Truth in Lending Act (Regulation Z); Loan Originator Compensation, 55271-55370 [2012-20808]

Agencies

• BUREAU OF CONSUMER FINANCIAL PROTECTION

[Federal Register Volume 77, Number 174 (Friday, September 7, 2012)]
[Proposed Rules]
[Pages 55271-55370]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-20808]



[[Page 55271]]

Vol. 77

Friday,

No. 174

September 7, 2012

Part II





Bureau of Consumer Financial Protection





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12 CFR Part 1026





Truth in Lending Act (Regulation Z); Loan Originator Compensation; 
Proposed Rule

Federal Register / Vol. 77 , No. 174 / Friday, September 7, 2012 / 
Proposed Rules

[[Page 55272]]


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BUREAU OF CONSUMER FINANCIAL PROTECTION

12 CFR Part 1026

[Docket No. CFPB-2012-0037]
RIN 3170-AA13


Truth in Lending Act (Regulation Z); Loan Originator Compensation

AGENCY: Bureau of Consumer Financial Protection.

ACTION: Proposed rule with request for public comment.

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SUMMARY: The Bureau of Consumer Financial Protection is publishing for 
public comment a proposed rule amending Regulation Z (Truth in Lending) 
to implement amendments to the Truth in Lending Act (TILA) made by the 
Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank 
Act). The proposal would implement statutory changes made by the Dodd-
Frank Act to Regulation Z's current loan originator compensation 
provisions, including a new additional restriction on the imposition of 
any upfront discount points, origination points, or fees on consumers 
under certain circumstances. In addition, the proposal implements 
additional requirements imposed by the Dodd-Frank Act concerning proper 
qualification and registration or licensing for loan originators. The 
proposal also implements Dodd-Frank Act restrictions on mandatory 
arbitration and the financing of certain credit insurance premiums. 
Finally, the proposal provides additional guidance and clarification 
under the existing regulation's provisions restricting loan originator 
compensation practices, including guidance on the application of those 
provisions to certain profit-sharing plans and the appropriate analysis 
of payments to loan originators based on factors that are not terms but 
that may act as proxies for a transaction's terms.

DATES: Comments must be received on or before October 16, 2012, except 
for comments on the Paperwork Reduction Act analysis in part IX of this 
document, which must be received on or before November 6, 2012.

ADDRESSES: You may submit comments, identified by Docket No. CFPB-2012-
0037 or RIN 3170-AA13, by any of the following methods:
     Electronic: https://www.regulations.gov. Follow the 
instructions for submitting comments.
     Mail/Hand Delivery/Courier: Monica Jackson, Office of the 
Executive Secretary, Consumer Financial Protection Bureau, 1700 G 
Street NW., Washington, DC 20552.
    Instructions: All submissions should include the agency name and 
docket number or Regulatory Information Number (RIN) for this 
rulemaking. Because paper mail in the Washington, DC area and at the 
Bureau is subject to delay, commenters are encouraged to submit 
comments electronically. In general, all comments received will be 
posted without change to https://www.regulations.gov. In addition, 
comments will be available for public inspection and copying at 1700 G 
Street NW., Washington, DC 20552, on official business days between the 
hours of 10 a.m. and 5 p.m. Eastern Time. You can make an appointment 
to inspect the documents by telephoning (202) 435-7275.
    All comments, including attachments and other supporting materials, 
will become part of the public record and subject to public disclosure. 
Sensitive personal information, such as account numbers or Social 
Security numbers, should not be included. Comments will not be edited 
to remove any identifying or contact information.

FOR FURTHER INFORMATION CONTACT: Daniel C. Brown and Michael G. Silver, 
Counsels; Krista P. Ayoub and R. Colgate Selden, Senior Counsels; Paul 
Mondor, Senior Counsel & Special Advisor; Charles Honig, Managing 
Counsel: Office of Regulations, at (202) 435-7700.

SUPPLEMENTARY INFORMATION:

I. Summary of the Proposed Rule

A. Background

    The mortgage market crisis focused attention on the critical role 
that loan officers and mortgage brokers play in the loan origination 
process. Because consumers generally take out only a few home loans 
over the course of their lives, they often rely heavily on loan 
officers and brokers to guide them. But prior to the crisis, training 
and qualification standards for loan originators varied widely, and 
compensation was frequently structured to give loan originators strong 
incentives to steer consumers into more expensive loans. Often, 
consumers paid loan originators an upfront fee without realizing that 
their creditors also were paying the loan originators commissions that 
increased with the price of the loan.
    The Dodd-Frank Wall Street Reform and Consumer Protection Act 
(Dodd-Frank Act) \1\ expanded on previous efforts by lawmakers and 
regulators to strengthen loan originator qualification requirements and 
regulate industry compensation practices. The Bureau is proposing new 
rules to implement the Dodd-Frank Act requirements, as well as to 
revise and clarify existing regulations and guidance on loan originator 
compensation.
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    \1\ Public Law 111-203, 124 Stat. 1376.
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    The Bureau is also proposing rules to implement a new Dodd-Frank 
Act requirement that appears to be designed to address broader consumer 
confusion about the relationship between certain upfront charges and 
loan interest rates. Specifically, for mortgage loans in which a 
brokerage firm or creditor pays a loan originator a transaction-
specific commission, the Dodd-Frank Act would ban the imposition on 
consumers of discount points, origination points, or other upfront 
origination fees that are retained by the creditor, broker, or an 
affiliate of either. Although bona fide upfront payments to independent 
appraisers or other third parties would still be permitted, the Act 
would require creditors in the vast majority of transactions in today's 
market to restructure their current pricing practices.
    However, the Bureau is proposing to use its exception authority 
under the Dodd-Frank Act to allow creditors to continue making 
available loans with points and/or fees, so long as they also make 
available a comparable, alternative loan, as described below. The 
Bureau believes this approach would benefit consumers and industry 
alike. Making both options available would make it easier for consumers 
to evaluate different pricing options, while preserving their ability 
to make some upfront payments if they want to reduce their periodic 
payments over time. And the proposed approach would promote stability 
in the mortgage market, which would otherwise face radical 
restructuring of its existing pricing structures and practices to 
comply with the new Dodd-Frank Act requirement.

B. Restriction on Upfront Points and Fees

    The proposed rule would generally require that, before a creditor 
or mortgage broker may impose upfront points and/or fees on a consumer 
in a closed-end mortgage transaction, the creditor must make available 
to the consumer a comparable, alternative loan with no upfront discount 
points, origination points, or origination fees that are retained by 
the creditor, broker, or an affiliate of either (a ``zero-zero 
alternative''). The requirement would not be triggered by charges that 
are passed on to independent third parties that are not affiliated with 
the creditor or mortgage broker. The requirement

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would not apply where the consumer is unlikely to qualify for the zero-
zero alternative.
    In transactions that do not involve a mortgage broker, the proposed 
rule would provide a safe harbor if, any time prior to application that 
the creditor provides a consumer an individualized quote for a loan 
that includes upfront points and/or fees, the creditor also provides a 
quote for a zero-zero alternative. In transactions that involve 
mortgage brokers, the proposed rule would provide a safe harbor under 
which creditors provide mortgage brokers with the pricing for all of 
their zero-zero alternatives. Mortgage brokers then would provide 
quotes to consumers for the zero-zero alternatives when presenting 
different loan options to consumers.
    The Bureau is seeking comment on a number of related issues, 
including:
     Whether the Bureau should adopt as proposed a ``bona 
fide'' requirement to ensure that consumers receive value in return for 
paying upfront points and/or fees and, if so, the relative merits of 
several alternatives on the details of such a requirement;
     Whether additional adjustments to the proposal concerning 
the treatment of affiliate fees would make it easier for consumers to 
compare offers between two or more creditors;
     Whether to take a different approach concerning situations 
in which a consumer does not qualify for the zero-zero alternative; and
     Whether to require information about zero-zero 
alternatives to be provided not just in connection with informal 
quotes, but also in advertising and at the time that consumers are 
provided disclosures within three days after application.

C. Restrictions on Loan Originator Compensation

    The proposal would adjust existing rules governing compensation to 
loan officers and mortgage brokers in connection with closed-end 
mortgage transactions to account for the Dodd-Frank Act and to provide 
greater clarity and flexibility. Specifically, the proposal would:
     Continue the general ban on paying or receiving 
commissions or other loan originator compensation based on the terms of 
the transaction (other than loan amount), with some refinements:
    [cir] The proposal would allow reductions in loan originator 
compensation to cover unanticipated increases in closing costs from 
non-affiliated third parties under certain circumstances.
    [cir] The proposal would clarify when a factor used as a basis for 
compensation is prohibited as a ``proxy'' for a transaction term.
     Clarify and revise restrictions on pooled compensation, 
profit-sharing, and bonus plans for loan originators, depending on the 
potential incentives to steer consumers to different transaction terms.
    [cir] The proposal would permit employers to make contributions 
from general profits derived from mortgage activity to 401(k) plans, 
employee stock plans, and other ``qualified plans'' under tax and 
employment law.
    [cir] The proposal would permit employers to pay bonuses or make 
contributions to non-qualified profit-sharing or retirement plans from 
general profits derived from mortgage activity if either (1) the loan 
originator affected has originated five or fewer mortgage transactions 
during the last 12 months; or (2) the company's mortgage business 
revenues are limited. The Bureau is proposing two alternatives, 25 
percent or 50 percent of total revenues, as the applicable test.
    [cir] Even though contributions and bonuses could be funded from 
general mortgage profits, the amounts of such contributions and bonuses 
could not be based on the terms of the transactions that the individual 
had originated.
     Continue the general ban on loan originators being 
compensated by both consumers and other parties, with some refinements:
    [cir] The proposal would allow mortgage brokerage firms that are 
paid by the consumer to pay their individual brokers a commission, so 
long as the commission is not based on the terms of the transaction.
    [cir] The proposal would clarify that certain funds contributed 
toward closing costs by sellers, home builders, home-improvement 
contractors, or similar parties, when used to compensate a loan 
originator, are considered payments made directly to the loan 
originator by the consumer.

D. Loan Originator Qualification Requirements

    The proposal would implement a Dodd-Frank Act provision requiring 
both individual loan originators and their employers to be 
``qualified'' and to include their license or registration numbers on 
certain specified loan documents.
     Where a loan originator is not already required to be 
licensed under the Secure and Fair Enforcement for Mortgage Licensing 
Act (SAFE Act), the proposal would require his or her employer to 
ensure that the loan originator meets character, fitness, and criminal 
background check standards that are equivalent to SAFE Act requirements 
and receives training commensurate with the loan originator's duties.
     Employers would be required to ensure that their loan 
originator employees are licensed or registered under the SAFE Act 
where applicable.
     Employers and the individual loan originators that are 
primarily responsible for a particular transaction would be required to 
list their license or registration numbers on certain key loan 
documents.

E. Other Provisions

    The proposal would implement certain other Dodd-Frank Act 
requirements applicable to both closed-end and open-end mortgage 
credit:
     The proposal would ban general agreements requiring 
consumers to submit any disputes that may arise to mandatory 
arbitration rather than filing suit in court.
     The proposal would generally ban the financing of premiums 
for credit insurance.
     In the preamble below, the Bureau describes rule text that 
may be included in the final rule to implement a Dodd-Frank Act 
requirement that the Bureau require depository institutions to 
establish and maintain procedures to assure and monitor compliance with 
many of the requirements described above and the registration 
procedures established under the SAFE Act.

II. Background

A. The Mortgage Market

Overview of the Market and the Mortgage Crisis
    The mortgage market is the single largest market for consumer 
financial products and services in the United States, with 
approximately $10.3 trillion in loans outstanding.\2\ During the last 
decade, the market went through an unprecedented cycle of expansion and 
contraction. So many other parts of the American financial system were 
drawn into mortgage-related activities that, when the bubble collapsed 
in 2008, it sparked the most severe recession in the United States 
since the Great Depression.
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    \2\ 2 Inside Mortg. Fin., The 2012 Mortgage Market Statistical 
Annual 7 (2012).
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    The expansion in the market was driven, in part, by an era of low 
interest rates and rising house prices. Interest rates dropped 
significantly--by more than 20 percent--from 2000 through

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2003.\3\ Housing prices increased dramatically--about 152 percent--
between 1997 and 2006.\4\ Driven by the decrease in interest rates and 
the increase in housing prices, the volume of refinancings was 
increasing, from about 2.5 million loans in 2000 to more than 15 
million in 2003.\5\
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    \3\ See U.S. Dep't of Hous. & Urban Dev., An Analysis of 
Mortgage Refinancing, 2001-2003, at 2 (2004), available at: 
www.huduser.org/Publications/pdf/MortgageRefinance03.pdf; Souphala 
Chomsisengphet & Anthony Pennington-Cross, The Evolution of the 
Subprime Mortgage Market, 88 Fed. Res. Bank of St. Louis Rev. 31, 48 
(2006), available at: https://research.stlouisfed.org/publications/review/article/5019.
    \4\ U.S. Fin. Crisis Inquiry Comm'n, The Financial Crisis 
Inquiry Report: Final Report of the National Commission on the 
Causes of the Financial and Economic Crisis in the United States 156 
(Official Gov't ed. 2011) (``FCIC Report''), available at: https://www.gpo.gov/fdsys/pkg/GPO-FCIC/pdf/GPO-FCIC.pdf.
    \5\ An Analysis of Mortgage Refinancing, 2001-2003, at 1.
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    Growth in the mortgage loan market was particularly pronounced in 
what are known as ``subprime'' and ``Alt-A'' products. Subprime 
products were sold primarily to borrowers with poor or no credit 
history, although there is evidence that some borrowers who would have 
qualified for ``prime'' loans were steered into subprime loans as 
well.\6\ The Alt-A category of loans permitted borrowers to take out 
mortgage loans while providing little or no documentation of income or 
other evidence of repayment ability. Because these loans involved 
additional risk, they were typically more expensive to borrowers than 
``prime'' mortgages, although many of them had very low introductory 
interest rates. In 2003, subprime and Alt-A origination volume was 
about $400 billion; in 2006, it had reached $830 billion.\7\
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    \6\ The Federal Reserve Board on July 18, 2011 issued a consent 
cease and desist order and assessed an $85 million civil money 
penalty against Wells Fargo & Company of San Francisco, a registered 
bank holding company, and Wells Fargo Financial, Inc., of Des 
Moines. The order addresses allegations that Wells Fargo Financial 
employees steered potential prime borrowers into more costly 
subprime loans and separately falsified income information in 
mortgage applications. In addition to the civil money penalty, the 
order requires that Wells Fargo compensate affected borrowers. See 
https://www.federalreserve.gov/newsevents/press/enforcement/20110720a.htm.
    \7\ Inside Mortg. Fin., The 2011 Mortgage Market Statistical 
Annual (2011).
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    So long as housing prices were continuing to increase, it was 
relatively easy for borrowers to refinance their loans to avoid 
interest rate resets and other adjustments. When housing prices began 
to decline in 2005, refinancing became more difficult and delinquency 
rates on these subprime and Alt-A products increased dramatically.\8\ 
The private securitization-backed subprime and Alt-A mortgage market 
ground to a halt in 2007 in the face of these rising delinquencies. 
Fannie Mae and Freddie Mac, which supported the mainstream mortgage 
market, experienced heavy losses and were placed in conservatorship by 
the Federal government in 2008.
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    \8\ FCIC Report at 215-217.
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    Four years later, the United States continues to grapple with the 
fallout. Home prices are down 35 percent from the peak nationally, as 
the national market appears at or near its bottom.\9\ Mortgage markets 
continue to rely on extraordinary U.S. government support, and 
distressed homeownership and foreclosure rates remain at unprecedented 
levels.\10\
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    \9\ Standard & Poors/Case-Shiller 20-City Composite, Bloomberg, 
LP, available at: https://www.bloomberg.com (data service accessible 
only through paid subscription).
    \10\ PowerPoint Presentation, Lender Processing Servs., LPS 
Mortgage Monitor: May 2012 Mortgage Performance Observations, Data 
as of April 2012 Month End, at 3, 11 (May 2012), available at: 
https://www.lpsvcs.com/LPSCorporateInformation/CommunicationCenter/DataReports/Pages/Mortgage-Monitor.aspx.
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    Nevertheless, even with the economic downturn, approximately $1.28 
trillion in mortgage loans were originated in 2011.\11\ The 
overwhelming majority of homebuyers continue to use mortgage loans to 
finance at least some of the purchase price of their property. In 2011, 
93 percent of all new home purchases were financed with a mortgage 
loan.\12\ Purchase loans and refinancings together produced 6.3 million 
new first-lien mortgage loan originations in 2011.\13\ Home equity 
loans and lines of credit resulted in an additional 1.3 million 
mortgage loan originations in 2011.\14\
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    \11\ Credit Forecast 2012, Moody's Analytics (2012), available 
at, https://www.economy.com/default.asp (reflects first-lien mortgage 
loans) (data service accessible only through paid subscription).
    \12\ 1 Inside Mortg. Fin., The 2012 Mortgage Market Statistical 
Annual 12 (2012).
    \13\ Credit Forecast 2012. The proportion of loans that are for 
purchases as opposed to refinancings varies with the interest rate 
environment. In 2011, refinance transactions comprised 65 percent of 
the market, and purchase money mortgage loans comprised 35 percent, 
by dollar volume. 1 Inside Mortg. Fin., The 2012 Mortgage Market 
Statistical Annual 17 (2012). Historically the distribution has been 
more even. In 2000, refinancings accounted for 44 percent of the 
market as measured by dollar volume, while purchase money mortgage 
loans comprised 56 percent, and in 2005 the two types of mortgage 
loan were split evenly. Id.
    \14\ Credit Forecast (2012). Using a home equity loan or line of 
credit, a homeowner uses home equity as collateral for a loan. The 
loan proceeds can be used, for example, to pay for home improvements 
or to pay off other debts.
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The Mortgage Origination Process and Origination Channels
    Consumers must go through a mortgage origination process to obtain 
a mortgage loan. There are many actors involved in a mortgage 
origination. In addition to the creditor and the consumer, a 
transaction may involve a mortgage broker, settlement agent, appraiser, 
multiple insurance providers, local government clerks and tax offices, 
and others. Purchase money loans involve additional parties such as 
sellers and real estate agents. These third parties typically charge 
fees or commissions for the services they provide.
    Application. To obtain a mortgage loan, consumers must first apply 
through a loan originator. There are three different ``channels'' for 
mortgage loan origination in the current market:
     Retail: The consumer deals with a loan officer that works 
directly for the mortgage creditor, such as a bank, credit union, or 
specialized mortgage finance company. The creditor typically operates a 
network of branches, but may also communicate with consumers through 
mail and the Internet. The entire origination transaction is conducted 
within the corporate structure of the creditor, and the loan is closed 
using funds supplied by the creditor. Depending on the type of 
creditor, the creditor may hold the loan in its portfolio or sell the 
loan to investors on the secondary market, as discussed further below.
     Wholesale: The consumer deals with an independent mortgage 
broker, which may be an individual or a mortgage brokerage firm. The 
broker may seek offers from many different creditors, and then acts as 
a liaison between the consumer and whichever creditor ultimately makes 
the loan. At closing, the loan is funded using the creditor's funds and 
the mortgage note is written in the creditor's name.\15\ Again, the 
creditor may hold the loan in its portfolio or sell the loan on the 
secondary market.
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    \15\ In some cases, mortgage brokers use a process called 
``table funding,'' in which the wholesale creditor provides the 
funds to the settlement, but the loan is closed in the broker's 
name. The broker simultaneously assigns the closed loan to the 
creditor.
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     Correspondent: The consumer deals with a loan officer that 
works directly for a ``correspondent lender'' that does not deal 
directly with the secondary market. At closing, the correspondent 
lender closes the loans using its own funds, but then immediately sells 
the loan to an ``acquiring creditor,'' which in turn either holds the 
loan in portfolio or sells it on the secondary market.
    Both loan officers and mortgage brokers generally help consumers 
determine what kind of loan best suits their needs, and will take their

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completed loan applications for submission to the creditor's loan 
underwriter. The application includes consumer credit and income 
information, along with information about the home to be purchased. 
Consumers can work with multiple loan originators to compare the loan 
offers that loan originators may obtain on their behalf from creditors. 
Once the consumer has decided to move forward with a loan, the loan 
originator may request additional information or documents from the 
consumer to support the information in the application and obtain an 
appraisal of the property.
    Underwriting. The creditor's loan underwriter uses the application 
and additional information to confirm initial information provided by 
the consumer. The underwriter will assess whether the creditor should 
take on the risk of making the mortgage loan. To make this decision, 
the underwriter considers whether the consumer can repay the loan and 
whether the home is worth enough to serve as collateral for the loan. 
If the underwriter finds that the consumer and the home qualify, the 
underwriter will approve the consumer's mortgage application.
    Closing. After being approved for a mortgage loan, completing any 
closing requirements, and receiving necessary disclosures, the consumer 
can close on the loan. Multiple parties participate at closing, 
including the consumer, the creditor, and the settlement agent.
Loan Pricing and Disposition of Closed Loans
    Mortgage loan pricing is an extremely complex process that involves 
a series of trade-offs for both the consumer and the creditor between 
upfront and long-term payments. Some of the costs that borrowers pay to 
close the loan--such as third-party appraisal fees, title insurance, 
taxes, etc.--are independent of the other terms of the loan. But costs 
that are paid to the creditor, broker, or affiliates of either company 
often vary in connection with the interest rate because the consumer 
can choose whether to pay more money up front (through discount points, 
origination points, or origination fees) or over time (through the 
interest rate, which drives monthly payments). Borrowers face a complex 
set of decisions around whether to pay upfront charges to reduce the 
interest rate they would otherwise pay and, if so, how much to pay in 
such charges to receive a specific rate reduction.
    Thus, from the consumer's perspective, loan pricing depends on 
several elements:
     Loan terms. The loan terms affect how the loan is to be 
repaid, including the type of loan ``product,'' \16\ the interest rate, 
the payment amount, and the length of the loan term.
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    \16\ The meaning of loan ``product'' is not firmly established 
and varies with the person using the term, but it generally refers 
to various combinations of features such as the type of interest 
rate and the form of amortization. Feature distinctions often 
thought of as distinct ``loan products'' include, for example, fixed 
rate versus adjustable rate loans and fully amortizing versus 
interest-only or negatively amortizing loans.
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     Discount points and cash rebates. Discount points are paid 
by consumers to the creditor to purchase a lower interest rate. 
Conversely, creditors may offer consumers a cash rebate at closing 
which can help cover upfront closing costs in exchange for paying a 
higher rate over the life of the loan. Both discount points and 
creditor rebates involve an exchange of cash now (in the form of a 
payment or credit at closing) for cash over time (in the form of a 
reduced or increased interest rate).
     Origination points or fees. Creditors and/or loan 
originators also sometimes charge origination points or fees, which are 
typically presented as charges to apply for the loan. Origination fees 
can take a number of forms: A flat dollar amount, a percentage of the 
loan amount (i.e., an ``origination point''), or a combination of the 
two. Origination points or fees may also be framed as a single lump sum 
or as several different fees (e.g., application fee, underwriting fee, 
document preparation fee).
     Closing costs. Closing costs are the additional upfront 
costs of completing a mortgage transaction, including appraisal fees, 
title insurance, recording fees, taxes, and homeowner's insurance, for 
example. These closing costs, as distinct from upfront discount points 
and origination charges, often are paid to third parties other than the 
creditor or loan originator.
    In practice, both discount points and origination points or fees 
are revenue to the lender and/or loan originator, and that revenue is 
fungible. The existence of two types of fees and the many names lenders 
use for origination fees--some of which may appear to be more 
negotiable than others--has the potential to confuse consumers.
    Determining the appropriate trade-off between payments now and 
payments later requires a consumer to have a clear sense of how long he 
or she expects to stay in the home and in the particular loan. If the 
consumer plans to stay in the home for a number of years without 
refinancing, paying points to obtain a lower rate may make sense 
because the consumer will save more in monthly payments than he or she 
pays up front in discount points. If the consumer expects to move or 
refinance within a few years, however, then agreeing to pay a higher 
rate on the loan to reduce out of pocket expenses at closing may make 
sense because the consumer will save more up front than he or she will 
pay in increased monthly payments before moving or refinancing. There 
is a breakeven moment in time where the present value of a reduction/
increase to the rate just equals the corresponding upfront points/
credits. If the consumer moves or refinances earlier (in the case of 
discount points) or later (in the case of creditor rebates) than the 
breakeven moment, then the consumer will lose money compared to a 
consumer that neither paid discount points nor received creditor 
rebates.
    The creditor's assessment of pricing--and in particular what 
different combinations of points, fees, and interest rates it is 
willing to offer particular consumers--is also driven by the trade-off 
between upfront and long-term payments. Creditors in general would 
prefer to receive as much money as possible up front, because having to 
wait for payments to come in over the life of the loan increases the 
level of risk. If consumers ultimately pay off a loan earlier than 
expected or cannot pay off a loan due to financial distress, the 
creditors will not earn the overall expected return on the loan.
    One mechanism that has developed to manage this risk is the 
creation of the secondary market, which allows creditors to sell off 
their loans to investors, recoup the capital they have invested in the 
loans and recycle that capital into new loans. The investors then 
benefit from the payment streams over time, as well as bearing the risk 
of early payment or default. And the creditor can go on to make 
additional money from additional loans. Thus, although some banks and 
credit unions hold some loans in portfolio over time, many creditors 
prefer not to hold loans until maturity.\17\
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    \17\ For companies that are affiliated with securitizers, the 
processing fees involved in creating investment vehicles on the 
secondary market can itself become a distinct revenue stream. 
Although the secondary market was originally created by government-
sponsored enterprises Fannie Mae and Freddie Mac to provide 
liquidity for the mortgage market, over time, Wall Street companies 
began packaging mortgage loans into private-label mortgage-backed 
securities. Subprime and Alt-A loans, in particular, were often sold 
into private-label securities. During the boom, a number of large 
creditors started securitizing the loans themselves in-house, 
thereby capturing the final piece of the loan's value.
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    When a creditor sells a loan into the secondary market, the 
creditor is exchanging an asset (the loan) that

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produces regular cash flows (principal and interest) for an upfront 
cash payment from the buyer.\18\ That upfront cash payment represents 
the buyer's present valuation of the loan's future cash flows, using 
assumptions about the rate of prepayments due to moves and 
refinancings, the rate of expected defaults, the rate of return 
relative to other investments, and other factors. Secondary market 
buyers assume considerable risk in determining the price they are 
willing to pay for a loan. If, for example, loans prepay faster than 
expected or default at higher rates than expected, the investor will 
receive a lower return than expected. Conversely, if loans prepay more 
slowly than expected, or default at lower rates than expected, the 
investor will earn a higher return over time than expected.\19\
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    \18\ For simplicity, this discussion assumes that the secondary 
market buyer is a person other than the creditor, such as Fannie 
Mae, Freddie Mac, or a Wall Street investment bank. In practice, 
during the mortgage boom, some creditors securitized their own 
loans. In this case, the secondary market price for the loans was 
effectively determined by the price investors were willing to pay 
for the subsequent securities.
    \19\ For simplicity, these examples do not take into account the 
use of various risk mitigation techniques, such as risk-sharing 
counterparties and loan level mortgage or other security credit 
enhancements.
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    Secondary market mortgage prices are typically quoted as a multiple 
of the principal loan amount and are specific to a given interest rate. 
For illustrative purposes, at some point in time, a loan with an 
interest rate of 3.5 percent might earn 102.5 in the secondary market. 
This means that for every $100 in initial loan principal amount, the 
secondary market buyer will pay $102.50. Of that amount, $100 is to 
cover the principal amount and $2.50 is revenue to the creditor in 
exchange for the rights to the future interest payments on the 
loan.\20\ The secondary market price of a loan increases or decreases 
along with the loan's interest rate, but the relationship is not 
typically linear. In other words, using the above example at the same 
point in time, loans with interest rates higher than 3.5 percent will 
typically earn more than 102.5, and loans with interest rates less than 
3.5 percent will typically earn less than 102.5. However, each 
subsequent 0.125 percent increment in interest rate above or below 3.5 
percent may not be associated with the same size increment in secondary 
market price.\21\
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    \20\ The creditor's profit is equal to secondary market revenue 
plus origination fees collected by the creditor (if any) plus value 
of the mortgage servicing rights (MSRs) less origination expenses.
    \21\ Susan E. Woodward, Urb. Inst., A Study of Closing Costs for 
FHA Mortgages10-11 (U.S. Dep't of Hous. & Urban Dev. 2008), 
available at: https://www.huduser.org/publications/pdf/FHA_closing_cost.pdf.
---------------------------------------------------------------------------

    In some cases, secondary market prices can actually be less than 
the principal amount of the loan. A price of 98.75, for example, means 
that for every $100 in principal, the selling creditor receives only 
$98.75. This represents a loss of $1.25 per $100 of principal just on 
the sale of the loan, before the creditor takes its expenses into 
account. This usually happens when the interest rate on the loan is 
below prevailing interest rates. But so long as discount points or 
other origination charges can cover the shortfall, the creditor will 
still make its expected return on the loan. The same style of pricing 
is used when correspondent lenders sell loans to acquiring creditors.
    Discount points are also valuable to creditors (and secondary 
market investors) for another reason: Because payment of discount 
points signals the consumer's expectations about how long he or she 
expects to stay in the loan, they make prepayment risk easier to 
predict. The more discount points a consumer pays, the longer the 
consumer likely expects to keep the loan in place. This fact mitigates 
a creditor's or investor's uncertainty about how long interest payments 
can be expected to continue, which facilitates assigning a present 
value to the loan's yield and, therefore, setting the loan's price.
Loan Originator Compensation
    Prior to 2010, compensation for individual loan officers and 
mortgage brokers was also often calculated and paid as a premium above 
every $100 in principal. This was typically called a ``yield spread 
premium.'' The loan originator might keep the entire yield spread 
premium as a commission, or he or she might provide some of the yield 
spread premium to the borrower as a credit against closing costs.\22\
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    \22\ Mortgage brokers, and some retail loan officers, were 
compensated in this fashion. Some retail loan officers may have been 
paid a salary with a bonus for loan volume, rather than yield spread 
premium-based commissions.
---------------------------------------------------------------------------

    While this system was in place, it was common for loan originator 
commissions to mirror secondary market pricing closely. The ``price'' 
that the creditor quoted to its brokers and loan officers was somewhat 
lower than the price that the creditor expected to receive from the 
secondary market--the creditor kept the difference as corporate 
revenue. However, the underlying mechanics of the secondary market 
flowed through to the loan originator's compensation. The higher the 
interest rate on the loan or the more in upfront charges the consumer 
pays to the creditor (or both), the greater the yield spread premium 
available to the loan originator. This created a situation in which the 
loan originator had a financial incentive to steer consumers into the 
highest interest rate possible or to impose on the consumer additional 
upfront charges payable to the creditor.
    In a perfectly competitive and transparent market, competition 
would ensure that this incentive would be countered by the need to 
compete with other loan originators to offer attractive loan terms to 
consumers. However, the mortgage origination market is neither always 
perfectly competitive nor always transparent, and consumers (who take 
out a mortgage only a few times in their lives) may be uninformed about 
how prices work and what terms they can expect.\23\ Moreover, prior to 
2010, mortgage brokers were free to charge consumers directly for 
additional origination points or fees, which were generally described 
as compensating for the time and expense of working with the consumer 
to submit the loan application. This compensation structure was 
problematic both because the loan originator had an incentive to steer 
borrowers into less favorable pricing terms and because the consumer 
may have paid origination fees to the loan originator believing that 
the loan originator was working for the borrower, without knowing that 
the loan originator was receiving compensation from the creditor as 
well.
---------------------------------------------------------------------------

    \23\ James Lacko and Janis Pappalardo, Improving Consumer 
Mortgage Disclosures: An Empirical Assessment of Current and 
Prototype Disclosure Forms, Federal Trade Commission, p. 26 (June 
2007), available at: https://www.ftc.gov/os/2007/06/P025505MortgageDisclosureReport.pdf, Brian K. Bucks and Karen M. 
Pence, Do Borrowers Know their Mortgage Terms?, J. of Urban Econ. 
(2008), available at: https://works.bepress.com/karen_pence/5, Hall 
and Woodward, Diagnosing Consumer Confusion and Sub-Optimal Shopping 
Effort: Theory and Mortgage-Market Evidence (2012), available at: 
https://www.stanford.edu/~rehall/DiagnosingConsumerConfusionJune2012.
---------------------------------------------------------------------------

The 2010 Loan Originator Final Rule
    In the aftermath of the mortgage crisis, regulators and lawmakers 
began focusing on concerns about the steering of consumers into less 
favorable loan terms than those for which they otherwise qualified. 
Both the Board of Governors of the Federal Reserve System (Board) and 
the Department of Housing and Urban Development (HUD) had explored the 
use of disclosures to inform consumers about loan originator 
compensation practices. HUD did adopt a new disclosure regime under the 
Real Estate Settlement Procedures Act (RESPA), in a 2008 final rule, 
which addressed among other matters the

[[Page 55277]]

disclosure of mortgage broker compensation.\24\ The Board, on the other 
hand, first proposed a disclosure-based approach to addressing concerns 
with mortgage broker compensation.\25\ The Board later determined, 
however, that the proposed approach presented a significant risk of 
misleading consumers regarding both the relative costs of brokers and 
creditors and the role of brokers in their transactions and, 
consequently, withdrew that aspect of the 2008 proposal as part of its 
2008 Home Ownership and Equity Protection Act (HOEPA) Final Rule.\26\
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    \24\ 73 FR 68204, 68222-27 (Nov. 17, 2008).
    \25\ See 73 FR 1672, 1698-1700 (Jan. 9, 2008).
    \26\ 73 FR 44522, 44564 (Jul. 30, 2008). The Board indicated 
that it would continue to explore available options to address 
potential unfairness associated with loan originator compensation 
practices. Id. at 44565.
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    The Board in 2009 proposed new rules addressing in a more 
substantive fashion loan originator compensation practices.\27\ 
Although this proposal was prior to the enactment of the Dodd-Frank 
Act, Congress subsequently codified significant elements of the Board's 
proposal.\28\ Specifically, the Board's new proposal prohibited the 
payment and receipt of loan originator compensation based on 
transaction terms or conditions, and banned the receipt by a loan 
originator of compensation on a particular transaction from both the 
consumer and any other person; the Dodd-Frank Act substantially 
paralleled both of these provisions. The Board therefore decided in 
2010 to finalize those rules, while acknowledging that some adjustments 
would need to be made to account for the statutory language.\29\ The 
Board's 2010 Loan Originator Final Rule took effect in April of 2011.
---------------------------------------------------------------------------

    \27\ 74 FR 43232, 43279-286 (Aug. 26, 2009).
    \28\ Sections 1402 and 1403 of the Dodd-Frank Act, codified at 
15 U.S.C. 1639b.
    \29\ 75 FR 58509 (Sept. 24, 2010) (2010 Loan Originator Final 
Rule).
---------------------------------------------------------------------------

    Most notably, the Board's 2010 Loan Originator Final Rule 
substantially restricted the use of yield spread premiums. Under the 
current regulations, creditors may not base a loan originator's 
compensation on the transaction's terms or conditions, other than the 
mortgage loan amount. In addition, the rule prohibits ``dual 
compensation,'' in which a loan originator is paid compensation by both 
the consumer and the creditor (or any other person).\30\ The existing 
rules, however, do not address broader consumer confusion regarding the 
relationship between loan originator compensation and general trade-
offs between points, fees, and interest rates.
---------------------------------------------------------------------------

    \30\ See generally 12 CFR 226.36(d). The CFPB restated this rule 
at 12 CFR 1026.36(d). 76 FR 79768 (Dec. 22, 2011).
---------------------------------------------------------------------------

B. TILA and Regulation Z

    Congress enacted the Truth in Lending Act (TILA) based on findings 
that the informed use of credit resulting from consumers' awareness of 
the cost of credit would enhance economic stability and would 
strengthen competition among consumer credit providers. 15 U.S.C. 
1601(a). One of the purposes of TILA is to provide meaningful 
disclosure of credit terms to enable consumers to compare credit terms 
available in the marketplace more readily and avoid the uninformed use 
of credit. Id. TILA's disclosures differ depending on whether credit is 
an open-end (revolving) plan or a closed-end (installment) loan. TILA 
also contains procedural and substantive protections for consumers. 
TILA is implemented by the Bureau's Regulation Z, 12 CFR part 1026, 
though historically the Board's Regulation Z, 12 CFR part 226, has 
implemented TILA.\31\
---------------------------------------------------------------------------

    \31\ The Board's rule remains applicable to certain motor 
vehicle dealers. See section 1029 of the Dodd-Frank, 12 U.S.C. 5519.
---------------------------------------------------------------------------

    On August 26, 2009, as discussed above, the Board published 
proposed amendments to Regulation Z to include new limits on loan 
originator compensation for all closed-end mortgages (Board's 2009 Loan 
Originator Proposal). 74 FR 43232 (Aug. 26, 2009). The Board 
considered, among other changes, prohibiting certain payments to a 
mortgage broker or loan officer based on the transaction's terms or 
conditions, prohibiting dual compensation as described above, and 
prohibiting a mortgage broker or loan officer from ``steering'' 
consumers to transactions not in their interest, to increase mortgage 
broker or loan officer compensation. The Board issued the 2009 Loan 
Originator Proposal using its authority to prohibit acts or practices 
in the mortgage market that the Board found to be unfair, deceptive, or 
(in the case of refinancings) abusive under TILA section 129(l)(2) (now 
re-designated as TILA section 129(p)(2), 15 U.S.C. 1639(p)(2)).
    On September 24, 2010, the Board issued the 2010 Loan Originator 
Final Rule, which finalized the 2009 Loan Originator Proposal and 
included the above prohibitions. 75 FR 58509 (Sept. 24, 2010). The 
Board acknowledged, however, that further rulemaking would be required 
to address certain issues and adjustments made by the Dodd-Frank Act, 
which was signed on July 21, 2010.\32\ Public Law 111-203, 124 Stat. 
1376.
---------------------------------------------------------------------------

    \32\ As the Board explained: ``The Board has decided to issue 
this final rule on loan originator compensation and steering, even 
though a subsequent rulemaking will be necessary to implement 
Section 129B(c). The Board believes that Congress was aware of the 
Board's proposal and that in enacting TILA Section 129B(c), Congress 
sought to codify the Board's proposed prohibitions while expanding 
them in some respects and making other adjustments. The Board 
further believes that it can best effectuate the legislative purpose 
of the [Dodd-Frank Act] by finalizing its proposal relating to loan 
origination compensation and steering at this time. Allowing 
enactment of TILA Section 129B(c) to delay final action on the 
Board's prior regulatory proposal would have the opposite effect 
intended by the legislation by allowing the continuation of the 
practices that Congress sought to prohibit.'' 75 FR 58509 (Sept. 24, 
2010).
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C. The SAFE Act

    The Secure and Fair Enforcement for Mortgage Licensing Act of 2008 
(SAFE Act) generally prohibits an individual from engaging in the 
business of a loan originator without first obtaining, and maintaining 
annually, a unique identifier from the Nationwide Mortgage Licensing 
System and Registry (NMLSR) and either a registration as a registered 
loan originator or a license and registration as a State-licensed loan 
originator. 12 U.S.C. 5103. Loan originators who are employees of 
depository institutions are generally subject to the registration 
requirement, which is implemented by the Bureau's Regulation G, 12 CFR 
part 1007. Other loan originators are generally subject to the State 
licensing requirement, which is implemented by the Bureau's Regulation 
H, 12 CFR part 1008, and by State law.

D. The Dodd-Frank Act

    Effective July 21, 2011, the Dodd-Frank Act transferred rulemaking 
authority for TILA and the SAFE Act, among other laws, to the 
Bureau.\33\ See sections 1061 and 1100A of the Dodd-Frank Act. In 
addition, the Dodd-Frank Act added section 129B to TILA, which

[[Page 55278]]

imposes two new duties on mortgage originators. The first such duty is 
to be ``qualified'' and (where applicable) registered and licensed in 
accordance with the SAFE Act and other applicable State or Federal law. 
The second new duty of mortgage originators is to include on all loan 
documents the originator's identifier number from the NMLSR. See 
section 1402 of the Dodd-Frank Act.
---------------------------------------------------------------------------

    \33\ Section 1029 of the Dodd-Frank Act excludes from this 
transfer of authority, subject to certain exceptions, any rulemaking 
authority over a motor vehicle dealer that is predominantly engaged 
in the sale and servicing of motor vehicles, the leasing and 
servicing of motor vehicles, or both. 12 U.S.C. 5519. Pursuant to 
the Dodd-Frank Act and TILA, as amended, the Bureau published for 
public comment an interim final rule establishing a new Regulation 
Z, 12 CFR part 1026, implementing TILA (except with respect to 
persons excluded from the Bureau's rulemaking authority by section 
1029 of the Dodd-Frank Act). 76 FR 79768 (Dec. 22, 2011). Similarly, 
the Bureau's Regulations G and H are recodifications of predecessor 
agencies' regulations implementing the SAFE Act. 76 FR 78483 (Dec. 
19, 2011). The Bureau's Regulations G, H, and Z took effect on 
December 30, 2011. These rules did not impose any new substantive 
obligations but did make certain technical, conforming, and 
stylistic changes to reflect the transfer of authority and certain 
other changes made by the Dodd-Frank Act.
---------------------------------------------------------------------------

    In addition, the Dodd-Frank Act generally codified, but in some 
cases imposed new or different requirements than, the Board's 2009 Loan 
Originator Proposal. Shortly after the legislation, the Board adopted 
the 2010 Loan Originator Final Rule, which prohibits loan originator 
compensation based on transactions' terms or conditions and 
compensation from both the consumer and another person, as discussed 
above. Those regulatory provisions were consistent with some aspects of 
the Dodd-Frank Act. In addition, the Dodd-Frank Act generally prohibits 
any person from requiring consumers to pay any upfront discount points, 
origination points, or fees, however denominated, where a mortgage 
originator is being paid transaction-specific compensation by any 
person other than the consumer (subject to the Bureau's express 
authority to make an exemption from the prohibition of such upfront 
charges if the Bureau finds such an exemption to be in the interest of 
consumers and the public). See section 1403 of the Dodd-Frank Act. 
Finally, the Dodd-Frank Act also added new restrictions on the 
financing of single-premium credit insurance and mandatory arbitration 
agreements. See section 1414 of the Dodd-Frank Act.

E. Other Rulemakings

    In addition to this proposal, the Bureau currently is engaged in 
six other rulemakings relating to mortgage credit to implement 
requirements of the Dodd-Frank Act:
     TILA-RESPA Integration: On July 9, 2012, the Bureau 
published a proposed rule and proposed integrated forms combining the 
TILA mortgage loan disclosures with the Good Faith Estimate (GFE) and 
settlement statement required under the Real Estate Settlement 
Procedures Act (RESPA), pursuant to Dodd-Frank Act section 1032(f) and 
sections 4(a) of RESPA and 105(b) of TILA, as amended by Dodd-Frank Act 
sections 1098 and 1100A, respectively. 12 U.S.C. 2603(a); 15 U.S.C. 
1604(b). The public has until November 6, 2012 to review and provide 
comments on most of this proposal, except that comments are due by 
September 7, 2012 for specific portions of the proposal.
     HOEPA: The Bureau proposed on July 9, 2012 to implement 
Dodd-Frank Act requirements expanding protections for ``high-cost'' 
mortgage loans under the Home Ownership and Equity Protection Act 
(HOEPA), pursuant to TILA sections 103(bb) and 129, as amended by Dodd-
Frank Act sections 1431 through 1433. 15 U.S.C. 1602(bb) and 1639. The 
public has until September 7, 2012 to review and provide comment on 
this proposal, except comments on the Paperwork Reduction Act.
     Servicing: The Bureau proposed on August 9, 2012 to 
implement Dodd-Frank Act requirements regarding force-placed insurance, 
error resolution, and payment crediting, as well as forms for mortgage 
loan periodic statements and ``hybrid'' adjustable-rate mortgage reset 
disclosures, pursuant to sections 6 of RESPA and 128, 128A, 129F, and 
129G of TILA, as amended or established by Dodd-Frank Act sections 
1418, 1420, 1463, and 1464. 12 U.S.C. 2605; 15 U.S.C. 1638, 1638a, 
1639f, and 1639g. The Bureau also proposed rules on reasonable 
information management, early intervention for delinquent consumers, 
continuity of contact, and loss mitigation, pursuant to the Bureau's 
authority to carry out the consumer protection purposes of RESPA in 
section 6 of RESPA, as amended by Dodd-Frank Act section 1463. 12 
U.S.C. 2605. The public has until October 9, 2012 to review and provide 
comment on these proposals, except comments on the Paperwork Reduction 
Act.
     Appraisals: The Bureau, jointly with Federal prudential 
regulators and other Federal agencies, on August 15, 2012 issued a 
proposal to implement Dodd-Frank Act requirements concerning appraisals 
for higher-risk mortgages, appraisal management companies, and 
automated valuation models, pursuant to TILA section 129H as 
established by Dodd-Frank Act section 1471, 15 U.S.C. 1639h, and 
sections 1124 and 1125 of the Financial Institutions Reform, Recovery, 
and Enforcement Act of 1989 (FIRREA) as established by Dodd-Frank Act 
sections 1473(f), 12 U.S.C. 3353, and 1473(q), 12 U.S.C. 3354, 
respectively. In addition, the Bureau on the same date issued rules to 
implement section 701(e) of the Equal Credit Opportunity Act (ECOA), as 
amended by Dodd-Frank Act section 1474, to require that creditors 
provide applicants with a free copy of written appraisals and 
valuations developed in connection with applications for loans secured 
by a first lien on a dwelling. 15 U.S.C. 1691(e).
     Ability to Repay: The Bureau is in the process of 
finalizing a proposal issued by the Board to implement provisions of 
the Dodd-Frank Act requiring creditors to determine that a consumer can 
repay a mortgage loan and establishing standards for compliance, such 
as by making a ``qualified mortgage,'' pursuant to TILA section 129C as 
established by Dodd-Frank Act sections 1411 and 1412. 15 U.S.C. 1639c.
     Escrows: The Bureau is in the process of finalizing a 
proposal issued by the Board to implement provisions of the Dodd-Frank 
Act requiring certain escrow account disclosures and exempting from the 
higher-priced mortgage loan escrow requirement loans made by certain 
small creditors, among other provisions, pursuant to TILA section 129D 
as established by Dodd-Frank Act sections 1461 and 1462. 15 U.S.C. 
1639d.
With the exception of the TILA-RESPA Integration Proposal, the Dodd-
Frank Act requirements will take effect on January 21, 2013 unless 
final rules implementing those requirements are issued on or before 
that date and provide for a different effective date.
    The Bureau regards the foregoing rulemakings as components of a 
single, comprehensive undertaking; each of them affects aspects of the 
mortgage industry and its regulation that intersect with one or more of 
the others. Accordingly, the Bureau is coordinating carefully the 
development of the proposals and final rules identified above. Each 
rulemaking will adopt new regulatory provisions to implement the 
various Dodd-Frank Act mandates described above. In addition, each of 
them may include other provisions the Bureau considers necessary or 
appropriate to ensure that the overall undertaking is accomplished 
efficiently and that it ultimately yields a comprehensive regulatory 
scheme for mortgage credit that achieves the statutory purposes set 
forth by Congress, while avoiding unnecessary burdens on industry.
    Thus, the Bureau intends that the rulemakings listed above function 
collectively as a whole. In this context, each rulemaking may raise 
concerns that might appear unaddressed if that rulemaking were viewed 
in isolation. The Bureau intends, however, to address issues raised by 
its mortgage rulemakings through whichever rulemaking is most 
appropriate, in the Bureau's judgment, for addressing each specific 
issue. In some cases, the Bureau expects that one rulemaking may raise 
an issue and yet may not be the rulemaking that is most appropriate for

[[Page 55279]]

addressing that issue. For example, the proposed requirement to include 
NMLS IDs on loan documents, discussed in Part V under Sec.  1026.36(g), 
below, also is proposed to be addressed in part by the TILA-RESPA 
Integration Proposal.

III. Outreach Conducted for This Rulemaking

A. Early Stakeholder Outreach & Feedback on Existing Rules

    The Bureau conducted extensive outreach in developing the 
provisions in this proposed rule. Bureau staff met with and held in-
depth conference calls with large and small bank and non-bank mortgage 
creditors, mortgage brokers, trade associations, secondary market 
participants, consumer groups, non-profit organizations, and State 
regulators. Discussions covered existing business models and 
compensation practices and the impact of the existing Loan Originator 
Rule. They also covered the Dodd-Frank Act provisions and the impact on 
consumers, loan originators, lenders, and secondary market participants 
of various options for implementing the statutory provisions. The 
Bureau developed several of the proposed clarifications of existing 
regulatory requirements in response to compliance inquiries and with 
input from industry participants.

B. Small Business Review Panel

    In May 2012, the Bureau convened a Small Business Review Panel with 
the Chief Counsel for Advocacy of the Small Business Administration 
(SBA) and the Administrator of the Office of Information and Regulatory 
Affairs (OIRA) within the Office of Management and Budget (OMB).\34\ As 
part of this process, the Bureau prepared an outline of the proposals 
then under consideration and the alternatives considered (Small 
Business Review Panel Outline), which the Bureau posted on its Web site 
for review by the general public as well as the small entities 
participating in the panel process.\35\ The Small Business Review Panel 
gathered information from representatives of small creditors, mortgage 
brokers, and not-for-profit organizations and made findings and 
recommendations regarding the potential compliance costs and other 
impacts of the proposed rule on those entities. These findings and 
recommendations are set forth in the Small Business Review Panel 
Report, which will be made part of the administrative record in this 
rulemaking.\36\ The Bureau has carefully considered these findings and 
recommendations in preparing this proposal and has addressed certain 
specific ones below.
---------------------------------------------------------------------------

    \34\ The Small Business Regulatory Enforcement Fairness Act of 
1996 (SBREFA) requires the Bureau to convene a Small Business Review 
Panel before proposing a rule that may have a substantial economic 
impact on a significant number of small entities. See Public Law 
104-121, tit. II, 110 Stat. 847, 857 (1996) (as amended by Pub. L. 
110-28, section 8302 (2007)).
    \35\ U.S. Consumer Fin. Prot. Bureau, Outline of Proposals under 
Consideration and Alternatives Considered (May 9, 2012), available 
at: https://files.consumerfinance.gov/f/201205_cfpb_MLO_SBREFA_Outline_of_Proposals.pdf .
    \36\ U.S. Consumer Fin. Prot. Bureau, U.S. Small Bus. Admin., 
and U.S. Office of Mgmt. and Budget, Final Report of the Small 
Business Review Panel on CFPB's Proposals Under Consideration for 
Residential Mortgage Loan Origination Standards Rulemaking (July 11, 
2012) (Small Business Review Panel Final Report), available at: 
https://files.consumerfinance.gov/f/201208_cfpb_LO_comp_SBREFA.pdf.
    .
---------------------------------------------------------------------------

    In addition, the Bureau held roundtable meetings with other Federal 
banking and housing regulators, consumer advocacy groups, and industry 
representatives regarding the Small Business Review Panel Outline. At 
the Bureau's request, many of the participants provided feedback, which 
the Bureau has considered in preparing this proposal.

IV. Legal Authority

    The Bureau is issuing this proposed rule pursuant to its authority 
under TILA and the Dodd-Frank Act. On July 21, 2011, section 1061 of 
the Dodd-Frank Act transferred to the Bureau the ``consumer financial 
protection functions'' previously vested in certain other Federal 
agencies, including the Board. The term ``consumer financial protection 
function'' is defined to include ``all authority to prescribe rules or 
issue orders or guidelines pursuant to any Federal consumer financial 
law, including performing appropriate functions to promulgate and 
review such rules, orders, and guidelines.'' 12 U.S.C. 5581(a)(1). TILA 
and title X of the Dodd-Frank Act are Federal consumer financial laws. 
Dodd-Frank Act section 1002(14), 12 U.S.C. 5481(14) (defining ``Federal 
consumer financial law'' to include the ``enumerated consumer laws'' 
and the provisions of title X of the Dodd-Frank Act); Dodd-Frank Act 
section 1002(12), 12 U.S.C. 5481(12) (defining ``enumerated consumer 
laws'' to include TILA). Accordingly, the Bureau has authority to issue 
regulations pursuant to TILA, as well as title X of the Dodd-Frank Act.

A. The Truth in Lending Act

TILA Section 105(a)
    As amended by the Dodd-Frank Act, TILA section 105(a), 15 U.S.C. 
1604(a), directs the Bureau to prescribe regulations to carry out the 
purposes of TILA, and provides that such regulations may contain 
additional requirements, classifications, differentiations, or other 
provisions, and may provide for such adjustments and exceptions for all 
or any class of transactions, that the Bureau judges are necessary or 
proper to effectuate the purposes of TILA, to prevent circumvention or 
evasion thereof, or to facilitate compliance. The purpose of TILA is 
``to assure a meaningful disclosure of credit terms so that the 
consumer will be able to compare more readily the various credit terms 
available to him and avoid the uninformed use of credit.'' TILA section 
102(a); 15 U.S.C. 1601(a). These stated purposes are tied to Congress's 
finding that ``economic stabilization would be enhanced and the 
competition among the various financial institutions and other firms 
engaged in the extension of consumer credit would be strengthened by 
the informed use of credit.'' TILA section 102(a). Thus, strengthened 
competition among financial institutions is a goal of TILA, achieved 
through the effectuation of TILA's purposes. In addition, TILA section 
129B(a)(2) establishes a purpose of TILA sections 129B and 129C to 
``assure consumers are offered and receive residential mortgage loans 
on terms that reasonably reflect their ability to repay the loans and 
that are understandable and not unfair, deceptive or abusive.'' 15 
U.S.C. 1639b(a)(2).
    Historically, TILA section 105(a) has served as a broad source of 
authority for rules that promote the informed use of credit through 
required disclosures and substantive regulation of certain practices. 
However, Dodd-Frank Act section 1100A clarified the Bureau's section 
105(a) authority by amending that section to provide express authority 
to prescribe regulations that contain ``additional requirements'' that 
the Bureau finds are necessary or proper to effectuate the purposes of 
TILA, to prevent circumvention or evasion thereof, or to facilitate 
compliance. This amendment clarified the authority to exercise TILA 
section 105(a) to prescribe requirements beyond those specifically 
listed in the statute that meet the standards outlined in section 
105(a). The Dodd-Frank Act also clarified the Bureau's rulemaking 
authority over certain high-cost mortgages pursuant to section 105(a). 
As

[[Page 55280]]

amended by the Dodd-Frank Act, the Bureau's TILA section 105(a) 
authority to make adjustments and exceptions to the requirements of 
TILA applies to all transactions subject to TILA, except with respect 
to the substantive protections of TILA section 129, 15 U.S.C. 1639,\37\ 
which apply to the high-cost mortgages referred to in TILA section 
103(bb), 15 U.S.C. 1602(bb).
---------------------------------------------------------------------------

    \37\ TILA section 129 contains requirements for certain high-
cost mortgages, established by the Home Ownership and Equity 
Protection Act (HOEPA), which are commonly called HOEPA loans.
---------------------------------------------------------------------------

    For the reasons discussed in this notice, the Bureau is proposing 
regulations to carry out TILA's purposes and is proposing such 
additional requirements, adjustments, and exceptions as, in the 
Bureau's judgment, are necessary and proper to carry out the purposes 
of TILA, prevent circumvention or evasion thereof, or to facilitate 
compliance. In developing these aspects of the proposal pursuant to its 
authority under TILA section 105(a), the Bureau has considered the 
purposes of TILA, including ensuring meaningful disclosures, 
facilitating consumers' ability to compare credit terms, and helping 
consumers avoid the uninformed use of credit, as well as ensuring 
consumers are offered and receive residential mortgage loans on terms 
that reasonably reflect their ability to repay the loans and that are 
understandable and not unfair, deception or abusive. In developing this 
proposal and using its authority under TILA section 105(a), the Bureau 
also has considered the findings of TILA, including strengthening 
competition among financial institutions and promoting economic 
stabilization.
TILA Section 129B(c)
    Dodd-Frank Act section 1403 amended TILA section 129B by imposing 
two limitations on loan originator compensation to reduce or eliminate 
steering incentives for residential mortgage loans.\38\ 15 U.S.C. 
1639b(c). First, it generally prohibits loan originators from receiving 
compensation for any residential mortgage loan that varies based on the 
terms of the loan, other than the amount of the principal. Second, TILA 
section 129B generally allows only consumers to compensate loan 
originators, though an exception permits other persons to pay ``an 
origination fee or charge'' to a loan originator, but only if two 
conditions are met: (1) The loan originator does not receive any 
compensation directly from a consumer; and (2) the consumer does not 
make an upfront payment of discount points, origination points, or fees 
(other than bona fide third party fees that are not retained by the 
creditor, the loan originator, or the affiliates of either). The Bureau 
has authority to prescribe regulations to prohibit the above practices. 
In addition, TILA section 129B(c)(2)(B)(ii) authorizes the Bureau to 
create exemptions from the exception's second prerequisite, that the 
consumer must not make any upfront payments of points or fees, where 
the Bureau determines that doing so ``is in the interest of consumers 
and in the public interest.''
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    \38\ Section 1403 of the Dodd-Frank Act also added new TILA 
section 129B(c)(3), which requires the Bureau to prescribe 
regulations to prohibit certain kinds of steering, abusive or unfair 
lending practices, mischaracterization of credit histories or 
appraisals, and discouraging consumers from shopping with other 
mortgage originators. 15 U.S.C. 1639b(c)(3). This proposed rule does 
not address those provisions. Because they are structured as a 
requirement that the Bureau prescribe regulations establishing the 
substantive prohibitions, notwithstanding Dodd-Frank Act section 
1400(c)(3), 15 U.S.C. 1601 note, the Bureau believes that the 
substantive prohibitions cannot take effect until the regulations 
establishing them have been prescribed and taken effect. The Bureau 
intends to prescribe such regulations in a future rulemaking. Until 
such time, no obligations are imposed on mortgage originators or 
other persons under TILA section 129B(c)(3).
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TILA Section 129(p)(2)
    HOEPA amended TILA by adding, in new section 129, a broad mandate 
to prohibit certain acts and practices in the mortgage industry. In 
particular, TILA section 129(p)(2), as re-designated by Dodd-Frank Act 
section 1433(a), requires the Bureau to prohibit, by regulation or 
order, acts or practices in connection with mortgage loans that the 
Bureau finds to be unfair, deceptive, or designed to evade the 
provisions of HOEPA. 15 U.S.C. 1639(p)(2). Likewise, TILA requires the 
Bureau to prohibit, by regulation or order, acts or practices in 
connection with the refinancing of mortgage loans that the Bureau finds 
to be associated with abusive lending practices, or that are otherwise 
not in the interest of the consumer. Id.
    The authority granted to the Bureau under TILA section 129(p)(2) is 
broad. It reaches mortgage loans with rates and fees that do not meet 
HOEPA's rate or fee trigger in TILA section 103(bb), 15 U.S.C. 
1602(bb), as well as mortgage loans not covered under that section. 
TILA section 129(p)(2) is not limited to acts or practices by 
creditors, or to loan terms or lending practices.
TILA Section 129B(e)
    Dodd-Frank Act section 1405(a) amended TILA to add new section 
129B(e), 15 U.S.C. 1639b(e). That section provides for the Bureau to 
prohibit or condition terms, acts, or practices relating to residential 
mortgage loans on a variety of bases, including when the Bureau finds 
the terms, acts, or practices are not in the interest of the consumer. 
In developing proposed rules under TILA section 129B(e), the Bureau has 
considered all of the bases for its authority set forth in that 
section.
TILA Section 129C(d)
    Dodd-Frank Act section 1414(d) amended TILA to add new section 
129C(d), 15 U.S.C. 1639c(d). That section prohibits the financing of 
certain single-premium credit insurance products. As discussed more 
fully in the section-by-section analysis below, the Bureau is proposing 
to implement this prohibition in new Sec.  1026.36(i).
TILA Section 129C(e)
    Dodd-Frank Act section 1414(e) amended TILA to add new section 
129C(e), 15 U.S.C. 1639c(e). That section restricts mandatory 
arbitration agreements in residential mortgage loan transactions. As 
discussed more fully in the section-by-section analysis below, the 
Bureau is proposing to implement these restrictions in new Sec.  
1026.36(h).

B. The Dodd-Frank Act

    Section 1022(b)(1) of the Dodd-Frank Act authorizes the Bureau to 
prescribe rules ``as may be necessary or appropriate to enable the 
Bureau to administer and carry out the purposes and objectives of the 
Federal consumer financial laws, and to prevent evasions thereof[.]'' 
12 U.S.C. 5512(b)(1). Section 1022(b)(2) of the Dodd-Frank Act 
prescribes certain standards for rulemaking that the Bureau must follow 
in exercising its authority under section 1022(b)(1). 12 U.S.C. 
5512(b)(2). As discussed above, TILA and title X of the Dodd-Frank Act 
are Federal consumer financial laws. Accordingly, the Bureau proposes 
to exercise its authority under Dodd-Frank Act section 1022(b) to 
prescribe rules under TILA that carry out the purposes and prevent 
evasion of TILA. See part VI for a discussion of the Bureau's analysis 
and consultation pursuant to the standards for rulemaking under Dodd-
Frank Act section 1022(b)(2).

V. Section-by-Section Analysis

    This proposal implements new TILA sections 129B(b)(1), (c)(1), and 
(c)(2) and 129C(d) and (e), as added by sections 1402, 1403, 1414(d) 
and (e) of the Dodd-Frank Act.\39\ As discussed in more detail in the 
section-by-section analysis to proposed Sec.  1026.36(f) and (g), TILA

[[Page 55281]]

section 129B(b)(1) requires each mortgage originator to be qualified 
and include unique identification numbers on loan documents. As 
discussed in more detail in the section-by-section analysis to proposed 
Sec.  1026.36(d)(1) and (2), TILA section 129B(c)(1) and (2) prohibits 
``mortgage originators'' in ``residential mortgage loans'' from 
receiving compensation that varies based on loan terms and from 
receiving origination charges or fees from persons other than the 
consumer except in certain circumstances. Additionally, as discussed in 
more detail in the section-by-section analysis to proposed Sec.  
1026.36(i), TILA section 129C(d) creates prohibitions on single-premium 
credit insurance. Finally, as discussed in the section-by-section 
analysis to proposed Sec.  1026.36(h), TILA section 129C(e) provides 
restrictions on mandatory arbitration agreements.
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    \39\ As discussed in Part VI.B, below, the final rule under this 
proposal also may implement new TILA section 129B(b)(2).
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Section 1026.25 Record Retention

    Current Sec.  1026.25 requires creditors to retain evidence of 
compliance with Regulation Z. The Bureau proposes to add Sec.  
1026.25(c)(2) and (3) to establish record retention requirements for 
compliance with Sec.  1026.36(d). Proposed Sec.  1026.25(c)(2): (1) 
Extends the time period for retention by creditors of compensation-
related records from two years to three years; (2) requires loan 
originator organizations (i.e., generally, mortgage broker companies) 
to maintain certain compensation-related records for three years; and 
(3) clarifies the types of compensation-related records that are 
required to be maintained under the rule. Proposed Sec.  1026.25(c)(3) 
requires creditors to maintain records evidencing compliance with the 
requirements related to discount points and origination points or fees 
set forth in proposed Sec.  1026.36(d)(2)(ii); it also extends the two-
year requirement to three years.
25(a) General Rule
    Current comment 25(a)-5 clarifies the nature of the record 
retention requirements under Sec.  1026.25 as applied to Regulation Z's 
loan originator compensation provisions. The comment provides that for 
each transaction subject to the loan originator compensation provisions 
in Sec.  1026.36(d)(1), a creditor should maintain records of the 
compensation it provided to the loan originator for the transaction as 
well as the compensation agreement in effect on the date the interest 
rate was set for the transaction. The comment also states that where a 
loan originator is a mortgage broker, a disclosure of compensation or 
other broker agreement required by applicable State law that complies 
with Sec.  1026.25 would be presumed to be a record of the amount 
actually paid to the loan originator in connection with the 
transaction.
    The Bureau is proposing new Sec.  1026.25(c)(2), which sets forth 
certain new record retention requirements for loan originators as 
discussed below. New comments 25(c)(2)-1 and -2 are being proposed to 
accompany proposed Sec.  1026.25(c)(2), and those comments incorporate 
substantially the same guidance as existing comment 25(a)-5. Therefore, 
the Bureau proposes to delete existing comment 25(a)-5.
25(c) Records Related to Certain Requirements for Mortgage Loans 
25(c)(2) Records Related to Requirements for Loan Originator 
Compensation Retention of Records for Three Years
    TILA does not contain requirements to retain specific records, but 
Sec.  1026.25 requires creditors to retain evidence of compliance with 
TILA for two years after the date disclosures are required to be made 
or action is required to be taken. Section 1404 of the Dodd-Frank Act 
amended TILA section 129B to provide a cause of action against any 
mortgage originator for failure to comply with the requirements of TILA 
section 129B and any of its implementing regulations. 15 U.S.C. 
1639b(d). Section 1416(b) of the Dodd-Frank Act amended section 130(e) 
of TILA to extend the statute of limitations for a civil action 
alleging a violation of TILA section 129B (along with sections 129 and 
129C) to three years beginning on the date of the occurrence of the 
violation.\40\ 15 U.S.C. 1639b(d), 1640(e). In view of the statutory 
changes to TILA, the provisions of current Sec.  1026.25, which require 
a two-year record retention period, do not reflect all applicable 
statutes of limitations for causes of action brought under TILA. 
Moreover, the record retention provisions in Sec.  1026.25 currently 
are limited to creditors, whereas TILA section 129B(e), as added by the 
Dodd-Frank Act, covers all loan originators and not solely creditors.
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    \40\ Prior to the Dodd-Frank Act amendment, TILA section 130(e) 
provided for a one year statute of limitations for civil actions to 
enforce TILA provisions. A civil action to enforce certain TILA 
provisions (including section 129B) brought by a State attorney 
general has a three year statute of limitations.
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    Consequently, the Bureau proposes Sec.  1026.25(c)(2), which makes 
two changes to the current record retention provisions. First, a 
creditor must maintain records sufficient to evidence the compensation 
it pays to a loan originator organization or the creditor's individual 
loan originators, and the governing compensation agreement, for three 
years after the date of payment. Second, a loan originator organization 
must maintain for three years records of the compensation (1) it 
receives from a creditor, a consumer, or another person, and (2) it 
pays to its individual loan originators. The loan originator 
organization must maintain records sufficient to evidence the 
compensation agreement that governs those receipts or payments, for 
three years after the date of the receipts or payments. The Bureau 
proposes these changes pursuant to its authority under section 105(a) 
of TILA to prevent circumvention or evasion of TILA by requiring 
records that can be used to establish compliance. The Bureau believes 
these proposed modifications will ensure records associated with loan 
originator compensation are retained for a time period commensurate 
with the statute of limitations for causes of action under TILA section 
130 and are readily available for examination, which is necessary to 
prevent circumvention of and to facilitate compliance with TILA.
    However, the Bureau invites public comment on whether a record 
retention period of five years, rather than three years, would be 
appropriate. The Bureau believes that relevant actions and compensation 
practices that must be evidenced in retained records may in some cases 
occur prior to the beginning of the three-year period of enforceability 
that applies to a particular transaction. In addition, the running of 
the three-year period may be tolled (i.e., paused) under some 
circumstances, resulting in a period of enforceability that ends more 
than three years following an occurrence of a violation of applicable 
requirements. Accordingly, a record retention period that is longer 
than three years may help ensure that consumers are able to avail 
themselves of TILA protections while imposing minimal incremental 
burden on creditors and loan originators. The Bureau notes that many 
State and local laws related to transactions involving real property 
may require a record retention period, or may depend on the information 
being available, for five years. Additionally, a five-year record 
retention period is consistent with provisions in the Bureau's TILA-
RESPA Integration Proposal.
    The Bureau believes that it is necessary to extend the record 
retention requirements to loan originator organizations, thus requiring 
both creditors and loan originator organizations to retain evidence of 
compliance with the requirements of

[[Page 55282]]

Sec.  1026.36(d)(1) for three years. Although creditors may retain some 
of the records needed to demonstrate compliance with TILA section 129B 
and its implementing regulations, in some circumstances, the records 
may be available solely from the loan originator organization. For 
example, if a creditor pays a loan originator organization a fee for 
arranging a loan and the loan originator organization in turn allocates 
a portion of that fee to the individual loan originator as a 
commission, the creditor may not possess a copy of the commission 
agreement setting forth the arrangement between the loan originator 
organization and the individual loan originator or any record of the 
payment of the commission. The Bureau believes that applying this 
proposed requirement to both creditors and loan originator 
organizations will prevent circumvention of and facilitate compliance 
with TILA, as amended by the Dodd-Frank Act.
    The Bureau recognizes that extending the record retention 
requirement for creditors from two years for specific information 
related to loan originator compensation, as currently provided in 
Regulation Z, to three years may result in some increase in costs for 
creditors. The Bureau believes, however, that creditors should be able 
to use existing recordkeeping systems to maintain the records for an 
additional year at minimal cost. Similarly, although loan originator 
organizations may incur some costs to establish and maintain 
recordkeeping systems, loan originator organizations may be able to use 
existing recordkeeping systems that they maintain for other purposes at 
minimal cost. During the Small Business Review Panel process, the small 
entity representatives were asked about their current record retention 
practices and the potential impact of the proposed enhanced record 
retention requirements. Of the few small entity representatives who 
gave feedback on the issue, one creditor small entity representative 
stated that it maintained detailed records of compensation paid to all 
of its employees and that a regulator already reviews its compensation 
plans regularly, and another creditor small entity representative 
reported that it did not believe the proposed record retention 
requirement would require it to change its current practices.
    Applying the current two-year record retention period to 
information specified in proposed Sec.  1026.25(c) could adversely 
affect the ability of consumers to bring actions under TILA. The 
extension also would serve to reduce litigation risk and maintain 
consistency between creditors and loan originator organizations. The 
Bureau therefore believes it is appropriate to expand the time period 
for record retention to effectuate the three-year statute of 
limitations period established by Congress for actions against loan 
originators under section 129B of TILA.
Exclusion of Individual Loan Originators
    The proposed recordkeeping requirements do not apply to individual 
loan originators. Although section 129B(d) of TILA, as amended by the 
Dodd-Frank Act, permits consumers to bring actions against mortgage 
originators (which include individual loan originators), the Bureau 
believes that applying the proposed record retention requirements of 
Sec.  1026.25 to individual loan originators is unnecessary. Under the 
proposed record retention requirements, loan originator organizations 
and creditors must retain certain records regarding all of their 
individual loan originator employees. Applying the same record 
retention requirements to the individual loan originator employees 
themselves would be duplicative. In addition, such a requirement may 
not be feasible in all cases, because individual loan originators may 
not have access to the types of records required to be retained under 
Sec.  1026.25, particularly after they cease to be employed by the 
creditor or loan originator organization. An individual loan originator 
who is a sole proprietor, however, is responsible for compliance with 
provisions that apply to the proprietorship (which is a loan originator 
organization) and, as a result, is responsible for compliance with the 
proposed record retention requirements. Similarly, an individual who is 
a creditor is subject to the requirements that apply to creditors.
Substance of Record Retention Requirements
    As discussed above, proposed Sec.  1026.25(c)(2) makes two changes 
to the current record retention provisions. First, proposed Sec.  
1026.25(c)(2)(i) requires a creditor to maintain records sufficient to 
evidence all compensation it pays to a loan originator organization or 
the creditor's individual loan originators, and a copy of the governing 
compensation agreement. Second, proposed Sec.  1026.25(c)(2)(ii) 
requires a loan originator organization to maintain records of all 
compensation that it receives from a creditor, a consumer, or another 
person or that it pays to its individual loan originators; it also 
requires the loan originator organization to maintain a copy of the 
compensation agreement that governs those receipts or payments.
    Proposed comment 25(c)(2)-1.i clarifies that, under proposed Sec.  
1026.25(c)(2), records are sufficient to evidence that compensation was 
paid and received if they demonstrate facts enumerated in the comment. 
The comment gives examples of the types of records that, depending on 
the facts and circumstances, may be sufficient to evidence compliance. 
Proposed comment 25(c)(2)-1.ii clarifies that the compensation 
agreement, evidence of which must to be retained under 1026.25(c)(2), 
is any agreement, written or oral, or course of conduct that 
establishes a compensation arrangement between the parties. Proposed 
comment 25(c)(2)-1.iii provides an example where the expiration of the 
three-year retention period varies depending on when multiple payments 
of compensation are made. Proposed comment 25(c)(2)-2 provides an 
example of retention of records sufficient to evidence payment of 
compensation.
25(c)(3) Records Related to Requirements for Discount Points and 
Origination Points or Fees
    Proposed Sec.  1026.25(c)(3) requires creditors to retain records 
pertaining to compliance with the provisions of Sec.  
1026.36(d)(2)(ii), regarding the payment of discount points and 
origination points or fees (see the section-by-section analysis to 
proposed Sec.  1026.36(d)(2)(ii), below, for further discussion of 
these proposed requirements). Specifically, it provides that, for each 
transaction subject to proposed Sec.  1026.36(d)(2)(ii), the creditor 
must maintain records sufficient to evidence that the creditor has made 
available to the consumer the comparable, alternative loan that does 
not include discount points and origination points or fees as required 
by Sec.  1026.36(d)(2)(ii)(A) or if such a loan was not made available 
to the consumer, a good-faith determination that the consumer was 
unlikely to qualify for such a loan. The creditor must also maintain 
records to evidence compliance with the ``bona fide'' requirements 
under proposed Sec.  1026.36(d)(2)(ii)(C) (e.g., that the payment of 
discount points and origination points or fees leads to a bona fide 
reduction in the interest rate). For the same reasons discussed above 
under Sec.  1026.25(c)(2), the Bureau also proposes that creditors be 
required to retain records under Sec.  1026.25(c)(3) for three years 
and also invites comment on whether the period of required record

[[Page 55283]]

retention for purposes of Sec.  1026.25(c)(3) should be five years.

