Loan Originator Compensation Requirements Under the Truth in Lending Act (Regulation Z), 11279-11427 [2013-01503]
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Vol. 78
Friday,
No. 32
February 15, 2013
Part II
Bureau of Consumer Financial Protection
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12 CFR Part 1026
Loan Originator Compensation Requirements Under the Truth in Lending
Act (Regulation Z); Final Rule
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Federal Register / Vol. 78, No. 32 / Friday, February 15, 2013 / Rules and Regulations
BUREAU OF CONSUMER FINANCIAL
PROTECTION
12 CFR Part 1026
[Docket No. CFPB–2012–0037]
RIN 3170–AA13
Loan Originator Compensation
Requirements Under the Truth in
Lending Act (Regulation Z)
Bureau of Consumer Financial
Protection.
ACTION: Final rule; official
interpretations.
AGENCY:
The Bureau of Consumer
Financial Protection (Bureau) is
amending Regulation Z 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
final rule implements requirements and
restrictions imposed by the Dodd-Frank
Act concerning loan originator
compensation; qualifications of, and
registration or licensing of loan
originators; compliance procedures for
depository institutions; mandatory
arbitration; and the financing of singlepremium credit insurance. The final
rule revises or provides additional
commentary on Regulation Z’s
restrictions on loan originator
compensation, including application of
these restrictions to prohibitions on
dual compensation and compensation
based on a term of a transaction or a
proxy for a term of a transaction, and to
recordkeeping requirements. The final
rule also establishes tests for when loan
originators can be compensated through
certain profits-based compensation
arrangements. At this time, the Bureau
is not prohibiting payments to and
receipt of payments by loan originators
when a consumer pays upfront points or
fees in the mortgage transaction. Instead
the Bureau will first study how points
and fees function in the market and the
impact of this and other mortgagerelated rulemakings on consumers’
understanding of and choices with
respect to points and fees. This final
rule is designed primarily to protect
consumers by reducing incentives for
loan originators to steer consumers into
loans with particular terms and by
ensuring that loan originators are
adequately qualified.
DATES: The amendments to § 1026.36(h)
and (i) are effective on June 1, 2013. All
other provisions of the rule are effective
on January 10, 2014.
FOR FURTHER INFORMATION CONTACT:
Daniel C. Brown, Nora Rigby, and
Michael G. Silver, Counsels; Krista P.
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SUMMARY:
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Ayoub, and R. Colgate Selden, Senior
Counsels; Charles Honig, Managing
Counsel; Office of Regulations, at (202)
435–7700.
SUPPLEMENTARY INFORMATION:
I. Summary of the Final Rule
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 the creditors in the
transactions also were paying the loan
originators commissions that increased
with the interest rate or other terms.
The Dodd-Frank Wall Street Reform
and Consumer Protection Act (DoddFrank Act) expanded on previous efforts
by lawmakers and regulators to
strengthen loan originator qualification
requirements and regulate industry
compensation practices. The Bureau of
Consumer Financial Protection (Bureau)
is issuing new rules to implement the
Dodd-Frank Act requirements, as well
as to revise and clarify existing
regulations and commentary on loan
originator compensation. The rules also
implement Dodd-Frank Act provisions
that prohibit certain arbitration
agreements and the financing of certain
credit insurance in connection with a
mortgage loan.
The final rule revises Regulation Z to
implement amendments to the Truth in
Lending Act (TILA). It contains the
following key elements:
Prohibition Against Compensation
Based on a Term of a Transaction or
Proxy for a Term of a Transaction.
Regulation Z already prohibits basing a
loan originator’s compensation on ‘‘any
of the transaction’s terms or
conditions.’’ The Dodd-Frank Act
codifies this prohibition. The final rule
implements the Dodd-Frank Act and
clarifies the scope of the rule as follows:
• The final rule defines ‘‘a term of a
transaction’’ as ‘‘any right or obligation
of the parties to a credit transaction.’’
This means, for example, that a
mortgage broker cannot receive
compensation based on the interest rate
of a loan or on the fact that the loan
officer steered a consumer to purchase
required title insurance from an affiliate
of the broker, since the consumer is
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obligated to pay interest and the
required title insurance in connection
with the loan.
• To prevent evasion, the final rule
prohibits compensation based on a
‘‘proxy’’ for a term of a transaction. The
rule also further clarifies the definition
of a proxy to focus on whether: (1) The
factor consistently varies with a
transaction term over a significant
number of transactions; and (2) the loan
originator has the ability, directly or
indirectly, to add, drop, or change the
factor in originating the transaction.
• To prevent evasion, the final rule
generally prohibits loan originator
compensation from being reduced to
offset the cost of a change in transaction
terms (often called a ‘‘pricing
concession’’). However, the final rule
allows loan originators to reduce their
compensation to defray certain
unexpected increases in estimated
settlement costs.
• To prevent incentives to ‘‘upcharge’’ consumers on their loans, the
final rule generally prohibits loan
originator compensation based upon the
profitability of a transaction or a pool of
transactions. However, subject to certain
restrictions, the final rule permits
certain bonuses and retirement and
profit-sharing plans to be based on the
terms of multiple loan originators’
transactions. Specifically, the funds can
be used for: (1) Contributions to or
benefits under certain designated taxadvantaged retirement plans, such as
401(k) plans and certain pension plans;
(2) bonuses and other types of nondeferred profits-based compensation if
the individual loan originator originated
ten or fewer mortgage transactions
during the preceding 12 months; and (3)
bonuses and other types of non-deferred
profits-based compensation that does
not exceed 10 percent of the individual
loan originator’s total compensation.
Prohibition Against Dual
Compensation. Regulation Z already
provides that where a loan originator
receives compensation directly from a
consumer in connection with a
mortgage loan, no loan originator may
receive compensation from another
person in connection with the same
transaction. The Dodd-Frank Act
codifies this prohibition, which was
designed to address consumer confusion
over mortgage broker loyalties where the
brokers were receiving payments both
from the consumer and the creditor. The
final rule implements this restriction
but provides an exception to allow
mortgage brokers to pay their employees
or contractors commissions, although
the commissions cannot be based on the
terms of the loans that they originate.
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No Prohibition on Consumer Payment
of Upfront Points and Fees. Section
1403 of the Dodd-Frank Act contains a
section that would generally have
prohibited consumers from paying
upfront points or fees on transactions in
which the loan originator compensation
is paid by a person other than the
consumer (either to the creditor’s own
employee or to a mortgage broker).
However, the Dodd-Frank Act also
authorizes the Bureau to waive or create
exemptions from the prohibition on
upfront points and fees if the Bureau
determines that doing so would be in
the interest of consumers and in the
public interest.
The Bureau had proposed to waive
the ban so that creditors could charge
upfront points and fees in connection
with a mortgage loan, so long as they
made available to consumers an
alternative loan that did not include
upfront points and fees. The proposal
was designed to facilitate consumer
shopping, enhance consumer decisionmaking, and preserve consumer choice
and access to credit. The Bureau has
decided not to finalize this part of the
proposal at this time, however, because
of concerns that it would have created
consumer confusion and other negative
outcomes. The Bureau has decided
instead to issue a complete exemption
to the prohibition on upfront points and
fees pursuant to its exemption authority
under section 1403 and other authority
while it scrutinizes several crucial
issues relating to the proposal’s design,
operation, and possible effects in a
mortgage market undergoing regulatory
overhaul. The Bureau is planning
consumer testing and other research to
understand how new Dodd-Frank Act
requirements affect consumers’
understanding of and choices with
respect to points and fees, so that the
Bureau can determine whether further
regulation is appropriate to facilitate
consumer shopping and enhanced
decision-making while protecting access
to credit.
Loan Originator Qualifications and
Identifier Requirements. The DoddFrank Act imposes a duty on individual
loan officers, mortgage brokers, and
creditors to be ‘‘qualified’’ and, when
applicable, registered or licensed to the
extent required under State and Federal
law. The final rule imposes duties on
loan originator organizations to make
sure that their individual loan
originators are licensed or registered as
applicable under the Secure and Fair
Enforcement for Mortgage Licensing Act
of 2008 (SAFE Act) and other applicable
law. For loan originator employers
whose employees are not required to be
licensed, including depository
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institutions and bona fide nonprofits,
the rule requires them to: (1) Ensure that
their loan originator employees meet
character, fitness, and criminal
background standards similar to existing
SAFE Act licensing standards; and (2)
provide training to their loan originator
employees that is appropriate and
consistent with those loan originators’
origination activities. The final rule
contains special provisions with respect
to criminal background checks and the
circumstances in which a criminal
conviction is disqualifying, and with
respect to situations in which a credit
check on a loan originator is required.
The final rule also implements a
Dodd-Frank Act requirement that loan
originators provided their unique
identifiers under the Nationwide
Mortgage Licensing System and Registry
(NMLSR) on loan documents.
Accordingly, mortgage brokers,
creditors, and individual loan
originators that are primarily
responsible for a particular origination
will be required to list on enumerated
loan documents their NMLSR unique
identifiers (NMLSR IDs), if any, along
with their names.
Prohibition on Mandatory Arbitration
Clauses and Single Premium Credit
Insurance. The final rule also contains
language implementing two other DoddFrank Act provisions concerning
mortgage loan originations. The first
prohibits the inclusion of clauses
requiring the consumer to submit
disputes concerning a residential
mortgage loan or home equity line of
credit to binding arbitration. It also
prohibits the application or
interpretation of provisions of such
loans or related agreements so as to bar
a consumer from bringing a claim in
court in connection with any alleged
violation of Federal law. The second
provision prohibits the financing of any
premiums or fees for credit insurance
(such as credit life insurance) in
connection with a consumer credit
transaction secured by a dwelling, but
allows credit insurance to be paid for on
a monthly basis.
Other Provisions. The final rule also
extends existing recordkeeping
requirements concerning loan originator
compensation so that they apply to both
creditors and mortgage brokers for three
years. The rule also clarifies the
definition of ‘‘loan originator’’ for
purposes of the compensation and
qualification rules, including exclusions
for certain employees of manufactured
home retailers, servicers, seller
financers, and real estate brokers;
management, clerical, and
administrative staff; and loan
processors, underwriters, and closers.
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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 $9.9 trillion
in mortgage loans outstanding.1 During
the last decade, the market went
through an unprecedented cycle of
expansion and contraction that was
fueled in part by the securitization of
mortgages and creation of increasingly
sophisticated derivative products. So
many other parts of the American
financial system were drawn into
mortgage-related activities that, when
the housing market collapsed in 2008, it
sparked the most severe recession in the
United States since the Great
Depression.2
The expansion in this market is
commonly attributed to both particular
economic conditions (including an era
of low interest rates and rising housing
prices) and to changes within the
industry. Interest rates dropped
significantly—by more than 20
percent—from 2000 through 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 increased
rapidly, from about 2.5 million loans in
2000 to more than 15 million in 2003.5
Growth in the mortgage loan market
was particularly pronounced in what
are known as ‘‘subprime’’ and ‘‘Alt-A’’
products. Subprime products were sold
1 Fed. Reserve Sys., Flow of Funds Accounts of
the United States, at 67 tbl.L.10 (2012), available at
http://www.federalreserve.gov/releases/z1/Current/
z1.pdf (as of the end of the third quarter of 2012).
2 See Thomas F. Siems, Branding the Great
Recession, Fin. Insights (Fed. Reserve Bank of Dall.)
May 13, 2012, at 3, available at http://
www.dallasfed.org/assets/documents/banking/firm/
fi/fi1201.pdf (stating that the great recession ‘‘was
the longest and deepest economic contraction, as
measured by the drop in real GDP, since the Great
Depression.’’).
3 See U.S. Dep’t of Hous. & Urban Dev., An
Analysis of Mortgage Refinancing, 2001–2003, at 2
(2004) (‘‘An Analysis of Mortgage Refinancing,
2001–2003’’), available at www.huduser.org/
Publications/pdf/MortgageRefinance03.pdf;
Souphala Chomsisengphet & Anthony PenningtonCross, The Evolution of the Subprime Mortgage
Market, 88 Fed. Res. Bank of St. Louis Rev. 31, 48
(2006), available at http://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
http://www.gpo.gov/fdsys/pkg/GPO-FCIC/pdf/GPOFCIC.pdf.
5 An Analysis of Mortgage Refinancing, 2001–
2003, at 1.
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primarily to borrowers with poor or no
credit history, although some borrowers
who would have qualified for ‘‘prime’’
loans were steered into subprime loans
instead.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 almost $400 billion; in 2006, it had
reached $1 trillion.7
So long as housing prices were
continuing to increase, it was relatively
easy for borrowers to refinance their
existing loans into more affordable
products 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 More
and more consumers, especially those
with subprime and Alt-A loans, were
unable or unwilling to make their
mortgage payments. An early sign of the
mortgage crisis was an upswing in early
payment defaults—generally defined as
borrowers being 60 or more days
delinquent within the first year. Prior to
2006, 1.1 percent of mortgages would
end up 60 or more days delinquent
within the first year.9 Taking a more
expansive definition of early payment
default to include 60 days delinquent
within the first two years, this figure
was double the historic average during
2006, 2007, and 2008.10 In 2006, 2007,
and 2008, 2.3 percent, 2.1 percent, and
2.3 percent of mortgages ended up 60 or
more days delinquent within the first
two years, respectively. In addition, as
the economy worsened, the rates of
serious delinquency (90 or more days
past due or in foreclosure) for the
6 For example, the Federal Reserve Board on July
20, 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 http://www.federalreserve.gov/
newsevents/press/enforcement/20110720a.htm.
7 Inside Mortg. Fin., Mortgage Originations by
Product, in 1 The 2011 Mortgage Market Statistical
Annual 20 (2011).
8 FCIC Report at 215–217.
9 CoreLogic’s TrueStandings Servicing (reflects
first-lien mortgage loans) (data service accessible
only through paid subscription).
10 Id.
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subprime and Alt-A products began a
steep increase from approximately 10
percent in 2006, to 20 percent in 2007,
to more than 40 percent in 2010.11
The impact of this level of
delinquencies was severe on creditors
who held loans on their books and on
private investors who purchased loans
directly or through securitized vehicles.
Prior to and during the housing bubble,
the evolution of the securitization of
mortgages attracted increasing
involvement from financial institutions
that were not directly involved in the
extension of credit to consumers and
from investors worldwide.
Securitization of mortgages allows
originating creditors to sell off their
loans (and reinvest the funds earned in
making new ones) to investors who
want an income stream over time.
Securitization had been pioneered by
what are now called governmentsponsored enterprises (GSEs), including
the Federal National Mortgage
Association (Fannie Mae) and the
Federal Home Loan Mortgage
Corporation (Freddie Mac). But by the
early 2000s, large numbers of private
financial institutions were deeply
involved in creating increasingly
complex mortgage-related investment
vehicles through securities and
derivative products. The private
securitization-backed subprime and AltA mortgage market ground to a halt in
2007 in the face of the rising
delinquencies on subprime and Alt-A
products.12
Six years later, the United States
continues to grapple with the fallout.
The fall in housing prices is estimated
to have resulted in about $7 trillion in
household wealth losses.13 In addition,
distressed homeownership and
foreclosure rates remain at
unprecedented levels.14
Response and Government Programs
In light of these conditions, the
Federal Government began providing
support to the mortgage markets in 2008
and continues to do so at extraordinary
levels today. The Housing and
Economic Recovery Act of 2008 (HERA),
which became effective on October 1,
11 Id.
at 217.
at 124.
13 The U.S. Housing Market: Current Conditions
and Policy Considerations, 3 (Fed. Reserve Bd.,
White Paper, 2012), available at http://
www.federalreserve.gov/publications/other-reports/
files/housing-white-paper-20120104.pdf.
14 Lender Processing Servs., PowerPoint
Presentation, LPS Mortgage Monitor: December
2012 Mortgage Performance Observations, Data as
of November 2012 Month End, 3, 11 (December
2012), available at http://www.lpsvcs.com/
LPSCorporateInformation/CommunicationCenter/
DataReports/Pages/Mortgage-Monitor.aspx.
12 Id.
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2008, provided both new safeguards and
increased regulation for Fannie Mae and
Freddie Mac, as well as provisions to
assist troubled borrowers and the
hardest hit communities. 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 to support
the collapsing mortgage market.15
Because private investors have
withdrawn from the mortgage
securitization market and there are no
other effective secondary market
mechanisms in place, the GSEs’
continued operations help ensure that
the secondary mortgage market
continues to function and to assist
consumers in obtaining new mortgages
or refinancing existing mortgages. The
Troubled Asset Relief Program (TARP),
created to implement programs to
stabilize the financial system during the
financial crisis, was authorized through
the Emergency Economic Stabilization
Act of 2008 (EESA), as amended by the
American Recovery and Reinvestment
Act of 2009, and includes programs to
help struggling homeowners avoid
foreclosure.16 Since 2008, several other
15 HERA, which created the Federal Housing
Finance Agency (FHFA), granted the Director of
FHFA discretionary authority to appoint FHFA
conservator or receiver of the Enterprises ‘‘for the
purpose of reorganizing, rehabilitating, or winding
up the affairs of a regulated entity.’’ Housing and
Economic Recovery Act of 2008, section 1367(a)(2),
amending the Federal Housing Enterprises
Financial Safety and Soundness Act of 1992, 12
U.S.C. 4617(a)(2). On September 6, 2008, FHFA
exercised that authority, placing Fannie Mae and
Freddie Mac into conservatorships. The two GSEs
have since received more than $180 billion in
support from the Department of the Treasury.
Through the second quarter of 2012, Fannie Mae
has drawn $116.1 billion and Freddie Mac has
drawn $71.3 billion, for an aggregate draw of $187.5
billion from the Department of the Treasury. Fed.
Hous. Fin. Agency, Conservator’s Report on the
Enterprises’ Financial Performance, at 17 (Second
Quarter 2012), available at http://www.fhfa.gov/
webfiles/24549/ConservatorsReport2Q2012.pdf.
16 The Making Home Affordable Program (MHA)
is the umbrella program for Treasury’s homeowner
assistance and foreclosure mitigation efforts. The
main MHA components are the Home Affordable
Modification Program (HAMP), a Treasury program
that uses TARP funds to provide incentives for
mortgage servicers to modify eligible first-lien
mortgages, and two initiatives at the GSEs that use
non-TARP funds. Incentive payments for
modifications to loans owned or guaranteed by the
GSEs are paid by the GSEs, not TARP. Treasury
over time expanded MHA to include sub-programs
designed to overcome obstacles to sustainable
HAMP modifications. Treasury also allocated TARP
funds to support two additional housing support
efforts: an FHA refinancing program and TARP
funding for 19 state housing finance agencies,
called the Housing Finance Agency Hardest Hit
Fund. In the first half of 2012, Treasury extended
the application period for HAMP by a year to
December 31, 2013, and opened HAMP to nonowner-occupied rental properties and to consumers
with a wider range of debt-to-income ratios under
‘‘HAMP Tier 2.’’
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Federal government efforts have
endeavored to keep the country’s
housing finance system functioning,
including the Treasury Department’s
and the Federal Reserve System’s
mortgage-backed securities (MBS)
purchase programs to help keep interest
rates low and the Federal Housing
Administration’s (FHA’s) increased
market presence. As a result, mortgage
credit has remained available, albeit
with more restrictive underwriting
terms that limit or preclude some
consumers’ access to credit. These same
government agencies together with the
GSEs and other market participants
have also undertaken a series of efforts
to help families avoid foreclosure
through loan-modification programs,
loan-refinance programs and foreclosure
alternatives.17
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Size and Volume of the Current
Mortgage Origination Market
Even with the economic downturn
and tightening of credit standards,
approximately $1.28 trillion in mortgage
loans were originated in 2011.18 In
exchange for an extension of mortgage
credit, consumers promise to make
regular mortgage payments and provide
their home or real property as collateral.
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 home purchases
were financed with a mortgage credit
transaction.19
Consumers may obtain mortgage
credit to purchase a home, to refinance
an existing mortgage, to access home
equity, or to finance home
improvement. Purchase loans and
refinancings together produced 6.3
million new first-lien mortgage loan
originations in 2011.20 The proportion
of loans that are for purchases as
opposed to refinances varies with the
interest rate environment and other
market factors. In 2011, 65 percent of
the market was refinance transactions
17 The Home Affordable Refinance Program
(HARP) is designed to help eligible homeowners
refinance their mortgage. HARP is designed for
those homeowners who are current on their
mortgage payments but have been unable to get
traditional refinancing because the value of their
homes has declined. For a mortgage to be
considered for a HARP refinance, it must be owned
or guaranteed by the GSEs. HARP ends on
December 31, 2013.
18 Moody’s Analytics, Credit Forecast 2012 (2012)
(‘‘Credit Forecast 2012’’), available at http://
www.economy.com/default.asp (reflects first-lien
mortgage loans) (data service accessible only
through paid subscription).
19 Inside Mortg. Fin., New Homes Sold by
Financing, in 1 The 2012 Mortgage Market
Statistical Annual 12 (2012).
20 Credit Forecast 2012.
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and 35 percent was purchase loans, by
volume.21 Historically the distribution
has been more even. In 2000, refinances
accounted for 44 percent of the market
while purchase loans comprised 56
percent; in 2005, the two products were
split evenly.22
With a home equity transaction, a
homeowner uses his or her equity as
collateral to secure consumer credit.
The credit proceeds can be used, for
example, to pay for home
improvements. Home equity credit
transactions and home equity lines of
credit resulted in an additional 1.3
million mortgage loan originations in
2011.23
GSE-eligible loans, together with the
other federally insured or guaranteed
loans, cover the majority of the current
mortgage market. Since entering
conservatorship in September 2008, the
GSEs have bought or guaranteed roughly
three of every four mortgages originated
in the country. Mortgages guaranteed by
FHA make up most of the rest.24
Outside of the securitization available
through the Government National
Mortgage Association (Ginnie Mae) for
loans primarily backed by FHA, there
are very few alternatives in place today
to assume the secondary market
functions served by the GSEs.25
Continued Fragility of the Mortgage
Market
The current mortgage market is
especially fragile as a result of the recent
mortgage crisis. Tight credit remains an
important factor in the contraction in
mortgage lending seen over the past few
years. Mortgage loan terms and credit
standards have tightened most for
consumers with lower credit scores and
with less money available for a down
payment. According to CoreLogic’s
TrueStandings Servicing, a proprietary
data service that covers about two-thirds
of the mortgage market, average
underwriting standards have tightened
21 Inside Mortg. Fin., Mortgage Originations by
Product, in 1 The 2012 Mortgage Market Statistical
Annual 17 (2012).
22 Id. These percentages are based on the dollar
amount of the loans.
23 Credit Forecast 2012 (reflects open-end and
closed-end home equity loans).
24 Fed. Hous. Fin. Agency, A Strategic Plan for
Enterprise Conservatorships: The Next Chapter in a
Story that Needs an Ending, at 14 (2012) (‘‘FHFA
Report’’), available at http://www.fhfa.gov/webfiles/
23344/StrategicPlanConservatorshipsFINAL.pdf.
25 FHFA Report at 8–9. Secondary market
issuance remains heavily reliant upon the explicitly
government guaranteed securities of Fannie Mae,
Freddie Mac, and Ginnie Mae. Through the first
three quarters of 2012, approximately $1.2 trillion
of the $1.33 trillion in mortgage originations have
been securitized, less than $10 billion of the $1.2
trillion were non-agency mortgage backed
securities. Inside Mortg. Fin. (Nov. 2, 2012) at 4.
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considerably since 2007. Through the
first nine months of 2012, for consumers
that have received closed-end first-lien
mortgages, the weighted average FICO 26
score was 750, the loan-to-value (LTV)
ratio was 78 percent, and the debt-toincome (DTI) ratio was 34.5 percent.27
In comparison, in the peak of the
housing bubble in 2007, the weighted
average FICO score was 706, the LTV
was 80 percent, and the DTI was 39.8
percent.28
In this tight credit environment, the
data suggest that creditors are not
willing to take significant risks. In terms
of the distribution of origination
characteristics, for 90 percent of all the
Fannie Mae and Freddie Mac mortgage
loans originated in 2011, consumers had
a FICO score over 700 and a DTI less
than 44 percent.29 According to the
Federal Reserve’s Senior Loan Officer
Opinion Survey on Bank Lending
Practices, in April, 2012 nearly 60
percent of creditors reported that they
would be much less likely, relative to
2006, to originate a conforming homepurchase mortgage 30 to a consumer
with a 10 percent down payment and a
credit score of 620—a traditional marker
for those consumers with weaker credit
histories.31 The Federal Reserve Board
calculates that the share of mortgage
borrowers with credit scores below 620
has fallen from about 17 percent of
consumers at the end of 2006 to about
5 percent more recently.32 Creditors also
appear to have pulled back on offering
these consumers loans insured by the
FHA, which provides mortgage
insurance on loans made by FHAapproved creditors throughout the
United States and its territories and is
26 FICO is a type of credit score that makes up a
substantial portion of the credit report that lenders
use to assess an applicant’s credit risk and whether
to extend a loan.
27 CoreLogic, TrueStandings Servicing Database,
available at http://www.truestandings.com (data
reflects first-lien mortgage loans) (data service
accessible only through paid subscription).
According to CoreLogic’s TrueStandings Servicing,
FICO reports that in 2011, approximately 38 percent
of consumers receiving first-lien mortgage credit
had a FICO score of 750 or greater.
28 Id.
29 Id.
30 A conforming mortgage is one that is eligible
for purchase or credit guarantee by Fannie Mae or
Freddie Mac.
31 Fed. Reserve Bd., Senior Loan Officer Opinion
Survey on Bank Lending Practices, available at
http://www.federalreserve.gov/boarddocs/
SnLoanSurvey/default.htm.
32 Federal Reserve Board staff calculations based
on the Federal Reserve Bank of New York
Consumer Credit Panel. The 10th percentile of
credit scores on mortgage originations rose from 585
in 2006 to 635 at the end of 2011.
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especially structured to help promote
affordability.33
The Bureau is acutely aware of the
high levels of anxiety in the mortgage
market today. These concerns include
the continued slow pace of recovery, the
confluence of multiple major regulatory
and capital initiatives, and the
compliance burdens of the various
Dodd-Frank Act rulemakings (including
uncertainty on what constitutes a
qualified residential mortgage (QRM),
which relates to the Dodd-Frank Act’s
credit risk retention requirements and
mortgage securitizations). The Bureau
acknowledges that it will likely take
some time for the mortgage market to
stabilize and that creditors will need to
adjust their operations to account for
several major regulatory and capital
regime changes.
The Mortgage Origination Process and
Origination Channels
As discussed above, the mortgage
market crisis focused attention on the
critical role that loan officers and
mortgage brokers play in guiding
consumers through the loan origination
process. 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
loan officer employed by a creditor, 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 which may be paid directly by
the consumer or from loan proceeds, or
indirectly through a creditor or broker.
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
33 FHA insures mortgages on single family and
multifamily homes including manufactured homes
and hospitals. It is the largest insurer of mortgages
in the world, insuring over 34 million properties
since its inception in 1934.
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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 closes the loan. At
closing, the loan is consummated by
using the creditor’s funds, and the
mortgage note is written in the creditor’s
name.34 Again, the creditor may hold
the loan in its portfolio or sell the loan
on the secondary market.
• 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 provide information to
consumers about different types of loans
and advise consumers on choosing a
loan. Consumers rely on loan officers
and mortgage brokers to determine what
kind of loan best suits the consumers’
needs. Loan officers and mortgage
brokers also take a consumers’
completed loan application for
submission to the creditor’s loan
underwriter. The applications include
consumers’ 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
consumers have decided to move
forward with a loan, the loan originator
may request additional information or
documents from the consumers to
support the information in the
application and obtain an appraisal of
the property.
Underwriting. Historically, the
creditor’s loan underwriter used the
application and additional information
34 In some cases, mortgage brokers use a process
called ‘‘table funding,’’ in which the transaction is
closed using the wholesale creditor’s funds at the
settlement table, but the loan is closed in the
broker’s name. The broker simultaneously assigns
the closed loan to the creditor. These types of
transactions generally require the use of approved
title companies or title attorneys of the creditor to
assure strict adherence to the creditor’s closing
instructions. Such transactions are only valid in
those states that allow ‘‘wet closings.’’ These types
of closings are not as common today.
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to confirm initial information provided
by the consumer. The underwriter
assessed whether the creditor should
take on the risk of making the mortgage
loan. To make this decision, the
underwriter considered whether the
consumer could repay the loan and
whether the home was worth enough to
serve as collateral for the loan. If the
underwriter found that the consumer
and the home qualified, the underwriter
would approve the consumer’s mortgage
application.
During the years preceding the
mortgage crisis, much of this process
broke down as previously discussed.
Underwriting today appears to have
largely returned to these historical
norms. The Bureau’s 2013 Ability To
Repay (ATR) Final Rule is designed, in
substantial part, to assure that as credit
continues improve, creditors do not
return to the problematic practices of
the last decade.
