Karen to maintain a high profile in mortgage banking circles as a smart and innovative mortgage banking regulatory advocate and counselor; through his close relationship with the Lenders One cooperative group and various speaking engagements at state and federal mortgage banker trade association meetings, web shows, publications, and the like.

While unusual, it is not unethical[18] for a lawyer who has represented many clients in a consumer facing industry, such as the mortgage industry, to “switch teams” [19] and represent consumer class action plaintiffs against an industry player on a particular case. Frankly, friendly industry attorneys representing different clients can develop a sense of team/tribalism that is not countenanced by attorney ethical cannons which are largely premised on adversarial representation in litigation contexts. Those friendly relationships make for good conversations at conferences and enables shared ideas about common problems, but can be awkward when clients are on opposite sides of the table. Still, I am sure that many of my mortgage industry attorney colleagues were similarly surprised that the LD Lawsuit was filed on behalf of consumer plaintiffs by Mr. Karen and his firm.

Technical violations?

I am not going to comment on the facts applied to the law in the LD Lawsuit (I can privately with an engagement agreement). But, in light of my priors on the LO Comp Rule, I would like to comment on Mr. Karen’s characterization of the LD Lawsuit made outside of the pleadings (per the National Mortgage News),

“What is being alleged in the lawsuit is not merely a technical violation or garden variety imperfection in compliance with the rule. The allegations assert a designed effort to circumvent the rule in its entirety to obtain an advantage over the industry at the expense of borrowers and competitor.”

Having made the case about how the LO Comp Rule is anti-competitive and anti-consumer many times,[20] I disagree with Mr. Karen’s out of court characterization about consumer and competitor harm vs. technicality in connection with the alleged LO Comp Rule violations. Despite public reporting and industry chatter for many years about lenders allegedly violating the LO Comp Rule by lowering compensation to enable consumer discounts,[21] CFPB, even with beefed up enforcement resources during the Rohit Chopra[22] era couldn’t seem to find enough consumer harm in those allegations of LO Comp Rule violations to bring any actions in a decade.

So, while it doesn’t justify any actual compliance violations that may ultimately be found,[23] as far as I am concerned, the whole LO Comp Rule itself is one big anticompetitive and anti-consumer technical violation.

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[1] I have yet not seen the movie “The Brutalist” which I understand explores themes of post-WW II and holocaust related trauma that inspire Brutalist architecture designs of the protagonist. The movie is acclaimed, but any movie over 3 hours is, by my measure, brutal.

[2] Brutalist buildings can be found anywhere. I don’t usually pay much attention to art or architecture, but the example of Brutalist architecture in the photo above is of the allegedly “riot proof” George L. Mosse Humanities Building at the University of Wisconsin-Madison. The example I find most poignant in Milwaukee is the discordant architecture vandalizing downtown Milwaukee’s Lake Michigan lakefront: on one side there is the Brutalist-style War Memorial and, on the other, the Neo-futurist-I don’t know what style of the Quadracci Pavilion of the Milwaukee Art Museum, designed by Santiago Calatrava. The two buildings are incredibly incongruous and distracting from the beauty of the lakefront itself, but the Calatrava is at least pleasing to the eye. The War Memorial is just a blight.

[3] A Brutalist building is like an underperforming loan originator. Some might say it is worth keeping that originator around for the couple loans they might do, but as articulated better by mortgage industry consultants and weekly newsletter writters, Joe Garrett and Mike McAuley in their recent MBA webinar (again), those folks actually hinder you more in terms of culture and opportunity for progress than whatever marginal benefits they offer.

[4] Again, this blog is not legal advice and no attorney client relationship exists by virtue of your free subscription or reading this. All you are getting is snarkily delivered information and entertainment of interest to the mortgage industry (and my appreciation for your readership). On the topic of the Loan Originator Compensation Rule in particular (LO Comp Rule), mortgage lenders are urged to seek qualified counsel for customized advice regarding any specific business practices.

[5] I am not aware that any other class actions have ever been filed under the LO Comp Rule since the CFPB issued some Consent Orders involving LO Comp in 2015 which may have also generated class actions and settlements (e.g., Castle & Cook).

[6] My defined term of “CFPB’s LO Comp Rescission Notice” is significantly longer than the CFPB’s explanation of what it intends to do with the LO Comp Rule.

[7] CFPB has never been shy about taking an expansive view of its authority to engage in rulemaking in the past (see e.g., foreclosure moratorium or contract registry) , so, cynically speaking, there is no reason to expect the current CFPB will be judicious in its exercise of authority to rescind rulemaking as well.

[8] Attorney Ari Karen publicly provided an even more dismissive assessment of the impact of the CFPB’s LO Comp Notice on LinkedIn. The people that he refers to as “you guys” in that video presumably are mortgage bankers.

[9] Companies are not prohibited from discounting, but their largest origination expense is typically originator compensation, and the LO Comp Rule does not permit lenders to lower originator commissions on any transaction- even with the originator’s consent--unless the reason for the commission adjustment has nothing to do with loan terms or conditions.

[10] It would seem this also unfairly (unconstitutionally?) infringes on the individual liberty of the originator to choose whether to accept a lower compensation rather than lose a transaction entirely to a competitor.

[11] Compensation adjustments can be made for future transactions, but not at the point of sale.

[12] Generally speaking, the proxy test assesses whether a factor consistently varies with loan terms (profitability) over a significant number of transactions, and whether the loan originator has the ability to influence that factor. [citations omitted and this is a lot more complicated than just that].

[13] Note: the last time I did any legal work for loanDepot was over 5 years ago. None of my counsel to loanDepot related to the LO Comp Rule, and I do not know anything about loanDepot’s internal operations, LO Comp Rule compliance program, or whether any of the facts alleged in the LD Lawsuit are true. See also footnote #4 above.

[14] I talk about the need for a compliant narrative frequently in this blog, but false narratives are a bad idea.

[15] The LD Lawsuit alleges that internal documents were falsified to justify the reason for transfer of the loans to an ILC. How those internal documents were obtained by consumer plaintiffs is unknown.

[16] These issues, among others, could pose “commonality” and other questions for class certification. Hat tip to LO Comp Rule maven JM for that insight.

[17] See footnote #8 above.

[18] Some may claim that representing the “other side” occasionally can provide better insights for a lawyer on how to defend their typical clients. I think that is probably true, but it comes at a potential cost to business development.

[19] Speaking of teams, Mr. Karen’s firm bio says he is a Peloton enthusiast and “part of Robin’s wolfpack” (i.e., the fan group for Peloton instructor, Robin Arzon). Personally, I’m on #TeamWilpers (Matt Wilpers) for his individually structured and purposeful PowerZone workouts. I have heard from people who have been to the Peloton studio in NYC that Ms. Arzon is isn’t very friendly in person, but Mr. Wilpers is a real mensch.

[20] And of course, coming from the perspective of someone on “team” mortgage lender.

[21] Mr. Karen has also no doubt heard these concerns from his mortgage banking contacts for quite some time.

[22] As a reminder, Chopra is the CFPB director who called regulatory attorneys (like me) who disagree with his interpretations, “leeches who only want to pad their billable hours.”

[23] Using compliance to obtain a competitive advantage is a bad idea.