Section 36 Prohibited Acts or Practices and Certain Requirements for 
Credit Secured by a Dwelling

36(a) Loan Originator, Mortgage Broker, and Compensation Defined
    As discussed above, this proposed rule would implement new TILA 
sections 129B(b)(1), (c)(1) and (c)(2) and 129C(d) and (e), as added by 
sections 1402, 1403, and 1414(d) and (e) of the Dodd-Frank Act. TILA 
section 103(cc), which was added by section 1401 of the Dodd-Frank Act, 
contains definitions for ``mortgage originator'' and ``residential 
mortgage loan.'' These definitions are relevant to the implementation 
of loan originator compensation restrictions, limitations on discount 
points and origination points or fees, and loan originator 
qualification provisions under this proposal. The statutory definitions 
largely parallel the existing regulation's coverage, in terms of both 
persons and transactions subject to its requirements. As discussed 
below, the Bureau is seeking to retain the existing regulatory terms, 
to maximize continuity, while adjusting as necessary to reflect 
statutory differences, to reflect the fact that they now relate to more 
than just loan originator compensation limitations, and to facilitate 
the additional interpretation and clarification being proposed under 
existing rules.
    Current Sec.  1026.36 uses the term ``loan originator.'' Dodd-Frank 
Act amendments to TILA being addressed in this proposed rulemaking use 
the term ``mortgage originator'' as defined in TILA section 103(cc)(2). 
The Bureau does not propose to change the existing terminology in Sec.  
1026.36, although the Bureau is proposing certain clarifying amendments 
to the definition and its commentary. As discussed in more detail 
below, the Bureau believes that the definition of ``loan originator'' 
set forth in existing Sec.  1026.36(a)(1) is consistent with the 
definition of ``mortgage originator'' in TILA section 103(cc) as 
amended by the Dodd-Frank Act. The Bureau also believes that the term 
``loan originator'' has been in wide use since first adopted by the 
Board in 2010. Any changes to the ``loan originator'' terminology could 
require stakeholders to make equivalent revisions in many aspects of 
their operations, including in policies and procedures, compliance 
materials, and software and training. In addition, for the reasons 
discussed below, the Bureau is proposing two new definitions, in 
proposed Sec.  1026.36(a)(1)(ii) and (iii), to establish the terms 
``loan originator organization'' and ``individual loan originator.''
    The Bureau also proposes to add new Sec.  1026.36(a)(3) to define 
compensation. The proposal transfers guidance on the meaning of the 
term ``compensation'' in current comment 36(d)(1)- to Sec.  
1026.36(a)(3). Other guidance regarding the term ``compensation'' in 
comment 36(d)(1)-1 is proposed to be transferred to new comment 36(a)-5 
and revised.
36(a)(1) Loan Originator
36(a)(1)(i)
    The Bureau is proposing to re-designate Sec.  1026.36(a)(1) as 
Sec.  1026.36(a)(1)(i) and to make certain amendments to it and its 
commentary, as discussed below, to reflect new TILA section 103(cc)(2). 
TILA section 103(cc)(2)(A) defines ``mortgage originator'' to mean: 
``any person who, for direct or indirect compensation or gain, or in 
the expectation of direct or indirect compensation or gain--(i) takes a 
residential mortgage loan application; (ii) assists a consumer in 
obtaining or applying to obtain a residential mortgage loan; or (iii) 
offers or negotiates terms of a residential mortgage loan.'' TILA 
section 103(cc)(2)(B) further defines a mortgage originator as 
including ``any person who represents to the public, through 
advertising or other means of communicating or providing information 
(including the use of business cards, stationery, brochures, signs, 
rate lists, or other promotional items), that such person can or will 
provide any of the services or perform any of the activities described 
in subparagraph A.'' TILA section 103(cc)(2)(C) through (G) provides 
certain exclusions from the general definition of mortgage originator, 
as discussed below.
    In current Sec.  1026.36(a)(1), the term ``loan originator'' means 
``with respect to a particular transaction, a person who for 
compensation or other monetary gain, or in expectation of compensation 
or other monetary gain, arranges, negotiates, or otherwise obtains an 
extension of consumer credit for another person.'' The Bureau broadly 
interprets the phrase ``arranges, negotiates, or otherwise obtains an 
extension of consumer credit for another person'' in the definition of 
``loan originator.'' \41\ The Bureau believes the phrase includes the 
specific activities set forth in TILA section 103(cc)(2)(A), including: 
(1) Takes a loan application; (2) assists a consumer in obtaining or 
applying to obtain a loan; or (3) offers or negotiates terms of a loan.
---------------------------------------------------------------------------

    \41\ This is consistent with the Board's related rulemakings on 
this issue. See 75 FR 58509, 58518 (Sept. 24, 2010); 74 FR 43232, 
43279 (Aug. 26, 2009); 73 FR 44522, 44565 (July 30, 2008); 73 FR 
1672, 1726 (Jan. 9, 2008); 76 FR 27390, 27402 (May 11, 2011).
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    The meaning of the term ``arranges'' is very broad,\42\ and the 
Bureau believes that it includes any part of the process of originating 
a credit transaction, including advertising or communicating to the 
public that one can perform loan origination services and referrals of 
a consumer to another person who participates in the process of 
originating a transaction (subject to administrative, clerical and 
other applicable exclusions discussed in more detail below). That is, 
the definition includes persons who participate in arranging a credit 
transaction with others and persons who arrange the transaction 
entirely, including initial contact with the consumer, assisting the 
consumer to apply for a loan, taking the application, offering and 
negotiating loan terms, and consummation of the credit transaction.
---------------------------------------------------------------------------

    \42\ Arrange is defined by Merriam-Webster Online Dictionary to 
include: (1) ``to put into a proper order or into a correct or 
suitable sequence, relationship, or adjustment;'' (2) ``to make 
preparations for;'' (3) ``to bring about an agreement or 
understanding concerning.'' Arrange Definition, Merriam-Webster.com, 
available at: https://www.merriam-webster.com/dictionary/arrange.
---------------------------------------------------------------------------

    These statutory refinements to the phrase, ``assists a consumer in 
obtaining or applying to obtain a residential mortgage loan,'' suggest 
that minor actions, e.g., accepting a completed application form and 
delivering it to a loan officer, without assisting the consumer in 
completing it, processing or analyzing the information, or discussing 
loan terms, would not be included in the definition. In this situation, 
the person is not engaged in any action specific to actively aiding or 
further achieving a complete loan application or collecting information 
on behalf of the consumer specific to a mortgage loan. This 
interpretation is also consistent with the exclusion in TILA section 
103(cc)(2)(C)(i) for certain administrative and clerical persons, which 
is discussed in more detail below.
    Nevertheless, the Bureau proposes to add ``takes an application'' 
and ``offers,'' as used in the definition of ``mortgage originator'' in 
TILA section 103(cc)(2)(A), to the definition of ``loan originator'' in 
current Sec.  1026.36(a). The Bureau believes that, even though the 
definition of ``loan originator'' in current Sec.  1026.36(a) includes 
the meaning of these terms, expressly stating them clarifies that the 
definition

[[Page 55284]]

of ``loan originator'' in Sec.  1026.36(a) includes the core elements 
of the definition of ``mortgage originator'' in TILA section 
103(cc)(2)(A). Inclusion of the terms also facilitates compliance with 
TILA by removing any risk of uncertainty on this point.
Arranges, Negotiates, or Otherwise Obtains
    TILA section 103(cc)(2) defines ``mortgage originator'' to include 
a person who ``takes a residential mortgage loan application'' and 
``assists a consumer in obtaining or applying to obtain a residential 
mortgage loan.'' TILA section 103(cc)(4) provides that a person 
``assists a consumer in obtaining or applying to obtain a residential 
mortgage loan'' by taking actions such as ``advising on residential 
mortgage loan terms (including rates, fees, and other costs), preparing 
residential mortgage loan packages, or collecting information on behalf 
of the consumer with regard to a residential mortgage loan.'' The 
Bureau proposes comment 36(a)-1.i.A to provide further guidance on the 
existing phrase ``arranges, negotiates, or otherwise obtains,'' as used 
in Sec.  1026.36(a)(1), to clarify the phrase's applicability in light 
of these statutory provisions. Specifically, the Bureau proposes to 
clarify in comment 36(a)-1.i.A that ``takes an application, arranges, 
offers, negotiates, or otherwise obtains an extension of consumer 
credit for another person'' includes ``assists a consumer in obtaining 
or applying for consumer credit by advising on credit terms (including 
rates, fees, and other costs), preparing application packages (such as 
a loan or pre-approval application or supporting documentation), or 
collecting information on behalf of the consumer to submit to a loan 
originator or creditor, and includes a person who advertises or 
communicates to the public that such person can or will provide any of 
these services or activities.''
Advising on Residential Mortgage Loan Terms
    TILA section 103(cc)(2)(A)(ii) provides that a mortgage originator 
includes a person who ``assists a consumer in obtaining or applying to 
obtain a residential mortgage loan.'' TILA section 103(cc)(4) defines 
this phrase to include persons ``advising on residential mortgage loan 
terms (including rates, fees, and other costs).'' Thus, this section 
applies to persons advising on credit terms (including rates, fees, and 
other costs) advertised or offered by that person on its own behalf or 
for another person. The Bureau believes that the definition of 
``mortgage originator'' does not include bona fide third-party advisors 
such as accountants, attorneys, registered financial advisors, certain 
housing counselors, or others who do not receive or are paid no 
compensation for originating consumer credit transactions. Should these 
persons receive payments or compensation from loan originators, 
creditors, or their affiliates in connection with a consumer credit 
transaction, however, they could be considered loan originators.
Advertises or Communicates
    TILA section 103(cc)(2)(B) provides that a mortgage originator 
``includes any person who represents to the public, through advertising 
or other means of communicating or providing information (including the 
use of business cards, stationery, brochures, signs, rate lists, or 
other promotional items), that such person can or will provide any of 
the services or perform any of the activities described in subparagraph 
(A).'' The Bureau believes the current definition of ``loan 
originator'' in Sec.  1026.36(a) includes persons who in expectation of 
compensation or other monetary gain communicate or advertise loan 
origination activities or services to the public.
    The Bureau therefore proposes to amend comment 36(a)-1.i.A to 
clarify that a loan originator ``includes a person who in expectation 
of compensation or other monetary gain advertises or communicates to 
the public that such person can or will provide any of these [loan 
origination] services or activities.'' The Bureau notes that the phrase 
``advertises or communicates to the public'' is very broad and 
includes, but is not limited to, the use of business cards, stationery, 
brochures, signs, rate lists, or other promotional items listed in TILA 
section 103(cc)(2)(B) if these items advertise or communicate to the 
public that a person can or will provide loan origination services or 
activities. The Bureau believes this clarification furthers TILA's goal 
in section 129B(a)(2) of ensuring that responsible, affordable credit 
remains available to consumers. The Bureau also invites comment on this 
clarification to the definition of loan originator.
Manufactured Home Retailers
    The definition of ``mortgage originator'' in TILA section 
103(cc)(2)(C)(ii) also expressly excludes certain employees of 
manufactured home retailers. The definition of ``loan originator'' in 
current Sec.  1026.36(a)(1) does not address such employees. The Bureau 
proposes to implement the new statutory exclusion by revising the 
definition of ``loan originator'' in Sec.  1026.36(a)(1) to exclude 
employees of a manufactured home retailer who assist a consumer in 
obtaining or applying to obtain consumer credit, provided such 
employees do not take a consumer credit application, offer or negotiate 
terms of a consumer credit transaction, or advise a consumer on credit 
terms (including rates, fees, and other costs).
Creditors
    Current Sec.  1026.36(a) includes in the definition of loan 
originator only creditors that do not finance the transaction at 
consummation out of the creditor's own resources, including, for 
example, drawing on a bona fide warehouse line of credit, or out of 
deposits held by the creditor (table-funded creditors). TILA section 
129B(b), as added by section 1402 of the Dodd-Frank Act, imposes new 
qualification and loan document unique identifier requirements that 
apply under certain circumstances to all creditors, including non-
table-funded creditors, which are not loan originators for other 
purposes. Section 1401 of the Dodd-Frank Act amended TILA to add 
section 103(cc)(2)(F), which provides that the definition of ``mortgage 
originator'' expressly excludes creditors (other than creditors in 
table-funded transactions) for purposes of section 129B(c)(1), (2), and 
(4). Those provisions contain restrictions on steering activities and 
rules of construction for the statute. Thus, the term ``mortgage 
originator'' includes creditors for purposes of other TILA provisions 
that use the term, such as section 129B(b), as added by section 1402 of 
the Dodd-Frank Act. Section 129B(b) imposes on mortgage originators new 
qualification and loan document unique identifier requirements, 
discussed below under Sec.  1026.36(f) and (g). The Bureau therefore 
proposes to amend the definition of loan originator in Sec.  
1026.36(a)(1)(i) to include creditors (other than creditors in table-
funded transactions) for purposes of those provisions only.
    The Bureau also proposes to make technical amendments to comment 
36(a)-1.ii on table funding to clarify the applicability of TILA 
section 129B(b)'s new requirements to all creditors. Non-table-funded 
creditors are included in the definition of loan originator only for 
the purposes of Sec.  1026.36(f) and (g). The proposed revisions 
additionally clarify the applicability of Sec.  1026.36 to table-funded 
creditors.

[[Page 55285]]

Servicers
    TILA section 103(cc)(2)(G) defines ``mortgage originator'' not to 
include ``a servicer or servicer employees, agents and contractors, 
including but not limited to those who offer or negotiate terms of a 
residential mortgage loan for purposes of renegotiating, modifying, 
replacing or subordinating principal of existing mortgages where 
borrowers are behind in their payments, in default or have a reasonable 
likelihood of being in default or falling behind.'' The term 
``servicer'' is defined by TILA section 103(cc)(7) as having the same 
meaning as ``servicer'' ``in section 6(i)(2) of the Real Estate 
Settlement Procedures Act of 1974 [RESPA] (12 U.S.C. 2605(i)(2)).''
    RESPA defines the term ``servicer'' as ``the person responsible for 
servicing of a loan (including the person who makes or holds a loan if 
such person also services the loan).''\43\ The term ``servicing'' is 
defined to mean ``receiving any scheduled periodic payments from a 
borrower pursuant to the terms of any loan, including amounts for 
escrow accounts described in section 2609 of this title [Title 12], and 
making the payments of principal and interest and such other payments 
with respect to the amounts received from the borrower as may be 
required pursuant to the terms of the loan.'' 12 U.S.C. 2605(i)(3).
---------------------------------------------------------------------------

    \43\ RESPA defines ``servicer'' to exclude: (A) The FDIC in 
connection with changes in rights to assets pursuant to section 
1823(c) of title 12 or as receiver or conservator of an insured 
depository institution; and (B) Ginnie Mae, Fannie Mae, Freddie Mac, 
or the FDIC, in any case in which changes in the servicing of the 
mortgage loan is preceded by (i) termination of the servicing 
contract for cause; (ii) commencement of bankruptcy proceedings of 
the servicer; or (iii) commencement of proceedings by the FDIC for 
conservatorship or receivership of the servicer (or an entity by 
which the servicer is owned or controlled). 12 U.S.C. 2605(i)(2).
---------------------------------------------------------------------------

    Current comment 36(a)-1.iii provides that the definition of ``loan 
originator'' does not ``apply to a loan servicer when the servicer 
modifies an existing loan on behalf of the current owner of the loan. 
The rule only applies to extensions of consumer credit and does not 
apply if a modification of an existing obligation's terms does not 
constitute a refinancing under Sec.  1026.20(a).'' The Bureau proposes 
to amend comment 36(a)-1.iii to clarify how the definition of loan 
originator applies to servicers and to implement the Dodd-Frank Act's 
definition of mortgage originator.
    The Bureau believes the exception in TILA section 103(cc)(2)(G) 
narrowly applies to servicers, servicer employees, agents and 
contractors only when engaging in limited servicing activities with 
respect to a particular transaction after consummation, including loan 
modifications that do not constitute a refinancing. The Bureau does not 
believe, however, that the statutory exclusion was intended to shield 
from coverage companies that intend to act as servicers on loans when 
they engage in loan origination activities prior to consummation or 
servicers of existing loans that refinance such loans. The Bureau 
believes that exempting such companies merely because of the general 
status of ``servicer'' with respect to some loans would not reflect 
Congress's intended statutory scheme.
    The Bureau's interpretation rests on analyzing the two distinct 
parts of the statute. Under TILA section 103(cc)(2)(G), the definition 
of ``mortgage originator'' does not include: (1) ``a servicer'' or (2) 
``servicer employees, agents and contractors, including but not limited 
to those who offer or negotiate terms of a residential mortgage loan 
for purposes of renegotiating, modifying, replacing and subordinating 
principal of existing mortgages where borrowers are behind in their 
payments, in default or have a reasonable likelihood of being in 
default or falling behind.'' Under a textual analysis of this provision 
in combination with the definition of ``servicer'' under RESPA in 12 
U.S.C. 2605(i)(2), which is referenced by TILA section 103(cc)(7), a 
servicer that is responsible for servicing a loan or that makes a loan 
and services it is excluded from the definition of ``mortgage 
originator'' for that particular loan after the loan is consummated and 
the servicer becomes responsible for servicing it. ``Servicing'' is 
defined under RESPA as ``receiving and making payments according to the 
terms of the loan.'' Thus, a servicer cannot be responsible for 
servicing a loan that does not exist. A loan exists only after 
consummation. Therefore, for purposes of TILA section 103(cc)(2)(G), a 
person is a servicer with respect to a particular transaction only 
after it is consummated and that person retains or obtains its 
servicing rights.
    The Bureau believes this interpretation of the statute is the most 
consistent with the definition of ``mortgage originator'' in TILA 
section 103(cc)(2). A person cannot be a servicer until after 
consummation of a transaction. A person taking an application, 
assisting a consumer in obtaining or applying to obtain a loan, or 
offering or negotiating terms of a loan, or funding the transaction 
prior to and through the time of consummation, is a mortgage originator 
or creditor (depending upon the person's role). Thus, a person that 
funds a loan from the person's own resources or a table-funded creditor 
is subject to the appropriate provisions in TILA section 103(cc)(2)(F) 
for creditors until the person becomes responsible for servicing the 
loan after consummation. The Bureau believes this interpretation is 
also consistent with the definition of ``loan originator'' in current 
Sec.  1026.36(a) and comment 36(a)-1.iii. If a loan modification by the 
servicer constitutes a refinancing under Sec.  1026.20(a), the servicer 
is considered a creditor until after consummation of the refinancing 
when responsibility for servicing the refinanced loan arises.
    The Bureau believes the second part of the statutory provision 
applies to individuals (i.e., natural persons) who are employees, 
agents or contractors of the servicer, ``including but not limited to 
those who offer or negotiate terms of a residential mortgage loan for 
purposes of renegotiating, modifying, replacing and subordinating 
principal of existing mortgages where borrowers are behind in their 
payments, in default or have a reasonable likelihood of being in 
default or falling behind.'' The Bureau further believes that, to be 
considered employees, agents or contractors of the servicer for the 
purposes of TILA section 103(cc)(2)(G), the person for whom the 
employees, agent or contractors are working first must be a servicer. 
Thus, as discussed above, the particular loan must have already been 
consummated before such employees, agents, or contractors can be 
excluded from the statutory term, ``mortgage originator'' under TILA 
section 103(cc)(2)(G).
    The Bureau interprets the phrase ``including but not limited to 
those who offer or negotiate terms of a residential mortgage loan for 
purposes of renegotiating, modifying, replacing and subordinating 
principal of existing mortgages where borrowers are behind in their 
payments, in default or have a reasonable likelihood of being in 
default or falling behind'' to be an example of the types of activities 
the individuals are permitted to engage in that satisfy the purposes of 
TILA section 103(cc)(2)(G). However, the Bureau believes that 
``renegotiating, modifying, replacing and subordinating principal of 
existing mortgages'' or any other related activities that occur must 
not be a refinancing, as defined in Sec.  1026.20(a), for the purposes 
of TILA section 103(cc)(2)(G). Under the Bureau's view, a servicer may 
modify an existing loan in several ways without being considered a loan 
originator. A formal satisfaction of the existing obligation and 
replacement by a new obligation is a refinancing. But, short of that, a

[[Page 55286]]

servicer may modify a loan without being considered a loan originator.
    The Bureau interprets the term ``replacing'' in TILA section 
103(cc)(2)(G) not to include refinancings of consumer credit. The term 
``replacing'' is not defined in TILA or Regulation Z, but the Bureau 
believes the term ``replacing'' in this context means replacing 
existing debt without also satisfying the original obligation. For 
example, a first- and second-lien loan may be ``replaced'' by a single, 
new loan with a reduced interest rate and principal amount, the 
proceeds of which do not satisfy the full obligation of the prior 
loans. In such a situation, the agreement for the new loan may 
stipulate that the consumer is responsible for the remaining 
outstanding balances of the prior loans if the consumer refinances or 
defaults on the replacement loan within a stated period of time. This 
is conceptually distinct from a refinancing as described in Sec.  
1026.20(a), which refers to situations where an existing ``obligation 
is satisfied and replaced by a new obligation.'' \44\ (Emphasis added.)
---------------------------------------------------------------------------

    \44\ Comment 20(a)-1 clarifies: ``The refinancing may involve 
the consolidation of several existing obligations, disbursement of 
new money to the consumer or on the consumer's behalf, or the 
rescheduling of payments under an existing obligation. In any form, 
the new obligation must completely replace the prior one.'' 
(Emphasis added).
---------------------------------------------------------------------------

    The ability to repay provisions of TILA section 129C, which were 
added by section 1411 of the Dodd-Frank Act, make numerous references 
to certain ``refinancings'' for exemptions from the income verification 
requirement of section 129C. TILA section 128A, as added by section 
1419 of the Dodd-Frank Act, contains a disclosure requirement that 
includes a ``refinancing'' as an alternative for consumers of hybrid 
adjustable rate mortgages to pursue before the interest rate adjustment 
or reset after the fixed introductory period ends. Moreover, TILA's 
text prior to Dodd-Frank Act amendments contained the term 
``refinancing'' in numerous provisions. For example, TILA section 
106(f)(2)(B) provides finance charge tolerance requirements specific to 
a ``refinancing,'' TILA section 125(e)(2) exempts certain 
``refinancings'' from right of rescission disclosure requirements, and 
TILA section 128(a)(11) requires disclosure of whether the borrower is 
entitled to a rebate upon ``refinancing'' an obligation in full that 
involves a precomputed finance charge. For these reasons the Bureau 
believes that, if Congress intended for ``replacing'' to include or 
mean a ``refinancing'' of consumer credit, Congress would have used the 
existing term, ``refinancing,'' as Congress did for sections 1411 and 
1419 of the Dodd-Frank Act and in prior TILA legislation. Instead, 
without any additional guidance from Congress, the Bureau defers to the 
current definition of ``refinancing'' in Sec.  1026.20(a), where part 
of the definition of ``refinancing'' requires both replacement and 
satisfaction of the original obligation as separate and distinct 
elements of the defined term.
    Furthermore, the above interpretation of ``replacing'' better 
accords with the surrounding statutory text, which provides that 
servicers include persons offering or negotiating a residential 
mortgage loan for the purposes of ``renegotiating, modifying, replacing 
or subordinating principal of existing mortgages where borrowers are 
behind in their payments, in default or have a reasonable likelihood of 
being in default or falling behind.'' Taken as a whole, this text 
applies to distressed consumers for whom replacing and fully satisfying 
the existing obligation(s) is not an option. The situation covered by 
the text is distinct from a refinancing in which a consumer would 
simply use the proceeds from the refinancing to satisfy an existing 
loan or existing loans.
    The Bureau believes this interpretation gives full effect to the 
exclusionary language as Congress intended, to avoid undesirable 
impacts on servicers' willingness to modify existing loans to benefit 
distressed consumers, without undermining the new protections generally 
afforded by TILA section 129B. A broader interpretation that excludes 
servicers and their employees, agents, and contractors from those 
protections solely by virtue of their coincidental status as servicers 
is not the best reading of the statute as a whole and likely would 
frustrate rather than further congressional intent.
    Indeed, if persons are not included in the definition of mortgage 
originator when making but prior to servicing a loan or based on a 
person's status as a servicer under the definition of ``servicer,'' at 
least two-thirds of mortgage lenders (and their originator employees) 
nationwide could be excluded from the definition of ``mortgage 
originator'' in TILA section 103(cc)(2)(G). Many, if not all, of the 
top ten mortgage lenders by volume either hold and service loans they 
originated in portfolio or retain servicing rights for the loans they 
originate and sell into the secondary market.\45\ Under an 
interpretation that would categorically exclude a person who makes and 
services a loan or whose general ``status'' is a ``servicer,'' these 
lenders would be excluded as ``servicers'' from the definition of 
``mortgage originator.'' Thus, their employees and agents would also be 
excluded from the definition under this interpretation.
---------------------------------------------------------------------------

    \45\ For example, the top ten U.S. lenders by mortgage 
origination volume in 2011 held 72.7 percent of the market share. 1 
Inside Mortg. Fin., The 2012 Mortgage Market Statistical Annual 52-
53 (2012) (these percentages are based on the dollar amount of the 
loans). These same ten lenders held 60.8 percent of the market share 
for servicing mortgage loans. 1 Inside Mortg. Fin., The 2012 
Mortgage Market Statistical Annual 185-186 (2012) (these percentages 
are based on the dollar amount of the loans). Most of the largest 
lenders do not ordinarily sell loans into the secondary market with 
servicing released.
---------------------------------------------------------------------------

    The Bureau believes this result would be not only contrary to the 
statutory text but also contrary to Congress's stated intent in section 
1402 of the Dodd-Frank Act to ensure that responsible, affordable 
mortgage credit remains available to consumers by regulating practices 
related to residential mortgage loan origination. For example, based on 
the top ten mortgage lenders by origination and servicing volume alone, 
as much as 61 percent of the nation's loan originators could not only 
be excluded from prohibitions on dual compensation and compensation 
based on loan terms but also from the new qualification requirements 
added by the Dodd-Frank Act.
    The Bureau proposes to amend comment 36(a)-1.iii to reflect the 
Bureau's interpretation of the statutory text, to facilitate 
compliance, and to prevent circumvention. The Bureau interprets the 
statement in existing comment 36(a)-1.iii that the ``definition of 
`loan originator' does not apply to a loan servicer when the servicer 
modifies an existing loan on behalf of the current owner of the loan'' 
as consistent with the definition of mortgage originator as it relates 
to servicers in TILA section 103(cc)(2)(G). Proposed comment 36(a)-
1.iii thus clarifies that the TILA section 103(cc)(2)(G) definition of 
``loan originator'' includes a servicer or a servicer's employees, 
agents, and contractors when offering or negotiating terms of a 
particular existing loan obligation on behalf of the current owner for 
purposes of renegotiating, modifying, replacing, or subordinating 
principal of such a debt where the borrower(s) is not current, in 
default, or has a reasonable likelihood of becoming in default or not 
current. The Bureau proposes to amend comment 36(a)-1.iii to clarify 
that Sec.  1026.36 ``only applies to

[[Page 55287]]

extensions of consumer credit that constitute a refinancing under Sec.  
1026.20(a). Thus, the rule does not apply if a renegotiation, 
modification, replacement, or subordination of an existing obligation's 
terms occurs, unless it is a refinancing under Sec.  1026.20(a).''
Real Estate Brokers
    TILA section 103(cc)(2)(D) states that the definition of ``mortgage 
originator'' does not ``include a person or entity that only performs 
real estate brokerage activities and is licensed or registered in 
accordance with applicable State law, unless such person or entity is 
compensated by a lender, a mortgage broker, or other mortgage 
originator or by any agent of such lender, mortgage broker, or other 
mortgage originator.'' Thus, the statute provides that real estate 
brokers are not included in the definition of ``mortgage originator'' 
if they: (1) Only perform real estate brokerage activities, (2) are 
licensed or registered under applicable State law to perform such 
activities, and (3) do not receive compensation from loan originators, 
creditors, or their agents. Therefore, a real estate broker that 
performs loan originator activities or services as defined by proposed 
Sec.  1026.36(a) is a loan originator for the purposes of Sec.  
1026.36.\46\ The Bureau proposes to add comment 36(a)-1.iv to clarify 
that the term loan originator does not include certain real estate 
brokers.
---------------------------------------------------------------------------

    \46\ The Bureau understands that a real estate broker license in 
some states also permits the licensee to broker mortgage loans and 
in certain cases make mortgage loans. The Bureau does not consider 
brokering mortgage loans and making mortgage loans to be real estate 
brokerage activities.
---------------------------------------------------------------------------

    The Bureau believes the text of TILA section 103(cc)(2)(D) related 
to payments to a real estate broker ``by a lender, a mortgage broker, 
or other mortgage originator or by any agent of such lender, mortgage 
broker, or other mortgage originator'' is directed at payments by such 
persons in connection with the origination of a particular consumer 
credit transaction secured by a dwelling. Each of the three core 
elements in the definition of mortgage originator in TILA section 
103(cc)(2)(A) describes activities related to a residential mortgage 
loan.\47\ Moreover, if real estate brokers are deemed mortgage 
originators simply by receiving compensation from a creditor, then a 
real estate broker would be considered a mortgage originator if the 
real estate broker received compensation from a creditor for reasons 
wholly unrelated to loan origination (e.g., if the real estate broker 
found new office space for the creditor). The Bureau does not believe 
that either the definition of ``mortgage originator'' in TILA section 
103(cc)(2) or the statutory purpose of TILA section 129B(a)(2) to 
``assure consumers are offered and receive residential mortgage loans 
on terms that reasonably reflect their ability to repay the loans and 
that are understandable and not unfair, deception or abusive,'' 
demonstrate that Congress intended for TILA section 129B to cover this 
type of real estate brokerage activity. Thus, for a real estate broker 
to be included in the definition of ``mortgage originator,'' the real 
estate broker must receive compensation in connection with performing 
one or more of the three core ``mortgage originator'' activities for a 
particular consumer credit transaction secured by a dwelling.
---------------------------------------------------------------------------

    \47\ The three core elements in the definition of mortgage 
originator in TILA section 103(cc)(2)(A) are: ``(i) Takes a 
residential mortgage loan application; (ii) assists a consumer in 
obtaining or applying to obtain a residential mortgage loan; or 
(iii) offers or negotiates terms of a residential mortgage loan.'' 
(Emphasis added).
---------------------------------------------------------------------------

    For example, assume XYZ Bank pays a real estate broker for a broker 
price opinion in connection with a pending modification or default of a 
mortgage loan for consumer A. In an unrelated transaction, consumer B 
compensates the same real estate broker for assisting consumer B with 
finding and negotiating the purchase of a home. Consumer B also obtains 
credit from XYZ Bank to purchase the home. This real estate broker is 
not a loan originator under these facts. Proposed comment 36(a)-1.iv 
clarifies this point. The proposed comment also clarifies that a 
payment is not from a creditor, a mortgage broker, other mortgage 
originator, or an agent of such persons if the payment is made on 
behalf of the consumer to pay the real estate broker for real estate 
brokerage activities performed for the consumer.
    The Bureau notes that the definition of ``mortgage originator'' in 
the statute does not ``include a person or entity that only performs 
real estate brokerage activities and is licensed or registered in 
accordance with applicable State law.'' The Bureau believes that, if 
applicable State law defines real estate brokerage activities to 
include activities that fall within the definition of loan originator 
in Sec.  1026.36(a), the real estate broker is a loan originator when 
engaged in such activities subject to Sec.  1026.36 and is not a real 
estate broker under TILA section 103(cc)(2)(D). The Bureau invites 
comment on this proposed clarification of the meaning of ``loan 
originator'' for real estate brokers.
Seller Financing
    TILA section 103(cc)(2)(E) provides that the term ``mortgage 
originator'' does not include:

with respect to a residential mortgage loan, a person, estate, or 
trust that provides mortgage financing for the sale of 3 properties 
in any 12-month period to purchasers of such properties, each of 
which is owned by such person, estate, or trust and serves as 
security for the loan, provided that such loan--(i) is not made by a 
person, estate, or trust that has constructed, or acted as a 
contractor for the construction of, a residence on the property in 
the ordinary course of business of such person, estate, or trust; 
(ii) is fully amortizing; (iii) is with respect to a sale for which 
the seller determines in good faith and documents that the buyer has 
a reasonable ability to repay the loan; (iv) has a fixed rate or an 
adjustable rate that is adjustable after 5 or more years, subject to 
reasonable annual and lifetime limitations on interest rate 
increases; and (v) meets any other criteria the Bureau may 
prescribe.
    This provision must be read in conjunction with the existing 
exceptions in Regulation Z (Sec.  1026.2(a)(17)(v)), which provide that 
the definition of creditor: (1) Does not include persons that extend 
credit secured by a dwelling (other than high-cost mortgages) five or 
fewer times in the preceding calendar year and (2) does not include a 
person who extends no more than one high-cost mortgage (subject to 
Sec.  1026.32) in any 12-month period. Based on the definition of 
mortgage originator as described above and the exception for creditor 
together, the Bureau believes that persons, estates, or trusts are not 
included in the definition of ``mortgage originator'' when engaged in 
such described activities. That is, any person, estate, or trust who 
otherwise would be a mortgage originator under the statutory definition 
on the basis of engaging in activities other than those described above 
is a mortgage originator. Thus, only persons whose activity is 
financing sales of their own properties as described above are excluded 
under TILA section 103(cc)(2)(E). A person who finances sales of 
property, if such financing is subject to a finance charge or payable 
in more than four installments, generally is a creditor under Sec.  
1026.2(a)(17)(i) (except where excluded by virtue of the person's 
annual transaction volume).
    Moreover, TILA section 103(cc)(2)(F) provides that the definition 
of mortgage originator does not include creditors (other than creditors 
in table-funded transactions), except for purposes of TILA section 
129B(c)(1), (2), and (4). Thus, those creditors that are not included 
in the definition of mortgage

[[Page 55288]]

originator as a result of TILA section 103(cc)(2)(E) are still subject 
to the remaining provisions of TILA section 129B. Of these provisions 
of TILA section 129B, only section 129B(b)(1) imposes any substantive 
requirements on creditors: the qualification requirements and the 
requirement to include a unique identifier on loan documents, 
implemented by proposed Sec.  1026.36(f) and (g).
    The proposed definition of loan originator, however, would not 
include seller financers who finance three or fewer sales in any 12-
month period without extending high-cost mortgage financing. The 
proposed definition of the term loan originator includes ``a creditor 
for the transaction if the creditor does not finance the transaction at 
consummation out of the creditor's own resources, including drawing on 
a bona fide warehouse line of credit, or out of deposits held by the 
creditor'' (emphasis added). The term ``creditor for the transaction'' 
is intended to apply to persons who would otherwise be a ``creditor'' 
as defined in Sec.  1026.2(a)(17) but for the exception for not 
regularly extending consumer credit. Therefore, such a seller financer 
who finances three or fewer sales with a non-high cost mortgage in any 
12-month period is a ``creditor for the transaction,'' and is included 
neither in the definition of loan originator in Sec.  1026.36(a) nor 
the definition of creditor in Sec.  1026.2(a)(17). Thus, these persons 
are not subject to TILA and Regulation Z, including Sec.  1026.36.
    Section 1026.2(a)(17)(v) excludes from the definition of creditor 
persons that extend credit secured by a dwelling (other than high-cost 
mortgages) five or fewer times in the preceding calendar year. This has 
two implications. First, if a person's activity is limited to financing 
sales of three or fewer properties in any 12-month period by making 
extensions of credit that are not high-cost mortgages, the person 
cannot exceed the five-loan threshold in Sec.  1026.2(a)(17)(v) to be 
deemed a creditor and therefore be subject to any provision of 
Regulation Z, including Sec.  1026.36. Second, a person who finances 
the sale of no more than one property in any 12-month period by making 
an extension of one high-cost mortgage also is not a creditor under 
Sec.  1026.2(a)(17)(v). Thus, this person is not a creditor for the 
purposes of being included in the definition of ``mortgage originator'' 
as described by TILA section 103(cc)(2)(F). This person also is not 
subject to Regulation Z, including Sec.  1026.36.
    Given all of the foregoing, the only persons that are not included 
in the definition of mortgage originator as provided in TILA section 
103(cc)(2)(E), but are creditors for the purposes of Regulation Z, are 
persons, estates, or trusts that finance the sale of their own 
properties by extending high-cost mortgages either twice or three times 
in a calendar year. Thus, such persons are not subject to Sec.  
1026.36(f) and (g) because, they are not a loan originator and thus 
also are not subject to the other provisions of Sec.  1026.36. 
Nevertheless, to reflect this interpretation that a narrow category of 
persons are not included in the definition of loan originator in Sec.  
1026.36(a), the Bureau is proposing new comment 36(a)-1.v.
    Proposed comment 36(a)-1.v tracks the criteria set forth in TILA 
section 103(cc)(2)(E). The comment provides that the definition of 
``loan originator'' does not include a natural person, estate, or trust 
that finances the sale of three or fewer properties in any 12-month 
period owned by such natural person, estate, or trust where each 
property serves as a security for the credit transaction. It further 
states that the natural person, estate, or trust also must not have 
constructed or acted as a contractor for the construction of the 
dwelling in its ordinary course of business. The natural person, 
estate, or trust must additionally determine in good faith and document 
that the buyer has a reasonable ability to repay the credit 
transaction. Finally, the proposed comment states that the credit 
transaction must be fully amortizing, have a fixed rate or an 
adjustable rate that adjusts only after five or more years, and be 
subject to reasonable annual and lifetime limitations on interest rate 
increases.
    The Bureau also is proposing to include further guidance in the 
comment as to how a person may satisfy the requirement to determine in 
good faith that the buyer has a reasonable ability to repay the credit 
transaction. The comment would provide that the natural person, estate, 
or trust makes such a good faith determination by complying with the 
requirements of Sec.  1026.43. This refers to the requirements 
applicable generally to credit extensions secured by a dwelling, as 
proposed by the Board in its 2011 ATR Proposal. Those requirements 
implement TILA section 129C, and the language of section 129C(a)(1) 
parallels in almost identical language the ability to repay requirement 
in TILA section 103(cc)(2)(E). Any creditor seeking to rely on proposed 
comment 36(a)-1.v to avoid inclusion in the definition of loan 
originator (i.e., creditors as defined by Sec.  1026.2(a)(17)(v) making 
a second or a third high-cost mortgage in a calendar year) already must 
comply with the requirements of proposed Sec.  1026.43 as well as the 
provisions of Regulation Z other than Sec.  1026.36.
Administrative or Clerical Tasks
    TILA section 103(cc)(2)(C) defines ``mortgage originator'' to 
exclude persons who are not otherwise described by the three core 
elements of the mortgage originator definition or communicate to the 
public or advertise they can perform or provide the services described 
in those elements and who perform purely administrative or clerical 
tasks on behalf of mortgage originators. Existing comment 36(a)-4 
clarifies that managers, administrative staff, and similar individuals 
who are employed by a creditor or loan originator but do not arrange, 
negotiate, or otherwise obtain an extension of credit for a consumer, 
or whose compensation is not based on whether any particular loan is 
originated, are not loan originators. The Bureau believes the existing 
comment is largely consistent with TILA section 103(cc)(2)(C)'s 
treatment of administrative and clerical tasks.
    The Bureau proposes a minor technical revision to comment 36(a)-4, 
however, to implement the exclusion from ``mortgage originator'' in 
TILA section 103(cc)(2)C), by including ``clerical'' staff. The 
proposed revisions would also clarify that producing managers who also 
meet the definition of a loan originator would be considered a loan 
originator. Producing managers generally are managers of an 
organization (including branch managers and senior executives) that in 
addition to their management duties also originate loans. Thus, 
compensation received by producing managers would be subject to the 
restrictions of Sec.  1026.36. Non-producing managers (i.e., managers, 
senior executives, etc., who have a management role in an organization 
including, but not limited to, managing loan originators, but who do 
not otherwise meet the definition of loan originator) would not be 
considered a loan originator.
36(a)(1)(ii); 36(a)(1)(iii)
    Certain provisions of TILA section 129B, such as the qualification 
and loan document unique identifier requirements, as well as certain 
new guidance in the Bureau's proposal, necessitate a distinction 
between loan originators that are natural persons and those that are 
organizations. The Bureau therefore proposes to establish the 
distinction by creating new definitions for ``individual loan 
originator'' and

[[Page 55289]]

``loan originator organization'' in new Sec.  1026.36(a)(1)(ii) and 
(iii).
    The Bureau proposes to revise comment 36(a)-1.i.B to clarify that 
the term ``loan originator organization'' is a loan originator other 
than a natural person, including but not limited to a trust, sole 
proprietorship, partnership, limited liability partnership, limited 
partnership, limited liability company, corporation, bank, thrift, 
finance company, or a credit union. The Bureau understands that States 
have recognized many new business forms over the past 10 to 15 years. 
The Bureau believes that the additional examples should help to 
facilitate compliance with Sec.  1026.36 by clarifying the types of 
persons that fall within the definition of ``loan originator 
organization.'' The Bureau invites comment on whether other examples 
would be helpful for these purposes.
36(a)(2) Mortgage Broker
    Existing Sec.  1026.36(a)(2) defines ``mortgage broker'' as ``any 
loan originator that is not an employee of the creditor.'' As noted 
elsewhere, under this proposal the meaning of loan originator is 
expanded for purposes of Sec.  1026.36(f) and (g) to include all 
creditors. The Bureau is therefore proposing a conforming amendment to 
exclude such creditors from the definition of ``mortgage broker'' even 
though for certain purposes such creditors are loan originators. 
Proposed Sec.  1026.36(a)(2) provides that a mortgage broker is ``any 
loan originator that is not a creditor or the creditor's employee.''

36(a)(3) Compensation

    The Bureau proposes to define the term ``compensation'' in new 
Sec.  1026.36(a)(3) to include ``salaries, commissions, and any 
financial or similar incentive provided to a loan originator for 
originating loans.'' Sections 1401 and 1403 of the Dodd-Frank Act 
contain multiple references to the term ``compensation'' but do not 
define the term. The current rule does not define the term in 
regulatory text. Existing comment 36(d)(1)-1, however, provides 
guidance on the meaning of compensation. The Bureau's proposal reflects 
the basic principle of that guidance in proposed Sec.  1026.36(a)(3). 
The further guidance in comment 36(d)(1)-1 would be transferred to new 
comment 36(a)-5.
    The Bureau proposes to add comment 36(a)-5.iii (re-designated from 
comment 36(d)(1)-1.iii and essentially the same as that comment, except 
as noted below) to be consistent with provisions set forth in TILA 
section 129B(c)(2), as added by section 1403 of the Dodd-Frank Act. 
Specifically, TILA section 129B(c)(2)(A) provides that, for any 
residential mortgage loan, a mortgage originator generally may not 
receive from any person other than the consumer any origination fee or 
charge except bona fide third-party charges not retained by the 
creditor, the mortgage originator, or an affiliate of either. Likewise, 
no person, other than the consumer, who knows or has reason to know 
that a consumer has directly compensated or will directly compensate a 
mortgage originator, may pay a mortgage originator any origination fee 
or charge except bona fide third-party charges as described above. In 
addition, section TILA 129B(c)(2)(B) provides that a mortgage 
originator may receive an origination fee or charge from a person other 
than the consumer if, among other things, the mortgage originator does 
not receive any compensation directly from the consumer. As discussed 
in more detail in the section-by-section analysis to proposed Sec.  
1026.36(d)(2)(ii), the Bureau interprets ``origination fee or charge'' 
to mean compensation that is paid in connection with the transaction, 
such as commissions that are specific to, and paid solely in connection 
with, the transaction.
    Nonetheless, TILA section 129B(c)(2) does not appear to prevent a 
mortgage originator from receiving payments from a person other than 
the consumer for bona fide third-party charges not retained by the 
creditor, mortgage originator, or an affiliate of either, even if the 
mortgage originator also receives loan originator compensation directly 
from the consumer. For example, assume that a mortgage originator 
receives compensation directly from a consumer in a transaction. TILA 
section 129B(c)(2) does not restrict the mortgage originator from 
receiving payment from a person other than the consumer (e.g., a 
creditor) for bona fide and reasonable charges, such as title insurance 
or appraisals, where those amounts are not retained by the loan 
originator but are paid to a third party that is not the creditor, its 
affiliate, or the affiliate of the loan originator.
    Consistent with TILA section 129B(c)(2) and pursuant to the 
Bureau's authority under TILA section 105(a) to effectuate the purposes 
of TILA and facilitate compliance with TILA, the Bureau proposes to 
retain in new comment 36(a)-5.iii essentially the same guidance as set 
forth in current comment 36(d)(1)-1.iii. Thus, the new comment 
clarifies that the term ``compensation'' as used in Sec.  1026.36(d) 
and (e) does not include amounts a loan originator receives as payment 
for bona fide and reasonable charges, such as title insurance or 
appraisals, where those amounts are not retained by the loan originator 
but are paid to a third party that is not the creditor, its affiliate, 
or the affiliate of the loan originator. Accordingly, under proposed 
Sec.  1026.36(d)(2)(i) and comment 36(a)-5.iii, a loan originator that 
receives compensation directly from a consumer would not be restricted 
from receiving a payment from a person other than the consumer for such 
bona fide and reasonable charges. In addition, a loan originator would 
not be deemed to be receiving compensation directly from a consumer for 
purposes of Sec.  1026.36(d)(2) where the originator imposes such a 
bona fide and reasonable third-party charge on the consumer.
    Proposed comment 36(a)-5.iii also recognizes that, in some cases, 
amounts received for payment for such third-party charges may exceed 
the actual charge because, for example, the originator cannot determine 
with accuracy what the actual charge will be before consummation when 
the charge is imposed on the consumer. In such a case, under proposed 
comment 36(a)-5.iii, the difference retained by the originator would 
not be deemed compensation if the third-party charge collected from a 
person other than the consumer was bona fide and reasonable, and also 
complies with State and other applicable law. On the other hand, if the 
originator marks up a third-party charge and retains the difference 
between the actual charge and the marked-up charge, the amount retained 
is compensation for purposes of Sec.  1026.36(d) and (e). This guidance 
parallels that in existing comment 36(d)(1)-1.
    Proposed comment 36(a)-5.iii, like current comment 36(d)(1)-1.iii, 
contains two illustrations. The illustrations in proposed comment 
36(a)-5.iii.A and B are similar to the ones contained in current 
comment 36(d)(1)-1.iii.A and B except that the illustrations are 
amended to clarify that the charges described in those illustrations 
are not paid to the creditor, its affiliates, or the affiliate of the 
loan originator. The proposed illustrations also simplify the current 
illustrations.
    The first illustration, in proposed comment 36(a)-5.iii.A, assumes 
a loan originator will receive compensation directly from either a 
consumer or a creditor. The illustration further assumes the loan 
originator uses average charge pricing in accordance with Regulation X 
\48\ to charge the consumer

[[Page 55290]]

a $25 credit report fee for a credit report provided by a third party 
that is not the loan originator, creditor, or affiliate of either. At 
the time the loan originator imposes the credit report fee on the 
consumer, the loan originator is uncertain of the cost of the credit 
report because the cost of a credit report from the consumer reporting 
agency is paid in a monthly bill and varies between $15 and $35 
depending on how many credit reports the originator obtains that month. 
Later, the cost for the credit report is determined to be $15 for this 
consumer's transaction. In this case, the $10 difference between the 
$25 credit report fee imposed on the consumer and the actual $15 cost 
for the credit report is not deemed compensation for purposes of Sec.  
1026.36(d) and (e), even though the $10 is retained by the loan 
originator. Proposed comment 36(a)-5.iii.B provides a second 
illustration that explains that, in the same example above, the $10 
difference would be compensation for purposes of Sec.  1026.36(d) and 
(e) if the credit report fees vary between $10 and $15.
---------------------------------------------------------------------------

    \48\ See 12 CFR 1024.8(b).
---------------------------------------------------------------------------

    The Bureau solicits comment on proposed comment 36(a)-5.iii. 
Specifically, the Bureau requests comment on whether the term 
``compensation'' should exclude payment from the consumer or from a 
person other than the consumer to the loan originator, as opposed to a 
third party, for certain services that unambiguously relate to 
ancillary services rather than core loan origination services, such as 
title insurance or appraisal, if the loan originator, creditor or the 
affiliates of either performs those services, so long as the amount 
paid for those services is bona fide and reasonable. The Bureau further 
solicits comment on how such ancillary services might be described 
clearly enough to distinguish them from the core origination charges 
that would not be excluded under such a provision.
    The Bureau also proposes new comment 36(a)-5.iv to clarify that the 
definition of compensation for purposes of Sec.  1026.36(d) and (e) 
includes stocks, stock options, and equity interests that are provided 
to individual loan originators and that, as a result, the provision of 
stocks, stock options, or equity interests to individual loan 
originators is subject to the restrictions in Sec.  1026.36(d) and (e). 
The proposed comment further clarifies that bona fide returns or 
dividends paid on stocks or other equity holdings, including those paid 
to loan originators who own such stock or equity interests, are not 
considered compensation for purposes of Sec.  1026.36(d) and (e). The 
comment explains that: (1) Bona fide returns or dividends are those 
returns and dividends that are paid pursuant to documented ownership or 
equity interests allocated according to capital contributions and where 
the payments are not mere subterfuges for the payment of compensation 
based on loan terms and (2) bona fide ownership or equity interests are 
ownership or equity interests not allocated based on the terms of a 
loan originator's transactions. The comment gives an example of a 
limited liability company (LLC) loan originator organization that 
allocates its members' respective equity interests based on the 
member's transaction terms; in that instance, the distributions are not 
bona fide and, thus, are considered compensation for purposes of Sec.  
1026.36(d) and (e). The Bureau believes the clarification provided by 
proposed comment 36(a)-5.iv is necessary to distinguish legitimate 
returns on ownership from returns on ownership in companies that 
manipulate business ownership structures as a means to circumvent the 
restrictions on compensation in Sec.  1026.36(d) and (e).
    The Bureau invites comment on comment 36(a)-5.iv as proposed and on 
whether other forms of corporate structure or returns on ownership 
interest should be specifically addressed in the definition of 
``compensation.'' The Bureau also seeks comment generally on other 
methods of providing incentives to loan originators that the Bureau 
should consider specifically addressing in the proposed guidance on the 
definition of ``compensation.''
36(d)) Prohibited Payments to Loan Originators
36(d)(1) Payments Based on Transaction Terms
    Section 1026.36(d)(1)(i), which was added to Regulation Z by the 
Board's 2010 Loan Originator Final Rule, provides that, in connection 
with a consumer credit transaction secured by a dwelling, ``no loan 
originator shall receive and no person shall pay to a loan originator, 
directly or indirectly, compensation in an amount that is based on any 
of the transaction's terms or conditions.'' Section 1026.36(d)(1)(ii) 
states that the amount of credit extended is not deemed to be a 
transaction term or condition, provided compensation received by or 
paid to a loan originator, directly or indirectly, is based on a fixed 
percentage of the amount of credit extended; the provision also states 
that such compensation may be subject to a minimum or maximum dollar 
amount. Section 1026.36(d)(1)(iii) provides that Sec.  1026.36(d)(1)(i) 
does not apply to any transaction subject to Sec.  1026.36(d)(2) (i.e., 
where a consumer pays a loan originator directly).
    In adopting its 2010 Loan Originator Final Rule, the Board noted 
that ``compensation payments based on a loan's terms or conditions 
create incentives for loan originators to provide consumers loans with 
higher interest rates or other less favorable terms, such as prepayment 
penalties,'' citing ``substantial evidence that compensation based on 
loan rate or other terms is commonplace throughout the mortgage 
industry, as reflected in Federal agency settlement orders, 
congressional hearings, studies, and public proceedings.'' 75 FR 58520. 
Among the Board's stated concerns was: ``Creditor payments to brokers 
based on the interest rate give brokers an incentive to provide 
consumers loans with higher interest rates. Large numbers of consumers 
are simply not aware this incentive exists.'' \49\ Id. The official 
commentary to Sec.  1026.36(d)(1) provides further guidance regarding 
the general prohibition on loan originator compensation based on terms 
and conditions of loans.
---------------------------------------------------------------------------

    \49\ The Board adopted this prohibition on certain compensation 
practices based on its finding that compensating loan originators 
based on a loan's terms or conditions, other than the amount of 
credit extended, is an unfair practice that causes substantial 
injury to consumers. Id. The Board stated that it was relying on 
authority under TILA section 129(l)(2) (since re-designated as 
section 129(p)(2)) to prohibit acts or practices in connection with 
mortgage loans that it finds to be unfair or deceptive. Id. The 
Board decided to issue its 2010 Loan Originator Final Rule even 
though a subsequent rulemaking was necessary to implement TILA 
section 129B(c). See 75 FR at 58509. As discussed below, Dodd-Frank 
Act section 1403 provides an additional express statutory base of 
authority for the Bureau's rulemaking.
---------------------------------------------------------------------------

    Since the Board's 2010 Loan Originator Final Rule was promulgated, 
the Board and the Bureau (following the transfer of authority over TILA 
to the Bureau under the Dodd-Frank Act) have received numerous 
interpretive questions about the provisions of Sec.  1026.36(d)(1). 
First, questions have arisen about the application of the Board's rule 
to payments that are based on factors that may be ``proxies'' for loan 
terms. The Bureau understands there has been considerable uncertainty 
on this issue. Furthermore, mortgage creditors and others have raised 
questions about whether Sec.  1026.36(d)(1) prohibits the pooling of 
compensation and sharing in such pooled compensation by loan 
originators that are compensated differently and originate loans with 
different terms.
    The Board and the Bureau also have received a number of questions 
about

[[Page 55291]]

whether, and how, the current regulation applies to employer 
contributions to profit-sharing, 401(k), and employee stock ownership 
plans (ESOPs) that are qualified under section 401(a) of the Internal 
Revenue Code and how the regulation applies to compensation paid 
pursuant to employer-sponsored profit-sharing plans that are not 
qualified plans. These questions have arisen because often the amount 
of payments to individual loan originators under profit-sharing plans 
and of contributions to qualified or non-qualified plans in which 
individual loan originators participate will depend substantially on 
the profits of the creditors and the loan originator organizations, 
which in turn often may depend in part on the terms of the loans 
generated by the individual loan originators, such as the interest 
rate. In response to these questions, the Bureau issued a bulletin on 
April 2, 2012 (CFPB Bulletin 2012-2), clarifying that, until the Bureau 
adopts final rules implementing the Dodd-Frank Act provisions regarding 
loan originator compensation, an employer may make contributions to a 
qualified retirement plan out of a pool of profits derived from loans 
originated by the company's loan originator employees. CFPB Bulletin 
2012-02 (Apr. 2, 2012).\50\ The Bureau did not believe it was practical 
at the time, however, to provide guidance on the application of the 
current rules to plans that are not qualified plans because such 
questions are fact-specific in nature. Id. The Bureau noted that it 
anticipated providing greater clarity on these arrangements in 
connection with a proposed rule on the loan origination provisions in 
the Dodd-Frank Act. Id. This proposed rule is intended, in part, to 
provide such clarity.
---------------------------------------------------------------------------

    \50\ U.S. Consumer Fin. Prot. Bureau, CFPB Bull. No. 2012-2, 
Payments to Loan Originators Based on Mortgage Transaction Terms or 
Conditions under Regulation Z (Apr. 2, 2012), available at: https://files.consumerfinance.gov/f/201204_cfpb_LoanOriginatorCompensationBulletin.pdf.
---------------------------------------------------------------------------

    As discussed earlier, section 1403 of the Dodd-Frank Act added new 
TILA section 129B(c). This new statutory provision builds on, but in 
some cases imposes new or different requirements than, the current 
Regulation Z provisions established by the Board's 2010 Loan Originator 
Final Rule. Under TILA section 129B(c)(1), for any residential mortgage 
loan, no mortgage originator shall receive from any person and no 
person shall pay to a mortgage originator, directly or indirectly, 
compensation that varies based on the terms of the loan (other than the 
amount of the principal). 12 U.S.C. 1639b(c)(1). Further, TILA section 
129B(c)(4)(A) provides that nothing in section 129B(c) of TILA permits 
yield spread premiums or other similar compensation that would, for any 
residential mortgage loan, permit the total amount of direct and 
indirect compensation from all sources permitted to a mortgage 
originator to vary based on the terms of the loan (other than the 
amount of the principal). 12 U.S.C. 1639b(c)(4)(A).\51\ The statute 
also provides that nothing in TILA section 129B(c) prohibits incentive 
payments to a mortgage originator based on the number of residential 
mortgage loans originated within a specified period of time. 12 U.S.C. 
1639b(c)(4)(D).\52\ The statute serves as an additional express base of 
authority for the Bureau to undertake this rulemaking.
---------------------------------------------------------------------------

    \51\ TILA section 129B(c)(4) also states that nothing in TILA 
section 129B(c) shall be deemed to limit or affect the amount of 
compensation received by a creditor upon the sale of a consummated 
loan to a subsequent purchaser. 12 U.S.C. 1639b(c)(4)(B). Moreover, 
a consumer is not restricted from financing at his or her option, 
including through principal or rate, any origination fees or costs 
permitted under TILA section 129B(c)(4), and a mortgage originator 
may receive such fees or costs, including compensation (subject to 
other provisions of TILA section 129B(c)), so long as such fees or 
costs do not vary based on the terms of the loan (other than the 
amount of the principal) or the consumer's decision as to whether to 
finance the fees or costs. 12 U.S.C. 1639b(c)(4)(C).
    \52\ Comment 36(d)(1)-3 already clarifies that the loan 
originator's overall loan volume delivered to the creditor is an 
example of permissible compensation for purposes of the regulation.
---------------------------------------------------------------------------

    Although the language in section 1403 of the Dodd-Frank Act 
amending TILA and addressing mortgage originator compensation that 
varies based on terms of the transaction generally mirrors the current 
regulatory text and commentary of Sec.  1026.36(d)(1), the statutory 
and regulatory provisions differ in several respects. First, unlike 
Sec.  1026.36(d)(1)(iii), the statute does not contain an exception to 
the general prohibition on compensation varying based on loan terms for 
transactions where the mortgage originator receives compensation 
directly from the consumer. Second, while Sec.  1026.36(d)(1) prohibits 
compensation that is based on a transaction's ``terms or conditions,'' 
TILA section 129B(c)(1) refers only to compensation that varies based 
on ``terms.'' Finally, Sec.  1026.36(d)(1)(i) provides that the loan 
originator may not receive and no person shall pay compensation in an 
amount ``that is based on'' any of the transaction's terms or 
conditions, whereas TILA section 129B(c)(1) prohibits compensation that 
``varies based on'' the terms of the loan.\53\
---------------------------------------------------------------------------

    \53\ The latter two differences are discussed in the section-by-
section analysis of proposed Sec.  1026.36(a), above.
---------------------------------------------------------------------------

    In view of the differences in the statutory and regulatory 
provisions prohibiting loan originator compensation based on 
transaction terms and the interpretive questions that have arisen with 
regard to the current regulations noted above, the Bureau is proposing 
revisions to Sec.  1026.36(d)(1) and its commentary to harmonize the 
regulatory provisions with the language added to TILA by the Dodd-Frank 
Act. Moreover, the Bureau is proposing certain revisions to Sec.  
1026.36(d)(1) and its commentary to address the interpretive issues 
that have arisen under the current regulations.
36(d)(1)(i)
Terms or Conditions
    As noted previously, Sec.  1026.36(d)(1)(i) provides that, in 
connection with a consumer credit transaction secured by a dwelling, 
``no loan originator shall receive and no person shall pay to a loan 
originator, directly or indirectly, compensation in an amount that is 
based on any of the transaction's terms or conditions.'' The Dodd-Frank 
Act section 1403 amendments, which added TILA section 129B(c), limits 
restrictions on mortgage originator compensation to ``terms of the 
loan'' only. Current Sec.  1026.36(d)(1)(i) and commentary provide that 
a loan originator may not receive and no person may pay to a loan 
originator compensation that is based on any of the ``transaction's 
terms or conditions.''
    The Bureau proposes to retain the word ``transaction,'' rather than 
use the statutory term ``loan,'' to preserve consistency within 
Regulation Z. The Bureau makes this proposal pursuant to its authority 
under TILA section 105(a) to prescribe regulations that provide for 
such adjustments and exceptions for all or any class of transactions, 
that the Bureau judges are necessary or proper to effectuate the 
purposes of TILA, to prevent circumvention or evasion thereof, or to 
facilitate compliance. The Bureau believes that ``transaction'' and 
``loan,'' as that term is used in TILA section 129B(c), have consistent 
meanings and, therefore, that preserving the use of ``transaction'' in 
Sec.  1026.36(d)(1)(i) will facilitate compliance for creditors by 
avoiding the need to contend with a distinct, but duplicative, defined 
term.
    On the other hand, the Bureau proposes to revise the phrase ``terms 
or conditions'' to delete the word

[[Page 55292]]

``conditions'' for Sec.  1026.36(d)(1)(i) where applicable in both the 
regulatory text and commentary. The Bureau is also proposing conforming 
amendments to Sec.  1026.36(d)(1)(ii). The Bureau believes that removal 
of the term ``conditions'' from ``transaction terms or conditions'' 
clarifies Sec.  1026.36(d)(1) but does not materially amend the 
provision's scope. The Bureau also proposes to revise the discussion 
about proxies, discussed in more detail below, to aid in determining 
whether a factor is a proxy for a transaction's terms.
Varies Based On
    TILA section 129B(c)(1) prohibits a mortgage originator from 
receiving, and any person from paying a mortgage originator, 
``compensation that varies based on'' the terms of the loan (emphasis 
added). The prohibition in current Sec.  1026.36(d)(1) is on 
``compensation in an amount that is based on'' the transaction's terms 
and conditions (emphasis added). The Bureau believes the meaning of the 
statute's reference to compensation that ``varies'' based on loan terms 
is already embodied in Sec.  1026.36(d)(1). Thus, the Bureau does not 
propose to revise Sec.  1026.36(d)(1) to include the word ``varies.''
    The Bureau believes that compensation to loan originators violates 
the prohibition if the amount of the compensation is based on the terms 
of the transaction (that is, a violation does not require a showing of 
any person's subjective intent to relate the amount of the payment to a 
particular loan term). Proposed new comment 36(d)(1)-1.i clarifies 
these points. The Bureau is proposing new comment 36(d)(1)-1 in place 
of existing comment 36(d)(1)-1, which is being moved to comment 36(a)-
5, as discussed above.
    The proposed comment also clarifies that a difference between the 
amount of compensation paid and the amount that would have been paid 
for different terms might be shown by a comparison of different 
transactions with different terms made by the same loan originator, but 
a violation does not require a comparison of multiple transactions.
Proxy for Loan Terms
    The Bureau also proposes revisions to Sec.  1026.36(d)(1) and 
comment 36(d)(1)-2 to provide guidance for determining whether a factor 
is a proxy for a transaction's term and also provide examples. As 
stated above, Sec.  1026.36(d)(1)(i) provides that, in connection with 
a consumer credit transaction secured by a dwelling, no loan originator 
shall receive and no person shall pay to a loan originator, directly or 
indirectly, compensation in an amount that is based on any of the 
transaction's terms or conditions. Existing comment 36(d)(1)-2 further 
elaborates on the prohibition by stating:

    The rule also prohibits compensation based on a factor that is a 
proxy for a transaction's terms or conditions. For example, a 
consumer's credit score or similar representation of credit risk, 
such as the consumer's debt-to-income ratio, is not one of the 
transaction's terms or conditions. However, if a loan originator's 
compensation varies in whole or in part with a factor that serves as 
a proxy for loan terms or conditions, then the originator's 
compensation is based on a transaction's terms or conditions.

The existing comment also illustrates the guidance by providing an 
example of payments based on credit score that would violate Sec.  
1026.36(d)(1).
    Since the Board's 2010 Loan Originator Final Rule was promulgated, 
the Board and the Bureau have received numerous inquiries on whether 
particular loan originator payment structures are based on factors that 
are proxies for loan terms. Small Entity Representatives (SERs) on the 
Small Business Review Panel also urged the Bureau to use this 
rulemaking to clarify when a factor used to determine compensation for 
a loan originator is a proxy for a loan term. The Bureau does not 
believe that any departure from the approach to proxies in current 
comment 36(d)(1)-2 is necessitated by the Dodd-Frank Act. The Bureau 
also believes that current Sec.  1026.36(d)(1)(i) prohibits 
compensation based on a factor that is a proxy for a transaction's 
terms. However, the Bureau understands there has been considerable 
uncertainty on this issue and proposes clarifications in Sec.  
1026.36(d)(1)(i) and comment 36(d)(1)-2.i to help creditors and loan 
originators determine whether a factor on which compensation would be 
based is a proxy for a transaction's terms.
    The proposal clarifies in Sec.  1026.36(d)(1)(i), rather than 
commentary only, that compensation based on a proxy for a transaction's 
terms is prohibited. The proposed clarification in Sec.  
1026.36(d)(1)(i) and comment 36(d)(1)-2.i also provides that a factor 
(that is not itself a term of a transaction originated by the loan 
originator) is a proxy for the transaction's terms if: (i) The factor 
substantially correlates with a term or terms of the transaction and 
(ii) the loan originator can, directly or indirectly, add, drop, or 
change the factor when originating the transaction.\54\
---------------------------------------------------------------------------

    \54\ The Bureau specifically sought input during the Small 
Business Review Panel process on clarifying the rule's application 
to proxies. The proxy proposal under consideration presented to the 
SERs during the Small Business Review Panel process stated that ``a 
factor is a proxy if: (1) It substantially correlates with a loan 
term; and (2) the MLO has discretion to use the factor to present a 
loan to the consumer with more costly or less advantageous term(s) 
than term(s) of another loan available through the MLO for which the 
consumer likely qualifies.'' After further consideration, the Bureau 
believes the proxy proposal contained in this proposed rule would be 
easier to apply uniformly and would better addresses cases where the 
loan originator does not ``use'' the factor than the specific 
proposal presented to the Small Business Review Panel. The Bureau, 
however, welcomes comment on how best to address proxies.
---------------------------------------------------------------------------

    Both conditions must be satisfied for a factor to be considered a 
proxy for a transaction's terms. If a factor does not ``substantially'' 
correlate with a term of a transaction originated by the loan 
originator, the factor is not a proxy for a transaction's terms. The 
Bureau proposes to use the term ``substantially'' but invites comment 
on whether this term is sufficiently clear and, if not, what other 
terms should be considered. The Bureau also seeks comment on how 
correlation to a term should be determined.
    If the factor does substantially correlate with a term of a 
transaction originated by the loan originator, then the factor must be 
analyzed under the second condition, whether the loan originator can, 
directly or indirectly, add, drop, or change the factor when 
originating the transaction. The Bureau believes that, where a loan 
originator has no or minimal ability directly or indirectly to add, 
drop, or change a factor, that factor cannot be a proxy for the 
transaction's terms because such a factor cannot be the basis for 
incentives to steer consumers inappropriately. For example, loan 
originators cannot change a property's location, thus property location 
cannot be a proxy for a transaction's terms. Arguably, a loan 
originator could indirectly change the property location by steering a 
consumer to choose a property in a particular location. However, the 
ability for loan originators to steer consumers to a particular 
property location with such frequency to serve as an incentive for 
steering consumers is minimal. In proposed comment 36(d)(1)-2.i, the 
Bureau provides three new examples to illustrate use of the proposed 
proxy standard and to facilitate compliance with the rule.
    The Bureau also proposes to delete the current proxy example in the 
comment that identifies credit scores as a proxy for a transaction's 
terms. The Bureau believes the current credit score proxy example is 
confusing and created uncertainty for creditors and loan originators 
depending on their

[[Page 55293]]

particular facts and circumstances. Moreover, under the guidance 
discussed above, a credit score may or may not be a proxy for a 
transaction's terms, depending on the facts and circumstances; it is 
not automatically a proxy, as many creditors and loan originators have 
inferred from the existing comment's example.
    The Bureau proposes to add comment 36(d)(1)-2.i.A which provides an 
example of compensation based on a loan originator's employment tenure. 
This factor likely has little (if any) correlation to loan terms. This 
example illustrates how, if a factor that compensation is based on has 
little to no correlation to a transaction's term or terms, it is not a 
proxy for a transaction's terms.
    Proposed comment 36(d)(1)-2.i.B provides an example illustrating 
how a loan originator's compensation varies based on whether a loan is 
held in portfolio or sold into the secondary market. In this case, the 
example assumes a loan is held in portfolio or sold into the secondary 
market depending in large part on whether the loan is a five-year 
balloon loan or a thirty-year loan. Thus, whether a loan is held in 
portfolio or sold into the secondary market substantially correlates 
with the transaction's terms. The loan originator in the example may be 
able to change the factor indirectly by steering the consumer to choose 
the five-year loan or the thirty-year loan. Thus, whether a loan is 
held in portfolio or sold into the secondary market is a proxy for a 
transaction's terms under these particular facts and circumstances.
    Proposed comment 36(d)(1)-2.i.C illustrates an example where 
compensation is based on the geographic location of the property 
securing a refinancing. The loan originator is paid a higher commission 
for refinancings secured by property in State A than in State B. Even 
if refinancings secured by property in State A have lower interest 
rates than loans secured by property in State B, the property's 
location substantially correlates with loan terms. However, the loan 
originator cannot change the presence or absence of the factor (i.e., 
whether the refinancing is secured by property in State A or State B). 
Thus, geographic location, under these particular facts and 
circumstances, would not be considered a proxy for a transaction's 
terms.
    Other proposed revisions to comment 36(d)(1)-2 include clarifying 
that the rule does not prohibit compensating loan originators 
differently on different transactions, provided such differences in 
compensation are not based on a transaction's terms or a proxy for a 
transaction's terms. The Bureau also proposes to delete ``conditions'' 
from the comment where applicable and the existing guidance that the 
loan-to-value ratio is not a term of the transaction to conform to the 
proposed amendment discussed above concerning the prohibition on 
compensation based on the transaction's ``terms.''
    The Bureau believes that the proposed changes and the addition of 
new commentary should reduce uncertainty and help simplify application 
of the prohibition on compensation based on the transaction's terms. 
The Bureau has learned through outreach, however, that a number of 
creditors pay loan originators the same commission regardless of loan 
product or type. Many of these institutions have expressed concerns 
about revising the proxy guidance. They argue that unscrupulous loan 
originators will attempt to use any specific proxy guidance to justify 
compensation schemes that violate the principles of the rule. The 
Bureau therefore solicits comment on the proposal, alternatives the 
Bureau should consider, or whether any action to revise the proxy 
concept and analysis is helpful and appropriate.
Pooled Compensation
    Comment 36(d)(1)-2 provides examples of compensation that is based 
on transaction terms or conditions. Mortgage creditors and others have 
raised questions about whether loan originators that are compensated 
differently and originate loans with different terms are prohibited 
under Sec.  1026.36(d)(1) from pooling their compensation and sharing 
in that compensation pool. For example, assume that Loan Originator A 
receives a commission of two percent of the loan amount for each loan 
that he or she originates and originates loans that generally have 
higher interest rates than the loans that Loan Originator B originates. 
In addition, assume Loan Originator B receives a commission of one 
percent of the loan amount for each loan that he or she originates and 
originates loans that generally have lower interest rates than the 
loans originated by Loan Originator A. The Bureau proposes to revise 
comment 36(d)(1)-2 to make clear that, where loan originators are 
compensated differently and they each originate loans with different 
terms, Sec.  1026.36(d)(1) does not permit the pooling of compensation 
so that the loan originators share in that pooled compensation. In this 
example, proposed comment 36(d)(1)-2.ii clarifies that the compensation 
of the two loan originators may not be pooled so that the loan 
originators share in that pooled compensation. The Bureau believes that 
this type of pooling is prohibited by Sec.  1026.36(d)(1) because each 
loan originator is being paid based on loan terms, with each loan 
originator receiving compensation based on the terms of the loans made 
by the loan originators collectively. This type of pooling arrangement 
could provide an incentive for the loan originators participating in 
the pooling arrangement to steer some consumers to loan originators 
that originate loan with less favorable terms (for example, that have a 
higher interest rate), to maximize their compensation.
Creditor's Ability to Offer Certain Loan Terms
    Comment 36(d)(1)-4 clarifies that Sec.  1026.36(d)(1) does not 
limit the creditor's ability to offer certain loan terms. Specifically, 
comment 36(d)(1)-4 makes clear that Sec.  1026.36(d)(1) does not limit 
a creditor's ability to offer a higher interest rate as a means for the 
consumer to finance the payment of the loan originator's compensation 
or other costs that the consumer would otherwise pay (for example, in 
cash or by increasing the loan amount to finance such costs). Thus, a 
creditor is not prohibited by Sec.  1026.36(d)(1) from charging a 
higher interest rate to a consumer who will pay some or none of the 
costs of the transaction directly, or offering the consumer a lower 
rate if the consumer pays more of the costs directly. For example, a 
creditor may charge an interest rate of 6.0 percent where the consumer 
pays some or all of the transaction costs but may charge an interest 
rate of 6.5 percent where the consumer pays none of those costs 
(subject to the requirements of proposed Sec.  1026.36(d)(2)(ii), 
discussed below). Section 1026.36(d)(1) also does not limit a creditor 
from offering or providing different loan terms to the consumer based 
on the creditor's assessment of credit and other risks (such as where 
the creditor uses risk-based pricing to set the interest rate for 
consumers). Finally, a creditor is not prohibited under Sec.  
1026.36(d)(1) from charging consumers interest rates that include an 
interest rate premium to recoup the loan originator's compensation 
through increased interest paid by the consumer (such as by adding a 
0.25 percentage point to the interest rate on each loan). This guidance 
recognizes that creditors that pay a loan originator's compensation 
generally recoup that cost through a higher interest rate charged to 
the consumer.