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. In
some instances, the loan originator also
functions as the settlement agent. More
commonly, a separate individual
handles the settlement, although that
individual may be an employee of the
creditor or brokerage firm or of an
affiliate of one of those.
Loan Pricing and Disposition of Closed
Loans
From the consumer’s perspective,
loan pricing depends on several
elements:
• Loan terms. The loan terms affect
consumer costs and how the loan is to
be repaid, including the type of loan
‘‘product,’’ the method of calculating
monthly payments and repayment (for
example, whether the payments are
fully amortizing) and the length of the
loan term.35 The most important single
term in determining the price is, of
course, the interest rate (and for
adjustable rate mortgages the index and
margin).
• Discount points and cash rebates.
Discount points are paid by consumers
to the creditor to purchase a lower
interest rate. Conversely, creditors may
35 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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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).
Consumers will also incur some thirdparty fees in connection with a mortgage
application such as the fee for an
appraisal or for a credit report. These
may be paid at origination or, in some
cases, at closing.
• Origination points or fees. Creditors
and 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 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
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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 break-even
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 longterm 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. However,
for creditors, as for consumers, there is
a break-even point where the present
value of a reduction/increase to the rate
just equals the corresponding upfront
points/credits. If the creditor reduces
the upfront costs in return for a higher
interest rate and the consumer
continues to make payments on the loan
beyond the break-even points, the
creditor will come out ahead.
The creditor’s calculation of these
tradeoffs is generally heavily influenced
by 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. As described
above, the creditor can benefit from
going on to make additional money from
additional loans. Thus, although some
banks 36 and credit unions hold some
loans in portfolio over time, many
creditors prefer not to hold loans until
maturity.37
When a creditor sells a loan into the
secondary market, the creditor is
36 As
used throughout this document, the term
‘‘banks’’ also includes ‘‘savings associations.’’
37 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 privatelabel 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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11285
exchanging an asset (the loan) that
produces regular cash flows (principal
and interest) for an upfront cash
payment from the buyer.38 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.39
Secondary market mortgage prices are
typically quoted in relation to the
principal loan amount and are specific
to a given interest rate and other factors
that are correlated with default risk. 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.40 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
38 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.
39 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.
40 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.
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secondary market price.41 The same
style of pricing is used when
correspondent lenders sell loans to
acquiring creditors.
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.
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.
TKELLEY on DSK3SPTVN1PROD with RULES2
Loan Originator Compensation
Brokerage firms and loan officers are
typically paid a commission that is a
percentage of the loan amount. Prior to
2010, it was common for the percentage
to vary based upon the interest rate of
the loan: commissions on loans with
higher interest rates were higher than
commission on loans with lower
interest rates (just as the premiums paid
by the secondary market for loans vary
with the interest rate). This was
typically called a ‘‘yield spread
premium.’’ 42 In the wholesale context,
41 Susan E. Woodward, Urban Inst., A Study of
Closing Costs for FHA Mortgages 10–11 (U.S. Dep’t
of Hous. & Urban Dev. 2008), available at: http://
www.huduser.org/publications/pdf/
FHA_closing_cost.pdf.
42 Some commenters use the term ‘‘yield spread
premium’’ to refer to any payment from a creditor
to a mortgage broker that is funded by increasing
the interest rate that would otherwise be charged to
the consumer in the absence of that payment. These
commenters generally assume that any payment to
the brokerage firm by the creditor is funded out of
the interest rate, reasoning that had the consumer
paid the brokerage firm directly, the creditor would
have had lower expenses and would have been able
to charge a lower rate. Other commenters use the
term ‘‘yield spread premium’’ more narrowly to
refer only to a payment from a creditor to a
mortgage broker that is based on the interest rate,
i.e., the mortgage broker receives a larger payment
if the consumer agrees to a higher interest rate. To
avoid confusion, the Bureau is limiting its use of
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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.43
While this system was in place, it was
common for loan originator
commissions to mirror secondary
market pricing closely. The ‘‘price’’ that
the creditor offered to its brokers 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 compensation 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.44 Moreover, prior to 2010,
mortgage brokers were free to charge
consumers directly for additional
origination points or fees, which were
generally described to the consumer 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
the term and is instead more specifically describing
the payment at issue.
43 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 premiumbased commissions.
44 James Lacko and Janis Pappalardo, Improving
Consumer Mortgage Disclosures: An Empirical
Assessment of Current and Prototype Disclosure
Forms, Federal Trade Commission, ES–12 (June
2007), available at http://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 http://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 http://www.stanford.edu/∼rehall/
DiagnosingConsumerConfusionJune2012.
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pricing terms while 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.
B. TILA and Regulation Z
Congress enacted the 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 of Governors of
the Federal Reserve System (Board)
Regulation Z, 12 CFR part 226, had
implemented TILA.45
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 and
the Department of Housing and Urban
Development (HUD) had explored the
use of disclosures to inform consumers
about loan originator compensation
practices. HUD adopted a new
disclosure regime under the Real Estate
Settlement Procedures Act (RESPA), in
a 2008 final rule, which addressed
among other matters the disclosure of
mortgage broker compensation. 73 FR
68204, 68222–27 (Nov. 17, 2008). The
Board also proposed a disclosure-based
approach to addressing concerns with
mortgage broker compensation. 73 FR
1672, 1698 (Jan. 9, 2008). 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
45 The Board’s rule remains applicable to certain
motor vehicle dealers. See 12 U.S.C. 5519 (Section
1029 of the Dodd-Frank Act).
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TKELLEY on DSK3SPTVN1PROD with RULES2
Act (HOEPA) Final Rule.46 73 FR 44522,
44564 (July 30, 2008).
The Board in 2009 proposed new
rules addressing in a more substantive
fashion loan originator compensation
practices. The Board’s proposal
included, among other provisions,
proposed rules 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 based that
proposal on 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
redesignated as TILA section 129(p)(2),
15 U.S.C. 1639(p)(2)). 74 FR 43232,
43279–286 (Aug. 26, 2009). Although
the Board issued its proposal prior to
the enactment of the Dodd-Frank Act,
Congress subsequently amended TILA
to codify significant elements of the
Board’s proposal. See, e.g., 15 U.S.C.
1639b (Section 1403 of the Dodd-Frank
Act). The Board therefore decided in
2010 to finalize the rules it had
proposed under its preexisting TILA
powers, while acknowledging that
further rulemaking would be required to
address certain issues and adjustments
made by the Dodd-Frank Act.47 75 FR
58509 (Sept. 24, 2010) (2010 Loan
Originator Final Rule). The Board’s 2010
Loan Originator Final Rule took effect in
April 2011.
Most notably, the Board’s 2010 Loan
Originator Final Rule substantially
restricted the payments to loan
originators which create incentives for
them to steer consumers to more
expensive loans. Under this rule,
46 The Board indicated that it would continue to
explore available options to address potential
unfairness associated with loan originator
compensation practices. 73 FR 44522, 44565 (July
30, 2008).
47 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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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). See generally 12 CFR
226.36(d). After authority for Regulation
Z transferred from the Board, the Bureau
republished the rule at 12 CFR
1026.36(d). 76 FR 79768 (Dec. 22, 2011).
C. The SAFE Act
The Secure and Fair Enforcement for
Mortgage Licensing Act of 2008 (SAFE
Act), 12 U.S.C. 5106–5116, generally
prohibits an individual from engaging in
the business of a loan originator without
first obtaining, and maintaining
annually, a unique identifier from the
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
The Dodd-Frank Act expanded on
previous efforts by lawmakers and
regulators to strengthen loan originator
qualification requirements and regulate
industry compensation practices. Public
Law 111–203, 124 Stat. 1376 (approved
July 21, 2010). The Dodd-Frank Act
adopted several new provisions
concerning the compensation and
qualifications of mortgage originators,
defined related terms, and prohibited
certain arbitration and credit insurance
financing practices. See Dodd-Frank Act
sections 1401, 1402, 1403, and 1414.
Section 1401 of the Dodd-Frank Act
amended TILA section 103 to add
definitions of the term ‘‘mortgage
originator’’ and of other terms relating to
mortgage loan origination. 15 U.S.C.
1602. Section 1402 of the Dodd-Frank
Act amended TILA section 129 by
redesignating existing text and adding
section 129B to require mortgage
originators to meet qualification
standards and depository institutions to
establish and maintain procedures
reasonably designed to assure
compliance with these qualification
standards, the loan originator
registration procedures established
pursuant to the SAFE Act, and the other
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requirements of TILA section 129B.
TILA section 129B also requires
mortgage originators to provide their
license or registration number on loan
documents. 15 U.S.C. 1639b. Section
1403 of the Dodd-Frank Act amended
new TILA section 129B to prohibit loan
originator compensation that varies
based on the terms of the loan, other
than the amount of the principal, and
generally to prohibit loan originators
from being compensated simultaneously
by both the consumer and a person
other than the consumer. Section 1403
of the Dodd-Frank Act also added new
TILA section 129B(c)(2), which would
generally have prohibited consumers
from paying upfront points or fees on
transactions in which the loan
originator compensation is paid by the
creditor (either to the creditor’s own
employee or to a mortgage broker).
However, TILA section 129B(c)(2) also
authorized the Bureau to waive or create
exemptions from the prohibition on
upfront points and fees if the Bureau
determines that doing so would be in
the interest of consumers and in the
public interest. Section 1414 of the
Dodd-Frank Act amended new TILA
section 129C, in part to prohibit certain
financing practices for single-premium
credit insurance and debt cancellation
or suspension agreements and to restrict
mandatory arbitration agreements.
III. Summary of Rulemaking Process
A. Pre-Proposal Outreach
In developing a proposal to
implement sections 1401, 1402, 1403,
and 1414 of the Dodd-Frank Act, the
Bureau conducted extensive outreach.
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, nonprofit
organizations, and State regulators.
Discussions covered existing business
models and compensation practices and
the impact of the existing 2010 Loan
Originator Compensation Final 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.
In addition, the Bureau held
roundtable meetings with other Federal
banking and housing regulators,
consumer groups, and industry
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representatives regarding the Small
Business Review Panel Outline. At the
Bureau’s request, many of the
participants provided feedback, which
the Bureau considered in preparing the
proposed rule as well as this final rule.
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
Advocacy) and the Administrator of the
Office of Information and Regulatory
Affairs within the Office of Management
and Budget (OMB).48 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.49 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 were set forth in the
Small Business Review Panel Report,
which was made part of the
administrative record in this
rulemaking.50 The Bureau carefully
considered these findings and
recommendations in preparing the
proposed rule.
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C. Proposed Rule
On September 7, 2012, the Bureau
published a proposed rule in the
Federal Register to implement the
Dodd-Frank Act requirements, as well
as to revise and clarify existing
regulations and commentary on loan
originator compensation. 77 FR 55272
48 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)).
49 U.S. Consumer Fin. Prot. Bureau, Outline of
Proposals under Consideration and Alternatives
Considered (May 9, 2012), available at: http://files.
consumerfinance.gov/f/201205_cfpb_MLO_
SBREFA_Outline_of_Proposals.pdf.
50 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 http://
files.consumerfinance.gov/f/201208_cfpb_LO_
comp_SBREFA.pdf.
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(Sept. 7, 2012) (the ‘‘2012 Loan
Originator Compensation Proposal’’).
The proposal included the following
main provisions:
1. Restrictions on Loan Originator
Compensation
The proposal would have adjusted
existing rules governing compensation
to loan officers and mortgage brokers in
connection with closed-end mortgage
transactions to account for the DoddFrank Act and to provide greater clarity
and flexibility. Specifically, the
proposal would have continued 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.
Pricing Concessions: The proposal
would have allowed loan originators to
reduce their compensation to cover
unanticipated increases in closing costs
from non-affiliated third parties under
certain circumstances.
Proxies: The proposal would have
clarified when a factor used as a basis
for compensation is prohibited as a
‘‘proxy’’ for a transaction term.
Profit-sharing: The proposal would
have clarified and revised restrictions
on pooled compensation, profit-sharing,
and bonus plans for loan originators by
permitting contributions from general
profits derived from mortgage activity to
401(k) plans, employee stock plans, and
other ‘‘qualified plans’’ under tax and
employment law. The proposal would
have permitted payment of bonuses or
contributions to non-qualified profitsharing 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 a limited percentage of its
total revenues. The proposal solicited
comment on other alternatives to the
measure based on company revenue,
including an individual loan originator
total compensation test.
Dual Compensation: The proposal
would have continued the general ban
on loan originators being compensated
by both consumers and other persons
but would have allowed 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.
2. Restriction on Upfront Points and
Fees
The Bureau proposed to use its
exemption authority under the DoddFrank Act to allow creditors and loan
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originator organizations to continue
making available loans with consumerpaid upfront points or fees, so long as
they also make available a comparable,
alternative loan without those points or
fees. The proposal generally would have
required that, before a creditor or loan
originator organization may impose
upfront points 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 have applied where the consumer is
unlikely to qualify for the zero-zero
alternative. The Bureau solicited
comments on variations and alternatives
to this approach.
3. Loan Originator Qualification
Requirements
The proposal would have
implemented the Dodd-Frank Act
provision requiring each loan originator
both to be ‘‘qualified’’ and to include his
or her NMLSR ID on certain specified
loan documents. The proposal would
have required loan originator
organizations to ensure their loan
originators not already required to be
licensed under the SAFE Act meet
character, fitness, and criminal
background check standards that are
similar to SAFE Act requirements and
receive training commensurate with
their duties. The loan originator
organization and the individual loan
originators that are primarily
responsible for a particular transaction
would have been required to list their
NMLSR ID and names on certain key
loan documents.
4. Other Provisions
The proposal would have banned
both agreements requiring consumers to
submit any disputes that may arise to
mandatory arbitration rather than filing
suit in court, and the financing of
premiums for credit insurance.
D. Overview of Public Comments
The Bureau received 713 comments
on the 2012 Loan Originator
Compensation Proposal. The comments
came from individual consumers,
consumer groups, community banks,
large banks, large bank holding
companies, secondary market
participants, credit unions, nonbank
servicers, State and national trade
associations for financial institutions,
local and national community groups,
Federal and State regulators, academics,
and other interested parties. Although
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some commenters provided comments
on all of the major provisions of the
2012 Loan Originator Compensation
Proposal, most commenters focused on
specific aspects of the proposal, as
discussed in greater detail in the
section-by-section analysis below.
Many commenters addressed the
proposed provisions regarding records
that creditors and loan originator
organizations would have been required
to maintain to demonstrate compliance
with the compensation-related
provisions of the proposal. The majority
of commenters agreed with the Bureau’s
belief that the proposed increase in the
recordkeeping period from two years to
three years would not significantly
increase costs. Some commenters asked
for clarification regarding what types of
records would be required to be
maintained.
Numerous commenters addressed the
proposed definition of ‘‘loan
originator,’’ which determines which
persons would be subject to several of
the provisions in the proposal. The
topic that the largest number of
commenters addressed was the
exception from the definition of ‘‘loan
originator’’ for certain persons who
provide financing to consumers who
purchase a dwelling from these persons
(i.e., ‘‘seller financing’’). Individuals,
industry professionals, and small
business owners commented that the
Bureau had overlooked the impact that
the proposal would have on consumers,
stating that it would reduce access to
credit for some while eliminating a
reliable retirement vehicle for others.
A large number of commenters
addressed the Bureau’s proposal to
allow creditors to charge upfront
origination points, discounts, and fees
in transactions in which someone other
than the consumer pays compensation
to a loan originator, provided that the
creditor make available to the consumer
loan terms without upfront origination
points, discount points, or fees (i.e., the
zero-zero alternative). One of the most
common assertions from commenters
relating to points and fees was that the
zero-zero alternative restrictions were
duplicative of other regulations, or that
the restrictions being implemented in
other rules were sufficient and more
effective at protecting consumers.
Many banks, credit unions, and
mortgage professionals expressed
concern that prohibiting discount points
would result in higher interest rates,
could reduce access to credit for
consumers, and would subject the
creditors to higher-priced mortgage
rules. Banks and credit unions opined
that complying with the proposal would
make lower-value loans unprofitable
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and banks and credit unions would no
longer be able to profitably serve that
segment of the market.
A significant number of commenters
asserted that the proposal would have a
negative impact on affiliated businesses,
namely inconvenience, reduced pricing
advantages, and duplicative processes.
Other commenters advocated exempting
fees for title services from the types of
compensation treated as loan originator
compensation when it is paid to an
affiliate. Several commenters asserted
that a restriction on title services would
not benefit consumers and could
detrimentally limit consumers’ credit
options.
There was no consensus among
consumer groups on whether, or how,
the Bureau should use its exemption
authority regarding the statutory ban on
consumers paying upfront points and
fees. Some industry commenters
advocated adjustments or alternatives to
the zero-zero proposal, rather than a
complete exemption, although the
approaches varied by commenter.
A large number of comments
addressed qualification standards for
loan originators who are not subject to
State licensing requirements.
Representatives of banks stated that the
proposed requirements were duplicative
of existing requirements.
Representatives of nonbank creditors
and brokers argued that the proposal
was too lenient, would allow for
unqualified loan originators to work at
depository institutions, and would
create an unfair competitive advantage
for these institutions.
E. Post-Proposal Outreach
After the proposal was issued, the
Bureau held roundtable meetings with
other Federal banking and housing
regulators, consumer groups, and
industry representatives to discuss the
proposal and the final rule. At the
Bureau’s request, many of the
participants provided feedback, which
the Bureau has considered in preparing
the final rule.
F. Other Rulemakings
In addition to this final rule, the
Bureau is adopting several other final
rules and issuing one proposal, all
relating to mortgage credit to implement
requirements of title XIV of the DoddFrank Act. The Bureau is also issuing a
final rule jointly with other Federal
agencies to implement requirements for
mortgage appraisals in title XIV. Each of
the final rules follows a proposal issued
in 2011 by the Board or in 2012 by the
Bureau alone or jointly with other
Federal agencies. Collectively, these
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proposed and final rules are referred to
as the Title XIV Rulemakings.
• Ability to Repay: The Bureau
recently issued a rule, following a May
2011 proposal issued by the Board (the
Board’s 2011 ATR Proposal), 76 FR
27390 (May 11, 2011), to implement
provisions of the Dodd-Frank Act (1)
requiring creditors to determine that a
consumer has a reasonable ability to
repay covered mortgage loans and
establishing standards for compliance,
such as by making a ‘‘qualified
mortgage,’’ and (2) establishing certain
limitations on prepayment penalties,
pursuant to TILA section 129C as
established by Dodd-Frank Act sections
1411, 1412, and 1414. 15 U.S.C. 1639c.
The Bureau’s final rule is referred to as
the 2013 ATR Final Rule.
Simultaneously with the 2013 ATR
Final Rule, the Bureau issued a proposal
to amend the final rule implementing
the ability-to-repay requirements,
including by the addition of exemptions
for certain nonprofit creditors and
certain homeownership stabilization
programs and a definition of a
‘‘qualified mortgage’’ for certain loans
made and held in portfolio by small
creditors (the 2013 ATR Concurrent
Proposal). The Bureau expects to act on
the 2013 ATR Concurrent Proposal on
an expedited basis, so that any
exceptions or adjustments to the 2013
ATR Final Rule can take effect
simultaneously with that rule.
• Escrows: The Bureau recently
issued a rule, following a March 2011
proposal issued by the Board (the
Board’s 2011 Escrows Proposal), 76 FR
11598 (Mar. 2, 2011), to implement
certain provisions of the Dodd-Frank
Act expanding on existing rules that
require escrow accounts to be
established for higher-priced mortgage
loans and creating an exemption for
certain loans held by creditors operating
predominantly in rural or underserved
areas, pursuant to TILA section 129D as
established by Dodd-Frank Act sections
1461. 15 U.S.C. 1639d. The Bureau’s
final rule is referred to as the 2013
Escrows Final Rule.
• HOEPA: Following its July 2012
proposal (the 2012 HOEPA Proposal), 77
FR 49090 (Aug. 15, 2012), the Bureau
recently issued a final rule to implement
Dodd-Frank Act requirements
expanding protections for ‘‘high-cost
mortgages’’ under the Homeownership
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 Bureau recently
issued rules to implement certain title
XIV requirements concerning
homeownership counseling, including a
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requirement that lenders provide lists of
homeownership counselors to
applicants for federally related mortgage
loans, pursuant to RESPA section 5(c),
as amended by Dodd-Frank Act section
1450. 12 U.S.C. 2604(c). The Bureau’s
final rule is referred to as the 2013
HOEPA Final Rule.
• Servicing: Following its August
2012 proposals (the 2012 RESPA
Servicing Proposal and 2012 TILA
Servicing Proposal), 77 FR 57200 (Sept.
17, 2012) (RESPA); 77 FR 57318 (Sept.
17, 2012) (TILA), the Bureau recently
issued final rules to implement DoddFrank Act requirements regarding forceplaced insurance, error resolution,
information requests, and payment
crediting, as well as requirements for
mortgage loan periodic statements and
adjustable-rate mortgage reset
disclosures, pursuant to section 6 of
RESPA and sections 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 recently
finalized rules on early intervention for
troubled and delinquent borrowers, and
loss mitigation procedures, pursuant to
the Bureau’s authority under section 6
of RESPA, as amended by Dodd-Frank
Act section 1463, to establish
obligations for mortgage servicers that it
finds to be appropriate to carry out the
consumer protection purposes of
RESPA, and its authority under section
19(a) of RESPA to prescribe rules
necessary to achieve the purposes of
RESPA. The Bureau’s final rule under
RESPA with respect to mortgage
servicing also establishes requirements
for general servicing standards policies
and procedures and continuity of
contact pursuant to its authority under
section 19(a) of RESPA. The Bureau’s
final rules are referred to as the 2013
RESPA Servicing Final Rule and the
2013 TILA Servicing Final Rule,
respectively.
• Appraisals: The Bureau, jointly
with other Federal agencies,51 is issuing
a final rule implementing Dodd-Frank
Act requirements concerning appraisals
for higher-risk mortgages, pursuant to
TILA section 129H as established by
Dodd-Frank Act section 1471. 15 U.S.C.
1639h. This rule follows the agencies’
August 2012 joint proposal (the 2012
Interagency Appraisals Proposal). 77 FR
54722 (Sept. 5, 2012). The agencies’
joint final rule is referred to as the 2013
51 Specifically, the Board of Governors of the
Federal Reserve System, the Office of the
Comptroller of the Currency, the Federal Deposit
Insurance Corporation, the National Credit Union
Administration, and the Federal Housing Finance
Agency.
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Interagency Appraisals Final Rule. In
addition, following its August 2012
proposal (the 2012 ECOA Appraisals
Proposal), 77 FR 50390 (Aug. 21, 2012),
the Bureau is issuing a final rule to
implement provisions of the DoddFrank Act requiring 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, pursuant to section
701(e) of the Equal Credit Opportunity
Act (ECOA) as amended by Dodd-Frank
Act section 1474. 15 U.S.C. 1691(e). The
Bureau’s final rule is referred to as the
2013 ECOA Appraisals Final Rule.
The Bureau is not at this time
finalizing proposals concerning various
disclosure requirements that were
added by title XIV of the Dodd-Frank
Act, integration of mortgage disclosures
under TILA and RESPA, or a simpler,
more inclusive definition of the finance
charge for purposes of disclosures for
closed-end mortgage transactions under
Regulation Z. The Bureau expects to
finalize these proposals and to consider
whether to adjust regulatory thresholds
under the Title XIV Rulemakings in
connection with any change in the
calculation of the finance charge later in
2013, after it has completed quantitative
testing, and any additional qualitative
testing deemed appropriate, of the forms
that it proposed in July 2012 to combine
TILA mortgage disclosures with the
good faith estimate (RESPA GFE) and
settlement statement (RESPA settlement
statement) required under RESPA,
pursuant to Dodd-Frank Act section
1032(f) and sections 4(a) of RESPA and
105(b) of TILA, as amended by DoddFrank Act sections 1098 and 1100A,
respectively (the 2012 TILA–RESPA
Proposal). 77 FR 51116 (Aug. 23, 2012).
Accordingly, the Bureau already has
issued a final rule delaying
implementation of various affected title
XIV disclosure provisions. 77 FR 70105
(Nov. 23, 2012). The Bureau’s
approaches to coordinating the
implementation of the Title XIV
Rulemakings and to the finance charge
proposal are discussed in turn below.
G. Coordinated Implementation of Title
XIV Rulemakings
As noted in all of its foregoing
proposals, the Bureau regards each of
the Title XIV Rulemakings as affecting
aspects of the mortgage industry and its
regulations. Accordingly, as noted in its
proposals, the Bureau is coordinating
carefully the Title XIV Rulemakings,
particularly with respect to their
effective dates. The Dodd-Frank Act
requirements to be implemented by the
Title XIV Rulemakings generally will
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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. See Dodd-Frank Act
section 1400(c), 15 U.S.C. 1601 note. In
addition, some of the Title XIV
Rulemakings are to take effect no later
than one year after they are issued. Id.
The comments on the appropriate
implementation date for this final rule
are discussed in detail below in part VI
of this notice. In general, however,
consumer groups requested that the
Bureau put the protections in the Title
XIV Rulemakings into effect as soon as
practicable. In contrast, the Bureau
received some industry comments
indicating that implementing so many
new requirements at the same time
would create a significant cumulative
burden for creditors. In addition, many
commenters also acknowledged the
advantages of implementing multiple
revisions to the regulations in a
coordinated fashion.52 Thus, a tension
exists between coordinating the
adoption of the Title XIV Rulemakings
and facilitating industry’s
implementation of such a large set of
new requirements. Some have suggested
that the Bureau resolve this tension by
adopting a sequenced implementation,
while others have requested that the
Bureau simply provide a longer
implementation period for all of the
final rules.
The Bureau recognizes that many of
the new provisions will require
creditors and loan originators to make
changes to automated systems and,
further, that most administrators of large
systems are reluctant to make too many
changes to their systems at once. At the
same time, however, the Bureau notes
that the Dodd-Frank Act established
virtually all of these changes to
institutions’ compliance
responsibilities, and contemplated that
they be implemented in a relatively
short period of time. And, as already
noted, the extent of interaction among
52 Of the several final rules being adopted under
the Title XIV Rulemakings, six entail amendments
to Regulation Z, with the only exceptions being the
2013 RESPA Servicing Final Rule (Regulation X)
and the 2013 ECOA Appraisals Final Rule
(Regulation B); the 2013 HOEPA Final Rule also
amends Regulation X, in addition to Regulation Z.
The six Regulation Z final rules involve numerous
instances of intersecting provisions, either by crossreferences to each other’s provisions or by adopting
parallel provisions. Thus, adopting some of those
amendments without also adopting certain other,
closely related provisions would create significant
technical issues, e.g., new provisions containing
cross-references to other provisions that do not yet
exist, which could undermine the ability of
creditors and other parties subject to the rules to
understand their obligations and implement
appropriate systems changes in an integrated and
efficient manner.
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many of the Title XIV Rulemakings
necessitates that many of their
provisions take effect together. Finally,
notwithstanding commenters’ expressed
concerns for cumulative burden, the
Bureau expects that creditors and loan
originators actually may realize some
efficiencies from adapting their systems
for compliance with multiple new,
closely related requirements at once,
especially if given sufficient overall
time to do so.
Accordingly, the Bureau is requiring
that, as a general matter, creditors, loan
originators, and other affected persons
begin complying with the final rules on
January 10, 2014. As noted above,
section 1400(c) of the Dodd-Frank Act
requires that some provisions of the
Title XIV Rulemakings take effect no
later than one year after the Bureau
issues them. Accordingly, the Bureau is
establishing January 10, 2014, one year
after issuance of the Bureau’s 2013 ATR,
Escrows, and HOEPA Final Rules (i.e.,
the earliest of the title XIV final rules),
as the baseline effective date for most of
the Title XIV Rulemakings. The Bureau
believes that, on balance, this approach
will facilitate the implementation of the
rules’ overlapping provisions, while
also affording creditors sufficient time
to implement the more complex or
resource-intensive new requirements.
The Bureau has identified certain
rulemakings or selected aspects thereof,
however, that do not present significant
implementation burdens for industry,
including § 1026.36(h) and (i) of this
final rule. Accordingly, the Bureau is
setting earlier effective dates for these
paragraphs and certain other final rules
or aspects thereof, as applicable. The
effective dates for this final rule are set
forth and explained in part VI. The
effective dates for the other final rules
are discussed in the Federal Register
notices for those rules.