[[Page 55294]]

    As discussed in the section-by-section analysis to proposed Sec.  
1026.36(d)(2)(ii), for transactions subject to proposed Sec.  
1026.36(d)(2)(ii), a creditor, a loan originator organization, or 
affiliates of either may not impose on the consumer any discount points 
and origination points or fees unless the creditor complies with Sec.  
1026.36(d)(2)(ii)(A). As discussed below, proposed Sec.  
1026.36(d)(2)(ii)(A) requires, as a prerequisite to a creditor, loan 
originator organization, or affiliates of either imposing any discount 
points and origination points or fees on a consumer in a transaction, 
that the creditor also make available to the consumer a comparable, 
alternative loan that does not include discount points and origination 
points or fees, unless the consumer is unlikely to qualify for such a 
loan. Because of these restrictions in proposed Sec.  
1026.36(d)(2)(ii), the Bureau proposes to revise comment 36(d)(1)-4 to 
clarify that charging different interest rates, such as in accordance 
with risk-based pricing policies, relates only to Sec.  1026.36(d)(1) 
and is not intended to override the restrictions in proposed Sec.  
1026.36(d)(2)(ii).
Point Banks
    Based on numerous inquiries received, the Bureau considered 
proposing commentary language addressing whether there are any 
circumstances under which point banks are permissible under Sec.  
1026.36(d). The Bureau received and considered the views of SERs 
participating in the Small Business Review Panel process as well as the 
views expressed by other stakeholders during outreach. Based on those 
views and the Bureau's own considerations, the Bureau believes that 
there are no circumstances under which point banks are permissible, and 
they therefore continue to be prohibited.
    Point banks operate as follows: Each time a loan originator closes 
a transaction, the creditor contributes some agreed upon, small 
percentage of that transaction's principal amount (for example, 0.15 
percent, or 15 ``basis points'') into the loan originator's point bank 
account. This account is not actually a deposit account with the 
creditor or any depository institution but is only a continuously 
maintained accounting balance of basis points credited for originations 
and amounts debited when ``spent'' by the loan originator. The loan 
originator may spend any amount up to the current balance in the point 
bank to obtain pricing concessions from the creditor on the consumer's 
behalf for any transaction. For example, the loan originator may pay 
discount points to the creditor from the loan originator's point bank 
to obtain a lower rate for the consumer.
    Payments to point banks serve as a form of loan originator 
compensation because they enable additional transactions to be 
consummated and loan originators to receive compensation on these 
transactions. Accordingly, they are a financial incentive to the loan 
originator and, therefore, compensation as proposed Sec.  1026.36(a)(3) 
defines that term. To the extent such payments are based on the 
transaction's terms or a factor that operates as a proxy for the 
transaction's terms, they violate Sec.  1026.36(d)(1) directly. Even if 
the contribution to a loan originator's point bank for a given 
transaction is not based on the transaction's terms (or a proxy 
therefor), the loan originator's subsequent spending of amounts from 
the point bank on other transactions violates Sec.  1026.36(d)(1) as an 
impermissible pricing concession pursuant to comment 36(d)(1)-5, 
discussed below. The Bureau believes that even a point bank whose funds 
are reserved for use in the unique circumstances described in proposed 
new comment 36(d)(1)-7 where pricing concessions would be permitted, 
discussed below, cannot be legitimate because the criteria set forth in 
comment 36(d)(1)-7 limit such concessions to unusual and infrequent 
cases of unforeseen increases in closing costs; by definition, a point 
bank contemplates routine use, which is contrary to the premises of 
comment 36(d)(1)-7.
    The Bureau's decision not to propose to allow point banks was also 
informed by the uniformly negative view of SERs participating in the 
Small Business Review Panel process and negative views expressed by 
many other stakeholders in further outreach. The SERs listed a number 
of concerns, including the risk that points bank would create 
incentives for loan originators to upcharge some consumers to create 
flexibility for themselves to provide concessions to other consumers; 
the possibility that point banks would permit loan officers to treat 
consumers differently, which could lead to fair lending concerns; and 
the prospect of mortgage brokers steering consumers to the lender that 
provided them with the greatest point bank contributions. For the 
reasons stated above, the Bureau is not proposing to provide guidance 
describing circumstances under which point banks are permissible under 
Sec.  1026.36(d).
Pricing Concessions
    The Bureau proposes two revisions to the Sec.  1026.36(d)(1) 
commentary addressing loan originator pricing concessions. Comment 
36(d)(1)-5 discusses the effect of modifying loan terms on loan 
originator compensation. The existing comment provides that a creditor 
and loan originator may not agree to set the originator's compensation 
at a certain level and then subsequently lower it in selective cases 
(such as where the consumer is offered a reduced rate to meet a quote 
from another creditor), i.e., the compensation is not subject to change 
(increase or decrease) based on whether different loan terms are 
negotiated. The Bureau is proposing a revision to this comment. The 
revised comment provides that, while the creditor may change loan terms 
or pricing, for example to match a competitor, avoid triggering high-
cost loan provisions, or for other reasons, the loan originator's 
compensation on that transaction may not be changed. Thus, the revised 
comment clarifies that a loan originator may not agree to reduce its 
compensation or provide a credit to the consumer to pay a portion of 
the consumer's closing costs, for example, to avoid high-cost loan 
provisions. The revised comment also includes a cross-reference to 
comment 36(d)(1)-7 for further guidance.
    The Bureau proposes to delete existing comment 36(d)(1)-7, which 
clarifies that the prohibition in Sec.  1026.36(d)(1) does not apply to 
transactions in which any loan originator receives compensation 
directly from the consumer (i.e., ``consumer-paid transactions''). Like 
the language in current Sec.  1026.36(d)(1)(iii) (discussed later in 
this section-by-section analysis), this comment has been superseded by 
the Dodd-Frank Act, which applies the prohibition on compensation based 
on transaction terms to consumer-paid transactions.
    In its place, the Bureau proposes to include a new comment 
36(d)(1)-7 addressing a discrete issue related to pricing concessions. 
The proposed comment provides that, notwithstanding comment 36(d)(1)-5, 
Sec.  1026.36(d)(1) does not prohibit loan originators from decreasing 
their compensation to cover unanticipated increases in non-affiliated 
third-party closing costs that result in the actual amounts of such 
closing costs exceeding limits imposed by applicable law (e.g., 
tolerance violations under Regulation X). This interpretation of Sec.  
1026.36(d)(1) does not apply if the creditor or the loan originator 
knows or should reasonably be expected to know the amount of any

[[Page 55295]]

third-party closing costs in advance. Proposed comment 36(d)(1)-7 
explains, by way of example, that a loan originator is reasonably 
expected to know the amount of the third-party closing costs in advance 
if the loan originator allows the consumer to choose from among only 
three pre-approved third-party service providers.
    The Bureau believes that such concessions, when made in response to 
unforeseen events outside the loan originator's control to comply with 
otherwise applicable legal requirements, do not raise concerns about 
the potential for steering consumers to different loan terms. That is, 
if the excess closing cost is truly unanticipated and results in the 
loan originator having to take less compensation to cure the violation 
of applicable law, no steering issues are present because the loan 
originator's compensation is being decreased after-the-fact. Thus, a 
loan originator's reduced compensation in such cases is not in fact 
based on the transaction's terms and does not violate Sec.  
1026.36(d)(1). This further clarification effectuates the purposes of, 
and facilitates compliance with, TILA section 129B(c)(1) and Sec.  
1026.36(d)(1)(i) because, without it, creditors and loan originators 
might incorrectly conclude that such concessions being borne by a loan 
originator would violate those provisions, or they could face 
unnecessary uncertainty with regard to compliance with these provisions 
and other laws, such as Regulation X's tolerance requirements.
    Under the proposed comment, a loan originator cannot make a pricing 
concession where the loan originator knows or reasonably is expected to 
know the amount of the third-party closing costs in advance. If a loan 
originator makes repeated pricing concessions for the same categories 
of closing costs across multiple transactions, based on a series of 
purportedly unanticipated expenses, the Bureau believes proposed 
comment 36(d)(1)-7 does not apply because the loan originator is 
reasonably expected to know the closing costs across multiple 
transactions. In that instance, the pricing concessions would raise the 
same concerns that resulted in the guidance under current comment 
36(d)(1)-5 that pricing concessions are not permissible under Sec.  
1026.36(d)(1)(i) (i.e., because loan originators could knowingly 
overestimate the closing costs and then selectively reduce the closing 
costs as a concession).
    The Bureau solicits comment on whether this interpretation is 
appropriate, too narrow, or creates a risk of undermining the principal 
prohibition of compensation based on a transaction's terms.
Compensation Based on Terms of Multiple Transactions by an Individual 
Loan Originator
    Section 1026.36(d)(1)(i) prohibits payment of an individual loan 
originator's compensation that is directly or indirectly based on the 
terms of ``the transaction.'' The Bureau believes that ``transaction'' 
necessarily includes multiple transactions by a single individual loan 
originator because the payment of compensation is not always tied to a 
single transaction. Current comment 36(d)(1)-3 lists several examples 
of compensation methods not based on transaction terms that take into 
account multiple transactions, including compensation based on overall 
loan volume and the long-term performance of the individual loan 
originator's loans. Moreover, multiple transactions by definition 
comprise the individual transactions. Thus, the Bureau believes that 
the singular word ``transaction'' in Sec.  1026.36(d)(1)(i) includes 
multiple transactions by a single individual loan originator. To avoid 
any possible uncertainty, however, the Bureau proposes to clarify, as 
part of proposed comment 36(d)(1)-1.ii, that Sec.  1026.36(d)(1)(i) 
prohibits compensation based on the terms of multiple transactions by 
an individual loan originator.
Compensation Based on Terms of Multiple Individual Loan Originators' 
Transactions
    As noted above, current Sec.  1026.36(d)(1)(i) prohibits payment of 
an individual loan originator's compensation that is ``directly or 
indirectly'' based on the terms of ``the transaction,'' and TILA (as 
amended by the Dodd-Frank Act) similarly prohibits compensation that 
``directly or indirectly'' varies based on the terms of ``the loan.'' 
However, the current regulation and its commentary do not expressly 
address whether a person may pay compensation by considering the terms 
of multiple transactions subject to Sec.  1026.36(d) of multiple 
individual loan originators employed by the person during the time 
period for which the compensation is being paid. Compensation in the 
form of a bonus, for example, may be based indirectly on the terms of 
multiple individual loan originators' transactions. For example, assume 
that a creditor employs six individual loan originators and offers 
loans at a minimum rate of 6.0 percent and a maximum rate of 8.0 
percent (unrelated to risk-based pricing). Assuming relatively constant 
loan volume and amounts of credit extended and relatively static market 
rates, if the six individual loan originators' aggregate transactions 
in a given calendar year average a rate of 7.5 percent rather than 7.0 
percent, creating a higher interest rate spread over the creditor's 
minimum acceptable rate of 6.0 percent, the creditor will generate 
higher amounts of interest revenue if the loans are held in portfolio 
and increased proceeds from secondary market purchasers if the loans 
are sold. Assume that the increased revenues lead to higher profits for 
the creditor (i.e., expenses do not increase so as to negate the effect 
of higher revenues). If the creditor pays a bonus to an individual loan 
originator out of a bonus pool established with reference to the 
creditor's profitability that, all other factors being equal, is higher 
than it would have been if the average rate of the six individual loan 
originators' transactions was 7.0 percent, then the bonus is indirectly 
related to the terms of multiple transactions of multiple loan 
originators.
    Because neither TILA (as amended by the Dodd-Frank Act) nor the 
current regulations expressly addresses the payment of compensation 
that is based on the terms of multiple loan originators' transactions, 
numerous questions have been posed regarding the applicability of the 
current regulation to qualified plans and profit-sharing and retirement 
plans that are not qualified plans. In CFPB Bulletin 2012-2, the Bureau 
stated that it was permissible to pay contributions to qualified plans 
if the contributions to the qualified plans are derived from profits 
generated by mortgage loan originations but did not address how the 
rules applied to non-qualified plans. CFPB Bulletin 2012-2 stated 
further that guidance on the payment of compensation out of profits 
generated by mortgage loan originations would be forthcoming. The 
proposed rule reflects the Bureau's views on this issue.
    The Bureau believes that compensation that directly or indirectly 
is based on the terms of multiple transactions subject to Sec.  
1026.36(d) of multiple individual loan originators poses the same 
fundamental problems that the Dodd-Frank Act and the current regulation 
address with regard to the individual loan originator's transactions. A 
profit-sharing plan, bonus pool, or profit pool set aside out of a 
portion of a creditor or loan originator organization's profits, from 
which bonuses are paid or contributions to qualified or non-qualified 
plans are

[[Page 55296]]

made, may readily and directly reflect transaction terms of multiple 
individual loan originators taken in the aggregate. As a result, this 
type of compensation creates potential incentives for individual loan 
originators to steer consumers to different loan terms.
    In view of such matters, the framing of compensation restrictions 
in current Sec.  1026.36(d)(1)(i) in terms of ``the transaction'' 
permits an interpretation that could undermine the purpose of the rule. 
The prohibition in current Sec.  1026.36(d)(1)(i) means that a creditor 
or loan originator organization cannot differentially distribute 
compensation among individual loan originators based on each individual 
loan originator's transaction terms. Because the current regulation 
does not expressly address compensation based on the terms of multiple 
individual loan originators' transactions, however, creditors and loan 
originator organizations could establish compensation policies that 
evade the intent of Sec.  1026.36(d)(1)(i). For example, creditors and 
loan originator organizations could restructure their compensation 
policies to pay a higher percentage of the individual loan originator's 
compensation through bonuses under profit-sharing plans rather than 
through salary, commissions, or other forms of compensation that are 
not based on aggregate transaction terms of multiple individual loan 
originators.
    Through outreach with creditors and loan originator organizations, 
the Bureau is aware that their bonus structures take a multitude of 
forms, including payment of so-called ``top-down'' and ``bottom-up'' 
bonuses. In a top-down process, management determines the size of a 
bonus pool for the firm as a whole at or near the end of the 
performance year, splits the bonus pool into sub-pools for each line of 
business, and then allocates the sub-pools to individual employees in a 
manner related to their individual performance. In contrast, a bottom-
up bonus is paid following the firm's assessment of each employee's 
performance and assignment of an incentive compensation award, with the 
firm's total amount of incentive compensation for the year being the 
sum of the individual incentive compensation awards. For many large 
banks, the processes are a mixture of top-down and bottom-up, but the 
emphasis can differ markedly.\55\ Although the potential incentive for 
steering consumers to different loan terms is clearly present with top-
down bonuses, where an actual profit pool is set up, steering 
incentives exist with regard to bottom-up bonuses as well. This is 
because the profitability of the company could be one of several 
factors taken into account in awarding a bonus package for an 
individual loan originator, making it clear to the individual loan 
originators that the employers are basing the amount of any bonuses 
paid on a factor (profits) which is substantially correlated to the 
terms of multiple transactions. Moreover, the Bureau understands that 
many companies utilize a mix of bottom-up and top-down bonuses, so 
drawing a distinction between top-down and bottom-up bonuses for 
regulatory purposes may be artificial and under-inclusive.
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    \55\ See Bd. of Governors of the Fed. Reserve Sys., Incentive 
Compensation Practices: A Report on the Horizontal Review of 
Practices at Large Banking Organizations 15 (2011), available at: 
https://www.federalreserve.gov/publications/other-reports/incentive-compensation-report-201110.htm (discussing bottom-up and top-down 
bonus structures).
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    In light of the foregoing, the Bureau is proposing a new comment 
36(d)(1)-1.ii to clarify that the prohibition on payment and receipt of 
compensation based on the transaction's terms under Sec.  
1026.36(d)(1)(i) covers compensation that directly or indirectly is 
based on the terms of multiple transactions subject to Sec.  1026.36(d) 
of multiple individual loan originators employed by the person. 
Proposed comment 36(d)(1)-1.ii also gives examples illustrating the 
application of this guidance. Proposed comment 36(d)(1)-2.iii.C 
provides further clarification on these issues. The Bureau believes 
this approach is necessary to implement the statutory provisions and is 
appropriate to address the potential incentives to steer consumers to 
different loan terms that are present with profit-sharing plans and to 
prevent circumvention or evasion of the statute.
    The Bureau believes this proposed clarification sets a bright-line 
standard with regard to compensating individual loan originators 
through bonuses and contributions to qualified or non-qualified plans 
based on the terms of multiple loan transactions by multiple individual 
loan originators. As discussed below, the Bureau believes it is 
appropriate to create additional rules to take into account 
circumstances where any potential incentives are sufficiently 
attenuated to permit such compensation. Specifically, the Bureau's 
proposal would permit employer contributions made to qualified plans in 
which individual loan originators participate, pursuant to Sec.  
1026.36(d)(1)(iii), discussed below. The proposal also would permit 
payment of bonuses under profit-sharing plans and contributions to non-
qualified defined benefit and contribution plans even if the 
compensation is directly or indirectly based on the terms of multiple 
individual loan originators' transactions where: (1) The revenues of 
the mortgage business do not predominate with respect to the total 
revenues of the person or business unit to which the profit-sharing 
plan applies, as applicable (pursuant to proposed Sec.  
1026.36(d)(1)(iii)(B)(1)) or (2) the individual loan originator being 
compensated was the loan originator for a de minimis number of 
transactions (pursuant to proposed Sec.  1026.36(d)(1)(iii)(B)(2)). The 
section-by-section analysis of proposed Sec.  1026.36(d)(1)(iii), 
below, discusses these additional provisions in more detail. In all 
instances, the compensation cannot take into account an individual loan 
originator's transaction terms, pursuant to Sec.  
1026.36(d)(1)(iii)(A). Because the Bureau is proposing to permit 
compensation based on multiple individual loan originators' terms in 
certain circumstances under proposed Sec.  1026.36(d)(1)(iii), the 
Bureau is proposing to revise Sec.  1026.36(d)(1)(i) to include the 
language ``Except as provided in [Sec.  1026.36(d)(1)(iii)]'' to 
emphasize that the compensation restrictions in Sec.  1026.36(d)(1)(i) 
are subject to the provisions in proposed Sec.  1026.36(d)(1)(iii).
    The Bureau recognizes that the potential incentives to steer 
consumers to different loan terms that are inherent in profit-sharing 
plans may vary based on many factors, including the organizational 
structure, size, diversity of business lines, and compensation 
arrangements. In certain circumstances, a particular combination of 
factors may substantially mitigate the potential steering incentives 
arising from profit-sharing plans. For example, the incentive of 
individual loan originators to upcharge likely diminishes as the total 
number of individual loan originators contributing to the profit pool 
increases. That is, the incentives may be mitigated because: (1) Each 
individual loan originator's efforts will have increasingly less impact 
on compensation paid under profit-sharing plans; and (2) the ability of 
an individual loan originator to coordinate efforts with the other 
individual loan originators will decrease.\56\ This may be

[[Page 55297]]

particularly true for large depository institution creditors or large 
non-depository loan originator organizations that employ many 
individual loan originators.\57\ In such a large organization, 
moreover, the nexus between the terms of the transactions of the 
multiple individual loan originators, the revenues of the organization, 
the profits of the organization, and the compensation decisions may be 
more diffuse. The Bureau thus solicits comment on the scope of the 
steering incentive problem presented by profit-sharing plans, whether 
the proposal effectively addresses these issues, and whether a 
different approach would better address these issues.
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    \56\ This ``free-riding'' behavior has long been observed by 
economists. See, e.g., Martin L.Weitzman. Incentive Effects of 
Profit Sharing (1980); Robert M. Axelrod, The Evolution of 
Cooperation (1984); Oliver Hart & Bengt Holmstrom, The Theory of 
Contracts, in Advanced Economic Theory (T. Bewley ed., 1987); 
Douglas L. Kruse, Profit Sharing and Employment Variability: 
Microeconomic Evidence on Weizman Theory, 44 Indus. and Lab. Rel. 
Rev., 437 (1991); Haig R. Nalbantian, Incentive Compensation in 
Perspective, in Incentive Compensation and Risk Sharing (Haig R. 
Nalbantian ed., 1987); and Roy Radner, The Internal Organization of 
Large Firms, 96 Econ. J. 1 (1986). Quantifying these trade-offs has 
been difficult for practical applications, however. See Sumit 
Agarwal & Itzhak Ben-David, Do Loan Officers' Incentives Lead to Lax 
Lending Standards? (Fisher Coll. of Bus. Working Paper No. 2012-03-
007, 2012); Stefan Grosse, Louis Putterman & Bettina Rockenbach, 
Monitoring in Teams, 9 J. Eur. Econ. Ass'n. 785 (2011); and Claude 
Meidenger, Jean-Louis Rulliere & Marie-Claire Villeval, Does Team-
Based Compensation Give Rise to Problems when Agents Vary in Their 
Ability? (GATE Groupe, Working Paper No. W.P. 01-13, 2001).
    \57\ The Bureau notes that incentive compensation practices at 
large depository institutions were the subject of final guidance 
issued in 2010 by the Board, the Office of the Comptroller of the 
Currency, the Federal Deposit Insurance Corporation, and the Office 
of Thrift Supervision. 75 FR 36395 (Jun. 17, 2010) (the Interagency 
Guidance). The Interagency Guidance was issued to help ensure that 
incentive compensation policies at large depository institutions do 
not encourage imprudent risk-taking and are consistent with the 
safety and soundness of the institutions. Id. The Bureau's proposed 
rule does not affect the Interagency Guidance on loan origination 
compensation. In addition, to the extent a person is subject to both 
the Bureau's rulemaking and the Interagency Guidance, compliance 
with Bureau's rulemaking is not deemed to be compliance with the 
Interagency Guidance.
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    The Bureau is further cognizant of the burdens that restrictions on 
compensation may impose on creditors, loan originator organizations, 
and individual loan originators. The Bureau believes that, when paid 
for legitimate reasons, bonuses and contributions to defined 
contribution and benefit plans can be useful and important inducements 
for individual loan originators to perform well. Profit-sharing plans, 
moreover, are a means for individual loan originators to become 
invested in the success of the organization as a whole. The Bureau 
solicits comment on whether the proposed restrictions on bonuses and 
other compensation paid under profit-sharing plans and contributions to 
defined contribution and benefit plans accomplish the Bureau's 
objectives without unduly restricting compensation approaches that 
address legitimate business needs.
    Current comment 36(d)(1)-1 \58\ provides guidance on what 
constitutes compensation and refers to salaries, commissions and 
similar payments. The Bureau is not proposing any clarifications to 
this existing guidance. In general, salary and commission amounts are 
more likely than bonuses to be set in advance. Salaries, unlike 
bonuses, are typically paid out of budgeted operating expenses rather 
than a ``profit pool.'' Commissions typically are paid for individual 
transactions and without reference to the person's profitability. Thus, 
payment of fixed percentage or fixed dollar amount commissions 
typically does not raise the potential issue of individual loan 
originators steering consumers to different loan terms. Also, the 
amounts of the individual loan originator's salary and commission often 
are stipulated by an employment contract, commission agreement, or 
similar agreement, the terms of which the employer agrees to satisfy so 
long as the employee meets the conditions set forth in the agreement or 
other employment performance requirements. The Bureau seeks comment on 
whether the prohibition on compensation relating to aggregate 
transaction terms of multiple individual loan originators should 
encompass a broader array of compensation methods, including, e.g., 
salaries and commissions.
---------------------------------------------------------------------------

    \58\ As discussed in the section-by-section analysis of Sec.  
1026.36(a), the Bureau is proposing to move the text of this comment 
to proposed comment 36(a)-5.
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36(d)(1)(ii)
Amount of Credit Extended
    As discussed above, Sec.  1026.36(d)(1)(i) provides that a loan 
originator may not receive and a person may not pay to a loan 
originator, directly or indirectly, compensation in an amount that is 
based on any of the transaction's terms or conditions. Section 
1026.36(d)(1)(ii) provides that the amount of credit extended is not 
deemed to be a transaction term or condition, provided compensation is 
based on a fixed percentage of the amount of credit extended. Such 
compensation may be subject to a minimum or maximum dollar amount.
    Use of the term ``amount of credit extended.'' TILA section 
129B(c)(1), which was added by section 1403 of the Dodd-Frank Act, 
provides that a mortgage originator may not receive (and no person may 
pay to a mortgage originator), directly or indirectly, compensation 
that varies based on the terms of the loan (other than the amount of 
principal). 12 U.S.C. 1639b(c)(1). Thus, TILA section 129B(c)(1) 
permits mortgage originators to receive (and a person to pay mortgage 
originators) compensation that varies based on the ``amount of the 
principal'' of the loan. Section 1026.36(d)(1)(ii) currently uses the 
phrase ``amount of credit extended'' instead of the phrase ``amount of 
the principal'' as set forth in TILA section 129B(c)(1). Those phrases, 
however, typically are used to describe the same amount and generally 
have the same meaning. The term ``principal,'' in certain contexts, 
sometimes may mean only the portion of the total credit extended that 
is applied to the consumer's primary purpose, such as purchasing the 
home or paying off the existing balance in the case of a refinancing. 
When used in this sense, the ``amount of the principal'' might 
represent only a portion of the amount of credit extended, for example 
where the consumer also borrows additional amounts to cover transaction 
costs. The Bureau does not believe that Congress intended ``amount of 
the principal'' in this narrower, less common way, however, because the 
exception appears intended to accommodate existing industry practices, 
under which loan originators generally are compensated based on the 
total amount of credit extended without regard to the purposes to which 
any portions of that amount may be applied.
    For the foregoing reasons, pursuant to its authority under TILA 
section 105(a) to facilitate compliance with TILA, the Bureau proposes 
to retain the phrase ``amount of credit extended'' in Sec.  
1026.36(d)(1)(ii) instead of replacing it with the statutory phrase 
``amount of the principal.'' The Bureau believes that using the same 
phrase that is in the current regulatory language will ease compliance 
burden without diminishing the consumer protection afforded by Sec.  
1026.36(d) in any foreseeable way. Creditors already have developed 
familiarity with the term ``amount of credit extended'' in complying 
with the current regulation. The Bureau solicits comment on these 
beliefs and this proposal to keep the existing regulatory language in 
place.
    Fixed percentage with minimum and maximum dollar amounts. Section 
1026.36(d)(1)(ii) provides that loan originator compensation paid as a 
fixed percentage of the amount of credit extended may be subject to a 
minimum

[[Page 55298]]

or maximum dollar amount. On the other hand, TILA section 129B(c)(1), 
as added by section 1403 of the Dodd-Frank Act, permits mortgage 
originators to receive (and a person to pay the mortgage originator) 
compensation that varies based on the ``amount of the principal'' of 
the loan, without addressing the question of whether such compensation 
may be subject to minimum or maximum limits. 12 U.S.C. 1639b(c)(1). 
Pursuant to its authority under TILA section 105(a) to facilitate 
compliance with TILA, the Bureau proposes to retain the current 
restrictions in Sec.  1026.36(d)(1)(ii) on when loan originators are 
permitted to receive (and when persons are permitted to pay loan 
originators) compensation that is based on the amount of credit 
extended. Specifically, proposed Sec.  1026.36(d)(1)(ii) continues to 
provide that the amount of credit extended is not deemed to be a 
transaction term, provided compensation received by or paid to a loan 
originator is based on a fixed percentage of the amount of credit 
extended; however, such compensation may be subject to a minimum or 
maximum dollar amount.
    The Bureau believes that permitting creditors to set a minimum and 
maximum dollar amount is consistent with, and therefore furthers the 
purposes of, the statutory provision allowing compensation based on a 
percentage of the principal amount, consistent with TILA section 
105(a). As noted above, the Bureau believes the purpose of excluding 
the principal amount from the ``terms'' on which compensation may not 
be based is to accommodate common industry practice. The Bureau also 
believes that, for some creditors, setting a maximum and minimum dollar 
amount also is common and appropriate because, without such limits, 
loan originators may be unwilling to originate very small loans and 
could receive unreasonably large commissions on very large loans. The 
Bureau therefore believes that, consistent with TILA section 105(a), 
permitting creditors to set minimum and maximum commission amounts may 
facilitate compliance and also may benefit consumers by ensuring that 
loan originators have sufficient incentives to originate particularly 
small loans.
    In addition, comment 36(d)(1)-9 provides that Sec.  1026.36(d)(1) 
does not prohibit an arrangement under which a loan originator is 
compensated based on a percentage of the amount of credit extended, 
provided the percentage is fixed and does not vary with the amount of 
credit extended. However, compensation that is based on a fixed 
percentage of the amount of credit extended may be subject to a minimum 
and/or maximum dollar amount, as long as the minimum and maximum dollar 
amounts do not vary with each credit transaction. For example, a 
creditor may offer a loan originator one percent of the amount of 
credit extended for all loans the originator arranges for the creditor, 
but not less than $1,000 or greater than $5,000 for each loan. On the 
other hand, as comment 36(d)(1)-9 clarifies, a creditor may not 
compensate a loan originator one percent of the amount of credit 
extended for loans of $300,000 or more, two percent of the amount of 
credit extended for loans between $200,000 and $300,000, and three 
percent of the amount of credit extended for loans of $200,000 or less. 
For the same reasons discussed above, consistent with TILA section 
105(a), the Bureau believes this guidance is consistent with and 
furthers the statutory purposes and therefore proposes to retain it. To 
the extent a creditor seeks to avoid disincentives to originate small 
loans and unreasonably high compensation amounts on larger loans, the 
Bureau believes the ability to set minimum and maximum dollar amounts 
meets such goals.
    Reverse mortgages. Industry representatives have asked what the 
phrase ``amount of credit extended'' means in the context of closed-end 
reverse mortgages. For closed-end reverse mortgages, a creditor 
typically calculates a ``maximum claim amount.'' Under the Federal 
Housing Administration's (FHA's) Home Equity Conversion Mortgage 
program, the ``maximum claim amount'' is the home value at origination 
(or applicable FHA loan limit, whichever is less). The creditor then 
calculates the maximum dollar amount the consumer is authorized to 
borrow (typically called the ``initial principal limit'') by 
multiplying the ``maximum claim amount'' by an applicable ``principal 
limit factor,'' which is calculated based on the age of the youngest 
borrower and the interest rate. The initial principal limit sets the 
maximum proceeds available to the consumer for the reverse mortgage. 
For closed-end reverse mortgages, a consumer often borrows the 
``initial principal limit'' in a lump sum at closing. There can also be 
payments from the loan proceeds on behalf of the consumer such as to 
pay off existing tax liens.
    Reverse mortgage creditors have requested guidance on whether the 
``maximum claim amount'' or the ``initial principal limit'' is the 
``amount of credit extended'' in the context of closed-end reverse 
mortgages. The Bureau believes that the ``initial principal limit'' 
most closely resembles the amount of credit extended on a traditional, 
``forward'' mortgage. Thus, consistent with Dodd-Frank Act section 1403 
and pursuant to its authority under TILA section 105(a) to facilitate 
compliance with TILA, the Bureau proposes to add comment 36(d)(1)-10 to 
provide that, for closed-end reverse mortgage loans, the ``amount of 
credit extended'' for purposes of Sec.  1036.36(d)(1) means the maximum 
proceeds available to the consumer under the loan, which is the 
``initial principal limit.''
36(d)(1)(iii)
Consumer Payments Based On Loan Terms
    As discussed above, Sec.  1026.36(d)(1)(i) currently provides that 
no loan originator may receive and no person may pay to a loan 
originator compensation based on any of the transaction's terms or 
conditions. Section 1026.36(d)(1)(iii), however, currently provides 
that the prohibition in Sec.  1026.36(d)(1)(i) does not apply to 
transactions in which a loan originator received compensation directly 
from the consumer and no other person provides compensation to a loan 
originator in connection with that transaction. Thus, even though, in 
accordance with Sec.  1026.36(d)(2), a loan originator organization 
that receives compensation from a consumer may not split that 
compensation with its individual loan originator, current Sec.  
1026.36(d)(1) does not prohibit a consumer's payment of compensation to 
the loan originator organization from being based on the transaction's 
terms or conditions.
    TILA section 129B(c)(1), which was added by section 1403 of the 
Dodd-Frank Act, provides that mortgage originators may not receive (and 
no person may pay to mortgage originators), directly or indirectly, 
compensation that varies based on the terms of the loan (other than the 
amount of principal). 12 U.S.C. 1639b(c)(1). Thus, TILA section 
129B(c)(1) imposes a ban on compensation that varies based on loan 
terms even in transactions where the mortgage originator receives 
compensation directly from the consumer. For example, under the 
amendment, even if the only compensation that a loan originator 
receives comes directly from the consumer, that compensation may not 
vary based on the loan terms.
    Consistent with TILA section 129B(c)(1), the Bureau proposes to 
delete existing Sec.  1026.36(d)(1)(iii) and a related sentence in 
existing comment

[[Page 55299]]

36(d)(1)-7. Thus, transactions where a loan originator receives 
compensation directly from the consumer would no longer be exempt from 
the prohibition set forth in Sec.  1026.36(d)(1)(i). As a result, 
whether the consumer or another person, such as a creditor, pays a loan 
originator compensation, that compensation may not be based on any of 
the transaction's terms. Comment 36(d)(1)-7 provides guidance on when 
payments to a loan originator are considered compensation received 
directly from the consumer. As discussed in more detail in the section-
by-section analysis to proposed Sec.  1026.36(d)(2)(i), the Bureau 
proposes to delete the first sentence of this comment and move the 
other content of this comment to new comment 36(d)(2)(i)-2.i.
Profit-Sharing and Related Plans
    The Bureau proposes a new Sec.  1026.36(d)(1)(iii), which permits 
in limited circumstances the payment of compensation that directly or 
indirectly is based on the terms of transactions subject to Sec.  
1026.36(d) of multiple individual loan originators.
    Qualified plans. As noted above, following a number of inquiries 
about how the restrictions in the current regulation apply to qualified 
retirement and profit-sharing plans, the Bureau issued a Bulletin 
stating that bonuses and contributions to qualified plans out of loan 
origination profits were permissible under the current rules. The 
Bureau's position was based in part on certain structural and 
operational requirements that the Internal Revenue Code (IRC) imposes 
on qualified plans, including contribution and benefit limits, deferral 
requirements (regarding both access to and taxation of the funds 
contributed), the considerable tax penalties for non-compliance, non-
discrimination provisions, and requirements to allocate among plan 
participants based on a definite formula.\59\ Employers also may 
receive tax deductions for contributions to defined contribution plans 
up to defined limits, which typically places upward limits on the 
compensation awarded to individual loan originators through qualified 
plans. Consistent with its position in CFPB Bulletin 2012-2, the Bureau 
believes that these structural and operational requirements greatly 
reduce the likelihood of steering incentives.
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    \59\ See Internal Revenue Serv., U.S. Dep't of the Treasury, 
Publication 560, Retirement Plans for Small Businesses (2012).
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    Based on these considerations, proposed Sec.  1026.36(d)(1)(iii) 
permits a person to compensate an individual loan originator through a 
contribution to a qualified defined contribution or benefit plan in 
which an individual loan originator employee participates, provided 
that the contribution is not directly or indirectly based on the terms 
of that individual loan originator's transactions subject to Sec.  
1026.36(d). Proposed comment 36(d)(1)-2.iii.E clarifies the types of 
plans that are considered qualified plans for purposes of Sec.  
1026.36(d)(1)(iii) (i.e., plans, such as 401k plans, that satisfy the 
qualification requirements of section 401(a) of the IRC and applicable 
terms of the Employee Retirement Income Security Act of 1974 (ERISA), 
29 U.S.C. 1001, et seq., the requirements for tax-sheltered annuity 
plans under IRC section 403(b), or governmental deferred compensation 
plans under IRC section 457(b)).
    Proposed comment 36(d)(1)-2.iii.B clarifies the meaning of defined 
benefit plan and defined contribution plan as such terms are used in 
Sec.  1026.36(d)(1)(iii). The proposed comment cross-references 
proposed comments 36(d)(1)-2.iii.E and -2.iii.G for guidance on the 
distinction between qualified and non-qualified plans and the relevance 
of such distinction to the provisions of proposed Sec.  
1026.36(d)(1)(iii).
    The Bureau solicits comment on whether any other types of 
retirement plan, profit-sharing plan, or other defined benefit or 
contribution plans should be treated similarly to qualified plans for 
purposes of permitting contributions to such plans, even if the 
compensation relates directly or indirectly to the transaction terms of 
multiple individual loan originators. For example, the Bureau 
understands that some non-qualified pension plans limit distribution of 
funds to participating employees until their separation of service from 
their employer, which would seem to present more limited incentives to 
steer consumers to different loan terms.
    Non-qualified plans. Proposed Sec.  1026.36(d)(1)(iii) provides 
that, notwithstanding Sec.  1026.36(d)(1)(i), an individual loan 
originator may receive, and a person may pay to an individual loan 
originator, compensation in the form of a bonus or other payment under 
a profit-sharing plan or a contribution to a defined benefit or 
contribution plan other than a qualified plan in certain circumstances. 
Specifically, the proposed rule permits such compensation even if the 
compensation directly or indirectly is based on the terms of the 
transactions subject to Sec.  1026.36(d) of multiple individual loan 
originators, provided that the conditions set forth in proposed Sec.  
1026.36(d)(1)(iii)(A) and (B) are satisfied.
    Proposed comment 36(d)(1)-2.iii.A provides guidance on the 
definition of profit-sharing plan as that term is used in proposed 
Sec.  1026.36(d)(1)(iii). The proposed comment clarifies that for 
purposes of the rule, profit-sharing plans include so-called ``bonus 
plans,'' ``bonus pools,'' or ``profit pools'' from which a person or 
the business unit, as applicable, pays individual loan originators 
employed by the person (as well as other employees, if it so elects) 
bonuses or other compensation with reference to the profitability of 
the person or business unit, as applicable (i.e., depending on the 
level within the company at which the profit-sharing plan is 
established). The proposed comment gives an example of a compensation 
structure that is a profit-sharing plan under Sec.  1026.36(d)(1)(iii). 
The proposed comment also notes that a bonus that is made without 
reference to profitability, such a retention payment budgeted for in 
advance, does not violate the prohibition on payment of compensation 
based on transaction terms under Sec.  1026.36(d)(1)(i), as clarified 
by proposed comment 36(d)(1)-1.ii, meaning that the provisions of 
proposed Sec.  1026.36(d)(1)(iii) do not apply.
    Proposed comment 36(d)(1)-2.iii.C clarifies that the compensation 
addressed in proposed Sec.  1026.36(d)(1)(iii) directly or indirectly 
is based on the terms of transactions of multiple individual loan 
originators when the compensation, or its amount, results from or is 
otherwise related to the terms of multiple transactions subject to 
Sec.  1026.36(d). The proposed comment provides that if a creditor does 
not permit its individual loan originator employees to deviate from the 
creditor's pre-established loan terms, such as the interest rate 
offered, then the creditor's payment of a bonus at the end of a 
calendar year to an individual loan originator under a profit-sharing 
plan is not related to the transaction terms of multiple individual 
loan originators. The proposed comment also clarifies that if a loan 
originator organization whose revenues are derived exclusively from 
fees paid by the creditors that fund its originations (i.e., 
``creditor-paid transactions'') pays a bonus under a profit-sharing 
plan, the bonus is permitted. Proposed comment 36(d)(1)-2.iii.C cross-
references proposed comment 36(d)(1)-1.i and -1.ii for further guidance 
on when a payment is ``based on'' transaction terms.
    Proposed comment 36(d)(1)-2.iii.D clarifies that, under proposed

[[Page 55300]]

Sec.  1026.36(d)(1)(iii), the time period for which the compensation is 
paid is the time period for which the individual loan originator's 
performance was evaluated for purposes of the compensation decision 
(e.g., calendar year, quarter, month), whether the compensation is 
actually paid during or after that time period. The proposed comment 
provides an example where a ``pre-holiday'' bonus paid in November is 
``based on'' multiple individual loan originators' terms during the 
entire calendar year because it is paid following an accounting of 
multiple individual loan originators' transaction terms during the 
first three quarters of a calendar year and projected similar 
transaction terms for the remainder of the calendar year.
36(d)(1)(iii)(A)
    Proposed Sec.  1026.36(d)(1)(iii)(A) prohibits payment of 
compensation to an individual loan originator that directly or 
indirectly is based on the terms of that individual loan originator's 
transaction or transactions. This language is intended to underscore 
the fact that a person cannot pay compensation to an individual loan 
originator based on the terms of that individual loan originator's 
transactions regardless of whether the compensation is of the type that 
is permitted in limited circumstances under Sec.  
1026.36(d)(1)(iii)(B). Proposed comment 36(d)(1)-2.iii.F clarifies the 
provision by giving an example and cross-referencing proposed comment 
36(d)(1)-1 for further guidance on determining whether compensation is 
``based on'' transaction terms.
36(d)(1)(iii)(B)
36(d)(1)(iii)(B)(1)
    Proposed Sec.  1026.36(d)(1)(iii)(B)(1) permits a creditor or a 
loan originator organization to pay compensation in the form of a bonus 
or other payment under a profit-sharing plan (including bonus or profit 
pools) or a contribution to a non-qualified defined benefit or 
contribution plan where the steering incentives are sufficiently 
attenuated, even if the compensation is directly or indirectly based on 
the terms of transactions of multiple individual loan originators 
employed by the person. As described above, the Bureau is concerned 
that the current regulation does not provide the requisite clarity to 
address the potential steering incentives present where creditors or 
loan originator organizations reward their individual loan originator 
employees through compensation that is directly or indirectly based on 
the terms of multiple transactions of multiple individual loan 
originator employees. That said, the Bureau recognizes the challenges 
of developing a clear and practical standard to determine whether the 
particular compensation method creates incentives for individual loan 
originators to steer consumers into different loan terms. The Bureau is 
cognizant that a formulaic approach may pose challenges given the 
plethora of different entities that will be affected by this proposed 
rule, which vary greatly in size, organizational structure, diversity 
of business lines, and compensation structures. Depending on the 
circumstances, any or all of these factors could accentuate or mitigate 
the prevalence of steering incentives.
    The Bureau also acknowledges the difficulty of establishing a 
direct nexus between the multiple individual loan originators' actions 
that may adversely affect consumers and the payment and receipt of 
bonuses or other compensation that directly or indirectly is based on 
the terms of those individual loan originators' transactions. Creditors 
and loan originator organizations use a variety of revenue and 
profitability measures, and each organization presumably employs 
methods of compensation that are tailored to fit their business needs. 
Therefore, a regulatory approach that addresses the potential steering 
incentives created by compensation methods that reward individual loan 
originators based on the collective terms of multiple transactions of 
multiple individual loan originators must be flexible enough to take 
such factors into account.
    With these considerations in mind, the Bureau believes that 
proposed Sec.  1026.36(d)(1)(iii)(B)(1) balances the need for a bright-
line rule with the recognition that a rigid, one-size-fits-all approach 
may not be workable in light of the wide spectrum of size, type, and 
business line diversity of the companies that would be subject to the 
requirement. Assuming that the conditions set forth in proposed Sec.  
1026.36(d)(1)(iii)(A) have been met, proposed Sec.  
1026.36(d)(1)(iii)(B)(1) permits compensation in the form of a bonus or 
other payment under a profit-sharing plan or a contribution to a non-
qualified defined benefit or contribution plan, even if the 
compensation relates directly or indirectly to the terms of the 
transactions subject to Sec.  1026.36(d) of multiple individual loan 
originators, so long as not more than a certain percentage of the total 
revenues of the person or business unit to which the profit-sharing 
plan applies, as applicable, are derived from the person's mortgage 
business during the tax year immediately preceding the tax year in 
which the compensation is paid. As described below, the Bureau is 
proposing two alternatives for the threshold percentage--50 percent, 
under Alternative 1 proposed by the Bureau, or 25 percent, under 
Alternative 2 proposed by the Bureau. To ascertain whether the 
conditions under Sec.  1026.36(d)(1)(iii)(B)(1) are met, a person 
measures the revenue of the mortgage business divided by the total 
revenue of the person or business unit, as applicable. Section 
1026.36(d)(1)(iii)(B)(1) explains how total revenues are determined, 
when the revenues of a person's affiliates are or are not taken into 
account, and how total revenues derived from the mortgage business are 
determined. Proposed comment 36(d)(1)-2.iii provides additional 
guidance on the meaning of the terms total revenue, mortgage business, 
and tax year under proposed Sec.  1026.36(d)(1)(iii)(B)(1), all 
discussed below.
    The proposed revenue test is intended as a bright-line rule to 
distinguish methods of compensation where there is a substantial risk 
of consumers being steered to different loan terms from compensation 
methods where steering potential is sufficiently attenuated. The 
proposed bright-line rule recognizes the intertwined relationship among 
the person's revenues, profitability, and payment of compensation to 
its individual loan originators. The aggregate loan terms of multiple 
transactions at a creditor or loan originator organization within a 
given time period generally affect the revenues of that creditor or 
loan originator organization during that period. The creditor or loan 
originator organization's revenues during that period, in turn, 
generally affect the profitability of the person during that period. 
And the profitability of the creditor or loan originator organization 
presumably relates to--if not determines--the amount of compensation 
available for the profit-sharing plan, bonus pool, or profit pool and 
distributed to individual loan originators in the form of bonuses or 
contributions to defined benefit or contribution plans. In other words, 
the Bureau is treating revenue as a proxy for profitability, and 
profitability as a proxy for transaction terms in the aggregate.
    Furthermore, the Bureau is proposing a threshold of 50 percent 
because if more than 50 percent of the person's total revenues are 
derived from the person's mortgage business, the mortgage business 
revenues are predominant, at which point the attendant steering 
incentives seem most

[[Page 55301]]

likely to exist.\60\ For example, loans with higher interest rate 
spreads over the creditor's minimum acceptable rate, all else being 
equal, will yield greater amounts of interest payments if the loans are 
kept in portfolio by the creditor and a greater gain on sale if sold on 
the secondary market. As discussed above, in general revenues drive 
profitability and profitability relates to, if not drives, decisions 
about compensation for individual loan originators. Thus, if the 
mortgage-related revenues predominate, there is more risk that the 
individual loan originators, whose transactions generate mortgage 
business revenue, will be incentivized to upcharge or otherwise steer 
consumers to different loan terms. On the other hand, where the 
person's revenues do not predominantly consist of revenue from its 
mortgage business, the connection between revenue received from 
multiple individual loan originators' transactions and the payment from 
the profit-sharing plan or contribution to the defined benefit or 
contribution plan in which the individual loan originator participates 
may be sufficiently attenuated to mitigate steering concerns given the 
number of other employees, products or services, and other actions that 
contribute to the overall profitability of the company.
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    \60\ In its materials prepared for the Small Business Review 
Panel process in May 2012, the Bureau indicated that it was 
considering a revenue test threshold of between 20 and 50 percent. 
As noted above, the Bureau is proposing two alternative threshold 
amounts--50 percent and 25 percent--and is soliciting comment on 
whether the threshold should be different.
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    The Bureau recognizes, however, that a bright-line rule with a 
threshold set at 50 percent of total revenue may not be commensurate in 
all cases with steering incentives in light of the differing sizes, 
organizational structures, and compensation structures of the persons 
affected by the proposed rule. Even if the mortgage business does not 
predominate the overall generation of revenues, the revenues may be 
sufficiently high that, in view of other facts and circumstances, the 
connection between the mortgage-business revenue generated and the 
compensation paid to individual loan originators may not be 
sufficiently attenuated, and thus still present a steering risk. 
Therefore, the Bureau is proposing an alternative approach that 
includes the same regulatory text and commentary language but contains 
a stricter threshold amount of 25 percent for purposes of the revenue 
test under Sec.  1026.36(d)(1)(iii)(B)(1). The Bureau solicits comment 
on whether 50 percent, 25 percent, or a different threshold amount 
would better effectuate the purposes of the rule.
    The Bureau is also aware of the potential differential effects the 
provisions of Sec.  1026.36(d)(1)(iii)(B)(1) may have on small 
creditors and loan originator organizations that employ individual loan 
originators when compared to the effects on larger institutions. In 
particular, the Bureau recognizes that loan originator organizations 
that originate loans as their exclusive, or primary, line of business 
will, barring diversification of their business lines, not be able to 
pay the types of compensation that are permitted in limited 
circumstances under Sec.  1026.36(d)(1)(iii)(B)(1). During the Small 
Business Review Panel process, a SER stated that there should be no 
threshold limit because any limit would disadvantage small businesses 
that originate only mortgages. In response to this and other SERs' 
feedback, the Small Business Review Panel recommended that the Bureau 
seek public comment on the ramifications for small businesses and other 
businesses of setting the revenue limit at 50 percent of company 
revenue or at other levels. The Small Business Review Panel also 
recommended that the Bureau solicit public comment on the treatment of 
qualified and non-qualified plans and whether treating qualified plans 
differently than non-qualified plans would adversely affect small 
creditors and loan originator organizations relative to large creditors 
and loan originator organizations. The Bureau accordingly seeks comment 
on these issues. The Bureau is also proposing, as discussed in the 
section-by-section analysis to proposed Sec.  1026.36(d)(1)(iii)(B)(2), 
below, to permit compensation in the form of bonuses and other payments 
under profit-sharing plans and contributions to non-qualified defined 
benefit or contribution plans where an individual loan originator is 
the loan originator for five or fewer transactions within the 12-month 
period preceding the payment of the compensation. The Bureau expects 
that for some small entities, this de minimis exception should address 
some of the concerns expressed by the small entity representatives.
Revenue Test Formula
    Proposed comment 36(d)(1)-2.iii.G clarifies various aspects of the 
revenue test. Proposed comment 36(d)(1)-2.iii.G.1 addresses the 
measurement of total revenue under the revenue test formula, which 
pursuant to Sec.  1026.36(d)(1)(iii)(B)(1) is the person's total 
revenues or the total revenues of the business unit to which the 
profit-sharing plan applies, as applicable, during the tax year 
immediately preceding the tax year in which the compensation is paid. 
The comment clarifies that under this provision, whether the revenues 
of the person or business unit are used depends on the level within the 
person's organizational structure at which the profit-sharing plan is 
established and whose profitability is referenced for purposes of 
payment of the compensation. The comment provides that if the 
profitability of the person is referenced for purposes of establishing 
the profit-sharing plan, then the total revenues of the person are 
used, and gives an example of how total revenues are calculated for a 
creditor that has two separate business units. The Bureau believes that 
the total revenues for purposes of the revenue test under Sec.  
1026.36(d)(1)(iii)(B)(1) must reflect the revenues of the business unit 
within the company whose profitability is referenced for purposes of 
paying compensation to the individual loan originators, because 
including the revenues of business units to which the profit-sharing 
plan does not apply would lead to an artificially over-inclusive 
measurement of total revenues, thus undermining the purpose of the 
revenue test in Sec.  1026.36(d)(1)(iii)(B)(1). For example, if the 
overall revenues of a creditor with diverse revenue sources across 
business units were included in the total revenues regardless of the 
level in the ownership structure at which the profit-sharing plan was 
established, the creditor could establish a profit-sharing plan at the 
level of the mortgage business unit to pay bonuses to individual loan 
originators only, and yet still pass the revenue test. This type of 
arrangement is one where incentives to steer consumers to different 
loan terms are present, and therefore the Bureau believes that it 
should be captured by the revenue test.
    Proposed comment 36(d)(1)-2.iii.G.1 also clarifies that a tax year 
is the person's annual accounting period for keeping records and 
reporting income and expenses (i.e., it may be a calendar year or a 
fiscal year depending on the person's annual accounting period) and 
gives an example showing how the revenue test is applied in the context 
of a creditor that uses a calendar year accounting period. The Bureau 
acknowledges that taking only one tax year's revenues into account 
necessitates an annual reevaluation of whether the revenue test is met. 
This also could result in a person with

[[Page 55302]]

relatively consistent revenue flow over a number of years falling above 
or below the threshold based on an anomalous tax year where revenues 
fluctuate greatly for reasons that are not related to incentive 
structures. Moreover, the proposed rule requires evaluation of the 
previous tax year's revenues. This means that, for example, whether a 
company can pay a bonus under a profit-sharing plan in December of a 
particular year might, under the proposed revenue test, depend in part 
on the level of mortgage business and total revenues generated 
beginning in January of the previous calendar year (i.e., 23 months 
prior), which in the context may be a stale data point. The Bureau, 
therefore, solicits comment on whether the total revenues should 
instead be based on a rolling average of revenues over two tax years, a 
rolling average of revenues during the 12 months preceding the decision 
to make the compensation payment, or another time period.
    Section 1026.36(d)(1)(iii)(B)(1) also provides that total revenues 
are determined through a methodology that is consistent with generally 
accepted accounting principles and, as applicable, the reporting of the 
person's income for purposes of Federal tax filings or, if none, any 
industry call reports filed regularly by the person. As applicable, the 
methodology also shall reflect an accurate allocation of revenues among 
the person's business units. The proposed commentary notes that 
industry call reports filed regularly by the person could, depending on 
the person, include the NMLSR Mortgage Call Report or the National 
Credit Union Administration (NCUA) Call Report. The proposed commentary 
also notes that a Federal credit union that is exempt from paying 
Federal income tax would, under the proposed rule, use a methodology to 
determine total annual revenues that reflects the income reported in 
any NCUA Call Reports filed by the credit union; if none, the 
methodology otherwise must be consistent with GAAP and, as applicable, 
reflects an accurate allocation of revenues among the credit union's 
business units. The Bureau is proposing that a person determine total 
revenues in this manner to ensure that the measurement of total 
revenues is methodologically sound and consistent with the company's 
own reporting of income for Federal tax purposes or, if none, any 
industry call reports filed regularly by the person, and to ensure that 
it is not subject to manipulation to produce an outcome favorable to 
the company (presumably, a total revenue measurement of over 50 percent 
or 25 percent, depending on the alternative threshold chosen for the 
revenue test). The Bureau solicits comment on whether this standard for 
measuring total revenues is appropriate in light of the diversity in 
size of the financial institutions that would be subject to the 
requirement and, more generally, on what types of income should be 
included in the definition of total revenues. The Bureau also solicits 
comment on whether the definition of total revenues should be tied to a 
more objective standard such as the Bureau's definition of ``receipts'' 
in the Bureau's final ``larger participants'' rule regarding the 
supervision of consumer reporting agencies.\61\
---------------------------------------------------------------------------

    \61\ Defining Larger Participants of the Consumer Reporting 
Market, 77 FR 42873 (July 20, 2012) (to be codified at 12 CFR part 
1090). In the final rule, the Bureau noted that the proposed 
definition of ``annual receipts'' is adapted in part from the 
existing measure used by the U.S. Small Business Administration 
(SBA) for its small business loan programs.
---------------------------------------------------------------------------

    The Bureau recognizes that some of the creditors and loan 
originator organizations subject to this proposed rule may have 
numerous business organizations set up under common ownership, and the 
determination of profitability (which, in turn, relates to compensation 
decisions) may be made at a different level than by the management of 
the individual loan originators' business unit. Moreover, the nature of 
the ownership hierarchy, both horizontal and vertical, and the level of 
proximity within the organization among the individual loan 
originators, the employees of the other business units, and the 
compensation decision-makers all may serve to reduce or enhance the 
prevalence of steering incentives depending on the circumstances. In 
general, the Bureau believes that the revenues of the business 
organization or unit whose profits are used as reference for 
compensation decisions--whether the person, a business unit within the 
person, or an affiliate of the person--should be the business 
organization or unit whose revenues are evaluated for purposes of 
proposed Sec.  1026.36(d)(1)(iii)(B)(1). Therefore, proposed Sec.  
1026.36(d)(1)(iii)(B)(1) states that the revenues of the person's 
affiliates generally are not taken into account for purposes of the 
revenue test unless the profit-sharing plan applies to the affiliate, 
in which case the person's total revenues also include the total 
revenues of the affiliate. Proposed comment 36(d)(1)-2.iii.G.1 notes 
that the profit-sharing plan applies to the affiliate when, for 
example, the funds used to pay a bonus to an individual loan originator 
are the same funds used to pay a bonus to employees of the affiliate. 
The Bureau solicits comment on whether the revenues of affiliates 
should be treated in a different manner for purposes of the revenue 
test under Sec.  1026.36(d)(1)(iii)(B)(1).
    Section 1026.36(d)(1)(iii)(B)(1) provides that the revenues derived 
from mortgage business are the portion of those total revenues that are 
generated through a person's transactions subject to Sec.  1026.36(d). 
Proposed comment 36(d)(1)-2.iii.G.2 clarifies that, pursuant to Sec.  
1026.36(j) and comment 36-1, Sec.  1026.36(d) applies to closed-end 
consumer credit transactions secured by dwellings and reverse mortgages 
that are not home-equity lines of credit under Sec.  1026.40. The 
proposed comment also gives guidance that a person's revenues from its 
mortgage business include, for example: origination fees and interest 
associated with loans for purchase money or refinance purposes 
originated by individual loan originators employed by the person, 
income from servicing of loans for purchase money or refinance purposes 
originated by individual loan originators employed by the person, and 
proceeds of secondary market sales of loans for purchase money or 
refinance purposes originated by individual loan originators employed 
by the person. The proposed comment further notes that revenues derived 
from mortgage business do not include, for example, servicing income 
where the loans being serviced were purchased by the person after their 
origination by another person. This distinction is drawn because the 
individual loan originators employed by a particular creditor or loan 
originator organization do not have steering incentives when the loans 
being serviced were originated by another person. In addition, 
origination fees, interest, and secondary market sale proceeds 
associated with home-equity lines of credit, loans secured by 
consumers' interests in timeshare plans, or loans made primarily for 
business, commercial, or agricultural purposes are not counted as 
mortgage business revenues because such transactions are outside the 
coverage of Sec.  1026.36(d). In light of the distinctions drawn to 
include and exclude categories of mortgage-related revenues for 
purposes of the revenue test, the Bureau requests comment on the scope 
of revenues included in the definition of mortgage revenues. The Bureau 
also recognizes that the definition of mortgage business revenues, as 
clarified by proposed comment 36(d)(1)-2.iii.G.2, includes revenues, 
such as origination fees,

[[Page 55303]]

interest, and servicing income, of transactions subject to Sec.  
1026.36(d) that were originated before the current regulation on 
mortgage loan origination went into effect. During the Small Business 
Review Panel process, the SERs asserted that using mortgage revenue as 
a standard would be over-inclusive because the standard would capture 
income from all mortgage loans, including existing portfolio loans, 
rather than only newly originated loans. The Bureau thus solicits 
comment on whether revenues associated with transactions originated 
prior to the effect of the Board's 2010 Loan Originator Final Rule or 
this proposed rule (if adopted) should be excluded.
Alternative Approaches to Revenue Test
    The Bureau recognizes that, for purposes of proposed Sec.  
1026.36(d)(1)(iii)(B)(1), a formula that utilizes profitability as a 
measuring point may be more appropriate than revenues. Compensation 
decisions are more likely to relate to profits than revenues because 
the funds available for bonuses will be driven by the amount remaining 
following payment of expenses, rather than the gross revenues generated 
by the company. Focusing on revenues may be an imperfect test to 
measure the relationship between the mortgage business and the 
profitability of the person or business unit, as applicable (which, in 
turn, relates to the compensation decisions). For example, a company 
could derive 40 percent of its total revenues from its mortgage 
business, but that same line of business may generate 80 percent of the 
company's profits. In such an instance, the steering incentives could 
be significant given the impact the mortgage business has on the 
company's overall profitability. Yet, under the revenue test this 
organization would be permitted to pay certain compensation based on 
terms of multiple individual loan originators' transactions taken in 
the aggregate. The Bureau believes a test based on profitability would 
create significant challenges, such as the need to define profitability 
and the question of how affiliate relationships are addressed. Such an 
approach could require detailed, complex rules to clarify how the test 
works. Moreover, the Bureau is concerned that using profitability as 
the metric could lead to evasion of the rule if a person were to 
allocate costs in a manner across business lines that would lead to 
understatement of the mortgage business profits (making it more likely 
that the revenue test would be passed even though steering incentives 
are still present). In light of these considerations, the Bureau 
solicits comment on whether the formula under Sec.  
1026.36(d)(1)(iii)(B)(1) should be changed to the total profits of the 
mortgage business divided by the total profits of the person or 
business unit, as applicable, and, if so, how profits should be 
calculated.
    The Bureau recognizes that concerns about individual loan 
originators steering consumers to different loan terms may vary 
depending on the proportion of an individual loan originator's total 
compensation that is attributable to payments permitted under Sec.  
1026.36(d)(1)(iii)(B)(1). Thus, the Bureau additionally solicits 
comment on whether to establish a cap on the percentage of an 
individual loan originator's total compensation that can be 
attributable to payments permitted under Sec.  
1026.36(d)(1)(iii)(B)(1), either in addition to or in lieu of the 
proposed revenue test. The Bureau also solicits comment on the 
appropriate threshold amount if the Bureau were to adopt a total 
compensation test.
    The Bureau recognizes that the bright-line standard in proposed 
Sec.  1026.36(d)(1)(iii)(B)(1) creates an ``exempt or non-exempt'' 
approach that prohibits the payment of bonuses and other compensation 
and the making of contributions to non-qualified defined benefit and 
contribution plans if the creditor or loan origination organization has 
mortgage business revenues of greater than 50 percent of its total 
revenues (under Alternative 1 proposed by the Bureau), 25 percent of 
its total revenues (under Alternative 2 proposed by the Bureau), or 
some lesser percentage that the Bureau may determine to be more 
appropriate. The Bureau acknowledges that terms of multiple individual 
loan originators' transactions taken in the aggregate will not, in 
every instance, have a substantial effect on profitability, and 
likewise there are occasions where the profitability will relate only 
insubstantially to the compensation. However, the Bureau believes that 
it is critical to create a workable test that does not have significant 
complexity. Otherwise, it may be difficult for creditors and loan 
originator organizations to employ the test. The Bureau also recognizes 
that any test is likely to be both under- and over-inclusive.
    Consequently, the Bureau solicits comment on whether it should 
include an additional provision under Sec.  1026.36(d)(1)(iii)(B) that 
would permit bonuses under a profit-sharing plan or contributions to 
non-qualified defined benefit or contribution plans where the 
compensation bears an insubstantial relationship to the terms of 
transactions subject to Sec.  1026.36(d) of multiple individual loan 
originators. This test would look to whether the aggregate loan terms 
of multiple individual loan originators is only one factor or variable 
among multiple significant factors or variables taken into account in 
the compensation decision and does not affect the outcome of the 
compensation decision to a substantial degree. For example, if a 
creditor pays a year-end bonus based on formula that includes ten 
different factors, all of which are permissible under Sec.  
1026.36(d)(1) (e.g., performance of loans, amount of credit extended, 
amount of transactions closed relative to application), and the 
profitability of the creditor will make only a marginal difference of 
two percent as to the amount of bonus paid (e.g., an individual loan 
originator who receives a $2,000 bonus would receive a $1,960 bonus but 
for the fact that the person's profitability was taken into account in 
determining the bonus), the creditor might, depending on the facts and 
circumstances, demonstrate that the compensation is substantially 
independent of the terms of transactions subject to Sec.  1026.36(d) of 
multiple individual loan originators. It is unclear, however, how such 
a test would work in practice and what standards would apply to 
determine if compensation is substantially independent. Nonetheless, 
the Bureau solicits comment on whether such an additional provision 
should be included under Sec.  1026.36(d)(1)(iii).
36(d)(1)(iii)(B)(2)
    Proposed Sec.  1026.36(d)(1)(iii)(B)(2) permits a person to pay, 
and an individual loan originator to receive, compensation in the form 
of a bonus or other payment under a profit-sharing plan sponsored by 
the person or a contribution to a non-qualified defined contribution or 
benefit plan if the individual is a loan originator (as defined in 
proposed Sec.  1026.36(a)(1)(i)) for five or fewer transactions subject 
to Sec.  1026.36(d) during the 12-month period preceding the 
compensation decision. This compensation is permitted even when the 
payment or contribution relates directly or indirectly to the terms of 
the transactions subject to Sec.  1026.36(d) of multiple individual 
loan originators.
    The intent of proposed Sec.  1026.36(d)(1)(iii)(B)(2) is to exempt 
individual loan originators who engage in a de minimis number of 
transactions subject to Sec.  1026.36(d) from the restrictions on 
payment of bonuses and making of contributions to defined benefit and 
defined contribution plans that are not qualified plans. The Bureau

[[Page 55304]]

is proposing to exempt individual loan originators who are loan 
originators for five or fewer transactions within a 12-month period 
preceding the date of the decision to pay the compensation. Under TILA, 
a person is not considered a creditor unless the person regularly 
extends credit, which with respect to consumer credit transactions 
secured by a dwelling is at least five transactions per calendar year. 
See Sec.  1026.2(a)(17)(v). The Bureau believes, by analogy, that an 
individual loan originator who is a loan originator for five or fewer 
transactions is not truly active as an individual loan originator and 
thus is insufficiently incentivized to steer consumers to different 
loan terms. Proposed comment 36(d)(1)-2.iii.H also provides an example 
of the de minimis transaction exception as applied to a loan originator 
organization employing six individual loan originators.
    The Bureau solicits comment on the number of individual loan 
originators who will be affected by the exception and whether, in light 
of such number, the de minimis test is necessary. The Bureau also 
solicits comment on the appropriate number of originations that should 
constitute the de minimis standard, over what time period the 
transactions should be measured, and whether this standard should be 
intertwined with the potential total compensation test on which the 
Bureau is soliciting comment, discussed in the section-by-section 
analysis to proposed Sec.  1026.36(d)(1)(iii)(B)(1). The Bureau, 
finally, solicits comment on whether the 12-month period used to 
measure whether the individual loan originator has a de minimis number 
of transactions should end on the date on which the compensation is 
paid, rather than the date on which the compensation decision is made. 
The Bureau believes that having the 12-month period end on the date on 
which the decision is made will be simpler for compliance purposes 
because it would require the person to verify whether the individual 
loan originator is eligible for the compensation payment when making 
the decision, but not thereafter. If the 12-month period were to end on 
the date of the payment, the employer presumably would have to verify 
the number of transactions twice--at the time the person decides to 
award the compensation to the individual loan originator, and again 
before the compensation is paid (assuming there is a time lag between 
the decision and the payment). The Bureau recognizes, however, that the 
date on which the compensation is paid may be more easily documentable 
(e.g., through a payroll stub) for purposes of the recordkeeping 
requirements proposed under Sec.  1026.25(c)(2).
    Proposed comment 36(d)(1)-2.iii.I.1 and -2.iii.I.2 illustrates the 
effect of proposed Sec.  1026.36(d)(1)(iii)(A) and (B) on a company 
that has mortgage and credit card businesses and harmonizes through 
examples the concepts discussed in other proposed comments to Sec.  
1026.36(d)(1)(iii).
36(d)(2) Payments by Persons Other Than Consumer
36(d)(2)(i) Dual Compensation
Background
    Section 1026.36(d)(2) currently provides that if any loan 
originator receives compensation directly from a consumer in a consumer 
credit transaction secured by a dwelling: (1) No loan originator may 
receive compensation from another person in connection with the 
transaction; and (2) no person who knows or has reason to know of the 
consumer-paid compensation to the loan originator (other than the 
consumer) may pay any compensation to a loan originator in connection 
with the transaction.
    Comment 36(d)(2)-1 currently provides that the restrictions imposed 
under Sec.  1026.36(d)(2) relate only to payments, such as commissions, 
that are specific to and paid solely in connection with the transaction 
in which the consumer has paid compensation directly to a loan 
originator. Thus, the phrase ``in connection with the transaction'' as 
used in Sec.  1026.36(d)(2) does not include salary or hourly wages 
that are not tied to a specific transaction.
    Thus, under current Sec.  1026.36(d)(2), a loan originator that 
receives compensation directly from the consumer may not receive 
compensation in connection with the transaction (e.g., a commission) 
from any other person (e.g., a creditor). In addition, if any loan 
originator is paid compensation directly by the consumer in a 
transaction, no other loan originator may receive compensation in 
connection with the transaction from a person other than the consumer. 
Moreover, if any loan originator receives compensation directly from a 
consumer, no person who knows or has reason to know of the consumer-
paid compensation to the loan originator (other than the consumer) may 
pay any compensation to a loan originator in connection with the 
transaction. For example, assume that a loan originator that is not a 
natural person (loan originator organization) receives compensation 
directly from the consumer in a mortgage transaction subject to Sec.  
1026.36(d)(2). The loan originator organization may not receive 
compensation in connection with that particular transaction (e.g., a 
commission) from a person other than the consumer (e.g., the creditor). 
In addition, because the loan originator organization is a person other 
than the consumer, the loan originator organization may not pay 
individual loan originators any compensation, such as a transaction-
specific commission, in connection with that particular transaction. 
Consequently, under current rules, in the example above, the loan 
originator organization must pay individual loan originators only in 
the form of a salary or hourly wage or other compensation that is not 
tied to the particular transaction.
The Dodd-Frank Act
    Section 1403 of the Dodd-Frank Act added TILA section 129B. 12 
U.S.C. 1639b. TILA section 129B(c)(2)(A) states that, for any mortgage 
loan, a mortgage originator generally may not receive from any person 
other than the consumer any origination fee or charge except bona fide 
third-party charges not retained by the creditor, mortgage originator, 
or an affiliate of either. Likewise, no person, other than the 
consumer, who knows or has reason to know that a consumer has directly 
compensated or will directly compensate a mortgage originator, may pay 
a mortgage originator any origination fee or charge except bona fide 
third-party charges as described above. Notwithstanding this general 
prohibition on payments of any origination fee or charge to a mortgage 
originator by a person other than the consumer, TILA section 
129B(c)(2)(B) provides that a mortgage originator may receive from a 
person other than the consumer an origination fee or charge, and a 
person other than the consumer may pay a mortgage originator an 
origination fee or charge, if: (1) The mortgage originator does not 
receive any compensation directly from the consumer; and (2) ``the 
consumer does not make an upfront payment of discount points, 
origination points, or fees, however denominated (other than bona fide 
third party charges not retained by the mortgage originator, creditor, 
or an affiliate of the creditor or originator).'' TILA section 
129B(c)(2)(B) also provides the Bureau authority to waive or create 
exemptions from this prohibition on consumers paying upfront discount 
points, origination points or fees where doing so is in the interest of 
consumers and the public.

[[Page 55305]]

The Bureau's Proposal
    As explained in more detail below, while the statute is structured 
differently and uses different terminology than existing Sec.  
1026.36(d)(2), the restrictions on dual compensation set forth in 
existing Sec.  1026.36(d)(2) generally are consistent with the 
restrictions on dual compensation set forth in TILA section 129B(c)(2). 
Nonetheless, the Bureau proposes several changes to existing Sec.  
1026.36(d)(2) (re-designated as Sec.  1026.36(d)(2)(i)) to provide 
additional guidance and flexibility to loan originators. For example, 
as explained in more detail below, in response to questions, the Bureau 
proposes to provide additional guidance on whether compensation to a 
loan originator paid on the borrower's behalf by a person other than a 
creditor or its affiliates, such as a non-creditor seller, home 
builder, home improvement contractor or real estate broker or agent, is 
considered compensation received directly from a consumer for purposes 
of Sec.  1026.36(d)(2)(i). Specifically, the Bureau proposes to add 
Sec.  1026.36(d)(2)(i)(B) and comment 36(d)(2)-2.iii to clarify that 
such payments to a loan originator are considered compensation received 
directly from the consumer for purposes of Sec.  1026.36(d)(2) if they 
are made pursuant to an agreement between the borrower and the person 
other than the creditor or its affiliates.
    In addition, currently, Sec.  1026.36(d)(2) prohibits a loan 
originator organization that receives compensation directly from a 
consumer in connection with a transaction from paying compensation in 
connection with that transaction to individual loan originators (such 
as its employee brokers), although the organization could pay 
compensation that is not tied to the transaction (such as salary or 
hourly wages) to individual loan originators. As explained in more 
detail below, the Bureau proposes to revise Sec.  1026.36(d)(2) (re-
designated as Sec.  1026.36(d)(2)(i)) to provide that, if a loan 
originator organization receives compensation directly from a consumer 
in connection with a transaction, the loan originator organization may 
pay compensation in connection with the transaction to individual loan 
originators and the individual loan originators may receive 
compensation from the loan originator organization. As explained in 
more detail below, the Bureau believes that allowing loan originator 
organizations to pay compensation in connection with a transaction to 
individual loan originators, even if the loan originator organization 
has received compensation directly from the consumer in that 
transaction, is consistent with the statutory purpose of ensuring that 
a loan originator organization is not compensated by both the consumer 
and the creditor for the same transaction because whether and how the 
loan originator organization splits its compensation with its 
individual loan originators does not affect the total amount of 
compensation paid by the consumer (directly or indirectly).
    As discussed in more detail below, the Bureau also believes that 
the original purpose of the restriction in current Sec.  1026.36(d)(2) 
is addressed separately by other revisions pursuant to the Dodd-Frank 
Act. Under current Sec.  1026.36(d)(1)(iii), compensation paid directly 
by a consumer to a loan originator could be based on loan terms and 
conditions. Consequently, individual loan originators could have 
incentives to steer a consumer into a transaction where the consumer 
compensates the loan originator organization directly, resulting in 
greater compensation to the loan originator organization than it could 
receive if compensated by the creditor subject to the restrictions of 
Sec.  1026.36(d)(1). The Dodd-Frank Act prohibits compensation based on 
loan terms, even when a consumer is paying compensation directly to a 
mortgage originator. Thus, if an individual loan originator receives 
compensation in connection with the transaction from the loan 
originator organization (where the loan originator organization 
receives compensation directly from the consumer), the amount of the 
compensation paid by the consumer to the loan originator organization, 
and the amount of the compensation paid by the loan originator 
organization to the individual loan originator, cannot be based on loan 
terms.
    In addition, with this proposed revision, more loan originator 
organizations may be willing to structure transactions where consumers 
pay loan originator compensation directly. The Bureau believes that 
this result may enhance the interests of consumers and the public by 
giving consumers greater flexibility in structuring the payment of loan 
originator compensation.
    The Bureau's proposal on restrictions related to dual compensation 
as set forth in proposed Sec.  1026.36(d)(2)(i) are discussed in more 
detail below.
    Compensation received directly from the consumer. As discussed 
above, under Sec.  1026.36(d)(2), a loan originator that receives 
compensation directly from the consumer may not receive compensation in 
connection with the transaction (e.g., a commission) from any other 
person (e.g., a creditor). In addition, if any loan originator is paid 
compensation directly by the consumer in a transaction, no other loan 
originator (such as an employee of a loan originator organization) may 
receive compensation in connection with the transaction from another 
person. Moreover, if any loan originator receives compensation directly 
from a consumer, no person who knows or has reason to know of the 
consumer-paid compensation to the loan originator (other than the 
consumer) may pay any compensation to a loan originator, directly or 
indirectly, in connection with the transaction. Existing comment 
36(d)(1)-7 provides guidance on when payments to a loan originator are 
considered compensation received directly from the consumer. The Bureau 
proposes to delete the first sentence of this comment because it is no 
longer relevant given that the Bureau proposes to remove Sec.  
1026.36(d)(1)(iii), as discussed above under the section-by-section 
analysis to proposed Sec.  1026.36(d)(1). The Bureau also proposes to 
move the other content of this comment to proposed comment 36(d)(2)-
2.i; no substantive change is intended.
    Existing comment 36(d)(2)-2 references Regulation X, which 
implements the Real Estate Settlement Procedures Act (RESPA), and 
provides that a yield spread premium paid by a creditor to the loan 
originator may be characterized on the RESPA disclosures as a 
``credit'' that will be applied to reduce the consumer's settlement 
charges, including origination fees. Existing comment 36(d)(2)-2 
clarifies that a yield spread premium disclosed in this manner is not 
considered to be received by the loan originator directly from the 
consumer for purposes of Sec.  1026.36(d)(2). The Bureau proposes to 
move this guidance to proposed comment 36(d)(2)(i)-2.ii and revise it. 
The Bureau proposes to revise the guidance in proposed comment 
36(d)(2)(i)-2.ii recognizing that Sec.  1026.36 prohibits yield spread 
premiums and overages. Yield spread premiums and overages were 
additional sums (premiums or bonuses) paid to mortgage brokers and loan 
officers, respectively, for selling consumers an interest rate that is 
higher than the minimum rate the creditor would be willing to offer a 
particular consumer based on the creditor's specific underwriting 
criteria (i.e., the difference in interest rate yield, the yield 
spread, or overage) without the borrower paying

[[Page 55306]]

points to reduce this minimum rate further. Yield spread premiums or 
overages also differed significantly from lender credits or rebates 
because the loan originator had the discretion to retain all of the 
proceeds obtained from the yield spread premium or overage and not use 
any proceeds to reduce the borrower's settlement costs.
    ``Rebates,'' ``credits,'' or ``lender credits'' on the other hand 
are paid by the creditor for the interest rate chosen by the consumer 
or on behalf of the consumer to reduce the consumer's settlement costs. 
Comment 36(d)(2)-2 (re-designated as proposed comment 36(d)(2)(i)-2.ii) 
would be revised to use the term ``rebates'' and ``credits,'' instead 
of yield spread premiums. Rebates are disclosed as ``credits'' under 
the current Regulation X disclosure regime.
    The Bureau also proposes to add Sec.  1026.36(d)(2)(i)(B) and 
comment 36(d)(2)(i)-2.iii to provide additional guidance on the phrase 
``compensation directly from the consumer'' as used in new TILA section 
129B(c)(2)(B), as added by section 1403 of the Dodd-Frank Act, and 
Sec.  1026.36(d)(2) (as re-designated proposed Sec.  1026.36(d)(2)(i)). 
Mortgage creditors and other industry representatives have raised 
questions about whether payments to a loan originator on behalf of the 
borrower by a person other than the creditor are considered 
compensation received directly from a consumer for purposes of Sec.  
1026.36(d)(2). For example, non-creditor sellers, home builders, home 
improvement contractors, or real estate brokers or agents may agree to 
pay some or all of the consumer's closing costs. Some of this payment 
may be used to compensate a loan originator. In proposed Sec.  
1026.36(d)(2)(i)(B), the Bureau proposes to interpret the phrase 
``compensation directly from the consumer'' as used in new TILA section 
129B(c)(2)(B) and proposed Sec.  1026.36(d)(2)(i) to include payments 
to a loan originator made pursuant to an agreement between the consumer 
and a person other than the creditor or its affiliates. Proposed 
comment 36(d)(2)(i)-2.iii clarifies that whether there is an agreement 
between the parties will depend on State law. See Sec.  1026.2(b)(3). 
Also, proposed comment 36(d)(2)(i)-2.iii makes clear that the parties 
do not have to agree specifically that the payments will be used to pay 
for the loan originator's compensation, but just that the person will 
make a payment toward the borrower's closing costs. For example, assume 
that a non-creditor seller has an agreement with the borrower to pay 
$1,000 of the borrower's closing costs on a transaction. Any of the 
$1,000 that is used to pay compensation to a loan originator is deemed 
to be compensation received directly from the consumer, even if the 
agreement does not specify that some or all of $1,000 must be used to 
compensate the loan originator. In such cases, the loan originator 
would be permitted to receive compensation from both the consumer and 
the other person who has the agreement with the consumer (but not from 
any other person).
    The Bureau believes that arrangements where a person other than a 
creditor or its affiliate pays compensation to a loan originator on 
behalf of the borrower do not raise the same concerns as when that 
compensation is being paid by the creditor or its affiliates. The 
Bureau believes that one of the primary goals of section 1403 of the 
Dodd-Frank Act is to restrict a loan originator from receiving 
compensation both directly from a consumer and from the creditor or its 
affiliates, which more easily may occur without the consumer's 
knowledge. Allowing loan originators to receive compensation from both 
the consumer and the creditor can create inherent conflicts of interest 
of which consumers may not be aware. When a loan originator 
organization charges the consumer a direct fee for arranging the 
consumer's mortgage loan, this charge may lead the consumer to infer 
that the broker accepts the consumer-paid fee to represent the 
consumer's financial interests. Consumers also may reasonably believe 
that the fee they pay is the originator's sole compensation. This may 
lead reasonable consumers erroneously to believe that loan originators 
are working on their behalf, and are under a legal or ethical 
obligation to help them obtain the most favorable loan terms and 
conditions. Consumers may regard loan originators as ``trusted 
advisors'' or ``hired experts,'' and consequently rely on originators' 
advice. Consumers who regard loan originators in this manner may be 
less likely to shop or negotiate to assure themselves that they are 
being offered competitive mortgage terms.
    The Bureau believes, however, that the statutory goals discussed 
above are facilitated by proposed Sec.  1026.36(d)(2)(i)(B) and comment 
36(d)(2)(i)-2.iii. Under the proposal, a payment by a person other than 
a creditor or its affiliates is considered received directly from the 
consumer for purposes of Sec.  1026.36(d)(2) only if the payment is 
made pursuant to an agreement between the consumer and that person. 
Thus, if there is an agreement, presumably the consumer will be aware 
of the payment. In addition, because this payment would be considered 
compensation directly received from the consumer, the consumer is the 
only other person in the transaction that could pay compensation in 
connection with the transaction to the loan originator. For example, 
the creditor or its affiliates could not pay compensation in connection 
with the transaction to the loan originator.
    In addition, the Bureau believes that proposed Sec.  
1026.36(d)(2)(i)(B) and comment 36(d)(2)(i)-2.iii help prevent 
circumvention of the dual compensation provisions. If payments by 
persons other than the creditor or its affiliates were not deemed to be 
compensation directly from the consumer, a loan originator could 
arrange for the consumer to pay compensation to such a person and for 
that person to pay the compensation to the loan originator. Because 
this payment would not be deemed to be coming directly from the 
consumer, the loan originator could receive compensation from a 
creditor and this other person, circumventing the dual compensation 
rules.
    Under proposed Sec.  1026.36(d)(2)(i)(B) and comment 36(d)(2)(i)-
2.iii, payment of loan originator compensation by an affiliate of the 
creditor, including a seller, home builder, home improvement 
contractor, etc., to a loan originator is not deemed to be made 
directly by the consumer for purposes of Sec.  1026.36(d)(2) (re-
designated as proposed Sec.  1026.36(d)(2)(i)), even if the payment is 
made pursuant to an agreement between the borrower and the affiliate. 
That is, for example, if a home builder is an affiliate of a creditor, 
proposed Sec.  1026.36(d)(2)(i) prohibits this person from paying 
compensation in connection with a transaction if a consumer pays 
compensation to the loan originator in connection with the transaction. 
This proposal is consistent with current Sec.  1026.36(d)(3), which 
states that for purposes of Sec.  1026.36(d) affiliates must be treated 
as a single ``person.'' In addition, considering payments of 
compensation to a loan originator by an affiliate of the creditor to be 
payments directly made by the consumer may allow creditors to 
circumvent the restrictions in proposed Sec.  1026.36(d)(2)(i). A 
creditor could provide compensation to the loan originator indirectly 
by structuring the arrangement such that the creditor pays the 
affiliate and the affiliate pays the loan originator.
    Prohibition on a loan originator receiving compensation in 
connection with a transaction from both the consumer and a person other 
than the

[[Page 55307]]

consumer. As discussed above, under Sec.  1026.36(d)(2), a loan 
originator that receives compensation directly from the consumer in a 
closed-end consumer credit transaction secured by a dwelling may not 
receive compensation from any other person in connection with the 
transaction. In addition, in such cases, no person who knows or has 
reason to know of the consumer-paid compensation to the loan originator 
(other than the consumer) may pay any compensation to the loan 
originator in connection with the transaction. Current comment 
36(d)(2)-1 provides that, for purposes of Sec.  1026.36(d)(2), 
compensation that is ``in connection with the transaction'' means 
payments, such as commissions, that are specific to, and paid solely in 
connection with, the transaction in which the consumer has paid 
compensation directly to a loan originator. To illustrate: Assume that 
a loan originator organization receives compensation directly from the 
consumer in a mortgage transaction subject to Sec.  1026.36(d)(2). 
Because the loan originator organization is receiving compensation 
directly from the consumer in this transaction, the loan originator 
organization is restricted under Sec.  1026.36(d)(2) from receiving 
compensation in connection with that particular transaction (e.g., a 
commission) from a person other than the consumer (e.g., the creditor). 
Similarly, a person other than the consumer may not pay the loan 
originator any compensation in connection with the transaction.
    Except as provided below, the Bureau proposes to retain the 
prohibition described above in current Sec.  1026.36(d)(2) (re-
designated as Sec.  1026.36(d)(2)(i)), as consistent with the 
restriction on dual compensation set forth in TILA section 129B(c)(2). 
Specifically, TILA section 129B(c)(2)(A) provides that for any mortgage 
loan, a mortgage originator generally may not receive from any person 
other than the consumer any origination fee or charge except bona fide 
third-party charges not retained by the creditor, the mortgage 
originator, or an affiliate of either. Likewise, no person, other than 
the consumer, who knows or has reason to know that a consumer has 
directly compensated or will directly compensate a mortgage originator, 
may pay a mortgage originator any origination fee or charge except bona 
fide third party charges as described above. In addition, section 
129B(c)(2)(B) provides that a mortgage originator may receive an 
origination fee or charge from a person other than the consumer if, 
among other things, the mortgage originator does not receive any 
compensation directly from the consumer.
    Pursuant to its authority under TILA section 105(a) to effectuate 
the purposes of TILA and facilitate compliance with TILA, the Bureau 
interprets ``origination fee or charge'' to mean compensation that is 
paid ``in connection with the transaction,'' such as commissions, that 
are specific to, and paid solely in connection with, the transaction. 
The Bureau believes that, if Congress intended the prohibitions on dual 
compensation to apply to salary or hourly wages that are not tied to a 
specific transaction, Congress would have used the term 
``compensation'' in TILA section 129B(c)(2), as it did in TILA section 
129B(c)(1) that prohibits compensation based on loan terms. Thus, like 
current Sec.  1026.36(d)(2), TILA section 129B(c)(2) prohibits a 
mortgage originator that receives compensation directly from the 
consumer in a closed-end consumer credit transaction secured by a 
dwelling from receiving compensation, directly or indirectly, from any 
person other than the consumer in connection with the transaction.
    Nonetheless, TILA section 129B(c)(2) does not restrict a mortgage 
originator from receiving payments from a person other than the 
consumer for bona fide third-party charges not retained by the 
creditor, mortgage originator, or an affiliate of the creditor or 
mortgage originator, even if the mortgage originator receives 
compensation directly from the consumer. For example, assume that a 
loan originator receives compensation directly from a consumer in a 
transaction. TILA section 129B(c)(2) does not restrict the loan 
originator from receiving payment from a person other than the consumer 
(e.g., a creditor) for bona fide and reasonable charges, such as credit 
reports, where those amounts are not retained by the loan originator 
but are paid to a third party that is not the creditor, its affiliate, 
or the affiliate of the loan originator. Because the loan originator 
does not retain such charges, they are not considered part of the loan 
originator's compensation for purposes of Sec.  1026.36(d).
    Consistent with TILA section 129B(c)(2) and pursuant to the 
Bureau's authority under TILA section 105(a) to effectuate the purposes 
of TILA and facilitate compliance with TILA, as discussed in more 
detail in the section-by-section analysis to proposed Sec.  1026.36(a), 
the Bureau proposes to amend comment 36(d)(1)-1.iii (re-designated as 
proposed comment 36(a)-5.iii) to clarify that the term ``compensation'' 
does not include amounts a loan originator receives as payment for bona 
fide and reasonable charges, such as credit reports, where those 
amounts are not retained by the loan originator but are paid to a third 
party that is not the creditor, its affiliate, or the affiliate of the 
loan originator. Thus, under proposed Sec.  1026.36(d)(2)(i) and 
comment 36(a)-5.iii, a loan originator that receives compensation 
directly from a consumer could receive a payment from a person other 
than the consumer for bona fide and reasonable charges where those 
amounts are not retained by the loan originator but are paid to a third 
party that is not the creditor, its affiliate, or the affiliate of the 
loan originator. For example, assume a loan originator receives 
compensation directly from a consumer in a transaction. Further assume 
the loan originator charges the consumer $25 for a credit report 
provided by a third party that is not the creditor, its affiliates or 
the affiliate of the loan originator, and this fee is bona fide and 
reasonable. Assume also that the $25 for the credit report is paid by 
the creditor with proceeds from a rebate. The loan originator in that 
transaction is not prohibited by proposed Sec.  1026.36(d)(2)(i) from 
receiving the $25 from the creditor, even though the consumer paid 
compensation to the loan originator in the transaction.
    In addition, a loan originator that receives compensation in 
connection with a transaction from a person other than the consumer 
could receive a payment from the consumer for a bona fide and 
reasonable charge where the amount of that charge is not retained by 
the loan originator but is paid to a third party that is not the 
creditor, its affiliate, or the affiliate of the loan originator. For 
example, assume a loan originator receives compensation in connection 
with a transaction from a creditor. Further assume the loan originator 
charges the consumer $25 for a credit report provided by a third party 
that is not the creditor, its affiliates or the affiliate of the loan 
originator, and this fee is bona fide and reasonable. Assume the $25 
for the credit report is paid by the consumer. The loan originator in 
that transaction is not prohibited by proposed Sec.  1026.36(d)(2)(i) 
from receiving the $25 from the consumer, even though the creditor paid 
compensation to the loan originator in connection with the transaction.
    As discussed in more detail in the section-by-section analysis to 
proposed Sec.  1026.36(a), proposed comment 36(a)-5.iii also recognizes 
that, in some cases, amounts received for payment for such third-party 
charges may exceed the

[[Page 55308]]

actual charge because, for example, the originator cannot determine 
precisely what the actual charge will be before consummation. In such a 
case, under proposed comment 36(a)-5.iii, the difference retained by 
the originator would not be deemed compensation if the third-party 
charge collected from the consumer or a person other than the consumer 
was bona fide and reasonable, and also complies with State and other 
applicable law. On the other hand, if the originator marks up a third-
party charge (a practice known as ``upcharging''), and the originator 
retains the difference between the actual charge and the marked-up 
charge, the amount retained is compensation for purposes of Sec.  
1026.36(d) and (e). Proposed comment 36(a)-5.iii contains two 
illustrations, which are discussed in more detail in the section-by-
section analysis to proposed Sec.  1026.36(a).
    If any loan originator receives compensation directly from the 
consumer, no other loan originator may receive compensation in 
connection with the transaction. Under current Sec.  1026.36(d)(2), if 
any loan originator is paid compensation directly by the consumer in a 
transaction, no other loan originator may receive compensation in 
connection with the transaction from a person other than the consumer. 
For example, assume that a loan originator organization receives 
compensation directly from the consumer in a mortgage transaction 
subject to Sec.  1026.36(d)(2). The loan originator organization may 
not receive compensation in connection with the transaction (e.g., a 
commission) from a person other than the consumer (e.g., the creditor). 
In addition, the loan originator organization may not pay individual 
loan originators any transaction-specific compensation, such as 
commissions, in connection with that particular transaction. 
Nonetheless, the loan originator organization could pay individual loan 
originators a salary or hourly wage or other compensation that is not 
tied to the particular transaction. See current comment 36(d)(2)-1. In 
addition, a person other than the consumer (e.g., the creditor) may not 
pay compensation in connection with the transaction to any loan 
originator, such as a loan originator that is employed by the creditor 
or by the loan originator organization.
    TILA section 129B(c)(2), which was added by section 1403 of the 
Dodd-Frank Act, generally is consistent with the above prohibition in 
current Sec.  1026.36(d)(2) (re-designated as proposed Sec.  
1026.36(d)(2)(i)). 12 U.S.C. 1639b(c)(2). TILA section 129B(c)(2)(B) 
prohibits a loan originator organization that receives compensation 
directly from a consumer in a transaction from paying compensation tied 
to the transaction (such as a commission) to individual loan 
originators. Specifically, TILA section 129B(c)(2)(B) provides that a 
mortgage originator may receive from a person other than the consumer 
an origination fee or charge, and a person other than the consumer may 
pay a mortgage originator an origination fee or charge, if: (1) The 
mortgage originator does not receive any compensation directly from the 
consumer; and (2) ``the consumer does not make an upfront payment of 
discount points, origination points, or fees, however denominated 
(other than bona fide third party charges not retained by the mortgage 
originator, creditor, or an affiliate of the creditor or originator).'' 
The individual loan originator is the one that is receiving 
compensation from a person other than the consumer, namely the loan 
originator organization. Thus, TILA section 129B(c)(2)(B) permits the 
individual loan originator to receive compensation tied to the 
transaction from the loan originator organization if (1) the individual 
loan originator does not receive any compensation directly from the 
consumer and (2) the consumer does not make an upfront payment of 
discount points, origination points, or fees, however denominated 
(other than bona fide third party charges not retained by the 
individual loan originator, creditor, or an affiliate of the creditor 
or originator). The individual loan originator is not deemed to be 
receiving compensation in connection with the transaction from a 
consumer simply because the loan originator organization is receiving 
compensation from the consumer in connection with the transaction. The 
loan originator organization and the individual loan originator are 
separate persons. Nonetheless, the consumer is making ``an upfront 
payment of discount points, origination points, or fees'' in the 
transaction when it pays the loan originator organization compensation. 
The payment of the origination point or fee by the consumer to the loan 
originator organization is not a bona fide third-party charge under 
TILA section 129B(c)(2)(B)(ii). Thus, because the loan originator 
organization has received an upfront payment of origination points or 
fees from the consumer in the transaction, unless the Bureau exercises 
its exemption authority as discussed in more detail below, no loan 
originator (including an individual loan originator) may receive 
compensation tied to the transaction from a person other than the 
consumer.
    Nonetheless, TILA section 129B(c)(2)(B) also provides the Bureau 
authority to waive or create exemptions from this prohibition on 
consumers paying upfront discount points, origination points or fees, 
where doing so is in the interest of consumers and the public. Pursuant 
to this waiver/exemption authority, the Bureau proposes to add Sec.  
1026.36(d)(2)(i)(C) to provide that, if a loan originator organization 
receives compensation directly from a consumer in connection with a 
transaction, the loan originator entity may pay compensation to 
individual loan originators, and the individual loan originators may 
receive compensation from the loan originator organization. The Bureau 
also proposes to amend comment 36(d)(2)-1 (re-designated as proposed 
comment 36(d)(2)(i)-1) to be consistent with proposed Sec.  
1026.36(d)(2)(i)(C). For the reasons discussed below, the Bureau 
believes that it is in the interest of consumers and the public to 
allow a loan originator organization to pay individual loan originators 
compensation in connection with the transaction, even when the loan 
originator organization has received compensation in connection with 
the transaction directly from the consumer.
    The Bureau believes that the risk of harm to consumers that the 
current restriction was intended to address is likely no longer 
present, in light of new TILA provision 129B(c)(1). Under current Sec.  
1026.36(d)(1)(iii), compensation paid directly by a consumer to a loan 
originator could be based on loan terms and conditions. Thus, if a loan 
originator organization were allowed to pay an individual loan 
originator that works for the organization a commission in connection 
with a transaction, the individual loan originator could possibly steer 
the consumer into a loan with terms and conditions that would produce 
greater compensation to the loan originator organization, and the 
individual loan originator, because of this steering, could receive 
greater compensation if he or she were allowed to receive compensation 
in connection with the transaction. However, the risk is now expressly 
addressed by the Dodd-Frank Act. Specifically, TILA section 129B(c)(1), 
as added by section 1403 of the Dodd-Frank Act, prohibits compensation 
based on loan terms, even when a consumer is paying compensation 
directly to a mortgage originator. 12 U.S.C. 1639b(c)(1). Thus, 
pursuant to TILA section 129B(c)(1), and under proposed Sec.  
1026.36(d)(1), even if an individual loan originator is

[[Page 55309]]

permitted to receive compensation in connection with the transaction 
from the loan originator organization where the loan originator 
organization receives compensation directly from the consumer, the 
amount of the compensation paid by the consumer to the loan originator 
organization, and the amount of the compensation paid by the loan 
originator organization to the individual loan originator, cannot be 
based on loan terms. In outreach with consumer groups, these groups 
agreed that loan origination organizations that receive compensation 
directly from a consumer in a transaction should be permitted to pay 
individual loan originators that work for the organization compensation 
in connection with the transaction.
    The Bureau believes that it is in the interest of consumers and the 
public to allow loan originator organizations to pay compensation in 
connection with the transaction to individual loan originators, even 
when the loan originator organization is receiving compensation 
directly from the consumer. As discussed above, the Bureau believes the 
risk of the harm to the consumer that the restriction was intended to 
address has been remedied by the statutory amendment prohibiting even 
compensation that is paid by the consumer from being based on the 
transaction's terms. With that protection in place, allowing this type 
of compensation to the individual loan originator no longer presents 
the same risk to the consumer of being steered into a transaction 
involving direct compensation from the consumer because both the loan 
originator organization and the individual loan originator can realize 
greater compensation. In addition, with this proposed revision, more 
loan originator organizations may be willing to structure transactions 
where consumers pay loan originator compensation directly. The Bureau 
believes that this result will enhance the interests of consumers and 
the public by giving consumers greater flexibility in structuring the 
payment of loan originator compensation. In a transaction where the 
consumer pays compensation directly to the loan originator, the amount 
of the compensation may be more transparent to the consumer. In 
addition, in these transactions, the consumer may have more flexibility 
to choose the pricing of the loan. Subject to proposed Sec.  
1026.36(d)(2)(ii), as discussed in more detail below, in transactions 
where the consumer pays compensation directly to the loan originator, 
the consumer would know the amount of the loan originator compensation 
and could pay all of that compensation upfront, rather than the 
creditor determining the compensation and recovering the cost of that 
compensation from the consumer through the rate, or a combination of 
the rate and upfront origination points or fees.
36(d)(2)(ii) Restrictions on Discount Points and Origination Points or 
Fees Background
    As discussed above, under current Sec.  1026.36(d)(2), a person 
other than the consumer (e.g., a creditor) is not prohibited from 
paying compensation to any loan originator in connection with a 
transaction, so long as no loan originator has received compensation 
directly from the consumer in that transaction. Loan originator 
organizations typically are the only loan originators that receive 
compensation directly from the consumer in a transaction. Individual 
loan originators that work for a loan originator organization typically 
are prohibited by applicable law and by the loan originator 
organization from receiving compensation directly from the consumer. 
Thus, in the typical transaction that involves a loan originator 
organization, under Sec.  1026.36(d)(2), a creditor is not prohibited 
from paying compensation in connection with a transaction (e.g., 
commission) to a loan originator organization and the loan originator 
organization is not prohibited from paying compensation in connection 
with the transaction to individual loan originators, so long as the 
loan originator organization has not received compensation directly 
from the consumer in that transaction. In addition, in a transaction 
that does not involve a loan originator organization, a creditor is not 
prohibited under Sec.  1026.36(d)(2) from paying compensation in 
connection with a transaction to individual loan originators that work 
for the creditor, so long as the individual loan originators have not 
received compensation directly from the consumer in that transaction, 
which they are generally prohibited from doing by the creditor pursuant 
to safety and soundness regulation.
    Also, if a creditor is paying compensation in connection with a 
transaction to a loan originator organization or to individual loan 
originators that work for the creditor, as described above, current 
Sec.  1026.36(d)(2) does not prohibit the creditor from collecting 
discount points or origination points or fees from the consumer in the 
transaction. For example, current Sec.  1026.36(d)(2) does not limit a 
creditor's ability to charge the consumer origination points or fees 
which the consumer would pay in cash or out of the loan proceeds at or 
before closing as a means for the creditor to collect the loan 
originator's compensation or other costs. In addition, current Sec.  
1026.36(d)(2) does not limit a creditor's ability to offer a lower 
interest rate in a transaction in exchange for the consumer paying 
discount points.
The Dodd-Frank Act
    New TILA section 129B(c)(2), which was added by section 1403 of the 
Dodd-Frank Act, restricts the ability of a creditor, the mortgage 
originator, or the affiliates of either to collect from the consumer 
upfront discount points, origination points, or fees in a transaction. 
12 U.S.C. 1639b(c)(2). Specifically, TILA section 129B(c)(2)(B) 
provides that a mortgage originator may receive from a person other 
than the consumer an origination fee or charge, and a person other than 
the consumer may pay a mortgage originator an origination fee or 
charge, if: (1) the mortgage originator does not receive any 
compensation directly from the consumer; and (2) ``the consumer does 
not make an upfront payment of discount points, origination points, or 
fees, however denominated (other than bona fide third party charges not 
retained by the mortgage originator, creditor, or an affiliate of the 
creditor or originator).'' TILA section 129B(c)(2)(B)(ii) also provides 
the Bureau authority to waive or create exemptions from this 
prohibition on consumers paying upfront discount points, origination 
points, or fees, where doing so is in the interest of consumers and the 
public interest.
    As discussed in more detail in the section-by-section analysis to 
proposed Sec.  1026.36(d)(2)(i), the Bureau interprets the phrase 
``origination fee or charge'' as used in new TILA section 129B(c)(2) 
more narrowly than compensation as used in TILA section 129B(c)(1) and 
to mean compensation that is paid ``in connection with the 
transaction,'' such as commissions, that are specific to, and paid 
solely in connection with, the transaction. Thus, under TILA section 
129B(c)(2), for a transaction involving a loan originator organization, 
a creditor may pay compensation in connection with a transaction (e.g., 
a commission) to the loan originator organization, and the loan 
originator organization may pay compensation in connection with a 
transaction to individual loan originators only if: (1) The loan 
originator organization does not receive compensation directly from the

[[Page 55310]]

consumer; and (2) the consumer does not make an upfront payment of 
discount points, origination points, or fees as discussed above.
    In addition, the Bureau proposes to use its exemption authority in 
TILA section 129B(c)(2)(B)(ii) to permit a loan originator organization 
to pay compensation in connection with a transaction to individual loan 
originators, even if the loan originator organization received 
compensation directly from the consumer. Assume a transaction where a 
loan originator organization receives compensation directly from the 
consumer. As discussed in more detail in the section-by-section 
analysis to proposed Sec.  1026.36(d)(2)(i), TILA section 129B(c)(2) 
prohibits the loan originator organization from paying compensation 
tied to a transaction (such as commission) to an individual loan 
originator unless: (1) The individual loan originator does not receive 
compensation directly from the consumer; and (2) the consumer does not 
make an upfront payment of discount points, origination points, or 
fees, however denominated (other than bona fide third party charges not 
retained by the individual loan originator, creditor, or an affiliate 
of the creditor or originator). An individual loan originator is not 
deemed to be receiving compensation in connection with a transaction 
from a consumer simply because the loan originator organization is 
receiving compensation from the consumer in connection with the 
transaction. The loan originator organization and the individual loan 
originator are separate persons. Nonetheless, the consumer makes ``an 
upfront payment of discount points, origination points, or fees'' in 
the transaction when the loan originator organization is paid 
compensation by the consumer. The payment of the origination points or 
fees by the consumer to the loan originator organization is not 
considered a bona fide third-party charge under TILA section 
129B(c)(2)(B)(ii). Thus, because the loan originator organization has 
received an upfront payment of origination points or fees from the 
consumer in the transaction, unless the Bureau exercises its exemption 
authority, no loan originator (including an individual loan originator) 
could receive compensation tied to the transaction from a person other 
than the consumer.\62\
---------------------------------------------------------------------------

    \62\ The Bureau notes that the restrictions in TILA section 
129B(c)(2) do not apply in transactions where a loan originator 
organization receives compensation directly from the consumer and 
the loan originator organization does not pay individual loan 
originators compensation (such as a commission) in connection with 
the transaction. In these cases, TILA section 129(B)(c)(2) is not 
violated because no loan originator is receiving compensation in 
connection with a transaction from a person other than the consumer.
---------------------------------------------------------------------------

    Likewise, under TILA section 129B(c)(2), for a transaction not 
involving a loan originator organization, unless the Bureau exercises 
its exemption authority, a creditor may pay compensation in connection 
with a transaction to individual loan originators, such as the 
creditor's employees, only if: (1) These individual loan originators do 
not receive compensation directly from the consumer, which they are 
generally prohibited from doing by the creditor pursuant to safety and 
soundness regulation; and (2) the consumer does not make an upfront 
payment of discount points, origination points, or fees as discussed 
above. As a result, under TILA section 129B(c)(2), if a consumer pays 
discount points, origination points, or fees to a creditor, the 
creditor cannot pay compensation in connection with the transaction 
(e.g., a commission) to individual loan originators that work for the 
creditor. However, the restrictions in TILA section 129B(c)(2) do not 
apply if a creditor does not pay compensation to individual loan 
originators that is not tied to a particular transaction. For example, 
if a creditor pays to individual loan originators only a salary or 
hourly wage, the restriction on the consumer paying discount points, 
origination points, or fees in the transaction as set forth in TILA 
section 129B(c)(2)(B)(ii) would not apply. In this case, the creditor 
and its affiliates could collect discount points, origination points, 
or fees, as described in TILA section 129B(c)(2)(B)(ii), from the 
consumer.
    To summarize, the prohibition in TILA section 129B(c)(2)(B)(ii) on 
the consumer paying upfront discount points, origination points, or 
fees in a transaction generally applies in three scenarios: (1) The 
creditor pays compensation in connection with the transaction (e.g., a 
commission) to individual loan originators, such as the creditor's 
employees; (2) the creditor pays a loan originator organization 
compensation in connection with a transaction, regardless of how the 
loan originator organization pays compensation to individual loan 
originators; and (3) the loan originator organization receives 
compensation directly from the consumer in a transaction and pays 
individual loan originators compensation in connection with the 
transaction. The prohibition in TILA section 129B(c)(2)(B)(ii) on the 
consumer paying upfront discount points, origination points, or fees in 
a transaction generally does not apply in the following two scenarios: 
(1) The creditor pays individual loan originators, such as the 
creditor's employees, only in the form of a salary, hourly wage or 
other compensation that is not tied to the particular transaction; and 
(2) the loan originator organization receives compensation directly 
from the consumer in a transaction and pays individual loan originators 
that work for the organization only in the form of a salary, hourly 
wage, or other compensation that is not tied to the particular 
transaction. The Bureau understands, however, that in most 
transactions, creditors and loan originator organizations pay 
individual loan originators compensation tied to a particular 
transaction (such as a commission). Thus, the Bureau expects that the 
restrictions in new TILA section 129B(c)(2)(B)(ii) will apply to most 
mortgage transactions except to the extent that the Bureau exercises 
its exemption authority as discussed below.
The Bureau's Proposal
    The Bureau is proposing to implement the statutory provisions 
addressing the prohibition on the upfront payment by the consumer of 
discount points, origination points, or fees as set forth in TILA 
section 129B(c)(2)(B)(ii) by using its exemption authority provided in 
that same section. Specifically, the Bureau proposes to use its 
exemption authority set forth in TILA section 129B(c)(2)(B)(ii), which 
provides the Bureau authority to waive or create exemptions from the 
prohibition on consumers' paying upfront discount points, origination 
points, or fees, where doing so is in the interest of consumers and the 
public.
    As discussed in more detail below, the Bureau proposes in new Sec.  
1026.36(d)(2)(ii)(A) restrictions on discount points and origination 
points or fees in a closed-end consumer credit transaction secured by a 
dwelling, if any loan originator will receive from any person other 
than the consumer compensation in connection with the transaction. 
Specifically, in these transactions, a creditor or loan originator 
organization may not impose on the consumer any discount points and 
origination points or fees in connection with the transaction unless 
the creditor makes available to the consumer a comparable, alternative 
loan that does not include discount points and origination points or 
fees; the creditor need not make available the

[[Page 55311]]

alternative, comparable loan, however, if the consumer is unlikely to 
qualify for such a loan. The term ``comparable'' means equal or 
equivalent. Thus, the term ``comparable, alternative loan'' would mean 
that the two loans must have the same terms and conditions, other than 
the interest rate, any terms that change solely as a result of the 
change in the interest rate (such as the amount of the regular periodic 
payments), and the amount of any discount points and origination points 
or fees.
    Under the proposal, a creditor would not be required to provide all 
consumers the option of a comparable, alternative loan that does not 
include discount points and origination points or fees. If the creditor 
determines that a consumer is unlikely to qualify for a comparable, 
alternative loan that does not include discount points and origination 
points or fees, the creditor is not required to make such a loan 
available to the consumer.
    The Bureau notes that under Sec.  1026.36(d)(3), affiliates are 
treated as a single ``person.'' Thus, affiliates of the creditor and 
the loan originator organization also could not impose on the consumer 
any discount points and origination points or fees in connection with 
the transaction unless the creditor makes available to the consumer a 
comparable, alternative loan that does not include discount points and 
origination points or fees, except that the creditor need not make 
available the alternative, comparable loan if the consumer is unlikely 
to qualify for such a loan. See proposed comment 36(d)(2)(ii)-3. The 
proposal also makes clear that proposed Sec.  1026.36(d)(2)(ii) does 
not override any of the prohibitions on dual compensation set forth in 
proposed Sec.  1026.36(d)(2)(i), as discussed above. For example, Sec.  
1026.36(d)(2)(ii) does not permit a loan originator organization to 
receive compensation in connection with a transaction both from a 
consumer and from a person other than the consumer. See proposed 
comment 36(d)(2)(ii)-1.iii.
    The proposal also provides that no discount points and origination 
points or fees may be imposed on the consumer in connection with a 
transaction subject to proposed Sec.  1026.36(d)(2)(ii)(A) unless there 
is a bona fide reduction in the interest rate compared to the interest 
rate for the comparable, alternative loan that does not include 
discount points and origination points or fees required to be made 
available to the consumer under Sec.  1026.36(d)(2)(ii)(A). In 
addition, for any rebate paid by the creditor that will be applied to 
reduce the consumer's settlement charges, the creditor must provide a 
bona fide rebate in return for an increase in the interest rate 
compared to the interest rate for the loan that does not include 
discount points and origination points or fees required to be made 
available to the consumer under Sec.  1026.36(d)(2)(ii)(A). As 
discussed in more detail below, the Bureau has evaluated three primary 
types of approaches to implement a requirement that the trade-off be 
``bona fide.''
    As described in more detail below, the Bureau proposes in new Sec.  
1026.36(d)(2)(ii)(B) to define the term ``discount points and 
origination points or fees'' for purposes of Sec.  1026.36(d) and (e) 
to include all items that would be included in the finance charge under 
Sec.  1026.4(a) and (b), and any fees described in Sec.  1026.4(a)(2) 
notwithstanding that those fees may not be included in the finance 
charge under Sec.  1026.4(a)(2), that are payable at or before 
consummation by the consumer to a creditor or a loan originator 
organization, except for: (1) Interest, including per-diem interest; 
(2) any bona fide and reasonable third-party charges not retained by 
the creditor or loan originator organization; and (3) seller's points 
and premiums for property insurance that are excluded from the finance 
charge under Sec.  1026.4(c)(5), and (d)(2), respectively. Under the 
proposal, the phrase ``payable at or before consummation by the 
consumer to a creditor or a loan originator organization'' would 
include amounts paid by the consumer in cash at or before closing or 
financed and paid out of the loan proceeds.
    The Bureau notes that the proposal does not contain two potential 
restrictions that were discussed as part of the Small Business Review 
Panel process. First, the proposal does not contain a provision that 
would ban origination points and prevent origination fees from varying 
based on loan size. By and large, SERs were strongly opposed to the 
requirement that origination fees do not vary with the size of loan. 
SERs' opposition to the flat fee requirement was based on the view that 
the costs of origination varied for loans with different 
characteristics, such as geography and loan type, and GSE-imposed loan 
level pricing adjustments vary by loan size. In addition, SERs stated 
that the imposition of the flat fee requirement would 
disproportionately harm small lenders and would be regressive because 
borrowers with smaller loan amounts would be charged more than they are 
typically charged currently. The Bureau believes that the provisions 
set forth in this proposal accomplish a similar purpose as the flat fee 
requirement, namely to ensure that consumers are in the position to 
shop and receive value for origination points or fees, but does so in a 
way to minimize adverse consequences for industry and consumers that 
the flat fee requirement might entail.
    Second, the proposal does not contain a provision that would 
``sunset'' the proposed exemptions from the statutory restrictions on 
consumers' upfront payment of discount points, origination points, or 
fees. As detailed in the Small Business Review Panel Report, the Bureau 
had considered a sunset provision whereby, after a specified period 
(e.g., three or five years), the proposed rule permitting creditors and 
loan originator organizations in certain circumstances to impose 
upfront discount points and origination points or fees on consumers 
would automatically expire (and the default prohibition would take full 
effect) unless the Bureau takes affirmative action to extend it. At 
that time, the Bureau would have had time to conduct a more detailed 
assessment of the payment of discount points and origination points or 
fees in a more stable regulatory environment to determine the long-term 
regulatory regime that would maximize consumer protections and credit 
availability. As part of the Small Business Review Panel process, the 
Bureau also noted that with or without a sunset provision, the Bureau 
would review the regulation within five years of its effective date 
pursuant to section 1022(d) of the Dodd-Frank Act, which requires the 
Bureau to ``conduct an assessment of each significant rule or order 
adopted by the Bureau under Federal consumer financial law'' and 
publish a report of its assessment. 12 U.S.C. 5512(d). The assessment 
must address, among other relevant factors, the effectiveness of the 
rule or order in meeting the Dodd-Frank Act's purposes and objectives 
and the specific goals stated by the Bureau, and it must reflect any 
available evidence and data collected by the Bureau. Before publishing 
a report of its assessment, the Bureau is required to invite public 
comment on recommendations for modifying, expanding, or eliminating the 
newly adopted significant rule or order.
    SERs generally preferred the Bureau to follow its Dodd-Frank-Act 
requirement to review the impact of whatever regulation is adopted 
after five years instead of adopting an automatic sunset. The SERs 
believed an automatic sunset could be disruptive to the market.

[[Page 55312]]

    To minimize potential disruption to the market, the Bureau is not 
proposing the ``sunset'' provision. The Bureau believes that the review 
it must conduct within five years of the rule's effective date pursuant 
to section 1022(d) of the Dodd-Frank Act is the appropriate method to 
continue to assess the impact of the rule. If the Bureau finds through 
this review that changes in the rule may be needed, the Bureau could 
make changes to the rule with notice and comment as appropriate. 
Nonetheless, the Bureau solicits comment on whether such as ``sunset'' 
provision would be beneficial.
    Use of the Bureau's exemption authority. Unlike TILA section 
129B(c)(2)(B)(ii), the Bureau's proposal would permit consumers in 
certain circumstances to pay upfront discount points and origination 
points or fees in transactions where any loan originator receives 
compensation in connection with the transaction from a person other 
than the consumer. Pursuant to the exemption authority set forth in 
TILA section 129B(c)(2)(B)(ii), the Bureau believes that it is ``in the 
interest of consumers and the public interest'' to permit discount 
points and origination points or fees to be charged on loans in certain 
instances.
    The Bureau believes that the proposal may benefit consumers and the 
public by providing consumers the flexibility to decide whether to pay 
discount points and origination points or fees. The Bureau believes 
that permitting creditors to offer consumers the option to choose to 
pay discount points and origination points or fees may benefit 
consumers by giving them additional options in choosing a loan product 
that fits their needs.
    Some mortgage consumers may want the lowest rate possible on their 
loans. In addition, some mortgage customers may prefer to lower the 
future monthly payment on the loan below some threshold amount, and 
paying discount points and origination points or fees would allow 
consumers to achieve this lower monthly payment by reducing the 
interest rate. In addition, some consumers may need to pay discount 
points and origination points or fees to reduce the monthly payment on 
the loan so that they can qualify for the loan. Without the ability to 
pay discount points and origination points or fees to reduce the 
monthly payment, the interest rate and the monthly payments on the loan 
that does not include discount points and origination points or fees 
may be too high for the consumer to qualify for the loan.
    A consumer could achieve a lower monthly payment by making a bigger 
down payment and thus reducing the loan amount. Nonetheless, it may be 
difficult for consumers to use this option to reduce significantly the 
monthly payment because it might take a significant increase in the 
down payment to achieve the desired reduction in the monthly payment. 
In other words, if the consumer took the same money that he or she 
would pay in discount points and origination points or fees and made a 
bigger down payment to reduce the loan amount, the consumer may not 
gain as large of a reduction in the monthly payment as if the consumer 
used that money to pay discount points and origination points or fees 
to reduce the interest rate. Some consumers may also obtain a tax 
benefit by paying discount points that applying such funds to a down 
payment would not achieve.
    Having the option to pay discount points and origination points or 
fees also allows consumers to determine whether they can best lower the 
overall costs of the mortgage loan by paying discount points and 
origination points or fees upfront in exchange for a lower interest 
rate. There will be a specific point in the timeline of the loan where 
the money spent to buy down the interest rate will be equal to the 
money saved by making reduced loan payments resulting from the lower 
interest rate on the loan. Selling the property or refinancing prior to 
this break-even point will result in a net financial loss for the 
consumer, while keeping the loan for longer than this break-even point 
will result in a net financial savings for the consumer. The longer a 
consumer keeps the same credit extension in place, the more the money 
spent on the discount points and origination points or fees will pay 
off. The Bureau believes consumers will be benefited by retaining the 
option to make these evaluations based upon their assessment of the 
costs and benefits, as well as their future plans.
    On the other hand, some consumers may prefer not to pay discount 
points and origination points or fees. For example, some consumers may 
not have the cash to pay discount points and origination points or fees 
before or at closing, and may wish not to finance such fees or have 
insufficient equity available to do so. In addition, some consumers may 
contemplate selling the home or refinancing the mortgage within a short 
period of time and may believe that it is not in their best interests 
to pay discount points and origination points or fees upfront in 
exchange for a lower interest rate.
    The Bureau is proposing to structure the use of its exemption 
authority to leverage the benefits that would arise if creditors were 
limited to making loans that do not include discount points and 
origination points or fees while preserving consumers' ability to 
choose another loan when appropriate. Through the proposal, the Bureau 
hopes to advance two objectives to address the problems in the current 
mortgage market that the Bureau believes the prohibition on discount 
points and origination points or fees was designed to address: (1) To 
facilitate consumer shopping by enhancing the ability of consumers to 
make comparisons using loans that do not include discount points and 
origination points or fees available from different creditors as a 
basis for comparison; and (2) to enhance consumer decisionmaking by 
facilitating a consumer's ability to understand and make meaningful 
trade-offs on loans available from a particular creditor of paying 
discount points and origination points or fees in exchange for a higher 
interest rate. In addition, the Bureau is considering whether to adopt 
additional safeguards to ensure consumers who make upfront payments of 
discount points and origination points or fees receive value in return.
    Making available a loan that does not include discount points and 
origination points or fees. Under the proposal, a creditor would be 
required to make available to a consumer a comparable, alternative loan 
that does not include discount points and origination points or fees, 
unless the consumer is unlikely to qualify for such a loan. To ensure 
that consumers are informed of the option to choose such a loan from 
the creditor that does not include discount points and origination 
points or fees, the proposal would provide guidance on what it means 
for the creditor to make such a loan available. Specifically, the 
proposal would provide that, in a retail transaction, a creditor would 
be deemed to have made that loan available if any time the creditor 
gives an oral or written quote specific to the consumer of the interest 
rate, regular periodic payments, the total discount points and 
origination points or fees, or the total closing costs for a loan that 
includes discount points and origination points or fees, the creditor 
also provides a quote for those same types of information for the 
comparable, alternative loan that does not include discount points and 
origination points or fees. The term ``comparable, alternative loan'' 
would mean that the two loans for which quotes are provided must have 
the same terms and conditions, other than the interest rate, any terms 
that change solely as a result of the change in the

[[Page 55313]]

interest rate (such as the amount of regular periodic payments), and 
the amount of any discount points and origination points or fees.
    The quote for the loan that does not include discount points and 
origination points or fees would need to be given only if the quote for 
the loan that includes discount points and origination points or fees 
is given prior to when the consumer receives the Good Faith Estimate 
(required under RESPA). The requirement to provide a quote for a loan 
that does not include discount points or origination points or fees 
would also not apply to any disclosures required by TILA or RESPA on 
loans that include discount points or origination points or fees. The 
Bureau believes that consumers generally ask for, and are provided, 
quotes from creditors prior to application. However, as discussed 
below, the Bureau is inviting comments as to whether the requirement to 
provide an alternative quote should apply in conjunction with the Loan 
Estimate, as proposed in the TILA-RESPA Integration Proposal.
    Under the proposal, a creditor using this safe harbor is required 
to provide information about the loan that does not include discount 
points and origination points or fees only when the information about 
the loan that includes discount points or origination points or fees is 
specific to the consumer. Advertisements would not be subject to this 
requirement. See comment 2(a)(2)-1.ii.A. If the information about the 
loan that includes discount points or origination points or fees is an 
advertisement under Sec.  1026.24, the creditor is not required to 
provide the quote for the loan that does not include discount points 
and origination points or fees. For example, if prior to the consumer 
submitting an application, the creditor provides a consumer an 
estimated interest rate and monthly payment for a loan that includes 
discount points and origination points or fees, and the estimates were 
based on the estimated loan amount and the consumer's estimated credit 
score, then the creditor must also disclose the estimated interest rate 
and estimated monthly payment for the loan that does not include 
discount points and origination points or fees. In contrast, if the 
creditor provides the consumer with a preprinted list of available 
rates for different loan products that include discount points and 
origination points or fees, the creditor is not required to provide the 
information about the loans that do not include discount points and 
origination points or fees under this safe harbor. Nonetheless, as 
discussed in more detail below, the Bureau solicits comment on whether 
the advertising rules in Sec.  1026.24(d) should be revised as well.
    In addition, in a transaction that involves a loan originator 
organization, the creditor generally would be deemed to have made 
available the loan that does not include discount points and 
origination points or fees if the creditor communicates to the loan 
originator organization the pricing for all loans that do not include 
discount points and origination points or fees. Separately, mortgage 
brokers are prohibited under Sec.  1026.36(e) from steering consumers 
into a loan solely to maximize the broker's commission. The rule sets 
forth a safe harbor for complying with provisions prohibiting steering 
if the broker presents to the consumer three loan options that are 
specified in the rule. One of these loan options is the loan with the 
lowest total dollar amount for discount points and origination points 
or fees. Thus, mortgage brokers that are using the safe harbor must 
present to the consumer the loan with the lowest interest rate that 
does not include discount points and origination points or fees. The 
Bureau believes that most mortgage brokers are using the safe harbor to 
comply with the provision prohibiting steering, so most consumers in 
transactions that involve mortgage brokers would be informed of the 
loan with the lowest interest rate that does not include discount 
points and origination points or fees.
    As discussed above, under the proposal, a creditor is not required 
to make available a comparable, alternative loan if the consumer is 
unlikely to qualify for that loan. The Bureau solicits comment on 
whether consumers should be informed that they were not given 
information about a comparable, alternative loan because they were 
unlikely to qualify for that loan. For example, in transactions that do 
not involve a loan originator organization, should creditors be 
required either to make the comparable, alternative loan available to 
the consumer if the consumer likely qualifies for that loan or to 
inform consumers that the creditor is not making the comparable, 
alternative loan available because the consumer is unlikely to qualify 
for that loan? In transactions that involve a loan originator 
organization, should a loan originator organization using the safe 
harbor under Sec.  1026.36(e) be required to disclose to a consumer 
that the loan originator organization did not present a loan that does 
not include discount points and origination points or fees because the 
consumer was unlikely to qualify for that loan from the creditors with 
whom the loan originator organization regularly does business? The 
Bureau specifically requests comment on whether it is useful to 
consumers to be informed that they were unlikely to qualify for the 
comparable, alternative loan.
    The Bureau recognizes that creditors who do not wish to make loans 
that do not include discount points and origination points or fees 
available to particular consumers could possibly manipulate their 
underwriting standards so that those consumers do not qualify for such 
a loan. To prevent this practice, the Bureau is considering safeguards 
designed to prohibit creditors from changing their qualification 
standards, such as loan-to-value ratios and credit score requirements, 
solely for the purpose of disqualifying consumers from receiving loans 
that does not include discount points and origination points or fees. 
This alternative would make clear that creditors must make available 
the loan that does not include discount points and origination points 
or fees unless, as a result of the increased monthly payment resulting 
from the higher interest rate on the loan that does not include 
discount points and origination points or fees, the consumer cannot 
satisfy the creditor's underwriting rules. The Bureau invites comments 
on whether there is a risk that, absent such a requirement, some 
creditors might manipulate their underwriting standards and whether the 
Bureau should adopt a rule against doing so.
    The Bureau recognizes, however, that even if underwriting standards 
could not be manipulated, creditors who do not want to make loans that 
do not include discount points and origination points or fees could set 
the interest rates high for certain consumers, which could increase the 
monthly payment on those loans to be high so that those consumers 
cannot satisfy the creditor's underwriting rules. Thus, the Bureau is 
considering another alternative, whereby a creditor would be able to 
make available a loan that includes discount points and origination 
points or fees only when the consumer also qualifies for a comparable, 
alternative loan that does not include discount points and origination 
points or fees. A potential advantage of this alternative is that it 
would effectively limit creditors' opportunity to manipulate their 
underwriting standards or charge above-market interest rates to prevent 
particular consumers from qualifying for a loan that does not include 
discount points and origination points or fees.
    On the other hand, the Bureau is concerned that adoption of such an 
alternative may impact access to credit.

[[Page 55314]]

The Bureau recognizes that there are some creditors who will not make a 
loan where the debt-to-income ratio exceeds a certain level and that 
there may be some consumers for whom the difference between the 
interest rate on a loan that includes and does not include discount 
points and origination points or fees will determine whether the 
consumer can satisfy the creditor's debt-to-income standard. In that 
case, consumers who do not qualify for specific loans that do not 
include discount points and origination points or fees would not be 
able to receive from the creditor the same type of loans that include 
discount points and origination points or fees. This could harm those 
consumers who might prefer to obtain from a creditor a specific type of 
loan that includes discount points and origination points or fees, 
rather than not be able to obtain that type of loan at all from the 
creditor.
    The Bureau specifically requests comment on credit availability 
issues of adopting such an alternative. For example, in some cases, a 
consumer may not qualify for the loan that does not include discount 
points and origination points or fees because the loan has a higher 
interest rate and the monthly payments on that loan will be too high 
for the consumer to qualify based on the debt-to-income ratio and other 
underwriting standards used by the creditor. The Bureau recognizes that 
this may be true even if the interest rate the creditor charges on the 
loan that does not include discount points and origination points or 
fees is a competitive market rate, and the creditor does not change its 
underwriting standards purposefully to prevent consumers from 
qualifying for the loan. The Bureau requests comment on how common it 
would be for this to occur, in which scenarios it would be more likely 
to occur, and what types of consumers would likely be affected.
    In addition, in industry outreach meetings, some creditors 
expressed concern that the interest rate (and corresponding APR) that a 
creditor may need to charge a less-creditworthy consumer for a loan 
that does not include discount points and origination points or fees to 
make the loan profitable to the creditor could exceed the APR threshold 
set forth in the rules under Sec.  1026.32 for high-cost mortgages 
(``high-cost mortgage rules'') and could make that loan a high-cost 
mortgage. These creditors also pointed out that there are State laws 
that have restrictions similar to the high-cost mortgage rules. Many 
creditors generally do not want to make loans that would be subject to 
the high-cost mortgage rules or similar State laws. If the alternative 
were adopted where a consumer must qualify for the comparable, 
alternative loan that does not include discount points and origination 
points or fees, the consumer could not obtain this specific type of 
loan from the creditor even though the creditor would be willing to 
make the consumer a comparable, alternative loan that includes discount 
points and origination points or fees because this loan would not 
trigger the high-cost mortgage rules or similar State laws. The Bureau 
does not currently have sufficient data to model the impact of the 
requirement for a creditor to make available a comparable, alternative 
loan that does not include discount points and origination points or 
fees on triggering the high-cost mortgage rules or similar State laws 
or to model the impact on credit availability to the extent that such 
rules or laws are triggered. The Bureau seeks data and comment on the 
potential triggering of the high-cost mortgage rule or similar State 
laws, the potential impact on credit availability, and potential 
modifications to the requirement to mitigate these effects.
    Moreover, the Bureau is aware that certain State loan programs that 
permit creditors to charge origination points on the loans do not 
permit the option of charging a higher interest rate in lieu of 
charging the origination points. The Bureau requests additional comment 
on these types of State loan programs, how they work, how prevalent 
they are, the types of consumers these programs typically serve; and 
how common it is for creditors under these programs not to have the 
option of charging a higher interest rate.
    Also, in outreach meetings, some creditors mentioned that, while 
creditors that sell loans in the secondary market typically can recover 
their origination costs through the premium paid through the sale of 
the loan for the higher interest rate, creditors that hold loans in 
portfolio do not have that option and would be required to recover the 
origination costs through a higher interest rate if the creditor cannot 
charge an upfront origination fee. Consumers with loan products with 
higher rates are more likely to refinance those loan products and thus 
a creditor that holds those loans in portfolio would have to use 
another approach to recover the costs to originate those loans. Thus, 
creditors that plan to hold a loan in portfolio may be more reluctant 
to make available to a consumer a loan that does not include discount 
points and origination points or fees. This may particularly affect 
small or specialty creditors that may be more likely to hold a sizable 
number of loans in portfolio. The Bureau requests comment on whether 
creditors currently make portfolio loans that do not include discount 
points and origination points or fees, and if so, how creditors 
typically manage the risk that such consumers will refinance the loans 
or sell the homes and repay the loans prior to the origination costs 
being recovered.
    In addition, in outreach with industry, some creditors raised 
concerns that, even for creditors that sell loans into the secondary 
market, it may not possible for creditors in all cases to make 
available to all consumers a loan that does not include discount points 
and origination points or fees. These creditors indicated that in some 
cases it is possible that the premium paid in the secondary market for 
a loan will not be sufficient for the creditor to cover origination and 
other costs and to realize a profit. These creditors indicated that 
this may occur more often for smaller loans, or riskier loans (such as 
where the consumer's credit score is low and the loan-to-value ratio on 
the loan is high). These creditors indicated that the interest rates on 
these types of loans would likely be high, and the secondary market may 
not pay sufficient premiums for those loans even though they have a 
higher interest rate because secondary market investors would be 
concerned about prepayment risk. These creditors indicated that in 
these situations, creditors may not make loans that include discount 
points and origination points or fees available to consumers because 
they would be unwilling to make available, as required, a comparable, 
alternative loan that does not include discount points and origination 
points or fees.
    The Bureau requests comment, however, on: (1) The circumstances, 
either currently or in the past, where creditors are unable to make 
available to consumers loans that do not include discount points and 
origination points or fees because the premiums received by the 
creditor on those loans are not sufficient to sell the loan into the 
secondary market, and (2) the characteristics of the types of loans and 
consumers affected in these circumstances. In addition, the Bureau 
requests comment on whether the secondary market is likely to adjust to 
create new securities to disperse risk, including prepayment risk, if 
the volume of loans with higher interest rates increases because more 
consumers are offered the option, and actually choose, not to pay 
discount points and origination points or fees.

[[Page 55315]]

    The Bureau also solicits comment on whether, if the alternative 
were adopted where a consumer must qualify for the comparable, 
alternative loan that does not include discount points and origination 
points or fees, creditors should be required to inform a consumer that 
he or she is not being offered a loan that includes discount points and 
origination points or fees because the consumer does not qualify for 
the comparable, alternative loan that does not include discount points 
and origination points or fees.\63\ The Bureau solicits comment on 
whether it would be useful or beneficial to consumers to be informed 
that they did not qualify in these circumstances. The Bureau also 
solicits comment on, if such notification would be useful or 
beneficial, what form such a notice should take.
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    \63\ The Bureau notes that in these circumstances, a creditor 
would not be required to provide an adverse action notice to the 
consumer under the Bureau's Regulation B, 12 CFR part 1002, which 
implements the Equal Credit Opportunity Act, because the creditor's 
denial of the loan that includes discount points and origination 
points or fees would be required by law. See 12 CFR. 1002.2(c).
---------------------------------------------------------------------------

    Facilitating consumer shopping. Through the proposal, the Bureau 
intends to facilitate consumer shopping by enhancing the ability of 
consumers to make comparisons using loans that do not include discount 
points and origination points or fees made available by different 
creditors as a basis for comparison. As discussed above, for retail 
transactions, a creditor will be deemed to be making the loan available 
if, any time the creditor provides a quote specific to the consumer for 
a loan that includes discount points and origination points or fees, 
the creditor also provides a quote for a comparable, alternative loan 
that does not include discount points and origination points or fees 
(unless the consumer is unlikely to qualify for the loan). Nonetheless, 
the Bureau is concerned that by the time a consumer receives a quote 
from a particular creditor for a loan that does not include discount 
points and origination points or fees, the consumer may have already 
completed his or her shopping in comparing loans from different 
creditors.
    Thus, the Bureau solicits comment on whether the advertising rules 
in Sec.  1026.24(d) should be revised to enable consumers to make 
comparisons using loans that does not include discount points and 
origination points or fees made available by different creditors as a 
basis for comparison. Currently, under Sec.  1026.24(d), if an 
advertisement includes a ``trigger term,'' the advertisement must 
contain certain other information described in Sec.  1026.24(d). The 
``trigger terms'' set forth in Sec.  1026.24(d)(1) are: (1) The amount 
or percentage of any downpayment; (2) the number of payments or period 
of repayment; (3) the amount of any payment; and (4) the amount of any 
finance charge (which includes the interest rate). Currently, under 
Sec.  1024(d)(2), if one or more of these trigger terms are set forth 
in such an advertisement, the following information (``triggered 
terms'') must also be contained in the advertisement: (1) The amount or 
percentage of the downpayment; (2) the terms of repayment, which 
reflect the repayment obligations over the full terms of the loan, 
including any balloon payment; and (3) the ``annual percentage rate,'' 
using that term and, if the rate may be increased after consummation, 
that fact.\64\ Thus, currently under Sec.  1026.24(d)(2), if a creditor 
includes in an advertisement the interest rate that applies to a loan 
that includes discount points and origination points or fees, the 
creditor must include in that advertisement the following terms related 
to that loan: (1) The amount or percentage of the downpayment; (2) the 
terms of repayment, which reflect the repayment obligations over the 
full terms of the loan, including any balloon payment; and (3) the 
``annual percentage rate,'' using that term and, if the rate may be 
increased after consummation, that fact. Currently, under Sec.  
1024(d)(2), a creditor may use an example of one or more typical 
extensions of credit with a statement of all the terms described above 
applicable to each example.
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    \64\ Section 1026.24(g) provides an alternative disclosure 
method for television and radio advertisements.
---------------------------------------------------------------------------

    The Bureau solicits comment on whether the creditor in such an 
advertisement that contains the interest rate for a loan that includes 
discount points and origination points or fees also must contain the 
following information for the comparable, alternative loan that does 
not include discount points and origination points or fees: (1) The 
interest rate; and (2) the amount or percentage of the downpayment; (3) 
the terms of repayment, which reflect the repayment obligations over 
the full terms of the loan, including any balloon payment; and (4) the 
``annual percentage rate,'' using that term and, if the rate may be 
increased after consummation, that fact. The Bureau solicits comment on 
whether this information about the loan that does not include discount 
points and origination points or fees must be equally prominent in the 
advertisement as the information about the loan that includes discount 
points and origination points or fees. The Bureau expects that the 
other rules set forth in Sec.  1026.24 (such as the special rules 
applicable to catalog advertisements, and radio and television 
advertisements) would apply to this additional information about the 
loan that does not include discount points and origination points or 
fees, as applicable, in the same way that it applies to the information 
that is provided for the loan that includes discount points and 
origination points or fees. For example, in radio and television 
advertisements where the creditor discloses an interest rate for a loan 
that includes discount points and origination points or fees, a 
creditor is given the option (1) to comply with the rules in Sec.  
1026.24(d), as described above; or (2) to state the ``annual percentage 
rate,'' using that term and, if the rate may be increased after 
consummation, that fact and to list a toll-free telephone number that 
may be used by consumers to obtain additional cost information. See 
Sec.  1026.24(g). The Bureau expects that a similar alternative method 
of disclosure would apply to the information that must be provided for 
the comparable, alternative loan that does not include discount points 
and origination points or fees.
    The Bureau solicits comment on whether Sec.  1026.24 should be 
revised, as discussed above, to require that a creditor that provides 
in an advertisement the interest rate for a loan that includes discount 
points and origination points or fees to include in such advertisement 
certain information for a comparable, alternative loan that does not 
include discount points and origination points or fees. The Bureau 
specifically solicits comment on whether this information would be 
useful to consumers that are interested in loans that do not include 
discount points and origination points or fees to compare such loans 
available from different creditors.
    Consumers may find it easier to compare the loan pricing on loans 
that do not include discount points and origination points or fees 
available from different creditors because most of the cost of the 
loans would be incorporated into the interest rate. A consumer could 
compare the interest rates on such loans available from different 
creditors, without having to consider a variety of different discount 
points and origination points or fees that might be charged on each 
loan.
    The Bureau recognizes that new TILA section 129B(c)(2)(B)(ii), and 
this

[[Page 55316]]

proposal in its definition of discount points and origination points or 
fees, treats charges differently based on whether they are paid to the 
creditor, loan originator organization, or the affiliates of either, or 
paid to an unaffiliated third party. Concerns have been raised that 
these advertising rules (and the quotes discussed above) may not 
effectively enable consumers to shop among multiple different 
creditors. If a consumer is comparing two loan products with no 
discount points and origination points or fees from different 
creditors, it may be difficult for the consumer to compare the two 
interest rates because the interest rate that is available from each 
creditor may depend at least in part on whether certain services, such 
as appraisal or lender's title insurance, are performed by the 
creditor, the loan originator organization, or affiliates of either, or 
whether they are performed by an unaffiliated third party. For example, 
if for one creditor the creditor's title insurance services will be 
performed by the creditor's affiliate while for another creditor these 
services will be performed by a third party, the interest rate 
available on the loan that does not include discount points and 
origination points or fees is likely to be higher for the first 
creditor than the interest rate available from the second creditor 
because the first creditor may not collect the cost of the title 
insurance from the consumer in cash at or before closing or through the 
loan proceeds but instead may collect those costs from the consumer 
through a higher rate.
    The Bureau potentially could address this inconsistent treatment of 
third-party charges by providing that certain third-party charges are 
always excluded from discount points and origination points or fees, 
even when they are payable to an affiliate of the creditor or a loan 
originator organization. Nonetheless, even if payments for certain 
services were consistently excluded from the definition of discount 
points and origination points or fees, the consumer still may need to 
consider the amount of such closing costs in comparing alternative 
transactions. Consistently excluding certain services from the 
definition of discount points and origination points or fees may make 
it easier for a consumer to compare the interest rates on loan products 
available from different creditors if (1) the total amount of the 
closing costs that are not incorporated into the interest rate 
generally remains similar among different creditors; or (2) consumers 
have the ability to hold these costs constant by shopping for these 
services.
    The Bureau requests comment on the scope of the definition of 
discount points and origination points or fees.
    The Bureau also requests comment on ways to revise the definition 
of discount points and origination points or fees to facilitate 
consumers' ability to compare alternative loans that do not include 
discount points and origination points or fees from different 
creditors. In particular, the Bureau solicits comment on whether it 
should exempt from the definition of discount points and origination 
points or fees any fees imposed for lender's title insurance, 
regardless of whether this service is provided by the creditor, the 
loan originator organization, or the affiliates of either or is 
provided by an unaffiliated third party, so long as the fees are bona 
fide and reasonable. The Bureau understands that the cost of lender's 
title insurance can be a significant portion of a mortgage loan's total 
closing costs. Thus, excluding this cost from being incorporated into 
the rate for the loan that does not include discount points and 
origination points or fees, regardless of what party provides the 
service, may help produce interest rates that are more comparable 
across different creditors. In addition, the Bureau believes that, 
because the cost of lender's title insurance often is regulated by the 
States, the cost may remain constant from creditor to creditor. 
Accordingly, excluding lender's title coverage from the definition of 
discount points and origination points or fees in all cases may 
increase the ease with which consumers can shop among multiple 
creditors using the interest rate that does not include discount points 
and origination points or fees as a means of comparison. The Bureau 
also solicits comment on whether this same reasoning may be applicable 
for other types of insurance, assuming those costs also generally are 
regulated by the States.
    The Bureau also recognizes that there may be other services that 
might be performed either by the creditor, the loan originator 
organization, or affiliates of either, or by an unaffiliated third 
party. For example, such services may include appraisal, credit 
reporting, property inspections, and others. The Bureau requests 
comment on whether continuing to treat these services differently for 
purposes of the definition of discount points and origination points or 
fees depending on what party provides those services would hinder 
consumers' ability to shop among multiple creditors using the interest 
rate on loans that do not include discount points and origination 
points or fees.
    Alternatively, the Bureau solicits comment on whether fees for all 
services provided by an affiliate of a creditor or loan originator 
organization should be excluded from the definition of discount points 
and origination points or fees. The Bureau solicits comment on whether 
excluding affiliate fees consistent with the exclusion for third-party 
fees would facilitate consumers' ability to shop using the interest 
rates on loans that do not include discount points and origination 
points or fees. The Bureau remains concerned, however, that such an 
exclusion for affiliates fees could be used by creditors to circumvent 
the prohibition in proposed Sec.  1026.36(d)(2)(ii). For example, 
creditors could have affiliates perform certain services that are 
typically performed by the creditor (subject to RESPA restrictions), 
and exclude fees for those services under this exception. This would 
permit such a creditor to make available to consumers an interest rate 
for a loan that does not include discount points or origination points 
or fees, as defined, but still impose up front through its affiliate 
some or all of the costs that, in light of the purpose of proposed 
Sec.  1026.36(d)(2)(ii), more properly should be included in the 
interest rate.
    As a third alternative, the Bureau solicits comment on whether it 
should exclude certain services that unambiguously relate to ancillary 
services, such as credit reports, appraisals, and property inspections, 
rather than core loan origination services, even if the creditor, loan 
originator organization, or an affiliate of either performs those 
services, so long as the amount paid for those services is bona fide 
and reasonable. The core loan origination services that could not be 
excluded would be ones that specifically relate to the origination of a 
mortgage loan and typically are provided by the creditor or the loan 
originator organization, possibly clarified further by reference to the 
meaning of ``loan originator'' in proposed Sec.  1026.36(a)(3). The 
Bureau requests comment on whether such an approach is likely to 
improve the ease with which consumers can compare loans that does not 
include discount points and origination points or fees from different 
creditors, by ensuring that the types of fees incorporated into the 
interest rate for the loans that does not include discount points and 
origination points or fees generally remain constant across different 
creditors. The Bureau further solicits comment on how such ancillary

[[Page 55317]]

services that would be excluded from the definition, and core 
origination services that would not be excluded from the definition, 
might be described clearly enough to distinguish the two. For example, 
would elaborating on core origination services by reference to the 
kinds of activities described in the definition of ``loan originator'' 
in proposed Sec.  1026.36(a)(3) be a workable and sufficient approach?
    Understanding trade-offs. As previously discussed, the Bureau is 
proposing to mandate that creditors make available a comparable, 
alternative loan that does not include discount points and origination 
points or fees to help assure that consumers understand that points and 
fees can vary with the interest rate and that there are trade-offs for 
the consumer to consider.
    Consumer groups have raised concerns that consumers' ability to 
choose to pay discount points and origination points or fees may not 
actually be beneficial to consumers because they do not understand 
trade-offs between upfront discount points and origination points or 
fees and paying a higher interest rate. Furthermore, even if consumers 
understand such trade-offs, they may not be able to determine whether 
discount points and origination points or fees paid up front result in 
a reasonably proportionate interest rate reduction. There is also 
concern that creditors may present multiple permutations and, because 
of their complexity and opaqueness, consumers may not be easily able to 
make such evaluations.
    Consumer testing conducted by the Bureau on closed-end mortgage 
disclosures suggests that some consumers do understand that there is a 
trade-off between paying upfront discount points and origination points 
or fees and paying a higher interest rate. Specifically, as discussed 
in part II.E above, the Bureau is proposing to combine certain 
disclosures that consumers receive in connection with applying for and 
closing on a mortgage loan under TILA and RESPA. As discussed in the 
supplementary information to that proposed rule, the Bureau conducted 
extensive consumer testing on these proposed disclosure forms. Through 
this consumer testing, the Bureau specifically examined how the 
required disclosures should work together on the integrated disclosure 
to maximize consumer understanding. As part of the consumer testing, 
the Bureau looked at how consumers would make trade-offs between the 
interest rate and closing costs. For example, in one round of testing, 
participants compared two adjustable rate loans with different closing 
costs. One loan had a 2.75 percent initial interest rate that adjusted 
every year after Year 5 with $11,448 in closing costs; the other loan 
had an 3.5 percent initial interest rate that adjusted every year after 
Year 5 with $3,254 in closing costs. In subsequent rounds of testing, 
the Bureau tested forms that presented interest only loans; various 
adjustable rate loans; balloon payments; bi-weekly payment loans; loans 
with escrow accounts, partial escrow accounts, and no escrow accounts; 
different closing costs; and different amounts of cash to close.
    Significantly, in this testing, participants were able to make 
multi-factored trade-offs between the interest rate and monthly 
payments and the cash needed to close based on their personal 
situations. Many participants were aware of the trade-off between the 
cash to close and the interest rate and corresponding monthly loan 
payment. When they chose the higher interest rate, they understood it 
would result in a higher monthly payment. They made this choice 
however, because they knew they did not have access to the needed cash 
to close. Conversely, other participants were willing to pay the higher 
closing costs to lower the monthly payment. Even with increasingly 
complicated decisions, participants continued to be able to use the 
disclosures to make certain multi-factored trade-offs and gave rational 
and personal explanations of their choices.
    Thus, the Bureau believes that providing information to consumers 
about the comparable, alternative loan that does not include discount 
points and origination points or fees so that consumers can compare 
these loans to loans that include such points or fees and have lower 
interest rates facilitates consumers' ability to choose the trade-off 
that best fits their needs. As discussed above, for retail 
transactions, a creditor will be deemed to be making the loan available 
if, any time the creditor provides a quote specific to the consumer for 
a loan that includes discount points and origination points or fees, 
the creditor also provides a quote for a comparable, alternative loan 
that does not include those discount points and origination points or 
fees (unless the consumer is unlikely to qualify for the loan). The 
interest rate on the loan that does not include discount points and 
origination points or fees provides a baseline interest rate for the 
consumer. By having the interest rate on this loan as the baseline, 
consumers may better understand the trade-off that the creditor is 
providing to the consumer for paying discount points and origination 
points or fees in exchange for a lower interest rate.
    In addition, to further achieve the goal of enhancing consumer 
understanding of the trade-offs of making upfront payments in return 
for a reduced interest rate, the Bureau is also considering and 
solicits comment on whether there should be a requirement after 
application that a creditor disclose to a consumer a loan that does not 
include discount points and origination points or fees. As discussed in 
part II.E above, the Bureau issued a proposal to combine certain 
disclosures that consumers receive in connection with applying for and 
closing on a mortgage loan under TILA and RESPA. Under that proposal, 
the Bureau proposed to require creditors to provide a ``Loan Estimate'' 
not later than the third business day after the creditor receives the 
consumer's application. See proposed Sec.  1026.19(e) under the TILA-
RESPA Integration Proposal. This Loan Estimate would contain 
information about the loan to which the Loan Estimate relates. The 
first page of the Loan Estimate would contain, among other things, 
information about the interest rate, the regular periodic payments, and 
the amount of money the consumer would need at closing including the 
total amount of closing costs. The second page of the Loan Estimate 
would contain, among other things, a detailed list of the closing 
costs. See proposed Sec.  1026.37(f) under the TILA-RESPA Integration 
Proposal.
    The Bureau solicits comment on whether it would be useful for the 
consumer if, at the time a creditor first provides a Loan Estimate for 
a loan that includes discount points and origination points or fees, 
the creditor also were required to provide either a complete Loan 
Estimate, or just the first page of the Loan Estimate, for a 
comparable, alternative loan that does not include discount points and 
origination points or fees. Thus, if the Loan Estimate the creditor 
initially provides to the consumer not later than the third business 
day after the creditor receives the consumer's application describes a 
loan that includes discount points and origination points or fee, the 
creditor also would be required to disclose a second Loan Estimate (or 
at least the first page of the Loan Estimate) at that time to the 
consumer that describes the comparable, alternative loan that does not 
include discount points and origination points or fees. The Bureau 
specifically solicits comment on whether receiving this second Loan 
Estimate from the same creditor would be helpful to the consumer in 
understanding the trade-off

[[Page 55318]]

in the reduction in the interest rate that the consumer is receiving in 
exchange for paying discount points and origination points or fees, and 
helpful to the consumer in deciding which loan to choose.
    The Bureau expects that, if this alternative were adopted, it would 
not become effective until the rules mandating the Loan Estimate are 
finalized. Until the Loan Estimate is finalized, creditors are required 
to provide two different disclosure forms to consumers applying for a 
mortgage, namely the mortgage loan disclosures required under TILA and 
the GFE required under RESPA. The Bureau believes that it would create 
information overload for consumers to receive two disclosure forms for 
the loan that includes discount points and origination points or fees, 
and two disclosure forms for the comparable, alternative loan that does 
not include discount points and origination points or fees.
Competitive Trade-Off
    Proposed Sec.  1026.36(d)(2)(ii)(C) provides that no discount 
points and origination points or fees may be imposed on the consumer in 
connection with a transaction subject to proposed Sec.  
1026.36(d)(2)(ii)(A) unless there is a bona fide reduction in the 
interest rate compared to the interest rate for the comparable, 
alternative loan that does not include discount points and origination 
points or fees required to be made available to the consumer under 
Sec.  1026.36(d)(2)(ii)(A). In addition, for any rebate paid by the 
creditor that will be applied to reduce the consumer's settlement 
charges, the creditor must provide a bona fide rebate in return for an 
increase in the interest rate compared to the interest rate for the 
loan that does not include discount points and origination points or 
fees required to be made available to the consumer under Sec.  
1026.36(d)(2)(ii)(A). As discussed in more detail below, the Bureau has 
evaluated three primary types of approaches to implement a requirement 
that the trade-off be ``bona fide.''
    The Bureau solicits comment on whether the Bureau should adopt a 
``bona fide'' requirement to help ensure that all consumers receive a 
competitive market trade-off between the interest rate and the payment 
of discount points and origination points or fees or whether, 
alternatively, market forces are sufficient to ensure that consumers 
generally receive such competitive trade-offs. As discussed above, the 
requirement to make available a loan that does not include discount 
points and origination points or fees informs consumers of the baseline 
interest rates on the loans that do not include discount points and 
origination points or fees so that consumers can make informed 
decisions on the trade-offs presented by creditors. In addition, as 
discussed above, consumer testing conducted by the Bureau on closed-end 
mortgage disclosures suggests that some consumers do understand aspects 
of the trade-off between paying upfront discount points and origination 
points or fees and paying a higher interest rate. The Bureau believes 
that, in general, creditors will need to incorporate competitive 
pricing into their pricing policies to attract consumers that do 
understand this trade-off and shop for the best pricing. Nonetheless, 
the Bureau recognizes that there will be some consumers who are less 
sophisticated in terms of understanding the trade-off, and creditors 
may be able to present those consumers less competitive pricing than 
what is in the creditor's pricing policy. Thus, the Bureau solicits 
comment on whether a ``bona fide'' requirement is necessary to ensure 
that all consumers receive a competitive market trade-off between the 
interest rate and the payment of discount points and origination points 
or fees.
    In addition, the Bureau seeks comment on how it might structure 
such a ``bona fide'' requirement, if one is appropriate. In considering 
this issue, the Bureau has evaluated the following three primary types 
of approaches to structuring the bona fide trade-off requirements: (1) 
A pricing-policy approach; (2) a minimum rate reduction approach; and 
(3) a market-based benchmark approach.
    Pricing-policy approach. A pricing-policy approach would require 
that, in transactions where the requirement to make available a loan 
that does not include discount points and origination points or fees 
would apply, a creditor also must meet the following four requirements:
     First, the creditor would be required to establish a 
pricing policy that sets forth the amount of discount points and 
origination points or fees that each consumer would pay or the amount 
of the ``rebate'' that each consumer would receive, as applicable, for 
each interest rate on each loan product available to the consumer. The 
term ``rebate'' refers to an amount contributed by the creditor to pay 
some or all of the consumer's transaction costs, generally resulting 
from the consumer's agreeing to accept a ``premium'' (above par) 
interest rate.
     Second, the creditor would be allowed to change its 
pricing policy periodically, but may not do so to provide less 
favorable pricing for the purpose of a consumer's particular 
transaction. The term ``pricing'' would mean the interest rate 
applicable to a loan and the corresponding discount points and 
origination points or fees a consumer would pay or the amount of the 
rebate that the consumer would receive, as applicable, for the interest 
rate applicable to the loan.
     Third, at the time the interest rate on the transaction is 
set (or ``locked''), the pricing offered to the consumer must be no 
less favorable than the pricing established by the creditor's current 
pricing policy.
     Fourth, at the time the interest rate on the transaction 
is set, the interest rate offered to the consumer in return for paying 
discount points and origination points or fees must be lower than the 
interest rate for the loan that does not include discount points and 
origination points or fees.
    Under such an approach, a creditor would not be required to charge 
all consumers the same amount of discount points and origination points 
or fees or provide all consumers the same amount of rebate, as 
applicable, at each interest rate for each loan product. A creditor's 
pricing policy could still set forth specific pricing adjustments for 
determining the amount of discount points and origination points or 
fees or the amount of the rebate, as applicable, for consumers at each 
rate for each loan, based on factors such as the consumer's risk 
profile (such as the consumer's credit score) and the characteristics 
of the loan or the property securing the loan (such as the loan-to-
value ratio, or whether the property will be owner-occupied). The 
pricing adjustments, however, would need to be set forth with 
specificity in the pricing policy. These pricing adjustments could be 
changed periodically, for example, for market or other reasons, but may 
not be changed to provide less favorable pricing for the purpose of a 
consumer's particular transaction.
    Also, under such an approach, creditors would still be allowed to 
provide more favorable pricing to a particular consumer than the 
pricing set forth in the creditor's current pricing policy. This would 
preserve consumers' ability to negotiate better pricing with creditors. 
For example, upon receiving a rate quote from a creditor, a consumer 
could inform the creditor that a competitor is offering a lower rate 
for the consumer paying the same amount of discount points and 
origination points or fees. The creditor could agree to match the lower 
rate under this approach.

[[Page 55319]]

    The Bureau recognizes that, with this flexibility, a creditor could 
potentially circumvent the purpose of this approach by setting forth 
less competitive pricing in its pricing policy but then regularly 
departing from the policy to provide more favorable pricing to 
particular consumers, especially more sophisticated consumers. On the 
other hand, the Bureau believes that several factors could militate 
against a creditor doing this. Processing frequent exceptions to the 
pricing policy may be inefficient for a creditor; expose creditors to 
risks, such as potential violations of fair lending laws; and would 
call into question whether the creditor has complied with the 
requirement under this approach to set forth its pricing policy. In 
addition, competition may discipline creditors to offer competitive 
rates. The Bureau specifically requests comment on whether such an 
approach should be adopted, as well as on its advantages and 
disadvantages. The Bureau also requests comment specifically on the 
burdens this approach would create for creditors to retain records 
necessary to document the pricing policy applicable to each consumer's 
transaction.
    Minimum rate reduction. The Bureau also requests comment on an 
alternative approach under which the consumer must receive a minimum 
reduction in the interest rate for each point paid (compared to the 
interest rate that is applicable to the loan that does not include 
discount points and origination points or fees where fees would be 
converted to points). The Bureau is aware that Fannie Mae will purchase 
or securitize loans only if the total points and fees (converted into 
points) do not exceed five points. Fannie Mae excludes ``bona fide'' 
discount points for this calculation and specifies that, to be bona 
fide, each discount point must result in at least a .25 percent 
reduction in the interest rate. Similarly, the rule could specify that 
for each point paid by the consumer in discount points and origination 
points or fees (where fees would be converted to points), the consumer 
must receive a reduction in the interest rate of at least a certain 
portion of a percentage point, e.g., .125 of a percentage point, 
compared to the interest rate that is applicable to the loan that does 
not include discount points and origination points or fees.
    However, the Bureau is concerned that mandating such a minimum 
reduction in the interest rate for each point paid could unduly 
constrict pricing of mortgage products. The Bureau understands that 
creditors often use the dollar amount of the premium that the creditor 
expects to receive from the secondary market for a loan at a particular 
rate as a factor in its determination of the reduction in the interest 
rate given for each point paid. The Bureau understands that these 
premiums do not move in a linear manner. Thus, depending on the 
premiums that are paid by the secondary market for each interest rate, 
the amount of reduction in the interest rate may be .125 of a 
percentage point for the first point paid, but may be .25 of a 
percentage point for the second point paid. In addition, the amount of 
reduction in the interest rate for each point paid by the consumer in 
discount points and origination points or fees also could vary for a 
number of other reasons, such as by product type (e.g., 30-year fixed-
rate loans versus adjustable rate loans).
    Market-based benchmarks. The Bureau has also considered whether an 
objective measure for determining whether a creditor is providing a 
competitive market trade-off in the interest rate on a loan that 
includes discount points and origination points or fees, as compared to 
established industry standards, could be achieved by reference to 
current, or at least recent, trade-offs actually provided to consumers.
    In the Board's 2011 Ability to Repay (ATR) Proposal, the Board 
proposed a definition of ``bona fide discount points'' for use in 
determining whether a loan is a ``qualified mortgage.'' Under the 2011 
ATR Proposal, a creditor can make a ``qualified mortgage,'' which 
provides the creditor with protections against potential liability 
under the general ability-to-repay standard set forth in that 
proposal.\65\ Also, under the 2011 ATR Proposal, a qualified mortgage 
generally may not have ``points and fees,'' as that term is defined in 
the Board's proposal, that exceed three percent of the total loan 
amount.\66\
---------------------------------------------------------------------------

    \65\ 76 FR 27390 (May 11, 2011); see also section 1412 of the 
Dodd-Frank Act (adding new TILA section 129C(b), which sets forth 
the statutory standards for a ``qualified mortgage'').
    \66\ 76 FR 27390, 27396 (May 11, 2011); see also section 1412 of 
the Dodd-Frank Act (adding new TILA section 129C(b)(2)(A)(vii), 
which sets the three percent cap for a ``qualified mortgage'').
---------------------------------------------------------------------------

    The 2011 ATR Proposal provided exceptions to the calculation of 
points and fees for certain bona fide discount points, which were 
defined as ``any percent of the loan amount'' paid by the consumer that 
reduces the interest rate or time-price differential applicable to the 
mortgage loan by an amount based on a calculation that: (1) Is 
consistent with established industry practices for determining the 
amount of reduction in the interest rate or time-price differential 
appropriate for the amount of discount points paid by the consumer; and 
(2) accounts for the amount of compensation that the creditor can 
reasonably expect to receive from secondary market investors in return 
for the mortgage loan.\67\
---------------------------------------------------------------------------

    \67\ The ATR proposal was implementing new TILA section 
129C(b)(2)(C)(iv), as added by Dodd-Frank Act section 1412, which 
mandates that, to be bona fide discount points, ``the amount of the 
interest rate reduction purchased is reasonably consistent with 
established industry norms and practices for secondary mortgage 
market transactions.''
---------------------------------------------------------------------------

    As discussed by the Board in its 2011 ATR Proposal, the value of a 
rate reduction in a particular mortgage transaction on the secondary 
market is based on many complex factors, which interact in a variety of 
complex ways.\68\ These factors may include, among others:
---------------------------------------------------------------------------

    \68\ 76 FR 27390, 27467 (May 11, 2011).
---------------------------------------------------------------------------

     The product type, such as whether the loan is a fixed-rate 
or adjustable-rate mortgage, or has a 30-year term or a 15-year term.
     How much the mortgage-backed securities (MBS) market is 
willing to pay for a loan at that interest rate and the liquidity of an 
MBS with loans at that rate.
     How much the secondary market is willing to pay for excess 
interest on the loan that is available for capitalization outside of 
the MBS market.
     The amount of the guaranty fee required to be paid by the 
creditor to the investor.\69\
---------------------------------------------------------------------------

    \69\ Id.