More Inclusive Finance Charge Proposal
As noted above, the Bureau proposed
in the 2012 TILA–RESPA Proposal to
make the definition of finance charge
more inclusive, thus rendering the
finance charge and annual percentage
rate a more useful tool for consumers to
compare the cost of credit across
different alternatives. 77 FR 51116,
51143 (Aug. 23, 2012). Because the new
definition would include additional
costs that are not currently counted, it
would cause the finance charges and
APRs on many affected transactions to
increase. This in turn could cause more
such transactions to become subject to
various compliance regimes under
Regulation Z. Specifically, the finance
charge is central to the calculation of a
transaction’s ‘‘points and fees,’’ which
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in turn has been (and remains) a
coverage threshold for the special
protections afforded ‘‘high-cost
mortgages’’ under HOEPA. Points and
fees also will be subject to a 3-percent
limit for purposes of determining
whether a transaction is a ‘‘qualified
mortgage’’ under the 2013 ATR Final
Rule. Meanwhile, the APR serves as a
coverage threshold for HOEPA
protections as well as for certain
protections afforded ‘‘higher-priced
mortgage loans’’ under § 1026.35,
including the mandatory escrow
account requirements being amended by
the 2013 Escrows Final Rule. Finally,
because the 2013 Interagency Appraisals
Final Rule uses the same APR-based
coverage test as is used for identifying
higher-priced mortgage loans, the APR
affects that rulemaking as well. Thus,
the proposed more inclusive finance
charge would have had the indirect
effect of increasing coverage under
HOEPA and the escrow and appraisal
requirements for higher-priced mortgage
loans, as well as decreasing the number
of transactions that may be qualified
mortgages—even holding actual loan
terms constant—simply because of the
increase in calculated finance charges,
and consequently APRs, for closed-end
mortgage transactions generally.
As noted above, these expanded
coverage consequences were not the
intent of the more inclusive finance
charge proposal. Accordingly, as
discussed more extensively in the
Escrows Proposal, the HOEPA Proposal,
the ATR Proposal, and the Interagency
Appraisals Proposal, the Board and
subsequently the Bureau (and other
agencies) sought comment on certain
adjustments to the affected regulatory
thresholds to counteract this
unintended effect. First, the Board and
then the Bureau proposed to adopt a
‘‘transaction coverage rate’’ for use as
the metric to determine coverage of
these regimes in place of the APR. The
transaction coverage rate would have
been calculated solely for coverage
determination purposes and would not
have been disclosed to consumers, who
still would have received only a
disclosure of the expanded APR. The
transaction coverage rate calculation
would exclude from the prepaid finance
charge all costs otherwise included for
purposes of the APR calculation except
charges retained by the creditor, any
mortgage broker, or any affiliate of
either. Similarly, the Board and Bureau
proposed to reverse the effects of the
more inclusive finance charge on the
calculation of points and fees; the points
and fees figure is calculated only as a
HOEPA and qualified mortgage coverage
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metric and is not disclosed to
consumers. The Bureau also sought
comment on other potential mitigation
measures, such as adjusting the numeric
thresholds for particular compliance
regimes to account for the general shift
in affected transactions’ APRs.
The Bureau’s 2012 TILA–RESPA
Proposal sought comment on whether to
finalize the more inclusive finance
charge proposal in conjunction with the
Title XIV Rulemakings or with the rest
of the TILA–RESPA Proposal
concerning the integration of mortgage
disclosure forms. 77 FR 51116, 51125
(Aug. 23, 2012). Upon additional
consideration and review of comments
received, the Bureau decided to defer a
decision whether to adopt the more
inclusive finance charge proposal and
any related adjustments to regulatory
thresholds until it later finalizes the
TILA–RESPA Proposal. 77 FR 54843
(Sept. 6, 2012); 77 FR 54844 (Sept. 6,
2012).53 Accordingly, the 2013 Escrows,
HOEPA, ATR, and Interagency
Appraisals Final Rules all are deferring
any action on their respective proposed
adjustments to regulatory thresholds.
IV. Legal Authority
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 is a Federal
consumer financial law. 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); DoddFrank 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.
This final rule is issued on January 20,
2013, in accordance with 12 CFR
1074.1.
53 These notices extended the comment period on
the more inclusive finance charge and
corresponding regulatory threshold adjustments
under the 2012 TILA–RESPA and HOEPA
Proposals. They did not change any other aspect of
either proposal.
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A. The Truth in Lending Act
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TILA Section 103(cc)(2)(E)(v)
As added by the Dodd-Frank Act,
TILA section 103(cc)(2)(E)(v), 15 U.S.C.
1602(cc)(2)(E)(v) authorizes the Bureau
to prescribe other criteria that seller
financers need to meet, aside from those
enumerated in the statute, to qualify for
the seller financer exclusion from the
definition of the term ‘‘mortgage
originator. The Bureau’s exercise of that
authority is discussed in the section-bysection analysis of the seller financer
exclusion.
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
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‘‘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
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. 1639,54 which apply to the highcost mortgages referred to in TILA
section 103(bb), 15 U.S.C. 1602(bb).
This final rule implements the DoddFrank Act requirements and establishes
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 final
rule 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,
deceptive or abusive. In developing this
final rule 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.55 15 U.S.C.
54 TILA section 129 contains requirements for
certain high-cost mortgages, established by HOEPA,
which are commonly called HOEPA loans.
55 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
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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.’’
TILA Section 129(p)(2)
The Dodd-Frank Act 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
redesignated by Dodd-Frank Act section
1433(a) and amended by Dodd-Frank
Act section 1100A, 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.
appraisals, and discouraging consumers from
shopping with other mortgage originators. 15 U.S.C.
1639b(c)(3). This final 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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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, as amended by Dodd-Frank Act
section 1100A, 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(a)
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 § 1026.36(i).
TILA Section 129C(e)
Dodd-Frank Act section 1414(a)
amended TILA to add new section
129C(e), 15 U.S.C. 1639c(e). That
section restricts mandatory arbitration
agreements in residential mortgage
loans and extensions of open-end credit
secured by the consumer’s principal
dwelling. It also prohibits provisions of
these loans and related agreements from
being applied or interpreted to bar a
consumer from bringing a Federal claim
in court. As discussed more fully in the
section-by-section analysis below, the
Bureau is proposing to implement these
restrictions in new § 1026.36(h).
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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). TILA and
title X of the Dodd-Frank Act are
Federal consumer financial laws.
Accordingly, the Bureau is exercising its
authority under Dodd-Frank Act section
1022(b)(1) to prescribe rules that carry
out the purposes and objectives of TILA
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and title X and prevent evasion of those
laws.
V. Section-by-Section Analysis of the
Final Rule
This final rule implements new TILA
sections 129B(b)(1), (b)(2), (c)(1), and
(c)(2) and 129C(d) and (e), as added by
sections 1402, 1403, and 1414(a) of the
Dodd-Frank Act. As discussed in more
detail in the section-by-section analysis
of § 1026.36(f) and (g), TILA 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 of
§ 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
of § 1026.36(i), TILA section 129C(d)
creates prohibitions on single-premium
credit insurance. As discussed in the
section-by-section analysis of
§ 1026.36(h), TILA section 129C(e)
provides restrictions on mandatory
arbitration agreements and waivers of
Federal claims. Finally, as discussed in
more detail in the section-by-section
analysis of § 1026.36(j), TILA section
129B(b)(2), requires the Bureau to
prescribe regulations requiring
depository institutions to establish and
maintain procedures reasonably
designed to assure and monitor the
compliance of such depository
institutions, the subsidiaries of such
institutions, and the employees of such
institutions or subsidiaries with the
requirements of TILA section 129B and
the registration procedures established
under section 1507 of the SAFE Act, 12
U.S.C. 5101 et seq.
Section 1026.25 Record Retention
Existing § 1026.25 requires creditors
to retain evidence of compliance with
Regulation Z. The Bureau proposed
adding § 1026.25(c)(2) to establish
record retention requirements for
compliance with the loan originator
compensation restrictions in TILA
section 129B as implemented by
§ 1026.36(d). Proposed section
1026.25(c)(2) would have: (1) Extended
the time period for retention by
creditors of compensation-related
records from two years to three years;
(2) required loan originator
organizations (i.e., generally, mortgage
broker companies) to maintain certain
compensation-related records for three
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11293
years; and (3) clarified the types of
compensation-related records that are
required to be maintained under the
rule. Proposed § 1026.25(c)(3) would
have required creditors to maintain
records evidencing compliance with the
requirements related to discount points
and origination points or fees set forth
in proposed § 1026.36(d)(2)(ii).
25(a) General Rule
Existing comment 25(a)–5 clarifies the
nature of the record retention
requirements under § 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
§ 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 § 1026.25
is presumed to be a record of the
amount actually paid to the loan
originator in connection with the
transaction.
The Bureau proposed new
§ 1026.25(c)(2), which sets forth certain
new record retention requirements for
compensation paid to loan originators,
as discussed below. The Bureau also
proposed new comments 25(c)(2)–1 and
–2, which incorporate substantially the
same interpretations as existing
comment 25(a)–5. For the sake of
improved organization of the
commentary and to prevent duplication,
the Bureau proposed to remove existing
comment 25(a)–5. No substantive
change was intended by this proposal.
The Bureau received no public
comments on the proposal to remove
comment 25(a)–5. Therefore, this final
rule is removing comment 25(a)–5 as
unnecessary, consistent with the
proposed rule.
25(c) Records Related to Certain
Requirements for Mortgage Loans
25(c)(2) Records Related to
Requirements for Loan Originator
Compensation
Three-Year Record Retention
TILA does not contain requirements
to retain specific records, but § 1026.25
requires creditors to retain evidence of
compliance with Regulation Z for two
years after the date disclosures are
required to be made or action is
required to be taken. Section 1404 of the
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Dodd-Frank Act amended TILA section
129B, which imposes substantive
restrictions on loan originator
compensation and provides civil
liability for 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 DoddFrank Act amended section 130(e) of
TILA to provide a three-year limitations
period for civil actions alleging a
violation of certain sections of TILA,
including section 129B concerning loan
originator compensation, beginning on
the date of the occurrence of the
violation. 15 U.S.C. 1640(e). Prior to
amendment by the Dodd-Frank Act, the
limitations period for individual actions
alleging violations of TILA was
generally one year. 15 U.S.C. 1640(e)
(2008). In view of the statutory changes
to TILA, the provisions of existing
§ 1026.25, which impose a two-year
record retention period, do not reflect
the applicable limitations period for
causes of action that may be brought
under TILA section 129B. Moreover, the
record retention provisions in § 1026.25
currently are limited to creditors,
whereas the compensation restrictions
in TILA section 129B, as added by the
Dodd-Frank Act, cover all mortgage
originators and not solely creditors.
To reflect these statutory changes, the
Bureau proposed § 1026.25(c)(2), which
would have made two changes to the
existing record retention provisions.
First, the proposed rule would have
required that a creditor maintain records
sufficient to evidence the compensation
it pays to a loan originator and the
governing compensation agreement, for
three years after the date of payment.
Second, the proposed rule would have
required a loan originator organization
to maintain for three years records of the
compensation: (1) It receives from a
creditor, a consumer, or another person;
and (2) it pays to any individual loan
originators. The loan originator
organization also must maintain the
compensation agreement that governs
those receipts or payments for three
years after the date of the receipts or
payments. The Bureau proposed 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 stated
its belief that these proposed
modifications would 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
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available for examination. In addition,
the Bureau stated its belief that the
modifications are necessary to prevent
circumvention of and to facilitate
compliance with TILA.
The Bureau recognized that increasing
the period a creditor must retain records
for specific information related to loan
originator compensation from two years,
as currently provided in Regulation Z,
to three years may impose some
marginal increase in the creditor’s
compliance burden in the form of
incremental cost of storage. The Bureau
stated its belief, 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 would incur
some costs to establish and maintain
recordkeeping systems, the Bureau
expected that loan originator
organizations would be able to adopt at
minimal cost their existing
recordkeeping systems to serve these
newly required purposes. During the
Small Business Review Panel, 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 that provided 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. Another
creditor Small Entity Representative
reported that it did not believe that the
proposed record retention requirement
would require it to change its current
practices.
In addition, the Bureau recognized
that applying the existing two-year
record retention period to information
specified in § 1026.25(c)(2) could
adversely affect the ability of consumers
to bring actions under TILA. As the
Bureau stated in the proposal, the
extension also would serve to reduce
litigation risk and maintain consistency
between creditors and loan originator
organizations. The Bureau therefore
believed that it was 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.
Most commenters agreed that
extending the retention period from two
years to three years would not
significantly increase the cost of
compliance. Though some commenters
opined that the changes in § 1026.25(c)
would significantly increase their
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compliance burden, those comments
appeared to be directed to the proposed
record retention provisions related to
proposed restrictions on discount points
and origination points or fees in
proposed § 1026.36(d)(2)(ii). Because
the Bureau is not finalizing in this rule
the points and fees proposal (or the
attendant record retention requirement),
the additional record retention
requirement imposed by this final rule
is minimal.
The Bureau invited public comment
on whether a record retention period of
five years, rather than three years,
would be appropriate. The Bureau
explained 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 threeyear period may be tolled 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, the proposal stated that 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 noted that many State and local
laws related to transactions involving
real property may set a record retention
period, or may depend on the
information being available, for five
years. Additionally, a five-year record
retention period would be consistent
with proposed provisions in the
Bureau’s 2012 TILA–RESPA Proposal.
Most commenters objected to a fiveyear record retention period as overly
burdensome. In addition, the
implementing regulations of the
Paperwork Reduction Act (PRA) require
that there be a showing of ‘‘substantial
need’’ to impose a record retention
requirement of longer than three years.
5 CFR 1320.5(d)(2)(iv). Given the PRA’s
preference for retention periods of three
years or less, the Bureau is adopting
§ 1026.25(c)(2)’s three-year retention
period as proposed, notwithstanding
some of the noted advantages of a longer
retention period.56
56 The language of § 1025(c)(2)(i) is revised
slightly from the proposal for the sake of simplicity.
The proposal would have required a creditor to
maintain records reflecting compensation paid to ‘‘a
loan originator organization or the creditor’s
individual loan originators.’’ The final rule requires
a creditor to maintain records reflecting
compensation paid ‘‘to a loan originator, as defined
in § 1026.36(a)(1).’’ No substantive change is
intended.
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Application to Loan Originator
Organizations
The Bureau stated in the proposal that
it would be necessary to require both
creditors and loan originator
organizations to retain for three years
evidence of compliance with the
requirements of § 1026.36(d)(1).
Although creditors would retain some of
the records needed to demonstrate
compliance with TILA section 129B and
its implementing regulations, in some
circumstances, the records would be
available solely from the loan originator
organization. For example, if a creditor
compensates a loan originator
organization for originating a
transaction and the loan originator
organization in turn allocates a portion
of that compensation to an 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 stated
that applying this requirement to both
creditors and loan originator
organizations would prevent
circumvention of and facilitate
compliance with TILA, as amended by
the Dodd-Frank Act.
The Bureau did not receive any
comments regarding the extension of the
record retention requirements to loan
originator organizations. Because the
Bureau continues to believe that
requiring loan originator organizations
to retain records related to
compensation will facilitate compliance
with TILA, the Bureau is adopting
§ 1026.25(c)(2)’s applicability to loan
originator organizations as proposed.
TKELLEY on DSK3SPTVN1PROD with RULES2
Exclusion of Individual Loan
Originators
Proposed § 1026.25(c)(2) would not
have applied Regulation Z
recordkeeping requirements to
individual loan originators. Although
section 129B(d) of TILA, as added by
the Dodd-Frank Act, permits consumers
to bring actions against mortgage
originators (which include individual
loan originators), the Bureau stated its
belief that applying the record retention
requirements of § 1026.25 to individual
loan originators is unnecessary. Under
§ 1026.25 as proposed, loan originator
organizations and creditors would have
been required to retain certain records
regarding all of their individual loan
originators. The preamble stated that
applying the same record retention
requirements to the individual loan
originator employees themselves would
be duplicative. In addition, such a
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requirement might not be feasible in all
cases, because individual loan
originators might not have access to the
types of records required to be retained
under § 1026.25, particularly after they
cease to be employed by the creditor or
loan originator organization. Under the
proposal, an individual loan originator
who is a sole proprietor, however,
would have been 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
record retention requirements.
Similarly, a natural person who is a
creditor would have been subject to the
requirements that apply to creditors.
The Bureau did not receive comments
on the exclusion of individual loan
originators. For the reasons discussed
above, the Bureau is adopting
§ 1026.25(c)(2) without making it
applicable to individual loan
originators, as proposed. The Bureau
notes that while the preamble to the
proposal discussed individual loan
originator employees, the exclusion
applies to all individual loan
originators, as that term is defined in
§ 1026.36(a)(1), whether or not
employees.
Substance of Record Retention
Requirements
As discussed above, proposed
§ 1026.25(c)(2) would have made two
changes to the existing record retention
provisions. First, § 1026.25(c)(2)(i)
would have required a creditor to
maintain for three years records
sufficient to evidence all compensation
it pays to a loan originator and a copy
of the governing compensation
agreement. Second, § 1026.25(c)(2)(ii)
would have required a loan originator
organization to maintain for three years
records of all compensation that it
receives from a creditor, a consumer, or
another person or that it pays to its
individual loan originators and a copy
of the compensation agreement that
governs those receipts or payments.
Proposed comment 25(c)(2)–1.i would
have clarified that, under
§ 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. One commenter
expressed concern that the comment
could be read to require retention of all
records listed; however, the comment
clearly states that the records listed are
examples only and what records would
be sufficient would be dependent on the
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11295
facts and circumstances and would vary
on a case-by-case basis. To prevent any
uncertainty, however, the comment is
clarified to describe which records
might be sufficient depending on the
type of compensation at issue in certain
circumstances. For example, the
comment explains that, for
compensation in the form of a
contribution to or benefit under a
designated tax-advantaged retirement
plan, records to be maintained might
include copies of required filings under
other applicable statutes relating to such
plans, copies of the plan and
amendments thereto and the names of
any loan originators covered by such
plans, or determination letters from the
Internal Revenue Service (IRS) regarding
such plans. The Bureau is also clarifying
the comment by removing the reference
to certain agreements being ‘‘presumed’’
to be a record of the amount of
compensation actually paid to the loan
originator. Instead, as revised, the
comment provides that such agreements
are a record of the amount actually paid
to the loan originator unless actual
compensation deviates from the amount
in the disclosure or agreement.
The Bureau is further revising
comment 25(c)(2)–1.i to indicate that if
compensation has been decreased to
defray the cost, in whole or part, of an
unforeseen increase in an actual
settlement cost over an estimated
settlement cost disclosed to the
consumer pursuant to section 5(c) of
RESPA (or omitted from that
disclosure), records to be maintained are
those documenting the decrease in
compensation and the reasons for it.
This revision corresponds with changes
to the commentary to § 1026.36(d)(1)
clarifying that the section prohibits a
loan originator from reducing its
compensation to bear the cost of a
change in transaction terms except to
defray such unforeseen increases in
settlement cost. Retaining these records
will allow for agency examination about
whether a particular decrease in loan
originator compensation is truly based
on unforeseen increases to settlement
costs, i.e., whether it indicates a pattern
or practice of the loan originator
repeatedly decreasing loan originator
compensation to defray the costs of
pricing concessions for the same
categories of settlement costs across
multiple transactions. Like other records
sufficient to evidence compensation
paid to loan originators, the Bureau
believes that records of decreases in
loan originator compensation in
unforeseen circumstances to defray the
costs of increased settlement cost above
those estimated should be retained for a
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time period commensurate with the
statute of limitations for causes of action
under TILA section 130 and be readily
available for examination, which is
necessary to prevent circumvention of
and to facilitate compliance with TILA.
Proposed comment 25(c)(2)–1.ii
would have clarified that the
compensation agreement, evidence of
which must 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 provided 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 provided an
example of retention of records
sufficient to evidence payment of
compensation. The Bureau did not
receive any public comment on these
proposed comments. The Bureau is
adopting comments 25(c)(2)–1.iii and
25(c)(2)–2 as proposed. Comment
25(c)(2)–1.ii is revised slightly from the
proposal to clarify that where a
compensation agreement is oral or based
on a course of conduct and cannot itself
be maintained, the records to be
maintained are those, if any, evidencing
the existence or terms of the oral or
course of conduct compensation
agreement.
TKELLEY on DSK3SPTVN1PROD with RULES2
25(c)(3) Records Related to
Requirements for Discount Points and
Origination Points or Fees
Proposed § 1026.25(c)(3) would have
required creditors to retain records
pertaining to compliance with the
provisions of proposed
§ 1026.36(d)(2)(ii), regarding the
payment of discount points and
origination points or fees. Because the
Bureau is not adopting proposed
§ 1026.36(d)(2)(ii), as discussed in the
section-by-section analysis of that
section, below, the Bureau is not
adopting proposed § 1026.25(c)(3).
Section 1026.36 Prohibited Acts or
Practices and Certain Requirements for
Credit Secured by a Dwelling
The Bureau is redesignating comment
36–1 as comment 36(b)–1. The analysis
of § 1026.36(b) discusses comment
36(b)–1 in further detail.
Existing comment 36–2 provides that
the final rules on loan originator
compensation in § 1026.36(d) and (e),
which were originally published in the
Federal Register on September 24, 2010,
apply to transactions for which the
creditor receives an application on or
after the effective date, which was in
April 2011. The comment further
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provides an example for the treatment of
applications received on March 25 or on
April 8 of 2011. The Bureau is removing
this comment because it is no longer
relevant.
36(a) Definitions
TILA section 103(cc), which was
added by section 1401 of the DoddFrank Act, contains definitions of
‘‘mortgage originator’’ and ‘‘residential
mortgage loan.’’ These definitions are
important to determine the scope of new
substantive TILA requirements added
by the Dodd-Frank Act, including, the
scope of restrictions on loan originator
compensation; the requirement that loan
originators be ‘‘qualified;’’ policies and
procedures to ensure compliance with
various requirements; and the
prohibitions on mandatory arbitration,
waivers of Federal claims, and single
premium credit insurance. See TILA
sections 129B(b)(1) and (2), (c)(1) and
(2) and 129C(d) and (e), as added by
sections 1402, 1403, and 1414(a) of the
Dodd-Frank Act. In the proposal, the
Bureau noted that the statutory
definitions largely parallel analogous
definitions in the 2010 Loan Originator
Final Rule and other portions of
Regulation Z for ‘‘loan originator’’ and
‘‘consumer credit transaction secured by
a dwelling,’’ respectively.
The proposal explained the Bureau’s
intent to retain the existing regulatory
terms to maximize continuity, while
adjusting the regulation and
commentary to reflect differences
between the existing Regulation Z
definition of ‘‘loan originator’’ and the
new TILA definition of ‘‘mortgage
originator’’ and to provide additional
interpretation and clarification. In the
case of ‘‘residential mortgage loan’’ and
‘‘consumer credit transaction secured by
a dwelling,’’ the Bureau did not propose
to make any changes to the regulation or
commentary.
Finally, the proposal would have
added three new definitions germane to
the scope of the compensation
restrictions and other aspects of the
proposal: (1) ‘‘Loan originator
organization’’ in new § 1026.36(a)(1)(ii);
(2) ‘‘individual loan originator’’ in new
§ 1026.36(a)(1)(iii); and (3)
‘‘compensation’’ in new § 1026.36(a)(3).
As noted in part III.F above, the
Bureau separately is adopting several
other final rules and issuing one
proposal, all relating to mortgage credit,
to implement requirements of title XIV
of the Dodd-Frank Act. Two of those
final rules, the 2013 ATR Final Rule and
2013 HOEPA Final Rule, require
creditors to calculate the points and fees
charged in connection with a
transaction to determine whether
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certain coverage tests under those rules
have been met. Both of these rules
generally require that creditors include
in the points and fees calculation all
‘‘compensation’’ paid directly or
indirectly by a consumer or creditor to
a ‘‘loan originator,’’ 57 terms that are
defined broadly in this final rule. While
the Bureau believes that such broad
definitions are well-suited to achieving
the Dodd-Frank Act’s goals for this
rulemaking, the Bureau believes that it
may be appropriate to interpret the
terms more narrowly in the 2013 ATR
and HOEPA Final Rules. The present
rule, for example, contains a prohibition
against paying compensation to a loan
originator based upon loan terms. It
would entirely defeat the purpose of
this rule if a creditor were free to pay
discretionary bonuses after a transaction
was consummated based upon the terms
of that transaction and thus for purposes
of this rule the term compensation
cannot be limited to payments made, or
determined, at particular moments in
time. In contrast, in the ATR and
HOEPA contexts, the terms loan
originator and compensation are used to
define a discrete input into the points
and fees calculation that needs to be
made at a specific moment in time in
order to determine whether the coverage
tests are met. Thus, § 1026.32(b)(1)(ii)
and associated commentary, as adopted
in the 2013 ATR Final Rule, provide
that compensation must be included in
points and fees for a particular
transaction only if such compensation
can be attributed to that particular
transaction at the time the interest rate
is set. The commentary also provides
examples of compensation types (e.g.,
base salary) that, in the Bureau’s view,
are not attributable to a particular
transaction and therefore are excluded
from the points and fees calculation.
At the same time the Bureau issued
the 2013 ATR and HOEPA Final Rules,
the Bureau also issued the 2013 ATR
Concurrent Proposal, which seeks
public comment on other aspects of the
definitions of ‘‘compensation’’ and
‘‘loan originator’’ for purposes of the
points and fees calculation. Among
other things, the proposal solicits
comment on whether additional
guidance would be useful in the ATR
and HOEPA contexts for the treatment
of compensation paid to persons who
are ‘‘loan originators’’ but who are not
employed by a creditor or mortgage
57 Specifically, as adopted in the 2013 ATR Final
Rule, § 1026.32(b)(1)(ii) provides that points and
fees for a closed-end credit transaction include
‘‘[a]ll compensation paid directly or indirectly by a
consumer or creditor to a loan originator, as defined
in § 1026.36(a)(1), that can be attributed to that
transaction at the time the interest rate is set.’’
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broker (e.g., certain employees of
manufactured home retailers, servicers,
and other parties that do not meet
exclusions specified in this rule).
Because of the overlapping issues
addressed in these rules, the Bureau is
carefully considering how these rules
interact and requests comment in the
concurrent proposal on whether there
are additional factors that the Bureau
should consider to harmonize the
various provisions.
36(a)(1) Loan Originator
TKELLEY on DSK3SPTVN1PROD with RULES2
36(a)(1)(i)
Existing § 1026.36(a)(1) defines the
term ‘‘loan originator’’ for purposes of
§ 1026.36. Section 1401 of the DoddFrank Act defines the term ‘‘mortgage
originator’’ in TILA section 103(cc)(2).
As discussed further below, both
definitions are similar to but not
identical with the SAFE Act definition
of ‘‘loan originator’’ for purposes of
national registration and licensing
requirements.
The proposal would have retained the
term ‘‘loan originator’’ in § 1026.36, but
would have made some changes to the
definition and associated commentary
to reflect certain distinctions in the
Dodd-Frank Act’s definition of mortgage
originator. In the proposed rule, the
Bureau stated that the regulatory
definition of ‘‘loan originator’’ was
generally consistent with the statutory
definition of ‘‘mortgage originator.’’ The
Bureau also noted ‘‘loan originator’’ has
been in wide use since first adopted by
the Board in 2010. The Bureau posited
that changes to the terminology would
likely require stakeholders to make
corresponding revisions in many
aspects of their operations, including
policies and procedures, compliance
materials, and software and training.
A few credit union commenters urged
the Bureau to use ‘‘mortgage originator’’
instead of ‘‘loan originator’’ to
distinguish the terminology and its
scope of coverage from those of the
SAFE Act and its implementing
regulations, Regulations G and H, which
refer to a covered employee at a nondepository institution as a ‘‘loan
originator’’ and a covered employee at a
depository institution as a ‘‘mortgage
loan originator.’’ The Bureau has
considered the comment, but continues
to believe that the burdens outlined in
the proposal would outweigh any of the
potential benefits garnered by signaling
differences in meaning. Thus, the final
rule retains the terminology ‘‘loan
originator.’’
Although the Bureau proposed to
retain the term ‘‘loan originator,’’ it did
propose changes to the definition of the
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term in § 1026.36(a)(1) to reflect the
scope of the term ‘‘mortgage originator’’
under section 103(cc)(2) of TILA.
Specifically, the statute states ‘‘mortgage
originator’’:
(A) means 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;
(B) 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.
TILA section 103(cc)(4) further
defines ‘‘assists a consumer in obtaining
or applying to obtain a residential
mortgage loan’’ to include, among other
things, advising on terms, preparing
loan packages, or collecting information
on behalf of the consumer. TILA section
103(cc)(2)(C) through (G) provides
certain exclusions from the general
definition of mortgage originator,
including an exclusion for certain
administrative and clerical staff. These
various elements are discussed further
below.
Existing § 1026.36(a)(1) defines ‘‘loan
originator’’ as: ‘‘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 proposed to redesignate
§ 1026.36(a)(1) as § 1026.36(a)(1)(i) and
explained that the phrase ‘‘arranges,
negotiates, or otherwise obtains an
extension of consumer credit for another
person’’ in the definition of ‘‘loan
originator’’ encompassed a broad variety
of activities 58 including those described
in new TILA section 103(cc)(2) with
respect to the definition of ‘‘mortgage
originator.’’