The Bureau recognizes, however, that it may not be appropriate to 
mandate the same market-based approach (or any other approach to bona 
fide reductions in the interest rate) in both the ATR context and this 
context given the differences between the purposes and scope of the 
requirements. For ATR purposes, a discount point must be ``bona fide'' 
to be excluded from the three-percent points and fees limit on 
qualified mortgages.\70\ For this rulemaking, the Bureau is considering 
adopting a mandatory trade-off for any transaction that is subject to 
the requirement that a creditor make available a loan without discount 
points and origination points or fees. In addition, the bona fide 
trade-off in this context includes discount points and origination 
points or fees, which is broader than the inclusion in the 2011 ATR 
Proposal of just discount points. The same approach may not be

[[Page 55320]]

appropriate for both contexts for a number of reasons, including the 
fact that the inclusion of origination points or fees may introduce 
different complexities.
---------------------------------------------------------------------------

    \70\ The 2011 ATR Proposal would not prohibit a creditor from 
charging discount points that are not bona fide, but such points 
would count towards the points-and-fees limit.
---------------------------------------------------------------------------

    Another variation of the market-based approach would be to measure 
whether a trade-off is bona fide through reference to regularly 
obtained, robust, and reliable data on the trade-offs currently being 
afforded, possibly by conducting a survey of actual market terms. 
According to this variation, the trade-off available from a particular 
creditor would be measured against this benchmark to determine whether 
it is deemed competitive for purposes of this rule. At present, the 
Bureau knows of no existing survey or other source of such data and, 
therefore, assumes that pursuing such an approach would require that 
the Bureau establish such a survey or other source of data for these 
purposes.
    The Bureau is concerned that it may be difficult to effectively 
implement this variation of the market-based approach in a manner that 
adequately accounts for the impacts of all the factors that affect the 
value that the secondary market places on a rate reduction for a 
particular transaction. In addition, the Bureau recognizes that a 
determination whether a creditor is providing a competitive market 
trade-off in the interest rate on a loan that is based on actual market 
trade-offs in the recent past might not be reflective of future trade-
offs, given that the MBS market varies frequently.
    The Bureau requests comment on the feasibility of using this 
variation of a market-based benchmark to determine whether a creditor 
is providing a competitive market trade-off in the interest rate on a 
loan that includes discount points and origination points or fees 
compared to industry standards. More generally, the Bureau solicits 
comment on whether any market-based benchmark should be pursued in this 
rulemaking and, if so, how it should be structured.
36(d)(2)(ii)(A)
The Bureau's Proposal
    As discussed in more detail above, the Bureau proposes in new Sec.  
1026.36(d)(2)(ii)(A) restrictions on discount points and origination 
points or fees in a closed-end consumer credit transaction secured by a 
dwelling, if any loan originator will receive from any person other 
than the consumer compensation in connection with the transaction. 
Specifically, in these transactions, a creditor or loan originator 
organization may not impose on the consumer any discount points and 
origination points or fees in connection with the transaction unless 
the creditor makes available to the consumer a comparable, alternative 
loan that does not include discount points and origination points or 
fees; the creditor need not make available the alternative, comparable 
loan, however, if the consumer is unlikely to qualify for such a loan.
    Scope. To provide guidance on the scope of the transactions to 
which proposed Sec.  1026.36(d)(2)(ii) applies, the Bureau is proposing 
comment 36(d)(2)(ii)-1 to provide examples of transactions to which 
Sec.  1026.36(d)(2)(ii) applies, and examples of transactions to which 
Sec.  1026.36(d)(2)(ii) does not apply. Specifically, proposed comment 
36(d)(2)(ii)-1.i provides the following three examples of transactions 
in which the prohibition in proposed Sec.  1026.36(d)(2)(ii) applies: 
(1) For transactions that do not involve a loan originator 
organization, the creditor pays compensation in connection with the 
transaction (e.g., a commission) to individual loan originators that 
work for the creditor; (2) the creditor pays a loan originator 
organization compensation in connection with a transaction, regardless 
of how the loan originator organization pays compensation to individual 
loan originators that work for the organization; and (3) the loan 
originator organization receives compensation directly from the 
consumer in a transaction and the loan originator organization pays 
individual loan originators that work for the organization compensation 
in connection with the transaction. Proposed comment 36(d)(2)(ii)-1.ii 
provides the following two examples of transactions where the 
prohibition in proposed Sec.  1026.36(d)(2)(ii) does not apply: (1) For 
transactions that do not involve a loan originator organization, the 
creditor pays individual loan originators that work for the creditor 
only in the form of a salary, hourly wage, or other compensation that 
is not tied to the particular transaction; and (2) the loan originator 
organization receives compensation directly from the consumer in a 
transaction and the loan originator organization pays individual loan 
originators that work for the organization only in the form of a 
salary, hourly wage, or other compensation that is not tied to the 
particular transaction.
    Proposed comment 36(d)(2)(ii)-1.iii clarifies the relationship of 
proposed Sec.  1026.36(d)(2)(ii) to the provisions prohibiting dual 
compensation in proposed Sec.  1026.36(d)(2)(i). This proposed comment 
clarifies that Sec.  1026.36(d)(2)(ii) does not override any of the 
prohibitions on dual compensation set forth in Sec.  1026.36(d)(2)(i). 
For example, Sec.  1026.36(d)(2)(ii) does not permit a loan originator 
organization to receive compensation in connection with a transaction 
both from a consumer and from a person other than the consumer.
    Loan product where consumer will not pay discount points and 
origination points or fees. Proposed comment 36(d)(2)(ii)(A)-3 would 
provide guidance on identifying the comparable, alternative loan 
product that does not include discount points and origination points or 
fees. As explained in proposed comment 36(d)(2)(ii)(A)-3, in some 
cases, the creditor's pricing policy may not contain an interest rate 
for which the consumer will neither pay discount points and origination 
points or fees nor receive a rebate. For example, assume that a 
creditor's pricing policy only provides interest rates in \1/8\ percent 
increments. Assume also that under the creditor's current pricing 
policy, the pricing available to a consumer for a particular loan 
product would be for the consumer to pay a 5.0 percent interest rate 
with .25 discount point, pay a 5.125 percent interest rate and receive 
.25 point in rebate, or pay a 5.250 percent interest rate and receive a 
1.0 point in rebate. This creditor's pricing policy does not contain a 
rate for this particular loan product where the consumer would neither 
pay discount points and origination points or fees nor receive a rebate 
from the creditor. In such cases, proposed comment 36(d)(2)(ii)(A)-3 
clarifies that the interest rate for a loan that does not include 
discount points and origination points or fees would be the interest 
rate for which the consumer does not pay discount points and 
origination points or fees and the consumer would receive the smallest 
possible amount of rebate from the creditor. Thus, in the example 
above, the interest rate for that particular loan product that does not 
include discount points and origination points or fees is the 5.125 
percent rate with .25 point in rebate.
    Make available. Proposed comment 36(d)(2)(ii)(A)-1 would provide 
guidance on how creditors may meet the requirement in Sec.  
1026.36(d)(2)(ii)(A) to make available the required comparable, 
alternative loan that does not include discount points and origination 
points or fees. Specifically, proposed comment 36(d)(2)(ii)(A)-1.i 
provides guidance for transactions that do not involve a loan 
originator organization. In this case, a creditor will be deemed to 
have made available to the consumer a comparable, alternative loan that 
does not include discount points and origination points

[[Page 55321]]

or fees if, any time the creditor provides any oral or written estimate 
of the interest rate, the regular periodic payments, the total amount 
of the discount points and origination points or fees, or the total 
amount of the closing costs specific to a consumer for a transaction 
that would include discount points and origination points or fees, the 
creditor also provides an estimate of those same types of information 
for a comparable, alternative loan that does not include discount 
points and origination points or fees, unless a creditor determines 
that a consumer is unlikely to qualify for such a loan. A creditor 
using this safe harbor is required to provide the estimate for the loan 
that does not include discount points and origination points or fees 
only if the estimate for the loan that includes discount points and 
origination points or fees is received by the consumer prior to the 
estimated disclosures required within three business days after 
application pursuant to the Bureau's regulations implementing the Real 
Estate Settlement Procedures Act (RESPA). See proposed comment 
36(d)(1)(A)-1.i.A.
    Proposed comment 36(d)(2)(ii)(A)-1.i.B clarifies that a creditor 
using this safe harbor is required to provide information about the 
loan that does not include discount points and origination points or 
fees only when the information about the loan that includes discount 
points or origination points or fees is specific to the consumer. 
Advertisements would be excluded from this requirement. See comment 
2(a)(2)-1.ii.A. If the information about the loan that includes 
discount points or origination points or fees is an advertisement under 
Sec.  1026.24, the creditor is not required to provide the quote for 
the loan that does not include discount points and origination points 
or fees. For example, if prior to the consumer submitting an 
application, the creditor provides a consumer an estimated interest 
rate and monthly payment for a loan that includes discount points and 
origination points or fees, and the estimates were based on the 
estimated loan amount and the consumer's estimated credit score, then 
the creditor must also disclose the estimated interest rate and 
estimated monthly payment for the loan that does not include discount 
points and origination points or fees. In contrast, if the creditor 
provides the consumer with a preprinted list of available rates for 
different loan products that include discount points and origination 
points or fees, the creditor is not required to provide the information 
about the loans that do not include discount points and origination 
points or fees under this safe harbor. Nonetheless, as discussed in 
more detail below, the Bureau solicits comment on whether the 
advertising rules in Sec.  1026.24(d) should be revised as well.
    Under this safe harbor, proposed comment 36(d)(2)(ii)(A)-1.i.C 
clarifies that ``comparable, alternative loan'' means that the two 
loans for which estimates are provided as discussed above have the same 
terms and conditions, other than the interest rate, any terms that 
change solely as a result of the change in the interest rate (such the 
amount of regular periodic payments), and the amount of any discount 
points and origination points or fees. The Bureau believes that, for a 
consumer to compare loans meaningfully and usefully, it is important 
that the only terms and conditions that are different between the loan 
that includes discount points and origination points or fees and the 
loan that does not include discount points and origination points or 
fees are: (1) The interest rates applicable to the loans; (2) any terms 
that change solely as a result of the change in the interest rate (such 
the amount of regular periodic payments); and (3) the fact that one 
loan includes discount points and origination points or fees and the 
other loan does not. Proposed comment 36(d)(2)(ii)(A)-4 provides 
guidance on the meaning of ``regular periodic payment'' and indicates 
that this term means payments of principal and interest (or interest 
only, depending on the loan features) specified under the terms of the 
loan contract that are due from the consumer for two or more unit 
periods in succession. The Bureau believes that limiting the 
differences between the two loans will allow consumers to focus 
consumer choice on core loan terms and help consumers understand better 
the trade-off between the two loans in terms of paying discount points 
and origination points or fees in exchange for a lower interest rate. 
In addition, proposed comment 36(d)(2)(ii)(A)-1.i.C clarifies that a 
creditor using this safe harbor must provide the estimate for the loan 
that does not include discount points and origination points or fees in 
the same manner (i.e., orally or in writing) as provided for the loan 
that does include discount points and origination points or fees. For 
both written and oral estimates, both of the written (or both of the 
oral) estimates must be given at the same time.
    Also, as clarified by proposed comment 36(d)(2)(ii)(A)-1.i.E, a 
creditor using this safe harbor must disclose estimates of the interest 
rate, the regular periodic payments, the total amount of the discount 
points and origination points or fees, and the total amount of the 
closing costs for the loan that does not include discount points and 
origination points or fees only if the creditor disclosed estimates for 
those types of information for the loan that includes discount points 
and origination points or fees. For example, if a creditor provides 
estimates of the interest rate and monthly payments for a loan that 
includes discount points and origination points or fees, the creditor 
using the safe harbor must provide estimates of the interest rate and 
monthly payments for the loan that does not includes discount points 
and origination points or fees, such as saying ``your estimated 
interest rate and monthly payments on this loan product where you will 
not pay discount points and origination points or fees to the creditor 
or its affiliates is [x] percent, and $[xx] per month.'' On the other 
hand, if the creditor provides an estimate of only the interest rate 
for the loan that includes discount points and origination points or 
fees and does not provide an estimate of the regular periodic payments 
for that loan, the creditor using the safe harbor is required only to 
provide an estimate of the interest rate for the loan that does not 
include discount points and origination points or fees and is not 
required to provide an estimate of the regular periodic payments for 
the loan without discount points and origination points or fees.
    Proposed comment 36(d)(2)(ii)(A)-1.ii would specify guidance for 
transactions that involve a loan originator organization. In this case, 
a creditor will be deemed to have made available to the consumer a 
comparable, alternative loan that does not include discount points and 
origination points or fees if the creditor communicates to the loan 
originator organization the pricing for all loans that do not include 
discount points and origination points or fees. Separately, mortgage 
brokers are prohibited under Sec.  1026.36(e) from steering consumers 
into a loan just to maximize the broker's commission. The rule sets 
forth a safe harbor for complying with provisions prohibiting steering 
if the broker presents to the consumer three loan options that are 
specified in the rule. One of these loan options is the loan with the 
lowest total dollar amount for discount points and origination points 
or fees. Thus, mortgage brokers that are using the safe harbor must 
present to the consumer the loan with the lowest interest rate that

[[Page 55322]]

does not include discount points and origination points or fees. The 
Bureau believes that most mortgage brokers are using the safe harbor to 
comply with the provision prohibiting steering, so most consumers in 
transactions that involve mortgage brokers would be informed of the 
loan with the lowest interest rate that do not include discount points 
and origination points or fees.
    The Bureau solicits comments generally on the safe harbor 
approaches set forth in proposed comment 36(d)(2)(ii)(A)-1, and 
specifically on the effectiveness of these approaches to ensure that 
consumers are informed of the options to obtain loans that do not 
include discount points and origination points or fees. As discussed in 
more detail above, the Bureau specifically requests comment on whether 
there should be a requirement after application that a creditor 
disclose to a consumer a loan that does not include discount points and 
origination points or fees. The Bureau specifically solicits comment on 
whether it would be useful for the consumer if, at the time a creditor 
first provides a Loan Estimate for a loan that includes discount points 
and origination points or fees, the creditor also were required to 
provide either a complete Loan Estimate, or just the first page of the 
Loan Estimate, for a comparable, alternative loan that does not include 
discount points and origination points or fees.
    In addition, as discussed in more detail above, through the 
proposal, the Bureau intends to facilitate consumer shopping by 
enhancing the ability of consumers to make comparisons using loans that 
do not include discount points and origination points or fees available 
from different creditors as a basis for comparison. Nonetheless, the 
Bureau is concerned that by the time a consumer receives a quote from a 
particular creditor for a loan that does not include discount points 
and origination points or fees, the consumer may have already completed 
his or her shopping in comparing loans from different creditors. Thus, 
as discussed in more detail above, the Bureau specifically solicits 
comment on whether the advertising rules in Sec.  1026.24 should be 
revised to enable consumers to make comparisons using loans that do not 
include discount points and origination points or fees available from 
different creditors as a basis for comparison.
    Transactions for which a consumer is unlikely to qualify. Proposed 
comment 36(d)(2)(ii)(A)-2 provides guidance on how a creditor may 
determine whether a consumer is likely not to qualify for a comparable, 
alternative loan that does not include discount points and origination 
points or fees. Specifically, this proposed comment provides that the 
creditor must have a good-faith belief that a consumer will not qualify 
for a loan that has the same terms and conditions as the loan that 
includes discount points and origination points or fees, other than the 
interest rate, any terms that change solely as a result of the change 
in the interest rate (such the amount of regular periodic payments) and 
the fact that the consumer will not pay discount points and origination 
points or fees. Under this proposed comment, the creditor's belief that 
the consumer is likely not to qualify for such a loan must be based on 
the creditor's current pricing and underwriting policy. In making this 
determination, the creditor may rely on information provided by the 
consumer, even if it subsequently is determined to be inaccurate.
36(d)(2)(ii)(B)
Definition of Discount Points and Origination Points or Fees
    Under proposed Sec.  1026.36(d)(2)(ii)(B), the term ``discount 
points and origination points or fees'' for purposes of Sec.  
1026.36(d) and (e) means all items that would be included in the 
finance charge under Sec.  1026.4(a) and (b) and any fees described in 
Sec.  1026.4(a)(2) notwithstanding that those fees may not be included 
in the finance charge under Sec.  1026.4(a)(2) that are payable at or 
before consummation by the consumer to a creditor or a loan originator 
organization, except for (1) interest, including any per-diem interest, 
or the time-price differential; (2) any bona fide and reasonable third-
party charges not retained by the creditor or loan originator 
organization; and (3) seller's points and premiums for property 
insurance that are excluded from the finance charge under Sec.  
1026.4(c)(5), (c)(7)(v) and (d)(2). Proposed comment 36(d)(2)(ii)(B)-4 
provides that, for purposes of Sec.  1026.36(d)(2)(ii)(B), the phrase 
``payable at or before consummation by the consumer to a creditor or a 
loan originator organization'' includes amounts paid by the consumer in 
cash at or before closing or financed as part of the transaction and 
paid out of the loan proceeds. The Bureau notes that Sec.  
1026.36(d)(3) provides that for purposes of Sec.  1026.36(d), 
affiliates must be treated as a single person. Thus, for purposes of 
the definition of discount points and origination points or fees, 
charges that are payable by a consumer to a creditor's affiliate or the 
affiliate of a loan originator organization are deemed to be payable to 
the creditor or loan originator organization, respectively. See 
proposed comment 36(d)(2)(ii)-3.
    The Bureau believes the definition of discount points and 
origination points or fees is consistent with the description of the 
discount points, origination points, or fees referenced in the 
statutory ban in TILA section 129B(c)(2)(B)(ii), which was added by 
section 1403 of the Dodd-Frank Act. 12 U.S.C. 1639b(c)(2)(B)(ii). 
Specifically, TILA section 129B(c)(2)(B)(ii) uses the phrase ``upfront 
payment of discount points, origination points, or fees, however 
denominated (other than bona fide third party charges not retained by 
the mortgage originator, creditor, or an affiliate of the creditor or 
originator).'' The Bureau interprets the phrase ``upfront payment of 
discount points, origination points, or fees, however denominated'' 
generally to mean finance charges (except for interest) that are 
imposed in connection with the mortgage transaction that are payable at 
or before consummation by the consumer. The Bureau believes that 
Congress did not intend to cover charges that are payable by the 
consumer in comparable cash real estate transactions, such as real 
estate broker fees, where these charges are imposed regardless of 
whether the consumer engages in a credit transaction. The provision 
prohibiting consumers from paying upfront discount points and 
origination points or fees amends TILA, which generally regulates 
credit transactions, and not the underlying real estate transactions 
that are in connection with the extensions of credit.
    The proposed definition of discount points and origination points 
or fees also includes an exception for any bona fide and reasonable 
third-party charges not retained by the creditor, loan originator 
organization, or any affiliate of either, consistent with TILA section 
129B(c)(2)(B)(ii). The Bureau believes that this exception for bona 
fide and reasonable third-party charges means that Congress 
presumptively intended to include such third-party charges in the 
definition of ``discount points, origination points, or fees'' where 
they are retained by the creditor, mortgage originator, or affiliates 
of either. In addition, the exception for fees that are not 
``retained'' by the creditor is consistent with the current comment 
36(d)(1)-7 (re-designated as proposed comment 36(d)(2)(i)-2.i) and the 
Bureau's position that the definition of ``discount points, origination 
points, or fees'' includes upfront payments when the consumer either 
pays in cash or finances these payments from loan

[[Page 55323]]

proceeds because in either instance, the creditor, mortgage originator, 
or affiliates retain such payments. The proposed definition of discount 
points and origination points or fees reflects proposed changes that 
the Bureau set forth in the TILA-RESPA Integration Proposal to the 
definition of finance charge for purposes of mortgage transactions. 
Specifically, in the TILA-RESPA Integration Proposal, the Bureau 
proposes to add new Sec.  1026.4(g) to specify that Sec.  1026.4(a)(2) 
and (c) through (e), other than Sec.  1026.4(c)(2), (c)(5), (c)(7)(v), 
and (d)(2), do not apply to closed-end transactions secured by real 
property or a dwelling. Thus, under the TILA-RESPA Integration 
Proposal, the term finance charge for purposes of closed-end 
transactions secured by real property or a dwelling would mean all 
items that would be included in the finance charge under Sec.  
1026.4(a) and (b) and fees described in Sec.  1026.4(a)(2) 
notwithstanding that those fees may not be included in the finance 
charge under Sec.  1026.4(a)(2) except for charges for late payments or 
for delinquency, default or other similar occurrences, seller's points, 
and premiums for property insurance that are excluded from the finance 
charge under Sec.  1026.4(c)(2), (c)(5), (c)(7)(v) and (d)(2). In the 
supplementary information to the TILA-RESPA Integration Proposal, the 
Bureau solicits comment on the definition of finance charge generally 
in Sec.  1026.4 as it relates to closed-end mortgage transactions, and 
specifically proposed Sec.  1026.4(g). To the extent that the Bureau 
revises the definition of finance charge as it relates to closed-end 
mortgage transaction in response to the TILA-RESPA Integration 
Proposal, the Bureau expects to make corresponding changes to the 
definition of discount points and origination points or fees.
    Proposed comment 36(d)(2)(ii)(B)-1 provides guidance generally on 
the definition of discount points and origination points or fees as set 
forth in proposed Sec.  1026.36(d)(2)(ii)(B). This proposed comment 
clarifies that, for purposes of proposed Sec.  1026.36(d)(2)(ii)(B), 
``items included in the finance charge under Sec.  1026.4(a) and (b)'' 
means those items included under Sec.  1026.4(a) and (b), without 
reference to any other provisions of Sec.  1026.4. Nonetheless, 
proposed Sec.  1026.36(d)(2)(ii)(B)(3) specifies that items that are 
excluded from the finance charge under Sec.  1026.4(c)(5), (c)(7)(v) 
and (d)(2) are also excluded from the definition of discount points and 
origination points or fees. For example, property insurance premiums 
may be excluded from the finance charge if the conditions set forth in 
Sec.  1026.4(d)(2) are met, and these premiums also may be excluded if 
they are escrowed. See Sec.  1026.4(c)(7)(v), (d)(2). Under proposed 
Sec.  1026.36(d)(2)(ii)(B)(3), these premiums are also excluded from 
the definition of discount points and origination points or fees. In 
addition, charges in connection with transactions that are payable in a 
comparable cash transaction are not included in the finance charge. See 
comment 4(a)-1. For example, property taxes imposed to record the deed 
evidencing transfer from the seller to the buyer of title to the 
property are not included in the finance charge because they would be 
paid even if no credit were extended to finance the purchase. Thus, 
these charges would not be included in the definition of discount 
points and origination points or fees.
    The proposed definition of discount points and origination points 
or fees also excludes any bona fide and reasonable third-party charges 
not retained by the creditor or loan originator organization. Proposed 
comment 36(d)(2)(B)-2 provides guidance on this exception. 
Specifically, proposed comment 36(d)(2)(B)-2 notes that Sec.  
1026.36(d)(2)(ii)(B) generally includes any fees described in Sec.  
1026.4(a)(2) notwithstanding that those fees may not be included in the 
finance charge under Sec.  1026.4(a)(2). Section 1026.4(a)(2) discusses 
fees charged by a ``third party'' that conducts the loan closing. For 
purposes of Sec.  1026.4(a)(2), the term ``third party'' includes 
affiliates of the creditor or the loan originator organization. 
Nonetheless, for purposes of the definition of discount points and 
origination points or fees, the term ``third party'' does not include 
affiliates of the creditor or the loan originator. Thus, fees described 
in Sec.  1026.4(a)(2) would be included in the definition of discount 
points and origination points or fees if they are charged by affiliates 
of the creditor or the loan originator. Nonetheless, fees described in 
Sec.  1026.4(a)(2) would not be included in such definition if they are 
charged by a third party that is not an affiliate of the creditor or 
any loan originator organization, pursuant to the exception in Sec.  
1026.36(d)(2)(ii)(B)(2).
    The proposed comment also recognizes that, in some cases, amounts 
received for payment for third-party charges may exceed the actual 
charge because, for example, the creditor cannot determine with 
accuracy what the actual charge will be before consummation. In such a 
case, the difference retained by the creditor or loan originator 
organization is not deemed to fall within the definition of discount 
points and origination points or fees if the third-party charge imposed 
on the consumer was bona fide and reasonable, and also complies with 
State and other applicable law. On the other hand, if the creditor or 
loan originator organization marks up a third-party charge (a practice 
known as ``upcharging''), and the creditor or loan originator 
organization retains the difference between the actual charge and the 
marked-up charge, the amount retained falls within the definition of 
discount points and origination points or fees.
    Proposed comment 36(d)(2)(ii)(B)-2 provides two illustrations for 
this guidance. The first illustration assumes that the creditor charges 
the consumer a $400 application fee that includes $50 for a credit 
report and $350 for an appraisal that will be conducted by a third 
party that is not the affiliate of the creditor or the loan originator 
organization. Assume that $50 is the amount the creditor pays for the 
credit report to a third party that is not affiliated with the creditor 
or with the loan originator organization. At the time the creditor 
imposes the application fee on the consumer, the creditor is uncertain 
of the cost of the appraisal because the appraiser charges between $300 
and $350 for appraisals. Later, the cost for the appraisal is 
determined to be $300 for this consumer's transaction. Assume, however, 
that the creditor uses average charge pricing in accordance with 
Regulation X. In this case, the $50 difference between the $400 
application fee imposed on the consumer and the actual $350 cost for 
the credit report and appraisal is not deemed to fall within the 
definition of discount points and origination points or fees, even 
though the $50 is retained by the creditor. The second illustration 
specifies that, using the same example as described above, the $50 
difference would fall within the definition of discount points and 
origination points or fees if the appraisers from whom the creditor 
chooses charge fees between $250 and $300.
    Proposed comment 36(d)(2)(ii)(B)-3 provides that, if at the time a 
creditor must comply with the requirements in proposed Sec.  
1026.36(d)(2)(ii) the creditor does not know whether a particular 
charge will be paid to its affiliate or an affiliate of the loan 
originator organization or will be paid to a third-party that is not 
the creditor's affiliate or an affiliate of the loan originator 
organization, the creditor must assume that the charge will be paid to 
its affiliates or an affiliate of the loan originator organization, as 
applicable,

[[Page 55324]]

for purposes of complying with the requirements in Sec.  
1026.36(d)(2)(ii). For example, assume that a creditor typically uses 
three title insurance companies, one of which is an affiliate of the 
creditor and two are not affiliated with the creditor or the loan 
originator organization. If the creditor does not know at the time it 
must establish available credit terms for a particular consumer 
pursuant to proposed Sec.  1026.36(d)(2)(ii) whether the title 
insurance services will be performed by the affiliate of the creditor, 
the creditor must assume that the title insurance services will be 
conducted by the affiliate for purposes of complying with the 
requirements in Sec.  1026.36(d)(2)(ii).
    The Bureau solicits comment generally on the proposed definition of 
discount points and origination points or fees. As discussed in more 
detail above, the Bureau requests comment on the scope of the 
definition of discount points and origination points or fees and its 
impact on the ease with which consumers can compare loans that do not 
include discount points and origination points or fees from different 
creditors.
36(d)(2)(ii)(C)
    Proposed Sec.  1026.36(d)(2)(ii)(C) provides that no discount 
points and origination points or fees may be imposed on the consumer in 
connection with a transaction subject to proposed Sec.  
1026.36(d)(2)(ii)(A) unless there is a bona fide reduction in the 
interest rate compared to the interest rate for the comparable, 
alternative loan that does not include discount points and origination 
points or fees required to be made available to the consumer under 
Sec.  1026.36(d)(2)(ii)(A). In addition, for any rebate paid by the 
creditor that will be applied to reduce the consumer's settlement 
charges, the creditor must provide a bona fide rebate in return for an 
increase in the interest rate compared to the interest rate for the 
loan that does not include discount points and origination points or 
fees required to be made available to the consumer under Sec.  
1026.36(d)(2)(ii)(A). As discussed in detail above, the Bureau is 
seeking comment on whether such a bona fide requirement is necessary 
and, if so, what form the requirement should take.
36(e) Prohibition on Steering
36(e)(3) Loan Options Presented
    Section 1026.36(e)(1) provides that a loan originator may not 
direct or ``steer'' a consumer to consummate a transaction based on the 
fact that the originator will receive greater compensation from the 
creditor in that transaction than in other transactions the originator 
offered or could have offered to the consumer, unless the consummated 
transaction is in the consumer's interest. Section 1026.36(e)(2) 
provides a safe harbor that loan originators may use to comply with the 
prohibition set forth in Sec.  1026.36(e)(1). Specifically, Sec.  
1026.36(e)(2) provides that a transaction does not violate Sec.  
1026.36(e)(1) if the consumer is presented with loan options that meet 
certain conditions set forth in Sec.  1026.36(e)(3) for each type of 
transaction in which the consumer expressed an interest. The term 
``type of transaction'' refers to whether: (1) A loan has an annual 
percentage rate that cannot increase after consummation; (2) a loan has 
an annual percentage rate that may increase after consummation; or (3) 
a loan is a reverse mortgage.
    As set forth in Sec.  1026.36(e)(3), in order for a loan originator 
to qualify for the safe harbor in Sec.  1026.36(e)(2), the loan 
originator must obtain loan options from a significant number of the 
creditors with which the originator regularly does business and must 
present the consumer with the following loan options for each type of 
transaction in which the consumer expressed an interest: (1) The loan 
with the lowest interest rate; (2) the loan with the lowest total 
dollar amount for origination points or fees and discount points; and 
(3) a loan with the lowest interest rate without negative amortization, 
a prepayment penalty, a balloon payment in the first seven years of the 
loan term, shared equity, or shared appreciation, or, in the case of a 
reverse mortgage, a loan without a prepayment penalty, shared equity, 
or shared appreciation. In accordance with current Sec.  
1026.36(e)(3)(ii), the loan originator must have a good faith belief 
that the options presented to the consumer as discussed above are loans 
for which the consumer likely qualifies.
The Bureau's Proposal
    Discount points and origination points or fees. As discussed above, 
to qualify for the safe harbor in Sec.  1026.36(e)(2), a loan 
originator must present to a consumer particular loan options, one of 
which is the loan with the lowest total dollar amount for ``origination 
points or fees and discount points'' for which the consumer likely 
qualifies. See Sec.  1026.36(e)(3)(C). For consistency, the Bureau 
proposes to revise Sec.  1026.36(e)(3)(C) to use the terminology 
``discount points and origination points or fees,'' which is a defined 
term in proposed Sec.  1026.36(d)(2)(ii)(B).
    In addition, the Bureau proposes to amend 1026.36(e)(3)(C) to 
address the situation where two or more loans have the same total 
dollar amount of discount points and origination points or fees. This 
situation is likely to occur in transactions that are subject to 
proposed Sec.  1026.36(d)(2)(ii). As discussed above, proposed Sec.  
1026.36(d)(2)(ii)(A) requires, as a prerequisite to a creditor, loan 
originator organization, or affiliate of either imposing any discount 
points and origination points or fees on a consumer in a transaction, 
that the creditor also make available to the consumer a comparable, 
alternative loan that does not include discount points and origination 
points or fees, unless the consumer is unlikely to qualify for such a 
loan. For transactions that involve a loan originator organization, a 
creditor will be deemed to have made available to the consumer a 
comparable, alternative loan that does not include discount points and 
origination points or fees if the creditor communicates to the loan 
originator organization the pricing for all loans that do not include 
discount points and origination points or fees, unless the consumer is 
unlikely to qualify for such a loan. See proposed comment 
36(d)(2)(ii)(A)-1. Thus, each creditor with whom a loan originator 
regularly does business generally will be communicating pricing to the 
loan originator for all loans that do not include discount points and 
origination points or fees.
    Proposed Sec.  1026.36(e)(3)(C) provides that with respect to the 
loan with the lowest total dollar amount of discount points and 
origination points or fees, if two or more loans have the same total 
dollar amount of discount points and origination points or fees, the 
creditor must disclose the loan with the lowest interest rate that has 
the lowest total dollar amount of discount points and origination 
points or fees for which the consumer likely qualifies. For example, 
for transactions that are subject to proposed Sec.  1026.36(d)(2)(ii), 
the loan originator must disclose the loan with the lowest rate that 
does not include discount points and origination points or fees for 
which the consumer likely qualifies. This proposed guidance will help 
ensure that loan originators are not steering consumers into loans to 
maximize the originator's compensation.
    The loan with the lowest interest rate. As discussed above, to 
qualify for the safe harbor in Sec.  1026.36(e)(2), a loan originator 
must present to a consumer particular loan options, one of which is the 
loan with the lowest interest rate for which the consumer likely 
qualifies. See Sec.  1026.36(e)(3)(A). Mortgage creditors

[[Page 55325]]

and other industry representatives have asked for additional guidance 
on how to identify the loan with the lowest interest rate for which a 
consumer likely qualifies as set forth in Sec.  1026.36(e)(3)(A), given 
that a consumer generally can obtain a lower rate by paying discount 
points. To provide additional guidance, the Bureau proposes to amend 
comment 36(e)(3)-3 to clarify that the loan with the lowest interest 
rate for which the consumer likely qualifies is the loan with the 
lowest rate the consumer can likely obtain, regardless of how many 
discount points the consumer must pay to obtain it.
36(f) Loan Originator Qualification Requirements
    Section 1402(a)(2) of the Dodd-Frank Act added TILA section 129B, 
which imposes new requirements for mortgage originators, including 
requirements for them to be licensed, registered, and qualified, and to 
include their identification numbers on loan documents. 15 U.S.C. 
1639b.
    TILA section 129B(b)(1)(A) authorizes the Bureau to issue 
regulations requiring mortgage originators to be registered and 
licensed in compliance with State and Federal law, including the SAFE 
Act, 12 U.S.C. 5101. TILA section 129B(b)(1)(A) also authorizes the 
Bureau's regulations to require mortgage originators to be 
``qualified.'' As discussed in the section-section analysis of Sec.  
1026.36(a)(1), above, for purposes of TILA section 129B(b) the term 
``mortgage originator'' includes natural persons and organizations. 
Moreover, for purposes of TILA section 129B(b), the term includes 
creditors, notwithstanding that the definition in TILA section 
103(cc)(2) excludes creditors for certain other purposes.
    The SAFE Act imposes licensing and registration requirements on 
individuals. Under the SAFE Act, loan originators who are employees of 
a depository institution or a Federally regulated subsidiary of a 
depository institution are subject to registration, and other loan 
originators are generally required to obtain a State license. 
Regulation H, 12 CFR part 1008, which implements SAFE Act standards 
applicable to State licensing, provides that a State is not required to 
impose licensing requirements on loan originators who are employees of 
a bona fide non-profit organization. 12 CFR 1008.103(e)(7). Individuals 
who are subject to SAFE Act registration or State licensing are 
required to obtain a unique identification number from the NMLSR, which 
is a system and database for registering, licensing, and tracking loan 
originators.
    SAFE Act licensing is implemented by States. To grant an individual 
a SAFE Act-compliant loan originator license, the State must determine 
that the individual has never had a loan originator license revoked; 
has not been convicted of enumerated felonies within specified 
timeframes; has demonstrated financial responsibility, character, and 
fitness; has completed eight hours of pre-licensing classes that have 
been approved by the NMLSR; has passed a written test approved by the 
NMLSR; and has met net worth or surety bond requirements. Licensed loan 
originators must take eight hours of continuing education classes 
approved by the NMLSR and must renew their licenses annually. Some 
States impose additional or higher minimum standards for licensing of 
individual mortgage loan originators under their SAFE Act-compliant 
licensing regimes. Separately from their SAFE Act-compliant licensing 
regimes, most States also require licensing or registration of loan 
originator organizations.
    SAFE Act registration generally requires depository institution 
employee loan originators to submit to the NMLSR identifying 
information and information about their employment history and certain 
criminal convictions, civil judicial actions and findings, and adverse 
regulatory actions. The employee must also submit fingerprints to the 
NMLSR and authorize the NMLSR and the employing depository institution 
to obtain a criminal background check and information related to 
certain findings and sanctions against the employee by a court or 
government agency. Regulation G, 12 CFR part 1007, which implements 
SAFE Act registration requirements, imposes an obligation on the 
employing depository institution to have and follow policies to ensure 
compliance with the SAFE Act. The policies must also provide for the 
depository institution to review employee criminal background reports 
and to take appropriate action consistent with Federal law. 12 CFR 
1007.104(h).
    Proposed Sec.  1026.36(f) implements, as applicable, TILA section 
129B(b)(1)(A)'s mortgage originator licensing, registration, and 
qualification requirements by requiring a loan originator for a 
consumer credit transaction to meet the requirements described above. 
Proposed Sec.  1026.36(f) tracks the TILA requirement that mortgage 
originators comply with State and Federal licensing and registration 
requirements, including those of the SAFE Act. Proposed comment 36(f)-1 
notes that the definition of loan originator includes individuals and 
organizations and, for purposes of Sec.  1026.36(f), includes 
creditors. Comment 36(f)-2 clarifies that Sec.  1026.36(f) does not 
affect the scope of individuals and organizations that are subject to 
State and Federal licensing and registration requirements. The 
remainder of Sec.  1026.36(f) sets forth standards that loan originator 
organizations must meet to comply with the TILA requirement that they 
be qualified, as discussed below. Section 1026.36(f) clarifies that the 
requirements do not apply to government agencies and State housing 
finance agencies, employees of which are not required to be licensed 
under the SAFE Act. This differentiation is made pursuant to the 
Bureau's authority under TILA section 105(a) to effectuate the purposes 
of TILA, which as provided in TILA section 129B(a)(2) include assuring 
that consumers are offered and receive residential mortgage loans on 
terms that reasonably reflect their ability to repay the loans and that 
are understandable and not unfair, deceptive, or abusive. The Bureau 
does not believe that it is proper to apply the proposed qualification 
requirements to these individuals, because such agencies directly 
regulate and control the manner of all of their loan origination 
activities, thereby providing consumers adequate protection from these 
types of harm.
36(f)(1)
    Proposed Sec.  1026.36(f)(1) requires loan originator organizations 
to comply with applicable State law requirements for legal existence 
and foreign qualification, meaning the requirements that govern the 
legal creation of the organization and the authority of the 
organization to transact business in another State. Proposed comment 
36(f)(1)-1 states, by way of example, that the provision encompasses 
requirements for incorporation or other type of formation and for 
maintaining an agent for service of process. This requirement would 
help ensure that consumers are able to seek remedies against loan 
originator organizations that fail to comply with requirements for 
legal formation and, when applicable, for operating as foreign 
businesses.
36(f)(2)
    Proposed Sec.  1026.36(f)(2) requires loan originator organizations 
to ensure that their individual loan originators are in compliance with 
SAFE Act licensing and registration requirements. Proposed comment 
36(f)(2)-1 notes that the loan

[[Page 55326]]

originator organization can comply with the requirement by verifying 
information that is available on the NMLSR consumer access Web site.
36(f)(3)
    Proposed Sec.  1026.36(f)(3) provides actions that a loan 
originator organization must take for its individual loan originators 
who are not required to be licensed, and are not licensed, pursuant to 
the SAFE Act and State SAFE Act implementing laws. Individual loan 
originators who are not required to be licensed generally include 
employees of depository institutions and organizations that a State has 
determined to be bona fide non-profit organizations, in accordance with 
criteria in Regulation H. 12 CFR 1008.103(e)(7).
    The proposed requirements in Sec.  1026.36(f)(3)(ii) apply to 
unlicensed individual loan originators two of the core standards that 
apply to individuals who are subject to SAFE Act State licensing 
requirements: the criminal background standards and the financial 
responsibility, character, and general fitness standards. Proposed 
Sec.  1026.36(f)(3)(iii) also requires loan originator organizations to 
provide periodic training to these individual loan originators, a 
requirement that is analogous to but, as discussed below, more flexible 
than the continuing education requirement that applies to individuals 
who have SAFE Act-compliant State licenses.
    The SAFE Act's application of the less stringent registration 
standards to employees of depository institutions, as well as 
Regulation H's provision for States to exempt from State licensing 
employees of bona fide non-profit organizations, are based in part on 
an assumption that these institutions carry out basic screening of and 
provide basic training to their employee loan originators to comply 
with prudential regulatory requirements or to ensure a minimum level of 
protection of and service to their borrowers. The proposed requirements 
in Sec.  1026.36(f)(3) would help ensure that all individual loan 
originators meet core standards of integrity and competence, regardless 
of the type of loan originator organization for which they work.
    The proposal does not require employers of unlicensed loan 
originator individuals to obtain the covered information and make the 
required determinations on a periodic basis. Instead, such employers 
would be required to obtain the information and make the determinations 
under the criminal, financial responsibility, character, and general 
fitness standards before an individual acts as a loan originator in a 
covered consumer credit transaction. However, the Bureau invites public 
comment on whether such determinations should be required on a periodic 
basis or whether the employer of an unlicensed loan originator should 
be required to make subsequent determinations only when it obtains 
information that indicates the individual may no longer meet the 
applicable standards.
    The Bureau is not proposing to apply to employees of depository 
institutions and bona fide non-profit organizations the more detailed 
requirements to pass a standardized test and to be covered by a surety 
bond that apply to individuals seeking a SAFE Act-compliant State 
license. The Bureau has not found evidence that consumers who obtain 
mortgage loans from depository institutions and bona fide non-profit 
organizations face risks that are not adequately addressed through 
existing safeguards and proposed safeguards in this proposed rule. 
However, the Bureau will continue to monitor the market to consider 
whether additional measures are warranted.
36(f)(3)(i)
    Proposed Sec.  1026.36(f)(3)(i) provides that the loan originator 
organization must obtain, for each individual loan originator who is 
not licensed under the SAFE Act, a State and national criminal 
background check, a credit report from a nationwide consumer reporting 
agency in compliance, where applicable, with the requirements of 
section 604(b) of the Fair Credit Reporting Act (15 U.S.C. 1681b), and 
information about any administrative, civil, or criminal findings by 
any court or government agency. Proposed comment 36(f)(3)(i)-1 
clarifies that loan originator organizations that do not have access to 
this information in the NMLSR (generally, bona fide non-profit 
organizations) could satisfy the requirement by obtaining a criminal 
background check from a law enforcement agency or commercial service. 
Such a loan originator organization could satisfy the requirement to 
obtain information about administrative, civil, or criminal 
determinations by requiring the individual to provide it with this 
information. The Bureau notes that the information in the NMLSR about 
administrative, civil, or criminal determinations about an individual 
is generally supplied to the NMLSR by the individual, rather than by a 
third party. The Bureau invites public comment on whether loan 
originator organizations that do not have access to this information in 
the NMLSR should be permitted to satisfy the requirement by requiring 
the individual loan originator to provide it directly to the loan 
originator organization or if, instead, there are other means of 
obtaining the information that are more reliable or efficient.
36(f)(3)(ii)
    Proposed Sec.  1026.36(f)(3)(ii) specifies the standards that a 
loan originator organization must apply in reviewing the information it 
is required to obtain. The standards are the same as those that State 
agencies must apply in determining whether to grant an individual a 
SAFE Act-compliant loan originator license. Proposed comment 
36(f)(3)(ii)-1 clarifies that the scope of the required review includes 
the information required to be obtained under Sec.  1026.36(f)(3)(i) as 
well information the loan originator organization has obtained or would 
obtain as part of its customary hiring and personnel management 
practices, including information from application forms, candidate 
interviews, and reference checks.
    First, under proposed Sec.  1026.36(f)(3)(ii)(A), a loan originator 
organization must determine that the individual loan originator has not 
been convicted (or pleaded guilty or nolo contendere) to a felony 
involving fraud, dishonesty, a breach of trust, or money laundering at 
any time, or any other felony within the preceding seven-year period. 
Depository institutions already apply similar standards in complying 
with the SAFE Act registration requirements under 12 CFR 1007.104(h) 
and other applicable Federal requirements, which generally prohibit 
employment of individuals convicted of offenses involving dishonesty, 
money laundering, or breach of trust. For depository institutions, the 
incremental effect of the proposed standard generally would be to 
expand the scope of disqualifying crimes to include felonies other than 
those involving dishonesty, money laundering, or breach of trust if the 
conviction was in the previous seven years. The Bureau does not believe 
that depository institutions or bona fide non-profit organizations 
currently employ many individual loan originators who would be 
disqualified by the proposed provision, but the proposed provision 
would give consumers confidence that individual loan originators meet 
common minimum criminal background standards, regardless of the type of 
institution or organization for which they work. The proposed 
description of potentially disqualifying convictions is

[[Page 55327]]

the same as that in the SAFE Act provision that applies to applicants 
for State licenses and includes felony convictions in foreign courts. 
The Bureau recognizes that records of convictions in foreign courts may 
not be easily obtained and that many foreign jurisdictions do not 
classify crimes as felonies. The Bureau invites public comment on what, 
if any, further clarifications the Bureau should provide for this 
provision.
    Second, under proposed Sec.  1026.36(f)(3)(ii)(B), a loan 
originator organization must determine that the individual loan 
originator has demonstrated financial responsibility, character, and 
general fitness to warrant a determination that the individual loan 
originator will operate honestly, fairly, and efficiently. This 
standard is identical to the standard that State agencies apply to 
applicants for SAFE Act-compliant loan originator licenses, except that 
it does not include the requirement to determine that the individual's 
financial responsibility, character, and general fitness ``such as to 
command the confidence of the community.'' The Bureau believes that 
responsible depository institutions and bona fide non-profit 
organizations already apply similar standards when hiring or 
transferring any individual into a loan originator position. The 
proposed requirement formalizes this practice and ensures that the 
determination considers reasonably available, relevant information so 
that, as with the case of the proposed criminal background standards, 
consumers can be confident that all individual loan originators meet 
common minimum qualification standards for financial responsibility, 
character, and general fitness. Proposed comment 36(f)(3)(ii)(B)-1 
clarifies that the review and assessment need not include consideration 
of an individual's credit score but must include consideration of 
whether any of the information indicates dishonesty or a pattern of 
irresponsible use of credit or of disregard of financial obligations. 
As an example, the comment states that conduct revealed in a criminal 
background report may show dishonest conduct, even if the conduct did 
not result in a disqualifying felony conviction. It also distinguishes 
delinquent debts that arise from extravagant spending from those that 
arise, for example, from medical expenses. The Bureau's view is that an 
individual with a history of dishonesty or a pattern of irresponsible 
use of credit or of disregard of financial obligations should not be in 
a position to interact with or influence consumers in the loan 
origination process, during which consumers must decide whether to 
assume a significant financial obligation and determine which of any 
presented mortgage options is appropriate for them.
    The Bureau recognizes that, even with guidance in the proposed 
comment, any standard for financial responsibility, character, and 
general fitness inherently includes a subjective component. During the 
Small Business Review Panel process, some SERs expressed concern that 
the proposed standard could lead to uncertainty whether a loan 
originator organization was meeting the standard. The proposed standard 
excludes the phrase ``such as to command the confidence of the 
community'' to reduce the potential for this uncertainty. Nonetheless, 
in light of the civil liability imposed under TILA, the Bureau invites 
public comment on how to address this concern while also ensuring that 
the loan originator organization's review of information is sufficient 
to protect consumers. For example, if a loan originator organization 
reviews the required information and documents a rational explanation 
for why relevant negative information does not show that the standard 
is violated, should the provision provide a presumption that the loan 
originator organization has complied with the requirement?
36(f)(3)(iii)
    In addition to the screening requirements discussed above, proposed 
Sec.  1026.36(f)(3)(iii) requires loan originator organizations to 
provide periodic training to its individual loan originators who are 
not licensed under the SAFE Act. The training must cover the Federal 
and State law requirements that apply to the individual loan 
originator's loan origination activities. The proposed requirement is 
analogous to, but more flexible than, the continuing education 
requirement that applies to loan originators who are subject to SAFE 
Act licensing. Whereas the SAFE Act requires licensed individuals to 
take eight hours of preapproved classes every year, the proposed 
requirement is intended to be flexible to accommodate the wide range of 
loan origination activities in which covered loan originator 
organizations engage and for which covered individuals are responsible. 
For example, the training provision applies to a large depository 
institution providing complex mortgage loan products as well as a non-
profit organization providing only basic home purchase assistance loans 
secured by a second lien on a dwelling. The proposed provision also 
recognizes that covered individuals already possess a wide range of 
knowledge and skill levels. Accordingly, it would require loan 
originator organizations to provide training to close any gap in the 
individual loan originator's knowledge of Federal and State law 
requirements that apply to the individual's loan origination 
activities.
    The proposed requirement also differs from the analogous SAFE Act 
requirement in that it does not include a requirement to provide 
training on ``ethical standards,'' beyond those that amount to State or 
Federal legal requirements. In light of the civil liability imposed 
under TILA, the Bureau invites public comment on whether there exist 
loan originator ethical standards that are sufficiently concrete and 
widely applicable such that loan originator organizations would be able 
to determine what subject matter must be included in the required 
training, if the Bureau were to include ethical standards in the 
training requirement.
    Proposed comment 36(f)(3)(iii)-1 includes explanations of the 
training requirement and also describes the flexibility available under 
Sec.  1026.36(f)(3)(iii) regarding how the required training is 
delivered. It clarifies that training may be delivered by the loan 
originator organization or any other party through online or other 
technologies. In addition, it states that training that a Federal, 
State, or other government agency or housing finance agency has 
approved or deemed sufficient for an individual to originate loans 
under a program sponsored or regulated by that agency is presumptively 
sufficient to meet the proposed requirement. It further states that 
training approved by the NMLSR to meet the continuing education 
requirement applicable to licensed loan originators is sufficient to 
meet the proposed requirement to the extent that the training covers 
the types of loans the individual loan originator originates and 
applicable Federal and State laws and regulations. The proposed comment 
recognizes that many loan originator organizations already provide 
training to their individual loan originators to comply with 
requirements of prudential regulators, funding agencies, or their own 
operating procedures. Thus, the proposed comment clarifies that Sec.  
1026.36(f)(3)(iii) does not require training that is duplicative of 
training that loan originator organizations are already providing if 
that training meets the standard in Sec.  1026.36(f)(3)(iii). These 
clarifications are intended to respond to questions that SERs raised

[[Page 55328]]

during the Small Business Review Panel process discussed above.
36(g) NMLSR Identification Number on Loan Documents
    TILA section 129B(b)(1)(A), which was added by Dodd-Frank Act 
section 1402(b), authorizes the Bureau to issue regulations requiring 
mortgage originators to include on all loan documents any unique 
identifier issued by the NMLSR (also referred to as an NMLSR ID). 
Individuals who are subject to SAFE Act registration or State licensing 
are required to obtain an NMLSR ID, and many organizations also obtain 
NMLSR IDs pursuant to State or other requirements. Proposed Sec.  
1026.36(g) incorporates the requirement that mortgage originators must 
include their NMLSR ID on loan documents while providing several 
clarifications. The Bureau believes that the purpose of the statutory 
requirement is not only to permit consumers to look up the loan 
originator's record on the consumer access Web site of the NMLSR 
(www.nmlsconsumeraccess.org) before proceeding further with a mortgage 
transaction, but also to help ensure accountability of loan originators 
both before and after a transaction has been originated.
36(g)(1)
    Proposed Sec.  1026.36(g)(1)(i) and (ii) provides that loan 
originators must include both their NMLSR IDs and their names on loan 
documents, because without the associated names, a consumer may not 
understand whom or what the NMLSR ID number serves to identify. Having 
the loan originator's name may help consumers understand that they have 
the opportunity to assess the risks associated with a particular loan 
originator in connection with the transaction, which in turn promotes 
the informed use of credit (consistent with TILA section 105(a)'s 
provision for additional requirements that are necessary or proper to 
effectuate the purposes of TILA or to facilitate compliance with TILA). 
These provisions also clarify, consistent with the statutory 
requirement that mortgage originators include ``any'' NMLSR ID, that 
the requirement applies if the organization or individual loan 
originator has ever been issued an NMLSR ID. Proposed Sec.  
1026.36(g)(1) also provides that the NMLSR IDs must be included each 
time any of these documents are provided to a consumer or presented to 
a consumer for signature. Proposed comment 36(g)(1)-1 notes that for 
purposes of Sec.  1026.36(g), creditors are not excluded from the 
definition of ``loan originator.'' Proposed comment 36(g)(1)-2 
clarifies that the requirement applies regardless of whether the 
organization or individual loan originator is required to obtain an 
NMLSR ID under the SAFE Act or otherwise. Proposed Sec.  
1026.36(g)(1)(ii) recognizes that there may be transactions in which 
more than one individual meets the definition of a loan originator and 
clarifies that the individual loan originator whose NMLSR ID must be 
included is the individual with primary responsibility for the 
transaction at the time the loan document is issued.
    In its 2012 TILA-RESPA Integration Proposal, the Bureau is 
proposing to integrate TILA and RESPA mortgage disclosure documents, in 
accordance with section 1032(f) of the Dodd-Frank Act, 12 U.S.C. 
5532(f). That separate rulemaking also addresses inclusion of NMLSR IDs 
on the integrated disclosures it proposes, as well as the possibility 
that in some circumstances more than one individual may meet the 
criteria for whose NMLSR ID must be included. To ensure harmonization 
between the two rules, proposed comment 36(g)(1)(ii)-1 states that 
under these circumstances, an individual loan originator may comply 
with the requirement in Sec.  1026.36(g)(1)(ii) by complying with the 
applicable provision governing disclosure of NMLSR IDs in rules issued 
by the Bureau pursuant to Dodd-Frank Act section 1032(f).
36(g)(2)
    Proposed Sec.  1026.36(g)(2) identifies the documents that must 
include loan originators' NMLSR IDs as the application, the disclosure 
provided under section 5(c) of the Real Estate Settlement Procedures 
Act of 1974 (RESPA), the disclosure provided under TILA section 128, 
the note or loan contract, the security instrument, and the disclosure 
provided to comply with section 4 of RESPA. Proposed comment 36(g)(2)-1 
clarifies that the NMLSR ID must be included on any amendment, rider, 
or addendum to the note or loan contract or security instrument. These 
clarifications are provided in response to concerns that SERs expressed 
in the Small Business Review Panel process that the statutory reference 
to ``all loan documents'' would lead to uncertainty as to what is or is 
not considered a ``loan document.'' The proposed scope of the 
requirement's coverage is intended to ensure that loan originators' 
NMLSR IDs are included on documents that include the terms or 
prospective terms of the transaction or borrower information that the 
loan originator may use to identify loan terms that are potentially 
available or appropriate for the consumer. To the extent that any 
document not listed in Sec.  1026.36(g)(2) is arguably a ``loan 
document,'' differentiation as to which documents must include loan 
originators' NMLSR IDs is consistent with TILA section 105(a), which 
allows the Bureau to make exceptions that are necessary or proper to 
effectuate the purposes of TILA or to facilitate compliance with TILA.
    A final rule implementing the proposed requirements to include 
NMLSR IDs on loan documents may be issued, and may generally become 
effective, prior to the effective date of a final rule implementing the 
Bureau's 2012 TILA-RESPA Integration Proposal. If so, then the 
requirement to include the NMLSR ID would apply to the current Good 
Faith Estimate, Settlement Statement, and TILA disclosure until the 
issuance of the integrated disclosures. The Bureau recognizes that such 
a sequence of events might cause loan originator organizations to have 
to incur the cost of adjusting their systems and procedures to 
accommodate the NMLSR IDs on the current disclosures, even though those 
disclosures will be replaced in the future by the integrated 
disclosures. Accordingly, the Bureau invites public comment on whether 
the effective date of the provisions regarding inclusion of the NMLSR 
IDs on the RESPA and TILA disclosures should be delayed until the date 
that the integrated disclosures are issued.
36(g)(3)
    Proposed Sec.  1026.36(g)(3) defines ``NMLSR identification 
number'' as a number assigned by the NMLSR to facilitate electronic 
tracking of loan originators and uniform identification of, and public 
access to, the employment history of, and the publicly adjudicated 
disciplinary and enforcement actions against, loan originators. The 
definition is consistent with the definition of ``unique identifier'' 
in section 1503(12) of the SAFE Act, 12 U.S.C. 5102(12).
36(h) Prohibition on Mandatory Arbitration Clauses and Waivers of 
Certain Consumer Rights
    Section 1414 of the Dodd-Frank Act added TILA section 129C(e), 
which prohibits certain transactions secured by a dwelling from 
requiring arbitration or any other non-judicial procedure as the method 
for resolving disputes arising from the transaction. The same provision 
provides that a consumer and creditor or their assignees may 
nonetheless agree, after a dispute arises, to use arbitration or other 
non-judicial

[[Page 55329]]

procedure to resolve the dispute. It further provides, however, that no 
covered transaction secured by a dwelling, and no related agreement 
between the consumer and creditor, may limit a consumer's ability to 
bring a claim in connection with any alleged violation of Federal law. 
As a result, even a post-dispute agreement to use arbitration or other 
non-judicial procedure must not limit a consumer's right to bring a 
claim in connection with any alleged violation of Federal law, thus the 
consumer must be able to bring any such claim through the agreed-upon 
non-judicial procedure. The provision does not address State law causes 
of action. Proposed Sec.  1026.36(h) codifies these statutory 
provisions.
36(i) Prohibition on Financing Single-Premium Credit Insurance
    Dodd-Frank Act section 1414 added TILA section 129C(d), which 
generally prohibits a creditor from financing any premiums or fees for 
credit insurance in connection with certain transactions secured by a 
dwelling. The same provision provides that the prohibition does not 
apply to credit insurance for which premiums or fees are calculated and 
paid in full on a monthly basis. The prohibition applies to credit 
life, credit disability, credit unemployment, credit property 
insurance, and other similar products. It does not apply, however, to 
credit unemployment insurance for which the premiums are reasonable, 
the creditor receives no compensation, and the premiums are paid 
pursuant to another insurance contract and not to the creditor's 
affiliate. Proposed Sec.  1026.36(i) codifies these statutory 
provisions. Rather than repeating Dodd-Frank Act section 1414's list of 
covered credit insurance products, it cross-references the existing 
description of insurance products in Sec.  1026.4(d)(1) and (3). The 
Bureau does not intend any substantive change to the statutory 
provision's scope of coverage. The Bureau believes that these 
provisions are straightforward enough that they require no further 
clarification. The Bureau requests comment, however, on whether any 
issues raised by the provision require clarification and, if so, how 
they should be clarified. The Bureau also solicits comment on when the 
provision should become effective, for example, 30 days following 
publication of the final rule, or at a later time.
36(j)
Scope of Sec.  1026.36
    The Bureau proposes to transfer Sec.  1026.36(f) to new Sec.  
1026.36(j). Moving the section accommodates new Sec.  1026.36(f), (g), 
(h) and (i). The Bureau also proposes to amend Sec.  1026.36(j) to 
reflect the scope of coverage for the proposals implementing TILA 
sections 129B (except for (c)(3)) and 129C(d) and (e), as added by 
sections 1402, 1403, 1414(d) and (e) of the Dodd-Frank Act as discussed 
further below.
    The Bureau proposes to implement the scope of products covered in 
TILA section 129C(d) and (e) (the new arbitration and single-premium 
credit insurance provisions proposed in Sec.  1026.36(h) and (i)) by 
amending Sec.  1026.36(j) to state that Sec.  1026.36(h) and (i) 
applies both to HELOCs subject to Sec.  1026.40 and closed-end consumer 
credit transactions, secured by the consumer's principal dwelling. The 
Bureau further proposes to implement the scope of coverage in TILA 
section 129B(b) (the new qualification, document identification and 
compliance procedure requirements proposed in new Sec.  1026.36(f) and 
(g)) by amending Sec.  1026.36(j) to include Sec.  1026.36(f) and (g) 
with the coverage applicable to Sec.  1026.36(d) and (e). That is, 
Sec.  1026.36(d), (e), (f) and (g) applies to closed-end consumer 
credit transactions secured by a dwelling (as opposed to the consumer's 
principal dwelling). The Bureau does not propose amending the scope of 
transactions covered by Sec.  1026.36(d) and (e).
    The Bureau also proposes to make technical revisions to comment 36-
1 reflecting these scope-of-coverage amendments proposed in Sec.  
1026.36(j). The Bureau relies on its interpretive authority under TILA 
section 105(a) to the extent there is ambiguity in TILA sections 129B 
(except for (c)(3)) and 129C(d) and (e), as added by sections 1402, 
1403, 1414(d) and (e) of the Dodd-Frank Act, regarding which provisions 
apply to different types of transactions.
Consumer Credit Transaction Secured by a Dwelling
    The definition of ``mortgage originator'' in TILA section 
103(cc)(2) applies to activities related to a ``residential mortgage 
loan'' only. TILA section 103(cc)(5) defines ``residential mortgage 
loan'' as:

any consumer credit transaction that is secured by a mortgage, deed 
of trust, or other equivalent consensual security interest on a 
dwelling or on residential real property that includes a dwelling, 
other than a consumer credit transaction under an open end credit 
plan or, for purposes of sections 129B and 129C and section 128(a) 
(16), (17), (18), and (19), and sections 128(f) and 130(k), and any 
regulations promulgated thereunder, an extension of credit relating 
to a plan described in section 101(53D) of title 11, United States 
Code.

The Bureau does not propose to use the statutory term ``residential 
mortgage loan'' in Sec.  1026.36. Section 1026.36 uses the term 
``consumer credit transaction'' throughout and proposed Sec.  
1026.36(j) qualifies the scope of Sec.  1026.36's provisions. The 
Bureau believes that changing the terminology of ``consumer credit 
transaction'' to ``residential mortgage loan'' is unnecessary because 
the same meaning will be preserved.
Dwelling
    The Bureau believes the definition of ``dwelling'' in Sec.  
1026.2(a)(19) is consistent with TILA section 103(cc)(5)'s use of the 
term in the definition of ``residential mortgage loan.'' Section 
1026.2(a)(19) defines ``dwelling'' to mean ``a residential structure 
that contains one to four units, whether or not that structure is 
attached to real property. The term includes an individual condominium 
unit, cooperative unit, mobile home, and trailer, if it is used as a 
residence.'' The Bureau interprets the term ``dwelling'' to also 
include dwellings in various stages of construction. Construction loans 
are often secured by dwellings in this fashion. Indeed, draws to fund 
construction are usually released in phases as the dwelling comes into 
existence and secures the draws. Thus, a construction loan secured by 
an improvement through various stages of construction that will be used 
as a residence is secured by a ``dwelling.'' The Bureau proposes to 
maintain this definition of dwelling.

VI. Implementation

A. This Proposal

    Section 1400(c)(1) of the Dodd-Frank Act mandates that the Bureau 
prescribe implementing regulations in final form by January, 21, 2013 
(i.e., the date that is 18 months after the ``designated transfer 
date'') for regulations that are required under title XIV of the Dodd-
Frank Act, and the Bureau must set effective dates of these regulations 
no later than one year from their date of issuance. The regulations 
proposed in this notice for which proposed rule text is set forth, 
while implementing amendments under title XIV of the Dodd-Frank Act, 
are not regulations required under title XIV.\71\ Pursuant to

[[Page 55330]]

section 1400(c)(2) of the Dodd-Frank Act, the final rule issued under 
this proposal will establish its effective date, which need not be 
within one year of issuance.\72\
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    \71\ As noted above in the section-by-section analysis, this 
proposal would implement TILA sections 129B(b)(1), (c)(1), and 
(c)(2), and 129C(d) and (e). The only provisions of TILA section 
129B that are required to be implemented by regulations are those in 
section 129B(b)(2) and (c)(3). Section 129B(b)(2), for which the 
Bureau has not set forth proposed rule text but which the Bureau may 
implement in the final rule, is discussed in more detail in part 
VI.B, below.
    \72\ If the Bureau does not issue implementing regulations by 
January 21, 2013, however, the Dodd-Frank Act amendments of title 
XIV generally will go into effect on January 21, 2013. See Dodd-
Frank Act section 1400(c)(3).
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    The Bureau recognizes the importance of the changes to be made by 
the Bureau's final rule for consumer protection and the need to put 
these changes into place for consumers. For example, mandating that 
creditors make available a loan without discount points and origination 
points or fees may help ensure that consumers can shop effectively 
among different creditors and get a reasonable value for discount 
points and origination points or fees. In addition, an individual loan 
originator who has been properly screened and trained to present the 
type of loan that the individual loan originator sells is a clear 
benefit to consumers. The Bureau believes consumers should have the 
benefit of the Dodd-Frank Act's additional protections and requirements 
as soon as practical.
    The Bureau also recognizes, however, that loan originators and 
creditors will need time to make systems changes and to retrain their 
staff to address the Dodd-Frank Act provisions implemented through the 
Bureau's final rule, including the requirement to make available in 
certain circumstances a loan without discount points and origination 
points or fees. Moreover, certain creditors and loan originator 
organizations will need to conduct training and screening for 
individual loan originators. The Bureau further recognizes that 
mortgage creditors and loan originators will need to make changes to 
address a number of other requirements relating to other Dodd-Frank Act 
provisions, some of which, unlike the requirements set out in the 
proposed rule text for this rulemaking, are required by the Dodd-Frank 
Act to take effect within one year after issuance of final implementing 
rules. The Bureau believes that ensuring that industry has sufficient 
time to make the necessary changes ultimately will benefit consumers 
through better industry compliance.
    The Bureau expects to issue a final rule under this proposal by 
January 21, 2013 because the statutory provisions it implements 
otherwise will take effect automatically on that date. The Bureau also 
expects to issue several other final rules by January 21, 2013 to 
implement other provisions of title XIV of the Dodd-Frank Act. The 
Bureau solicits comment on an appropriate implementation period for the 
final rule, in light of the competing considerations discussed above. 
The Bureau is especially mindful, however, of the importance of 
affording consumers the benefits of the additional protections in this 
proposal as soon as practical and therefore seeks detailed comment, and 
supporting information, on the nature and length of implementation 
processes that this rulemaking will necessitate.

B. TILA Section 129B(b)(2)

    As noted above, this proposal does not contain specific proposed 
rule text to implement TILA section 129B(b)(2). That section provides 
that the Bureau ``shall prescribe regulations requiring depository 
institutions to establish and maintain procedures reasonably designed 
to assure and monitor the compliance of such depository institutions, 
and subsidiaries of such institutions, and the employees of such 
institutions or subsidiaries with the requirements of this section and 
the registration procedures established under section 1507 of the [SAFE 
Act].'' 15 U.S.C. 1639b(b)(2). Nonetheless, the Bureau may adopt such 
rule text at the same time as the final rule under this proposal. 
Accordingly, it is describing the rule text it is considering in detail 
and invites interested parties to provide comment.
    Regulations to implement TILA section 129B(b)(2) are required by 
title XIV. Accordingly, under Dodd-Frank Act section 1400(c)(1), the 
Bureau must prescribe those regulations no later than January 21, 2013, 
and those regulations must take effect no later than one year after 
they are issued. The Bureau notes, however, that TILA section 
129B(b)(2) has no practical effect on depository institutions in the 
absence of implementing regulations because the statute imposes no 
requirement directly on any person other than the Bureau itself (to 
make regulations requiring depository institutions to adopt the 
referenced procedures).
    If the Bureau were to make the substantive requirements of this 
rulemaking implementing TILA section 129B effective more than one year 
after issuance of the final rule and also were to adopt regulations 
requiring depository institutions to establish the referenced 
procedures (which must take effect within one year of their issuance), 
depository institutions might appear to be required to establish and 
maintain procedures to ensure compliance with substantive regulatory 
requirements that have not yet taken effect.\73\ This incongruous 
result would not impose any practical requirements on depository 
institutions until the substantive regulatory requirements take effect. 
Nevertheless, the Bureau is concerned that depository institutions may 
experience considerable uncertainty and compliance burden in attempting 
to reconcile a currently effective requirement for procedures with its 
corresponding, but not yet effective, substantive requirements. 
Therefore, the Bureau sees no practical reason to put into effect a 
requirement for procedures, with no practical consequences and possible 
negative consequences for depository institutions, until the 
substantive requirements to which it relates take effect.
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    \73\ TILA section 129B(b)(2) mandates that the Bureau issue 
regulations to require procedures to assure and monitor compliance 
with ``this section,'' which is a reference to section 129B, not the 
regulations implementing section 129B. But Dodd-Frank Act section 
1400(c)(2) provides that the statutory provisions in title XIV take 
effect when the final regulations implementing them take effect, 
provided such regulations are issued by January 21, 2013.
---------------------------------------------------------------------------

    On the other hand, if the Bureau were to make the substantive 
requirements of this rulemaking implementing TILA section 129B 
effective one year or less after issuance, the Bureau could require 
depository institutions simultaneously to establish and maintain 
procedures to ensure compliance with those substantive requirements 
without creating the incongruity discussed above. The Bureau is aware 
that depository institutions generally establish and maintain 
procedures to ensure compliance with all regulatory requirements to 
which they are subject, as a matter of standard compliance practice. 
Thus, the Bureau believes that regulations implementing TILA section 
129B(b)(2), when adopted by the Bureau, will impose a relatively 
routine and familiar obligation on depository institutions and 
therefore could consist of a straightforward rule paralleling the 
statutory language.
    Specifically, the Bureau expects that such a rule would require 
depository institutions to establish and maintain procedures reasonably 
designed to assure and monitor the compliance of themselves, their 
subsidiaries, and the employees of both with the requirements of Sec.  
1026.36(d), (e), (f), and (g). The rule would provide further that the 
required procedures must be appropriate to the nature, size, 
complexity, and scope of the mortgage credit activities of the 
depository institution and its subsidiaries. Finally, consistent with 
the definitions in

[[Page 55331]]

section 2(18) of the Dodd-Frank Act, 12 U.S.C. 5301(18), the rule would 
define ``depository institution'' and ``subsidiary'' for this purpose 
to have the same meanings as in section 3 of the Federal Deposit 
Insurance Act (FDIA), 12 U.S.C. 1813.
    The Bureau notes that the definitions in section 2(18) of the Dodd-
Frank Act should not necessarily determine the meanings of the 
ambiguous terms in TILA section 129B(b)(2). The Dodd-Frank Act 
definitions apply, ``[a]s used in this Act,'' not necessarily as used 
in another statute, TILA, being amended by the Dodd-Frank Act. In 
addition, the Dodd-Frank Act definitions do not apply if ``the context 
otherwise requires.'' One of the substantive requirements to which TILA 
section 129B(b)(2) applies concerns the registration procedures under 
section 1507 of the SAFE Act. The SAFE Act provides that, for purposes 
of the SAFE Act: ``The term `depository institution' has the same 
meaning as in [12 U.S.C. 1813], and includes any credit union.'' 12 
U.S.C. 5102(2). It may therefore be appropriate in this context to 
apply the SAFE Act definition of ``depository institution'' either as 
an interpretation of TILA section 129B(b)(2) or as an exercise of the 
Bureau's authority under TILA section 105(a). Applying the SAFE Act 
definition in this way could facilitate compliance by aligning the 
definition of ``depository institution'' applicable to the procedures 
requirement under TILA section 129B(b)(2) with the definition of 
``depository institution'' applicable under the SAFE Act. Applying the 
SAFE Act definition in this way also could be necessary or proper to 
effectuate the purpose stated in TILA section 129B(a)(2) of assuring 
that consumers are offered and receive residential mortgage loans that 
are not unfair, deceptive, or abusive.
    The Bureau also notes that Regulation G, which implements the SAFE 
Act, contains a requirement that all covered financial institutions 
(including banks, savings associations, Farm Credit System 
institutions, and certain subsidiaries) adopt and follow certain 
policies and procedures related to SAFE Act requirements. 12 CFR 
1007.104. Accordingly, a regulation implementing TILA section 
129B(b)(2) to require procedures could also apply to credit unions, as 
well as Farm Credit System institutions, as an exercise of the Bureau's 
authority under TILA section 105(a). Extending the TILA section 
129B(b)(2) procedures requirement in this way may facilitate compliance 
by aligning the scope of the entities subject to the TILA and SAFE Act 
procedures requirements. Further, such an extension may be necessary or 
proper to effectuate the purpose stated in TILA section 129B(a)(2) of 
assuring that consumers are offered and receive residential mortgage 
loans that are not unfair, deceptive, or abusive.
    The Bureau further notes that under Regulation G only certain 
subsidiaries (those that are ``covered financial institutions'') are 
required by 12 CFR 1007.104 to adopt and follow written policies and 
procedures designed to assure compliance with Regulation G. 
Accordingly, it may be appropriate to apply the duty to assure and 
monitor compliance of subsidiaries and their employees under TILA 
section 129B(b)(2) only to subsidiaries that are covered financial 
institutions under Regulation G. Exercising TILA 105(a) authority to 
make an adjustment or exception in this way may facilitate compliance 
by aligning the scope of the subsidiaries covered by the TILA and SAFE 
Act procedures requirements.
    Finally, extending the scope of a regulation requiring procedures 
even further, to apply to other loan originators that are not covered 
financial institutions under Regulation G (such as independent mortgage 
companies), would help ensure consistent consumer protections and a 
level playing field. Exercising TILA section 105(a) authority in this 
way may be necessary or proper to effectuate the purpose stated in TILA 
section 129B(a)(2) of assuring that consumers are offered and receive 
residential mortgage loans that are not unfair, deceptive, or abusive.
    The Bureau therefore solicits comment on whether a regulation 
requiring procedures to comply with TILA section 129B also should apply 
only to depository institutions as defined in section 3 of the FDIA, or 
also to credit unions, other covered financial institutions subject to 
Regulation G, or any other loan originators such as independent 
mortgage companies. Additionally, the Bureau solicits comment on 
whether it should apply the duty to assure and monitor compliance of 
subsidiaries and their employees only with respect to subsidiaries that 
are covered financial institutions under Regulation G. With respect to 
all of the foregoing, the Bureau also solicits comment on whether any 
of the potential exercises of TILA section 105(a) authority should 
apply with respect to procedures concerning only SAFE Act registration, 
or with respect to procedures for all the duty of care requirements in 
TILA section 129B(b)(1), or with respect to procedures for all the 
requirements of TILA section 129B, including those added by section 
1402 of the Dodd-Frank Act.
    The Bureau also recognizes that a depository institution's failure 
to establish and maintain the required procedures under the 
implementing regulation would constitute a violation of TILA, thus 
potentially resulting in significant civil liability risk to depository 
institutions under TILA section 130. 15 U.S.C. 1640. The Bureau 
anticipates concerns on the part of depository institutions regarding 
their ability to avoid such liability risk and therefore seeks comment 
on the appropriateness of establishing a safe harbor that would 
demonstrate compliance with the rule requiring procedures. For example, 
such a safe harbor might provide that a depository institution is 
presumed to have met the requirement for procedures if it, its 
subsidiaries, and the employees of it and its subsidiaries do not 
engage in a pattern or practice of violating Sec.  1026.36(d), (e), 
(f), or (g).
    The Bureau may adopt such a rule requiring procedures at the same 
time as the final rule under this proposal. If the effective date of 
the substantive requirements in that final rule is more than one year 
after issuance, the Bureau could adopt the requirement for procedures 
but clarify that having no procedures satisfies the procedures 
requirement until such time as the rule's substantive requirements to 
which the procedures must relate take effect. Alternatively, the Bureau 
could refrain from issuing the rule requiring procedures until such 
time as it can take effect at the same time as the substantive 
requirements without the need for such a clarification. The Bureau 
solicits comment, however, on whether the requirement for procedures is 
straightforward enough to allow implementation by a regulation such as 
that described above. Alternatively, the Bureau seeks comment on 
whether the regulation prescribed under TILA section 129B(b)(2) should 
contain any specific guidance on the necessary procedures beyond that 
described above.

VII. Dodd-Frank Act Section 1022(b)(2)

    In developing the proposed rule, the Bureau has considered 
potential benefits, costs, and impacts, and has consulted or offered to 
consult with the prudential regulators, the Department of Housing and 
Urban Development (HUD), and the Federal Trade Commission (FTC) 
regarding consistency with any prudential,

[[Page 55332]]

market, or systemic objectives administered by such agencies.\74\
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    \74\ Specifically, section 1022(b)(2)(A) of the Dodd-Frank Act 
calls for the Bureau to consider the potential benefits and costs of 
a regulation to consumers and covered persons, including the 
potential reduction of access by consumers to consumer financial 
products or services; the impact on depository institutions and 
credit unions with $10 billion or less in total assets as described 
in section 1026 of the Dodd-Frank Act; and the impact on consumers 
in rural areas.
---------------------------------------------------------------------------

    In this rulemaking, the Bureau proposes to amend Regulation Z to 
implement amendments to TILA made by the Dodd-Frank Act. The proposed 
amendments to Regulation Z implement Dodd-Frank Act sections 1402 (new 
duties of mortgage originators concerning proper qualification, 
registration, and related requirements), 1403 (limitations on loan 
originator compensation to reduce steering incentives for residential 
mortgage loans), and 1414(d) and (e) (restrictions on the financing of 
single-premium credit insurance products and mandatory arbitration 
agreements in residential mortgage loan transactions).\75\ The proposed 
rule and commentary would also provide clarification of certain 
provisions in the existing Loan Originator Final Rule, including 
guidance on the application of those provisions to certain profit-
sharing plans and the appropriate analysis of other payments made to 
loan originators.
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    \75\ This rulemaking also solicits comment on implementing, 
possibly in the final rule, new TILA section 129B(b)(2), which was 
added by Dodd-Frank Act section 1402 and requires the Bureau to 
prescribe regulations requiring certain loan originators to 
establish and maintain various procedures. This rulemaking does not 
implement new TILA section 129B(c)(3) which was added by Dodd-Frank 
Act section 1403.
---------------------------------------------------------------------------

    As discussed in part II above, in 2010, the Board and Congress 
acted to address concerns that certain loan originator compensation 
arrangements could be difficult for consumers to understand and had the 
potential to create incentives to steer consumers to transactions with 
different terms, such as higher interest rates. The proposed rule would 
continue the protections provided in the Loan Originator Final Rule and 
implement the additional provisions Congress included in the Dodd-Frank 
Act that, as described above, to further improve the transparency of 
mortgage loan originations, enhance consumers' ability to understand 
loan terms, and afford additional protections to consumers.

A. Provisions To Be Analyzed

    The analysis below considers the benefits, costs, and impacts of 
the following major proposed provisions:
    1. New restrictions on discount points and origination points or 
fees in closed-end consumer credit transactions secured by a dwelling 
where any person other than the consumer will compensate a loan 
originator in connection with the transaction. Specifically, in these 
transactions, a creditor or loan originator organization may not impose 
on the consumer any upfront discount points and origination points or 
fees in connection with the transaction unless the creditor makes 
available to the consumer a comparable, alternative loan that does not 
include discount points and origination points and fees, unless the 
consumer is unlikely to qualify for such a loan. The term ``comparable, 
alternative loan'' would mean that the two loans have the same terms 
and conditions, other than the interest rate, any terms that change 
solely as a result of the change in the interest rate (such as the 
amount of the regular periodic payments), and the amount of any 
discount points and origination points or fees.
    2. Clarification of the applicability of the prohibition on payment 
and receipt of loan originator compensation based on the transaction's 
terms to employer contributions to qualified profit-sharing and other 
defined contribution or benefit plans in which individual loan 
originators participate, and to payment of bonuses under a profit-
sharing plan or a contribution to a non-qualified plan.
    3. New requirements for loan originators, including requirements 
related to their licensing, registration, and qualifications, and a 
requirement to include their identification numbers and names on loan 
documents.
    With respect to each major proposed provision, the analysis 
considers the benefits and costs to consumers and covered persons. The 
analysis also addresses certain alternative provisions that were 
considered by the Bureau in the development of the proposed rule.
    The data with which to quantify the potential benefits, costs, and 
impacts of the proposed rule are generally limited. For example, a lack 
of data regarding the specific distribution of loan products offered to 
consumers limits the precise estimation of the benefits of increased 
consumer choice. In light of these data limitations, the analysis below 
provides a mainly qualitative discussion of the benefits, costs, and 
impacts of the proposed rule. General economic principles, together 
with the limited data that are available, provide insight into these 
benefits, costs, and impacts. Wherever possible, the Bureau has made 
quantitative estimates based on these principles and the data 
available.
    The Bureau requests comments on the analysis of the potential 
benefits, costs, and impacts of the proposed rule.

B. Baseline for Analysis

    The amendments to TILA in sections 1402, 1403, and 1414(d) and (e) 
of the Dodd-Frank Act take effect automatically on January 21, 2013, 
unless final rules implementing those requirements are issued on or 
before that date and provide for a different effective date.\76\ 
Specifically, new TILA section 129B(c)(2), which was added by section 
1403 of the Dodd-Frank Act and restricts the ability of a creditor, the 
mortgage originator, or the affiliates of either to collect from the 
consumer upfront discount points, origination points, or fees in a 
transaction in which the mortgage originator receives from a person 
other than the consumer an origination fee or charge, will take effect 
automatically unless the Bureau exercises its authority to waive or 
create exemptions from this prohibition. New TILA section 129B(b)(1) 
requires each mortgage originator to be qualified and include unique 
identification numbers on loan documents. TILA section 129B(c)(1) 
prohibits mortgage originators in residential mortgage loans from 
receiving compensation that varies based on loan terms. TILA section 
129C(d) creates prohibitions on single-premium credit insurance, and 
TILA section 129C(e) provides restrictions on mandatory arbitration 
agreements. These statutory amendments to TILA also take effect 
automatically in the absence of the Bureau's regulation.
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    \76\ Sections 129B(b)(2) and 129B(c)(3) of TILA, as added by 
sections 1402 and 1403 of the Dodd-Frank Act, however, do not impose 
requirements on mortgage originators until Bureau implementing 
regulations take effect.
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    In some instances, the provisions of the proposed rule would 
provide substantial benefits compared to allowing the TILA amendments 
to take effect automatically, by providing exemptions to certain 
statutory provisions. In particular, the Dodd-Frank Act prohibits 
consumer payment of upfront points and fees in all loan transactions 
where someone other than the consumer pays a loan originator 
compensation tied to the transaction (e.g., a commission). Pursuant to 
its authority under the Dodd-Frank Act to create exemptions from this 
prohibition when doing so would be in the interest of consumers and in 
the public interest, the Bureau's proposed rule would permit consumers 
to pay upfront points and fees when the creditor also makes available a 
loan that does not include discount points and origination points or 
fees (or when the consumer is

[[Page 55333]]

unlikely to qualify for such loan). In proposing to use its exemption 
authority, the Bureau is attempting to capture the benefits to 
consumers from a loan that does not include discount points and 
origination points or fees (which would be the only loan available if 
the statute went into effect without use of exception authority), while 
preserving consumers' ability to choose, and creditors' and loan 
originator organizations' ability to offer, other loan options.
    In other instances, the provisions of the proposed rule would 
implement the statute more directly. Thus, many costs and benefits of 
the provisions of the proposed rule would arise largely or entirely 
from the Dodd-Frank Act and not from the Bureau's proposed provisions. 
In these cases, the benefits of the proposed rule derive from providing 
additional clarification of certain elements of the statute. The 
proposed rule would reduce the compliance burdens on covered persons 
by, for example, reducing costs for attorneys and compliance officers 
as well as potential costs of over-compliance and unnecessary 
litigation. Moreover, the costs that these provisions would impose 
beyond those imposed by the Dodd-Frank Act itself are likely to be 
minimal.
    Section 1022 of the Dodd-Frank Act permits the Bureau to consider 
the benefits, costs, and impacts of the proposed rule relative to the 
most appropriate baseline. This consideration can encompass an 
assessment of the benefits, costs, and impacts of the proposed rule 
solely compared to the state of the world in which the statute takes 
effect without implementing regulations. For the provisions of the 
proposed rule where the Bureau is using its exemption authority with 
respect to an otherwise self-effectuating statute, the Bureau believes 
that the benefits, costs, and impacts are best measured against such a 
post-statutory baseline. For the provisions that largely implement the 
statute or clarify ambiguity in the statute or existing regulations, a 
pre-statute baseline is used to discuss the benefits, costs and impacts 
of the proposed rule.
    Additionally, the provisions of the proposed rule and commentary 
that clarify or provide additional guidance on provisions of the Loan 
Originator Final Rule should not impose additional costs or require 
changes to the business practices, systems, and operations of covered 
persons, and in particular those of small entities, beyond those that 
would already have occurred in order to comply with the current 
rule.\77\ The additional clarity offered by the proposed rule and 
commentary should in fact lower compliance burden by reducing 
confusion, expenditures made to interpret the current rule (such as 
hiring counsel or contacting the regulating or supervising agencies 
with questions), and diminishing the risk of inadvertent non-
compliance.
---------------------------------------------------------------------------

    \77\ Entities would likely incur some costs, however, in 
reviewing the new rule and commentary.
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C. Coverage of the Proposed Rule

    The proposed rule applies to loan originators and table-funded 
creditors (i.e., those who take an application, arrange, offer, 
negotiate, or otherwise obtain an extension of consumer credit for 
compensation or other monetary gain). The new qualification, document 
identification, and compliance procedure requirements also apply to 
creditors that finance transactions from their own resources. Like 
current Sec.  1026.36(d) and (e), the proposed new qualification, 
document identification, and compliance procedure requirements apply to 
closed-end consumer credit transactions secured by a dwelling (as 
opposed to the consumer's principal dwelling). The proposed new 
arbitration and single-premium credit insurance provisions apply to 
both HELOCs subject to Sec.  1026.40 and closed-end consumer credit 
transactions secured by the consumer's principal dwelling.

D. Potential Benefits and Costs of the Proposed Rule to Consumers and 
Covered Persons

1. Restrictions on Discount Points and Origination Points or Fees With 
the Requirement of Making Available a Comparable, Alternative Loan
    The Dodd-Frank Act prohibits consumer payment of upfront points and 
fees in all residential mortgage loan transactions (as defined in the 
Dodd-Frank Act) except those where no one other than the consumer pays 
a loan originator compensation tied to the transaction (e.g., a 
commission). Pursuant to its authority under the Dodd-Frank Act to 
create exemptions from this prohibition when doing so would be in the 
interest of consumers and in the public interest, the Bureau is 
proposing to require that before a creditor or loan originator 
organization may impose discount points and origination points or fees 
on a consumer where someone other than the consumer pays a loan 
originator transaction-specific compensation, the creditor must make 
available to the consumer a comparable, alternative loan that does not 
include discount points and origination points or fees. (Making 
available the comparable, alternative loan is not necessary if the 
consumer is unlikely to qualify for such a loan.)
    In retail transactions, a creditor will be deemed to be making 
available the comparable, alternative loan that does not include 
discount points and origination points or fees if, any time prior to a 
loan application, a creditor that gives a quote specific to the 
consumer for a loan that includes discount points and origination 
points or fees also provides a quote for a comparable, alternative loan 
that does not include those points and fees. (Making available the 
comparable, alternative loan is not necessary if the consumer is 
unlikely to qualify for such a loan.) \78\
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    \78\ The proposed rule also solicits comment on: (1) Whether the 
rule should instead prohibit a creditor from making available a loan 
that includes discount points and origination points or fees if the 
consumer does not also qualify for the comparable, alternative loan 
that does not include points and fees; (2) whether to revise the 
Regulation Z advertising rules to require that advertisements that 
disclose information about loans that include discount points and 
origination points or fees also include information about the 
comparable, alternative loans to further facilitate shopping by 
consumers for loans from different creditors; and (3) whether the 
creditor should be required to provide a Loan Estimate (i.e., the 
combined TILA-RESPA disclosure proposed by the Bureau in its TILA-
RESPA Integration Proposal), or the first page of the Loan Estimate, 
for the loan that does not include discount points and origination 
points or fees to the consumer after application.
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    In transactions that involve mortgage brokers, a creditor will be 
deemed to be making available the comparable, alternative loan that 
does not include discount points and origination points or fees if the 
creditor provides mortgage brokers with the pricing for all of the 
creditor's comparable, alternative loans that do not include those 
points and fees. Mortgage brokers then would provide quotes to 
consumers for the loans that do not include discount points and 
origination points or fees when presenting different loan options to 
consumers.
    Because the Bureau is using its exemption authority with respect to 
the otherwise self-effectuating provisions regarding points and fees, 
the analysis measures the benefits, costs, and impacts of this 
provision of the proposed rule relative to the enactment of the statute 
alone, i.e., it uses a post-statute baseline. The two portions of the 
provision are discussed separately: the elimination of restrictions on 
charging of points and fees in certain transactions is discussed first, 
followed by the requirement to make available the comparable, 
alternative loan.

[[Page 55334]]

a. Restrictions on Discount Points and Origination Points or Fees
Potential Benefits and Costs to Consumers
    In any mortgage transaction, the consumer has the option to prepay 
the loan and exit the existing contract. This option to repay has some 
inherent value to the consumer and imposes a cost on the creditor.\79\ 
In particular, consumers usually pay for part of this option through 
one of three alternative means: (1) ``discount points,'' which are the 
current payment of the value of future interest; (2) a ``prepayment 
penalty,'' which is a payment of the same market value deferred until 
the time at which the loan balance is actually repaid; or (3) a higher 
coupon rate on the loan.
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    \79\ Should they expect to pay the balance of their loan prior 
to maturity, consumers can purchase from creditors the sole right to 
choose the date of this payoff. This right is valuable and its price 
is the market value such a sale creates for creditors in regard to 
the date of this potential payoff. Bond markets often exhibit an 
exactly opposite trade, in which the borrower cedes to the creditor 
the choice of time at which the creditor can require, if it chooses, 
the borrower to remit the remaining value of the bond. Bonds 
including such trades are termed ``callable.''
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    In many instances, creditors or loan originators will charge 
consumers an origination point or fee. This upfront payment is meant to 
cover the labor and material costs the originator incurs from 
processing the loan. Here too, the loan originator could offer the 
consumer a loan with a higher interest rate in order to recover the 
creditor's costs. In this sense, discount points and origination points 
or fees are similar; from the consumer's perspective, they are various 
upfront charges the consumer may pay where the possibility may exist to 
trade some or all of this payment in exchange for a higher interest 
rate.
    By permitting discount points under certain circumstances, the 
Bureau's proposed rule offers all consumers greater choice over the 
terms of the coupon payments on their loan and a choice between paying 
discount points or a higher rate for the purchase of the prepayment 
option embedded in the loan.\80\ The purchase of discount points, 
however, is essentially a calculated best guess by a consumer given an 
uncertain outcome. In this context, the purchase of discount points 
will not necessarily result in a benefit to the consumer after the 
consummation of the transaction. Rational consumers presumably purchase 
discount points because they expect to make loan payments for a long 
enough period to make a positive return. The occurrence of 
unanticipated events, however, could induce these consumers to pay off 
their loan after a shorter period, resulting in a realized loss.\81\
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    \80\ The two options are not mutually exclusive. In some 
transactions, consumers may pay for the embedded option through more 
than one of the methods outlined. Donald Keenan & James J Kau, An 
Overview of the Option-Theoretic Pricing of Mortgages, 6 Journal of 
Housing Research 217 (1995) (providing an overview of options 
embedded in residential mortgages); James J Kau, Donald Keenan, 
Walter Muller & James Epperson, A Generalized Valuation Model for 
Fixed-Rate Mortgages with Default and Prepayment, 11 Journal of Real 
Estate Finance & Economics 5 (1995) (providing a traditional method 
to value these options numerically); Robert R. Jones and David 
Nickerson, Mortgage Contracts, Strategic Options and Stochastic 
Collateral, 24 Journal of Real Estate Finance & Economics 35 (2002) 
(generating numerical values, in current dollars, for option-
embedded mortgages in a continuous-time environment).
    \81\ Similarly, consumers who expect to pay their loans over a 
period sufficiently short as to make the purchase of discount loans 
unattractive may find it better at the end of this expected period 
to continue to pay their mortgage and, consequently, suffer an 
unanticipated loss from refraining from the purchase of points. Yan 
Chang & Abdullah Yavas, Do Borrowers Make Rational Choices on Points 
and Refinancing?, 37 Real Estate Economics 635 (2009) (offering 
empirical evidence that consumers in their sample data remain in 
their current fixed-rate mortgages for too short a time to recover 
their initial investment in discount points). Other empirical 
evidence, however, conflicts with these results in regard to both 
the frequency and magnitude of losses. Simple numerical calculations 
that take into account taxes, local volatility in property values, 
and returns on alternative assets highlight the difficulty in 
drawing conclusions from much of the empirical data.
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    Greater choice over loan terms and greater choice over how to pay 
for the prepayment option should, under normal circumstances, increase 
the ex ante welfare of consumers. However, the degree to which 
individual consumers benefit will depend on their individual 
circumstances and their relative degree of financial acuity.\82\ Any ex 
post changes in aggregate benefits and changes in the overall volume of 
available credit also depend on consumers' circumstances and abilities.
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    \82\ In situations where consumers are unaware of their own 
circumstance or their own relative financial acuity, some creditors 
may be able to benefit. For example, an unethical creditor may 
persuade those consumers unaware of their lower relative financial 
ability to make incorrect decisions regarding purchasing points. The 
outcome of this type of adverse selection will, of course, be 
reversed when consumers have a more accurate knowledge of their 
financial abilities than does the creditor.
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    The choice over the means by which consumers compensate creditors 
for the prepayment option is of particular potential benefit to 
consumers who currently enjoy high liquidity but who either face 
prospects of diminished liquidity in the future or are more sensitive 
to the risk posed by a high variance in their future income or wealth. 
Examples of such consumers include retiring or older individuals 
wishing to secure their future housing, individuals who are otherwise 
predisposed to use their wealth for a one-time payment, consumers with 
relocation funds available, and consumers offered certain rebates by 
developers or other sellers.
    Relative to permitting the statutory provision to go into effect 
unaltered, the Bureau's proposed rule regarding upfront points and fees 
also provides the potential for an additional benefit to consumers when 
adverse selection in the mortgage market compounds the costs of 
uncertainty over early repayment. Consumers who buy discount points 
credibly signal to creditors that the expected maturity of their loans 
is longer than those loans taken out by consumers not purchasing 
points. Credible signaling by an individual consumer in this 
circumstance would result in the consumer being offered a rate below 
that obtained by purchasing discount points in a more efficient market. 
When creditors confirm the relationship between individual purchases of 
discount points and the rapidity of individual prepayment, they respond 
by offering a lower average rate on each class of mortgages over which 
creditors have discretion in pricing.\83\
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    \83\ Conversely, the elimination of the option to pay upfront 
points and fees could, depending on the extant risk in creditors' 
portfolios and their perceptions of differential risk between 
neighborhoods, seriously reduce the access to mortgage credit for 
some portion of consumers.
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    If having to understand and decide among loans with different 
points and fees combinations imposes a burden on some consumers, the 
existence of the increased choice made available by this provision may 
itself be a cost.\84\ In these circumstances, the Bureau's proposed 
exercise of its exemption authority would have the cost of not reducing 
this confusion, relative to the statute. However, the proposed rule 
also includes, and solicits comment on, a ``bona fide'' requirement to 
ensure that consumers receive value in return for paying discount 
points and origination points or fees and different options for 
structuring such a requirements. Implementing a requirement that the 
payment of discount points and origination points or fees be bona fide 
may benefit these consumers who, in the absence of such a provision, 
would incur these costs from the increased choice. In essence, by 
guaranteeing that any points and fees be bona fide, the proposed rule 
would offer some additional protection for these consumers.
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    \84\ In certain economic models, increased choice may not lead 
to improvements in consumer welfare.

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[[Page 55335]]

Potential Benefits and Costs to Covered Persons
    The ability to charge discount points and origination points or 
fees is a substantial benefit to loan originators and remains so even 
under the Bureau's requirement that, as a prerequisite for any such 
charge, creditors make available a comparable, alternative loan that 
does not include discount points and origination points or fees (except 
where the consumer is unlikely to qualify for the loan).\85\ Based on 
the assumption that the costs of originating a comparable, alternative 
loan that does not include discount points and origination points or 
fees are sufficiently small (relative to the revenue from all mortgage 
funding), the proposed rule would create three significant benefits for 
creditors.
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    \85\ Since the Bureau's proposed provisions on both loan 
originator compensation and the conditional ability to charge 
upfront points and fees should, if adopted, effectively eliminate a 
loan originator's ability to engage in steering or similar practices 
possible under moral hazard, the analysis here will focus on only 
those benefits and costs which are unrelated to moral hazard.
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    First, the conditional permission to charge discount points and 
origination points or fees allows creditors to increase their returns 
on mortgage funding by offering different loan terms to consumers 
having different preferences and posing different risks.
    Second, creditors have the option to share risk with consumers. As 
noted above, discount points are one way for creditors to recoup some 
portion of the implicit value of the prepayment option from consumers 
and the primary means by which a creditor can hedge losses from 
potential consumer prepayment. The proposed rule's allowance of the 
payment of points in circumstances other than the limited circumstances 
permitted under the Dodd-Frank Act preserves the ability of creditors 
to share a loan's prepayment risk, created by the prepayment option 
embedded in the loan, with consumers. Regardless of whether discount 
points are actually exchanged in any particular mortgage transaction, 
the ability to offer such points to consumers is a valuable option to 
the creditor.\86\
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    \86\ In contrast, the prohibition on payment of upfront points 
and fees in the Dodd-Frank Act under most circumstances would ensure 
that the value of the option to share risk through discount points 
is lost to both the creditor and the consumer in those 
circumstances.
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    A third benefit for creditors arises since adverse selection exists 
in the mortgage market, which compounds the risks borne from early 
repayment. Allowing consumers to purchase discount points, at least in 
part, allows them to signal to the creditor that they expect to make 
payments on their loan for a longer period than other consumers who 
choose not to purchase such points. Creditors gain from that 
information and will respond to such differences in behavior.\87\ 
Increasing a creditor's ability to measure more finely the prepayment 
risk posed by an individual consumer allows him or her to more finely 
``risk-price'' loans across consumers posing different risk. By 
charging different loan rates to consumers who pose different degrees 
of risk, the creditor will earn a greater overall return from funding 
mortgage loans.\88\
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    \87\ Credible signaling in such a situation, from the creditor's 
perspective, distinguishes two groups of consumers-- one with low 
prepayment risk who purchase discount points, and the second a group 
not purchasing discount points and, consequently, expect to prepay 
their loan more rapidly than average--in what would otherwise be a 
pool of consumers who are perceived by the creditor to exhibit an 
equivalent measure of prepayment risk.
    \88\ In this situation where the efficiency of the market is 
only impaired by adverse selection, this increase in creditor 
returns is independent of whether the creditor sells loans in the 
secondary market or chooses to engage in hedging to hold these 
mortgages in portfolio.
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    Both creditors, and by the preceding analysis, consumers benefit 
from the role of discount points as a credible signal and, 
consequently, the economic efficiency of the mortgage markets is 
enhanced.\89\ The Bureau believes that this private means for reducing 
the risk that the mortgage loan (a liability for the consumer) can pose 
to the assets of the creditor is a significant source of efficiency in 
the mortgage market. In addition, mindful of the state of the United 
States housing and mortgage markets, the proposed rule also lowers the 
chances of any potential disruptions to those markets that might arise 
from implementing the Dodd-Frank Act provisions without change, which 
would be significantly different than current regulations. This should 
help promote the recovery and stability of those markets.
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    \89\ Conversely, the elimination of the payment of upfront 
points and fees to the extent provided in the Dodd-Frank Act could, 
depending on the extant risk in creditors' portfolios and various 
characteristics of property by neighborhood, seriously reduce the 
access to mortgage credit for some portion of consumers.
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b. Requirement That All Creditors Make Available a Comparable, 
Alternative Loan
    The Bureau is proposing to require that before a creditor or loan 
originator organization may impose discount points and origination 
points or fees on a consumer where someone other than the consumer pays 
a loan originator transaction-specific compensation, the creditor must 
make available to the consumer a comparable, alternative loan that does 
not include discount points and origination points or fees. (Making 
available the comparable, alternative loan is not necessary if the 
consumer is unlikely to qualify for such a loan.)
    In transactions that do not involve a mortgage broker, the proposed 
rule would provide a safe harbor if, any time prior to application that 
the creditor provides a consumer an individualized quote for a loan 
that includes discount points and origination points or fees, the 
creditor also provides a quote for a comparable, alternative loan that 
does not include such points or fees. In transactions that involve 
mortgage brokers, the proposed rule would provide a safe harbor under 
which creditors provide mortgage brokers with the pricing for all of 
their comparable, alternative loans that do not include discount points 
and origination points or fees. Mortgage brokers then would provide 
quotes to consumers for the loans that do not include discount points 
and origination points or fees when presenting different loan options 
to consumers.
    Relative to the post-statute baseline, this provision on its own 
has no or very limited effect on the market. As described, in the 
absence of the proposed rule, virtually the only mortgage transactions 
allowed would be loans without any upfront discount points, or 
origination points and fees; under the proposed rule, creditors are 
required in most instances to make these loans available. Any 
differences that arise in prices, quantities or product mix available 
in the market that are attributable to changes in the legal 
environment, therefore arise from the exemption allowing discount 
points, and origination points and fees, rather than from this 
requirement.
    Nevertheless, the Bureau has chosen to discuss the benefits, costs 
and impacts from mandating that creditors make available the 
comparable, alternative loan (except where a consumer is unlikely to 
qualify for such a loan). With the Bureau's exemption authority, one 
alternative could be to completely eliminate the Dodd-Frank Act's 
prohibitions and allow the payment of upfront points and fees with no 
restrictions. (The Bureau has chosen not to present that alternative.) 
The following analysis discusses the benefits, costs and impacts of the 
current proposed rule relative to the alternative (which would mirror 
the status quo) where no such requirement for a comparable, alternative 
loan would be in place.

[[Page 55336]]

Potential Benefits and Costs to Consumers
    Eliminating the prohibition on upfront points and fees creates 
greater choice for consumers over the means by which the consumer may 
compensate the creditor in exchange for the prepayment option in the 
mortgage. The preceding analysis discussed that greater choice should, 
under normal circumstances, create an ex ante welfare gain for 
consumers. The ex post (or realized) gains to consumers, however, may 
or may not exceed the corresponding frequency of realized losses.
    Consumer choice is further expanded by the requirement that a 
creditor or loan originator organization generally make available the 
comparable, alternative loan to a consumer as a prerequisite to the 
creditor or loan originator organization imposing discount points and 
origination points or fees on the consumer in a transaction. In 
particular, the ability to choose this loan may be of particular 
benefit to those consumers having a relatively lower ability to 
accurately interpret loan terms. The simpler loan terms may help these 
consumers understand the total cost of the loan and select the mortgage 
most suited to them.\90\
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    \90\ Susan Woodward and Robert Hall (2012), Diagnosing Consumer 
Confusion and Sub-Optimal Shopping Effort: Theory and Mortgage-
Market Evidence, forthcoming American Economic Review: Papers and 
Proceedings (documenting the existence of such consumers in domestic 
mortgage markets).
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    Consumers may also benefit from the proposed rule if the greater 
prevalence of comparable, alternative loans and their rates makes terms 
of mortgage loans clearer and more observable for all mortgage 
products. A creditor's communication regarding its rate on a particular 
comparable, alternative loan may act as a benchmark or ``focal point'' 
for the purpose of comparing rates on all additional mortgage products 
available from this creditor. Such a focal point may anchor the 
consumer's assessment of the relative costs of each type of mortgage 
product available from that creditor. The comparable, alternative loan, 
as a result, conveys to consumers information about the value of 
discount points and origination points or fees on all other products 
offered by a given creditor and, under certain circumstances, across 
all creditors.\91\ The availability of this benchmark, consequently, 
enhances the ability of all consumers, and particularly those having a 
relatively low degree of financial sophistication, to more accurately 
compare the terms of alternative mortgage products offered by a 
creditor and select that product that best suits the consumer's needs.
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    \91\ The Bureau recognizes that rates on loans that do not 
include discount points and or origination points or fees may still 
not be perfectly comparable given that different creditors may have 
different additional charges. However, the rates on comparable, 
alternative loans should be correlated among creditors and 
informative.
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    The magnitude of the benefits to consumers from having the rate on 
comparable, alternative loans available as a benchmark would depend, in 
part, on the volume of transactions in such mortgages.\92\ A higher 
volume of transactions reduces the likelihood that the rate posted by 
any individual creditor reflects idiosyncrasies specific to that 
creditor. By reducing the expected deviation of the rate posted by a 
given creditor from the average rate posted by all creditors, a higher 
transaction volume results in an improvement in the accuracy with which 
a consumer can compare the rates on all loans offered by a given 
creditor. A lower volume, conversely, decreases such accuracy.
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    \92\ Higher transactions volumes in any product increase the 
accuracy and value of the information provided by its market price.
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    The Bureau believes that transactions without discount points and 
origination points or fees will be at a sufficiently high level to make 
the information conveyed by its average rate of significant value to 
consumers. This belief is founded on two factors. First, loans that do 
not include discount points and origination points or fees are 
currently offered and transacted in volumes comparable to several other 
types of mortgage loans. Second, the Bureau's proposed rule would give 
consumers certainty that this mortgage is generally available from 
virtually any creditor. Since current transactions volumes in this 
mortgage are comparable to those of many other mortgage products, this 
certainty about its universal availability, combined with its 
simplicity, should cause a level of consumer demand for the comparable, 
alternative mortgage sufficiently high to ensure sufficient transaction 
volumes.
    Providing a useful means by which to compare rates also provides a 
potentially significant additional benefit to consumers.\93\ Widespread 
availability of the current rate on the comparable, alternative loan 
should also lower the costs of comparing the rate on any mortgage 
product across creditors, owing to the correlation of costs and hence 
of rates among creditors. If so, this would encourage additional 
shopping by consumers. Additional shopping by consumers over 
alternative creditors would, in turn, enhance the degree of competition 
among creditors, further driving down prices and increasing consumer 
welfare.\94\
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    \93\ When a distribution of financial acuity and abilities 
exists among consumers market transparency may exacerbate any 
existing cross-subsidization between consumers. As a result, it is 
possible that some consumers gain more relative to others.
    \94\ Under certain plausible circumstances, such additional 
shopping would also encourage entry by creditors into previously 
localized mortgage markets.
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Potential Benefits and Costs to Covered Persons
    Under the proposal, a creditor generally must make available a 
comparable, alternative loan to a consumer as a prerequisite to the 
creditor or loan originator organization imposing any discount points 
and origination points or fees on the consumer in a transaction (unless 
the consumer is unlikely to qualify for the comparable, alternative 
loan.) The proposed requirement would, in theory, have the potential to 
impose finance-related costs on creditors, particularly those whose 
size may preclude them from accessing either the secondary mortgage 
market or hedging (derivatives) markets.\95\ Selling loans into the 
secondary market or investing in certain derivatives allows firms to 
lower the risk of their portfolios. Large and mid-sized creditors are 
able profitably to engage in these activities. In particular, the large 
number of fixed-income securities and hedging instruments available to 
these creditors should allow them to mitigate their financial risks.
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    \95\ The potential for these additional finance-related costs 
would likely be greater under the alternative discussed in part V. 
Under that alternative, some creditors will lose additional profits 
derived from loans they can no longer make because the consumer does 
not qualify for the comparable, alternative loan. Creditors in 
general will need to take the time to ensure that they make the 
comparable, alternative loan available, that they provide quotes for 
it where applicable, and that they assess the consumer's 
qualification for it.
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    The Bureau has considered whether future economic conditions could 
conceivably occur in which secondary market investors have no or low 
demand for comparable, alternative loans, rendering these products 
illiquid. In these circumstances, the volume of originations of such 
mortgages would drastically decrease with a concurrent rise in rates on 
the comparable, alternative loans, and a potential for increased 
exposure to credit and prepayment risk borne by creditors with limited 
asset diversification. Illiquidity in financial markets as a whole 
could inflict severe effects on creditors with portfolios consisting 
primarily of comparable, alternative loans. However, several factors 
mitigate the likelihood of

[[Page 55337]]

this event. Most historical experience, along with the size, liquidity, 
and pace of innovation in the United States mortgage markets, make such 
an event unlikely. For example, some of the earliest secondary market 
innovations involved structuring mortgage securities with different 
tranches of prepayment risk.\96\ These securities would offer investors 
the opportunity to voluntarily purchase alternative exposures to the 
prepayment risk arising from any underlying pool of mortgages.
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    \96\ Some of the earliest securitizations were so called 
Collateralized Mortgage Obligations created by Freddie Mac in the 
late 1980s. See Brochure, Freddie Mac, Direct Access Retail Remic 
Tranches (2008), available at: https://www.freddiemac.com/mbs/docs/freddiedarts_brochure.pdf; Frank Fabozzi, Chuck Ramsey, and Frank 
Ramirez, Collateralized Mortgage Obligations: Structures and 
Analysis (Frank J Fabozzi Assocs., 1994).
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    Another potential concern of creditors, closely related to the 
issues of liquidity discussed above, is the possibility that the rates 
on comparable, alternative loans could reach certain discrete 
thresholds such as the cutoff for higher-rate mortgages or the 
threshold rate that triggers HOEPA coverage. In such cases, creditors 
may face a limited ability to sell these loans. To the extent that 
creditors hold these new loans in portfolio, they will face some 
additional risk.\97\ Here too, considerations of several important 
features of the credit markets mitigate concerns for those creditors 
who could be adversely affected in these cases. First, creditors should 
be able to price comparable, alternative loans at values that maintain 
their compliance with regulations but allow them to attain a desired 
degree of aggregate risk in their portfolios of assets. Second, the 
volume of originations at such high rates would inevitably decline 
under all situations except that of a completely inelastic demand by 
consumers. Since each loan with discount points or origination points 
or fees is a substitute for the comparable, alternative loan, a 
sufficiently high relative price on the comparable, alternative loan 
will make them unattractive to most consumers.
---------------------------------------------------------------------------

    \97\
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    In considering the benefits, costs, and impacts, the Bureau notes 
that neither the alternative of allowing points and fees without 
restriction nor the elimination of all points and fees would on balance 
provide benefits to all consumers as a group. As a consequence, any 
conclusion about the comparative benefits and costs to consumers must 
be based on a comparison of two mutually exclusive classes of 
consumers: (1) Those who benefit more from the adoption of an 
unrestricted points and fees proposal, relative to the prohibition of 
all points and fees; and (2) those who benefit more from the 
elimination of all points and fees offers. Both groups should benefit 
from the current proposed rule where a creditor who wishes to make 
available to a consumer a menu of loans with terms including points 
and/or fees generally must also make available to this consumer the 
comparable, alternative loan that does not include discount points and 
origination points or fees. The costs of the proposed rule should be 
minimal assuming the likely scenario that a sufficiently efficient 
market for comparable, alternative loans (in the presence of other 
types of mortgage products) would exist and that the potential costs of 
making available the comparable, alternative loan is not be too high 
for a significant proportion of creditors.
2. Compensation Based on Transaction Terms
    Compensation rules, which restrict the means by which a loan 
originator receives compensation, are a practical way to mitigate 
potential harm to consumers arising from the opportunities for moral 
hazard on the part of loan originators.\98\ Similar to the current 
regulation regarding loan originator compensation (i.e., the Loan 
Originator Final Rule or, more simply, the ``current rule''), the Dodd-
Frank Act mitigates consumer harm by targeting the means by which loan 
originators can unfairly increase remuneration for their services.
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    \98\ Moral hazard, in the current context of mortgage 
origination, depends fundamentally on the advantage the loan 
originator has in knowing the least expensive loan terms acceptable 
to creditors and greater overall knowledge of the functioning of 
mortgage markets. Holden Lewis, ``Moral Hazard'' Helps Shape 
Mortgage Mess, Bankrate (Apr. 18, 2007), available at: https://www.bankrate.com/brm/news/mortgages/20070418_subprime_mortgage_morality_a1.asp (providing a practitioner description of the costs 
of such moral hazard on the current mortgage and housing 
industries).
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    The Dodd-Frank Act generally mirrors the current rule's general 
prohibition on compensating an individual loan originator based on the 
terms of a ``transaction.'' Although the statute and the current rule 
are clear that an individual loan originator cannot be compensated 
differently based on the terms of his or her transactions, they do not 
expressly address whether the individual loan originator may be 
compensated based on the terms of multiple transactions, taken in the 
aggregate, of multiple loan originators employed by the same creditor 
or loan originator organization.
    Through its outreach and the inquiries the Board and the Bureau 
have received about the application of the current regulation to 
qualified and non-qualified plans,\99\ the Bureau believes that 
confusion exists about the application of the current regulation to 
compensation in the form of bonuses paid under profit-sharing plans 
(which under the proposed commentary is deemed to include so called 
``bonus pools'' and ``profit pools'') and employer contributions to 
qualified and non-qualified defined benefit and contribution plans. As 
discussed in the section-by-section analysis, these types of 
compensation are often indirectly based on the aggregate transaction 
terms of multiple individual loan originators employed by the same 
creditor or loan originator organization, because aggregate transaction 
terms (e.g., the average interest rate spread of the individual loan 
originators' transactions in a particular calendar year over the 
creditor's minimum acceptable rate) affects revenues, which in turn 
affects profits, and which, in turn, influences compensation decisions 
where profits are taken into account.
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    \99\ As noted in the section-by-section analysis, the Bureau 
issued CFPB Bulletin 2012-2 in response to the questions it received 
regarding the applicability of the current regulation to qualified 
plans and non-qualified plans, and this regulation is intended in 
part to provide further clarity on such issues.
---------------------------------------------------------------------------

    The proposed rule and commentary would address this confusion by 
clarifying the scope of the compensation restrictions in current Sec.  
1026.36(d)(1)(i). In so clarifying the compensation restrictions, the 
proposed rule treats different types of compensation structures 
differently based on an analysis of the potential steering incentives 
created by the particular structure. The proposed rule would permit 
employers to make contributions to qualified plans (which, as explained 
in the proposed commentary, include defined benefit and contribution 
plans that satisfy the qualification requirements of IRC section 401(a) 
or certain other IRC sections), even if the contributions were made out 
of mortgage business profits. The proposed rule also would permit 
bonuses under non-qualified profit-sharing plans, profit pools, and 
bonus pools and employer contributions to non-qualified defined benefit 
and contribution plans if: (1) The mortgage business revenue component 
of the total revenues of the company or business unit to which the 
profit-sharing plan applies, as applicable, is below a certain 
threshold, even if the payments or contributions were made out of 
mortgage business profits (the Bureau is proposing

[[Page 55338]]

alternative threshold amounts of 50 and 25 percent); or (2) the 
individual loan originator has been the loan originator for five or 
fewer transactions during the preceding 12-month period, i.e., a ``de 
minimis'' test for individuals who originate a very small number of 
transactions per year. The proposed rule, however, would reaffirm the 
current rule and not permit individual loan originators to be 
compensated based on the terms of their individual transactions.
    Compensation in the form of bonuses paid under profit-sharing plans 
and employer contributions to qualified and non-qualified defined 
benefit and contribution plans is normally based on the profitability 
of the firm.\100\ As with compensation paid to the individual loan 
originator concurrently with loan origination, compensation paid 
pursuant to a profit-sharing plan is designed to provide individual 
loan originators and other employees with greater performance 
incentives and to align their interests with those of the owners of the 
institution employing them.\101\ When moral hazard exists, however, 
such profit-sharing could lead to misaligned incentives on the part of 
individual loan originators with respect to consumers. The magnitude of 
adverse incentives arising from profit-sharing in creating gains to the 
owners of the loan originator organization or creditor, however, 
depends on several circumstances.\102\ These include the number of 
individual loan originators employed by the creditor or loan originator 
organization that contributes to the funds available for profit-
sharing, the means by which shares of the profits are distributed to 
the individual loan originators in the same firm, and the ability of 
owners to monitor loan quality on an ongoing basis.
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    \100\ Payments to qualified retirement plans include, for 
example, employer contributions to employee 401(k) plans.
    \101\ Bengt Holmstrom, Moral Hazard and Observability, 10 Bell 
Journal of Economics 74 (1979) (providing the first careful analysis 
of the effects such compensation methods have on employee 
incentives).
    \102\ For example, when the compensation to each loan originator 
depends upon on the aggregate efforts of multiple originators 
(rather than directly on the individual loan originator's own 
performance) then that individual's efforts have increasingly little 
influence on the compensation the individual receives through a 
profit-sharing plan. As a result, each individual reduces his or her 
effort. This ``free-riding'' behavior has been extensively analyzed: 
Surveys of these analyses appear in Martin L. Weitzman, Incentive 
Effects of Profit Sharing, in Trends in Business Organization: Do 
Participation and Cooperation Increase Competitiveness? (Kiel Inst. 
of World Econs.1995), available at: https://ws1.ad.economics.harvard.edu/faculty/weitzman/files/IncentiveEffectsProfitSharing.pdf.
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Potential Benefits and Costs to Covered Persons
    As described above, considering the benefits, costs and impacts of 
this provision requires the understanding of current industry practice 
against which to measure any changes. As discussed, the Bureau 
believes, based on outreach to and inquiries received from industry, 
that confusion exists about the application of the current regulation 
to compensation in the form of bonuses paid under profit-sharing plans, 
bonus pools, and employer contributions to qualified and non-qualified 
plans. In light of this confusion, the Bureau believes that industry 
practice likely varies and therefore any determination of the costs and 
benefit of the proposed rule depend critically on assumptions about 
current firm practices.
    Firms that currently offer incentive-based compensation 
arrangements for individual loan originators that would continue to be 
allowed under the proposed rule should incur neither costs nor benefits 
from the proposed rule. Notably, the proposed rule would clarify that 
employer contributions to qualified plans in which individual loan 
originators participate are permitted under the current rule.\103\ Such 
firms can continue to benefit from these arrangements, which have the 
potential to motivate individual productivity; to reduce potential 
intra-firm moral hazard by aligning the interests of individual 
originators with those of their employer; and to reduce the potential 
for increased costs arising from adverse selection in the retention of 
more productive employees. Firms that do not offer such plans would 
benefit, with the increased clarity of the proposed rule, from the 
opportunity to do so should they so choose.\104\
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    \103\ As noted earlier, the Bureau issued CFPB Bulletin 2012-2, 
which stated that the practice is permitted under the current rule, 
but the bulletin was issued as guidance pending the adoption of 
final rules on loan originator compensation.
    \104\ Some firms may choose not to offer such compensation. In 
certain circumstances an originating institution (perhaps unable to 
invest in sufficient management expertise) will see reduced 
profitability from adopting incentive -based compensation.
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    Firms that did not change their compensation practices in response 
to the current rule and that currently offer compensation arrangements 
that would be prohibited under the proposed rule would incur costs. 
These include costs from changing internal accounting practices, re-
negotiating the remuneration terms in the contracts of existing 
employees and any other industry practice related to these methods of 
compensation. For these firms, the prohibition on compensation based on 
transaction terms may contribute to adverse selection among individual 
loan originators, a possible lower average quality of individual loan 
originators in such a firm, higher retention costs, and possibly lower 
profits.\105\ The specific numerical threshold also implies that some 
loan originators may now suffer the disadvantage of facing competitors 
with fewer restrictions on compensation. These potential differential 
effects may be greater for small creditors and loan originator 
organizations, and loan originator organizations that originate loans 
as their exclusive, or primary, line of business. The Bureau seeks 
comments and data on the current compensation practices of those firms 
at or above the thresholds.
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    \105\ Analysis of Call Report data from depository institutions 
and credit unions indicates that among depository institutions, 
roughly 6 percent are likely to exceed the 50 percent threshold and 
30 percent are likely to exceed the 25 percent threshold. The 
largest impact would be on thrifts, whose business model 
historically has centered on residential mortgage lending.
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Potential Benefits and Costs to Consumers
    The proposed rule would benefit most consumers by clarifying the 
current regulation to address, and mitigate, the steering incentives 
inherent in the nature of profit-sharing plans and other types of 
compensation that are directly or indirectly based on the terms of 
multiple transactions of multiple individual loan originators. Limiting 
such incentive-based compensation for many firms limits the potential 
for steering consumers into more expensive loans. The Bureau's approach 
permits bonuses under profit-sharing plans, contributions to qualified 
plans, and contributions to non-qualified plans only where the steering 
incentives are sufficiently attenuated (i.e., the nexus between the 
transaction terms and the compensation is too indirect).
3. Qualification Requirements for Loan Originators
    Section 1402 of Dodd-Frank amends TILA to impose a duty on loan 
originators to be ``qualified'' and, where applicable, registered or 
licensed as a loan originator under State law and the Federal SAFE Act. 
Employees of depositories, certain of their subsidiaries, and nonprofit 
organizations currently do not have to meet the SAFE Act standards that 
apply to licensing, such as taking pre-licensure classes, passing a 
test, meeting

[[Page 55339]]

character and fitness standards, having no felony convictions within 
the previous seven years, or taking annual continuing education 
classes. To implement the Dodd-Frank-Act's requirement that entities 
employing or retaining the services of individual loan originators be 
``qualified,'' the proposed rule would require entities whose 
individual loan originators are not subject to SAFE Act licensing, 
including depositories and bona fide nonprofit loan originator 
entities, to: (1) Ensure that their individual loan originators meet 
character and fitness and criminal background standards equivalent to 
the licensing standards that the SAFE Act applies to employees of non-
bank loan originators; and (2) provide appropriate training to their 
individual loan originators commensurate with the mortgage origination 
activities of the individual. The proposed rule would mandate training 
appropriate for the actual lending activities of the individual loan 
originator and would not impose a minimum number of training hours. In 
developing this provision, the Bureau used its discretion. As such, the 
benefits and costs of this provision are discussed relative to a pre-
statute baseline.\106\
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    \106\ Use of the post-statute baseline used earlier in this 
analysis would be uninformative since even post statute but in the 
absence of the proposal, the definition of ``qualified'' would still 
be unclear.
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Potential Benefits and Costs to Consumers
    Consumers will inevitably make subjective evaluations of the 
expertise of any loan originators with whom they consult. A consumer's 
knowledge that all originators possess a minimal level of such 
expertise would be of significant assistance to the accuracy of that 
evaluation and to the consumer's confidence in the originator with whom 
they initially begin negotiations. Consumers, who are generally 
considered to prefer certainty, will benefit to the extent that the 
current provisions increase such consumer confidence. Consumers incur 
no new direct costs created by the current proposal; any increases that 
originators may pass on to consumers will be de minimis.
Potential Benefits and Costs to Covered Persons
    The increased requirements for institutions that employ individuals 
not licensed under the SAFE Act would further assure that the 
individual loan originators in their employ satisfy those levels of 
expertise and standards of probity as specified in the current proposed 
rule.\107\ This would have a positive effect by tending to reduce any 
potential liability they incur in future mortgage transactions and to 
enhance their reputation among consumers. An increase in consumer 
confidence in the expertise and experience of loan originators may 
possibly increase the number of consumers willing to engage in these 
transactions.
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    \107\ Under Regulation G, depository institutions must already 
obtain criminal background checks for their individual loan 
originator employees and review them for compliance under Section 19 
of the FDIA.
---------------------------------------------------------------------------

    In addition, relative to current market conditions, the proposed 
rule would create a more level ``playing field'' between non-banking 
institutions and depository and non-profit institutions with regard to 
the enhanced training requirements and background checks that would be 
required of the latter institutions. This may help mitigate any 
possible adverse selection in the market for individual originators, in 
which non-banking institutions employ and retain only the most 
qualified individuals while those of more modest expertise seek 
employment by depository and non-profit institutions.
    For depository institutions, the enhanced requirements related to 
findings from a criminal background check may cause certain loan 
originators to no longer be able to work at these institutions. It also 
slightly limits the pool of employees from which to hire, relative to 
the pool from which they can hire under existing requirements. 
Following an initial transition period where firms will have to perform 
the background check on current employees, these costs should be 
minimal. Similarly, the additional credit check for current loan 
originators at depository institutions, and the ongoing requirement 
will result in some minimal increased costs. Non-banking institutions 
not currently subject to the SAFE Act will have to incur the costs of 
both the criminal background check and the credit check.
4. Potential Benefits and Costs From Other Provisions
    Mandatory Arbitration: Section 1414 of the Dodd-Frank Act added 
section 129C(e) to TILA. Section 129C(e) prohibits terms in any 
residential mortgage loan (as defined in the Dodd-Frank Act) or related 
agreement from requiring arbitration or any other non-judicial 
procedure as the method for resolving any controversy or settling any 
claims arising out of the transaction. The proposed rule implements 
this statutory provision of the Dodd-Frank Act. Relative to a pre-
statute baseline, mortgage-related agreements can no longer reflect 
such terms. Consumers who desire access to the judicial system over 
disputes will not be prohibited from having such access. Some creditors 
and other parties will have to incur any additional costs of such legal 
actions above the costs associated with arbitration. Based on its 
outreach, the Bureau believes that to the extent terms that would be 
prohibited are currently included in any transactions covered by the 
statute, they are most likely to be included in contracts for open-
ended mortgage credit. The Bureau requests comment on the prevalence of 
contracts with such terms for the purposes of the analysis under 
Section 1022 of the Dodd-Frank Act.
    Creditor Financing of ``Single Premium'' Credit Insurance: Dodd-
Frank Act section 1414 added section 129C(f) to TILA. Section 129(C)(f) 
pertains to a creditor financing credit insurance fees for the 
consumer. Although the provision permits insurance premiums to be 
calculated and paid in full per month, this provision prohibits a 
creditor from financing any fees, including premiums, for credit 
insurance in closed- and certain open-end loan transactions secured by 
a dwelling. The proposed rule implements the relevant statutory 
provision of the Dodd-Frank Act. The structure of these transactions is 
often harmful to consumers, and as such the proposed rule should 
benefit consumers.
5. Additional Potential Benefits and Costs
    Covered persons would have to incur some costs in reviewing the 
proposed rule and adapting their business practices to any new 
requirements. The Bureau notes that many of the provisions of the 
current rule do not require significant changes to current practice and 
therefore these costs should be minimal for most covered persons.
    The Bureau has considered whether the proposed rule would lead to a 
potential reduction in access to consumer financial products and 
services. The Bureau notes that many of the provisions of the current 
rule do not require significant changes to current consumer financial 
products or providers' practices. Firms will not have to incur 
substantial operational costs. As result, the Bureau does not 
anticipate any material impact on consumer access to mortgage credit.

[[Page 55340]]

E. Potential Specific Impacts of the Proposed Rule

1. Depository Institutions and Credit Unions With $10 Billion or Less 
in Total Assets, As Described in Section 1026 \108\
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    \108\ Approximately 50 banks with under $10 billion in assets 
are affiliates of large banks with over $10 billion in assets and 
subject to Bureau supervisory authority under Section 1025. However, 
these banks are included in this discussion for convenience.
---------------------------------------------------------------------------

    Overall, the impact on smaller creditors of the Bureau's proposed 
rule would depend on several factors, the most important of which 
involve: (1) The ability of such creditors to manage any additional 
risk or loss of return the requirement generally to make available a 
comparable, alternative loan potentially imposes on the overall risk 
and return of their current portfolios; (2) the effects of the 
requirements on their return to equity and capital costs relative to 
larger competitors; and (3) their ability to recover, in a timely 
matter, any costs of processing loans. As previously discussed, the 
additional risk to the portfolios of any but the smallest creditors, 
from the requirement to make available the comparable, alternative loan 
(unless the consumer is unlikely to qualify), is likely to be small for 
the same reasons that apply to the portfolio risk of larger 
institutions and other investors.
    Certain circumstances could, however, create a greater potential 
for adverse effects on small creditors, relative to their larger 
rivals, from originating large volumes of comparable, alternative 
loans. These circumstances occur if the financial capacity of the small 
creditor affects both its cost of raising capital and its ability to 
hedge risk. Should such an institution be unable effectively to hedge 
prepayment and credit risk with larger rivals or through the markets 
(e.g., the firm has substantial fixed costs of accessing the secondary 
market), then the general requirement to make available a comparable, 
alternative loan in specified circumstances could cause it greater 
costs, relative to its size, than those that larger institutions would 
incur.
    Under the proposed rule, smaller creditors may originate and hold 
more loans that do not include discount points and origination points 
or fees. These creditors may have fewer funds available from 
origination revenues to fund loan origination operations and, if they 
are unable to easily borrow, the general requirement to make available 
the comparable, alternative loan may result in greater costs. In all 
the cases described, however, these costs would necessarily be 
considerably smaller than those that they would suffer, for similar 
reasons, under the Dodd-Frank Act prohibition against the origination 
of mortgages with upfront discount points and origination points or 
fees under most circumstances.
2. Impact on Consumers in Rural Areas
    Consumers in rural areas are unlikely to experience benefits or 
costs from the proposed rule that are different from those benefits and 
costs experienced by consumers in general. Consumers in rural areas who 
obtain mortgage loans from mid-size to large creditors would experience 
virtually the same costs and benefits as do any others who use such 
creditors. Those consumers in rural areas who obtain mortgages from 
small local banks and credit unions may face slightly different benefit 
and costs. As noted above, the provisions of the proposed rule 
conditionally allowing upfront points and fees may expose some 
consumers to the risk that a more informed creditor will use these 
terms to its advantage. This may be less likely to occur in cases of 
smaller, more local creditors.
    To the extent that the requirement that a creditor generally must 
make available a make available comparable, alternative loans as a 
prerequisite to the creditor or loan originator organization imposing 
discount points and origination points or fees on consumers would raise 
the cost of credit, these impacts are most likely at smaller creditors. 
Rural consumers using such creditors may face these marginally 
increased costs. However, these effects would derive from the 
provisions of the Dodd-Frank Act if they were permitted to go into 
effect; if anything, the proposed rule would alleviate burden from 
small creditors by permitting them to make available loans with 
discount points and origination points or fees, subject to certain 
conditions.

F. Additional Analysis Being Considered and Request for Information

    The Bureau will further consider the benefits, costs and impacts of 
the proposed provisions and additional alternatives before finalizing 
the proposed rule. As noted above, there are a number of areas where 
additional information would allow the Bureau to better estimate the 
benefits, costs, and impacts of this proposed rule and more fully 
inform the rulemaking. The Bureau asks interested parties to provide 
comment or data on various aspects of the proposed rule, as detailed in 
the section-by-section analysis. The most significant of these include 
information or data addressing:
     The potential impact on all types of loan originators of 
the proposed restrictions on the methods by which a loan originator is 
remunerated in a transaction;
     The potential impact on mortgage lenders, including 
depository and non-depository institutions, of the requirement that all 
creditors must make available a comparable, alternative mortgage loan 
to a consumer that does not include discount points and origination 
points and fees, unless the consumer is unlikely to qualify for such a 
loan.

Information provided by interested parties regarding these and other 
aspects of the proposed rule may be considered in the analysis of the 
costs and benefits of the final rule.
    To supplement the information discussed in in this preamble and any 
information that the Bureau may receive from commenters, the Bureau is 
currently working to gather additional data that may be relevant to 
this and other mortgage related rulemakings. These data may include 
additional data from the NMLSR and the NMLSR Mortgage Call Report, loan 
file extracts from various creditors, and data from the pilot phases of 
the National Mortgage Database. The Bureau expects that each of these 
datasets will be confidential. This section now describes each dataset 
in turn.
    First, as the sole system supporting licensure/registration of 
mortgage companies for 53 agencies for States and territories and 
mortgage loan originators under the SAFE Act, NMLSR contains basic 
identifying information for non-depository mortgage loan origination 
companies. Firms that hold a State license or registration through 
NMLSR are required to complete either a standard or expanded Mortgage 
Call Report (MCR). The Standard MCR includes data on each firm's 
residential mortgage loan activity including applications, closed 
loans, individual mortgage loan originator activity, line of credit, 
and other data repurchase information by state. It also includes 
financial information at the company level. The expanded report 
collects more detailed information in each of these areas for those 
firms that sell to Fannie Mae or Freddie Mac.\109\ To date, the Bureau 
has received basic data on the firms in the NMLSR and de-identified 
data and tabulations of data from the NMLSR Mortgage Call Report. These 
data were used, along with data

[[Page 55341]]

from HMDA, to help estimate the number and characteristics of non-
depository institutions active in various mortgage activities. In the 
near future, the Bureau may receive additional data on loan activity 
and financial information from the NMLSR including loan activity and 
financial information for identified creditors. The Bureau anticipates 
that these data will provide additional information about the number, 
size, type, and level of activity for non-depository creditors engaging 
in various mortgage origination activities. As such, it supplements the 
Bureau's current data for non-depository institutions reported in HMDA 
and the data already received from NMLSR. For example, these new data 
will include information about the number and size of closed-end first 
and second loans originated, fees earned from origination activity, 
levels of servicing, revenue estimates for each firm and other 
information. The Bureau may compile some simple counts and tabulations 
and conduct some basic statistical modeling to better model the levels 
of various activities at various types of firms. In particular, the 
information from the NMLSR and the MCR may help the Bureau refine its 
estimates of benefits, costs, and impacts for updates to loan 
originator compensation rules, revisions to the GFE and HUD-1 
disclosure forms, changes to the HOEPA thresholds, changes to 
requirements for appraisals, and proposed new servicing requirements 
and the new ability to pay standards.
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    \109\ More information about Mortgage Call Report can be found 
at: https://mortgage.nationwidelicensingsystem.org/slr/common/mcr/Pages/default.aspx.
---------------------------------------------------------------------------

    Second, the Bureau is working to obtain a random selection of loan-
level data from a handful of creditors. The Bureau intends to request 
loan file data from creditors of various sizes and geographic locations 
to construct a representative dataset. In particular, the Bureau will 
request a random sample of ``GFEs'' and ``HUD-1'' forms from loan files 
for closed-end mortgage loans. These forms include data on some or all 
loan characteristics including settlement charges, origination charges, 
appraisal fees, flood certifications, mortgage insurance premiums, 
homeowner's insurance, title charges, balloon payment, prepayment 
penalties, origination charges, and credit charges or points. Through 
conversations with industry, the Bureau believes that such loan files 
exist in standard electronic formats allowing for the creation of a 
representative sample for analysis.
    Third, the Bureau may also use data from the pilot phases of the 
National Mortgage Database (NMDB) to refine its proposals and/or its 
assessments of the benefits costs and impacts of these proposals. The 
NMDB is a comprehensive database, currently under development, of loan-
level information on first lien single-family mortgages. It is designed 
to be a nationally representative sample (one percent) and contains 
data derived from credit reporting agency data and other administrative 
sources along with data from surveys of mortgage borrowers. The first 
two pilot phases, conducted over the past two years, vetted the data-
development process, successfully pretested the survey component and 
produced a prototype dataset. The initial pilot phases validated that 
credit repository data are both accurate and comprehensive and that the 
survey component yields a representative sample and a sufficient 
response rate. A third pilot is currently being conducted with the 
survey being mailed to holders of five thousand newly originated 
mortgages sampled from the prototype NMDB. Based on the 2011 pilot, a 
response rate of 50 percent or higher is expected. These survey data 
will be combined with the credit repository information of non-
respondents and then de-identified. Credit repository data will be used 
to minimize non-response bias, and attempts will be made to impute 
missing values. The data from the third pilot will not be made public. 
However, to the extent possible, the data may be analyzed to assist the 
Bureau in its regulatory activities and these analyses will be made 
publicly available.
    The survey data from the pilots may be used by the Bureau to 
analyze borrowers' shopping behavior regarding mortgages. For instance, 
the Bureau may calculate the number of borrowers who use brokers, the 
number of lenders contacted by borrowers, how often and with what 
patterns potential borrowers switch lenders, and other behaviors. 
Questions may also assess borrowers' understanding of their loan terms 
and the various charges involved with origination. Tabulations of the 
survey data for various populations and simple regression techniques 
may be used to help the Bureau with its analysis.
    In addition to the comment solicited elsewhere in this proposed 
rule, the Bureau requests commenters to submit data and to provide 
suggestions for additional data to assess the issues discussed above 
and other potential benefits, costs, and impacts of the proposed rule. 
The Bureau also requests comment on the use of the data described 
above. Further, the Bureau seeks information or data on the proposed 
rule's potential impact on consumers in rural areas as compared to 
consumers in urban areas. The Bureau also seeks information or data on 
the potential impact of the proposed rule on depository institutions 
and credit unions with total assets of $10 billion or less as described 
in Dodd-Frank Act section 1026 as compared to depository institutions 
and credit unions with assets that exceed this threshold and their 
affiliates.

VIII. Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA), as amended by SBREFA, 
requires each agency to consider the potential impact of its 
regulations on small entities, including small businesses, small not-
for-profit organizations, and small governmental units. 5 U.S.C. 601 et 
seq. The RFA generally requires an agency to conduct an initial 
regulatory flexibility analysis (IRFA) and a final regulatory 
flexibility analysis (FRFA) of any rule subject to notice-and-comment 
rulemaking requirements, unless the agency certifies that the rule will 
not have a significant economic impact on a substantial number of small 
entities. 5 U.S.C. 603, 604. The Bureau is also subject to certain 
additional procedures under the RFA involving the convening of a panel 
to consult with small entity representatives (SERs) prior to proposing 
a rule for which an IRFA is required. 5 U.S.C. 609.
    The Bureau has not certified that the proposed rule would not have 
a significant economic impact on a substantial number of small entities 
within the meaning of the RFA. Accordingly, the Bureau convened and 
chaired a Small Business Review Panel to consider the impact of the 
proposed rule on small entities that would be subject to that rule and 
to obtain feedback from representatives of such small entities. The 
Small Business Review Panel for this rulemaking is discussed below in 
part VIII.A.
    The Bureau is publishing an IRFA. Among other things, the IRFA 
estimates the number of small entities that will be subject to the 
proposed rule and describes the impact of that rule on those entities. 
The IRFA for this rulemaking is set forth below in part VIII.B.

A. Small Business Review Panel

    Under section 609(b) of the RFA, as amended by SBREFA and the Dodd-
Frank Act, the Bureau seeks, prior to conducting the IRFA, information 
from representatives of small entities that may potentially be affected 
by its proposed rules to assess the potential impacts of that rule on 
such small entities. 5 U.S.C. 609(b). Section 609(b) sets forth a 
series of procedural steps with regard to obtaining this information. 
The Bureau first notifies

[[Page 55342]]

the Chief Counsel for Advocacy (Chief Counsel) of the SBA and provides 
the Chief Counsel with information on the potential impacts of the 
proposed rule on small entities and the types of small entities that 
might be affected. 5 U.S.C. 609(b)(1). Not later than 15 days after 
receipt of the formal notification and other information described in 
section 609(b)(1) of the RFA, the Chief Counsel then identifies the 
SERs, the individuals representative of affected small entities for the 
purpose of obtaining advice and recommendations from those individuals 
about the potential impacts of the proposed rule. 5 U.S.C. 609(b)(2). 
The Bureau convenes a review panel for such rule consisting wholly of 
full-time Federal employees of the office within the Bureau responsible 
for carrying out the proposed rule, the Office of Information and 
Regulatory Affairs (OIRA) within the OMB, and the Chief Counsel. 5 
U.S.C. 609(b)(3). The Small Business Review Panel reviews any material 
the Bureau has prepared in connection with the Small Business Review 
Panel process and collects the advice and recommendations of each 
individual SER identified by the Bureau after consultation with the 
Chief Counsel on issues related to sections 603(b)(3) through (b)(5) 
and 603(c) of the RFA.\110\ 5 U.S.C. 609(b)(4). Not later than 60 days 
after the date the Bureau convenes the Small Business Review Panel, the 
panel reports on the comments of the SERs and its findings as to the 
issues on which the Small Business Review Panel consulted with the 
SERs, and the report is made public as part of the rulemaking record. 5 
U.S.C. 609(b)(5). Where appropriate, the Bureau modifies the rule or 
the IRFA in light of the foregoing process. 5 U.S.C. 609(b)(6).
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    \110\ As described in the IRFA in part VIII.B, below, sections 
603(b)(3) through (b)(5) and section 603(c) of the RFA, respectively 
require a description of and, where feasible, provision of an 
estimate of the number of small entities to which the proposed rule 
will apply; a description of the projected reporting, record 
keeping, and other compliance requirements of the proposed rule, 
including an estimate of the classes of small entities which will be 
subject to the requirement and the type of professional skills 
necessary for preparation of the report or record; an 
identification, to the extent practicable, of all relevant Federal 
rules which may duplicate, overlap, or conflict with the proposed 
rule; and a description of any significant alternatives to the 
proposed rule which accomplish the stated objectives of applicable 
statutes and which minimize any significant economic impact of the 
proposed rule on small entities. 5 U.S.C. 603(b)(3), 603(b)(4), 
603(b)(5), 603(c).
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    In May 2012, the Bureau provided the Chief Counsel with the formal 
notification and other information required under section 609(b)(1) of 
the RFA. To obtain feedback from SERs to inform the Small Business 
Review Panel pursuant to sections 609(b)(2) and 609(b)(4) of the RFA, 
the Bureau, in consultation with the Chief Counsel, identified 6 
categories of small entities that may be subject to the proposed rule 
for purposes of the IRFA: Commercial banks, savings institutions, 
credit unions, mortgage brokers, real estate credit entities (non-
depository lenders), and certain non-profit organizations. Section 3 of 
the IRFA, in part VIII.B.3, below, describes in greater detail the 
Bureau's analysis of the number and types of entities that may be 
affected by the proposed rule. Having identified the categories of 
small entities that may be subject to the proposed rule for purposes of 
an IRFA, the Bureau then, in consultation with the Chief Counsel, 
selected 17 SERs to participate in the Small Business Review Panel 
process. As described in chapter 7 of the Small Business Review Panel 
Report, described below, the SERs selected by the Bureau in 
consultation with the Chief Counsel included representatives from each 
of the categories identified by the Bureau and comprised a diverse 
group of individuals with regard to geography and type of locality 
(i.e., rural, urban, suburban, or metropolitan areas).
    On May 9, 2012, the Bureau convened the Small Business Review Panel 
pursuant to section 609(b)(3) of the RFA. Afterwards, to collect the 
advice and recommendations of the SERs under section 609(b)(4) of the 
RFA, the Small Business Review Panel held an outreach meeting/
teleconference with the SERs on May 23, 2012. To help the SERs prepare 
for the outreach meeting beforehand, the Small Business Review Panel 
circulated briefing materials prepared in connection with section 
609(b)(4) of the RFA that summarized the proposals under consideration 
at that time, posed discussion issues, and provided information about 
the SBREFA process generally.\111\ All 17 SERs participated in the 
outreach meeting either in person or by telephone. The Bureau then held 
two teleconference calls with the SERs on June 7 and June 8, 2012, in 
which a potential provision under consideration requiring that 
origination fees in certain transactions not vary with the size of the 
loan was further discussed. At the request of several SERs and in light 
of the additional calls, the Small Business Review Panel extended the 
SERs deadline to submit written feedback, which was originally June 4, 
2012, to June 11, 2012. The Small Business Review Panel received 
written feedback from 11 of the representatives.\112\
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    \111\ The Bureau posted these materials on its Web site and 
invited the public to email remarks on the materials. See U.S. 
Consumer Fin. Prot. Bureau, Small Business Review Panel for 
Residential Mortgage Loan Origination Standards Rulemaking: Outline 
of Proposals Under Consideration and Alternative Considered (May 9, 
2012) (Outline of Proposals), available at: https://files.consumerfinance.gov/f/201205_cfpb_MLO_SBREFA_Outline_of_Proposals.pdf.
    \112\ This written feedback is attached as Appendix A to the 
Small Business Review Panel Final Report discussed below.
---------------------------------------------------------------------------

    On July 11, 2012,\113\ the Small Business Review Panel submitted to 
the Director of the Bureau, Richard Cordray, the Small Business Review 
Panel Report that includes the following: Background information on the 
proposals under consideration at the time: Information on the types of 
small entities that would be subject to those proposals and on the SERs 
who were selected to advise the Small Business Review Panel; a summary 
of the Small Business Review Panel's outreach to obtain the advice and 
recommendations of those SERs; a discussion of the comments and 
recommendations of the SERs; and a discussion of the Small Business 
Review Panel findings, focusing on the statutory elements required 
under section 603 of the RFA. 5 U.S.C. 609(b)(5).\114\
---------------------------------------------------------------------------

    \113\ The Panel extended its deliberations in order to allow 
full consideration and incorporation of the written comments of the 
SERs that were submitted pursuant to the extended deadline.
    \114\ Small Business Review Panel Final Report, supra note 36.
---------------------------------------------------------------------------

    In preparing this proposed rule and the IRFA, the Bureau has 
carefully considered the feedback from the SERs participating in the 
Small Business Review Panel process and the findings and 
recommendations in the Small Business Review Panel Report. The section-
by-section analysis of the proposed rule in part V, above, and the IRFA 
discuss this feedback and the specific findings and recommendations of 
the Small Business Review Panel, as applicable. The Small Business 
Review Panel process provided the Small Business Review Panel and the 
Bureau with an opportunity to identify and explore opportunities to 
minimize the burden of the rule on small entities while achieving the 
rule's purposes. It is important to note, however, that the Small 
Business Review Panel prepared the Small Business Review Panel Report 
at a preliminary stage of the proposal's development and that the Small 
Business Review Panel Report--in particular, the Small Business Review 
Panel's findings and recommendations--should be considered in that 
light. Also, any options identified in the Small Business Review Panel 
Report for reducing the

[[Page 55343]]

proposed rule's regulatory impact on small entities were expressly 
subject to further consideration, analysis, and data collection by the 
Bureau to ensure that the options identified were practicable, 
enforceable, and consistent with TILA, the Dodd-Frank Act, and their 
statutory purposes. The proposed rule and the IRFA reflect further 
consideration, analysis, and data collection by the Bureau.

B. Initial Regulatory Flexibility Analysis

    Under RFA section 603(a), an IRFA ``shall describe the impact of 
the proposed rule on small entities.'' 5 U.S.C. 603(a). Section 603(b) 
of the RFA sets forth the required elements of the IRFA. Section 
603(b)(1) requires the IRFA to contain a description of the reasons why 
action by the agency is being considered. 5 U.S.C. 603(b)(1). Section 
603(b)(2) requires a succinct statement of the objectives of, and the 
legal basis for, the proposed rule. 5 U.S.C. 603(b)(2). The IRFA 
further must contain a description of and, where feasible, an estimate 
of the number of small entities to which the proposed rule will apply. 
5 U.S.C. 603(b)(3). Section 603(b)(4) requires a description of the 
projected reporting, recordkeeping, and other compliance requirements 
of the proposed rule, including an estimate of the classes of small 
entities that will be subject to the requirement and the types of 
professional skills necessary for the preparation of the report or 
record. 5 U.S.C. 603(b)(4). In addition, the Bureau must identify, to 
the extent practicable, all relevant Federal rules which may duplicate, 
overlap, or conflict with the proposed rule. 5 U.S.C. 603(b)(5). The 
Bureau, further, must describe any significant alternatives to the 
proposed rule that accomplish the stated objectives of applicable 
statutes and that minimize any significant economic impact of the 
proposed rule on small entities. 5 U.S.C. 603(b)(6). Finally, as 
amended by the Dodd-Frank Act, RFA section 603(d) requires that the 
IRFA include a description of any projected increase in the cost of 
credit for small entities, a description of any significant 
alternatives to the proposed rule which accomplish the stated 
objectives of applicable statutes and that minimize any increase in the 
cost of credit for small entities (if such an increase in the cost of 
credit is projected), and a description of the advice and 
recommendations of representatives of small entities relating to the 
cost of credit issues. 5 U.S.C. 603(d)(1); Dodd-Frank Act section 
1100G(d)(1).
1. Description of the Reasons Why Agency Action Is Being Considered
    As discussed in the Background, part II above, in the wake of the 
financial crisis, the Board in 2010 issued the Loan Originator Final 
Rule, which has been transferred to the Bureau. The Loan Originator 
Final Rule addressed many concerns regarding the lack of transparency, 
consumer confusion, and steering incentives created by certain 
residential loan originator compensation structures. The Dodd-Frank Act 
included a number of provisions that substantially paralleled, but also 
added further provisions to, the Loan Originator Final Rule. The Board 
noted in adopting the Loan Originator Final Rule that the Dodd-Frank 
Act would necessitate further rulemaking to implement the additional 
provisions of the legislation not reflected by the regulation. These 
provisions are new TILA sections 129B(b)(1) (requiring each mortgage 
originator to be qualified and include unique identification numbers on 
loan documents), (c)(1) and (c)(2) (prohibiting steering incentives 
including prohibiting mortgage originators from receiving compensation 
that varies based on loan terms and from receiving origination charges 
or fees from persons other than the consumer except in certain 
circumstances), and 129C(d) and (e) (prohibiting financing of single-
premium credit insurance and providing restrictions on mandatory 
arbitration agreements), as added by sections 1402, 1403, 1414(d) and 
(e) of the Dodd-Frank Act. The Bureau is also proposing to clarify 
certain provisions of the existing Loan Originator Final Rule to 
provide additional guidance and reduce uncertainty. The Bureau is also 
soliciting comment on implementing the requirement in TILA section 
129B(b)(2), as added by section 1402 of the Dodd-Frank Act, that it 
prescribe regulations requiring certain entities to establish and 
maintain certain procedures, a requirement that may be included in the 
final rule.
    The Dodd-Frank Act and TILA authorize the Bureau to adopt 
implementing regulations for the statutory provisions provided by 
sections 1402, 1403, and 1414(d) and (e) of the Dodd-Frank Act. The 
Bureau is using this authority to propose regulations in order to 
provide creditors and loan originators with clarity about their 
statutory obligations under these provisions. The Bureau is also 
proposing to adjust or provide exemptions to the statutory 
requirements, including the obligations of small entities, in certain 
circumstances. The Bureau is taking this action in order to ease burden 
when doing so would not sacrifice adequate protection of consumers.
    The new statutory requirements relating to qualification and 
compensation take effect automatically on January 21, 2013, as written 
in the statute, unless final rules are issued on or prior to that date 
that provide for a later effective date.\115\
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    \115\ See Small Business Review Panel Report for a detailed 
discussion of the issues related to the effective dates of the rules 
in this rulemaking.
---------------------------------------------------------------------------

2. Statement of the Objectives of, and Legal Basis for, the Proposed 
Rule
    The objectives of this rulemaking are: (1) To revise current Sec.  
1026.36 and commentary to implement substantive requirements in new 
TILA sections 129B(b), (c)(1), and (c)(2) and 129C(d) and (e), as added 
by sections 1402, 1403, and 1414(d) and (e) of the Dodd-Frank Act; (2) 
to clarify ambiguities between current Sec.  1026.36 and the new TILA 
amendments; (3) to adjust existing rules governing compensation to 
individual loan originators to account for Dodd-Frank Act amendments to 
TILA; and (4) to provide greater clarity, guidance, and flexibility on 
several issues.
    To address consumer confusion over the relationship between certain 
upfront loan charges and loan interest rates, the proposal would 
require that, in certain circumstances, before the creditor or loan 
originator organization may impose upfront discount points, origination 
points, or originations fees on a consumer, the creditor must make 
available to the consumer a comparable, alternative loan that does not 
include discount points and origination points or fees that are 
retained by the creditor, loan originator organization, or an affiliate 
of either. (Making available the comparable, alternative loan is not 
necessary if the consumer is unlikely to qualify for such a loan.) The 
proposed use of the Bureau's exception authority under TILA section 
129B(c)(2)(B)(ii) to allow creditors and loan originator organization 
to impose discount points and origination points or fees provided that 
the creditor makes available a comparable, alternative loan, as 
described above, will implement TILA section 129B(c)(2)(B) and make it 
easier for consumers to understand terms and evaluate pricing options 
while preserving their ability to make and receive the benefit of some 
upfront payments of points and fees. In addition to reducing consumer 
confusion, the proposal would also avoid a radical restructuring of 
existing mortgage market pricing structures that may

[[Page 55344]]

result from strict implementation of the Dodd-Frank Act and thus would 
promote stability in the mortgage market.
    The proposal would also implement certain other Dodd-Frank Act 
requirements applicable to both closed-end and open-end mortgage 
credit. Specifically, the proposed provisions would codify TILA section 
129C(d), which creates prohibitions on financing of premiums for 
single-premium credit insurance. The proposed provisions would also 
implement TILA section 129C(e), which restricts agreements requiring 
consumers to submit any disputes that may arise to mandatory 
arbitration, thereby preserving consumers' ability to seek redress 
through the court system after a dispute arises. The proposal also 
solicits comment on implementing TILA section 129B(b)(2), which 
requires the Bureau to prescribe regulations requiring depository 
institutions to establish and monitor compliance of such depository 
institutions, the subsidiaries of such institutions, and the employees 
of both with the requirements of TILA section 129B and the registration 
procedures established under section 1507 of the SAFE Act.
    In addition to creating new substantive requirements, the Dodd-
Frank Act extended previous efforts by lawmakers and regulators to 
strengthen loan originator qualification requirements and regulate 
industry compensation practices. New TILA section 129B(b) imposes a 
duty on loan originators to be ``qualified'' and, where applicable, 
registered or licensed as a loan originator under State law and the 
Federal SAFE Act and to include unique identification numbers on loan 
documents. The proposal would implement this section and expand 
consumer protections by requiring entities whose individual loan 
originators are not subject to SAFE Act licensing requirements, 
including depositories and bona fide nonprofit loan originator 
entities, to: (1) Ensure that their individual loan originators meet 
character and fitness and criminal background standards equivalent to 
the licensing standards that the SAFE Act applies to employees of non-
bank loan originators; and (2) provide appropriate training to their 
individual loan originators commensurate with the mortgage origination 
activities of the individual.
    Furthermore, the proposal would adjust existing rules governing 
compensation to individual loan originations in connection with closed-
end mortgage transactions to account for Dodd-Frank Act amendments to 
TILA and provide greater clarity and flexibility. Specifically, the 
proposed provisions would preserve, with some refinements, the 
prohibition on the payment or receipt of commissions or other loan 
originator compensation based on the terms of the transaction (other 
than loan amount) and on loan originators being compensated 
simultaneously by both consumers and other parties in the same 
transaction. To further reduce potential steering incentives for loan 
originators created by certain compensation arrangements, the proposed 
rule would also clarify and revise restrictions on pooled compensation, 
profit-sharing, and bonus plans for loan originators, depending on the 
potential for incentives to steer consumers to different transaction 
terms.
    Finally, the proposal would make two changes to the current record 
retention provisions of Sec.  1026.25 of TILA. The proposed provisions 
would: (1) Require a creditor to maintain records of the compensation 
paid to a loan originator organization or the creditor's individual 
loan originators, and the governing compensation agreement, for three 
years after the date of payment; and (2) require a loan originator 
organization to maintain records of the compensation it receives from a 
creditor, a consumer, or another person and that it pays to its 
individual loan originators, as well as the compensation agreement that 
governs those receipts or payments, for three years after the date of 
the receipts or payments. In addition, creditors would be required to 
make and maintain, for three years, records to show that they made 
available to a consumer a comparable, alternative loan when required by 
the proposed rule and complied with the requirement that where discount 
points and origination points or fees are charged, there be a bona fide 
reduction in the interest rate compared to the interest rate for the 
comparable, alternative loan. By ensuring that records associated with 
loan originator compensation are retained for a time period 
commensurate with the statute of limitations for causes of action under 
TILA section 130 and are readily available for examination, these 
proposed modifications to the existing recordkeeping provisions will 
prevent circumvention or evasion of TILA and facilitate compliance.
    The legal basis for the proposed rule is discussed in detail in the 
legal authority analysis in part IV and in the section-by-section 
analysis in part V, above.
3. Description and, Where Feasible, Provision of an Estimate of the 
Number of Small Entities To Which the Proposed Rule Will Apply
    For purposes of assessing the impacts of the proposals under 
consideration on small entities, ``small entities'' are defined in the 
RFA to include small businesses, small non-profit organizations, and 
small government jurisdictions. 5 U.S.C. 601(6). A ``small business'' 
is determined by application of SBA regulations and reference to the 
North American Industry Classification System (``NAICS'') 
classifications and size standards.\116\ 5 U.S.C. 601(3). A ``small 
organization'' is any ``not-for-profit enterprise which is 
independently owned and operated and is not dominant in its field.'' 5 
U.S.C. 601(4). A ``small governmental jurisdiction'' is the government 
of a city, county, town, township, village, school district, or special 
district with a population of less than 50,000. 5 U.S.C. 601(5).
---------------------------------------------------------------------------

    \116\ The current SBA size standards are available on the SBA's 
Web site at https://www.sba.gov/content/table-small-business-size-standards.
---------------------------------------------------------------------------

    During the Small Business Review Panel process, the Bureau 
identified six categories of small entities that may be subject to the 
proposed rule for purposes of the RFA:
     Commercial banks (NAICS 522110);
     Savings institutions (NAICS 522120); \117\
---------------------------------------------------------------------------

    \117\ Savings institutions include thrifts, savings banks, 
mutual banks, and similar institutions.
---------------------------------------------------------------------------

     Credit unions (NAICS 522130);
     Firms providing real estate credit (NAICS 522292);
     Mortgage brokers (NAICS 522310); and
     Small non-profit organizations.
    Commercial banks, savings institutions, and credit unions are small 
businesses if they have $175 million or less in assets. Firms providing 
real estate credit and mortgage brokers are small businesses if their 
average annual receipts do not exceed $7 million.
    A small non-profit organization is any not-for-profit enterprise 
that is independently owned and operated and is not dominant in its 
field. Small non-profit organizations engaged in loan origination 
typically perform a number of activities directed at increasing the 
supply of affordable housing in their communities. Some small non-
profit organizations originate mortgage loans for low and moderate-
income individuals while others purchase loans originated by local 
community development lenders.
    The following table provides the Bureau's estimated number of 
affected and small entities by NAICS Code and engagement in loan 
origination:

[[Page 55345]]



--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                        Entities that    Small entities
                                                                                                                        originate any    that originate
                           Category                                NAICS Code      Total entities    Small entities    mortgage loans     any mortgage
                                                                                                                             \b\              loans
--------------------------------------------------------------------------------------------------------------------------------------------------------
Commercial Banking............................................            522110             6,596             3,764         \a\ 6,362         \a\ 3,597
Savings Institutions..........................................            522120             1,145               491         \a\ 1,138           \a\ 487
Credit Unions.................................................            522130             7,491             6,569         \a\ 4,359         \a\ 3,441
Real Estate Credit c e........................................            522292             2,515             2,282             2,515         \a\ 2,282
Mortgage Brokers \e\..........................................            522310             8,051             8,049           \d\ N/A           \d\ N/A
                                                               -----------------------------------------------------------------------------------------
    Total.....................................................  ................            25,798            21,155            14,374             9,807
--------------------------------------------------------------------------------------------------------------------------------------------------------
Source: HMDA, Bank and Thrift Call Reports, NCUA Call Reports, NMLSR Mortgage Call Reports.
\a\ For HMDA reporters, loan counts from HMDA 2010. For institutions that are not HMDA reporters, loan counts projected based on Call Report data fields
  and counts for HMDA reporters.
\b\ Entities are characterized as originating loans if they make one or more loans. If loan counts are estimated, entities are counted as originating
  loans if the estimated loan count is greater than one.
\c\ NMLSR Mortgage Call Report (``MCR'') for Q1 and Q2 of 2011. All MCR reporters that originate at least one loan or that have positive loan amounts
  are considered to be engaged in real estate credit (instead of purely mortgage brokers). For institutions with missing revenue values revenues were
  imputed using nearest neighbor matching of the count of originations and the count of brokered loans.
\d\ Mortgage Brokers do not originate (back as a creditor) loans.
\e\ Data do not distinguish nonprofit from for-profit organizations, but Real Estate Credit and Mortgage Brokers categories presumptively include
  nonprofit organizations.

4. Projected Reporting, Recordkeeping, and Other Compliance 
Requirements of the Proposed Rule, Including an Estimate of the Classes 
of Small Entities Which Will Be Subject to the Requirement and the Type 
of Professional Skills Necessary for the Preparation of the Report
(1) Reporting Requirements
    The proposed rule does not impose new reporting requirements.
(2) Recordkeeping Requirements
    Regulation Z currently requires creditors to create and maintain 
records to demonstrate their compliance with provisions that apply to 
the compensation paid to or received by a loan originator. As discussed 
above in part V, the proposed rule would require creditors to retain 
these records for a three-year period, rather than for a two-year 
period as currently required. The Bureau is soliciting comment on 
extending the record retention period to five years. The proposed rule 
would apply the same requirement to organizations when they act as a 
loan originator in a transaction, even if they do not act as a creditor 
in the transaction. The proposed recordkeeping requirements, however, 
would not apply to individual loan originators. In addition, creditors 
would be required to make and maintain records for three years to show 
that they made available to a consumer a comparable, alternative loan 
when required by this proposed rule and complied with the requirement 
that where discount points and origination points or fees are charged, 
there be bona fide reduction in the interest rate compared to the 
interest rate for the comparable, alternative loan. The Bureau is also 
soliciting comment on extending this record retention period to five 
years.
    As discussed in the section-by-section analysis, the Bureau 
recognizes that extending the record retention requirement for 
creditors from two years for specific information related to loan 
originator compensation and discount points and origination points and 
fees, as currently provided in Regulation Z, to three years may result 
in some increase in costs for creditors. The Bureau believes, however, 
that creditors should be able to use existing recordkeeping systems to 
maintain the records for an additional year at minimal cost. Similarly, 
although loan originator organizations may incur some costs to 
establish and maintain recordkeeping systems, loan originator 
organizations may be able to use existing recordkeeping systems that 
they maintain for other purposes at minimal cost. During the Small 
Business Review Panel process, the SERs were asked about their current 
record retention practices and the potential impact of the proposed 
enhanced record retention requirements. Of the few SERs who provided 
feedback on the issue, one creditor stated that it maintained detailed 
records of compensation paid to all of its employees and that a 
regulator already reviews its compensation plans regularly, and another 
creditor reported that it did not believe the proposed record retention 
requirement would require it to change its current practices. 
Therefore, the Bureau does not believe that the record retention 
requirements will create undue burden for small entity creditors and 
loan originator organizations.
(3) Compliance Requirements
    The proposal contains both specific proposed provisions with 
regulatory or commentary language (proposed provisions) as well as 
requests for comment on modifications where regulatory or commentary 
language was not specifically included (additional proposed 
modifications). The possible compliance costs for small entities from 
each major component of the proposed rule are presented below. In most 
cases, the Bureau presents these costs against a pre-statute baseline. 
As noted above in the section 1022(b)(2) analysis in part VII above, 
provisions where the Bureau has used its exemption authority are 
discussed relative to the statutory provisions (a post-statute 
baseline). The analysis below considers the benefits, costs, and 
impacts of the following major proposed provisions on small entities:

1. Upfront points and fees
2. Compensation based on transaction's terms
3. Qualification for mortgage originators
(a) Upfront Points and Fees
    The Dodd-Frank Act prohibits consumer payment of upfront points and 
fees in all residential mortgage loan transactions (as defined in the 
Dodd-Frank Act) except those where no one other than the consumer pays 
a loan originator compensation tied to the transaction (e.g., a 
commission). As discussed in the Background and section-by-section 
analysis, the Bureau is proposing to require that before a creditor or 
loan originator may impose discount points and origination points or 
fees on a consumer, the creditor must make available to the consumer a 
comparable, alternative loan that does not include such points or fees. 
(Making available the comparable, alternative loan is not necessary if 
the consumer is unlikely to qualify for such a loan.)