Nevertheless, the Bureau proposed to
revise the general definition of loan
originator and associated commentary to
include a person who ‘‘takes an
application, arranges, offers, negotiates,
or otherwise obtains an extension of
credit for another person’’ as well as to
make certain other revisions to the
58 This view 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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11297
existing definition of ‘‘loan originator’’
to reflect new TILA section 103(cc)(2).
The proposal explained that the Bureau
interpreted ‘‘arranges’’ broadly to
include any task that is part of the
process of originating a credit
transaction, including advertising or
communicating to the public that one
can perform loan origination services
and referring a consumer to any other
person who participates in the
origination process.59 Participating in
the origination process, in turn,
includes any task involved in the loan
origination process, from commencing
the process of originating a transaction
through arranging consummation of the
credit transaction (subject to certain
exclusions). That is, the definition
includes both persons who participate
in arranging a credit transaction with
others and persons who arrange the
transaction entirely, including initially
contacting and orienting the consumer
to a particular loan originator’s or
creditor’s origination process, assisting
the consumer to apply for a loan, taking
the application, offering and negotiating
transaction terms, and making
arrangements for consummation of the
credit transaction.
The Bureau also stated that ‘‘arranges,
negotiates, or otherwise obtains an
extension of consumer credit for another
person’’ in the existing definition of
‘‘loan originator’’ already included the
following activities specified in TILA
section 103(cc)(2)(A): (1) Taking a loan
application; (2) assisting a consumer in
obtaining or applying to obtain a loan;
and (3) offering or negotiating terms of
a loan. Nevertheless, to remove any
uncertainty and facilitate compliance,
the Bureau proposed to add ‘‘takes an
application’’ and ‘‘offers,’’ as used in
TILA section 103(cc)(2)(A), to the
definition of ‘‘loan originator’’ in
§ 1026.36(a) to state expressly that these
core elements were included in the
definition of ‘‘loan originator.’’
Similarly, proposed comment 36(a)–
1.i.A would have stated that ‘‘loan
originator’’ includes persons who assist
a consumer in obtaining or applying to
obtain a loan, including each specific
activity identified in the statute as
included in the meaning of ‘‘assist.’’
Most commenters did not focus on the
proposed revised definition as a whole,
but rather on specific activities that they
59 Arrange is defined by the 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’’; and (3) ‘‘to bring about an
agreement or understanding concerning.’’ Arrange
Definition, Merriam-Webster.com, available at:
http://www.merriam-webster.com/dictionary/
arrange.
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believed should or should not be
included in the general definition of
loan originator. Manufactured housing
financers generally commented that the
proposed definition should include a
more expansive list of specific activities
that conform to those detailed by HUD’s
SAFE Act rulemakings for inclusion or
exclusion from the definition of loan
originator in Regulation H and its
appendix A, with some modifications to
exclude more employee activities. Some
non-depository institution commenters
stated that the proposed definition of
‘‘loan originator’’ should be more
closely aligned with the SAFE Act
definition. Many depository institution
commenters stated that the proposed
definition was overly broad because it
included persons who normally would
not be considered loan originators and
should instead be narrowed to be
similar to the definition of ‘‘mortgage
loan originator’’ specified by the Federal
banking agencies in their regulations
implementing the SAFE Act. See 75 FR
44656 (July 28, 2010).
As discussed in the proposal and in
more detail below, the Dodd-Frank Act
gives broad meaning to the term
‘‘mortgage originator,’’ and the Bureau
therefore believes it appropriate to give
the regulatory term ‘‘loan originator’’
equally broad meaning. In light of
commenters’ concerns regarding
particular activities covered by the
definition, the Bureau also believes
more clarity should be provided
regarding the specific activities that are
included or excluded by the definition
of loan originator. In the following
discussion, the Bureau first addresses
why it is adopting a broad definition of
‘‘loan originator’’ and then explains
specific elements of the definition and
related comments.
Congress defined ‘‘mortgage
originator’’ for the purposes of TILA, as
amended by the Dodd-Frank Act, to be
broader than its definition of ‘‘loan
originator’’ in the SAFE Act, which it
enacted just two years previously.
Moreover, although Congress adopted
legislation that effectively codified
major provisions of the Board’s 2009
Loan Originator Proposal, Congress used
broader language than the Board had
proposed.60 Under the Dodd-Frank Act
amendments to TILA section
103(cc)(2)(A), a person is a ‘‘mortgage
originator’’ for TILA purposes if the
person engages in any one of the
following activities for, or in
expectation of, direct or indirect
60 The Board’s proposal defined a loan originator
as one who for gain ‘‘arranges, negotiates or
otherwise obtains an extension of consumer credit.’’
The Board finalized this definition in its 2010 Loan
Originator Final Rule.
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compensation or gain: (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. Under the SAFE Act a person is a
‘‘loan originator’’ only if the person
engages in both of the following
activities: (1) Takes a residential
mortgage loan application; and (2) offers
or negotiates terms of a residential
mortgage loan for compensation or gain.
12 U.S.C. 5102(4).
Thus, there are three main differences
between the two definitions, in terms of
the activities involved.61 First, any
individual element under TILA, as
amended by the Dodd-Frank Act,
qualifies the person as a mortgage
originator, while the SAFE Act requires
that an individual must participate in
both taking an application and offering
or negotiating terms to trigger the
statute’s requirements. Second, the
TILA definition of ‘‘mortgage
originator’’ is separately triggered by
assisting a consumer in obtaining or
applying to obtain a loan, which is
further defined under TILA to include,
among other things, advising on terms,
preparing loan packages, or collecting
information on behalf of the consumer,
while the SAFE Act does not
specifically reference this activity.
Third, ‘‘mortgage originator’’ under
TILA section 103(cc)(2)(B) further
includes ‘‘any person who represents to
the public through advertising or other
means of communicating or providing
information * * * that such person can
or will provide any of the services or
perform any of the activities’’ described
in TILA section 103(cc)(2)(A).
The Bureau believes that these
differences between definitions
evidence a congressional intention
when enacting the Dodd-Frank Act to
cast a wide net to ensure consistent
regulation of a broad range of persons
that may have financial incentives and
opportunities to steer consumers to
credit transactions with particular terms
early in the origination process. The
statutory definition even includes
persons who simply inform consumers
that they can provide mortgage
origination services, prior to and
independent of actually providing such
services. The Bureau also believes that
both TILA and the SAFE Act evidence
a congressional concern specifically
about the risk that trusted advisers or
first-in-time service providers could
steer consumers to particular credit
providers, products, and terms. Thus,
61 Another difference, not pertinent here, is that
the SAFE Act’s ‘‘loan originator’’ includes only
natural persons, whereas TILA’s ‘‘mortgage
originator’’ can include organizations.
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for instance, the Bureau notes that in
both laws Congress specifically
included real estate brokers that are
compensated by a creditor or mortgage
broker in the definitions of ‘‘mortgage
originator’’ and ‘‘loan originator’’
respectively. 15 U.S.C. 1602(cc)(2)(D),
12 U.S.C. 5103(3)(A)(iii).
For the reasons stated above and as
discussed more extensively below, the
Bureau is redesignating § 1026.36(a)(1)
as § 1026.36(a)(1)(i) and revising the
general definition of loan originator in
§ 1026.36(a)(1)(i). The Bureau also is
adopting additional provisions in, and
commentary to, § 1026.36(a)(1) to
provide further clarification and
analysis for specific activities included
or excluded from the definition of ‘‘loan
originator.’’ As described further below,
the Bureau is defining ‘‘loan originator’’
in § 1026.36(a)(1)(i) to include a person
who takes an application, offers,
arranges, assists a consumer in
obtaining or applying to obtain,
negotiates, or otherwise obtains or
makes an extension of consumer credit
for another person. The Bureau is also
providing clarifications that address a
variety of specific actions such as taking
an application, management,
underwriting, and administrative or
clerical tasks, as well as the treatment of
particular types of persons such as real
estate brokers, seller financers, housing
counselors, financial advisors,
accountants, servicers and employees of
manufactured home retailers. The
revisions to § 1026.36(a)(1)(i) further
clarify that, to be a loan originator, a
person needs only to receive or expect
to receive direct or indirect
compensation in connection with
performing loan origination activities.
The revisions additionally remove the
phrase ‘‘with respect to a particular
transaction’’ from the existing definition
to clarify that the definition applies to
persons engaged in the activities it
describes regardless of whether any
specific consumer credit transaction is
consummated. Moreover, comment
36(a)–1.i.B clarifies that the definition of
loan originator includes not only
employees but also agents and
contractors of a creditor or mortgage
broker that satisfy the definition.
Takes an Application, Offers, Arranges,
Assists a Consumer, Negotiates, or
Otherwise Obtains or Makes
As described above, TILA section
103(cc)(2) defines ‘‘mortgage originator’’
to include a person who ‘‘takes a
residential mortgage loan application,’’
‘‘assists a consumer in obtaining or
applying to obtain a residential
mortgage loan,’’ or ‘‘offers or negotiates
terms of a residential mortgage loan.’’
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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 proposed comment 36(a)–
1.i.A to provide further interpretation of
the proposed phrase, ‘‘takes an
application, offers, arranges, negotiates,
or otherwise obtains,’’ to clarify the
phrase’s applicability in light of these
statutory provisions. Specifically, the
Bureau proposed to clarify in comment
36(a)–1.i.A that the definition of ‘‘loan
originator’’ and, more specifically,
‘‘arranges’’ also includes all of the
activities listed in TILA 103(cc)(4) that
define the term ‘‘assists a consumer in
obtaining or applying for consumer
credit,’’ including advising on credit
terms, preparing application packages
(such as a loan or pre-approval
application or supporting
documentation), and collecting
information on behalf of the consumer
to submit to a loan originator or
creditor. The comment also would have
included any person that advertises or
communicates to the public that such
person can or will provide any of the
listed services or activities. The Bureau
addresses each of these and additional
activities in the ‘‘takes an application,’’
‘‘offers, ‘‘arranges,’’ ‘‘assists,’’ and
‘‘negotiates or otherwise obtains or
makes’’ analyses below.
Takes an application. The Bureau
proposed to add ‘‘takes an application,’’
as used in the definition of ‘‘mortgage
originator’’ in TILA section
103(cc)(2)(A), to the definition of ‘‘loan
originator’’ in § 1026.36(a). A few
industry groups and several
manufactured housing financers raised
concerns that the proposal did not
define or provide any interpretation of
the phrase. One manufactured housing
financer commented that the mere
physical act of writing (or typing)
information onto an application form on
behalf of a consumer was a purely
administrative and clerical act that
should not be considered taking an
application. This commenter indicated
that such activity serves the interest of
low-income consumers who may be
uncomfortable with the home buying
and credit application processes. The
commenter further noted that
completing the application in this
manner ensures that the credit
information is accurately conveyed and
clearly written to avoid unnecessary
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delays in the application process.
Another industry group commenter
suggested that, under the proposal,
merely delivering a completed
application to a loan officer, without
more, would qualify as ‘‘takes an
application.’’
In the proposal, the Bureau noted
that, in connection with the application
process, certain minor actions alone
would not be included in the definition
of loan originator. For instance, the
proposal stated that physically handling
a completed application form to deliver
it to a loan officer would not constitute
acting as a loan originator where the
person performing the delivery does not
assist the consumer in completing the
application, process or analyze the
information reflected in the application,
or discuss specific transaction terms or
products with the consumer. Instead,
these activities would be considered
administrative and clerical and thus
within TILA section 103(cc)(2)(C)’s
express exclusion from the definition of
‘‘mortgage originator’’ of persons who
perform ‘‘purely administrative and
clerical tasks on behalf of mortgage
originators.’’ In light of the comments
received, the Bureau is revising
comment 36(a)–4.i in the final rule to
state explicitly that such activities are
not included in the definition of loan
originator.
The Bureau believes, however, that
filling out a consumer’s application,
inputting the information into an online
application or other automated system,
and taking information from the
consumer over the phone to complete
the application should be considered
‘‘tak[ing] an application’’ for the
purposes of the rule. The Bureau
believes that individuals performing
these functions play an important
enough role in the origination process
that they should be subject to the
requirements the Dodd-Frank Act
establishes with respect to loan
originators, including the prohibition on
compensation that creates steering
incentives. Consumers providing
information for an application during
the initial stages of the origination
process are susceptible to steering
influences that could be harmful. For
example, the application taker could
submit or characterize the application in
a way that is more favorable to the
application taker while limiting the
consumer’s options or qualifying the
consumer for a transaction the
consumer cannot repay. Or, when taking
in the information provided by the
consumer the application taker could
encourage a consumer to seek certain
credit terms or products. The Bureau is
revising comment 36(a)–1.i.A and
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comment 36(a)–4.i to clarify which
activities do or do not constitute
‘‘tak[ing] an application’’ by discussing
how persons merely aiding a consumer
to understand how to complete an
application would not be engaged in
taking an application, while persons
who actually fill out the application are
taking an application.
Offers. The Bureau proposed to revise
the general definition of loan originator
and associated commentary to include a
person who ‘‘offers’’ an extension of
credit. This revision would reflect new
TILA section 103(cc)(2) that includes in
the definition of ‘‘mortgage originator’’
persons who ‘‘offer’’ terms of a
residential mortgage loan.
In proposed comment 36(a)–1 and the
supplementary information of the
proposal, the Bureau explained that
‘‘arranges’’ would also include any task
that is part of the process of originating
a credit transaction, including
advertising or communicating to the
public by a person that the person can
perform loan origination services, as
well as referring a consumer to any
other person who participates in the
origination process. Several industry
associations, banks, and manufactured
housing finance commenters urged the
Bureau not to include in the definition
of ‘‘loan originator’’ bank tellers,
receptionists, customer service
representatives, or others who
periodically refer consumers to loan
originators. A large bank commenter
indicated that the TILA definition of
mortgage originator does not expressly
include employees who perform referral
activities.
Prior to the transfer of TILA
rulemaking authority to the Bureau, the
Board interpreted the definition of loan
originator to include referrals when
such activity was performed for
compensation or other monetary gain or
in the expectation of compensation or
other monetary gain. The Bureau further
notes that HUD also interpreted the
SAFE Act ‘‘offers and negotiates’’ to
include referrals. Specifically,
Regulation H, as restated by the Bureau,
provides in 12 CFR 1008.103(c)(2)(i)(C)
that an individual ‘‘offers or negotiates
terms of a residential mortgage loan for
compensation or gain’’ if the individual:
* * * (C) Recommends, refers, or steers
a borrower or prospective borrower to a
particular lender or set of residential
mortgage loan terms, in accordance with
a duty to or incentive from any person
other than the borrower or prospective
borrower * * * . 76 FR 78483, 78493
(Dec. 19, 2011). See also 76 FR 38464,
38495 (June 30, 2011).
The Federal banking agencies, when
implementing the SAFE Act, did not
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specifically address whether referral
activities are included in ‘‘offers or
negotiates’’ terms of a loan. However,
the agencies noted that activities
considered to be offering or negotiating
loan terms do not require a showing that
an employee received a referral fee. See
75 FR 44656 (July 28, 2010). Thus, the
agencies appear to have contemplated
that referral activity is included in the
meaning of ‘‘offers or negotiates’’ terms
of a loan.
To maintain consistency with
Regulation H and to facilitate
compliance, the Bureau interprets
‘‘offers’’ for purposes of the definition of
loan originator in § 1026.36(a)(1) to
include persons who: (1) Present for
consideration by a consumer particular
credit terms; or (2) recommend, refer, or
steer a consumer to a particular loan
originator, creditor, credit terms, or
credit product. The Bureau believes
that, even at initial stages of the
mortgage origination process, persons
who recommend, refer, or steer
consumers to a particular loan
originator, creditor, set of credit terms,
or credit product could have influence
over the particular credit products or
credit terms that a consumer seeks or
ultimately obtains. Moreover, because to
be a loan originator someone who offers
credit must do so for, or in the
expectation of, direct or indirect
compensation or gain, there not only is
an incentive to steer the consumer to
benefit the referrer but the referrer is
also effectively participating in the
extending of an offer of consumer credit
on behalf of the person who pays the
referrer’s compensation. The Bureau
believes that the statute was intended to
reach such situations and that it
appropriately regulates these activities
without imposing significant burdens.62
For instance, most persons engaged in
compensated referral activities (e.g.,
employees being paid by their
employers for referral activities) receive
62 The Bureau also believes that referral activities
are encompassed within the language ‘‘assists a
consumer in obtaining or applying to obtain a
residential mortgage loan’’ in TILA section
103(cc)(2). TILA section 103(cc)(4) provides that ‘‘‘a
person assists a consumer in obtaining or applying
to obtain a residential mortgage loan’ by, among
other things, advising on residential mortgage loan
terms.* * *’’ The Bureau believes that ‘‘among
other things’’ encompasses referral, which is a form
of advising a consumer on where to obtain
consumer credit. To the extent there is any
uncertainty with respect to whether a person
engaging in referral activity for or in expectation of
direct or indirect compensation is a loan originator,
the Bureau is also exercising its authority under
TILA section 105(a) to prescribe rules that contain
additional requirements, differentiations, or other
provisions. The Bureau believes that this
adjustment is necessary or proper to effectuate the
purposes of TILA and to prevent circumvention or
evasion thereof.
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a flat fee for each referral. A flat fee is
permissible under the existing and final
rule, which in § 1026.36(d)(1) generally
prohibits loan originators from receiving
compensation that is based on a term of
a transaction but permits compensation
based on the amount of the transaction
or on a flat per-transaction basis.
Accordingly, application of the
regulation will not require a change in
compensation practices where referrers
are compensated on a flat fee basis.
However, if referrers were to receive
compensation based on transaction
terms, the Bureau believes such persons
would also likely be incentivized to
steer consumers to particular
transaction terms that may be harmful to
the consumers. Moreover, most
consumers are likely unaware that the
person referring or recommending a
particular creditor or a particular credit
product may have a financial incentive
to do so. There is even less consumer
sensitivity to these potential harms
when a trusted advisor is engaged in
such referral activity. As also discussed
in the proposal, the Bureau believes that
one of the primary focuses of the DoddFrank Act and this rulemaking is to
prevent such incentives.
Similarly, the Bureau believes that
provisions of the final rule requiring
loan originators to be appropriately
‘‘qualified’’ under § 1026.36(f), with
regard to background checks, character
screening, and training of loan
originators, also will not be significantly
burdensome. The Bureau believes that
many referrers employed by nondepository institutions likely already
meet the rule’s qualification
requirements. States that follow the
interpretation of the SAFE Act in
Regulation H already require certain
persons who refer consumers, according
to a duty or incentive, to obtain a loan
originator license. Furthermore, in
contrast with Regulation H, as described
above, many States have enacted a
broader definition of loan originator
than is required under the SAFE Act by
using the disjunctive, i.e., takes an
application ‘‘or’’ offers or negotiates,
with the result that persons who refer
are already subject to State loan
originator licensing requirements in
those States even if they do not also
‘‘take an application.’’ 63 Individuals
who are licensed under the SAFE Act
are not subject to additional substantive
requirements to be ‘‘qualified’’ under
this final rule, as discussed further in
the section-by-section analysis of
63 See the section-by-section analysis of
§ 1026.36(f) and (g) below for additional
background on the SAFE Act.
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§ 1026.36(f) and (g) concerning loan
originator qualification requirements.
The Bureau additionally believes that
employees of depository institutions
likely also already meet many of the
final rule’s criminal background and
fitness qualification requirements in
new § 1026.36(f) because they are
subject to background-check
requirements under the Federal Deposit
Insurance Act or Federal Credit Union
Act. Moreover, the qualification training
requirements of this final rule for
depository institution loan originators
specify that the training be
commensurate with the individual’s
loan origination activities. Accordingly,
training that fulfills the final rule’s
qualification requirements for persons
whose only loan origination activities
are referrals is relatively modest as also
further discussed in the section-bysection analysis of § 1026.36(f) and
related commentary.
As discussed further below, the
Bureau is providing greater clarification
in comment 36(a)–4 to explain that
administrative staff who provide contact
or general information about available
credit in response to requests from
consumers generally are not for that
reason alone loan originators. For
example, an employee who provides a
loan originator’s or creditor’s contact
information to a consumer in response
to the consumer’s request does not
become a loan originator, provided that
the teller or receptionist does not
discuss particular credit terms and does
not refer the consumer, based on the
teller’s or receptionist’s assessment of
the consumer’s financial characteristics,
to a certain loan originator or creditor
seeking to originate particular
transactions to consumers with those
financial characteristics. In contrast, a
referral occurs (and an employee is a
loan originator) when, for example, a
bank teller asks a consumer if the
consumer is interested in refinance
loans with low introductory rates and
provides contact information for a loan
originator based on the teller’s
assessment of information provided by
the consumer or available to the teller
regarding the consumer’s financial
characteristics.64
The Bureau is revising comment
36(a)–1.i.A.1 to clarify that the
definition of loan originator includes a
person who refers a consumer (when the
referral activities are engaged in for
compensation or other monetary gain) to
a loan originator or creditor or an
64 The Bureau believes that a referral based on the
employee’s assessment of the financial
characteristics of the consumer occurs only if an
individual in fact has the discretion to choose to
direct a consumer to a particular loan originator.
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employee, agent, or contractor of a loan
originator or creditor. The Bureau is
further clarifying the definition of
‘‘referral’’ as generally including any
oral or written action directed to a
consumer that can affirmatively
influence the consumer to select a
particular loan originator or creditor to
obtain an extension of credit when the
consumer will pay for such credit. In
comment 36(a)–1.i.A.2 the Bureau is
clarifying that arranging a credit
transaction is one of the activities that
can make a person a ‘‘loan originator.’’
The Bureau is also clarifying in
comment 36(a)–1.i.A.4 that the
definition of ‘‘loan originator’’ includes
a person who presents for consideration
by a consumer particular credit terms or
communicates with a consumer for the
purpose of reaching a mutual
understanding about prospective credit
terms.
The Bureau is revising comment
36(a)–4 to clarify that the loan originator
definition, nevertheless, does not
include persons who (whether or not for
or in the expectation of compensation or
gain): (1) Provide general explanations,
information, or descriptions in response
to consumer queries, such as explaining
terminology or lending policies; (2) as
employees of a creditor or loan
originator, provide loan originator or
creditor contact information in response
to the consumer’s request, provided that
the employee does not discuss
particular transaction terms and does
not refer the consumer, based on the
employee’s assessment of the
consumer’s financial characteristics, to a
particular loan originator or creditor
seeking to originate particular
transactions to consumers with those
financial characteristics; (3) describe
product-related services; or (4) explain
or describe the steps that a consumer
would need to take to obtain a credit
offer, including providing general
clarification on qualifications or criteria
that would need to be met that is not
specific to that consumer’s
circumstances.
Arranges. The Board’s 2010 Loan
Originator Final Rule defined ‘‘loan
originator’’ in § 1026.36(a)(1) as: ‘‘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 proposal
would have broadly clarified ‘‘arranges’’
to include, for example, any part of the
process of originating a credit
transaction, including advertising or
communicating to the public that one
can perform origination services and
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referring a consumer to another person
who participates in the process of
originating a transaction. The
clarification in proposed comment
36(a)–1.i.A would have included both
persons who participate in arranging a
credit transaction with others and
persons who arrange the transaction
entirely, including through initial
contact with the consumer, assisting the
consumer to apply for mortgage credit,
taking the application, offering and
negotiating transaction terms, and
making arrangements for consummation
of the credit transaction.
The term ‘‘arranges’’ is not part of the
definition of mortgage originator in
TILA section 103(cc)(2)(A) as enacted by
the Dodd-Frank Act. Nevertheless, the
Bureau proposed to preserve the
existing regulation’s use of the term and,
as noted, indicated its belief that the
term subsumes many of the activities
described in the statutory definition.
The Bureau did not propose to include
the statutory ‘‘assists a consumer’’
element, for example, for this reason. As
discussed below, however, the Bureau is
including that element in the final
definition. The Bureau therefore
considered removing ‘‘arranges’’ from
the definition in this final rule. To
prevent any inference that the final rule
narrows the definition of loan
originator, however, the Bureau has kept
the term in the final rule.
Several industry groups and a
manufactured housing finance
commenter stated that the Bureau’s
proposed interpretation of ‘‘arranges’’
was overbroad. Several commenters
questioned whether ‘‘arranges’’ would
include activities typically performed
by or unique to certain commonly
recognized categories of industry
personnel. Specifically, these
commenters sought clarification on
whether the term’s scope would include
activities typically performed by
underwriters, senior managers who
work on underwriting and propose
counter-offers to be offered to
consumers, loan approval committees
that approve or deny transactions (with
or without conditions or counter-offers)
and communicate this information to
loan officers, processors who assemble
files for submission to underwriters,
loan closers, and individuals involved
with secondary market pricing who
establish rates that the creditor’s loan
officers quote to the public.
The Bureau believes the meaning of
‘‘arranges’’ does include activities
performed by these persons when those
activities amount to offering or
negotiating credit terms available from a
creditor with consumers or assisting a
consumer in applying for or obtaining
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an extension of credit, and thus also
amount to other activities specified in
the definition of loan originator.
However, most of the activities these
persons typically engage in would likely
not amount to offering or negotiating
and thus would likely not be included
in the definition of ‘‘loan originator.’’
Comment 36(a)–4 and the
corresponding analysis below on
management, administrative, and
clerical tasks provide additional
clarifications on which of these and
similar activities are not included in the
definition of loan originator.
In proposed comment 36(a)–1 and the
supplementary information of the
proposal, the Bureau explained that
‘‘arranges’’ would also include any task
that is part of the process of originating
a credit transaction, including
advertising or communicating to the
public by a person that the person can
perform loan origination services, as
well as referring a consumer to any
other person who participates in the
origination process. The Bureau is
finalizing the definition of ‘‘loan
originator’’ in § 1026.36(a)(1)(i) and in
related comment 36(a)–1.i.A to include
certain advertising activities and also to
include referrals as discussed in more
detail above in the analysis of ‘‘offers.’’
Nevertheless, comment 36(a)–1, as
adopted, does not state that ‘‘arranges’’
includes any task that is part of the
process of originating a credit
transaction because some loan
origination activities under this final
rule are included under elements other
than ‘‘arranges.’’
Assists a consumer. 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)
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
proposed to clarify in comment 36(a)–
1.i.A that the term ‘‘loan originator’’
includes a person who assists a
consumer in obtaining or applying for
consumer credit by: (1) Advising on
specific credit terms (including rates,
fees, and other costs); (2) filling out an
application; (3) preparing application
packages (such as a credit application or
pre-approval application or supporting
documentation); or (4) collecting
application and supporting information
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on behalf of the consumer to submit to
a loan originator or creditor. Each
component of this statutory provision
(i.e., advising on residential mortgage
loan terms, preparing residential
mortgage loan packages, and collecting
information on behalf of the consumer)
is addressed below.
TILA section 103(cc)(4) provides that
a person ‘‘assists a consumer in
obtaining or applying to obtain a
residential mortgage loan’’ by, among
other things, ‘‘advising on residential
mortgage loan terms (including rates,
fees, and other costs).’’ The Bureau
proposed 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).’’ In the proposal, the Bureau also
stated that the definition of ‘‘mortgage
originator’’ in TILA generally does not
include bona fide third-party advisors
such as accountants, attorneys,
registered financial advisors, certain
housing counselors, or others who
advise a consumer on credit terms
offered by another person and do not
receive compensation directly or
indirectly from that person. The Bureau
indicated that the definition of
‘‘mortgage originator’’ would apply to
persons who advise consumers
regarding the credit terms being
advertised or offered by that person or
by the loan originator or creditor to
whom the person brokered or referred
the transaction in expectation of
compensation, rather than objectively
advising consumers on transaction
terms already offered by an unrelated
party to the consumer (i.e., in the latter
scenario the advisor did not refer or
broker the transaction to a mortgage
broker or a creditor and is not receiving
compensation from a loan originator or
creditor originating the transaction or an
affiliate of that loan originator or
creditor). If the advisor receives
payments or compensation from a loan
originator, creditor, or an affiliate of the
loan originator or creditor offering,
arranging, or extending the consumer
credit in connection with advising a
consumer on credit terms, however, the
advisor could be considered a loan
originator.
The Bureau is defining ‘‘loan
originator’’ in § 1026.36(a)(1)(i) to
include persons who ‘‘assist a consumer
in obtaining or applying to obtain’’ an
extension of credit. The Bureau is
providing additional clarification in
revised comments 36(a)–1 and 36(a)–4
on the meaning of ‘‘assists a consumer
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in obtaining or applying to obtain’’ an
extension of credit.
Several industry groups and housing
counselor commenters requested
additional clarification on the meaning
of ‘‘assists a consumer in obtaining or
applying for consumer credit by
advising on credit terms (including
rates, fees, and other costs).’’ The
Bureau interprets the phrase, ‘‘advising
on credit terms (including rates, fees,
and other costs)’’ to include advising a
consumer on whether to seek or accept
specific credit terms from a creditor.
However, the phrase does not include
persons who merely provide general
explanations or descriptions in response
to consumer queries, such as by
explaining general credit terminology or
the interactions of various credit terms
not specific to a transaction. The Bureau
also is adopting additional clarifications
in comment 36(a)–1.v to reflect its
interpretation that ‘‘advising on credit
terms’’ does not include the activities
performed by bona fide third-party
advisors such as accountants, attorneys,
registered financial advisors, certain
housing counselors, or others who
advise consumers on particular credit
terms but do not receive compensation
or other monetary gain, directly or
indirectly, from the loan originator or
creditor offering or extending the
particular credit terms.
The Bureau believes that payment
from the loan originator or creditor
offering or extending the credit usually
evidences that the advisor is
incentivized to depart from the advisor’s
core, objective consumer advisory
activity to further the credit origination
goals of the loan originator or creditor
instead. Thus, this interpretation
applies only to advisory activity that is
part of the advisor’s activities. Although
not a requirement for the exclusion, the
Bureau believes that advisers acting
under authorization or the regulatory
oversight of a governing body, such as
licensed accountants advising clients on
the implications of credit terms,
registered financial advisors advising
clients on potential effects of credit
terms on client finances, HUD-approved
housing counselors assisting applicants
with understanding the origination
process and various credit terms offered
by a loan originator or a creditor, or a
licensed attorney assisting clients to
consummate the purchase of a home or
with divorce, trust, or estate planning
matters are generally already subject to
substantial consumer protection
requirements. Such third-party advisors
would be loan originators, however, if
they advise consumers on particular
credit terms and receive compensation
or other monetary gain, directly or
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indirectly, from the loan originator or
creditor offering or extending the
particular credit terms. Therefore, these
persons may no longer be viewed as
acting within the scope of their bona
fide third-party activities, which
typically do not involve any part of the
loan origination process (i.e., no longer
acting solely as an accountant, financial
advisor, housing counselor, or an
attorney instead of a loan originator).
The Bureau understands that some
nonprofit housing counselors or housing
counselor organizations may receive
fixed sums from creditors or loan
originators as a result of agreements
between creditors and local, State, or
Federal agencies or where such
compensation is expressly permitted by
applicable local, State or Federal law
that requires counseling. The Bureau
believes that housing counselors acting
pursuant to such permission or
authority for a particular transaction
should not be considered loan
originators for that transaction. Thus,
funding or compensation received by a
housing counselor organization or
person from a loan originator or a
creditor or the affiliate of a loan
originator or creditor that is not
contingent on referrals or on engaging in
loan origination activities other than
assisting a consumer in obtaining or
applying to obtain a residential
mortgage transaction, where such
compensation is expressly permitted by
applicable local, State, or Federal law
that requires counseling and the
counseling performed complies with
such law (for example, § 1026.34(a)(5)
and § 1026.36(k)) or where the
compensation is paid pursuant to an
agreement between the creditor or loan
originator (or either’s affiliate) and a
local, State, or Federal agency, would
not cause these persons to be considered
to be ‘‘advising on credit terms’’ within
the meaning of the loan originator
definition. The Bureau has added
comment 36(a)–1.v to clarify further that
such third-party advisors are not loan
originators.
The Bureau has adopted further
clarification in comment 36(a)–1.i.A.3 to
note that the phrase ‘‘assists a consumer
in obtaining or applying for consumer
credit by advising on credit terms
(including rates, fees, and other costs)’’
applies to ‘‘specific credit terms’’ rather
than ‘‘credit terms’’ generally. The
Bureau has also clarified the exclusion
for advising consumers on non-specific
credit terms and the loan process
generally from the definition of ‘‘loan
originator’’ for persons performing
management, administrative and
clerical tasks in comment 36(a)–4 as
discussed further below.
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TILA section 103(cc)(4) provides that
a person ‘‘assists a consumer in
obtaining or applying to obtain a
residential mortgage loan’’ by, among
other things, ‘‘preparing residential
mortgage loan packages.’’ The proposal
would have clarified ‘‘preparing
residential mortgage loan packages’’ in
comment 36(a)–1.i.A.3 by stating
‘‘preparing application packages (such
as credit or pre-approval application or
supporting documentation).’’
Many industry group, bank, and
manufactured housing finance
commenters stated that individuals
primarily engaged in ‘‘back-office’’
processing such as persons supervised
by a loan originator who compile and
assemble application materials and
supporting documentation to submit to
the creditor should not be considered
loan originators. A housing assistance
group and a State housing finance
agency indicated that HUD-approved
housing counselors often assist
consumers with collecting and
organizing documents for submitting
application materials to loan originators
or creditors. These commenters further
requested clarification regarding
whether housing counselors engaged in
these activities would be considered
loan originators.
The Bureau agrees that persons
generally engaged in loan processing or
who compile and process application
materials and supporting
documentation and do not take an
application, collect information on
behalf of the consumer, or communicate
or interact with consumers regarding
specific transaction terms or products
are not loan originators (see the separate
discussion above on taking an
application and collecting information
on behalf of the consumer).
Accordingly, while the Bureau is
adopting the phrase ‘‘preparing
application packages (such as credit or
pre-approval application or supporting
documentation)’’ as proposed, it also is
providing additional interpretation in
comment 36(a)–4 with respect to
persons who engage in certain
management, administrative, and
clerical tasks and are not included in
the definition of loan originator. The
Bureau believes this commentary
should clarify that persons providing
general application instruction to
consumers so consumers can complete
an application or persons engaged in
certain processing functions without
interacting or communicating with the
consumer regarding specific transaction
terms or products (other than
confirming terms that have already been
transmitted to the consumer in a written
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offer) are not included in the definition
of loan originator.
As discussed above regarding
advising on residential mortgage loan
terms and below in the discussion of
collecting information on behalf of the
consumer, the Bureau does not believe
the definition of loan originator
includes bona fide third-party advisors,
including certain housing counselors
that aid consumers in collecting and
organizing documents, or others who do
not receive compensation from a loan
originator, a creditor, or the affiliates of
a loan originator or a creditor in
connection with a consumer credit
transaction (or those who only receive
compensation paid to housing
counselors where counseling is required
by applicable local, State, or Federal law
and the housing counselors’ activities
are compliant with such law). This
interpretation is included in comment
36(a)–1.v.
TILA section 103(cc)(4) provides that
a person ‘‘assists a consumer in
obtaining or applying to obtain a
residential mortgage loan’’ by, among
other things, ‘‘collecting information on
behalf of the consumer with regard to a
residential mortgage loan.’’ (Emphasis
added.) The Bureau proposed to clarify
in comment 36(a)–1.i.A that the
definition of ‘‘loan originator’’ includes
assisting a consumer in obtaining or
applying for consumer credit by
‘‘collecting information on behalf of the
consumer to submit to a loan originator
or creditor.’’
Several industry associations, banks,
and manufactured housing finance
commenters sought clarification on
whether ‘‘collecting information on
behalf of the consumer to submit to a
loan originator or creditor’’ includes
persons engaged in clerical activities
with respect to such information. A
bank, a manufactured housing financer,
and an industry group commenter
argued that persons who contact the
consumer to collect application and
supporting information on behalf of a
loan originator or creditor should not be
subject to the rule. Many of these
commenters also suggested that
activities such as collecting information
would qualify for the exclusion from the
SAFE Act definition of loan originator
for ‘‘administrative or clerical tasks.’’
As discussed above, the Bureau
believes the Dodd-Frank Act definition
of loan originator is broader in most
ways than that in the SAFE Act. The
Bureau also believes, however, that
persons who, acting on behalf of a loan
originator or creditor, verify information
provided by the consumer in the credit
application, such as by asking the
consumer for documentation to support
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the information the consumer provided
in the application, or for the consumer’s
authorization to obtain supporting
documentation from third parties, are
not collecting information on behalf of
the consumer. Persons engaged in these
activities are collecting information on
behalf of the loan originator or creditor.
Furthermore, this activity is
administrative or clerical in nature as
discussed further in the managers,
administrative and clerical tasks
analysis below. However, collecting
information ‘‘on behalf of the
consumer’’ would include gathering
information or supporting
documentation from third parties on
behalf of the consumer to provide to the
consumer, for the consumer then to
provide in the application or for the
consumer to submit to the loan
originator or creditor, for compensation
or in expectation of compensation from
a loan originator, creditor, or an affiliate
of the loan originator or creditor.
Comment 36(a)–1.i.A.3 clarifies this
point.
The Bureau is finalizing comment
36(a)–1.i.A.3 to clarify that the
definition of ‘‘loan originator’’ includes
assisting a consumer in obtaining or
applying for consumer credit by
‘‘collecting information on behalf of the
consumer to submit to a loan originator
or creditor.’’ Thus, a person performing
these activities is a loan originator. The
Bureau is also providing additional
interpretation in comment 36(a)–4 with
respect to persons who engage only in
certain management, administrative,
and clerical tasks (i.e., typically loan
processors for the purposes of this
discussion) and are therefore not
included in the definition of loan
originator.
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
proposed to revise 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 stated in the section-bysection analysis of proposed
§ 1026.36(a) that the Bureau believes the
existing definition of ‘‘loan originator’’
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in § 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 noted
in the analysis 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 also stated in the analysis
that the Bureau believed this
clarification furthers TILA’s goal in
section 129B(a)(2) of ensuring that
responsible, affordable credit remains
available to consumers.
A commenter questioned whether
paid advertisers would be considered
loan originators under the proposal. The
Bureau believes a person performs the
activity described in the ‘‘advertises or
communicates’’ provision only if the
person, or an employee or affiliate of the
person, advertises that that person can
or will provide loan origination services
or activities. Thus, a person simply
publishing or broadcasting an
advertisement that indicates that a third
party can or will perform loan
origination services is not a loan
originator. The Bureau notes that the
more an advertisement is specifically
directed at and communicated to a
particular consumer or small number of
consumers only, the more the
advertisement could constitute a referral
and not an advertisement (see the
definition of referral in comment 36(a)–
1.i.A.1). The Bureau is finalizing
comment 36(a)–1.i.A.5 to accommodate
changes to surrounding proposed text as
follows: ‘‘The scope of activities covered
by the term loan originator includes:
* * * advertising or communicating to
the public that one can or will perform
any loan origination services.
Advertising the services of a third party
who engages or intends to engage in
loan origination activities does not make
the advertiser a loan originator.’’
TILA section 103(cc)(2)(B) does not
contain an express requirement that a
person must advertise for or in
expectation of compensation or gain to
be considered a ‘‘mortgage originator.’’
To the extent there is any uncertainty,
the Bureau relies on its exception
authority under TILA section 105(a) to
clarify that such a person must advertise
for or in expectation of compensation or
gain in return for the services advertised
to be a ‘‘loan originator.’’ Under TILA
section 103(cc)(2)(A), persons that
engage in one or more of the core
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‘‘mortgage originator’’ activities of the
statute and that do not receive or expect
to receive compensation or gain are not
‘‘mortgage originators.’’ The Bureau
believes that also applying the
compensation requirement to persons
who advertise that they can or will
perform ‘‘mortgage originator’’ activities
maintains consistency throughout the
definition of ‘‘mortgage originator.’’ This
result effectuates the purposes of TILA
in ensuring that responsible, affordable
mortgage credit remains available to
consumers and facilitates compliance by
reducing uncertainty.
Negotiates or otherwise obtains or
makes. TILA section 103(cc)(2) defines
‘‘mortgage originator’’ to include a
person who ‘‘negotiates’’ terms of a
residential mortgage loan. Existing
§ 1026.36(a)(1) contains ‘‘negotiates’’
and ‘‘otherwise obtains’’ in the
definition of ‘‘loan originator,’’ and the
Bureau proposed to retain the terms in
the definition. The Bureau did not
define ‘‘negotiates’’ or ‘‘otherwise
obtains’’ in the proposal except to state
that ‘‘arranges, negotiates, or otherwise
obtains’’ in the existing definition of
‘‘loan originator’’ already includes the
core elements of the term ‘‘mortgage
originator’’ in TILA section
103(cc)(2)(A).
The Bureau did not receive any
comments specific to the definition of
‘‘negotiates’’ or ‘‘otherwise obtains.’’
Consistent with the definition of
‘‘negotiates’’ in Regulation H and to
facilitate compliance, in comment
36(a)–1.i.A.4, the Bureau interprets
‘‘negotiates’’ as encompassing the
following activities: (1) Presenting for
consideration by a consumer particular
credit terms; or (2) communicating with
a consumer for the purpose of reaching
a mutual understanding about
prospective credit terms. The Bureau
also is including in the definition of a
loan originator the additional phrase ‘‘or
makes’’ to ensure that creditors that
extend credit without the use of table
funding, including those that do none of
the other activities described in the
definition in § 1026.36(a)(1)(i) but solely
provide the funds to consummate
transactions, are loan originators for
purposes of § 1026.36(f) and (g). As
discussed in more detail below, those
requirements are applicable to all
creditors engaged in loan origination
activities, unlike the other provisions of
§ 1026.36.
Manufactured Home Retailers
The definition of ‘‘mortgage
originator’’ in TILA section
103(cc)(2)(C)(ii) expressly excludes
certain employees of manufactured
home retailers if they assist a consumer
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in obtaining or applying to obtain a
residential mortgage loan by preparing
residential mortgage loan packages or
collecting information on behalf of the
consumer with regard to a residential
mortgage loan but do not take a
residential mortgage loan application,
do not offer or negotiate terms of a
residential mortgage application, and do
not advise a consumer on loan terms
(including rates, fees, and other costs).
The definition of ‘‘loan originator’’ in
existing § 1026.36(a)(1) does not address
such employees. The Bureau proposed
to implement the new statutory
exclusion by revising the definition of
‘‘loan originator’’ in § 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).
Many manufactured housing finance
commenters sought clarification on
whether retailers and their employees
would be considered loan originators.
The commenters stated that some
employees perform both sales activities
and loan origination activities, but
receive compensation characterized as a
commission for the sales activities only.
The Bureau notes that, under the statute
and proposed rule, a person who for
direct or indirect compensation engages
in loan origination activities is a loan
originator and that all forms of
compensation count for this purpose,
even if they are not structured as a
commission or other transactionspecific form of compensation (i.e.,
compensation includes salaries,
commissions, bonus, or any financial or
similar incentive regardless of the label
or name of the compensation as stated
in existing comment 36(d)(1)–1, which
this rulemaking recodifies as comment
36(a)–5). Thus, if a manufactured
housing retailer employee receives
compensation ‘‘in connection with’’ the
employee’s loan origination activities,
the employee is a loan originator,
regardless of the stated purpose or name
of the compensation. To clarify this
point further, the Bureau has revised
§ 1026.36(a)(1)(i) and comment 36(a)–
1.i.A to provide that, if a person receives
direct or indirect compensation for
taking an application, assisting a
consumer in obtaining or applying to
obtain, arranging, offering, negotiating,
or otherwise obtaining or making an
extension of consumer credit for another
person, the person is a loan originator.
A large number of manufactured
housing industry commenters stated
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that the Bureau should further clarify
what activities would be considered
‘‘assisting the consumer in obtaining or
applying to obtain’’ credit, ‘‘taking an
application,’’ ‘‘offering or negotiating
terms,’’ or ‘‘advising’’ on credit terms.
The Bureau has included several
clarifications of these elements of the
definition of ‘‘loan originator’’ in this
final rule in § 1026.36(a)(1)(i) and
comments 36(a)–1.i.A and 36(a)–4, as
discussed above.
One manufactured housing finance
commenter stated that, under the
proposed exclusion for employees of a
manufactured home retailer, employees
could be compensated, in effect, for
referring a consumer to a creditor
without becoming a loan originator. The
Bureau disagrees. The proposed
exclusion was for ‘‘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).’’
As discussed above and clarified in
comment 36(a)–1.i.A, the definition of
‘‘loan originator’’ includes referrals of a
consumer to another person who
participates in the process of originating
a credit transaction because referrals
constitute a form of ‘‘offering * * *
credit terms.’’ The one core activity that
the exclusion permits manufactured
housing retail employees to perform
without becoming loan originators,
‘‘[a]ssisting a consumer in obtaining or
applying to obtain’’ credit, has a
statutorily defined meaning that does
not include referring consumers to a
creditor. Thus, employees of
manufactured home retailers who refer
consumers to particular credit providers
would be considered loan originators if
they are compensated for such activity.
Many manufactured housing financer
commenters stated they were concerned
that all compensation paid to a
manufactured home retailer and its
employees could be considered loan
originator compensation and therefore
counted as ‘‘points and fees’’ in the
Board’s 2011 ATR Proposal and the
Bureau’s 2012 HOEPA Proposal. As
noted above, in the 2013 ATR
Concurrent Proposal, the Bureau is
seeking public comment on whether
additional clarification is necessary for
determining when compensation paid to
such loan originators must be included
in points and fees.
Creditors
Section 1401 of the Dodd-Frank Act
amended TILA to add section
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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 TILA section 129B(c)(1),
(2), and (4), which include restrictions
on compensation paid to loan
originators and are implemented in
§ 1026.36(d). As noted, however, the
TILA section 103(cc)(2)(F) exclusion
from these compensation provisions for
creditors does not apply to a tablefunded creditor. Accordingly, a tablefunded creditor that meets the
definition of a loan originator in a
transaction is subject to the
compensation restrictions. The proposal
noted this limited exclusion from the
compensation provisions and also noted
that TILA section 129B(b), added by
section 1402 of the Dodd-Frank Act,
imposes new qualification and loan
document unique identifier
requirements that apply to all creditors
that otherwise meet the definition of a
loan originator whether or not they
make use of table-funding. These new
requirements are implemented in
§ 1026.36(f) and (g), respectively.
Existing § 1026.36(a) includes a
creditor extending table-funded credit
transactions in the definition of a loan
originator. That is, a creditor who
originates the transaction but does not
finance the transaction at
consummation out of the creditor’s own
resources, including, for example, by
drawing on a bona fide warehouse line
of credit or out of deposits held by that
creditor, is a loan originator. The Bureau
proposed to amend the definition of
loan originator in § 1026.36(a)(1)(i) to
include all creditors, whether or not
they engage in table-funded
transactions, for purposes of § 1026.36(f)
and (g) only. The Bureau also proposed
to make technical amendments to
comment 36(a)-1.ii on table funding to
reflect the applicability of TILA section
129B(b)’s new requirements to such
creditors.
The Bureau received comments from
a manufactured housing industry group
and a manufactured housing financer
seeking clarification regarding whether
manufactured home retailers are tablefunded creditors, general TILA
creditors, or neither. These commenters
stated that the Bureau should
specifically clarify that manufactured
home retailers are not table-funded
creditors. These commenters noted that
manufactured home purchases are often
financed using retail installment sales
contracts. The commenters further
explained that the credit-sale form of
financing is the creditor’s choice and
not the retailer’s.
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Under the existing rule, manufactured
housing retailers that assign the retail
installment sales contract at
consummation to another person that
provides the funding directly are
already considered tabled-funded
creditors included in the definition of
loan originator for such transactions.
These table-funded creditors are subject
to the restrictions on compensation paid
to loan originators if the table-funded
creditor otherwise meets the definition
of a loan originator. The Dodd-Frank
Act did not provide a definition or
treatment of table-funded creditors that
differs from the existing rule, and the
Bureau believes it would be inconsistent
to exempt manufactured housing
retailers that act as table-funded
creditors from the restrictions on
compensation that apply to all tablefunded creditors that also meet the
definition of a loan originator.
To accommodate the applicability of
the new qualification and unique
identifier requirements to creditors, the
Bureau is defining ‘‘loan originator’’ in
§ 1026.36(a)(1)(i) and associated
comment 36(a)–1.i.A.2 to clarify that the
term includes persons who ‘‘make’’ an
extension of credit. The Bureau is also
revising § 1026.36(a)(1)(i) to clarify
further that all creditors engaging in
loan origination activities are loan
originators for purposes of § 1026.36(f)
and (g). The Bureau is adopting the
proposed clarification on the
applicability of the loan originator
compensation rules to creditors in tablefunded transactions and the technical
revisions as proposed.
Servicers
TILA section 103(cc)(2)(G) defines
‘‘mortgage originator’’ to exclude a
servicer or its employees, agents, or
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)).’’
This provision in 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
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the loan).’’ 65 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
[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).
Existing comment 36(a)–1.iii provides
that the definition of ‘‘loan originator’’
does not apply to a servicer when
modifying existing credit on behalf of
the current owner. The loan originator
definition only includes persons
involved in extending consumer credit.
Thus, modifications of existing credit,
which are not refinancings that involve
extinguishing existing obligations and
replacing them with a new credit
extension as described under
§ 1026.20(a), are not subject to the rule.
The Bureau’s proposal would have
amended comment 36(a)–1.iii to clarify
and reaffirm this distinction in
implementing the Dodd-Frank Act’s
definition of mortgage originator.
As stated in the supplementary
information of the proposal, the Bureau
believes the exception in TILA section
103(cc)(2)(G) applies to servicers and
servicer employees, agents, and
contractors only when engaging in
specified servicing activities with
respect to a particular transaction after
consummation, including loan
modifications that do not constitute
refinancings. The Bureau stated that it
does not believe that the statutory
exclusion was intended to shield from
coverage companies that intend to act as
servicers on transactions that they
originate when they engage in loan
origination activities prior to
consummation of such transactions or to
apply to servicers of existing mortgage
debts that engage in the refinancing of
such debts. The Bureau believes that
exempting such companies merely
because of the general status of
‘‘servicer’’ with respect to some credit
would be inconsistent with the general
purposes of the statute and create a large
potential loophole.
65 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).
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The Bureau’s rationale for the
proposed amendment to the comment
rested 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.’’ Considering the text
of this provision in combination with
the definition of ‘‘servicer’’ under
RESPA in 12 U.S.C. 2605(i)(2), a
servicer that is responsible for servicing
a mortgage debt or that extends
mortgage credit and services it is
excluded from the definition of
‘‘mortgage originator’’ for that particular
transaction after it 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 transaction
that does not yet exist. An extension of
credit that may be serviced 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.
In the section-by-section analysis of
the proposal, the Bureau further stated
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
of a credit extension until after
consummation of the transaction. A
person taking an application, assisting a
consumer in obtaining or applying to
obtain a mortgage transaction, offering
or negotiating terms of a transaction, or
funding the transaction prior to or at
consummation is a mortgage originator
or creditor (depending upon the
person’s role). Thus, a person that funds
a transaction from the person’s own
resources or a creditor engaged in a
table-funded transaction is subject to the
appropriate provisions in TILA section
103(cc)(2)(F) for creditors until the
person becomes responsible for
servicing the resulting debt obligation
after consummation. The Bureau
explained that this interpretation is also
consistent with the definition of ‘‘loan
originator’’ in existing § 1026.36(a) and
comment 36(a)–1.iii. If a loan
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modification by the servicer constitutes
a refinancing under § 1026.20(a), the
servicer is considered a loan originator
or creditor until after consummation of
the refinancing when responsibility for
servicing the refinanced debt arises.
The proposal’s supplementary
information stated the Bureau’s belief
that the second part of the statutory
servicer provision applies to individuals
(i.e., natural persons) who are
employees, agents, or contractors of the
servicer ‘‘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
noted 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
transaction 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).
In the supplementary information of
the proposal, the Bureau interpreted the
phrase ‘‘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 examples of the
types of activities the individuals are
permitted to engage in that satisfy the
purposes of TILA section 103(cc)(2)(G).
The Bureau explained, however, that
‘‘renegotiating, modifying, replacing and
subordinating principal of existing
mortgages’’ or any other related
activities does not extend to
refinancings, such that persons that
engage in a refinancing, as defined in
§ 1026.20(a), do qualify as loan
originators for the purposes of TILA
section 103(cc)(2)(G). Under the
Bureau’s view as stated in the proposal,
a servicer may modify an existing debt
obligation in several ways without being
considered a loan originator. A formal
satisfaction of the existing obligation
and replacement by a new obligation,
however, is a refinancing that involves
a new extension of credit.
The Bureau further interpreted 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
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Regulation Z, but the Bureau indicated
its belief in the proposal that the term
‘‘replacing’’ in this context means
replacing existing debt without also
satisfying the original obligation. For
example, two separate debt obligations
secured by a first- and second-lien,
respectively, may be ‘‘replaced’’ by a
single, new transaction with a reduced
interest rate and principal amount, the
proceeds of which do not satisfy the full
obligation of the prior debts. In such a
situation, the agreement for the new
transaction may stipulate that the
consumer remains responsible for the
outstanding balances that have not been
refinanced, if the consumer refinances
or defaults on the new transaction
within a stated period of time. This is
conceptually distinct from a refinancing
as described in § 1026.20(a), which
refers to situations where an existing
‘‘obligation is satisfied and replaced by
a new obligation.’’ 66 (Emphasis added.)
The Bureau reasoned in the
supplementary information of the
proposal that 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 1418 of the Dodd-Frank Act,
contains a required disclosure 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, prior to the Dodd-Frank
Act amendments, TILA 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 consumer is entitled to a
rebate upon ‘‘refinancing’’ an obligation
in full that involves a precomputed
finance charge. The Bureau stated for
these reasons its belief that, if Congress
intended ‘‘replacing’’ to include or
mean a ‘‘refinancing’’ of consumer
credit, Congress would have used the
existing term, ‘‘refinancing.’’ Instead,
66 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).
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without any additional guidance from
Congress, for the purposes of proposed
comment 36(a)–1.iii, the Bureau
deferred to the existing definition of
‘‘refinancing’’ in § 1026.20(a), where the
definition of ‘‘refinancing’’ requires both
replacement and satisfaction of the
original obligation as separate and
distinct elements of the defined term.
Furthermore, as the Bureau explained
in the proposal’s supplementary
information, the above interpretation of
‘‘replacing’’ better accords with the
surrounding statutory text in TILA
section 103(cc)(2)(G), 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) likely 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 stated in the proposal’s
supplementary information that 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. The Bureau further
stated that a broader interpretation that
excludes servicers and their employees,
agents, and contractors from those
protections solely by virtue of their
coincidental status as servicers would
not be the best reading of the statute as
a whole and likely would frustrate
rather than further congressional intent.
Indeed, as the Bureau also noted in
the supplementary information of the
proposal, if persons were not included
in the definition of mortgage originator
when making but prior to servicing a
transaction or based purely on a
person’s status as a servicer under the
definition of ‘‘servicer,’’ at least twothirds of mortgage creditors (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 creditors by volume either
hold or service loans they originated in
portfolio or retain servicing rights for
the loans they originate and sell into the
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secondary market.67 Under an
interpretation that would categorically
exclude a person who makes and also
services a transaction or whose general
‘‘status’’ is a ‘‘servicer,’’ these creditors
would be excluded as ‘‘servicers’’ from
the definition of ‘‘mortgage originator.’’
Further, their employees, agents, and
contractors would also be excluded
from the definition under this
interpretation.
The Bureau explained in the
proposal’s supplementary information
that 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
discussion above the top ten mortgage
creditors by origination and servicing
volume alone, as much as
approximately 61 percent of the nation’s
loan originators, could not only be
excluded from prohibitions on dual
compensation and compensation based
on transaction terms but also from the
new qualification requirements added
by the Dodd-Frank Act.
The Bureau’s proposed rule would
have amended comment 36(a)–1.iii, to
reflect the Bureau’s interpretation of the
statutory text as stated in the
supplementary information of the
proposal and again above, to facilitate
compliance, and to prevent
circumvention. In the supplementary
information, the Bureau also interpreted
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 would have clarified that the
definition of ‘‘loan originator’’ excludes
a servicer or a servicer’s employees,
agents, and contractors when offering or
negotiating terms of a particular existing
debt obligation on behalf of the current
owner for purposes of renegotiating,
67 For example, the top ten U.S. creditors 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 dollar
amounts). These same ten creditors held 60.8
percent of the market share for mortgage servicing.
1 Inside Mortg. Fin., The 2012 Mortgage Market
Statistical Annual 185–186 (2012) (these
percentages are based on dollar amounts). Most of
the largest creditors do not ordinarily sell their
originations into the secondary market with
servicing released.
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modifying, replacing, or subordinating
principal of such a debt where the
consumer is not current, is in default, or
has a reasonable likelihood of becoming
in default or not current. The Bureau
also proposed to amend comment 36(a)1.iii to clarify that § 1026.36 ‘‘only
applies to extensions of consumer credit
that constitute a refinancing under
§ 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
§ 1026.20(a).’’
Several industry groups and creditors
supported the Bureau’s approach to not
including servicers in the definition of
loan originator. Industry groups and
several large banks stated that the final
rule should make clear that the
definition of loan originator does not
include individuals facilitating loan
modifications, short sales, or
assumptions. An industry group
commenter indicated that the final rule
should clarify that persons who ‘‘offer’’
to modify an existing obligation should
also not be included in the definition of
loan originator. Other large banks and
industry groups stated that the final rule
should clarify that servicers include
persons who permit a new consumer to
assume an existing obligation.
Furthermore, they argued, the exclusion
for servicers should apply to companies
that, for example, pay off a lien on the
security property and allow the
consumer to repay the amount required
over time. A large secondary market
commenter also stated that comment
36(a)–1.iii should be further clarified to
include circumstances where the
servicer is modifying a mortgage
obligation on behalf of an assignee.