[[Page 55346]]

    The Bureau is proposing two safe harbors for how a creditor may 
comply with the requirement to make available a comparable, alternative 
loan (unless the consumer is unlikely to qualify for the loan). In 
transactions that do not involve a mortgage broker, a creditor will be 
deemed to have made available a comparable, alternative loan to a 
consumer if, any time prior to application that the creditor provides 
to the consumer an individualized quote for a loan that includes 
discount points and origination points or fees, the creditor also 
provides a quote for the comparable, alternative loan. In transactions 
that involve mortgage brokers, a creditor will be deemed to have made a 
comparable, alternative loan available to consumers if it provides to 
mortgage brokers the pricing for all of its comparable, alternative 
loans that do not include discount points and origination points or 
fees. Mortgage brokers then will provide quotes to consumers for loans 
that do not include discount points and origination points or fees when 
presenting different loan options to consumers. The requirement would 
not apply where the consumer is unlikely to qualify for the comparable, 
alternative loan.
    The Bureau is also seeking comment on a number of related issues, 
including whether the Bureau should adopt a ``bona fide'' requirement 
to ensure that consumers receive value in return for paying discount 
points and origination points or fees, and different options for 
structuring such a requirement; whether additional adjustments to the 
proposal concerning the treatment of affiliate fees would make it 
easier for consumers to compare offers between two or more creditors; 
whether to take a different approach concerning situations in which a 
consumer does not qualify for a comparable, alternative loan that does 
not include discount points and origination points or fees; and whether 
to require information about a comparable, alternative loan be provided 
not just in connection with informal quotes, but also in advertising 
and at the time that consumers are provided disclosures three days 
after application. These issues are described in more detail in the 
section-by-section analysis, above.
    Benefits for Small Entities: The Bureau's proposal with regard to 
points and fees has a number of potential benefits for small entities. 
First, relative to the Dodd-Frank Act ban on points and fees, allowing 
consumers to pay upfront discount points and origination points or fees 
in transactions in certain circumstances would increase the range of 
mortgage transactions available to consumers. Thus, the increased range 
of payment options would allow small creditors and loan originator 
organizations to be more flexible in marketing different mortgage loan 
products to consumers. The availability of different payment options 
also would enhance the ability of small creditors and loan originator 
organizations to enter into certain mortgage loan transactions with 
consumers. Furthermore, a consumer's ability to refinance is costly to 
the creditor. Preserving consumers' ability to choose to pay interest 
upfront in the form of discount points would reduce the ultimate cost 
to creditors from both loan default and prepayment.
    Moreover, the ability of small creditors to charge discount points 
in exchange for lower interest rates would accommodate those consumers 
who prefer to pay more at settlement in exchange for lower monthly 
interest charges and could produce a greater volume of available credit 
in residential mortgage markets. Preserving this ability would 
potentially allow a wider access to homeownership, which would benefit 
consumers, creditors, loan originator organizations, and individual 
loan originators. The ability to charge origination fees up front also 
would allow small creditors to recover fixed costs at the time they are 
incurred rather than over time through increased interest payments or 
through the secondary market prices. And, similarly, preserving the 
flexibility for affiliates of creditors and loan originator 
organizations to charge fees upfront should allow for these firms to 
charge directly for their services. This means that creditors and loan 
originator organizations may be less likely to divest such entities 
than if the Dodd-Frank Act mandate takes effect as written.
    Costs for Small Entities: As described, in the absence of the 
proposed rule in which the Bureau exercises its exemption authority, 
generally the only mortgage transactions permitted pursuant to the 
Dodd-Frank Act would be loans that do not include any discount points 
and origination points or fees. Under the proposed rule, creditors 
would be required in most instances to make available these loans. 
(Making available the comparable, alternative loan is not necessary if 
the consumer is unlikely to qualify for such a loan.) To ease 
compliance burdens, the Bureau is proposing two safe harbors for how a 
creditor may comply with the requirement to make available a 
comparable, alternative loan available.
    The requirement that creditors must generally make available loans 
that do not include discount points and origination points or fees 
(unless the consumer is unlikely to qualify for such a loan) would 
impose some restrictions on small creditors and loan originator 
organizations. As discussed in part VII, this requirement may impose 
costs on smaller entities with more limited access to the secondary 
market or to affordable hedging opportunities. There may be instances 
where a consumer's choice of the comparable, alternative loan from a 
small creditor increases that firm's financial risk; however for the 
reasons discussed, the Bureau believes such instances would be rare. 
The Bureau seeks comment on the costs to small entities from this 
requirement.
    The proposed rule also solicits comment on whether the Bureau 
should adopt a ``bona fide'' requirement to ensure that consumers 
receive value in return for paying discount points and origination 
points or fees, and different options for structuring such a 
requirements. To the extent the final rule imposes a bona fide 
requirement that departs from current market pricing practices, this 
condition may restrict small entities' flexibility in pricing. 
Implementing a requirement that the payment of discount points and 
origination points or fees be bona fide may also impose additional 
compliance and monitoring costs. Small creditors may already need to 
determine and monitor when discount points are bona fide for the 
purposes of the Bureau's forthcoming ATR rulemaking; and to the extent 
that the definitions of bona fide discount points in the ATR context 
and bona fide discount points and origination points or fees are 
similar, the additional costs would be reduced. Regarding compliance, 
the proposal seeks comments on market based approaches or approaches 
based on firms' own pricing policies; in either case, compliance would 
likely entail increased records retention.
    Moreover, the Bureau is soliciting comment on whether to require 
information about the comparable, alternative loan to be provided not 
just in connection with informal quotes, but also in advertising and 
after application by providing a Loan Estimate, or the first page of 
the Loan Estimate, which is the integrated disclosures under TILA and 
RESPA proposed by the Bureau in the TILA-RESPA Integration Proposal.
    Changes to the advertising rules under Regulation Z are unlikely to 
raise specific costs of compliance for small entities, apart from those 
costs associated with learning about and adjusting to any new 
regulations. The

[[Page 55347]]

requirement to provide the Loan Estimate for the comparable, 
alternative loan would marginally increase cost for some small entity 
originators. The Bureau seeks comments on the specific impacts these 
alternatives may have for small entities.
(b) Compensation Based on Transaction Terms
    The proposed rule clarifies and revises restrictions on pooled 
compensation, profit-sharing, and bonus plans for loan originators, 
depending on the potential incentives to steer consumers to different 
transaction terms. As discussed in the section-by-section analysis to 
proposed 1026.36(d)(1)(iii), the proposal regarding bonus plans would 
permit employers to make contributions from general profits derived 
from mortgage activity to 401(k) plans, employee stock option plans, 
and other ``qualified plans'' under section 401(a) of the IRC and 
ERISA, as applicable, and also would permit employers to pay bonuses or 
make contributions to non-qualified profit-sharing or retirement plans 
from general profits derived from mortgage activity if: (1) The loan 
originator affected has originated five or fewer mortgage transactions 
during the last 12 months; or (2) the company's mortgage business 
revenues are limited (the Bureau is seeking comment on whether 50 
percent or 25 percent of total revenues would be an appropriate test 
for such limitation, and on other related issues). The Bureau is also 
proposing, to permit compensation funded by general profits derived 
from mortgage activity in the form of bonuses and other payments under 
profit-sharing plans and contributions to non-qualified defined benefit 
or contribution plans where an individual loan originator is the loan 
originator for five or fewer transactions within the 12-month period 
preceding the payment of the compensation. Even though contributions 
and bonuses could be funded from general mortgage profits, the amounts 
paid to individual loan originators could not be based on the terms of 
the transactions that the individual had originated.
    With respect to the proposal to permit bonuses under profit-sharing 
plans and contributions to non-qualified retirement plans where the 
revenues of the mortgage business do not exceed a certain percentage of 
the total revenues of the organization (or, as applicable, the business 
until to which the profit-sharing plan applies), for small depository 
institutions and credit unions (defined as those institutions with 
assets under $175 million), regulatory data from 2010 indicate that at 
the higher threshold of 50 percent of total revenue, roughly 2 percent 
of small commercial banks (about 75 banks) and 3 percent of small 
credit unions (about 200 credit unions) would remain subject to the 
proposed restrictions. Using a lower threshold of 25 percent of 
revenue, roughly 28 percent of small commercial banks and 22 percent of 
small credit unions would be subject to the proposed restrictions. The 
numbers are larger and more significant for small savings institutions 
whose primary business focus is on residential mortgages. At the higher 
threshold, 59 percent of these firms would be restricted from paying 
bonuses based on mortgage-related profits to their individual loan 
originators.\118\ The Bureau lacks comprehensive data on nonbank 
lenders and, in particular, does not have information regarding the 
precise range of business activities that such companies engage in. As 
a result, it is unclear at this time the extent to which such nonbank 
lenders will face restrictions on their compensation practices.
---------------------------------------------------------------------------

    \118\ Estimates are based on 2010 Call Report data. Revenue from 
loan originations is assumed to equal fee and interest income from 
1-4 family residences as reported. To the extent that other revenue 
on the Call Reports is tied to loan originations, these numbers may 
be underestimated. Revenue estimates for credit unions are not 
available; instead, the percentage of assets held in 1-4 family 
residential real estate is used instead.
---------------------------------------------------------------------------

    Firms that did not change their compensation practices in response 
to the current rule and the Dodd-Frank Act and, thus, currently offer 
compensation arrangements that would be prohibited under the proposed 
rule, will incur costs. These include costs from changing internal 
accounting practices, renegotiating the remuneration terms in the 
contracts of existing employees, and any other industry practice 
related to these methods of compensation. For these firms, the 
prohibition on compensation based on transaction terms may contribute 
to adverse selection among individual loan originators, a possible 
lower average quality of individual loan originators in such a firm, 
and higher retention costs. The discrete nature of the threshold also 
implies that some loan originators may now suffer the disadvantage of 
facing competitors with fewer restrictions on compensation. These 
potential differential effects may be greater for small entities. The 
Bureau seeks comments and data on the current compensation practices of 
those firms at or above the thresholds.
    During the Small Business Review Panel process, a SER stated that 
there should be no threshold limit because any limit would disadvantage 
small businesses that originate only mortgages. In response to this and 
other SERs feedback, the Small Business Review Panel recommended that 
the Bureau seek public comment on the ramifications for small 
businesses and other businesses of setting the revenue limit at 50 
percent of company revenue or at other levels. The Small Business 
Review Panel also recommended that the Bureau solicit comment on the 
treatment of qualified and non-qualified plans and whether treating 
qualified plans differently than non-qualified plans would adversely 
affect small lenders and brokerages relative to large lenders and 
brokerage. While the Bureau expects that for some small entities, the 
de minimis exception should address some of the concerns expressed by 
the SERs through the Small Business Review Panel process, the Bureau is 
seeking comment on these issues.
(c) Loan Originator Qualification Requirements
    The proposal would implement a Dodd-Frank Act provision requiring 
both individual loan originators and their employers to be 
``qualified'' and to include their license or registration numbers on 
loan documents. Where an individual loan originator is not already 
required to be licensed under the SAFE Act, the proposal would require 
his or her employer to ensure that the individual loan originator meets 
character, fitness, and criminal background check standards that are 
equivalent to SAFE Act requirements and receives training commensurate 
with the individual loan originator's duties. Employers would be 
required to ensure that their individual loan originator employees are 
licensed or registered under the SAFE Act where applicable. Employers 
and the individual loan originators that are primarily responsible for 
a particular transaction would be required to list their license or 
registration numbers on key loan documents along with their names.
    Costs to Small Entities: Employees of depositories and bona fide 
non-profit organizations do not have to meet the SAFE Act standards 
that apply only to licensing, such as taking pre-licensure classes, 
passing a test, meeting character and fitness standards, having no 
felony convictions within the previous seven years, or taking annual 
continuing education classes. The proposed rule would require these 
institutions to adopt character and criminal record screening and 
ongoing training requirements. However, the Bureau

[[Page 55348]]

believes that many of these entities already have adopted screening and 
training requirements, either to satisfy safety-and-soundness 
requirements or as a matter of good business practice.
    For any entity that adopted screening and training requirements in 
the first instance, the Bureau estimates the costs to include the cost 
of a criminal background check and the time involved in checking 
employment and character references of an applicant. The time and cost 
required to provide occasional, appropriate training to individual loan 
originators will vary greatly depending on the lending activities of 
the entity and the skill and experience level of the individual loan 
originators; however, the Bureau anticipates that the training that 
many non-profit and depository individual loan originator employees 
already receive will be adequate to meet the proposed requirement. The 
Bureau expects that in no case would the training needed to satisfy the 
proposed requirement be more comprehensive, time-consuming, or costly 
than the online training approved by the NMLSR to satisfy the 
continuing education requirement imposed under the SAFE Act on those 
individuals who are subject to state licensing.
    The requirement to include the NMLSR unique identifiers and names 
of loan originators on loan documents may impose some additional costs 
relative to current practice. However, this may be mitigated by the 
fact that the Federal Housing Finance Agency already requires the NMLSR 
numerical identifier of individual loan originators and loan originator 
organizations to be included on all loan applications for Fannie Mae 
and Freddie Mac loans.
(d) Other Provisions
    (i) Mandatory Arbitration and Credit Insurance: The proposal would 
implement the Dodd-Frank Act requirements that prohibit agreements 
requiring consumers to submit any disputes that may arise to mandatory 
arbitration rather than filing suit in court and that ban the financing 
of premiums for credit insurance. Firms may incur some compliance cost 
such as amending standard contract form to reflect these changes.
    (ii) Dual Compensation, Pricing Concessions, and Proxies: The 
proposed rule contains provisions that would adjust existing rules 
governing compensation to individual loan originations in connection 
with closed-end mortgage transactions to account for Dodd-Frank Act 
amendments to TILA and provide greater clarity and flexibility.
    These proposed provisions would preserve the current prohibition on 
the payment or receipt of commissions or other loan originator 
compensation based on the terms of the transaction (other than loan 
amount) and on loan originators being compensated simultaneously by 
both consumers and other parties in the same transaction. The proposal 
would, however, revise the Loan Originator Final Rule to provide that 
if a loan originator organization receives compensation directly from a 
consumer in connection with a transaction, the loan originator 
organization may pay compensation in connection with the transaction 
(e.g., a commission) to individual loan originators and the individual 
loan originators may receive compensation from the loan originator 
organization. The proposed rule also would clarify that payments to a 
loan originator paid on the consumer's behalf by a person other than a 
creditor or its affiliates, such as a non-creditor seller, home 
builder, home improvement contractor, or realtor, are considered 
compensation received directly from the consumer if they are made 
pursuant to an agreement between the consumer and the person other than 
the creditor or its affiliates.
    In addition, the proposed rule would allow reductions in loan 
originator compensation in a limited set of circumstances where there 
are unanticipated increases in closing costs from non-affiliated third 
parties in a violation of applicable law (such as a tolerance violation 
under Regulation X). The proposed rule would also provide additional 
guidance on determining whether a factor used as a basis for 
compensation is prohibited as a ``proxy'' for a transaction term.
    These provisions will provide greater flexibility, relative to the 
statutory provisions of the Dodd-Frank Act, for firms needing to comply 
with the regulations. This greater clarity and flexibility should lower 
any costs of compliance for small entities by, for example, reducing 
costs for attorneys and compliance officers as well as potential costs 
of over-compliance and unnecessary litigation. These provisions of the 
proposed rule would therefore reduce the compliance burdens on small 
entities. The Bureau seeks comments on the specific impacts these 
provisions may have for small entities.
(4) Estimate of the Classes of Small Entities Which Will Be Subject to 
the Requirement and the Type of Professional Skills Necessary for the 
Preparation of the Report or Record
    Section 603(b)(4) of the RFA requires an estimate of the classes of 
small entities that will be subject to the requirements. The classes of 
small entities that will be subject to the reporting, recordkeeping, 
and compliance requirements of the proposed rule are the same classes 
of small entities that are identified above in part VIII.
    Section 603(b)(4) of the RFA also requires an estimate of the type 
of professional skills necessary for the preparation of the reports or 
records. The Bureau anticipates that the professional skills required 
for compliance with the proposed rule are the same or similar to those 
required in the ordinary course of business of the small entities 
affected by the proposed rule. Compliance by the small entities that 
will be affected by the proposed rule will require continued 
performance of the basic functions that they perform today.
5. Identification, to the Extent Practicable, of All Relevant Federal 
Rules Which May Duplicate, Overlap, or Conflict With the Proposed Rule
    The proposal contains restrictions on loan originator compensation 
practices, prerequisites to the making of a mortgage transaction with 
discount points and origination points or fees under most 
circumstances, requirements for loan originators to be qualified and 
licensed or registered, and restrictions on mandatory arbitration and 
the financing of certain credit insurance premiums. The Bureau has 
identified certain other Federal rules that relate in some fashion to 
these areas and has considered to what extent they may duplicate, 
overlap, or conflict with this proposal. Each of these is discussed 
below.
    The Bureau's Regulation X, 12 CFR part 1024, implements RESPA. The 
regulation requires, among other things, the disclosure to consumers 
pursuant to RESPA of real estate settlement costs. The settlement costs 
required to be disclosed under Regulation X include discount points and 
origination charges. See 12 CFR part 1024, app. C. Thus, Regulation X 
governs the disclosure of certain charges that this proposal would 
regulate substantively. The Bureau believes, however, that substantive 
restrictions on the charging of discount points and origination points 
or fees, as well as substantive restrictions on loan originator 
compensation, are distinct and independent from rules governing how 
such charges must be disclosed. Accordingly, the Bureau does not 
believe this proposal duplicates, overlaps, or conflicts with 
Regulation X.
    The Bureau's Regulations G, 12 CFR part 1007, and H, 12 CFR part 
1008,

[[Page 55349]]

implement the SAFE Act. Those regulations include the requirements 
pursuant to the SAFE Act that individual loan originators be qualified 
and licensed or registered, as applicable. As noted, this proposal also 
contains certain qualification, registration, and licensing 
requirements. This proposal, however, supplements the existing 
requirements of Regulations G and H, to the extent they apply to 
persons subject to this proposal's requirements. Where a person is 
already subject to the same kind of requirement that this proposal 
imposes pursuant to Regulation G or H, this proposal cross-references 
the existing requirement to avoid duplication. The Bureau believes this 
proposal therefore does not duplicate, overlap, or conflict with 
Regulations G and H. If the Bureau implements TILA section 129B(b)(2) 
in the final rule, the Bureau will endeavor to minimize any potential 
overlap with the procedures currently required by Regulation G.
    In the section-by-section analysis to Sec.  1026.36(d)(1)(i), 
above, the Bureau notes the Interagency Guidance on incentive 
compensation. 75 FR 36395 (Jun. 17, 2010). As discussed there, the 
Interagency Guidance was issued to help ensure that incentive 
compensation policies at large depository institutions do not encourage 
imprudent risk-taking and are consistent with the safety and soundness 
of the institutions. As also noted above, however, the Bureau's 
proposed rule does not affect the Interagency Guidance on loan 
origination compensation. While certain compensation practices may 
violate either the Interagency Guidance or this proposal but not the 
other, no practice is mandated by one and also prohibited by the other. 
Accordingly, the Bureau believes that this proposal does not conflict 
with the Interagency Guidance. The Bureau also believes that there is 
no duplication or overlap between the two.
    In addition to existing Federal rules, the Bureau is also in the 
process of several other rulemakings relating to mortgage credit to 
implement requirements of the Dodd-Frank Act. These other rulemakings 
are discussed in part II.E, above. As noted there, the Bureau is 
coordinating carefully the development of those proposals and final 
rules. Among those that include provisions potentially intersecting 
with this proposal are the TILA-RESPA Integration, HOEPA, and ATR 
rulemakings.
     Under the TILA-RESPA Integration Proposal, the integrated 
disclosures must include an NMLSR ID, which parallels proposed Sec.  
1026.36(g)(1)(ii) in this notice. The Bureau has sought to avoid 
duplication, overlap, or conflict in this regard through proposed 
comment 36(g)(1)(ii)-1, which states that an individual loan originator 
may comply with the requirement in Sec.  1026.36(g)(1)(ii) by complying 
with the applicable provision governing disclosure of NMLSR IDs in 
rules issued by the Bureau under the TILA-RESPA Integration rulemaking.
    The ATR and HOEPA rulemakings both involve the concept of bona fide 
discount points. As discussed in the section-by-section analysis to 
proposed Sec.  1026.36(d)(2)(ii)(C), this proposal includes an 
analogous concept in providing that no discount points and origination 
points or fees may be imposed on the consumer in certain transactions 
unless there is a bona fide reduction in the interest rate. The same 
discussion refers to the 2011 ATR Proposal and notes the parallel, 
while also recognizing that the two contexts may not necessarily call 
for an identical definition of ``bona fide'' given the differences 
between the purposes and scope of the requirements. The Bureau intends 
to coordinate carefully between this rulemaking and the ATR and HOEPA 
rulemakings with respect to any definitions of bona fide for their 
respective purposes, to ensure that they create no duplication, 
overlap, or conflict.
6. Description of Any Significant Alternatives to the Proposed Rule 
Which Accomplish the Stated Objectives of Applicable Statutes and 
Minimize Any Significant Economic Impact of the Proposed Rule on Small 
Entities
a. Payments of Upfront Points and Fees
    The Dodd-Frank Act prohibits consumers from making an ``upfront 
payment of discount points, origination points, or fees'' to a loan 
originator, creditor, or their affiliates in all retail and wholesale 
loan originations where the loan originator is compensated by creditors 
or brokerage firms. During the Small Business Review Panel process, one 
proposal the Bureau presented to the SERs for consideration concerned 
the nature of permissible origination fees. Specifically the Bureau 
asked the SERs to provide feedback on the proposal that consumers 
could, at the time of origination, remit to the loan originator, 
creditor, or their affiliates payment for bona fide or third-party 
charges connected with this origination, if these fees were independent 
of the size of the loan as well as its terms.
    This condition reflected the Bureau's belief that the actual costs 
incurred in originating a loan, whether in the wholesale or retail 
market, did not vary materially with the size of the initial loan 
balance. Under such constant costs, the requirement that fees not vary 
with the balance would benefit consumers in two distinct ways. First, 
it would likely improve market efficiency by requiring fees to 
consumers to mirror the actual costs of loan origination, precisely as 
they would in a competitive market, and consequently lower consumer 
costs. Second, it would eliminate an potential source of 
misinterpretation by consumers by essentially precluding originators 
from using the term ``points'' when referring to both origination 
points (charges to the borrower for originating the loan) and discount 
points (charges to the borrower that are exchanged for future interest 
payments).
    Industry, through both the Small Business Review Panel process and 
outreach, and consumer groups raised concerns with this proposal. SERs, 
in particular, raised objections focusing on the potential that the 
requirement would disadvantage smaller creditors. SERs and others also 
raised objections to the validity of the assumption of constant 
origination costs.
    Several SERs participating in Small Business Review Panel and 
participants in outreach calls asserted that, contrary to the Bureau's 
supposition, the economic costs of origination do vary with the loan 
balance and related loan characteristics. Two robust examples were 
cited in support of this assertion. The first involved GSE-imposed loan 
level pricing adjustments based on loan balance, which are incurred in 
the sale of mortgages to the secondary market. The second involved 
loans subsidized through the provision of an FHA or VA-funded financial 
guarantee against default by the primary borrower. More extensive 
services are required to originate such a loan, including efforts 
expended on consumer qualification and on certification of the terms of 
the guarantee per dollar of initial loan balance, than are required on 
a conventional loan.
    In addition, certain costs of hedging risk, incurred by creditors 
during and after origination vary with loan size. The most common 
example of this is the cost to the creditor of buying various forms of 
derivative securities to hedge the financial risks of newly-originated 
mortgage loans, the costs of which do vary with loan size and are 
incurred by creditors merely warehousing such loans for resale and 
those intending to hold these mortgages in portfolio.
    In response to the feedback it obtained from the SERs during the 
Small Business Review Panel process, as well as feedback obtained 
through

[[Page 55350]]

other outreach efforts, the Bureau has not proposed to restrict 
origination fees from varying with the size of the loan. Instead, an 
alternative provision, developed with the benefit of the SERs that met 
with the Small Business Review Panel as well as additional outreach to 
industry and consumer groups, would require a creditor to make 
available to a consumer a comparable, alternative loan that does not 
include discount points and origination points or fees as a 
prerequisite to the creditor or loan originator organization imposing 
discount points and origination points or fees on the consumer in the 
transaction (unless the consumer is unlikely to qualify for the 
comparable, alternative loan). Further, no discount points and 
origination points or fees could be imposed on the consumer unless 
there was a bona fide reduction in the interest rate. These provisions 
within the Bureau's current proposal are designed to accomplish a 
similar purpose as the flat fee requirement, namely to ensure that 
consumers are in the position to shop and receive value for origination 
points and fees, but do so in a way to minimize adverse consequences 
for industry and consumers that the flat fee requirement might entail.
7. Discussion of Impact on Cost of Credit for Small Entities
    Section 603(d) of the RFA requires the Bureau to consult with small 
entities regarding the potential impact of the proposed rule on the 
cost of credit for small entities and related matters. 5 U.S.C. 603(d). 
To satisfy this statutory requirement, the Bureau notified the Chief 
Counsel on May 9, 2012, that the Bureau would collect the advice and 
recommendations of the same SERs identified in consultation with the 
Chief Counsel during the Small Business Review Panel process concerning 
any projected impact of the proposed rule on the cost of credit for 
small entities.\119\ The Bureau sought and collected the advice and 
recommendations of the SERs during the Small Business Review Panel 
Outreach Meeting regarding the potential impact on the cost of business 
credit, since the SERs, as small providers of financial services, could 
also provide valuable input on any such impact related to the proposed 
rule.\120\
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    \119\ See 5 U.S.C. 603(d)(2)(A). The Bureau provided this 
notification as part of the notification and other information 
provided to the Chief Counsel with respect to the Small Business 
Review Panel process pursuant to section 609(b)(1) of the RFA.
    \120\ See 5 U.S.C. 603(d)(2)(B).
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    The Bureau had no evidence at the time of the Small Business Review 
Panel Outreach Meeting that the proposals then under consideration 
would result in an increase in the cost of business credit for small 
entities under any plausible economic conditions. The proposals under 
consideration at the time applied to consumer credit transactions 
secured by a mortgage, deed of trust, or other security interest on a 
residential dwelling or a residential real property that includes a 
dwelling, and the proposals would not apply to loans obtained primarily 
for business purposes.\121\
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    \121\ See Outline of Proposals at appendix A.
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    At the Small Business Review Panel Outreach Meeting, the Bureau 
specifically asked the SERs a series of questions regarding any 
potential increase in the cost of business credit. Specifically, the 
SERs were asked if they believed any of the proposals under 
consideration would impact the cost of credit for small entities and, 
if so, in what ways and whether there were any alternatives to the 
proposals being considered that could minimize such costs while 
accomplishing the statutory objectives addressed by the proposal.\122\ 
Although some SERs expressed the concern that any additional federal 
regulations, in general, had the potential to increase credit and other 
costs, all SERs responding to these questions stated that the proposals 
under consideration in this rulemaking would have little to no impact 
on the cost of credit to small businesses.
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    \122\ See the SBREFA Final Report, at app., appendix D, slide 38 
(PowerPoint slides from the Panel Outreach Meeting, ``Topic 7: 
Impact on the Cost of Business Credit'').
---------------------------------------------------------------------------

    Based on the feedback obtained from SERs at the Small Business 
Review Panel Outreach Meeting, the Bureau currently has no evidence 
that the proposed rule would result in an increase in the cost of 
credit for small business entities. In order to further evaluate this 
question, the Bureau solicits comment on whether the proposed rule 
would have any impact on the cost of credit for small entities.

IX. Paperwork Reduction Act

A. Overview

    The Bureau's collection of information requirements contained in 
this proposal, and identified as such, will be submitted to the Office 
of Management and Budget (OMB) for review under section 3507(d) of the 
Paperwork Reduction Act of 1995 (44 U.S.C. 3501 et seq.) (Paperwork 
Reduction Act or PRA) on or before publication of this proposal in the 
Federal Register. Under the Paperwork Reduction Act, the Bureau may not 
conduct or sponsor, and a person is not required to respond to, an 
information collection unless the information collection displays a 
valid OMB control number.
    This proposed rule would amend 12 CFR part 1026 (Regulation Z). 
Regulation Z currently contains collections of information approved by 
OMB, and the Bureau's OMB control number is 3170-0015 (Truth in Lending 
Act (Regulation Z) 12 CFR part 1026). As described below, the proposed 
rule would amend the collections of information currently in Regulation 
Z.
    The title of this information collection is: Loan Originator 
Compensation. The frequency of response is on-occasion. The information 
collection requirements in this proposed rule are required to provide 
benefits for consumers and would be mandatory. See 15 U.S.C. 1601 et 
seq. Because the Bureau would not collect any information under the 
proposed rule, no issue of confidentiality arises. The likely 
respondents would be commercial banks, savings institutions, credit 
unions, mortgage companies (non-bank creditors), mortgage brokers, and 
non-profit organizations that make or broker closed-end mortgage loans 
for consumers.
    Under the proposal, the Bureau would account for the paperwork 
burden associated with Regulation Z for the following respondents 
pursuant to its administrative enforcement authority: insured 
depository institutions with more than $10 billion in total assets, 
their depository institution affiliates, and certain non-depository 
loan originator organizations. The Bureau and the FTC generally both 
have enforcement authority over non-depository institutions for 
Regulation Z. Accordingly, the Bureau has allocated to itself half of 
its estimated burden to non-depository institutions. Other Federal 
agencies, including the FTC, are responsible for estimating and 
reporting to OMB the total paperwork burden for the institutions for 
which they have administrative enforcement authority. They may, but are 
not required, to use the Bureau's burden estimation methodology.
    Using the Bureau's burden estimation methodology, the total 
estimated burden for the approximately 22,400 institutions subject to 
the proposal, including Bureau respondents,\123\ would

[[Page 55351]]

be approximately 64,700 hours annually and 169,600 one-time hours. For 
the 10,984 Bureau respondents subject to this proposal, the estimates 
for the ongoing burden hours are roughly 32,400 annually, and the total 
one-time burden hours are roughly 84,500.
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    \123\ For purposes of this PRA analysis, the Bureau's 
respondents include 128 depository institutions and their depository 
institution affiliates. The Bureau's respondents include an 
estimated 2,515 non-depository creditors, an assumed 200 not-for 
profit originators (which may overlap with the other non-depository 
creditors), and 8,051 loan originator organizations.
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    The aggregate estimates of total burdens presented in this part IX 
are based on estimated costs that are averages across respondents. The 
Bureau expects that the amount of time required to implement each of 
the proposed changes for a given institution may vary based on the 
size, complexity, and practices of the respondent.

B. Information Collection Requirements

1. Record Retention Requirements
    Regulation Z currently requires creditors to create and maintain 
records to demonstrate their compliance with Regulation Z provisions 
regarding compensation paid to or received by a loan originator. As 
discussed above in part V, the proposed rule would require creditors to 
retain these records for a three-year period, rather than for a two-
year period as currently required. The proposed rule would apply the 
same requirement to organizations when they act as a loan originator in 
a transaction, even if they do not act as a creditor in the 
transaction. In addition, creditors would be required to make and 
maintain records for three years to show that they made available to a 
consumer a comparable, alternative mortgage loan when required by this 
proposed rule and complied with the requirement that where discount 
points and origination points or fees are charged, there be bona fide 
reduction in the interest rate compared to the interest rate for the 
comparable, alternative loan.
    For the requirement extending the record retention requirement for 
creditors from two years, as currently provided in Regulation Z, to 
three years, the Bureau assumes that there is not additional marginal 
cost. For most, if not all firms, the required records are in 
electronic form. The Bureau believes that, as a consequence, all 
creditors should be able to use their existing recordkeeping systems to 
maintain the required documentation for mortgage origination records 
for one additional year at a negligible cost of investing in new 
storage facilities.
    Loan originator organizations, but not creditors, will incur costs 
from the new requirement to retain records related to compensation. For 
the requirement that organizations retain records related to 
compensation on loan transactions, these firms will need to build the 
requisite reporting regimes. At some firms this may require the 
integration of information technology systems; for others simple 
reports can be generated from existing core systems.
    For the 8,051 Bureau respondents that are non-depository loan 
originator organizations but not creditors, the one-time burden is 
estimated to be roughly 162,800 hours to review the regulation and 
establish the requisite systems to retain compensation information. The 
Bureau estimates the requirement for these Bureau respondents to retain 
documentation of compensation arrangements is assumed to require 64,400 
ongoing burden hours annually. The Bureau has allocated to itself one-
half of this burden.
    The proposal would require a creditor to retain records that it 
made available to a consumer, when required, a comparable, alternative 
loan that does not include discount points and origination points or 
fees, or that it made a good-faith determination that a consumer is 
unlikely to qualify for it. The Bureau believes that there is no 
additional cost or burden associated with this requirement because it 
believes that most, if not all creditors, already keep records of 
quotes of loan terms that they make to individual consumers as a matter 
of usual and customary practice. The Bureau believes that, as a 
consequence, all creditors should be able to use their existing 
recordkeeping systems to maintain the required documentation. The 
Bureau seeks public comment on how creditors currently keep track of 
quotes they have made to particular consumers and any additional costs 
from the requirement to track compliance with the requirements 
regarding the comparable, alternative loan.
2. Requirement To Obtain Criminal Background Checks, Credit Reports, 
and Other Information for Certain Individual Loan Originators
    To the extent loan originator organizations employ or retain the 
services of individual loan originators who are not required to be 
licensed under the SAFE Act, and who are not so licensed, the loan 
originator organizations would be required to obtain a criminal 
background check and credit report for the individual loan originators. 
Loan originator organizations would also be required to obtain from the 
NMLSR or individual loan originator information about any findings 
against such individual loan originator by a government jurisdiction. 
In general, the loan originator organizations that would be subject to 
this requirement are depository institutions (including credit unions) 
and non-profit organizations whose loan originators are not subject to 
State licensing because the State has determined the organization to be 
a bona fide non-profit organization. The burden of obtaining this 
information may be different for a depository institution than it is 
for a non-profit organization because depository institutions already 
obtain criminal background checks for their loan originators to comply 
with Regulation G and have access to information about findings against 
such individual loan originator by a government jurisdiction through 
the NMLSR.
a. Credit Check
    Both depository institutions and non-profit organizations will 
incur one-time costs related to obtaining credit reports for all 
existing loan originators and ongoing costs for all future loan 
originators that are hired or transfer into this function. For the 
estimated 2,843 Bureau respondents, which include depository 
institutions over $10 billion, their depository affiliates, and one-
half the estimated burdens for the non-profit non-depository 
organizations, this one time estimated burden would be 2,950 hours and 
the estimated on going burden would be 150 hours.
b. Criminal Background Check
    Depository institutions already obtain criminal background checks 
for each of their individual loan originators through the NMLSR for 
purposes of complying with Regulation G. A criminal background check 
provided by the NMLSR to the depository institution is sufficient to 
meet the requirement to obtain a criminal background check in this 
proposed rule. Accordingly, the Bureau believes they will not incur any 
additional burden.
    Non-depository loan originator organizations that do not have 
access to information about criminal history in the NMLSR, including 
bona fide non-profit organizations, could satisfy the latter 
requirements by obtaining a national criminal background check.\124\ 
For the assumed 200 non-profit originators and their 1000 loan

[[Page 55352]]

originators,\125\ the one-time burden is estimated to be roughly 265 
hours.\126\ The ongoing cost to perform the check for new hires is 
estimated to be 15 hours annually. The Bureau has allocated to itself 
one-half of these burdens.
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    \124\ This check, more formally known as an individual's FBI 
Identification Record, uses the individual's fingerprint submission 
to collect information about prior arrests and, in some instances, 
federal employment, naturalization, or military service.
    \125\ The Bureau has not been able to determine how many loan 
originators organizations qualify as bona fide non-profit 
organizations or how many of their employee loan originators are not 
subject to SAFE Act licensing. Accordingly, the Bureau has estimated 
these numbers.
    \126\ The organizations are also assumed to pay $50 to get a 
national criminal background check. Several commercial services 
offer an inclusive fee, ranging between $48.00 and $50.00, for 
fingerprinting, transmission, and FBI processing. Based on a sample 
of three FBI-approved services, accessed on 2012-08-02: Accurate 
Biometrics, available at: https://www.accuratebiometrics.com/index.asp; Daon Trusted Identity Servs., available at: https://daon.com/prints; and Fieldprint, available at:https://www.fieldprintfbi.com/FBISubPage_FullWidth.aspx?ChannelID=272.
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c. Information About Findings Against the Individual by Government 
Jurisdictions
    Depository institutions already obtain and have access to 
information about government jurisdiction findings against their 
individual loan originators through the NMLSR. Such information is 
sufficient to meet the requirement to obtain a criminal background 
check in this proposed rule. Accordingly, the Bureau does not believe 
they will incur significant additional burden.
    The information for employees of non-profit organizations is 
generally not in the NMLSR. Accordingly, under the proposed rule a non-
profit organization would have to obtain this information using 
individual statements concerning any prior administrative, civil, or 
criminal findings. For the assumed 1,000 loan originators who are 
employees of bona-fide non-profit organizations, the Bureau estimates 
that no more than 10 percent have any such findings by a governmental 
jurisdiction to describe. The one-time burden is estimated to be 20 
hours, and the annual burden to obtain the information from new hires 
is estimated to be one hour.

C. Comments

    Comments are specifically requested concerning: (1) Whether the 
proposed collections of information are necessary for the proper 
performance of the functions of the Bureau, including whether the 
information will have practical utility; (2) the accuracy of the 
estimated burden associated with the proposed collections of 
information; (3) how to enhance the quality, utility, and clarity of 
the information to be collected; and (4) how to minimize the burden of 
complying with the proposed collections of information, including the 
application of automated collection techniques or other forms of 
information technology. All comments will become a matter of public 
record. Comments on the collection of information requirements should 
be sent to the Office of Management and Budget (OMB), Attention: Desk 
Officer for the Consumer Financial Protection Bureau, Office of 
Information and Regulatory Affairs, Washington, DC, 20503, or by the 
Internet to http://oira_submission@omb.eop.gov, with copies to the 
Bureau at the Consumer Financial Protection Bureau (Attention: PRA 
Office), 1700 G Street NW., Washington, DC 20552, or by the Internet to 
CFPB_Public_PRA@cfpb.gov.

List of Subjects in 12 CFR Part 1026

    Advertising, Consumer protection, Credit, Credit unions, Mortgages, 
National banks, Reporting and recordkeeping requirements, Savings 
associations, Truth in lending.

Text of Proposed Revisions

    Certain conventions have been used to highlight the proposed 
revisions. New language is shown inside bold arrows, and language that 
would be removed is shown inside bold brackets.

Authority and Issuance

    For the reasons set forth in the preamble, the Bureau proposes to 
amend Regulation Z, 12 CFR part 1026, as set forth below:

PART 1026--TRUTH IN LENDING (REGULATION Z)

    1. The authority citation for part 1026 continues to read as 
follows:

    Authority:  12 U.S.C. 5512, 5581; 15 U.S.C. 1601 et seq.
    2. Section 1026.25 is amended by adding paragraph (c) to read as 
follows:

Subpart D--Miscellaneous


Sec.  1026.25  Record Retention.

* * * * *
    [rtrif](c) Records related to certain requirements for mortgage 
loans.
    (1) [Reserved]
    (2) Records related to requirements for loan originator 
compensation. Notwithstanding the two-year record retention requirement 
in paragraph (a) of this section, for transactions subject to Sec.  
1026.36 of this part:
    (i) A creditor must maintain records sufficient to evidence all 
compensation it pays to a loan originator organization (as defined in 
Sec.  1026.36(a)(1)(iii)) or the creditor's individual loan originator 
(as defined in Sec.  1026.36(a)(1)(ii)) and the compensation agreement 
that governs those payments for three years after the date of payment.
    (ii) A loan originator organization must maintain records 
sufficient to evidence all compensation it receives from a creditor, a 
consumer, or another person, all compensation it pays to the loan 
originator organization's individual loan originators, and the 
compensation agreement that governs those receipts or payments for 
three years after the date of each receipt or payment.
    (3) Records related to requirements for discount points and 
origination points or fees. For each transaction subject to Sec.  
1026.36(d)(2)(ii), the creditor must maintain for three years after the 
date of consummation records sufficient to evidence:
    (i) The creditor has made available to the consumer a comparable, 
alternative loan that does not include discount points and origination 
points or fees as required by Sec.  1026.36(d)(2)(ii)(A) or, if such a 
loan was not made available to the consumer, a good-faith determination 
that the consumer was unlikely to qualify for such a loan; and
    (ii) Compliance with the ``bona fide'' requirements under Sec.  
1026.36(d)(2)(ii)(C).[ltrif]

Subpart E--Special Rules for Certain Home Mortgage Transactions

    3. Section 1026.36 is amended by:
    a. Revising the section heading;
    b. Revising paragraphs (a), (d)(1), (d)(2), and (e)(3)(i)(C);
    c. Re-designating paragraph (f) as paragraph (j);
    d. Adding new paragraph (f) and paragraphs (g), (h), and (i); and
    e. Revising newly re-designated paragraph (j),
    The revisions and additions read as follows:


Sec.  1026.36  Prohibited acts or practices [rtrif]and certain 
requirements for[ltrif][lsqbb]in connection with] credit secured by a 
dwelling.

    (a) Loan originator[rtrif],[ltrif][lsqbb]and[rsqbb] mortgage broker 
[rtrif], and compensation[ltrif] defined-- (1) Loan originator. 
[rtrif](i) [ltrif]For purposes of this section, the term ``loan 
originator'' means, with respect to a particular transaction, a person 
who [lsqbb]for compensation or other monetary gain, or in expectation 
of compensation or other monetary gain,[rsqbb][rtrif]takes an 
application,[ltrif] arranges, [rtrif]offers,[ltrif] negotiates, or 
otherwise obtains an extension of consumer credit for another 
person[rtrif] in expectation of compensation or other monetary gain or 
for compensation or other monetary gain.[ltrif] The term ``loan 
originator'' includes an employee of the creditor if

[[Page 55353]]

the employee meets this definition. The term ``loan originator'' 
includes [lsqbb]the[rsqbb] [rtrif]a[ltrif] creditor [rtrif]for the 
transaction [ltrif][lsqbb]only[rsqbb] if the creditor does not 
[lsqbb]provide the funds for[rsqbb][rtrif]finance [ltrif]the 
transaction at consummation out of the creditor's own resources, 
including drawing on a bona fide warehouse line of credit, or out of 
deposits held by the creditor[rtrif]. The term ``loan originator'' 
includes all creditors for purposes of Sec.  1026.36(f) and (g). The 
term does not include an employee of a manufactured home retailer who 
assists a consumer in obtaining or applying to obtain consumer credit, 
provided such employee does not take a consumer credit application, 
offer or negotiate terms of a consumer credit transaction, or advise a 
consumer on credit terms (including rates, fees, and other costs).
    (ii) An ``individual loan originator'' is a natural person who 
meets the definition of ``loan originator'' in paragraph (a)(1)(i) of 
this section.
    (iii) A ``loan originator organization'' is any loan originator, as 
defined in paragraph (a)(1)(i) of this section, that is not an 
individual loan originator[ltrif].
    (2) Mortgage broker. For purposes of this section, a mortgage 
broker with respect to a particular transaction is any loan originator 
that is not [rtrif]a creditor or the creditor's[ltrif][lsqbb]an[rsqbb] 
employee [lsqbb]of the creditor[rsqbb].
    [rtrif](3) Compensation. The term ``compensation'' includes 
salaries, commissions, and any financial or similar incentive provided 
to a loan originator for originating loans.[ltrif]
* * * * *
    (d) Prohibited payments to loan originators--(1) Payments based on 
transaction terms [lsqbb] or conditions[rsqbb]. (i) [rtrif]Except as 
provided in paragraph (d)(1)(iii) of this section, in[ltrif] 
[lsqbb]In[rsqbb] connection with a consumer credit transaction secured 
by a dwelling, no loan originator shall receive and no person shall pay 
to a loan originator, directly or indirectly, compensation in an amount 
that is based on any of the transaction's terms [lsqbb]or 
conditions[rsqbb]. [rtrif]If a loan originator's compensation is based 
in whole or in part on a factor that is a proxy for a transaction's 
terms, the loan originator's compensation is based on the transaction's 
terms. A factor (that is not itself a term of a transaction originated 
by the loan originator) is a proxy for the transaction's terms if the 
factor substantially correlates with a term or terms of the transaction 
and the loan originator can, directly or indirectly, add, drop, or 
change the factor when originating the transaction.[ltrif]
    (ii) For purposes of this paragraph (d)(1), the amount of credit 
extended is not deemed to be a transaction term [lsqbb]or 
condition[rsqbb], provided compensation received by or paid to a loan 
originator, directly or indirectly, is based on a fixed percentage of 
the amount of credit extended; however, such compensation may be 
subject to a minimum or maximum dollar amount.
    [lsqbb](iii) This paragraph (d)(1) shall not apply to any 
transaction in which paragraph (d)(2) of this section applies.[rsqbb]
    [rtrif](iii) Notwithstanding paragraph (d)(1)(i) of this section, 
an individual loan originator may receive, and a person may pay to an 
individual loan originator, compensation in the form of a contribution 
to a defined contribution plan or defined benefit plan that is a 
qualified plan and in which the individual loan originator 
participates, provided that the contribution is not directly or 
indirectly based on the terms of that individual loan originator's 
transactions subject to paragraph (d) of this section. In addition, 
notwithstanding paragraph (d)(1)(i) of this section, an individual loan 
originator may receive, and a person may pay, compensation in the form 
of a bonus or other payment under a profit-sharing plan sponsored by 
the person or a contribution to a defined benefit plan or defined 
contribution plan in which the individual loan originator participates 
that is not a qualified plan, even if the compensation directly or 
indirectly is based on the terms of the transactions subject to 
paragraph (d) of this section of multiple individual loan originators 
employed by the person during the time period for which the 
compensation is paid to the individual loan originator, provided that:
    (A) The compensation paid to an individual loan originator is not 
directly or indirectly based on the terms of that individual loan 
originator's transactions subject to paragraph (d) of this section; and
    (B) At least one of the following conditions is satisfied:

ALTERNATIVE 1--PARAGRAPH (d)(1)(iii)(B)(1):

    (1) Not more than 50 percent of the total revenues of the person 
(or, if applicable, the business unit to which the profit-sharing plans 
applies) are derived from the person's mortgage business during the tax 
year immediately preceding the tax year in which the payment or 
contribution is made. The total revenues are determined through a 
methodology that is consistent with generally accepted accounting 
principles and, as applicable, the reporting of the person's income for 
purposes of Federal tax filings or, if none, any industry call reports 
filed regularly by the person. As applicable, the methodology also 
shall reflect an accurate allocation of revenues among the person's 
business units. Notwithstanding the provisions of subparagraph (d)(3) 
of this section, the revenues of the person's affiliates are not taken 
into account for purposes of this paragraph, provided that, if the 
profit-sharing plan applies to the affiliate, then the person's total 
revenues for purposes of this paragraph also include the total revenues 
of the affiliate. The total revenues that are derived from the mortgage 
business is that portion of the total revenues that are generated 
through a person's transactions subject to paragraph (d) of this 
section; or

ALTERNATIVE 2--PARAGRAPH (d)(1)(iii)(B)(1):

    (1) Not more than 25 percent of the revenues of the person (or, if 
applicable, the business unit to which the profit-sharing plan applies) 
are derived from the person's mortgage business during the tax year 
immediately preceding the tax year in which the payment or contribution 
is made. The total revenues are determined through a methodology that 
is consistent with generally accepted accounting principles and, as 
applicable, the reporting of the person's income for purposes of 
Federal tax filings or, if none, any industry call reports filed 
regularly by the person. As applicable, the methodology also shall 
reflect an accurate allocation of revenues among the person's business 
units. Notwithstanding the provisions of subparagraph (d)(3) of this 
section, the revenues of the person's affiliates are not taken into 
account for purposes of this paragraph, provided that, if the profit-
sharing plan applies to the affiliate, then the person's total revenues 
for purposes of this paragraph also include the total revenues of the 
affiliate. The total revenues that are derived from the mortgage 
business is that portion of the total revenues that are generated 
through a person's transactions subject to paragraph (d) of this 
section; or
    (2) The individual loan originator was the loan originator for five 
or fewer transactions subject to paragraph (d) of this section during 
the 12-month period preceding the date of the decision to make the 
payment or contribution.[ltrif]
    (2) Payments by persons other than consumer-- [rtrif](i) Dual 
compensation. (A) Except as provided in paragraph (d)(2)(i)(C) of this 
section, if[ltrif] [lsqbb]If[rsqbb] any loan originator receives 
compensation directly from a consumer [lsqbb]in a consumer credit 
transaction secured by a dwelling[rsqbb]:

[[Page 55354]]

    ([rtrif]1[ltrif][lsqbb]i[rsqbb]) No loan originator shall receive 
compensation, directly or indirectly, from any person other than the 
consumer in connection with the transaction; and
    ([rtrif]2[ltrif][lsqbb]ii[rsqbb]) No person who knows or has reason 
to know of the consumer-paid compensation to the loan originator (other 
than the consumer) shall pay any compensation to a loan originator, 
directly or indirectly, in connection with the transaction.
    [rtrif](B) Compensation directly from a consumer includes payments 
to a loan originator made pursuant to an agreement between the consumer 
and a person other than the creditor or its affiliates.
    (C) Exception. If a loan originator organization receives 
compensation directly from a consumer in connection with a transaction, 
the loan originator organization may pay compensation to an individual 
loan originator, and the individual loan originator may receive 
compensation from the loan originator organization.
    (ii) Restrictions on discount points and origination points or 
fees. (A) If any loan originator receives compensation from any person 
other than the consumer in connection with a transaction, a creditor or 
a loan originator organization may not impose on the consumer any 
discount points and origination points or fees, as defined in paragraph 
(d)(2)(ii)(B) of this section, in connection with the transaction 
unless the creditor makes available to the consumer a comparable, 
alternative loan that does not include discount points and origination 
points or fees, unless the consumer is unlikely to qualify for such a 
loan.
    (B) The term ``discount points and origination points or fees'' for 
purposes of this paragraph (d) and paragraph (e) of this section means 
all items that would be included in the finance charge under Sec.  
1026.4(a) and (b), and any fees described in Sec.  1026.4(a)(2) 
notwithstanding that those fees may not be included in the finance 
charge under Sec.  1026.4(a)(2), that are payable at or before 
consummation by the consumer in connection with the transaction to a 
creditor or a loan originator organization, other than:
    (1) Interest, including per-diem interest, or the time-price 
differential;
    (2) Any bona fide and reasonable third-party charges not retained 
by the creditor or loan originator organization; and
    (3) Items that are excluded from the finance charge under Sec.  
1026.4(c)(5), (c)(7)(v) and (d)(2).
    (C) No discount points and origination points or fees may be 
imposed on the consumer in connection with a transaction subject to 
paragraph (d)(2)(ii)(A) of this section unless there is a bona fide 
reduction in the interest rate compared to the interest rate for the 
comparable, alternative loan that does not include discount points and 
origination points or fees required to be made available to the 
consumer under paragraph (d)(2)(ii)(A) of this section. For any rebate 
paid by the creditor that will be applied to reduce the consumer's 
settlement charges, the creditor must provide a bona fide rebate in 
return for an increase in the interest rate compared to the interest 
rate for the comparable, alternative loan that does not include 
discount points and origination points or fees required to be made 
available to the consumer under paragraph (d)(2)(ii)(A) of this 
section.[ltrif]
* * * * *
    (e). * * *
    (3) * * *
    (i) * * *
    (C) The loan with the lowest total dollar amount [rtrif]of discount 
points and origination points or fees. If two or more loans have the 
same total dollar amount of discount points and origination points or 
fees, the loan originator must present the loan with the lowest 
interest rate that has the lowest total dollar amount of discount 
points and origination points or fees.[ltrif][lsqbb]for origination 
points or fees and discount points.[rsqbb]
* * * * *
    [rtrif](f) Loan originator qualification requirements. A loan 
originator for a consumer credit transaction secured by a dwelling must 
comply with this paragraph (f) and be registered and licensed in 
accordance with applicable State and Federal law, including the Secure 
and Fair Enforcement for Mortgage Licensing Act of 2008 (SAFE Act, 12 
U.S.C. 5102 et seq.), its implementing regulations (12 CFR part 1007 or 
part 1008), and State SAFE Act implementing law. To comply with this 
paragraph (f), a loan originator organization that is not a government 
agency or State housing finance agency must:
    (1) Comply with all applicable State law requirements for legal 
existence and foreign qualification;
    (2) Ensure that its individual loan originators are licensed or 
registered to the extent the individual is required to be licensed or 
registered under the SAFE Act, its implementing regulations, and State 
SAFE Act implementing law; and
    (3) For each of its individuals who is not required to be licensed 
and is not licensed as a loan originator pursuant to Sec.  1008.103 of 
this chapter or State SAFE Act implementing law:
    (i) Obtain:
    (A) A State and national criminal background check through the 
Nationwide Mortgage Licensing System and Registry (NMLSR) or, in the 
case of an individual loan originator who is not a registered loan 
originator under the NMLSR, a State and national criminal background 
check from a law enforcement agency or commercial service;
    (B) A credit report from a consumer reporting agency described in 
section 603(p) of the Fair Credit Reporting Act (15 U.S.C. 1681a(p)) 
secured, where applicable, in compliance with the requirements of 
section 604(b) of the Fair Credit Reporting Act (15 U.S.C. 1681b(b); 
and
    (C) Information from the NMLSR about any administrative, civil, or 
criminal findings by any government jurisdiction or, in the case of an 
individual loan originator who is not a registered loan originator 
under the NMLSR, such information from the individual loan originator;
    (ii) Determine, on the basis of the information obtained pursuant 
to paragraph (f)(3)(i) of this section and any other information 
reasonably available to the loan originator organization, that the 
individual loan originator:
    (A) Has not been convicted of, or pleaded guilty or nolo contendere 
to, a felony in a domestic, foreign, or military court during the 
preceding seven-year period or, in the case of a felony involving an 
act of fraud, dishonesty, a breach of trust, or money laundering, at 
any time; and
    (B) Has demonstrated financial responsibility, character, and 
general fitness such as to command the confidence of the community and 
to warrant a determination that the individual loan originator will 
operate honestly, fairly, and efficiently; and
    (iii) Provide periodic training covering Federal and State law 
requirements that apply to the individual loan originator's loan 
origination activities.
    (g) NMLSR ID on loan documents. (1) For a transaction secured by a 
dwelling, a loan originator organization must include on the loan 
documents described in paragraph (g)(2) of this section, whenever each 
such loan document is provided to a consumer or presented to a consumer 
for signature, as applicable:
    (i) Its name and NMLSR identification number (NMLSR ID), if the 
NMLSR has provided it an NMLSR ID; and

[[Page 55355]]

    (ii) The name of the individual loan originator with primary 
responsibility for the origination and, if the NMLSR has provided such 
person an NMLSR ID, that NMLSR ID.
    (2) The loan documents that must include the names and NMLSR IDs 
pursuant to paragraph (g)(1) of this section are:
    (i) The credit application;
    (ii) The disclosure provided under section 5(c) of the Real Estate 
Settlement Procedures Act of 1974 (12 U.S.C. 2604(c));
    (iii) The disclosure provided under section 128 of the Truth in 
Lending Act (15 U.S.C. 1638);
    (iv) The note or loan contract;
    (v) The security instrument; and
    (vi) The disclosure provided to comply with section 4 of the Real 
Estate Settlement Procedures Act of 1974 (12 U.S.C. 2603).
    (3) For purposes of this Sec.  1026.36, NMLSR identification number 
means a number assigned by the Nationwide Mortgage Licensing System and 
Registry to facilitate electronic tracking of loan originators and 
uniform identification of, and public access to, the employment history 
of, and the publicly adjudicated disciplinary and enforcement actions 
against, loan originators.
    (h) Prohibition on mandatory arbitration clauses and waivers of 
certain consumer rights- (1) Arbitration. A contract or other agreement 
in connection with a consumer credit transaction secured by a dwelling 
may not require arbitration or any other non-judicial procedure to 
resolve disputes arising out of the transaction. This prohibition does 
not limit a consumer and creditor or any assignee from agreeing, after 
a dispute arises between them, to use arbitration or other non-judicial 
procedure to resolve a dispute.
    (2) No waivers of Federal statutory causes of action. A contract or 
other agreement in connection with a consumer credit transaction 
secured by a dwelling may not limit a consumer from bringing a claim in 
court, an arbitration, or other non-judicial procedure, pursuant to any 
provision of law, for damages or any other relief, in connection with 
any alleged violation of any Federal law. This prohibition applies to a 
post-dispute agreement to use arbitration or other non-judicial 
procedure to resolve a dispute, thus such an agreement may not limit 
the ability of a consumer to bring a covered claim through the agreed-
upon non-judicial procedure.
    (i) Prohibition on financing single-premium credit insurance. (1) A 
creditor may not finance any premiums or fees for credit insurance in 
connection with a consumer credit transaction secured by a dwelling. 
This prohibition does not apply to credit insurance for which premiums 
or fees are calculated and paid in full on a monthly basis.
    (2) In this paragraph (i), ``credit insurance'':
    (i) Includes insurance described in Sec.  1026.4(d)(1) and (3) of 
this part, whether or not such insurance is voluntary; but
    (ii) Excludes credit unemployment insurance for which the 
unemployment insurance premiums are reasonable, the creditor receives 
no direct or indirect compensation in connection with the unemployment 
insurance premiums, and the unemployment insurance premiums are paid 
pursuant to another insurance contract and not paid to an affiliate of 
the creditor.[ltrif]
    ([rtrif]j[ltrif][lsqbb]f[rsqbb]) This section does not apply to a 
home-equity line of credit subject to Sec.  1026.40[rtrif], except that 
Sec.  1026.36(h) and (i) applies to such credit when secured by the 
consumer's principal dwelling[ltrif]. Section 
1026.36(d)[rtrif],[ltrif][lsqbb]and[rsqbb] (e)[rtrif], (f), (g), (h), 
and (i)[ltrif] does not apply to a loan that is secured by a consumer's 
interest in a timeshare plan described in 11 U.S.C. 101(53D).
    4. Supplement I to part 1026 is amended as follows:
    a. Under Section 1026.25--Record Retention:
    i. 25(a) General rule, paragraph 5 is removed;
    ii. New heading 25(c)(2) Records related to requirements for loan 
originator compensation and paragraphs 1 and 2 are added.
    b. Under Section 1026.36--Prohibited Acts or Practices in 
Connection with Credit Secured by a Dwelling:
    i. The heading is revised to read Section 1026.36--Prohibited Acts 
or Practices and Certain Requirements for Credit Secured by a Dwelling;
    ii. Paragraph 1 is revised;
    iii. 36(a) Loan originator and mortgage broker defined, the heading 
is revised to read 36(a) Loan originator, mortgage broker, and 
compensation defined, paragraphs 1 and 4 are revised, and new paragraph 
5 is added;
    iv. 36(d) Prohibited payments to loan originators, paragraph 1 is 
revised;
    v. 36(d)(1) Payments based on transaction terms and conditions, the 
heading is revised to read 36(d)(1) Payments based on transaction 
terms, paragraphs 1 through 8 are revised, and new paragraph 10 is 
added;
    vi. 36(d)(2) Payments by persons other than consumer, new heading 
36(d)(2)(i) Dual compensation is added and paragraphs 1 and 2 are 
revised, new heading 36(d)(2)(ii) Restrictions on discount points and 
origination points or fees and new paragraphs 1 through 3 are added, 
new heading Paragraph 36(d)(2)(ii)(A) and new paragraphs 1 through 4 
are added, new heading Paragraph 36(d)(2)(ii)(B) and new paragraphs 1 
through 4 are added;
    vii. 36(e) Prohibition on steering, 36(e)(3) Loan options 
presented, paragraph 3 is revised;
    viii. New heading 36(f) Loan originator qualification requirements 
and new paragraphs 1 and 2 are added;
    ix. New heading Paragraph 36(f)(1) and new paragraph 1 are added;
    x. New heading Paragraph 36(f)(2) and new paragraph 1 are added;
    xi. New heading Paragraph 36(f)(3), and new paragraph 1 are added;
    xii. New heading Paragraph 36(f)(3)(i) and new paragraph 1 are 
added;
    xiii. New heading Paragraph 36(f)(3)(ii) and new paragraph 1 are 
added;
    xiv. New heading Paragraph 36(f)(3)(ii)(B) and new paragraph 1 are 
added;
    xv. New heading Paragraph 36(f)(3)(iii) and new paragraph 1 are 
added;
    xvi. New headings 36(g) NMLSR ID on loan documents, Paragraph 
36(g)(1) and new paragraphs 1 and 2 are added;
    xvii. New heading Paragraph 36(g)(1)(ii) and new paragraph 1 are 
added;
    xviii. New heading Paragraph 36(g)(2) and new paragraph 1 are 
added.

Supplement I to Part 1026--Official Interpretations

* * * * *

Subpart D--Miscellaneous

Section 1026.25--Record Retention

    25(a) General rule.
* * * * *
    [lsqbb]5. Prohibited payments to loan originators. For each 
transaction subject to the loan originator compensation provisions in 
Sec.  1026.36(d)(1), a creditor should maintain records of the 
compensation it provided to the loan originator for the transaction as 
well as the compensation agreement in effect on the date the interest 
rate was set for the transaction. See Sec.  1026.35(a) and comment 
35(a)(2)(iii)-3 for additional guidance on when a transaction's rate is 
set. For example, where a loan originator is a mortgage broker, a 
disclosure of compensation or other broker agreement required by 
applicable State law that complies with Sec.  1026.25 would be presumed 
to be a record of the amount actually paid to the loan

[[Page 55356]]

originator in connection with the transaction.[rsqbb]
* * * * *
    [rtrif]25(c)(2) Records related to requirements for loan originator 
compensation.
    1. Scope of records of loan originator compensation. Section 
1026.25(c)(2)(i) requires a creditor to maintain records sufficient to 
evidence all compensation it pays to a loan originator organization or 
the creditor's individual loan originators, as well as the compensation 
agreements that govern those payments for three years after the date of 
the payments. Section 1026.25(c)(2)(ii) requires that a loan originator 
organization maintain records sufficient to evidence all compensation 
it receives from a creditor, a consumer, or another person and all 
compensation it pays to the loan originator organization's individual 
loan originators, as well as the compensation agreements that govern 
those payments or receipts for three years after the date of the 
receipts or payments.
    i. Records sufficient to evidence payment and receipt of 
compensation. Records are sufficient to evidence payment and receipt of 
compensation if they demonstrate the following facts: The nature and 
amount of the compensation; that the compensation was paid, and by 
whom; that the compensation was received, and by whom; and when the 
payment and receipt of compensation occurred. The records that are 
sufficient necessarily will vary on a case-by-case basis depending on 
the facts and circumstances, particularly with regard to the nature of 
the compensation. In addition to the compensation agreements 
themselves, which are to be retained in all circumstances, records of 
the payment and receipt of compensation to be maintained under Sec.  
1026.25(c)(2) might include, for example, and depending on the facts 
and circumstances, copies of required filings under applicable 
provisions of the Employee Retirement Income Security Act of 1974 
(ERISA), 29 U.S.C. 1001, et seq., and the Internal Revenue Code (IRC) 
relating to qualified defined benefit and defined contribution plans; 
copies of qualified or non-qualified bonus and profit-sharing plans in 
which individual loan originator employees participate; the names of 
any loan originators covered by such plans; a settlement agent ``flow 
of funds'' worksheet or other written record; a creditor closing 
instructions letter directing disbursement of fees at consummation; 
records of any payments, distributions, awards, or other compensation 
made under any such agreements or plans. Where a loan originator is a 
mortgage broker, a disclosure of compensation or broker agreement 
required by applicable State law that recites the broker's total 
compensation for a transaction would be presumed to be a record of the 
amount actually paid to the loan originator in connection with the 
transaction.
    ii. Compensation agreement. For purposes of Sec.  1026.25(c)(2), a 
compensation agreement includes any agreement, whether oral, written, 
or based on a course of conduct that establishes a compensation 
arrangement between the parties (e.g., a brokerage agreement between a 
creditor and a loan originator organization, provisions of employment 
contracts addressing payment of compensation between a creditor and an 
individual loan originator employee). Creditors and loan originators 
are free to specify what transactions are governed by a particular 
compensation agreement as they see fit. For example, they may provide, 
by the terms of the agreement, that the agreement governs compensation 
payable on transactions consummated on or after some future effective 
date (in which case, a prior agreement governs transactions consummated 
in the meantime). For purposes of applying the record retention 
requirement, the relevant compensation agreement for a given 
transaction is the agreement pursuant to which compensation for that 
transaction is determined, pursuant to the agreement's terms.
    iii. Three-year retention period. The requirements in Sec.  
1026.25(c)(2)(i) and (ii) that the records be retained for three years 
after the date of receipt or payment, as applicable, means that the 
records are retained for three years after each receipt or payment, as 
applicable, even if multiple compensation payments relate to a single 
transaction. For example, if a loan originator organization pays an 
individual loan originator a commission consisting of two separate 
payments of $1,000 each on June 5 and July 7, 2012, then the 
organization loan originator is required to retain records sufficient 
to evidence the two payments through June 4, 2015, and July 6, 2015, 
respectively.
    2. An example of Sec.  1026.25(c)(2) as applied to a loan 
originator organization is as follows: Assume a loan originator 
organization originates only loans where the loan originator 
organization derives revenues exclusively from fees paid by creditors 
that fund its originations (i.e., ``creditor-paid'' compensation) and 
pays its individual loan originators commissions and annual bonuses. 
The loan originator organization must retain a copy of the agreement 
with any creditor that pays the loan originator organization 
compensation for originating loans and documentation evidencing the 
specific payment it receives from the creditor for each loan 
originated. In addition, the loan originator organization must retain 
copies of the agreements with its individual loan originators governing 
their commissions and their annual bonuses and records of any specific 
commissions and bonuses.[ltrif]
* * * * *

Subpart E--Special Rules for Certain Home Mortgage Transactions

* * * * *

Section 1026.36--Prohibited Acts or Practices [rtrif]and Certain 
Requirements for[ltrif][lsqbb]in Connection with[rsqbb] Credit Secured 
by a Dwelling

    1. Scope of coverage. Section 1026.36(b) 
[rtrif],[ltrif][lsqbb]and[rsqbb] (c) [rtrif], (h), and (i)[ltrif] 
applies to closed-end consumer credit transactions secured by a 
consumer's principal dwelling.[rtrif] Section 1026.36(h) and (i) also 
applies to home-equity lines of credit under Sec.  1026.40 secured by a 
consumer's principal dwelling.[ltrif] Section 
1026.36(d)[rtrif],[ltrif][lsqbb]and[rsqbb] (e)[rtrif], (f), and 
(g)[ltrif] applies to closed-end consumer credit transactions secured 
by a dwelling. [lsqbb]Section 1026.36(d) and (e) applies to 
closed[rsqbb][rtrif]Closed[ltrif]-end 
[lsqbb]loans[rsqbb][rtrif]consumer credit transactions include 
transactions [ltrif]secured by first or subordinate liens, and reverse 
mortgages that are not home-equity lines of credit under Sec.  1026.40. 
See Sec.  1026.36([lsqbb]f[rsqbb][rtrif]j[ltrif]) for additional 
restrictions on the scope of this section, and Sec. Sec.  1026.1(c) and 
1026.3(a) and corresponding commentary for further discussion of 
extensions of credit subject to Regulation Z.
* * * * *
    36(a) Loan originator[rtrif],[ltrif][lsqbb]and[rsqbb] mortgage 
broker [rtrif], and compensation [ltrif]defined.
    1. Meaning of loan originator. i. General. [rtrif]A. [ltrif]Section 
1026.36(a) provides that a loan originator is any person who for 
compensation or other monetary gain [rtrif]takes an application, 
[ltrif]arranges, [rtrif]offers, [ltrif]negotiates, or otherwise obtains 
an extension of consumer credit for another person. 
[lsqbb]Thus,[rsqbb][rtrif]The term includes a person who assists a 
consumer in obtaining or applying for consumer credit by advising on 
credit terms (including rates, fees, and other costs), preparing 
application packages (such as a credit or pre-approval application or 
supporting

[[Page 55357]]

documentation), or collecting application and supporting information on 
behalf of the consumer to submit to a loan originator or creditor. A 
loan originator includes a person who in expectation of compensation or 
other monetary gain advertises or communicates to the public that such 
person can or will provide any of these services or activities.
    B. The[ltrif][lsqbb]the[rsqbb] term ``loan originator'' 
[rtrif]also[ltrif] includes employees of a creditor as well as 
employees of a mortgage broker that satisfy this definition. In 
addition, the definition of loan originator expressly includes any 
creditor that satisfies the definition of loan originator but makes use 
of ``table funding'' by a third party. See comment 36(a)-1.ii 
[lsqbb]below[rsqbb] discussing table funding. Although consumers may 
sometimes arrange, negotiate, or otherwise obtain extensions of 
consumer credit on their own behalf, in such cases they do not do so 
for another person or for compensation or other monetary gain, and 
therefore are not loan originators [lsqbb]under this section[rsqbb]. 
[rtrif]A ``loan originator organization'' is a loan originator that is 
an organization such as a trust, sole proprietorship, partnership, 
limited liability partnership, limited partnership, limited liability 
company, corporation, bank, thrift, finance company, or a credit union. 
An ``individual loan originator'' is limited to a natural 
person.[ltrif] (Under Sec.  1026.2(a)(22), the term ``person'' means a 
natural person or an organization.)
    ii. Table funding. Table funding occurs when the creditor does not 
provide the funds for the transaction at consummation out of the 
creditor's own resources, including [rtrif], for example, [ltrif] 
drawing on a bona fide warehouse line of credit, or out of deposits 
held by the creditor. Accordingly, a table-funded transaction is 
consummated with the debt obligation initially payable by its terms to 
one person, but another person provides the funds for the transaction 
at consummation and receives an immediate assignment of the note, loan 
contract, or other evidence of the debt obligation. Although Sec.  
1026.2(a)(17)(i)(B) provides that a person to whom a debt obligation is 
initially payable on its face generally is a creditor, Sec.  
1026.36(a)(1) provides that, solely for the purposes of Sec.  1026.36, 
such a person is also considered a loan originator. [lsqbb]The creditor 
generally is not considered a loan originator unless table funding 
occurs.[rsqbb] For example, if a person closes a loan in its own name 
but does not fund the loan from its own resources or deposits held by 
it because it [rtrif]immediately [ltrif] assigns the loan 
[lsqbb]at[rsqbb][rtrif]after[ltrif] consummation, it is considered a 
creditor for purposes of Regulation Z and also a loan originator for 
purposes of Sec.  1026.36. However, if a person closes a loan in its 
own name and [rtrif]finances a consumer credit transaction from the 
person's own resources, including drawing on a bona fide warehouse line 
of credit or out of deposits held by the person, but does not 
immediately assign the loan at closing the person is not a table-funded 
creditor but is included in the definition of loan originator for the 
purposes of Sec.  1026.36(f) and (g). Such a person[ltrif] [lsqbb]draws 
on a bona fide warehouse line of credit to make the loan at 
consummation, it is considered[rsqbb][rtrif]is[ltrif] a creditor, not a 
loan originator, for purposes of Regulation Z, including [rtrif]the 
other provisions of[ltrif] Sec.  1026.36.
    iii. Servicing. [lsqbb]The definition of[rsqbb][rtrif]A[ltrif] 
``loan originator'' does not [lsqbb]apply 
to[rsqbb][rtrif]include[ltrif] a loan servicer when the servicer 
modifies an existing loan on behalf of the current owner of the loan. 
[rtrif]Other than Sec.  1026.36(b) and (c), Sec.  1026.36[ltrif] 
[lsqbb]The rule[rsqbb] applies to extensions of consumer credit 
[rtrif]that constitute a refinancing under Sec.  1026.20(a). Thus, 
other than Sec.  1026.36(b) and (c), Sec.  
1026.36[ltrif][lsqbb]and[rsqbb] does not apply if a [rtrif]person 
renegotiates,[ltrif] modifies[rtrif], replaces, or 
subordinates[ltrif][lsqbb]of[rsqbb] an existing obligation's terms 
[lsqbb]does not constitute[rsqbb][rtrif], unless the transaction 
is[ltrif] a refinancing under Sec.  1026.20(a).
    [rtrif]iv. Real estate brokerage. A ``loan originator'' does not 
include a person that performs only real estate brokerage activities 
(e.g., does not perform mortgage broker activities or extend consumer 
credit) if the person is licensed or registered under applicable State 
law governing real estate brokerage, unless such person is paid by a 
creditor or a loan originator for a particular consumer credit 
transaction subject to Sec.  1026.36. A person is not paid by a 
creditor or a loan originator if the person is paid by a creditor or a 
loan originator on behalf of a consumer solely for performing real 
estate brokerage activities.
    v. Seller financing by natural persons. The definition of ``loan 
originator'' does not include a natural person, estate, or trust that 
finances the sale of three or fewer properties in any 12-month period 
owned by such natural person, estate, or trust where each property 
serves as a security for the credit transaction. The natural person, 
estate, or trust also must not have constructed or acted as a 
contractor for the construction of the dwelling in its ordinary course 
of business. The natural person, estate, or trust must additionally 
determine in good faith and document that the buyer has a reasonable 
ability to repay the credit transaction. The natural person, estate, or 
trust makes such a good faith determination by complying with the 
requirements of Sec.  1026.43. The credit transaction also must be 
fully amortizing, have a fixed rate or an adjustable rate that adjusts 
only after five or more years, and be subject to reasonable annual and 
lifetime limitations on interest rate increases.[ltrif]
* * * * *
    4. Managers and administrative staff. For purposes of Sec.  
1026.36, managers, administrative [rtrif]and clerical[ltrif] staff, and 
similar individuals who are employed by a creditor or loan originator 
but do not arrange, negotiate, or otherwise obtain an extension of 
credit for a consumer, or whose compensation is not based on whether 
any particular loan is originated, are not loan originators. [rtrif]A 
``producing manager'' who also arranges, negotiates, or otherwise 
obtains an extension of consumer credit for another person, is a loan 
originator. Thus, a producing manager's compensation is subject to the 
restrictions of Sec.  1026.36.
    5. Compensation-- i. General. For purposes of Sec.  1026.36, 
compensation is defined in Sec.  1026.36(a)(3) as salaries, 
commissions, and any financial or similar incentive provided to a 
person for engaging in loan originator activities. See comment 
36(d)(1)-2 for examples of types of compensation that are covered by 
Sec.  1026.36(d) and (e), and comment 36(d)(1)-3 for examples of types 
of compensation that are not covered by Sec.  1026.36(d) and (e). For 
example, the term ``compensation'' includes:
    A. An annual or other periodic bonus; or
    B. Awards of merchandise, services, trips, or similar prizes.
    ii. Name of fee. Compensation includes amounts the loan originator 
retains and is not dependent on the label or name of any fee imposed in 
connection with the transaction. For example, if a loan originator 
imposes a ``processing fee'' in connection with the transaction and 
retains such fee, it is deemed compensation for purposes of Sec.  
1026.36(d) and (e), whether the originator expends the time to process 
the consumer's application or uses the fee for other expenses, such as 
overhead.
    iii. Amounts for third-party charges. Compensation includes amounts 
the loan originator retains, but does not include amounts the 
originator receives as payment for bona fide and reasonable charges, 
such as credit reports, where those amounts are passed on to a third