The Bureau is adopting
§ 1026.36(a)(1)(i)(E) to implement TILA
section 103(cc)(2)(G) consistent with the
analysis above, as well as comment
36(a)–1.iii as proposed with a few minor
clarifications to address issues raised by
several of the commenters. The final
rule amends comment 36(a)–1.iii to
clarify that the exclusion from the
definition of loan originator for a
‘‘servicer’’ also excludes the servicer’s
employees, agents, and contractors. The
final rule also revises the comment to
exclude persons who ‘‘offer’’ to modify
existing obligations from the definition
of loan originator. The Bureau is also
clarifying comment 36(a)–1.iii to
exclude servicers that modify the
obligations on behalf of an assignee or
that modify obligations the servicer
itself holds.
The Bureau continues to believe, as
noted in the supplementary information
of the proposal, that a formal
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satisfaction of the consumer’s existing
obligation and replacement by a new
obligation is a refinancing and not a
modification. But, short of refinancing,
a servicer may modify a mortgage
obligation without being considered a
loan originator. In both a short sale and
an assumption, there is no new
obligation for the consumer currently
obligated to repay the debt. The existing
obligation is effectively terminated from
that consumer’s perspective.
In a short sale the security property is
sold and the existing obligation is
extinguished. Thus, the Bureau believes
that a short sale constitutes a
modification of the existing obligation
assuming it is not being replaced by a
new obligation on the seller. If the
property buyer in the short sale receives
financing from the person who was
servicing the seller’s obligation, this
financing is a new extension of credit
that is subject to § 1026.36.
In an assumption, however, a
different consumer agrees to take on the
existing obligation. From this
consumer’s perspective the existing
obligation is a new extension of credit.
The Bureau believes such consumers
should be no less protected than the
original consumer who first became
obligated on the transaction. Therefore,
assumptions are subject to § 1026.36.
The Bureau is clarifying comment
36(a)–1.iii to provide that persons that
agree with a different consumer to
accept the existing debt obligation are
not servicers.
Regarding the comment that servicers
should include persons that pay off a
lien on the security property and allow
the consumer to repay the amount
required over time, the Bureau generally
does not interpret the ‘‘servicer’’
exclusion from the definition of loan
originator to apply to such persons. The
Bureau believes that, although paying
off the lien and permitting the consumer
to repay it over time is related to the
existing obligation, such a transaction
creates a new debt obligation of the
consumer to repay the outstanding
balance and is not a modification of the
existing obligation. But whether such a
person is a servicer also depends on the
terms of the note and security
instrument for the existing obligation. In
some instances, under the terms of the
existing agreement, an advance made by
the debt holder to protect or maintain
the holder’s security interest may
become part of the existing debt
obligation in which case such an
advance could effectively operate to
modify the existing obligation by adding
to the existing debt but not to create a
new debt obligation. The Bureau would
consider persons making advances
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under these circumstances, in
accordance with the existing agreement
to be servicers.
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.’’ As
the Bureau stated in the proposal, a real
estate broker that performs loan
origination activities or services as
described in § 1026.36(a) is a loan
originator for the purposes of
§ 1026.36.68 The Bureau proposed to
add comment 36(a)–1.iv to clarify that
the term loan originator does not
include real estate brokers that meet the
statutory exclusion in TILA section
103(cc)(2)(D).
The Bureau stated in the proposal that
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 to finance the
acquisition or sale of that dwelling (e.g.,
to purchase the dwelling or to finance
repairs to the property prior to selling
it). 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 also stated in the proposal
that it 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 the provisions of
68 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.
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TILA section 129B applicable to
mortgage originators to cover real estate
brokerage activity that is wholly
unrelated to a particular real estate
transaction involving a residential
mortgage loan. The Bureau concluded
that, 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
such as referring a consumer to a
mortgage originator or creditor as
discussed above (i.e., a referral is a
component of ‘‘offering’’ a residential
mortgage loan).
The Bureau included the following
example in the supplementary
information: Assume XYZ Bank pays a
real estate broker for a broker price
opinion in connection with a pending
modification or default of a mortgage
obligation 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. The
Bureau stated its belief that this real
estate broker is not a loan originator
under these facts. Proposed comment
36(a)–1.iv would have clarified this
point. The proposed comment would
also clarify 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 further noted in the
proposal’s supplementary information
that the definition of ‘‘mortgage
originator’’ in TILA section
103(cc)(2)(D) 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 stated its belief
that, if applicable State law defines real
estate brokerage activities to include
activities that fall within the definition
of loan originator in § 1026.36(a), the
real estate broker is a loan originator
when engaged in such activities subject
to § 1026.36 and is not a real estate
broker under TILA section 103(cc)(2)(D).
In this situation, even though State law
defines real estate brokerage activities to
include loan origination activities, TILA
section 103(cc)(2)(d) excludes only
persons who perform real estate
brokerage activities. A person
performing loan origination activities
does not become a person performing
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real estate brokerage activities for the
purposes of TILA section 103(cc)(2)(d)
because State law declares such loan
origination activities to be real estate
brokerage activities. The Bureau invited
comment on this proposed clarification
of the meaning of ‘‘loan originator’’ for
real estate brokers.
The Bureau received one comment
from a real estate broker trade
association generally agreeing with the
Bureau’s interpretation of the real estate
broker exclusion from the definition of
loan originator. The association also
commented, however, that the Bureau
should clarify that where a brokerage
earns a real estate commission for
selling a foreclosed property owned by
a creditor such compensation does not
turn real estate brokerage into loan
originator activity.
The Bureau is adopting
§ 1026.36(a)(1)(i)(C) to implement TILA
section 103(cc)(2)(D) in accordance with
the foregoing principles, as well as
comment 36(a)–1.iv as proposed with
additional clarification regarding
payments from the proceeds of a credit
transaction to a real estate agent on
behalf of the creditor or seller and with
respect to sales of properties owned by
a loan originator, creditor, or an affiliate
of a loan originator or creditor. The
Bureau agrees that where a real estate
broker earns a real estate commission
only for selling a foreclosed property
owned by a creditor such compensation
does not turn real estate brokerage into
a loan originator activity. But if, for
example, a real estate agent was paid
compensation by the real estate broker,
an affiliate of the creditor (e.g., the
affiliate is a real estate brokerage that
pays its real estate agents), for taking the
consumer’s credit application and
performing other functions related to
loan origination, the real estate agent
would be considered a loan originator
when engaging in such activity as set
forth in § 1026.36(a)(1) and comment
36(a)–1.i.A. Accordingly, different parts
of the commentary may apply
depending on the circumstances.
Seller Financers
As noted above, TILA section
103(cc)(2)(F) and § 1026.36(a)(1)
generally exclude creditors (other than
table-funded creditors) from the
definition of ‘‘loan originator’’ for most
purposes under § 1026.36. Under
existing Regulation Z, a person that sells
property and permits the buyer to pay
for the home in more than four
installments, subject to a finance charge,
generally is a creditor under
§ 1026.2(a)(17)(i). However,
§ 1026.2(a)(17)(v) provides that the
definition of creditor: (1) Does not
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include a person that extended credit
secured by a dwelling (other than highcost 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 § 1026.32) in any 12-month
period. Accordingly, absent special
provision, certain ‘‘seller financers’’ that
conduct a relatively small number of
transactions per year are not ‘‘creditors’’
under Regulation Z and therefore could
be subject to the loan originator
compensation and other restrictions
provided in § 1026.36 when engaging in
loan origination activities.
The Dodd-Frank Act specifically
addressed this issue in section 1401,
which amended TILA section
103(cc)(2)(E) to provide that the term
‘‘mortgage originator’’ does not include
a person, estate, or trust that provides
mortgage financing in connection with
the sale of up to three properties in any
twelve-month period, each of which is
owned by the person, estate, or trust and
serves as security for the financing, but
only if the financing meets a set of
detailed prescriptions. Specifically,
such seller-financed credit must:
(i) Not [be] 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)
[be] fully amortizing; (iii) [be] 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)
[have] 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) meet any other
criteria the Bureau may prescribe.
The Bureau proposed comment 36(a)–
1.v to implement these criteria. The
proposed comment provided that the
definition of ‘‘loan originator’’ does not
include a natural person, estate, or trust
that finances in any 12-month period
the sale of three or fewer properties
owned by such natural person, estate, or
trust where each property serves as
security for the credit transaction. It
further stated 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
proposed comment also stated that the
natural person, estate, or trust must
determine in good faith and document
that the buyer has a reasonable ability
to repay the credit transaction. Finally,
the proposed comment stated 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
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reasonable annual and lifetime
limitations on interest rate increases.
The Bureau also proposed to include
further interpretation in the comment as
to how a person may satisfy the
criterion to determine in good faith that
the buyer has a reasonable ability to
repay the credit transaction. The
comment would have provided that the
natural person, estate, or trust makes
such a good faith determination by
complying with separate regulations to
implement a general requirement under
section 1411 of the Dodd-Frank Act for
all creditors to make a reasonable and
good faith determination of consumers’
ability to repay before extending them
closed-end mortgage credit. Those
regulations, which were proposed by
the Board in its 2011 ATR Proposal and
which the Bureau intended to finalize in
§ 1026.43, contain detailed requirements
concerning the verification of income,
debts, and other information; payment
calculation rules; and other
underwriting practices. The Bureau
noted that the language of the general
obligation on creditors to consider
consumers’ ability to repay in TILA
section 129C(a)(1), largely parallels the
ability to repay criterion in the seller
financer language of TILA section
103(cc)(2)(E), except that the general
requirement mandates that the
evaluation be made on ‘‘verified and
documented’’ information.
While the Bureau proposed to
implement the statutory exclusion,
however, the Bureau also posited an
interpretation in the preamble to the
proposal that would have excluded
many seller financers from the
definition of ‘‘loan originator’’ without
having to satisfy the statutory criteria.
Specifically, the interpretation would
have treated persons who extend credit
as defined under Regulation Z from
their own resources (i.e., are not
engaged in table-funded transactions in
which they assign the seller financing
agreement at consummation) as
creditors for purposes of the loan
originator compensation rules even if
they were excluded from the first
branch of the Regulation Z definition of
‘‘creditor’’ under Regulation Z’s de
minimis thresholds (i.e., no more than
five mortgages generally). 77 FR at
55288. Under this interpretation, such
persons would not have been subject to
the requirements for ‘‘loan originators’’
under § 1026.36, and still would not
have been subject to other provisions of
Regulation Z governing ‘‘creditors.’’
Instead, the only seller financers that
would have been required to show that
they satisfied the statutory and
regulatory criteria were parties that
engaged in up to three transactions and
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did not satisfy the second branch of the
Regulation Z definition of creditor (i.e.
made more than one high-cost
mortgages per year.
The Bureau received a large number
of comments strongly opposing the
proposed treatment of the seller financer
exclusion. These comments noted that
seller financers are typically natural
persons who would be unable to satisfy
the ability to repay criteria of the
proposed exclusion given what the
commenters viewed as the complexities
involved in the ability to repay analysis
and the fact that consumers obtaining
seller financing typically do not meet
traditional underwriting standards. In
addition, several commenters stated that
the criterion to investigate ability to
repay may place the seller financer in an
unfair bargaining position with respect
to the real estate transaction because the
seller financer would have access to the
buyer’s financial information while also
negotiating the property sale. Moreover,
commenters asserted, an average private
seller cannot always provide financing
in compliance with the specific balloon,
interest-only, introductory period, and
amortization restrictions required by the
proposed exclusion. Some commenters
urged that seller financers should not be
prohibited from financing agreements
with these features.
Many commenters addressed the
merits of seller financing in general. For
example, some commenters noted that
seller financing creates an opportunity
for investors to buy foreclosed
properties and resell them to buyers
who cannot obtain traditional financing,
thus helping to reduce the inventory of
foreclosed properties via options
unavailable to most creditors and
buyers. Commenters additionally
indicated that seller financing is one of
only a few options in some cases,
especially for first-time buyers, persons
newly entering the workforce, persons
with bad credit due to past medical
issues, or where traditional creditors are
unwilling to take a security interest in
the property for various reasons. Many
of these commenters asserted that this
exclusion would curtail seller financing.
Thus, certain buyers would be forced to
seek financing from banks unlikely to
lend to them, and many rural sales
would not occur. Others argued that to
qualify for this exclusion seller
financers would need to meet onerous
TILA and Regulation Z requirements.
One escrow trade association
suggested that the Bureau increase the
de minimis exemption (regularly
extending credit threshold) for the
definition of creditor to 25 or fewer
credit transactions. Other trade
associations suggested that the Bureau
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create an exemption for occasional
seller financing similar to the SAFE
Act’s de minimis exemption for
depository institutions or the loan
originator business threshold for nondepository institutions. Furthermore,
these trade associations suggested that
the Bureau amend Regulation Z to
exempt anyone from the definition of
loan originator who is exempt from the
licensing and registration requirements
of the SAFE Act.
Many commenters who submitted a
comment on the seller financer
exclusion mistakenly believed that the
proposal would amend Regulation Z to
eliminate exclusions from the definition
of creditor for persons who do not
regularly extend credit and replace such
exclusions with the exclusion in
comment 36(a)–1.v. Many of these
commenters also mistakenly stated that
the exclusion would require all seller
financers to finance sales of their homes
according to the criteria in proposed
comment 36(a)–1.v.
In response to comments, the Bureau
is adopting the seller financer exclusion
set forth in the statute in
§ 1026.36(a)(1)(i)(D), with additional
clarifications, adjustments, and criteria
in § 1026.36(a)(4) and (a)(5) and
associated commentary discussed
below.
In the final rule, persons (including
estates or trusts) that finance the sale of
three or fewer properties in any 12month period would be seller financers
excluded from the definition of ‘‘loan
originator’’ if they meet one set of
criteria that largely tracks the criteria for
the mortgage financing exclusion in
TILA section 103(cc)(2)(E). This
exclusion is referred to as the ‘‘threeproperty exclusion.’’ Upon further
consideration the Bureau believes it is
also appropriate to exclude natural
persons, estates, or trusts that finance
the sale of only one property they own
in any 12-month period under a more
streamlined set of criteria provided in
§ 1026.36(a)(5). This exclusion is
referred to as the ‘‘one-property
exclusion.’’ The Bureau is not, however,
adopting the interpretation discussed in
the proposal that would have treated
only seller financers that engage in two
or three high-cost mortgage transactions
as being required to demonstrate
compliance with the requirements of the
rule to qualify for the exclusion from the
definition of loan originator. The criteria
for satisfying the three- and oneproperty exclusions are discussed in
detail in the section-by-section analyses
of § 1026.36(a)(4) and (5), below.
As discussed in the proposal, the
seller financer exclusion from the
definition of ‘‘loan originator’’ in the
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statute is in addition to exclusions
already available under TILA and
Regulation Z, specifically the exclusion
of creditors including seller financers
that engage in five or fewer such
transactions in a calendar year.
Moreover, the exclusion is only for the
purposes of provisions in § 1026.36 that
apply to loan originators. Any person
relying on the seller financer exclusion
is thereby excluded only from the loan
originator requirements of § 1026.36 and
not the remaining requirements of
§ 1026.36 or other provisions of
Regulation Z. For example, such a
person would still be subject to the
restrictions in § 1026.36(d) if the person
pays compensation to a loan originator.
Such a person would also have to
comply with the § 1026.36(h) provision
on mandatory arbitration.
In deciding to adopt two exclusions
from the definition of loan originator for
seller financers, the Bureau looked in
part to the purposes of the seller
financer exclusion in the statute, which
the Bureau believes was designed
primarily to accommodate persons or
smaller-sized estates or family trusts
with no, or less sophisticated,
compliance infrastructures. Such
persons and entities may engage in
seller financer transactions on just a
single or handful of properties, making
it impracticable for them to develop and
apply the types of underwriting
practices and standards that are used
routinely by traditional creditors. The
Bureau has accordingly attempted to
consider compliance burden and to
calibrate the criteria appropriately to
avoid unwarranted restrictions on
access to responsible, affordable
mortgage credit from such sources.
At the same time, the Bureau is also
aware of concerns that persons or
entities have been exploiting the
existing exclusion in § 1026.2(a)(17)(v)
of Regulation Z for persons that extend
credit secured by a dwelling (other than
high-cost mortgages) five or fewer times
in the preceding calendar year, and
might do the same with regard to this
exclusion from the definition of loan
originator under § 1026.36. In particular,
the Bureau has received reports that
persons may be recruiting multiple
individuals or creating multiple entities
to extend credit for five or fewer such
transactions each and then acquiring the
mortgages shortly after they have been
consummated. Such conduct may be
designed to evade the requirements of
Regulation Z. In these circumstances,
however, the person may in fact be
extending credit for multiple
transactions secured by a dwelling
through an intermediary, and thus be
subject to applicable requirements for
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creditors and/or loan originators under
Regulation Z.
Managers, Administrative, or Clerical
Staff
TILA section 103(cc)(2)(C) defines
‘‘mortgage originator’’ to exclude
persons who do not otherwise engage in
the core activities listed in the originator
definition and 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. In the proposal, the Bureau
stated that it believes the existing
comment is largely consistent with
TILA section 103(cc)(2)(C)’s treatment of
administrative and clerical tasks.
The Bureau proposed minor technical
revisions to existing comment 36(a)–4,
however, to conform the language more
closely to TILA section 103(cc)(2)C) by
including references to ‘‘clerical’’ staff
and to taking applications and offering
loan terms. The proposed revisions
would also clarify that ‘‘producing
managers’’ who meet the definition of a
loan originator would be considered
loan originators. The Bureau further
stated in the proposal that producing
managers generally are managers of an
organization (including branch
managers and senior executives) that, in
addition to their management duties,
also originate transactions subject to
§ 1026.36. Thus, compensation such as
salaries, commissions, bonuses, or other
financial or similar incentives received
by producing managers in connection
with loan origination activities would
be subject to the restrictions of
§ 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 loan originators if their
compensation is not otherwise based on
whether any particular loan is
originated (i.e., this exclusion from the
definition of loan originator does not
apply to non-producing managers who
receive compensation based on
particular transactions originated by
other loan originators).
The Bureau also noted in the proposal
that the statutory definition of the
phrase, ‘‘assists a consumer in obtaining
or applying to obtain a residential
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11311
mortgage loan,’’ suggests 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 transaction terms—constitute
administrative and clerical tasks. In
such situations, the person is not
actively aiding or further achieving a
completed credit application or
collecting information on behalf of the
consumer specific to a mortgage
transaction. In the proposal, the Bureau
stated its belief that this interpretation
was also consistent with the exclusion
in TILA section 103(cc)(2)(C)(i) for
certain administrative and clerical
persons.
Industry group and creditor
commenters addressing proposed
comment 36(a)–4 generally supported
the Bureau’s proposed revision.
However, many industry groups and
banks sought further clarification
regarding ‘‘producing managers.’’ One
bank commenter suggested that a
manager who arranges, negotiates, or
otherwise obtains an extension of
consumer credit for another person but
does not receive compensation specific
to any particular transaction should not
be considered a loan originator. Another
industry association commenter was
concerned that the proposal did not
contain a clear definition of ‘‘producing
manager.’’ The commenter noted that
officers and managers need to be
involved in loan originations from time
to time and that their compensation is
not directly based on such involvement
in an individual transaction. Another
industry association commenter
described the issue as defining the
boundary between a manager engaged in
customary credit approval functions or
setting terms in counter-offer situations,
which are more akin to underwriting,
and a manager actively arranging
transactions for consumers.
The Bureau generally agrees that a
person who approves credit transactions
or sets terms of the transaction in
counter-offer situations is not a loan
originator (and also not a ‘‘producing
manager’’)—provided any
communication to or with the consumer
regarding specific transaction terms, an
offer, negotiation, a counter-offer, or
approval conditions is made by a
qualified loan originator. Moreover,
persons who make underwriting
decisions by receiving and evaluating
the consumer’s information to
determine whether the consumer
qualifies for a particular credit
transaction or credit offer are considered
to be engaged in management,
administrative, or clerical tasks for the
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purposes of the rule if the persons only
advise the loan originator or creditor on
whether the credit may be extended or
purchased and all communications to or
with the consumer regarding specific
transaction terms, an offer, negotiation,
a counter-offer, or approval conditions
with the consumer are made by a loan
originator. Also, the Bureau considers
persons who establish pricing that the
creditor offers generally to the public,
via advertisements or other marketing or
via other persons who are qualified loan
originators, to be engaged in
management, administrative, or clerical
tasks rather than loan origination
activities. The Bureau is providing
further clarifications on these points
accordingly, in comment 36(a)–4.
The Bureau disagrees with the
commenter suggesting that a manager
who arranges, negotiates, or otherwise
obtains an extension of consumer credit
for another person but does not receive
compensation specific to any particular
transaction should not be considered a
loan originator. Persons who receive
compensation in connection with
engaging in such loan origination
activities, regardless of whether the
compensation is specific to any
particular transaction, are loan
originators. For this reason, for other
reasons discussed with respect to
profits-based compensation plans and
the new qualification and unique
document identifier requirements in
§ 1026.36(f) and (g), and for reasons
related to persons who perform other
activities in addition to loan origination
activities, the Bureau is revising
comments 36(a)–1.i, 36(a)–4, 36(a)–4.v,
and 36(a)–5 to clarify further that a
person, including a manager, who is
employed by a loan originator or
creditor (and thus receives
compensation from the employer) and
who engages in the foregoing loan
origination activities is a loan originator.
The Bureau is therefore removing
language referring to performance of
loan origination activities not in the
expectation of compensation because it
believes that such language created
circularity and could cause uncertainty
in applying the broader definition of
‘‘loan originator.’’
Industry trade associations, large and
small banks, and a credit union
requested in their comment letters
further clarification on whether certain
‘‘back-office’’ loan processing activities
would be considered assisting a
consumer in obtaining or applying to
obtain an extension of credit and thus
included in ‘‘arranging’’ or ‘‘otherwise
obtaining an extension of credit’’ for the
purposes of the ‘‘loan originator’’
definition. The Bureau believes that
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after a loan application has been
submitted by the consumer to the loan
originator or creditor, persons who: (1)
Provide general explanations or
descriptions in response to consumer
queries, such as explaining credit
terminology or policies, or describing
product-related services; (2) verify
information provided by the consumer
in the credit application, such as by
asking the consumer for supporting
documentation or the consumer’s
authorization to obtain supporting
documentation from other persons; or
(3) compile and assemble credit
application packages and supporting
documentation to submit to the creditor
while acting on behalf of a loan
originator or creditor are not
‘‘arranging’’ or ‘‘otherwise obtaining an
extension of credit’’ for the purposes of
the definition of ‘‘loan originator’’ as
described in more detail above. The
Bureau is adding specific discussions of
these activities to comment 36(a)–4.
Several industry group and bank
commenters stated that the final rule
should not apply to senior employees
who assist consumers only under
limited or occasional circumstances.
Similarly, these and other industry trade
association and bank commenters
asserted that the definition of loan
originator should not include any
employees who are not primarily and
regularly engaged in taking the
consumer’s application and offering or
negotiating transaction terms with
consumers. A large industry trade
association commenter and a bank
commenter indicated that the definition
of loan originator should not include
persons such as managers who originate
fewer than a de minimis number of
transactions per year, i.e., five and
twelve mortgages per year, respectively.
The Bureau believes that creating a
complete de minimis exclusion from the
mortgage originator restrictions of the
Dodd-Frank Act for any person
otherwise subject to them and involved
in the credit business would be
inconsistent with the statutory scheme.
TILA section 103(cc)(2) contains a
specific, conditional exclusion for seller
financers who engage in three
transactions or less in a 12-month
period. It seems doubtful that Congress
would have made that exclusion so
limited if it intended other persons who
are in the consumer credit business to
benefit from a general exclusion where
they participate in a perhaps even
greater number of transactions. Unlike
the licensing and registration provisions
of the SAFE Act (12 U.S.C. 5103) for
depositories and nondepositories
respectively, Congress did not provide
an explicit de minimis exclusion (see 12
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U.S.C. 5106(c)) or reference individuals
engaged in the ‘‘business’’ of loan
origination in the Dodd-Frank Act for
the new residential mortgage loan
origination qualification and
compensation requirements in section
129B(b) and (c) of TILA. In the DoddFrank Act, Congress merely referred to
persons engaging in mortgage originator
activities for compensation or gain with
one narrow exclusion for seller
financers not constructing or acting as a
contractor for the construction of a
residence on the property being
financed in the ordinary course of
business. Given the above, the Bureau
believes that a narrow exemption for
pooled compensation, for example, is
more appropriate than a wholesale
exclusion from the definition of loan
originator for persons otherwise
involved with the credit business.
The Bureau believes that the absence
of such an exclusion or exemption
further demonstrates that Congress
intended the definition of ‘‘mortgage
originator’’ in TILA, and thus the scope
of coverage of TILA’s compensation,
qualification, and loan document
unique identifier provisions, to be
broader than the somewhat similar
definition of ‘‘loan originator’’ in the
SAFE Act, which sets the scope of
coverage of the SAFE Act’s licensing
and registration requirements. The
Bureau therefore is not including in the
final rule an exemption from its
provisions for persons other than seller
financers engaged in a limited number
of credit transactions per year. The
Bureau further believes that declining to
create such a de minimis exemption for
other persons provides protections for
consumers that outweigh any other
public benefit that an exemption might
provide. However, as discussed in more
detail in the section-by-section analysis
of § 1026.36(d)(1)(iv), the Bureau
believes that a limited de minimis
exemption from the prohibition on
compensation based on a term of a
transaction for participation in profitsbased compensation plans is
appropriate for loan originators who
originate ten or fewer loans in a twelvemonth period.
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
clarifications in the regulation that the
Bureau proposed (and now is adopting),
necessitate a distinction between loan
originators who are natural persons and
those that are organizations. The Bureau
therefore proposed to establish the
distinction by creating new definitions
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for ‘‘individual loan originator’’ and
‘‘loan originator organization’’ in new
§ 1026.36(a)(1)(ii) and (iii). Proposed
§ 1026.36(a)(1)(ii) would have defined
an individual loan originator as a
natural person that meets the definition
of loan originator in § 1026.36(a)(1)(i).
Proposed § 1026.36(a)(1)(iii), in turn,
would have defined a loan originator
organization as any loan originator that
is not an individual loan originator.
The Bureau proposed 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. As
discussed in the supplementary
information of the proposed rule, the
Bureau understands that States have
recognized many new business forms
over the past 10 to 15 years. The Bureau
believed that the additional examples
provided in the proposal should help to
facilitate compliance with § 1026.36 by
clarifying the types of persons that fall
within the definition of ‘‘loan originator
organization.’’ The Bureau invited
comment on whether other examples
would be helpful for these purposes.
The Bureau received very few
comments on the proposed definitions
for individual loan originator and loan
originator organization. One creditor
commenter thought that the additional
definitions would add further
complexity to describe the various
persons acting in the mortgage market.
This commenter thought the proposal
should return to the definitions that
existed in the TILA and Regulation Z
framework prior to issuance by the
Board of its 2010 Loan Originator Final
Rule. That is, this commenter argued,
the Bureau should use the terms
‘‘individual loan originator’’ or
‘‘individual loan officer’’ and either
‘‘mortgage broker’’ or ‘‘creditor’’ as
appropriate.
The Bureau is adopting
§ 1026.36(a)(1)(ii) and (iii) as proposed.
The Bureau is also adopting comment
36(a)–1.i.B largely as proposed but with
the further clarification that ‘‘loan
originator organization’’ includes any
legal existence other than a natural
person. The comment is also adopted in
comment 36(a)–1.i.D instead of
comment 36(a)–1.i.B as proposed. The
Bureau is using the terms ‘‘individual
loan originator’’ and ‘‘loan originator
organization’’ to facilitate use of the
Bureau’s authority to permit loan
originator organizations to share
compensation on a particular
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transaction with individual loan
originators. Moreover, creditors
occasionally act as mortgage brokers and
are considered loan originators in their
own right for purposes of the
qualification and unique identifier
provisions in § 1026.36(f) and (g).
Accordingly, the Bureau believes use of
the terms is appropriate and necessary
to allow greater precision and to
facilitate compliance with the statutory
and regulatory requirements.
36(a)(2) Mortgage Broker
TILA section 129B(b)(1) imposes new
substantive requirements on all
mortgage originators, including
creditors involving qualification
requirements and the requirement to
include a unique identifier on loan
documents, which the Bureau is
proposing to implement in § 1026.36(f)
and (g). The compensation restrictions
applicable to loan originators in existing
§ 1026.36 also applied to creditors
engaged in table-funded transactions.
Existing § 1026.36(a)(2) defines
‘‘mortgage broker’’ as ‘‘any loan
originator that is not an employee of the
creditor.’’ This definition would include
creditors engaged in table-funded
transactions. The Bureau therefore
proposed a conforming amendment to
exclude creditors for table-funded
transactions from the definition of
‘‘mortgage broker’’ even though for
certain purposes such creditors are loan
originators to accommodate the new
qualification and unique identifier
requirements. Proposed § 1026.36(a)(2)
provided that a mortgage broker is ‘‘any
loan originator that is not a creditor or
the creditor’s employee.’’
The Bureau did not receive any
comment on this proposal. The Bureau,
however, is not revising the definition
of ‘‘mortgage broker’’ as proposed. The
revisions made by this final rule to the
definition of ‘‘loan originator’’ in
§ 1026.36(a)(1)(i) accommodate creditors
engaged in table-funded transactions
and other creditors for the purposes of
applying the new substantive
requirements in § 1026.36(f) and (g) and
the remaining requirements of § 1026.36
generally. Conforming amendments to
existing § 1026.36(a)(2) are no longer
necessary.
36(a)(3) Compensation
Sections 1401 and 1403 of the DoddFrank Act contain multiple references to
the term ‘‘compensation’’ but do not
define the term. The existing rule does
not define the term in regulatory text.
Existing comment 36(d)(1)–1, however,
provides interpretation on the meaning
of compensation.
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11313
Definition of Compensation and
Comment 36(a)–5.i and ii
Existing comment 36(d)(1)–1.i
provides that 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. The Bureau
proposed to define the term
‘‘compensation’’ in new § 1026.36(a)(3)
to include ‘‘salaries, commissions, and
any financial or similar incentive
provided to a loan originator for
originating loans,’’ intending this
definition to be consistent with the
interpretation in the existing
commentary in 36(d)(1)–1.i, as
explained in the proposal. Consistent
with this proposed definition, proposed
comment 36(a)–5.i stated that
compensation is defined in
§ 1026.36(a)(3) as salaries, commissions,
and any financial or similar incentive
provided to a person for engaging in
loan origination activities. Existing
comment 36(d)(1)–1.i also provides
examples of compensation, and those
provisions would have been transferred
to proposed comment 36(a)–5.i without
revision.
Existing comment 36(d)(1)–1.ii
clarifies that 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. The Bureau proposed to
transfer these provisions to new
proposed comment 36(a)–5.ii without
revision.
To clarify the intent of the definition
of compensation, the final rule revises
the definition in § 1026.36(a)(3) to
include ‘‘salaries, commissions, and any
financial or similar incentive’’ without
specifying ‘‘provided to a loan
originator for originating loans.’’ The
Bureau believes that the definition of
‘‘compensation’’ adopted in the final
rule is more consistent with the intent
and wording of the existing
interpretation on the meaning of
compensation set forth in existing
comment 36(d)(1)–1.i, and is less
circular when viewed in conjunction
with the definition of ‘‘loan originator.’’
Consistent with the definition of
‘‘compensation’’ as adopted in
§ 1026.36(a)(3), the final rule revises
comment 36(a)–5.i to reflect that
compensation is defined in
§ 1026.36(a)(3) as salaries, commissions,
and any financial or similar incentive.
The final rule also revises comment
36(a)–5.ii to reflect that the definition of
compensation in § 1036(a)(3) applies to
§ 1026.36 generally, including
§ 1026.36(d) and (e).
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Third-Party Charges and Charges for
Services That Are Not Loan Origination
Activities
Existing comment 36(d)(1)–1.iii
provides that compensation includes
amounts the loan originator retains, but
does not include amounts the originator
receives as payments for bona fide and
reasonable third-party charges, such as
title insurance or appraisals. The Bureau
proposed to revise existing comment
36(d)(1)–1.iii (redesignated as proposed
comment 36(a)–5.iii) to make more clear
that the term ‘‘third party’’ does not
include the creditor, its affiliates, or the
affiliates of the loan originator.
Specifically, proposed comment 36(a)–
5.iii would have clarified that the term
‘‘compensation’’ as used in § 1026.36
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.
The proposed revisions would have
been consistent with provisions set forth
in TILA section 129B(c)(2) concerning
exceptions to the general prohibition on
dual compensation for payments made
to bona fide third-party service
providers, as added by section 1403 of
the Dodd-Frank Act. Specifically, TILA
section 129B(c)(2)(A) provides that, for
any mortgage loan,69 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, TILA section
129B(c)(2)(B) provides that a mortgage
originator may receive an origination fee
69 TILA section 129B(c)(2) uses the term
‘‘mortgage loan’’ rather than the ‘‘residential
mortgage loan’’ used in TILA section 129B(c)(1),
which generally prohibits compensation from being
paid to loan originators based on loan terms.
Nonetheless, the Bureau believes that the
restrictions in TILA section 129B(c)(2) are limited
to ‘‘residential mortgage loans’’ because TILA
section 129B(c)(2) applies to mortgage originators.
The definition of ‘‘mortgage originator’’ in TILA
section 103(cc)(2) generally means a person who for
compensation takes a residential mortgage loan
application; assists a consumer in obtaining or
applying to obtain a residential mortgage loan, or
offers or negotiates terms of a residential mortgage
loan.
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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 of
§ 1026.36(d)(2), the proposal interpreted
‘‘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 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 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), under proposed
§ 1026.36(d)(2)(i) and proposed
comment 36(a)–5.iii, a loan originator
that receives compensation directly
from a consumer would not have been
restricted under proposed
§ 1026.36(d)(2)(i) from receiving 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. In addition, a loan
originator would not be deemed to be
receiving compensation directly from a
consumer for purposes of proposed
§ 1026.36(d)(2)(i) where the originator
imposes such a bona fide and
reasonable third-party charge on the
consumer.
Like existing comment 36(d)(1)–1,
proposed comment 36(a)–5.iii also
would have recognized that, in some
cases, amounts received for payment for
such third-party charges may exceed the
actual charge because, for example, the
loan originator cannot determine with
accuracy 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 have been deemed
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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
loan originator marks up a third-party
charge and retains the difference
between the actual charge and the
marked-up charge, the amount retained
would have been compensation for
purposes of § 1026.36(d) and (e).
Proposed comment 36(a)–5.iii, like
existing comment 36(d)(1)–1.iii, would
have contained two illustrations. The
illustrations in proposed comment
36(a)–5.iii.A and B would have been
similar to the ones contained in existing
comment 36(d)(1)–1.iii.A and B except
that the illustrations would have been
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 would have
simplified the existing illustrations.
The Bureau solicited comment on
proposed comment 36(a)–5.iii.
Specifically, the Bureau requested
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 unambiguously
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 solicited 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.
Several industry commenters
suggested that the definition of
‘‘compensation’’ in § 1026.36(a)(3)
should exclude payments to loan
originators for services other than core
loan origination services, such as title
insurance or appraisal, regardless of
whether the loan originator, creditor, or
affiliates of either are providing these
services, so long as the amount charged
for those services are bona fide and
reasonable. Other industry commenters
suggested that the Bureau specifically
exclude bona fide and reasonable
affiliate fees from the definition of
‘‘compensation’’ in § 1026.36(a)(3).
These commenters argued that there is
no basis for a distinction between
affiliate and non-affiliate charges. These
commenters also argued that a
requirement that both affiliate and nonaffiliate charges be bona fide and
reasonable would be sufficient to
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protect consumers. In addition, several
commenters stated that affiliated
business arrangements are expressly
permitted and regulated by RESPA. One
commenter further argued that the
Bureau’s proposal discourages the use of
affiliates, which undercuts a goal of the
Bureau’s 2012 TILA–RESPA Proposal to
increase certainty around the costs
imposed by affiliated providers by
providing for a zero tolerance for
settlement charges of affiliated entities.
Another commenter stated that fees paid
to affiliated parties for services such as
property insurance, home warranties
(both service contract and insurance
products), and similar services should
be excluded from the definition of
‘‘compensation’’ in the same manner as
third-party charges. The commenter
stated that all of these types of services
relate to the purchase of a home, and are
traditionally purchased or maintained
regardless of whether the home
purchase is financed. Therefore, the
commenter suggested that these types of
services are clearly not related to core
loan origination services, i.e., taking an
application, assisting in obtaining a
loan, or offering/negotiating loan terms.
Certain industry commenters also
expressed particular concern that
affiliated title charges were not
explicitly excluded from the definition
of ‘‘compensation.’’ These commenters
stated that there is no rational basis for
not explicitly excluding affiliated title
charges from the definition of
‘‘compensation’’ because, for example,
title insurance fees are regulated at the
State level either through statutorily
prescribed rates or through a
requirement that title insurance
premiums be publicly filed. These
commenters noted that, as a result of
State regulation, there is little variation
in title insurance charges from provider
to provider and such charges are not
subject to manipulation. In a variation
of the argument that the Bureau
generally should exclude affiliate
charges from the definition of
‘‘compensation,’’ some industry
commenters suggested that the Bureau
should adopt a specific exclusion for
affiliates’ title fees to the extent such
fees are otherwise regulated at the State
level, or to the extent that such charges
are reasonable and do not exceed the
cost for an unaffiliated issuers title
insurance.
With respect to third-party charges,
the final rule adopts comment 36(a)–
5.iii substantially as proposed, except
that the interpretation discussing
situations where the amounts received
for payment for third-party charges
exceeds the actual charge has been
moved to comment 36(a)–5.v, as
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discussed in more detail below. The
Bureau notes that comment 36(a)–5.iii
uses the term ‘‘bona fide and
reasonable’’ to describe third-party
charges. As in the 2013 ATR Final Rule
and 2013 HOEPA Final Rule, in
response to commenters’ concerns that
the ‘‘reasonableness’’ of third-party
charges may be second-guessed, the
Bureau notes its belief that the fact that
a transaction for such third-party
services is conducted arms-length
ordinarily should be sufficient to make
the charge reasonable.
In addition, based on comments
received and the Bureau’s own analysis,
the final rule revises comment 36(a)–
5.iv to clarify whether payments for
services that are not loan origination
activities are compensation under
§ 1026.36(a)(3). As adopted in the final
rule, comment 36(a)–5.iv.A clarifies that
the term ‘‘compensation’’ for purposes
of § 1026.36(a)(3) does not include: (1)
A payment received by a loan originator
organization for bona fide and
reasonable charges for services it
performs that are not loan origination
activities; (2) a payment received by an
affiliate of a loan originator organization
for bona fide and reasonable charges for
services it performs that are not loan
origination activities; or (3) a payment
received by a loan originator
organization for bona fide and
reasonable charges for services that are
not loan origination activities where
those amounts are not retained by the
loan originator organization but are paid
to the creditor, its affiliate, or the
affiliate of the loan originator
organization. Comment 36(a)–5.iv.C as
adopted clarifies that loan origination
activities for purposes of that comment
means activities described in
§ 1026.36(a)(1)(i) (e.g., taking an
application, offering, arranging,
negotiating, or otherwise obtaining an
extension of consumer credit for another
person) that would make a person
performing those activities for
compensation a loan originator as
defined in § 1026.36(a)(1)(i).
The Bureau recognizes that loan
originator organizations or their
affiliates may provide services to
consumers that are not loan origination
activities, such as title insurance, if
permitted by State and other applicable
law. If the term ‘‘compensation’’ for
purposes of § 1026.36(a)(3) were applied
to include amounts paid by the
consumer or a person other than the
consumer for services that are not loan
origination activities, the loan originator
organization or its affiliates could be
restricted under § 1026.36(d)(1) and
(d)(2) from being paid for those services.
For example, assume a loan originator
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organization provides title insurance
services to consumers and that title
insurance is required on a transaction
and thus is a term of the transaction
under § 1026.36(d)(1)(ii). In addition,
assume the loan originator organization
receives compensation from the creditor
in a transaction. If compensation for
purposes of § 1026.36(a)(3) included
amounts paid for these services by
consumers to the loan originator
organization, the payment of the charge
to the loan originator organization for
title insurance services would be
prohibited by § 1026.36(d)(1) because
the amount of the loan originator
organization’s compensation would
increase based on a term of the
transaction, namely the fact that the
consumer received the title insurance
services from the loan originator instead
of a third party. In addition, the loan
originator organization would be
prohibited by the dual compensation
provisions in § 1026.36(d)(2)
(redesignated as § 1026.36(d)(2)(i)) from
both collecting the title insurance fee
from the consumer, and also receiving
compensation from the creditor for this
transaction.
Likewise, assume the same facts,
except that the loan originator
organization’s affiliate provided the title
insurance services to the consumer. The
amount of any payment to the affiliate
directly or through the loan originator
organization for the title insurance
would be considered compensation to
the loan originator organization because
under § 1026.36(d)(3) the loan originator
organization and its affiliates are treated
as a single person. Thus, if
compensation for purposes of
§ 1026.36(a)(3) included amounts paid
for the title insurance services to the
affiliate, the affiliate could not receive
payment for the title insurance services
without the loan originator organization
violating § 1026.36(d)(1) and (d)(2).
The Bureau also recognizes that loan
originator organizations may receive
payment for services that are not loan
origination activities where those
amounts are not retained by the loan
originator but are paid to the creditor,
its affiliate, or the affiliate of the loan
originator organization. For example,
assume a loan originator organization
receives compensation from the creditor
in a transaction. Further assume the
loan originator organization collects
from the consumer $25 for a credit
report provided by an affiliate of the
creditor, and this fee is bona fide and
reasonable. Assume also that the $25 for
the credit report is paid by the
consumer to the loan originator
organization but the loan originator
organization does not retain this $25.
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Instead, the loan originator organization
pays the $25 to the creditor’s affiliate for
the credit report. If the term
‘‘compensation’’ for purposes of
§ 1026.36(a)(3) included amounts paid
by the consumer or a person other than
the consumer for such services that are
not loan origination activities, the loan
originator organization would be
prohibited by § 1026.36(d)(2)
(redesignated as § 1026.36(d)(2)(i)) from
both collecting this $25 fee from the
consumer, and also receiving
compensation from the creditor for this
transaction.
The Bureau believes that it is
appropriate for loan originator
organizations and their affiliates to
receive payments for services that are
not loan origination activities, as
described above, so long as the charge
imposed on the consumer or collected
from a person other than the consumer
for these services is bona fide and
reasonable. The Bureau believes that the
bona fide and reasonable standards will
provide sufficient protection to prevent
loan originator organizations from
circumventing the restrictions in
§ 1026.36(d)(1) and (2) by disguising
compensation for loan origination
activities within ancillary service
charges.
The Bureau notes, however, that the
final rule does not allow individual loan
originators to distinguish between
payments they receive for performing
loan origination activities and payments
purportedly being received for
performing other activities. Comment
36(a)–5.iv.B as adopted in the final rule
makes clear that compensation includes
any salaries, commissions, and any
financial or similar incentive provided
to an individual loan originator,
regardless of whether it is labeled as
payment for services that are not loan
origination activities. The Bureau
believes that allowing individual loan
originators to distinguish between these
two types of payments would promote
circumvention of the restrictions on
compensation in § 1026.36(d)(1) and (2).
For example, if an individual loan
originator were allowed to exclude from
the definition of ‘‘compensation’’
payments to it by the loan originator
organization by asserting that this
payment was received for performing
activities that are not loan origination
activities, a loan originator organization
and/or the individual loan originator
could disguise compensation for loan
origination activities by simply labeling
those payments as received for activities
that are not loan origination activities.
The Bureau believes that it would be
difficult for compliance and
enforcement purposes to determine
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whether the payments that were labeled
as received for activities that are not
loan origination activities were
legitimate payment for those activities
or whether these payments were labeled
as payments for activities that are not
loan origination activities merely to
evade the restrictions in § 1026.36(d)(1)
and (2).
The Bureau further notes that the
additional interpretation in comment
36(a)–5.iv as adopted in the final rule
does not permit a loan originator
organization or an individual loan
originator to receive compensation
based on whether the consumer obtains
an ancillary service from the loan
originator organization or its affiliate if
that service is a term of the transaction
under § 1026.36(d)(1). For example,
assume that title insurance is required
for a transaction and thus is a term of
the transaction under § 1026.36(d)(1)(ii).
In this case, a loan originator
organization would be prohibited under
§ 1026.36(d)(1) from charging the
consumer compensation of 1.0 percent
of the loan amount if the consumer
obtains title insurance from the loan
originator organization, but charging the
consumer 2.0 percent of the loan
amount if the consumer does not obtain
title insurance from the loan originator
organization. Likewise, in that
transaction, an individual loan
originator would be prohibited under
§ 1026.36(d)(1) from receiving a larger
amount of compensation from the loan
originator organization if the consumer
obtained title insurance from the loan
originator organization as opposed to
obtaining title insurance from a third
party.
As discussed above, the final rule
moves the interpretation in proposed
comment 36(a)–5.iii discussing
situations where the amounts received
for payment for third-party charges
exceeds the actual charge to comment
36(a)–5.v, and revises it. The final rule
also extends this interpretation to
amounts received by the loan originator
organization for payment for services
that are not loan origination activities
where those amounts are not retained by
the loan originator but are paid to the
creditor, its affiliate, or the affiliate of
the loan originator organization.
Specifically, as discussed above,
comment 36(a)–5.iii as adopted in the
final rule clarifies that the term
‘‘compensation’’ as used in § 1026.36
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
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the loan originator. In addition,
comment 36(a)–5.iv.A.3 clarifies that
compensation does not include the
amount the loan originator organization
receives as payment for bona fide and
reasonable charges for services that are
not loan origination activities where
those amounts are not retained by the
loan originator but are paid to the
creditor, its affiliate, or the affiliate of
the loan originator organization.
Comment 36(a)–5.v notes that, in some
cases, amounts received by the loan
originator organization for payment for
third-party charges described in
comment 36(a)–5.iii or payment for
services to the creditor, its affiliates, or
the affiliates of the loan originator
organization described in comment
36(a)–5.iv.A.3 may exceed the actual
charge because, for example, the loan
originator organization cannot
determine with accuracy what the
actual charge will be when it is imposed
and instead uses average charge pricing
(in accordance with RESPA). In such a
case, comment 36(a)–5.v provides that
the difference retained by the loan
originator organization is not
compensation if the 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 loan originator
organization marks up the charge (a
practice known as ‘‘upcharging’’), and
the loan originator organization retains
the difference between the actual charge
and the marked-up charge, the amount
retained is compensation for purposes
of § 1026.36, including § 1026.36(d) and
(e). Comment 36(a)–5.v as adopted in
the final rule contains two examples
illustrating this interpretation.
Returns on Equity Interests and
Dividends on Equity Holdings
In the proposal, the Bureau proposed
new comment 36(a)–5.iv to clarify that
the definition of compensation for
purposes of § 1026.36(d) and (e)
includes stock, stock options, and
equity interests that are provided to
individual loan originators and that, as
a result, the provision of stock, stock
options, or equity interests to individual
loan originators is subject to the
restrictions in § 1026.36(d) and (e). The
proposed comment would have further
clarified that bona fide returns or
dividends paid on stock or other equity
holdings, including those paid to loan
originators who own such stock or
equity interests, are not considered
compensation for purposes of
§ 1026.36(d) and (e). The comment
would have explained that: (1) Bona
fide returns or dividends are those
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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
transaction 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
would have given 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 § 1026.36(d) and (e). The Bureau
stated that it believed the clarification
provided by proposed comment 36(a)–
5.iv was 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
§ 1026.36(d) and (e).
The Bureau invited comment on
proposed comment 36(a)–5.iv and on
whether other forms of corporate
structure or returns on ownership
interest should have been specifically
addressed in the definition of
‘‘compensation.’’ The Bureau also
sought comment generally on other
methods of providing incentives to loan
originators that the Bureau should have
considered specifically addressing in
the proposed interpretation of the term
‘‘compensation.’’ The Bureau received
only one comment substantively
addressing the issues raised in the
proposed comment. A State credit union
trade association commented that the
proposed redefinition of compensation
to include stock, stock options, and
equity interests that are provided to
individual loan originators would
‘‘exponentially’’ increase the cost of
record retention because, the
commenter argued, the records must be
retained for each individual loan
originator. The association believed the
proposed three-year retention
requirement in § 1026.25(c)(2) would
not otherwise be problematic but for the
revised definition of compensation.
The Bureau has not made any changes
in response to this commenter. The
Bureau disagrees with the commenter
that the proposed redefinition of
compensation to include stock, stock
options, and equity interests that are
provided to individual loan originators
would increase the costs of record
retention at all, let alone an
‘‘exponential’’ amount. The Bureau
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believes that records evidencing the
award of stock and stock options are no
more difficult and expensive to retain
than records evidencing payment of
cash compensation, particularly if such
awards are made pursuant to a stock
options plan or similar company-wide
plan. Moreover, the awarding of equity
interests to an individual loan originator
by a creditor or loan originator
organization presumably would be
documented by an LLC agreement or
similar legal document, which can be
easily and inexpensively retained (as
can the records of any distributions
made under the LLC or like agreement).
Accordingly, the Bureau is adopting
the substance of proposed comment
36(a)–5.iv (but codified as comment
36(a)–5.vi because of additional new
comments being adopted) as proposed,
with two changes. First, comment 36(a)–
5.vi references ‘‘loan originators’’ rather
than ‘‘individual loan originators’’
whereas the proposal language used
such terms inconsistently. Reference to
‘‘loan originators’’ is appropriate to
account for the possibility that the
comment could, depending on the
circumstances, apply to a loan
originator organization or an individual
loan originator. Second, comment 36(a)–
5.vi now includes an additional
clarification about what constitutes
‘‘bona fide’’ ownership and equity
interests. The proposed comment would
have clarified that the term
‘‘compensation’’ for purposes of
§ 1026.36(d) and (e) does not include
bona fide returns or dividends paid on
stock or other equity holdings. The
proposed comment would have clarified
further that returns or dividends are
‘‘bona fide’’ if they are paid pursuant to
documented ownership or equity
interests, if they are not functionally
equivalent to compensation, and if the
allocation of bona fide ownership and
equity interests according to capital
contributions is not a mere subterfuge
for the payment of compensation based
on transaction terms. In addition to
these clarifications which the Bureau is
adopting as proposed, the final
comment clarifies that ownership and
equity interests are not ‘‘bona fide’’ if
the formation or maintenance of the
business organization from which
returns or dividends are paid is a mere
subterfuge for the payment of
compensation based on the terms of
transactions. The Bureau believes this
additional language is necessary to
prevent evasion of the rule through the
use of corporations, LLCs, or other
business organizations as vehicles to
pass through payments to loan
originators that otherwise would be
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11317
subject to the restrictions of § 1026.36(d)
and (e).
36(a)(4) Seller Financers; Three
Properties
In support of the exclusion for seller
financers in § 1026.36(a)(1)(i)(D)
discussed above, under the statute’s
exclusion incorporated with
clarifications, adjustments, and
additional criteria into the rule as the
three-property exclusion in
§ 1026.36(a)(4), a person (as defined in
§ 1026.2(a)(22), to include an estate or
trust) that meets the criteria in
§ 1026.36(a)(4) is not a loan originator
under § 1026.36(a)(1).70 In
§ 1026.36(a)(4) the Bureau has largely
preserved the statutory criteria for the
seller financer exclusion but with some
alternatives to reduce complexity and
facilitate compliance, while balancing
the needs of consumers, including by
adding three additional criteria.
The first criterion is that the person
provides seller financing for the sale of
three or fewer properties in any 12month period to purchasers of such
properties, each of which is owned by
the person and serves as security for the
financing. This criterion tracks the
introductory language of TILA section
103(cc)(2)(E).
The second criterion is that the
person has not constructed, or acted as
a contractor for the construction of, a
residence on the property in the
ordinary course of business of the
person. This criterion tracks TILA
section 103(cc)(2)(E)(i).
The third criterion is that the person
provides seller financing that meets
three requirements: First, the financing
must be fully amortizing. This
requirement tracks TILA section
103(cc)(2)(E)(ii). Second, the person
must determine in good faith that the
consumer has a reasonable ability to
repay. The language of this requirement
largely tracks TILA section
103(cc)(2)(E)(iii). It departs from the
statute, however, in that it does not
require documentation of the good faith
70 The Bureau’s proposal would have
implemented the seller financer exclusion in TILA
section 103(cc)(2)(E) to be available only to ‘‘natural
persons,’’ estates, and trusts. See 77 FR at 55288,
55357. As discussed below, the three-property
exclusion in the final rule is available to ‘‘persons,’’
estates, and trusts, consistent with the language in
TILA section 103(cc)(2)(E). ‘‘Person’’ is defined in
§ 1026.2(a)(22) to mean ‘‘a natural person or an
organization, including a corporation, partnership,
proprietorship, association, cooperative, estate,
trust, or government unit.’’ See also 15 U.S.C.
1602(d) and (e). The Bureau is not including the
words ‘‘estate’’ and ‘‘trust’’ in the three-property
exclusion, as the term ‘‘person’’ includes estates
and trusts. In contrast, the one-property exclusion
in the final rule is available only to ‘‘natural
persons,’’ estates, and trusts.
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determination. Where seller financers
retain such documentation, they will be
able to respond to questions that could
arise as to their compliance with TILA
and Regulation Z. However, pursuant to
its authority under TILA section 105(a),
the Bureau is not adopting a
requirement that the seller document
the good faith determination. The
Bureau believes that the statute’s
exclusion is designed primarily to
accommodate persons or smaller-sized
estates or family trusts with no, or less
sophisticated, compliance
infrastructures. If technical
recordkeeping violations were sufficient
to jeopardize a person’s status as a seller
financer, this could limit the value of
the exclusion. Accordingly, the Bureau
believes that alleviating such burdens
for seller financers will effectuate the
purposes of TILA by ensuring that
responsible, affordable mortgage credit
remains available to consumers and will
facilitate compliance by seller financers.
The third requirement of this third
criterion is that the financing have a
fixed rate or an adjustable rate that is
adjustable after five or more years,
subject to reasonable annual and
lifetime limitations on interest rate
increases. This requirement largely
tracks TILA section 103(cc)(2)(E)(iv).
However, the Bureau believes that, for
the financing to have reasonable annual
and lifetime limitations on interest rate
increases, the foundation upon which
those limitations is based must itself be
reasonable. This requirement can be met
if the index is widely published.
Accordingly, the final rule also
provides: (1) If the financing agreement
has an adjustable rate, the rate must be
determined by the addition of a margin
to an index and be subject to reasonable
rate adjustment limitations; and (2) the
index on which the adjustable rate is
based must be a widely available index
such as indices for U.S. Treasury
securities or LIBOR. The Bureau is
interpreting and adjusting the criterion
in TILA section 103(cc)(2)(E)(iv) using
its authority under TILA section 105(a).
The Bureau believes its approach
effectuates the purposes of TILA in
ensuring consumers are offered and
receive consumer credit that is
understandable and not unfair,
deceptive or abusive. To the extent the
additional provisions could be
considered additional criteria, the
Bureau is also exercising its authority
under TILA section 103(cc)(2)(E)(v) to
add additional criteria.
The Bureau is adding a new comment
36(a)(4)–1 to explain how a person can
meet the criterion on a good faith
determination of ability to repay under
the three-property exclusion. It provides
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that the person determines in good faith
that the consumer has a reasonable
ability to repay the obligation if the
person either complies with general
ability-to-repay standards in
§ 1026.43(c) or complies with
alternative criteria described in the
comment.
The Bureau is providing the option of
making the good faith determination of
ability to repay based on alternative
criteria using its interpretive authority
under TILA section 105(a) and section
1022 of the Dodd-Frank Act. The Bureau
believes that many seller financers who
may occasionally finance the sales of
properties they own may not be in a
position feasibly to comply with all of
the requirements of § 1026.43(c) in
meeting the criterion in TILA section
103(cc)(2)(E)(iii). As discussed above,
the Bureau believes that the statute’s
exclusion is designed primarily to
accommodate persons or smaller-sized
estates or family trusts with no, or less
sophisticated, compliance
infrastructures. Furthermore, providing
alternative standards to meet this
criterion will help ensure that
responsible, affordable seller financing
remains available to consumers
consistent with TILA section 129B(a)(1).
New comment 36(a)(4)–1 explains
how a person could consider the
consumer’s income to make the good
faith determination of ability to repay. If
the consumer intends to make payments
from income, the person considers
evidence of the consumer’s current or
reasonably expected income. If the
consumer intends to make payments
with income from employment, the
person considers the consumer’s
earnings, which may be reflected in
payroll statements or earnings
statements, IRS Form W–2s or similar
IRS forms used for reporting wages or
tax withholding, or military Leave and
Earnings Statements. If the consumer
intends to make payments from other
income, the person considers the
consumer’s income from sources such
as from a Federal, State, or local
government agency providing benefits
and entitlements. If the consumer
intends to make payments from income
earned from assets, the person considers
income from the relevant assets, such as
funds held in accounts with financial
institutions, equity ownership interests,
or rental property. However, the value
of the dwelling that secures the
financing does not constitute evidence
of the consumer’s ability to repay. In
considering these and other potential
sources of income to determine in good
faith that the consumer has a reasonable
ability to repay the obligation, the
person making that determination may
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rely on copies of tax returns the
consumer filed with the IRS or a State
taxing authority.