[[Page 55358]]

party that is not the creditor, its affiliate, or the affiliate of the 
loan originator. In some cases, amounts received for payment for such 
third-party charges may exceed the actual charge because, for example, 
the originator cannot determine with accuracy what the actual charge 
will be before consummation. In such a case, the difference retained by 
the originator is not deemed compensation if the third-party charge 
imposed on the consumer or collected from a person other than the 
consumer was bona fide and reasonable, and also complies with State and 
other applicable law. On the other hand, if the originator marks up a 
third-party charge (a practice known as ``upcharging''), and the 
originator retains the difference between the actual charge and the 
marked-up charge, the amount retained is compensation for purposes of 
Sec.  1026.36(d) and (e). For example:
    A. Assume a loan originator receives compensation directly from 
either a consumer or a creditor. Further assume the loan originator 
uses average charge pricing under Regulation X to charge the consumer 
$25 for a credit report provided by a third party that is not the 
creditor, its affiliate or the affiliate of the loan originator. At the 
time the loan originator imposes the credit report fee on the consumer, 
the loan originator is uncertain of the cost of the credit report 
because the cost of a credit report from the consumer reporting agency 
is paid in a monthly bill and varies from between $15 and $35 depending 
on how many credit reports the originator obtains that month. Assume 
the $25 for the credit report is paid by the consumer or is paid by the 
creditor with proceeds from a rebate. Later, at the end of the month, 
the cost for the credit report is determined to be $15 for this 
consumer's transaction. In this case, the $10 difference between the 
$25 credit report fee imposed on the consumer and the actual $15 cost 
for the credit report is not deemed compensation for purposes of Sec.  
1026.36(d) and (e), even though the $10 is retained by the loan 
originator.
    B. Using the same example in comment 36(a)-5.iii.A above, the $10 
difference would be compensation for purposes of Sec.  1026.36(d) and 
(e) if the price for a credit report varies between $10 and $15.
    iv. Returns on equity interests and dividends on equity holdings. 
The term ``compensation'' for purposes of Sec.  1026.36(d) and (e) also 
includes, for example, stocks and stock options, and equity interests 
that are awarded to individual loan originators. Thus, the awarding of 
stocks or stock options, or equity interests to individual loan 
originators is subject to the restrictions in Sec.  1026.36(d) and (e). 
For example, a person may not award additional stock or a preferable 
type of equity interest to an individual loan originator based on the 
terms of a consumer credit transaction subject to Sec.  1026.36(d) and 
(e) originated by that individual loan originator. However, bona fide 
returns or dividends paid on stocks or other equity holdings, including 
those paid to owners or shareholders of an loan originator organization 
who own such stock or equity interests, are not considered compensation 
for purposes of Sec.  1026.36(d) and (e). Bona fide returns or 
dividends are those returns and dividends that are paid pursuant to 
documented ownership or equity interests and are not functionally 
equivalent to compensation. Ownership and equity interests must be bona 
fide. Bona fide ownership and equity interests are allocated according 
to a loan originator's respective capital contribution and the 
allocation is not a mere subterfuge for the payment of compensation 
based on terms of a transaction. For example, assume that three 
individual loan originators form a loan originator organization that is 
a limited liability company (LLC). The three individual loan 
originators are members of the LLC, and the LLC agreement governing the 
loan originator organization's structure calls for regular 
distributions based on the members' respective equity interests. If the 
members' respective equity interests are allocated based on the 
members' transaction terms, rather than according to their respective 
capital contributions, then distributions based on such equity 
interests are not bona fide and, thus, are considered compensation for 
purposes of Sec.  1026.36(d) and (e).[ltrif]
* * * * *
    36(d) Prohibited payments to loan originators.
    1. Persons covered. Section 1026.36(d) prohibits any person 
(including the creditor) from paying compensation to a loan originator 
in connection with a covered credit transaction, if the amount of the 
payment is based on any of the transaction's terms[lsqbb]or 
conditions[rsqbb]. For example, a person that purchases a loan from the 
creditor may not compensate the loan originator in a manner that 
violates Sec.  1026.36(d).
* * * * *
    36(d)(1) Payments based on transaction terms[lsqbb]and 
conditions[rsqbb].
    1. [rtrif]Compensation that is ``based on'' transaction terms. i. 
Whether compensation is ``based on'' transaction terms does not require 
a determination that any person subjectively intended that there be a 
relationship between the amount of the compensation paid and a 
transaction term. Instead, the determination is based on the objective 
facts and circumstances indicating that compensation would have been 
different if a transaction term had been different. In general, this 
determination is based on a comparison of transactions originated, but 
a violation does not require a comparison of multiple transactions.
    ii. The prohibition on payment and receipt of compensation based on 
transaction ``terms'' under Sec.  1026.36(d)(1)(i) encompasses 
compensation that directly or indirectly is based on the terms of a 
single transaction of a single individual loan originator or the terms 
of multiple transactions of the individual loan originator within the 
time period for which the compensation is paid, where such transactions 
are subject to Sec.  1026.36(d). The prohibition also covers 
compensation in the form of a bonus or other payment under a profit-
sharing plan sponsored by the person or a contribution to a qualified 
or non-qualified defined contribution or benefit plan in which the 
individual loan originator participates, if the compensation directly 
or indirectly is based on the terms of the transactions of multiple 
individual loan originators employed by the person within the time 
period for which the compensation is paid, although such compensation 
may be permissible under Sec.  1026.36(d)(1)(iii). For further clarity 
on the definitions of qualified plans, profit-sharing plans, the time 
period in which compensation is paid, and the other terms used in this 
comment 36(d)(1)-1.ii, see comment 36(d)(1)-2.iii.
    A. For example, assume that a creditor employs six individual loan 
originators and offers loans at a minimum interest rate of 6.0 percent 
and a maximum rate of 8.0 percent (unrelated to risk-based pricing). 
Assuming relatively constant loan volume and amounts of credit extended 
and relatively static market rates, if the individual loan originators' 
aggregate transactions in a given calendar year average 7.5 percent 
rather than 7.0 percent, creating a higher interest rate spread over 
the creditor's minimum acceptable rate of 6.0 percent, the creditor 
will generate higher amounts of interest revenue if the loans are held 
in portfolio and increased proceeds from secondary market purchasers if 
the loans are sold. Assume that the increased revenues lead to higher 
profits for the creditor (i.e., expenses do not

[[Page 55359]]

increase so as to negate the effect of the higher revenues). If the 
creditor pays a bonus to an individual loan originator out of a bonus 
pool established with reference to the creditor's profitability that, 
all other factors being equal, is higher than the bonus would have been 
if the average rate of the six individual loan originators' 
transactions was 7.0 percent, then the bonus is indirectly related to 
the terms of multiple transactions of multiple loan originators. 
Therefore, the bonus is compensation based on the transactions' terms 
and is prohibited under Sec.  1026.36(d)(1)(i), unless the conditions 
under Sec.  1026.36(d)(1)(iii) are satisfied such that the compensation 
is permitted under that provision.
    B. Assume that an individual loan originator's employment contract 
with a creditor guarantees a quarterly bonus in a specified amount 
conditioned upon the individual loan originator meeting certain 
performance benchmarks (e.g., volume of loans monthly). A bonus paid 
following the satisfaction of those contractual conditions is not 
directly or indirectly based on the terms of multiple individual loan 
originators' transactions, because the creditor is obligated to pay the 
bonus, in the specified amount, regardless of the terms of multiple 
loan originators' transactions and the effect of those multiple 
transaction terms on the creditor's revenues and profits.[ltrif]
    [lsqbb]Compensation. i. General. For purposes of Sec.  1026.36(d) 
and (e), the term ``compensation'' includes salaries, commissions, and 
any financial or similar incentive provided to a loan originator that 
is based on any of the terms or conditions of the loan originator's 
transactions. See comment 36(d)(1)-3 for examples of types of 
compensation that are not covered by Sec.  1026.36(d) and (e). For 
example, the term ``compensation'' includes:
    A. An annual or other periodic bonus; or
    B. Awards of merchandise, services, trips, or similar prizes.
    ii. Name of fee. Compensation includes amounts the loan originator 
retains and is not dependent on the label or name of any fee imposed in 
connection with the transaction. For example, if a loan originator 
imposes a ``processing fee'' in connection with the transaction and 
retains such fee, it is deemed compensation for purposes of Sec.  
1026.36(d) and (e), whether the originator expends the time to process 
the consumer's application or uses the fee for other expenses, such as 
overhead.
    iii. Amounts for third-party charges. Compensation includes amounts 
the loan originator retains, but does not include amounts the 
originator receives as payment for bona fide and reasonable third-party 
charges, such as title insurance or appraisals. In some cases, amounts 
received for payment for third-party charges may exceed the actual 
charge because, for example, the originator cannot determine with 
accuracy what the actual charge will be before consummation. In such a 
case, the difference retained by the originator is not deemed 
compensation if the third-party charge imposed on the consumer was bona 
fide and reasonable, and also complies with State and other applicable 
law. On the other hand, if the originator marks up a third-party charge 
(a practice known as ``upcharging''), and the originator retains the 
difference between the actual charge and the marked-up charge, the 
amount retained is compensation for purposes of Sec.  1026.36(d) and 
(e). For example:
    A. Assume a loan originator charges the consumer a $400 application 
fee that includes $50 for a credit report and $350 for an appraisal. 
Assume that $50 is the amount the creditor pays for the credit report. 
At the time the loan originator imposes the application fee on the 
consumer, the loan originator is uncertain of the cost of the appraisal 
because the originator may choose from appraisers that charge between 
$300 and $350 for appraisals. Later, the cost for the appraisal is 
determined to be $300 for this consumer's transaction. In this case, 
the $50 difference between the $400 application fee imposed on the 
consumer and the actual $350 cost for the credit report and appraisal 
is not deemed compensation for purposes of Sec.  1026.36(d) and (e), 
even though the $50 is retained by the loan originator.
    B. Using the same example in comment 36(d)(1)-1.iii.A above, the 
$50 difference would be compensation for purposes of Sec.  1026.36(d) 
and (e) if the appraisers from whom the originator chooses charge fees 
between $250 and $300.[rsqbb]
    2. Examples of compensation that is based on transaction 
terms[lsqbb]or conditions[rsqbb]. Section 1026.36(d)(1) [rtrif]does not 
prohibit compensating a loan originator differently on different 
transactions, provided the difference is not based on a transaction's 
terms or a proxy for the transaction's terms. The section[ltrif] 
prohibits loan originator compensation that is based on the terms 
[lsqbb]or conditions[rsqbb] of the loan originator's transactions.
    [rtrif]i.[ltrif] For example, the rule prohibits compensation to a 
loan originator for a transaction based on that transaction's interest 
rate, annual percentage rate, [lsqbb]loan-to-value ratio,[rsqbb] or the 
existence of a prepayment penalty. The rule also prohibits compensation 
[rtrif]to a loan originator that is[ltrif] based on a factor that is a 
proxy for a transaction's terms [lsqbb]or conditions[rsqbb]. [rtrif]If 
the loan originator's compensation is based in whole or in part on a 
factor that is a proxy for a transaction's terms, then the loan 
originator's compensation is based on a transaction's terms. A factor 
(that is not itself a term of a transaction originated by the loan 
originator) is a proxy for the transaction's terms if the factor 
substantially correlates with a term or terms of the transaction and 
the loan originator can, directly or indirectly, add, drop, or change 
the factor when originating the transaction. [ltrif]For 
example[lsqbb],[rsqbb][rtrif]:
    A. No proxy exists if compensation is not substantially correlated 
with a difference in a transaction's terms. Assume a creditor pays loan 
originator employees with less than three years of employment with the 
creditor a commission of 0.75 percent of the total loan amount, loan 
originator employees with three through five years of employment 1.25 
percent of the loan amount, and loan originator employees with more 
than five years of employment 1.5 percent of the total loan amount. For 
this creditor, there is no substantial correlation between whether 
loans are originated by a loan originator with less than three years of 
employment, three through five years of employment, or more than five 
years of employment with any term of the creditor's transactions. Thus, 
payment of compensation in this circumstance based on tenure is not a 
proxy for a transaction's terms.
    B. [ltrif][lsqbb]A consumer's credit score or similar 
representation of credit risk, such as the consumer's debt-to-income 
ratio, is not one of the transaction's terms conditions. To illustrate, 
assume that consumer A and consumer B receive loans from the same loan 
originator and the same creditor. Consumer A has a credit score of 650, 
and consumer B has a credit score of 800. Consumer A's loan has a 7 
percent interest rate, and consumer B's loan has a 6\1/2\ percent 
interest rate, because of the consumers' different credit scores. If 
the creditor pays the loan originator $1,500 in compensation for 
consumer A's loan and $1,000 in compensation for consumer B's loan, 
because the creditor varies compensation payments in whole or in part 
with the consumer's credit score, the originator's compensation would 
be based on the transactions' terms.[rsqbb]
    [rtrif]Assume a creditor pays a loan originator differently based 
on whether a loan the person originates will be held

[[Page 55360]]

by the creditor in portfolio or sold by the creditor into the secondary 
market. The creditor holds in portfolio only loans that have a fixed 
interest rate and a five-year term with a final balloon payment. The 
creditor sells into the secondary market all other loans, which 
typically have a higher fixed interest rate and a thirty-year term. The 
creditor pays a loan originator a 1.5 percent commission for 
originating loans to be held in portfolio, and pays the same loan 
originator a 1 percent commission for originating loans that will be 
sold into the secondary market. Thus, whether a loan is held in 
portfolio or sold into the secondary market for this creditor 
correlates highly with whether the loan has a five-year term or a 
thirty-year term, which are terms of the transaction. Also, the loan 
originator can indirectly change the factor by steering the consumer to 
choose a loan destined for portfolio or for sale into the secondary 
market. Whether or not the loan will be held in portfolio is a factor 
that is a proxy for the transaction's terms.
    C. Assume a loan originator organization pays its individual loan 
originators different commissions for loans based on the location of 
the home. The loan originator organization pays its individual loan 
originators 1 percent of the loan amount for originating refinancings 
in State A and 2 percent of the loan amount for originating 
refinancings in State B. For this organization loan originator, on 
average, loans for refinancings in State A have substantially lower 
interest rates than loans for refinancings in State B even if a loan 
originator, however, cannot influence whether the refinancing of a 
particular loan is for a home located in State A or State B. In this 
instance, whether a refinancing is originated in State A or State B is 
not a proxy for the transaction's terms.
    ii. Pooled compensation. Where loan originators are compensated 
differently and they each originate loans with different terms, Sec.  
1026.36(d)(1) does not permit the pooling of compensation so that the 
loan originators share in that pooled compensation. For example, assume 
that Loan Originator A receives a commission of two percent of the 
amount of credit extended on each loan he or she originates and 
originates loans that generally have higher interest rates than the 
loans that Loan Originator B originates. In addition, assume Loan 
Originator B receives a commission of one percent of the amount of 
credit extended on each loan he or she originates and originates loans 
that generally have lower interest rates than the loans originated by 
Loan Originator A. The compensation to these loan originators may not 
be pooled so that the loan originators each share in that pooled 
compensation. This type of pooling is prohibited by Sec.  1026.36(d)(1) 
because each loan originator is being paid based on loan terms, with 
each loan originator receiving compensation based on the terms of the 
transactions the loan originators collectively make.
    iii. Payment and distribution of compensation to loan originators. 
Section 1026.36(d)(1)(i) prohibits a person from paying and a loan 
originator from receiving compensation that is based on any transaction 
terms, except as provided in Sec.  1026.36(d)(1)(iii). Comment 
36(d)(1)-1.ii clarifies that this prohibition covers the payment of 
compensation that directly or indirectly is based on the terms of a 
single transaction of that individual loan originator, the terms of 
multiple transactions of that individual loan originator, or the terms 
of multiple transactions of multiple individual loan originators 
employed by the person. Comment 36(d)(1)-1.ii also provides examples of 
when a bonus paid to an individual loan originator is and is not based 
on the terms of transactions of multiple individual loan originators. 
Section 1026.36(d)(1)(iii) provides that, notwithstanding Sec.  
1026.36(d)(1)(i), a person may make a contribution to a qualified 
defined contribution or benefit plan in which the individual loan 
originator participates, provided that the contribution is not directly 
or indirectly based on the terms of that individual loan originator's 
transactions subject to Sec.  1026.36(d). The section also provides 
that, notwithstanding Sec.  1026.36(d)(1)(i), an individual loan 
originator may receive, and a person may pay to an individual loan 
originator, compensation in the form of a bonus or other payment under 
a profit-sharing plan or a contribution to a non-qualified defined 
benefit or contribution plan even if the compensation directly or 
indirectly is based on the terms of the transactions subject to Sec.  
1026.36(d) of multiple individual loan originators, but only if the 
conditions set forth in Sec.  1026.36(d)(1)(iii)(A) and (B) are 
satisfied, as applicable. Pursuant to Sec.  1026.36(j) and comment 36-
1, Sec.  1026.36(d) applies to closed-end consumer credit transactions 
secured by dwellings and reverse mortgages that are not home-equity 
lines of credit under Sec.  1026.40.
    A. Profit-sharing plan. Under Sec.  1026.36(d)(1)(iii), a profit-
sharing plan is a plan sponsored and funded by a person under which the 
person pays an individual loan originator directly in cash, stock, or 
other non-deferred compensation or through deferred compensation to be 
distributed at retirement or another future date. The person's funding 
of the profit-sharing plan, and the distributions to the individual 
loan originators, may be determined by a fixed formula or may be at the 
discretion of the person (e.g., the person may elect not to contribute 
to the profit-sharing plan in a given year). For purposes of Sec.  
1026.36(d)(1)(iii), profit-sharing plans include ``bonus plans,'' 
``bonus pools,'' or ``profit pools'' from which a person pays 
individual loan originators employed by the person (as well as other 
employees, if it so elects) additional compensation based in whole or 
in part on the profitability of the person or the business unit within 
the person's organizational structure whose profitability is referenced 
for the compensation payment, as applicable (i.e., depending on the 
level within the company at which the profit-sharing plan is 
established). For example, a creditor that pays its individual loan 
originators bonuses at the end of a calendar year based on the 
creditor's average net return on assets for the calendar year is 
considered a profit-sharing plan under Sec.  1026.36(d)(1)(iii). A 
bonus that is paid to an individual loan originator without reference 
to the profitability of the person or business unit, as applicable, 
such as a retention payment budgeted for in advance, does not violate 
the prohibition on payment of compensation based on transaction terms 
under Sec.  1026.36(d)(1)(i), as clarified by comment 36(d)(1)-1.ii; 
therefore, the provisions of Sec.  1026.36(d)(1)(iii) do not apply (see 
comment 36(d)(1)-1.ii for further guidance)
    B. Contributions to defined benefit and contribution plans. A 
defined benefit plan is a retirement plan in which the sponsoring 
person agrees to provide a certain benefit to participants based on a 
pre-determined formula. A defined contribution plan is an employer-
sponsored retirement plan in which contributions are made to individual 
accounts of employees participating in the plan, and the final 
distribution consists solely of assets (including investment returns) 
that have accumulated in these individual accounts. Depending on the 
type of defined contribution plan, contributions may be made either by 
the sponsoring employer, the participating employee, or both. Defined 
contribution plans and defined benefit plans are either qualified or 
non-qualified. For guidance on the distinction between qualified and 
non-qualified plans and the relevance of

[[Page 55361]]

such distinction to the provisions of Sec.  1026.36(d)(1)(iii), see 
comments 36(d)(1)-2.iii.E and -2.iii.G.
    C. Directly or indirectly based on the terms of multiple individual 
loan originators. The compensation arrangements addressed in Sec.  
1026.36(d)(1)(iii) are directly or indirectly based on the terms of 
transactions of multiple individual loan originators when the 
compensation, or its amount, results from or is otherwise related to 
the terms of those multiple individual loan originators' transactions 
subject to Sec.  1026.36(d). See comment 36(d)(1)-1.i for further 
guidance on when compensation is ``based on'' loan terms. See comment 
36(d)(1)-1.ii for examples of when an individual loan originator's 
compensation is and is not based on multiple transactions of multiple 
individual loan originators. If a creditor does not permit its 
individual loan originator employees to deviate from the transaction 
terms established by the creditor for each consumer, such as the 
interest rate offered or existence of a prepayment penalty, then the 
creditor's payment of a bonus at the end of a calendar year to an 
individual loan originator under a profit-sharing plan is not directly 
or indirectly based on the transaction terms during that calendar year. 
If a loan originator organization's revenues are derived exclusively 
from fees paid by the creditors that fund its originations pays a bonus 
under a profit-sharing plan, the bonus is not directly or indirectly 
based on multiple individual loan originators' transaction terms 
because Sec.  1026.36(d)(1)(i) precludes any person (including the 
creditor) from paying to a loan originator (in this case, the loan 
originator organization) compensation based on the terms of the loans 
it is purchasing.
    D. Time period for which the compensation is paid. Under Sec.  
1026.36(d)(1)(iii), the time period for which the compensation is paid 
is the time period for which the individual loan originator's 
performance was evaluated for purposes of the compensation decision 
(e.g., calendar year, quarter, month), whether or not the compensation 
is actually paid during or after the time period. For example, assume a 
creditor assesses the financial performance of its mortgage business on 
a quarterly and calendar year basis (which annual review is the basis 
for the creditor's income tax filings). Among the factors taken into 
account in assessing the financial performance of the creditor's 
mortgage business are the interest rate spreads over the creditor's 
minimum acceptable rates of the loans subject to Sec.  1026.36(d) 
originated for the creditor by individual loan originators employed by 
the creditor during the calendar year (i.e., because the rate spreads 
will affect the amount of interest income and secondary market sale 
proceeds of the mortgage business line). Following its third quarter 
review, the creditor decides to pay a ``pre-holiday bonus'' in early 
November to every individual loan originator employee in an amount 
equal to two percent of each employee's salary. For purposes of Sec.  
1026.36(d)(1)(iii), the compensation decision is directly or indirectly 
based on the terms of multiple transactions of multiple individual loan 
originators during the full calendar year because it took into account 
the terms of transactions during the first three quarters as well as 
projected similar transaction terms for the remainder of the calendar 
year.
    E. Employer contributions to qualified plans. Section 
1026.36(d)(1)(iii) permits a person to compensate an individual loan 
originator through making a contribution to a qualified defined 
contribution or defined benefit plan in which an individual loan 
originator employee participates, even if the compensation is directly 
or indirectly based on the terms of transactions subject to Sec.  
1026.36(d) of multiple individual loan originators. For purposes of 
Sec.  1026.36(d)(1)(iii), qualified defined contribution and defined 
benefit plans (collectively, qualified plans) include 401(k) plans, 
employee stock ownership plans (ESOPs), profit-sharing plans, savings 
incentive match plans for employees (SIMPLE plans), simplified employee 
pensions (SEPs), and any other plans that satisfy the qualification 
requirements under section 401(a) of the Internal Revenue Code (IRC) 
and applicable terms of the Employee Retirement Income Security Act of 
1974 (ERISA), 29 U.S.C. 1001, et seq. For purposes of Sec.  
1026.36(d)(1)(iii), qualified plans also include tax-sheltered annuity 
plans under IRC section 403(b) and eligible governmental deferred 
compensation plans under IRC section 457(b). For example, a loan 
originator organization may make discretionary contributions to a 
qualified profit-sharing plan (i.e., the loan originator organization's 
annual contribution is not fixed and may even be zero in a given year) 
in accordance with a definite formula for allocating and distributing 
the contribution among the plan participants, even if the discretionary 
contribution is directly or indirectly based on the terms of multiple 
individual loan originators' transactions.
    F. Compensation based on terms of an individual loan originator's 
transactions. Under both Sec.  1026.36(d)(1)(iii), with regard to 
contributions made to qualified plans, and Sec.  1026.36(d)(1)(iii)(A), 
with regard to compensation in the form of a bonus or other payment 
under a profit-sharing plan or a contribution to a non-qualified 
defined contribution or benefit plan, the payment of compensation to an 
individual loan originator may not be directly or indirectly based on 
the terms of that individual loan originator's transaction or 
transactions. Consequently, the compensation payment may not take into 
account, for example, that the individual loan originator's 
transactions subject to Sec.  1026.36(d) during the preceding calendar 
year had higher interest rate spreads over the creditor's minimum 
acceptable rate on average than similar transactions for other 
individual loan originators employed by the creditor. See comment 
36(d)(1)-1 for further guidance on determining whether compensation is 
``based on'' transaction terms.

ALTERNATIVE 1--PARAGRAPH 2.iii.G

    G. Bonuses under profit-sharing plans; employer contributions to 
defined contribution and defined benefit plans other than qualified 
plans. Section 1026.36(d)(1)(iii)(B)(1) permits compensation to an 
individual loan originator in the form of a bonus or other payment 
under a profit-sharing plan or a contribution to a defined contribution 
or benefit plan other than a qualified plan even if the payment or 
contribution is directly or indirectly based on the terms of multiple 
individual loan originators' transactions subject to Sec.  1026.36(d), 
if certain conditions are met. Specifically, the compensation is 
permitted if no more than 50 percent of the total revenues of the 
person (or, if applicable, the business unit within the person at which 
level the payment or contribution is made) are derived from the 
person's mortgage business during the tax year immediately preceding 
the tax year in which the compensation is paid.
    1. Total revenues. The total revenues for purposes of the revenue 
test under Sec.  1026.36(d)(1)(iii)(B)(1) are the revenues of the 
person or the business unit to which the profit-sharing plan applies, 
as applicable, during the tax year immediately preceding the tax year 
in which the compensation is paid. Under this provision, whether the 
revenues of the person or the business

[[Page 55362]]

unit are used depends on the level within the person's organizational 
structure at which the profit-sharing plan is established and whose 
profitability is referenced for purposes of payment of the compensation 
under the profit-sharing plan. If the profitability of a business unit 
is referenced for purposes of establishing the profit-sharing plan 
rather than the overall profits of the person, then the revenues of the 
business unit are used. If the profitability of the person is 
referenced for purposes of establishing the profit-sharing plan, 
however, then the total revenues of the person are used. For example, 
if a creditor has two separate business units, one for commercial 
credit transactions and one for consumer credit transactions, and the 
profits of the consumer credit business unit are referenced for 
purposes of establishing a bonus pool to pay bonuses to individual loan 
originators then the profit-sharing plan applies to the consumer credit 
business unit, and thus the total revenues of the consumer credit 
business unit are the total revenues used for purposes of Sec.  
1026.36(d)(1)(i)(B)(1). If the creditor has a single profit-sharing 
plan for all of its employees, however, the creditor's total revenues 
across all business lines are used. The total revenues for the person 
or the applicable business unit or division, as applicable, are those 
revenues during the tax year immediately preceding the tax year in 
which the compensation is paid. A tax year is the person's annual 
accounting period for keeping records and reporting income and expenses 
(i.e., it may be a calendar year or a fiscal year depending on the 
person's annual accounting period). Thus, for example, if a loan 
originator organization at the level of the organization (rather than a 
lower-tier business unit) pays multiple individual loan originator 
employees a bonus under a profit-sharing plan in February 2013, and the 
loan originator organization uses a calendar year accounting period, 
then the total revenues used for purposes of Sec.  
1026.36(d)(1)(i)(B)(1) are the organization's revenues generated during 
2012. Pursuant to Sec.  1026.36(d)(1)(i)(B)(1), the total revenues are 
determined through a methodology that is consistent with generally 
accepted accounting principles (GAAP) and, as applicable, the reporting 
of the person's income for purposes of Federal tax filings or, if none, 
any industry call reports filed regularly by the person. Depending on 
the person, the industry call report to be used may be, for example, 
the NMLSR Mortgage Call Report or the NCUA Call Report. For example, to 
determine its total revenues on a calendar year basis, a Federal credit 
union that is exempt from paying Federal income tax uses a methodology 
to determine total annual revenues that reflects the income reported in 
the NCUA Call Reports. If the credit union does not file NCUA Call 
Reports, however, the credit union uses a methodology that, pursuant to 
Sec.  1026.36(d)(1)(i)(B)(1), otherwise is consistent with GAAP and, as 
applicable, reflects an accurate allocation of revenues among the 
credit union's business units. Pursuant to Sec.  
1026.36(d)(1)(i)(B)(1), the revenues of the person's affiliates 
generally are not taken into account for purposes of the revenue test 
unless the profit-sharing plan applies to the affiliate, in which case 
the person's total revenues also include the total revenues of the 
affiliate. The profit-sharing plan applies to the affiliate when, for 
example, the funds used to pay a bonus to an individual loan originator 
are the same funds used to pay a bonus to employees of the affiliate.
    2. Revenues derived from mortgage business. Section 
1026.36(d)(1)(iii)(B)(1) provides that revenues derived from mortgage 
business are the portion of the total revenues (see comment 36(d)(1)-
2.iii.G.1) that are generated through a person's transactions subject 
to Sec.  1026.36(d). Pursuant to Sec.  1026.36(j) and comment 36-1, 
Sec.  1026.36(d) applies to closed-end consumer credit transactions 
secured by dwellings and reverse mortgages that are not home-equity 
lines of credit under Sec.  1026.40. Thus, a person's revenues from its 
mortgage business include, for example: origination fees and interest 
associated with loans for purchase money or refinance purposes 
originated by individual loan originators employed by the person, 
income from servicing of loans for purchase money or refinance purposes 
originated by individual loan originators employed by the person, and 
proceeds of secondary market sales of loans for purchase money or 
refinance purposes originated by individual loan originators employed 
by the person. Revenues derived from mortgage business do not include, 
for example, servicing income where the loans being serviced were 
purchased by the person after the loans' origination by another person, 
or origination fees, interest, and secondary market sale proceeds 
associated with home-equity lines of credit, loans secured by 
consumers' interests in timeshare plans, or loans made primarily for 
business, commercial or agricultural purposes.

ALTERNATIVE 2--PARAGRAPH 2.iii.G

    G. Bonuses under profit-sharing plans; employer contributions to 
defined contribution and defined benefit plans other than qualified 
plans. Section 1026.36(d)(1)(iii)(B)(1) permits compensation to an 
individual loan originator in the form of a bonus or other payment 
under a profit-sharing plan or a contribution to a defined contribution 
or benefit plan other than a qualified plan even if the payment or 
contribution is directly or indirectly based on the terms of multiple 
individual loan originators' transactions subject to Sec.  1026.36(d), 
if certain conditions are met. Specifically, the compensation is 
permitted if no more than 25 percent of the total revenues of the 
person (or, if applicable, the business unit within the person at which 
level the payment or contribution is made) are derived from the 
person's mortgage business during the tax year immediately preceding 
the tax year in which the compensation is paid.
    1. Total revenues. The total revenues for purposes of the revenue 
test under Sec.  1026.36(d)(1)(iii)(B)(1) are the revenues of the 
person or the business unit to which the profit-sharing plan applies, 
as applicable, during the tax year immediately preceding the tax year 
in which the compensation is paid. Under this provision, whether the 
revenues of the person or the business unit are used depends on the 
level within the person's organizational structure at which the profit-
sharing plan is established and whose profitability is referenced for 
purposes of payment of the compensation under the profit-sharing plan. 
If the profitability of a business unit is referenced for purposes of 
establishing the profit-sharing plan rather than the overall profits of 
the person, then the revenues of the business unit are used. If the 
profitability of the person is referenced for purposes of establishing 
the profit-sharing plan, however, then the total revenues of the person 
are used. For example, if a creditor has two separate business units, 
one for commercial credit transactions and one for consumer credit 
transactions, and the profits of the consumer credit business unit are 
referenced for purposes of establishing a bonus pool to pay bonuses to 
individual loan originators then the profit-sharing plan applies to the 
consumer credit business unit, and thus the total revenues of the 
consumer credit business unit are the total revenues used for purposes 
of Sec.  1026.36(d)(1)(i)(B)(1). If the creditor has a single profit-
sharing plan for all of

[[Page 55363]]

its employees, however, the creditor's total revenues across all 
business lines are used. The total revenues for the person or the 
applicable business unit or division, as applicable, are those revenues 
during the tax year immediately preceding the tax year in which the 
compensation is paid. A tax year is the person's annual accounting 
period for keeping records and reporting income and expenses (i.e., it 
may be a calendar year or a fiscal year depending on the person's 
annual accounting period). Thus, for example, if a loan originator 
organization at the level of the organization (rather than a lower-tier 
business unit) pays multiple individual loan originator employees a 
bonus under a profit-sharing plan in February 2013, and the loan 
originator organization uses a calendar year accounting period, then 
the total revenues used for purposes of Sec.  1026.36(d)(1)(i)(B)(1) 
are the organization's revenues generated during 2012. Pursuant to 
Sec.  1026.36(d)(1)(i)(B)(1), the total revenues are determined through 
a methodology that is consistent with generally accepted accounting 
principles (GAAP) and, as applicable, the reporting of the person's 
income for purposes of Federal tax filings or, if none, any industry 
call reports filed regularly by the person. Depending on the person, 
the industry call report to be used may be, for example, the NMLSR 
Mortgage Call Report or the NCUA Call Report. For example, to determine 
its total revenues on a calendar year basis, a Federal credit union 
that is exempt from paying Federal income tax uses a methodology to 
determine total annual revenues that reflects the income reported in 
the NCUA Call Reports. If the credit union does not file NCUA Call 
Reports, however, the credit union uses a methodology that, pursuant to 
Sec.  1026.36(d)(1)(i)(B)(1), otherwise is consistent with GAAP and, as 
applicable, reflects an accurate allocation of revenues among the 
credit union's business units. Pursuant to Sec.  
1026.36(d)(1)(i)(B)(1), the revenues of the person's affiliates 
generally are not taken into account for purposes of the revenue test 
unless the profit-sharing plan applies to the affiliate, in which case 
the person's total revenues for purposes also include the total 
revenues of the affiliate. The profit-sharing plan applies to the 
affiliate when, for example, the funds used to pay a bonus to an 
individual loan originator are the same funds used to pay a bonus to 
employees of the affiliate.
    2. Revenues derived from mortgage business. Section 
1026.36(d)(1)(iii)(B)(1) provides that revenues derived from mortgage 
business are the portion of the total revenues (see comment 36(d)(1)-
2.iii.G.1) that are generated through a person's transactions subject 
to Sec.  1026.36(d). Pursuant to Sec.  1026.36(j) and comment 36-1, 
Sec.  1026.36(d) applies to closed-end consumer credit transactions 
secured by dwellings and reverse mortgages that are not home-equity 
lines of credit under Sec.  1026.40. Thus, a person's revenues from its 
mortgage business include, for example: origination fees and interest 
associated with loans for purchase money or refinance purposes 
originated by individual loan originators employed by the person, 
income from servicing of loans for purchase money or refinance purposes 
originated by individual loan originators employed by the person, and 
proceeds of secondary market sales of loans for purchase money or 
refinance purposes originated by individual loan originators employed 
by the person. Revenues derived from mortgage business do not include, 
for example, servicing income where the loans being serviced were 
purchased by the person after the loans' origination by another person, 
or origination fees, interest, and secondary market sale proceeds 
associated with home-equity lines of credit, loans secured by 
consumers' interests in timeshare plans, or loans made primarily for 
business, commercial or agricultural purposes.
    H. Individual loan originators who originate five or fewer mortgage 
loans. Section 1026.36(d)(1)(iii)(B)(2) permits compensation to an 
individual loan originator in the form of a bonus or other payment 
under a profit-sharing plan or a contribution to a defined contribution 
or benefit plan other than a qualified plan even if the payment or 
contribution is directly or indirectly based on the terms of multiple 
individual loan originators' transactions subject to Sec.  1026.36(d), 
if certain conditions are met. Specifically, the compensation is 
permitted if the individual is a loan originator (as defined in Sec.  
1026.36(a)(1)(i)) for five or fewer transactions subject to Sec.  
1026.36(d) during the 12-month period preceding the date of the 
decision to make the payment or contribution.

ALTERNATIVE 1--PARAGRAPHS 2.iii.H.1 and 2.iii.I

    1. For example, assume a loan originator organization employs six 
individual loan originators during a given calendar year. In January of 
the following calendar year, the loan originator organization formally 
determines the financial performance of its mortgage business for the 
prior calendar year, which takes into account the terms of all 
transactions subject to Sec.  1026.36(d) of the individual loan 
originators employed by the person during that calendar year. Based on 
that determination, the loan originator organization on February 1 
decides to pay bonuses to the individual loan originators out of a 
``bonus pool.'' Assume that between February 1 of the prior calendar 
year and January 31 of the current calendar year, individual loan 
originators A, B, and C each were the loan originators for between 
three and five transactions subject to Sec.  1026.36(d), and individual 
loan originators D, E, and F each were the loan originators for between 
10 and 15 transactions subject to Sec.  1026.36(d). Therefore, the loan 
originator organization may award the bonuses to individual loan 
originators A, B, and C, but the loan originator organization may not 
award the bonuses to individual loan originators D, E, and F unless the 
loan originator organization can demonstrate that its mortgage business 
revenues are 50 percent or less of the total revenues of the loan 
originator organization or the business unit to which the profit-
sharing plan applies, as applicable (thereby satisfying the conditions 
of Sec.  1026.36(d)(1)(iii)(B)(1)).
    I. Additional examples. 1. Assume that Company A is solely engaged 
in the mortgage and credit card businesses. Company A generates $1 
million in revenue in a given calendar year and files its income taxes 
on a calendar-year basis. Company A's mortgage business accounts for 
$150,000 in revenue (or 15 percent of the company's total revenues), 
while its credit card business accounts for $850,000 in revenue (or 85 
percent). A bonus pool is set aside at the level of the company, rather 
than the individual business units. Because Company A's mortgage 
business accounts for less than 50 percent of its total revenues, 
Company A may take into account the terms of multiple transactions 
subject to Sec.  1026.36(d) of multiple individual loan originators 
when paying a bonus or other compensation to an individual loan 
originator under a profit-sharing plan or making a contribution to a 
defined benefit or contribution plan (whether or not a qualified plan). 
However, the compensation cannot reflect the terms of that individual 
loan originator's transaction or transactions.
    2. Assume that Company B is solely engaged in the mortgage and 
credit card businesses. Company B earns $1 million in revenue in a 
given calendar year, and it files its income taxes on a calendar-year 
basis. Company B's mortgage business accounts for $510,000 in

[[Page 55364]]

revenue (51 percent), and its credit card business accounts for 
$490,000 in revenue (49 percent). A bonus pool is set aside at the 
level of the company, rather than the individual business units. 
Because Company B's mortgage business accounts for more than the 50 
percent of its total revenues, Company B may not take into account the 
terms of multiple transactions subject to Sec.  1026.36(d) of multiple 
individual loan originators when paying a bonus or other compensation 
under a profit-sharing plan or making a contribution to a non-qualified 
defined benefit or contribution plan. The compensation may be based on 
the financial performance of the credit card business alone. In 
addition, the compensation may be based on the terms of multiple 
individual loan originators' transactions with regard to a contribution 
to a qualified plan. Further, where an individual loan originator has 
been the loan originator for five or fewer transactions subject to 
Sec.  1026.36(d) during the 12 month period immediately preceding the 
decision to make the compensation payment, Company B make take into 
account the terms of multiple transactions subject to Sec.  1026.36(d) 
of multiple individual loan originators when paying a bonus or other 
compensation under a profit-sharing plan or making a contribution to a 
defined benefit or contribution plan (whether or not a qualified plan). 
In all instances, however, the compensation cannot reflect the terms of 
that individual loan originator's transaction or transactions.[ltrif]

ALTERNATIVE 2--PARAGRAPHS 2.iii.H.1 and 2.iii.I

    1. For example, assume a loan originator organization employs six 
individual loan originators during a given calendar year. In January of 
the following calendar year, the loan originator organization formally 
determines the financial performance of its mortgage business for the 
prior calendar year, which takes into account the terms of all 
transactions subject to Sec.  1026.36(d) of the individual loan 
originators employed by the person during that calendar year. Based on 
that determination, the loan originator organization on February 1 
decides to pay bonuses to the individual loan originators out of a 
``bonus pool.'' Assume that between February 1 of the prior calendar 
year and January 31 of the current calendar year, individual loan 
originators A, B, and C each were the loan originators for between 
three and five transactions subject to Sec.  1026.36(d), and individual 
loan originators D, E, and F each were the loan originators for between 
10 and 15 transactions subject to Sec.  1026.36(d). Therefore, the loan 
originator organization may award the bonuses to individual loan 
originators A, B, and C, but the loan originator organization may not 
award the bonuses to individual loan originators D, E, and F unless the 
loan originator organization can demonstrate that its mortgage business 
revenues are 25 percent or less of the total revenues of the loan 
originator organization or the business unit to which the profit-
sharing plan applies, as applicable (thereby satisfying the conditions 
of Sec.  1026.36(d)(1)(iii)(B)(1)).
    I. Additional examples. 1. Assume that Company A is solely engaged 
in the mortgage and credit card businesses. Company A generates $1 
million in revenue in a given calendar year and files its income taxes 
on a calendar-year basis. Company A's mortgage business accounts for 
$150,000 in revenue (or 15 percent of the company's total revenues), 
while its credit card business accounts for $850,000 in revenue (or 85 
percent). A bonus pool is set aside at the level of the company, rather 
than the individual business units. Because Company A's mortgage 
business accounts for less than 25 percent of its total revenues, 
Company A may take into account the terms of multiple transactions 
subject to Sec.  1026.36(d) of multiple individual loan originators 
when paying a bonus or other compensation to an individual loan 
originator under a profit-sharing plan or making a contribution to a 
defined benefit or contribution plan (whether or not a qualified plan). 
However, the compensation cannot reflect the terms of that individual 
loan originator's transaction or transactions.
    2. Assume that Company B is solely engaged in the mortgage and 
credit card businesses. Company B earns $1 million in revenue in a 
given calendar year, and it files its income taxes on a calendar-year 
basis. Company B's mortgage business accounts for $300,000 in revenue 
(30 percent), and its credit card business accounts for $700,000 in 
revenue (70 percent). A bonus pool is set aside at the level of the 
company, rather than the individual business units. Because Company B's 
mortgage business accounts for more than the 25 percent of its total 
revenues, Company B may not take into account the terms of multiple 
transactions subject to Sec.  1026.36(d) of multiple individual loan 
originators when paying a bonus or other compensation under a profit-
sharing plan or making a contribution to a non-qualified defined 
benefit or contribution plan. The compensation may be based on the 
financial performance of the credit card business alone. In addition, 
the compensation may be based on the terms of multiple individual loan 
originators' transactions with regard to a contribution to a qualified 
plan. Further, where an individual loan originator has been the loan 
originator for five or fewer transactions subject to Sec.  1026.36(d) 
during the 12 month period immediately preceding the decision to make 
the compensation payment, Company B make take into account the terms of 
multiple transactions subject to Sec.  1026.36(d) of multiple 
individual loan originators when paying a bonus or other compensation 
under a profit-sharing plan or making a contribution to a defined 
benefit or contribution plan (whether or not a qualified plan). In all 
instances, however, the compensation cannot reflect the terms of that 
individual loan originator's transaction or transactions.[ltrif]
    3. Examples of compensation not based on transaction terms [or 
conditions]. The following are only illustrative examples of 
compensation methods that are permissible (unless otherwise prohibited 
by applicable law), and not an exhaustive list. Compensation is not 
based on the transaction's terms [or conditions] if it is based on, for 
example:
    i. The loan originator's overall loan volume (i.e., total dollar 
amount of credit extended or total number of loans originated), 
delivered to the creditor.
    ii. The long-term performance of the originator's loans.
    iii. An hourly rate of pay to compensate the originator for the 
actual number of hours worked.
    iv. Whether the consumer is an existing customer of the creditor or 
a new customer.
    v. A payment that is fixed in advance for every loan the originator 
arranges for the creditor (e.g., $600 for every loan arranged for the 
creditor, or $1,000 for the first 1,000 loans arranged and $500 for 
each additional loan arranged).
    vi. The percentage of applications submitted by the loan originator 
to the creditor that results in consummated transactions.
    vii. The quality of the loan originator's loan files (e.g., 
accuracy and completeness of the loan documentation) submitted to the 
creditor.
    viii. A legitimate business expense, such as fixed overhead costs.
    ix. Compensation that is based on the amount of credit extended, as 
permitted by Sec.  1026.36(d)(1)(ii). See comment 36(d)(1)-9 discussing 
compensation based on the amount of credit extended.

[[Page 55365]]

    4. Creditor's flexibility in setting loan terms. Section 
1026.36(d)(1) does not limit a creditor's ability to offer a higher 
interest rate in a transaction as a means for the consumer to finance 
the payment of the loan originator's compensation or other costs that 
the consumer would otherwise be required to pay directly (either in 
cash or out of the loan proceeds). Thus, [rtrif]subject to Sec.  
1026.36(d)(2)(ii),[ltrif] a creditor may charge a higher interest rate 
to a consumer who will pay fewer of the costs of the transaction 
directly, or it may offer the consumer a lower rate if the consumer 
pays more of the costs directly. For example, if the consumer pays half 
of the transaction costs directly, a creditor may charge an interest 
rate of 6 percent but, if the consumer pays none of the transaction 
costs directly, the creditor may charge an interest rate of 6.5 
percent. Section 1026.36(d)(1) also does not limit a creditor from 
offering or providing different loan terms to the consumer based on the 
creditor's assessment of the credit and other transactional risks 
involved. [rtrif]But see Sec.  1026.36(d)(2)(ii).[ltrif] A creditor 
could also offer different consumers varying interest rates that 
include a constant interest rate premium to recoup the loan 
originator's compensation through increased interest paid by the 
consumer (such as by adding a constant 0.25 percent to the interest 
rate on each loan).
    5. Effect of modification of loan terms. Under Sec.  1026.36(d)(1), 
a loan originator's compensation may not [rtrif]be[ltrif] 
[lsqbb]vary[rsqbb] based on any of a credit transaction's terms. Thus, 
a creditor and loan originator may not agree to set the originator's 
compensation at a certain level and then subsequently lower it in 
selective cases (such as where the consumer is able to obtain a lower 
rate from another creditor). When the creditor offers to extend a loan 
with specified terms and conditions (such as the rate and points), the 
amount of the originator's compensation for that transaction is not 
subject to change (increase or decrease) based on whether different 
loan terms are negotiated. For example, if the creditor agrees to lower 
the rate that was initially offered, the new offer may not be 
accompanied by a reduction in the loan originator's compensation. 
[rtrif]Thus, while the creditor may change loan terms or pricing to 
match a competitor, to avoid triggering high-cost loan provisions, or 
for other reasons, the loan originator's compensation on that 
transaction may not be changed. A loan originator therefore may not 
agree to reduce its compensation or provide a credit to the consumer to 
pay a portion of the consumer's closing costs, for example, to avoid 
high-cost loan provisions. See comment 36(d)(1)-7 for further 
guidance.[ltrif]
    6. Periodic changes in loan originator compensation and 
transactions' terms [and conditions]. This section does not limit a 
creditor or other person from periodically revising the compensation it 
agrees to pay a loan originator. However, the revised compensation 
arrangement must result in payments to the loan originator that 
[rtrif]are not[ltrif] [do not vary] based on the terms [or conditions] 
of a credit transaction. A creditor or other person might periodically 
review factors such as loan performance, transaction volume, as well as 
current market conditions for originator compensation, and 
prospectively revise the compensation it agrees to pay to a loan 
originator. For example, assume that during the first six months of the 
year, a creditor pays $3,000 to a particular loan originator for each 
loan delivered, regardless of the loan terms [or conditions]. After 
considering the volume of business produced by that originator, the 
creditor could decide that as of July 1, it will pay $3,250 for each 
loan delivered by that particular originator, regardless of the loan 
terms [or conditions]. No violation occurs even if the loans made by 
the creditor after July 1 generally carry a higher interest rate than 
loans made before that date, to reflect the higher compensation.
    [rtrif]7. Unanticipated increases in non-affiliated third-party 
closing costs. Notwithstanding comment 36(d)(1)-5, Sec.  1026.36(d)(1) 
does not prohibit loan originators from decreasing their compensation 
to cover unanticipated increases in non-affiliated third-party closing 
costs that result in the actual amounts of such closing costs exceeding 
limits imposed by applicable law, provided that the creditor or the 
loan originator does not know or should not reasonably be expected to 
know the amount of any third-party closing costs in advance. An example 
of where the loan originator is reasonably expected to know the amount 
of closing costs in advance is if the loan originator allows the 
consumer to choose from among only three pre-approved third-party 
service providers.[ltrif]
    [7. Compensation received directly from the consumer. The 
prohibition in Sec.  1026.36(d)(1) does not apply to transactions in 
which any loan originator receives compensation directly from the 
consumer, in which case no other person may provide any compensation to 
a loan originator, directly or indirectly, in connection with that 
particular transaction pursuant to Sec.  1026.36(d)(2). Payments to a 
loan originator made out of loan proceeds are considered compensation 
received directly from the consumer, while payments derived from an 
increased interest rate are not considered compensation received 
directly from the consumer. However, points paid on the loan by the 
consumer to the creditor are not considered payments received directly 
from the consumer whether they are paid in cash or out of the loan 
proceeds. That is, if the consumer pays origination points to the 
creditor and the creditor compensates the loan originator, the loan 
originator may not also receive compensation directly from the 
consumer. Compensation includes amounts retained by the loan 
originator, but does not include amounts the loan originator receives 
as payment for bona fide and reasonable third-party charges, such as 
title insurance or appraisals. See comment 36(d)(1)-1.]
    8. Record retention. [rtrif] Creditors and loan originator 
organizations are subject to certain record retention requirements 
under Sec.  1026.25(a), (b), and (c)(2), as applicable, in order to 
comply with Sec.  1026.36(d)(1).[ltrif] See comment[rtrif]s[ltrif] 
[25(a)-5] [rtrif] 25(c)(2)-1 and -2[ltrif] for guidance on complying 
with the record retention requirements of Sec.  1026.25[(a)] as they 
apply to Sec.  1026.36(d)(1).
* * * * *
    [rtrif]10. Amount of credit extended under a reverse mortgage. For 
closed-end reverse mortgage loans, the ``amount of credit extended'' 
for purposes of Sec.  1036.36(d)(1) means the maximum proceeds 
available to the consumer under the loan.[ltrif]
    36(d)(2) Payments by persons other than consumer.
    [rtrif]36(d)(2)(i) Dual compensation.[ltrif]
    1. Compensation in connection with a particular transaction. Under 
Sec.  1026.36(d)(2)[rtrif](i)(A)[ltrif], if any loan originator 
receives compensation directly from a consumer in a transaction, no 
other person may provide any compensation to 
[rtrif]any[ltrif][lsqbb]a[rsqbb] loan originator, directly or 
indirectly, in connection with that particular credit transaction. See 
comment [rtrif]36(d)(2)(i)-2[ltrif][lsqbb]36(d)(1)-7[rsqbb] discussing 
compensation received directly from the consumer. The restrictions 
imposed under Sec.  1026.36(d)(2) relate only to payments, such as 
commissions, that are specific to, and paid solely in connection with, 
the transaction in which the consumer has paid compensation directly to 
a loan originator. [rtrif]Section 1026.36(d)(2)(i)(C)

[[Page 55366]]

provides that, if a loan originator organization receives compensation 
directly from a consumer, the loan originator organization may provide 
compensation to individual loan originators and the individual loan 
originator may receive compensation from the loan originator 
organization. (See comment 36(a)(1)-1.i for an explanation of the use 
of the term ``loan originator organization'' and ``individual loan 
originator'' for purposes of Sec.  1026.36(d)(2)(i)(C).)[ltrif] For 
example, payments by a mortgage broker 
[rtrif]organization[ltrif][lsqbb]company[rsqbb] to an employee 
[rtrif]as compensation for a specific credit 
transaction[ltrif][lsqbb]in the form of a salary or hourly wage, which 
is not tied to a specific transaction,[rsqbb] do not violate Sec.  
1026.36(d)(2)[rtrif](i)(A)[ltrif] even if the consumer directly pays 
[rtrif]the mortgage broker organization[ltrif] [lsqbb]a loan 
originator[rsqbb] a fee in connection with [rtrif]that 
transaction[ltrif] [lsqbb]a specific credit transaction[rsqbb]. 
However,[lsqbb]if any loan originator receives compensation directly 
from the consumer in connection with a specific credit 
transaction,[rsqbb] neither the mortgage broker 
[rtrif]organization[ltrif][lsqbb]company[rsqbb] nor 
[rtrif]the[ltrif][lsqbb]an[rsqbb] employee [lsqbb]of the mortgage 
broker company[rsqbb] can receive compensation from the creditor in 
connection with that particular credit transaction.
    2. Compensation received directly from a consumer. [rtrif]i. 
Payments to a loan originator from loan proceeds are considered 
compensation received directly from the consumer, while payments 
derived from an increased interest rate are not considered compensation 
received directly from the consumer. However, points paid on the loan 
by the consumer to the creditor are not considered payments to the loan 
originator that are received directly from the consumer whether they 
are paid directly by the consumer (for example, in cash or by check) or 
out of the loan proceeds. That is, if the consumer pays points to the 
creditor and the creditor compensates the loan originator, the loan 
originator may not also receive compensation directly from the 
consumer. Compensation includes amounts retained by the loan 
originator, but does not include amounts the loan originator receives 
as payment for bona fide and reasonable third-party charges, such as 
credit reports. See comment 36(a)-5.iii.
    ii. [ltrif][lsqbb]Under Regulation X, which implements the Real 
Estate Settlement Procedures Act (RESPA), [rsqbb][rtrif]A rebate that 
will be applied to reduce the consumer's settlement charges, including 
origination fees[ltrif][lsqbb]a yield spread premium[rsqbb] paid by a 
creditor to the loan originator may be characterized on the 
[lsqbb]RESPA[rsqbb] disclosures [rtrif]made pursuant to the Real Estate 
Settlement Procedures Act[ltrif] as a ``credit.'' [lsqbb]that will be 
applied to reduce the consumer's settlement charges, including 
origination fees.[rsqbb] A [lsqbb]yield spread 
premium[rsqbb][rtrif]rebate[ltrif] disclosed in this manner is not 
considered to be received by the loan originator directly from the 
consumer for purposes of Sec.  1026.36(d)(2).
    [rtrif]iii. Section 1026.36(d)(2)(i)(B) provides that compensation 
directly from a consumer includes payments to a loan originator made 
pursuant to an agreement between the consumer and a person other than 
the creditor or its affiliates. Compensation to a loan originator is 
sometimes paid on the borrower's behalf by a person other than a 
creditor or its affiliates, such as a non-creditor seller, home 
builder, home improvement contractor or real estate broker or agent. 
Such payments to a loan originator are considered compensation received 
directly from the consumer for purposes of Sec.  1026.36(d)(2) if they 
are made pursuant to an agreement between the consumer and the person 
other than the creditor or its affiliates. State law will determine if 
there is an agreement between the parties. See Sec.  1026.2(b)(3). The 
parties do not have to agree specifically that the payments will be 
used to pay for the loan originator's compensation, but just that the 
person will make a payment toward the borrower's closing costs. For 
example, assume that a non-creditor seller has an agreement with the 
borrower to pay $1,000 of the borrower's closing costs on a 
transaction. Any of the $1,000 that is used to pay compensation to a 
loan originator is deemed to be compensation received directly from the 
consumer, even if the agreement does not specify that some or all of 
$1,000 must be used to compensate the loan originator.

36(d)(2)(ii) Restrictions on Discount Points and Origination Points or 
Fees.

    1. Scope. i. Examples of transactions to which the restrictions on 
discount points and origination points or fees applies. The prohibition 
in Sec.  1026.36(d)(2)(ii) applies when:
    A. For transactions that do not involve a loan originator 
organization, the creditor pays compensation in connection with the 
transaction (e.g., a commission) to individual loan originators that 
work for the creditor;
    B. The creditor pays a loan originator organization compensation in 
connection with a transaction, regardless of how the loan originator 
organization pays compensation to individual loan originators that work 
for the organization; and
    C. The loan originator organization receives compensation directly 
from the consumer in a transaction and the loan originator organization 
pays individual loan originators that work for the organization 
compensation in connection with the transaction.
    ii. Examples of transactions to which the restrictions on discount 
points and origination points or fees does not apply. The prohibition 
in Sec.  1026.36(d)(2)(ii) does not apply when:
    A. For transactions that do not involve a loan originator 
organization, the creditor pays individual loan originators that work 
for the creditor only in the form of a salary, hourly wage, or other 
compensation that is not tied to the particular transaction; and
    B. For transactions that involve a loan origination organization, 
the loan originator organization receives compensation directly from 
the consumer and pays individual loan originators that work for the 
organization only in the form of a salary, hourly wage, or other 
compensation that is not tied to the particular transaction.
    iii. Relationship to provisions prohibiting dual compensation. 
Section 1026.36(d)(2)(ii) does not override any of the prohibitions on 
dual compensation set forth in Sec.  1026.36(d)(2)(i). For example, 
Sec.  1026.36(d)(2)(ii) does not permit a loan originator organization 
to receive compensation in connection with a transaction both from a 
consumer and from a person other than the consumer.
    2. Record retention. See Sec.  1026.25(c)(3) for record retention 
requirements as they apply to Sec.  1026.36(d)(2)(ii).
    3. Affiliates. Section 1026.36(d)(3) provides that for purposes of 
Sec.  1026.36(d), affiliates must be treated as a single person. Thus, 
under Sec.  1026.36(d)(2)(ii)(A), neither a creditor's affiliate nor an 
affiliate of the loan originator organization may impose on the 
consumer any discount points and origination points or fees in 
connection with the transaction unless the creditor makes available to 
the consumer a comparable, alternative loan that does not include 
discount points and origination points or fees, unless the consumer is 
unlikely to qualify for such a loan. In addition, for purposes of the 
definition of discount points and origination points or fees set forth 
in Sec.  1026.36(d)(2)(ii)(B), charges that are payable by a consumer 
to a creditor's affiliate or the affiliate of a loan originator 
organization are deemed to be payable to the creditor or loan 
originator organization, respectively.

[[Page 55367]]

Paragraph 36(d)(2)(ii)(A)

    1. Make available. i. Unless a creditor determines that a consumer 
is unlikely to qualify for a comparable, alternative loan that does not 
include discount points and origination points or fees, the creditor 
must make such a loan available to the consumer. For transactions that 
do not involve a loan originator organization, a creditor will be 
deemed to have made available to the consumer such a loan if:
    A. Any time the creditor provides any oral or written estimate of 
the interest rate, the regular periodic payments, the total amount of 
discount points and origination points or fees, or the total amount of 
closing costs specific to a consumer for a transaction that includes 
discount points and origination points or fees, the creditor also 
provides an estimate of those same types of information for a 
comparable, alternative loan that does not include discount points and 
origination points or fees, unless a creditor determines that a 
consumer is unlikely to qualify for such a loan. A creditor using this 
safe harbor is required to provide the estimate for the loan that does 
not include discount points and origination points or fees only if the 
estimate for the loan that includes discount points and origination 
points or fees is received by the consumer prior to the estimated 
disclosures required within three business days after application 
pursuant to the Bureau's regulations implementing the Real Estate 
Settlement Procedures Act (RESPA);
    B. A creditor using the safe harbor described in comment 
36(d)(1)(ii)-1.i.A is required to provide information about the loan 
that does not include discount points and origination points or fees 
only when the information about the loan that includes discount points 
or origination points or fees is specific to the consumer. 
Advertisements are not subject to this requirement. See comment 
2(a)(2)-1.ii.A. If the information about the loan that includes 
discount points and origination points or fees is an advertisement 
under Sec.  1026.24, the creditor using this safe harbor is not 
required to provide the quote for the loan that does not include 
discount points and origination points or fees. For example, if prior 
to the consumer submitting an application, the creditor provides a 
consumer an estimated interest rate and monthly payment for a loan that 
includes discount points and origination points or fees, and the 
estimates were based on the estimated loan amount and the consumer's 
estimated credit score, then the creditor must also disclose the 
estimated interest rate and estimated monthly payment for the loan that 
does not include discount points and origination points or fees. In 
contrast, if the creditor provides the consumer with a preprinted list 
of available rates for different loan products that include discount 
points and origination points or fees, the creditor is not required to 
provide the information about the loans that do not include discount 
points and origination points or fees under this safe harbor.
    C. For purposes of Sec.  1026.36(d)(2)(ii)(A) and this comment, 
``comparable, alternative loan'' means that the two loans for which 
estimates are provided as discussed in comment 36(d)(2)(ii)(A)-1.i.A 
have the same terms and conditions, other than the interest rate, any 
terms that change solely as a result of the change in the interest rate 
(such the amount of regular periodic payments), and the amount of any 
discount points and origination points or fees. If a creditor 
determines that the consumer is unlikely to qualify for such a loan 
that does not include discount points and origination points or fees, 
the creditor is not required to make the loan available to the 
consumer.
    D. A creditor using this safe harbor must provide the estimate for 
the loan that does not include discount points and origination points 
or fees in the same manner (i.e., either orally or in writing) as 
provided for the loan that does include discount points and origination 
points or fees. For both written and oral estimates, both of the 
written (or both of the oral) estimates must be given at the same time.
    E. A creditor using this safe harbor must disclose estimates of the 
interest rate, regular periodic payments, the total amount of the 
discount points and origination points or fees, and the total amount of 
the closing costs for the loan that does not include discount points 
and origination points or fees only if the creditor disclosed estimates 
for those types of information for the loan that includes discount 
points and origination points or fees. For example, if a creditor 
provides estimates of the interest rate and monthly payments for a loan 
that includes discount points and origination points or fees, the 
creditor using the safe harbor must provide estimates of the interest 
rate and monthly payments for the loan that does not include discount 
points and origination points or fees, such as saying ``your estimated 
interest rate and monthly payments on this loan product where you will 
not pay discount points and origination points or fees to the creditor 
or its affiliates is [x] percent, and $[x] per month.'' On the other 
hand, if the creditor provides an estimate of only the interest rate 
for the loan that includes discount points and origination points or 
fees and does not provide an estimate of the regular periodic payments 
for that loan, the creditor using the safe harbor is required only to 
provide an estimate of the interest rate for the loan that does not 
include discount points and origination points or fees and is not 
required to provide an estimate of the regular periodic payments for 
the loan that does not include discount points and origination points 
or fees.
    ii. For transactions that include a loan originator organization, a 
creditor will be deemed to have made available to the consumer a 
comparable, alternative loan that does not include discount points and 
origination points or fees if the creditor communicates to the loan 
originator organization the pricing for all loans that do not include 
discount points and origination points or fees, unless the consumer is 
unlikely to qualify for such a loan.
    2. Transactions for which the consumer is unlikely to qualify. 
Under Sec.  1026.36(d)(2)(ii)(A), a creditor or loan originator 
organization may not impose any discount points and origination points 
or fees on a consumer in a transaction unless the creditor makes 
available a comparable, alternative loan that does not include discount 
points and origination points or fees, unless the consumer is unlikely 
to qualify for such a loan. The creditor must have a good-faith belief 
that a consumer is unlikely to qualify for a loan that has the same 
terms and conditions as the loan that includes discount points and 
origination points or fees, other than the interest rate, any terms 
that change solely as a result of the change in the interest rate (such 
the amount of regular periodic payments), and the fact that the 
consumer will not pay discount points and origination points or fees. 
The creditor's belief that the consumer is unlikely to qualify for such 
a loan must be based on the creditor's current pricing and underwriting 
policy. In making this determination, the creditor may rely on 
information provided by the consumer, even if it subsequently is 
determined to be inaccurate.
    3. Loan with no discount points and origination points or fees. In 
some cases, the creditor's pricing policy may not contain an interest 
rate for which the consumer will neither pay discount points and 
origination points or fees nor receive a rebate. For example, assume 
that a creditor's pricing policy provides interest rates only in \1/8\ 
percent increments. Assume also that, under the

[[Page 55368]]

creditor's current pricing policy, the pricing available to a consumer 
for a particular loan product would be for the consumer to pay a 5.0 
percent interest rate with .25 discount point, pay a 5.125 percent 
interest rate and receive .25 point in rebate, or pay a 5.250 percent 
interest rate and receive a 1.0 point in rebate. This creditor's 
pricing policy does not contain a rate for this particular loan product 
where the consumer would neither pay discount points and origination 
points or fees nor receive a rebate from the creditor. In such cases, 
the interest rate for a loan that does not include discount points and 
origination points or fees would be the interest rate for which the 
consumer does not pay discount points and origination points or fees 
and would receive the smallest possible amount of rebate from the 
creditor. Thus, in the example above, the interest rate for that 
particular loan product that does not include discount points and 
origination points or fees is the 5.125 percent rate with .25 point in 
rebate.
    4. Regular periodic payments. For purposes of comments 
36(d)(2)(ii)(A)-1 and -2, the regular periodic payments are the 
payments of principal and interest (or interest only, depending on the 
loan features) specified under the terms of the loan contract that are 
due from the consumer for two or more unit periods in succession.

Paragraph 36(d)(2)(ii)(B)

    1. Finance charge. Under Sec.  1026.36(d)(2)(ii)(B), the term 
discount points and origination points or fees generally includes all 
items that would be included in the finance charge under Sec.  
1026.4(a) and (b) as well as fees described in Sec.  1026.4(a)(2) 
notwithstanding that those fees may not be included in the finance 
charge under Sec.  1026.4(a)(2). For purposes of Sec.  
1026.36(d)(2)(ii)(B), ``items included in the finance charge under 
Sec.  1026.4(a) and (b)'' means those items included under Sec.  
1026.4(a) and (b), without reference to any other provisions of Sec.  
1026.4. Nonetheless, Sec.  1026.36(d)(2)(ii)(B)(3) specifies that items 
that are excluded from the finance charge under Sec.  1026.4(c)(5), 
(c)(7)(v), and (d)(2) are also excluded from the definition of discount 
points and origination points or fees. For example, property insurance 
premiums may be excluded from the finance charge if the conditions set 
forth in Sec.  1026.4(d)(2) are met, and these premiums also may be 
excluded even though they are escrowed. See Sec.  1026.4(c)(7)(v), 
(d)(2). Under Sec.  1026.36(d)(2)(ii)(B)(3), these premiums also are 
excluded from the definition of discount points and origination points 
or fees. In addition, charges in connection with transactions that are 
payable in a comparable cash transaction are not included in the 
finance charge. See comment 4(a)-1. For example, property taxes imposed 
to record the deed evidencing transfer from the seller to the buyer of 
title to the property are not included in the finance charge because 
they would be paid even if no credit were extended to finance the 
purchase. Thus, these charges are not included in the definition of 
discount points and origination points or fees.
    2. Amounts for third-party charges. Section 1026.36(d)(2)(ii)(B) 
generally includes any fees described in Sec.  1026.4(a)(2) 
notwithstanding that those fees may not be included in the finance 
charge under Sec.  1026.4(a)(2). Section 1026.36(d)(2)(ii)(B)(2) 
excludes from the definition of discount points and origination points 
or fees any bona fide and reasonable third-party charges not retained 
by the creditor or loan originator organization. Section 1026.4(a)(2) 
discusses fees charged by a ``third party'' that conducts the loan 
closing. For purposes of Sec.  1026.4(a)(2), the term ``third party'' 
includes affiliates of the creditor or the loan originator 
organization. Nonetheless, for purposes of the definition of discount 
points and origination points or fees, the term ``third party'' does 
not include affiliates of the creditor or the loan originator. 
Specifically, Sec.  1026.36(d)(3) provides that for purposes of Sec.  
1026.36(d), affiliates must be treated as a single person. Thus, under 
Sec.  1026.36(d), affiliates of the creditor or the loan originator are 
not considered third parties. As a result, fees described in Sec.  
1026.4(a)(2) would be included in the definition of discount points and 
origination points or fees if they are charged by affiliates of the 
creditor or the loan originator. Nonetheless, fees described in Sec.  
1026.4(a)(2) would not be included in such definition if they are 
charged by a third party that is not an affiliate of the creditor or 
any loan originator organization, pursuant to the exception in Sec.  
1026.36(d)(2)(ii)(B)(2). In some cases, amounts received by the 
creditor or loan originator organization for payment of independent 
third-party charges may exceed the actual charge because, for example, 
the creditor or loan originator organization cannot determine with 
accuracy what the actual charge will be before consummation. In such a 
case, the difference retained by the creditor or loan originator 
organization is not deemed to fall within the definition of discount 
points and origination points or fees if the third-party charge imposed 
on the consumer was bona fide and reasonable, and also complies with 
State and other applicable law. On the other hand, if the creditor or 
loan originator organization marks up a third-party charge (a practice 
known as ``upcharging''), and the creditor or loan originator 
organization retains the difference between the actual charge and the 
marked-up charge, the amount retained falls within the definition of 
discount points and origination points or fees. For example:
    i. Assume a creditor charges the consumer a $400 application fee 
that includes $50 for a credit report and $350 for an appraisal that 
will be conducted by a third party that is not the affiliate of the 
creditor or the loan originator organization. Assume that $50 is the 
amount the creditor pays for the credit report to a third party that is 
not affiliated with the creditor or with the loan originator 
organization. At the time the creditor imposes the application fee on 
the consumer, the creditor is uncertain of the cost of the appraisal 
because the appraiser charges between $300 and $350 for appraisals. 
Later, the cost for the appraisal is determined to be $300 for this 
consumer's transaction. Assume, however, that the creditor uses average 
charge pricing in accordance with Regulation X. In this case, the $50 
difference between the $400 application fee imposed on the consumer and 
the actual $350 cost for the credit report and appraisal is not deemed 
to fall within the definition of discount points and origination points 
or fees, even though the $50 is retained by the creditor.
    ii. Using the same example as in comment 36(d)(2)(ii)(B)-2.i above, 
the $50 difference would fall within the definition of discount points 
and origination points or fees if the appraiser charge fees between 
$250 and $300.
    3. Information about whether point or fee will be paid to a 
creditor's affiliate or affiliate of the loan originator organization. 
If at the time a creditor must comply with the requirements in Sec.  
1026.36(d)(2)(ii) the creditor does not know whether a particular 
origination point or fee will be paid to its affiliate or an affiliate 
of the loan originator organization or will be paid to a third-party 
that is not the creditor's affiliate or an affiliate of the loan 
originator organization, the creditor must assume that those 
origination points or fees will be paid to its affiliates or an 
affiliate of the loan originator organization, as applicable, for 
purposes of complying with the requirements in Sec.  1026.36(d)(2)(ii). 
For example, assume that a creditor typically uses three title

[[Page 55369]]

insurance companies, one of which is an affiliate of the creditor and 
two are not affiliated with the creditor or the loan originator 
organization. If the creditor does not know at the time it must 
establish available credit terms for a particular consumer pursuant to 
Sec.  1026.36(d)(2)(ii) whether the title insurance services will be 
performed by the affiliate of the creditor, the creditor must assume 
that the title insurance services will be conducted by the affiliate 
for purposes of complying with the requirements in Sec.  
1026.36(d)(2)(ii).
    4. Payable to a creditor or loan originator organization. For 
purposes of Sec.  1026.36(d)(2)(ii)(B), the phrase ``payable at or 
before consummation by the consumer to a creditor or a loan originator 
organization'' includes amounts paid by the consumer in cash at or 
before closing or financed as part of the transaction and paid out of 
the loan proceeds.[ltrif]
* * * * *

36(e) Prohibition on Steering.

* * * * *

36(e)(3) Loan Options Presented.

* * * * *
    3. Lowest interest rate. To qualify under the safe harbor in Sec.  
1026.36(e)(2), for each type of transaction in which the consumer has 
expressed an interest, the loan originator must present the consumer 
with loan options that meet the criteria in Sec.  1026.36(e)(3)(i). The 
criteria are: The loan with the lowest interest rate; the loan with the 
lowest total dollar amount [rtrif]of[ltrif][lsqbb]for[rsqbb] discount 
points and origination points or fees; and a loan with the lowest 
interest rate without negative amortization, a prepayment penalty, a 
balloon payment in the first seven years of the loan term, shared 
equity, or shared appreciation, or, in the case of a reverse mortgage, 
a loan without a prepayment penalty, shared equity, or shared 
appreciation. [rtrif]The loan with the lowest interest rate for which 
the consumer likely qualifies is the loan with the lowest rate the 
consumer can likely obtain, regardless of how many discount points the 
consumer must pay to obtain it.[ltrif] To identify the loan with the 
lowest interest rate, for any loan that has an initial rate that is 
fixed for at least five years, the loan originator shall use the 
initial rate that would be in effect at consummation. For a loan with 
an initial rate that is not fixed for at least five years:
    i. If the interest rate varies based on changes to an index, the 
originator shall use the fully-indexed rate that would be in effect at 
consummation without regard to any initial discount or premium.
    ii. For a step-rate loan, the originator shall use the highest rate 
that would apply during the first five years.
* * * * *

[rtrif]36(f) Loan Originator Qualification Requirements.

    1. Scope. Section 1026.36(f) sets forth qualification requirements 
that a loan originator must meet. As provided in Sec.  1026.36(a)(1) 
and accompanying commentary, the term loan originator includes 
creditors for purposes of the qualification requirements in Sec.  
1026.36(f).
    2. Licensing and registration requirements. Section 1026.36(f) 
requires loan originators to comply with State and Federal licensing 
and registration requirements, including any such requirements imposed 
by the SAFE Act and its implementing regulations and State laws. SAFE 
Act licensing and registration applies to individual loan originators, 
but many State licensing and registration requirements apply to 
organizations as well. Section 1026.36(f) does not affect who must 
comply with these licensing and registration requirements. For example, 
the fact that the definition of loan originator in Sec.  1026.36(a)(1) 
differs somewhat from that in the SAFE Act does not affect who must 
comply with the SAFE Act.

Paragraph 36(f)(1).

    1. Legal existence and foreign qualification. Section 1026.36(f)(1) 
requires a loan originator organization to comply with State law 
requirements governing the legal existence and foreign qualification of 
the loan originator organization. Covered State law requirements 
include those that must be complied with to bring the loan originator 
organization into legal existence, to maintain its legal existence, to 
be permitted to transact business in another State, or facilitate 
service of process. For example, covered State law requirements include 
those for incorporation or other type of legal formation and for 
designating and maintaining a registered agent for service of process. 
State law requirements to pay taxes and other requirements that do not 
relate to legal accountability of the loan originator organization to 
consumers are outside the scope of Sec.  1026.36(f)(1).

Paragraph 36(f)(2).

    1. License or registration. Section 1026.36(f)(2) requires the loan 
originator organization to ensure that its individual loan originators 
are licensed or registered in compliance with the SAFE Act. A loan 
originator organization can meet this duty by confirming the 
registration or license status of an individual at 
www.nmlsconsumeraccess.org.

Paragraph 36(f)(3).

    1. Unlicensed individual loan originators. Section 1026.36(f)(3) 
sets forth actions that a loan originator organization must take for 
any of its individual loan originators who are not required to be 
licensed, and are not licensed, pursuant to the SAFE Act. Individual 
loan originators who are not subject to SAFE Act licensing generally 
include employees of depository institutions and their Federally 
regulated subsidiaries and employees of bona fide non-profit 
organizations that a State has exempted from licensing under the 
criteria in 12 CFR 1008.103(e)(7).

Paragraph 36(f)(3)(i).

    1. Criminal and credit histories. Section 1026.36(f)(3)(i) requires 
the loan originator organization to obtain, for each of its individual 
loan originators who is not licensed pursuant to the SAFE Act, a 
criminal background check, a credit report, and information related to 
any administrative, civil, or criminal determinations by any government 
jurisdiction. Loan originator organizations that do not have access to 
these items through the NMLSR may obtain them by other means. For 
example, a criminal background check may be obtained from a law 
enforcement agency or commercial service. A credit report may be 
obtained directly from a consumer reporting agency or through a 
commercial service. Information on any past administrative, civil, or 
criminal findings may be obtained from the individual loan originator.

Paragraph 36(f)(3)(ii).

    1. Scope of review. Section 1026.36(f)(3)(ii) requires the loan 
originator organization to review the information that it obtains under 
Sec.  1026.36(f)(3)(i) and other reasonably available information to 
determine whether the individual loan originator meets the standards in 
Sec.  1026.36(f)(3)(ii). Other reasonably available information 
includes any information the loan originator organization has obtained 
or would obtain as part of its customary hiring and personnel 
management practices, including information obtained from application 
forms, candidate interviews, and reference checks.

[[Page 55370]]

Paragraph 36(f)(3)(ii)(B).

    1. Financial responsibility, character, and fitness. The 
determination of financial responsibility, character, and general 
fitness required under Sec.  1026.36(f)(3)(ii)(B) requires an 
assessment of reasonably available. A determination that an individual 
loan originator meets the standard complies with the requirement if it 
results from a reasonable assessment of information that is known to 
the loan originator organization or would become known to the loan 
originator organization as part of a reasonably prudent hiring process. 
Review and assessment of the individual loan originator's credit report 
does not require consideration of a credit score. A review and 
assessment of financial responsibility, character, and general fitness 
must consider whether the information indicates dishonesty or a pattern 
of irresponsible use of credit or of disregard of financial 
obligations. For example, conduct shown in a criminal background check 
may indicate dishonesty even if it did not result in a disqualifying 
felony conviction under Sec.  1026.36(f)(3)(ii)(A). Irresponsible use 
of credit may be indicated by delinquent debts incurred as a result of 
extravagant spending on consumer goods but may not be shown by debts 
resulting from medical expenses.

Paragraph 36(f)(3)(iii).

    1. Training. The periodic training required in Sec.  
1026.36(f)(3)(iii) must be adequate in frequency, timing, duration, and 
content to ensure the individual loan originator has the knowledge of 
State and Federal legal requirements that apply to the individual loan 
originator's loan origination activities. It must take into 
consideration the particular responsibilities of the individual loan 
originator and the nature and complexity of the mortgage loans with 
which the individual loan originator works. An individual loan 
originator is not required to receive training on requirements and 
standards that apply to types of mortgage loans the individual loan 
originator does not originate, or on subjects in which the individual 
loan originator already has the necessary knowledge and skill. Training 
may be delivered by the loan originator organization or any other party 
and may utilize workstation, Internet, teleconferencing, or other 
interactive technologies and delivery methods. Training that a 
government agency or housing finance agency has established for an 
individual to originate mortgage loans under a program sponsored or 
regulated by that a Federal, State, or other government agency or 
housing finance agency satisfies the requirement in Sec.  
1026.36(f)(3)(iii), to the extent that the training covers the types of 
loans the individual loan originator originates and applicable Federal 
and State laws and regulations. Training that the NMLSR has approved to 
meet the licensed loan originator continuing education requirement at 
Sec.  1008.107(a)(2) of this chapter satisfies the requirement of Sec.  
1026.36(f)(3)(iii), to the extent that the training covers the types of 
loans the individual loan originator originates and applicable Federal 
and State laws and regulations.

36(g) NMLSR ID on Loan Documents

Paragraph 36(g)(1)

    1. NMLSR ID. Section 1026.36(g)(1) requires a loan originator 
organization to include its name and NMLSR ID and the name and NMLSR ID 
of the individual loan originator on certain loan documents. As 
provided in Sec.  1026.36(a)(1), the term loan originator does not 
exclude creditors for purposes this requirement. Thus, for example, if 
an individual loan originator employed by a bank originates a loan, the 
name and NMLSR ID of the individual and the bank must be included on 
covered loan documents. The NMLSR ID is a number generally assigned by 
the NMLSR to individuals registered or licensed through NMLSR to 
provide loan origination services. For more information, see the Secure 
and Fair Enforcement for Mortgage Licensing Act of 2008 (SAFE Act) 
sections 1503(3) and (12) and 1504 (12 U.S.C. 5102(3) and (12) and 
5103), and its implementing regulations (12 CFR 1007.103(a) and 
1008.103(a)(2)). An organization may also have an NMLSR unique 
identifier.
    2. Loan originators without NMLSR IDs. An NMLSR ID is not required 
by Sec.  1026.36(g)(1) to be included on loan documents if the loan 
originator is not required to obtain and has not been issued an NMLSR 
ID. For example, certain loan originator organizations, and individual 
loan originators who are employees of bona fide non-profit 
organizations, may not be required to obtain a unique identifier under 
State law. However, some loan originators may have obtained NMLSR IDs, 
even if they are not required to have one for their current jobs. If a 
loan originator organization or an individual loan originator has been 
provided a unique identifier by the NMLSR, it must be included on the 
loan documents, regardless of whether the loan originator organization 
or individual loan originator is required to obtain an NMLSR unique 
identifier.

Paragraph 36(g)(1)(ii).

    1. Multiple individual loan originators. If more than one 
individual meets the definition of a loan originator for a transaction, 
the NMLSR ID of the individual loan originator with primary 
responsibility for the transaction at the time the loan document is 
issued must be included. An individual loan originator may comply with 
the requirement in Sec.  1026.36(g)(1)(ii), with respect to the TILA 
and RESPA disclosure documents, by complying with the applicable 
provision governing disclosure of NMLSR IDs in rules issued by the 
Bureau pursuant to section 1032(f) of the Dodd-Frank Act, 15 U.S.C. 
5532(f).

Paragraph 36(g)(2).

    1. Amendments. The requirements under Sec.  1026.36(g)(2)(iv) and 
(v) to include the NMLSR ID on the note or other loan contract and the 
security instrument also apply to any amendment, rider, or addendum to 
the note or security instrument made at consummation.[ltrif]

    Dated: August 17, 2012.
Richard Cordray,
Director, Bureau of Consumer Financial Protection.
[FR Doc. 2012-20808 Filed 8-29-12; 11:15 am]
BILLING CODE 4810-AM-P