New comment 36(a)(4)–2 provides
safe harbors for the criterion that a seller
financed adjustable rate financing be
subject to reasonable annual and
lifetime limitations on interest rate
increases. New comment 36(a)(4)–2.i.
provides that an annual rate increase of
two percentage points or less is
reasonable. New comment 36(a)(4)–2.ii.
provides that a lifetime limitation of an
increase of six percentage points or less,
subject to a minimum floor of the
person’s choosing and maximum ceiling
that does not exceed the usury limit
applicable to the transaction, is
reasonable.
36(a)(5) Seller Financers; One Property
In support of the exclusion for seller
financers in § 1026.36(a)(1)(i)(D)
discussed above, the Bureau is further
establishing criteria for the one-property
exclusion in § 1026.36(a)(5). The Bureau
has attempted to implement the
statutory exclusion in a way that
effectuates congressional intent, but
remains concerned that the exclusion is
fairly complex. The Bureau understands
that natural persons, estates, and trusts
that rarely engage in seller financing
may engage in such transactions a few
times during their lives in the case of
natural persons or perhaps not more
than once for estates or family trusts.
For this reason, and given the
complexities commenters highlighted of
the seller financer exclusion in the
statute, the Bureau is establishing an
additional exclusion where only one
property is financed in a given 12month period.
Under the exclusion incorporated into
the final rule as the one-property
exclusion in § 1026.36(a)(5), a natural
person, an estate, or a trust (but not
other persons) that meets the criteria in
that paragraph is not a loan originator
under § 1026.36(a)(1). The first criterion
is that the natural person, estate, or trust
provides seller financing for the sale of
only one property in any 12-month
period to purchasers of such property,
which is owned by the natural person,
estate, or trust and serves as security for
the financing. This criterion is similar to
the introductory language of TILA
section 103(cc)(2)(E), except that rather
than a three-property maximum per 12month period, the one-property
exclusion uses a one-property maximum
per 12-month period.
The second criterion is that the
natural person, estate, or trust has not
constructed, or acted as a contractor for
the construction of, a residence on the
property in the ordinary course of
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business of the person, estate or trust.
Again, this criterion tracks TILA section
103(cc)(2)(E)(i).
The third criterion is that the
financing meet two requirements: First,
the financing must have a repayment
schedule that does not result in negative
amortization. This requirement is
narrower than the criterion in TILA
section 103(cc)(2)(E)(ii), which requires
that the financing be fully amortizing,
not just that it does not result in
negative amortization. The second
requirement parallels the third
criterion’s third requirement for the
three-property exclusion, described
above, with regard to credit terms.
Specifically, consistent with TILA
section 103(cc)(2)(E)(iv), the financing
must have a fixed rate or an adjustable
rate that is adjustable after five or more
years, subject to reasonable annual and
lifetime limitations on interest rate
increases. Further, if the financing
agreement has an adjustable rate, the
rate must be determined by the addition
of a margin to an index and be subject
to reasonable rate adjustment
limitations. In addition, the index on
which the adjustable rate is based must
be a widely available index such as
indices for U.S. Treasury securities or
LIBOR. The Bureau has also adopted
comment 36(a)(5)–1 to provide the same
safe harbors regarding adjustable rate
financing as apply under the threeproperty exclusion as discussed above
with respect to the one-property
exclusion.
The Bureau believes that the oneproperty exclusion is appropriate
because natural persons, estates, or
trusts that may finance the sales of
properties not more than once in a 12month period (and perhaps only a few
times in a lifetime) are not in a position
to comply with all of the requirements
of § 1026.43(c) or even the alternative
criteria under the three-property
exclusion discussed above in meeting
the criterion in TILA section
103(cc)(2)(E)(iii). Accordingly, the
Bureau believes this exclusion will help
ensure that responsible, affordable seller
financing remains available to
consumers consistent with TILA section
129B(a)(1). Natural persons, trusts, and
estates using this exclusion do not need
to comply with the criteria in TILA
section 103(cc)(2)(E) to be excluded
from the definition of loan originator
under § 1026.36(a)(1) as seller financers.
In creating the exclusion, the Bureau
is relying on its authority under TILA
section 105(a) to prescribe rules
providing adjustments and exceptions
necessary or proper to facilitate
compliance with and effectuate the
purposes of TILA. At the same time, to
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the extent the Bureau is imposing other
criteria that are not in TILA section
103(cc)(2)(E) on natural persons, trusts,
and estates using this exclusion, the
Bureau is exercising its authority under
TILA section 105(a) to impose
additional requirements the Bureau
determines are necessary or proper to
effectuate the purposes of TILA or to
facilitate compliance therewith. The
Bureau also has authority to impose
additional criteria under TILA section
103(cc)(2)(E)(v). The Bureau believes
that any risk of consumer harm under
the one-property exclusion is not
appreciably greater than the risk under
the three-property exclusion.
36(b) Scope
Scope of Transactions Covered by
§ 1026.36
This rulemaking implements new
TILA sections 129B(b)(1) and (2) and
(c)(1) and (2) and 129C(d) and (e), as
added by sections 1402, 1403, and
1414(a) of the Dodd-Frank Act. TILA
section 129B(b)(1) and (2) and (c)(1) and
(2) requires that loan originators be
‘‘qualified;’’ that depository institutions
maintain policies and procedures to
ensure compliance with various
requirements; restrictions on loan
originator compensation; and
restrictions on the payment of upfront
discount points and origination points
or fees with respect to ‘‘residential
mortgage loans.’’ TILA section
129B(c)(2) applies to mortgage
originators engaging in certain activities
with respect to ‘‘any mortgage loan’’ but
for reasons discussed above, the Bureau
interprets TILA section 129B(c)(2) to
only apply to residential mortgage
loans. TILA section 103(cc)(5) defines a
‘‘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 a
time share plan under 11 U.S.C.
101(53D). TILA section 129C(d) and (e)
impose prohibitions on mandatory
arbitration and single-premium credit
insurance for residential mortgage loans
or any extension of credit under an
open-end consumer credit plan secured
by the principal dwelling of the
consumer.
The Bureau proposed to recodify
§ 1026.36(f) as § 1026.36(j) to
accommodate new § 1026.36(f), (g), (h),
and (i). The Bureau also proposed to
amend § 1026.36(j) to reflect the scope
of coverage for the proposals
implementing TILA sections 129B
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11319
(except for 129B(c)(3)) and 129C(d) and
(e), as added by sections 1402, 1403,
and 1414(a) of the Dodd-Frank Act, as
discussed further below.
The proposal would have applied, in
§ 1026.36(h), the new prohibition on
mandatory arbitration clauses, waivers
of Federal claims, and related issues
mandated by TILA section 129C(e) and,
in § 1026.36(i), the new prohibition on
financing single-premium credit
insurance mandated by TILA section
129C(e) both to home equity lines of
credit (HELOCs), as defined by
§ 1026.40, and closed-end credit
transactions secured by the consumer’s
principal dwelling. In contrast, the
proposal would have amended
§ 1026.36(j) to apply the new loan
originator qualification and loan
document identification requirements in
TILA section 129B(b), as implemented
in new § 1026.36(f) and (g), to closedend consumer credit transactions
secured by a dwelling (which is broader
than the consumer’s principal
dwelling), but not to HELOCs. This
scope of coverage would have been the
same as the scope of transactions
covered by § 1026.36(d) and (e)
(governing loan originator compensation
and the prohibition on steering), which
coverage the proposal would not have
amended. The proposal also would have
made technical revisions to comment
36–1 to reflect these scope-of-coverage
changes.
A mortgage broker association and
several mortgage brokers and mortgage
bankers submitted similar comments
specifically stating that the Bureau
should exempt all prime, traditional,
and government credit products from
the compensation regulations while
retaining restrictions for high-cost and
subprime mortgages. These commenters
suggested that the exemption would
eliminate any incentive for placing a
prime qualified consumer in a high-cost
mortgage for the purpose of greater
financial gain.
A State housing finance authority
submitted a comment requesting that
the Bureau exempt products developed
by and offered through housing finance
agencies. The commenter stated that it
developed credit products for at-orbelow median income households and
poorly served rural communities and
assisted repairing and remediating code
violations in urban centers. The
commenter further stated that its
products addressed unmet needs in the
marketplace, including energy
efficiency and repair credit, partnership
credit programs with Habitat for
Humanity, rehabilitation credit
programs for manufactured housing,
down-payment and closing cost
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assistance programs for first-time
homebuyers, and employee assistance
programs for affordable homes near
work.71
The Bureau believes that in most
cases exempting certain credit products
would be contrary to the Dodd-Frank
Act compensation restrictions that
apply to all mortgage loans regardless of
the product type or the social or
economic goals advanced by the
creditor or loan originator organization.
Section 1026.36(d) applies to all closedend consumer credit secured by a
dwelling except for certain time sharesecured transactions and does not make
a distinction between whether a credit
transaction is prime or subprime. The
specific mortgage originator
compensation restrictions and
qualification requirements in TILA
section 129B added by the Dodd-Frank
Act do not specify different treatment
on the basis of credit transaction type.72
The Bureau believes that, regardless of
the type of mortgage product being sold
or its value to consumers, the policy of
ensuring that the loan originator is
qualified and trained is still relevant.
The Bureau likewise believes that,
regardless of the product type,
consumers are entitled to protection
from loan originators with conflicting
interests and thus that the restrictions
on compensating the loan originator
based on transaction terms and on dual
compensation are relevant across-the
board. Accordingly, the Bureau declines
to create distinctions between credit
products in setting forth this
rulemaking’s scope of coverage.
The Bureau received a comment
noting discrepancies among the
supplementary information, regulation
text, and commentary regarding
§ 1026.36(h) and (i). The Bureau is
finalizing the scope provisions as
proposed but adopting proposed
71 The same commenter noted that HUD expressly
exempted housing finance agencies from the SAFE
Act based on HUD’s finding that these agencies
‘‘carry out housing finance programs * * * without
the purpose of obtaining profit.’’ The SAFE Act
applies only to individuals who engage ‘‘in the
business of a loan originator.’’ See 12 U.S.C.
1504(a). The Dodd-Frank Act does not similarly
require a nexus to business activity.
72 Moreover, the statement of Congressional
findings in the Dodd-Frank Act accompanying the
amendments to TILA that are the subject of this
rulemaking supports the application of the
rulemaking provisions to the prime mortgage
market. Congress explained that it found ‘‘that
economic stabilization would be enhanced by the
protection, limitation, and regulation of the terms
of residential mortgage credit and the practices
related to such credit, while ensuring that
responsible, affordable mortgage credit remains
available to consumers.’’ Section 1402 of the DoddFrank Act (TILA section 129B(a)(1). This statement
does not distinguish different types of credit
products.
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§ 1026.36(j) as § 1026.36(b) with the
heading, ‘‘Scope’’ and providing in
§ 1026.36(b) and comment 36–1 (now
redesignated comment 36(b)–1) that
§ 1026.36(h) and (i) also applies to
closed-end consumer credit transactions
secured by a dwelling. The Bureau
believes that organizing the scope
section after the definitions section in
§ 1026.36(a) and providing a heading
will facilitate compliance by making the
scope and coverage of the rule easier to
discern. The Bureau notes that, to
determine the scope of coverage for any
particular substantive provision in
§ 1026.36, the applicable scope of
coverage provision in § 1026.36(b), the
scope of coverage in comment 36(b)–1,
and the substantive regulatory provision
itself must be read together. The
Bureau’s redesignation of comment 36–
1 to comment 36(b)–1 should
additionally facilitate compliance by
making the scope and coverage of the
rule easier to discern.
To the extent there is any uncertainty
in TILA sections 129B (except for (c)(3))
and 129C(d) and (e) regarding which
provisions apply to different types of
transactions, the Bureau relies on its
interpretive authority under TILA
section 105(a).
Consumer Credit Transaction Secured
by a Dwelling
Existing § 1026.36 applies the
section’s coverage to ‘‘a consumer credit
transaction secured by a dwelling.’’
TILA section 129B uses the term
‘‘residential mortgage loan’’ for the
purpose of determining the applicability
of the provisions of this rulemaking.
TILA section 103(cc)(5) defines a
‘‘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.’’ The
proposal would have continued to use
‘‘consumer credit transaction secured by
a dwelling’’ and would not have
adopted ‘‘residential mortgage loan’’ in
§ 1026.36.
Existing § 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.’’ In
the proposal, the Bureau explained that
the definition of ‘‘dwelling’’ in
§ 1026.2(a)(19) was consistent with the
meaning of dwelling in the definition of
‘‘residential mortgage loan’’ in TILA
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section 103(cc)(5). The Bureau proposed
to interpret ‘‘dwelling’’ also to include
dwellings in various stages of
construction. Consumer credit to
finance construction is often secured by
dwellings in this fashion. The Bureau
proposed to maintain this definition of
dwelling.
The Bureau did not receive comment
on its intention to continue to use
consumer credit transaction secured by
a dwelling or its interpretation of a
dwelling. The Bureau continues to
believe that changing the terminology of
‘‘consumer credit transaction secured by
a dwelling’’ to ‘‘residential mortgage
loan’’ is unnecessary because the same
meaning would be preserved.
Accordingly, the Bureau is adopting
§ 1026.36(b) as proposed.
36(d) Prohibited Payments to Loan
Originators
Section 1026.36(d) contains the core
restrictions on loan originator
compensation in this final rule. Section
1026.36(d)(1) generally prohibits
compensation based on the terms of the
transaction, other than credit amount.
This section is designed to address
incentives that could cause a loan
originator to steer consumers into
particular credit products or features to
increase the loan originator’s own
compensation. Section 1026.36(d)(2)
generally prohibits loan originators from
receiving compensation in connection
with a transaction from both the
consumer and other persons (dual
compensation), and is designed to
address potential consumer confusion
about loan originator loyalty where a
consumer pays an upfront fee but does
not realize that the loan originator may
also be compensated by the creditor.
Each of these prohibitions is similar to
one first enacted in the Board’s 2010
Loan Originator Final Rule. Congress
largely codified similar prohibitions in
the Dodd-Frank Act, with some
adjustments; this final rule reconciles
certain differences between the statutory
and regulatory provisions.
36(d)(1) Payments Based on a Term of
a Transaction
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 existing Regulation Z
provisions restricting compensation
based on credit terms established by the
2010 Loan Originator Final Rule.73
73 The Board issued that final rule after passage
of the Dodd-Frank Act, but acknowledged that a
subsequent rulemaking would be necessary to
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Currently, § 1026.36(d)(1)(i), which was
added to Regulation Z by the 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.’’ 74
Section 1026.36(d)(1)(ii) states that the
amount of credit extended is not
deemed to be a transaction term or
condition, provided that 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.
With certain adjustments, discussed
below, the Dodd-Frank Act generally
codifies these provisions in new TILA
section 129B(c)(1). Specifically, new
TILA section 129B(c)(1) provides that,
‘‘[f]or 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).
In addition, Congress set forth ‘‘rules
of construction’’ in new TILA section
129B(c)(4). This provision states, among
other things, that nothing in section
129B(c) of TILA shall be construed as
‘‘permitting yield spread premium 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).75
This provision also states 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, which
is generally consistent with the
interpretation provided in existing
comment 36(d)(1)–3.76 12 U.S.C.
1639b(c)(4)(D).
These provisions of new TILA section
129B(c) differ from the existing
regulations in a key respect: they
expand the scope of the restrictions on
loan originator compensation from
transactions in which any person other
than the consumer pays the loan
originator to all residential mortgage
loans. Under the 2010 Loan Originator
Final Rule, transactions in which the
consumer pays compensation directly to
a loan originator organization are not
subject to the restrictions, so the amount
of the compensation may be based on
the terms and conditions of the
transaction.
The proposal sought to implement
new TILA section 129B by amending
§ 1026.36(d) to reflect the fact that the
Dodd-Frank Act applies the ban on
compensation based on terms to all
residential mortgage loans and to further
harmonize the existing regulation’s
language with the statute’s language.
The Bureau also took the opportunity to
address a number of interpretive
questions about the 2010 Loan
Originator Final Rule that have been
frequently raised by industry with both
the Board and the Bureau.
implement TILA section 129B(c). See 75 FR 58509
(Sept. 24, 2010).
74 In adopting this restriction, 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.’’ 75 FR 58509, 58520 (Sept.
24, 2010). The Board cited ‘‘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.’’ Id. Among the Board’s stated
concerns was that ‘‘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.’’ 75 FR 58509, 58511
(Sept. 24, 2010). The Board adopted this prohibition
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. 75 FR 58509, 58520 (September 24,
2010). The Board stated that it was relying on
authority under TILA section 129(l)(2) (since
redesignated as section 129(p)(2)) to prohibit acts or
practices in connection with mortgage loans that it
finds to be unfair or deceptive. Id.
36(d)(1)(i)
As noted above, section 1403 of the
Dodd-Frank Act generally codifies the
baseline rule in existing § 1026.36(d). As
the Bureau described in the proposal,
however, the new statutory provisions
differ from the existing regulatory
provisions in three primary respects.
First, unlike existing § 1026.36(d)(1)(iii),
the statute does not contain an
exception to the general prohibition on
varying compensation based on terms
for transactions where the mortgage
originator receives compensation
directly from the consumer. Second,
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75 Congress did not define ‘‘yield spread
premium.’’ However, as discussed elsewhere in this
notice, the Bureau is interpreting this term to mean
compensation for loan originators that is calculated
and paid as a premium above every $100 in
principal.
76 Existing comment 36(d)(1)–3 clarifies that the
loan originator’s overall loan volume delivered to
the creditor is an example of permissible
compensation for purposes of the regulation.
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while existing § 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.’’ Third, existing
§ 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.
Prohibition Against Payments Based on
a Term of a Transaction
Existing § 1026.36(d)(1) provides that
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.
Similarly, new TILA section 129B(c)(1)
prohibits mortgage originators from
receiving or being paid, directly or
indirectly, compensation that varies
based on the terms of the transaction.
However, neither TILA nor existing
Regulation Z defines a transaction’s
terms.
The Board realized that the
compensation prohibition in
§ 1026.36(d)(1) could be circumvented
by compensating a loan originator based
on a substitute factor that is not a
transaction term or condition but
effectively mimics a transaction term or
condition. Existing comment 36(d)(1)–2
further clarifies that compensation
based on a proxy for a term or condition
of a transaction is also prohibited. The
comment explains that compensation
based on the 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
compensation varies in whole or in part
with a factor that serves as a proxy for
transaction terms or conditions, the
compensation is deemed to be based on
a transaction’s terms or conditions.
The Board and the Bureau have each
received numerous inquiries on whether
compensation based on various
specified factors would be
compensation based on a proxy for a
term or condition of a transaction and
thus prohibited. Based on the volume of
questions received about the existing
compensation prohibition and the
commentary concerning proxies, the
Bureau recognized in the proposal that
this issue had become a significant
source of confusion and uncertainty.
The Bureau responded by proposing to
revise § 1026.36(d)(1)(i), comment
36(d)(1)–2, and related commentary to
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remove the term ‘‘conditions’’ and to
clarify the meaning of proxy.
Specifically, the proposal outlined a
multi-stage analysis, starting first with a
determination of whether a loan
originator’s compensation is ‘‘based on’’
a transaction’s terms. If so, such
compensation would generally violate
§ 1026.36(d)(1)(i). If not, the second
inquiry is whether compensation is
based on a proxy for a transaction’s
terms. The proposal would have
subjected a factor to a two-part test to
determine if it is a prohibited proxy for
a loan term. First, whether the factor
substantially correlates with a term or
terms of the transaction is analyzed.
Second, whether the loan originator can,
directly or indirectly, add, drop, or
change the factor when originating the
transaction. The Bureau also specifically
solicited comment on the issue of
transaction terms and proxies,
alternatives to the Bureau’s proposal,
and whether any action to revise the
proxy concept and analysis would be
helpful and appropriate. 77 FR at 55293.
As discussed further below, the
Bureau is retaining this multi-stage
analysis in the final rule, with
additional clarifications, examples, and
commentary based on the comments
and additional analysis. In response to
the comments received, however, the
Bureau has recognized that two
additions would provide useful
clarification and facilitate compliance.
Accordingly, the Bureau is not only
finalizing the multi-stage proxy
analysis, but amending the regulation to
define what is a ‘‘term of a transaction’’
in the first instance and providing
additional commentary listing several
compensation methods that are
expressly permitted under the statute
and regulation without need for
application of a proxy analysis. The
Bureau believes that this additional
clarification will significantly reduce
uncertainty regarding permissible and
impermissible compensation methods,
while maintaining critical safeguards
against evasion of the Dodd-Frank Act
mandate.
Specifically, the final rule amends
§ 1026.36(d)(1)(i) to prohibit
compensation based on ‘‘a term of a
transaction,’’ amends § 1026.36(d)(1)(ii)
to define that term to mean ‘‘any right
or obligation of the parties to a credit
transaction,’’ and makes conforming
amendments to remove the term
‘‘conditions’’ from related regulatory
text and commentary.
The Bureau is also amending
comment 36(d)(1)–1.iii to provide
further clarification of this definition.
Under comment 36(d)(1)–1.iii, the
Bureau interprets ‘‘credit transaction’’ as
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the operative acts (e.g., the consumer’s
purchase of certain goods or services
essential to the transaction) and written
and oral agreements that, together,
create the consumer’s right to defer
payment of debt or to incur debt and
defer its payment. For the purposes of
§ 1026.36(d)(1)(ii), this means: (1) The
rights and obligations, or part of any
rights or obligations, memorialized in a
promissory note or other credit contract,
as well as the security interest created
by a mortgage, deed of trust, or other
security instrument, and in any
document incorporated by reference in
the note, contract, or security
instrument; (2) the payment of any loan
originator or creditor fees or charges
imposed on the consumer, including
any fees or charges financed through the
interest rate; and (3) the payment of any
fees or charges imposed on the
consumer, including any fees or charges
financed through the interest rate, for
any product or service required to be
obtained or performed as a condition of
the extension of credit. The potential
universe of fees and charges as
described above that could be included
in the definition of a term of a
transaction is limited to any of those
required to be disclosed in either or
both the Good Faith Estimate and the
HUD–1 (or HUD–1A) and subsequently
in any TILA and RESPA integrated
disclosures promulgated by the Bureau
as required by the Dodd-Frank Act.
The Bureau believes the statutory text
of TILA evidences a Congressional
intent to define ‘‘credit transaction’’
within the definition of ‘‘residential
mortgage loan’’ to include not only the
note, security instrument and any
document incorporated by reference
into the note or security instrument but
also any product or service required as
a condition of the extension of credit.
TILA section 129B(c)(1) prohibits
compensation ‘‘that varies based on the
terms of the [residential mortgage]
loan.’’ TILA section 103(cc)(5) defines
‘‘residential mortgage loan’’ to mean
‘‘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 certain specified forms of
credit. TILA section 103(f) defines
‘‘credit’’ as ‘‘the right granted by a
creditor to a debtor to defer payment of
debt or to incur debt and defer its
payment.’’ In other words, any product
or service the creditor requires the
acquisition or performance of prior to
granting the right to the consumer to
defer payment of debt or to incur debt
and defer its payment (i.e., required as
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a condition of the extension of credit) is
also included in the definition.
Moreover, express Congressional
support for including any product or
service required as a condition of the
extension credit in the definition of a
term of a transaction can be found in
TILA section 103(cc)(2)(C) and (cc)(4).
Both provisions contain this phrase:
‘‘* * * loan terms (including rates, fees,
and other costs)’’ (emphasis added). The
Bureau believes that fees and costs
charged by the loan originator or
creditor for the credit, or for a product
or service provided by the loan
originator or creditor related to the
extension of that credit, impose
additional costs on the consumer and
thus are ‘‘loan terms.’’ The Bureau is not
including other costs paid by the
consumer as part of the overall
transaction (i.e., the Bureau is not
including costs other than those
required as a condition of the extension
of credit in the definition), because such
costs are not part of the ‘‘credit
transaction’’ and thus are not a term of
a ‘‘residential mortgage loan.’’ For
example, costs not included in a term of
a transaction for the purposes of the
final rule could include charges for
owner’s title insurance or fees paid by
a consumer to an attorney representing
the consumer’s interests.
Attempts to evade the prohibition on
compensation based on a term of the
transaction could be made by paying the
loan originator based on whether a
product or service has been purchased
and not based on the amount of the fee
or charge for it. The Bureau believes that
payment based on whether the
underlying product or service was
purchased is equivalent to paying based
on the existence of a fee or the charge.
That is, payment based on either the
amount of the fee or charge or the
existence of a fee or charge would be
payment based on a term of the
transaction.
To reduce uncertainty and facilitate
compliance, the Bureau is limiting the
universe of potential fees or charges that
could be included in the definition of a
term of the transaction to any fees or
charges required to be disclosed in
either or both the Good Faith Estimate
and the HUD–1 (or HUD–1A) (and
subsequently in any TILA–RESPA
integrated disclosure promulgated by
the Bureau). Moreover, to facilitate
compliance, the Bureau believes the fees
or charges that meet the definition of a
term of a transaction should be readily
identifiable under an existing regulatory
regime or a regime that loan originators
and creditors will be complying with in
the future (i.e., the upcoming TILA–
RESPA integrated disclosure regime). To
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the extent there is any uncertainty
regarding the definition of ‘‘loan terms’’
or ‘‘consumer credit transaction’’ in
TILA section 103(cc)(2)(C), (cc)(4), and
(cc)(5), the Bureau relies on its
interpretive authority and authority to
prevent circumvention or evasion and
facilitate compliance under TILA
section 105(a).
Thus, any provision or part of a
provision included in the note or the
security instrument or any document
incorporated by reference that creates
any right or obligation of the consumer
or the creditor effectively is a term of
the transaction. For example, the
consumer’s promise to pay interest at a
yearly rate of X percent is a term of the
transaction. The rate itself is also a term
of the transaction. The existence of a
prepayment penalty or the specific
provision or part of the provision
describing the prepayment penalty in
the note additionally is a term of the
transaction.
Any provision set forth in riders to
the note or security instrument such as
covenants creating rights or obligations
in an adjustable rate rider, planned unit
development, second home,
manufactured home, or condominium
rider are also included. For example, a
provision in a condominium rider
requiring the consumer to perform all of
the consumer’s obligations under the
condominium project’s constituent
documents is a term of a transaction.
The name of the planned unit
development is also a term of the
transaction if it is part of the creditor’s
right described in the planned unit
development rider to secure
performance of the consumer’s promise
to pay.
Any loan originator or creditor fee or
charge imposed on the consumer for the
credit or for a product or service
provided by the loan originator or
creditor that is related to the extension
of that credit, including any fee or
charge financed through the interest
rate, is a term of a transaction. Thus,
points, discount points, document fees,
origination fees, and mortgage broker
fees imposed on consumers are terms of
a transaction. Also, if a creditor
performs the appraisal or a second
appraisal, and charges an appraisal fee,
the appraisal fee is a term of the
transaction regardless of whether it is
required as a condition of the extension
of credit if the appraisal is related to the
credit transaction (i.e., the appraisal is
for the dwelling that secures the credit).
Fees and charges for goods obtained or
services performed by the loan
originator or creditor in a ‘‘no cost’’ loan
where the fees and charges are financed
through the interest rate instead of paid
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directly by the consumer at closing are
also terms of the transaction.
Moreover, any fees or charges for any
product or service required to be
obtained or performed as a condition of
the extension of credit are also terms of
a transaction. For example, creditors
often require consumers to purchase
hazard insurance or a creditor’s title
insurance policy. The amount charged
for the insurance or the purchase of the
underlying insurance policy itself is a
term of the transaction if the policy is
required as a condition of the extension
of credit.
Comment 36(d)(1)–2 explains that,
among other things, the interest rate,
annual percentage rate, collateral type
(e.g., condominium, cooperative,
detached home, or manufactured
housing), and the existence of a
prepayment penalty are terms of a
transaction for purposes of
§ 1026.26(d)(1). As discussed below,
this comment also provides
interpretations about permissible
compensation factors that are neither
terms of a transaction nor proxies for
such terms under § 1026.36(d)(1).
The Bureau recognizes that, under
§ 1026.36(d)(1), a term of a transaction
could also include, for example, creditor
requirements that a consumer pay a
recording fee for the county recording
certain credit transaction documents,
maintain an escrow account, or pay any
upfront fee or charge as a condition of
the extension of credit. Thus, the
requirement for a consumer to pay
recording fees or taxes to the county for
the recording service as a condition of
the extension of credit would be
considered a term of a transaction. But,
as with many other terms of the
transaction, the requirement to pay
recording taxes under this scenario
would not likely present a risk of
violating the prohibition against
compensation based on a term of a
transaction because a person typically
would not compensate a loan originator
based on whether the consumer paid
recording taxes to the county.
As noted above, compensation paid to
a loan originator organization directly
by a consumer (i.e., mortgage broker fees
imposed on the consumer) is a term of
a transaction under § 1026.36(d)(1)(ii).
As a result, the Bureau is concerned that
§ 1026.36(d)(1) could be read to prohibit
a loan originator organization from
receiving compensation directly from a
consumer in all cases because that
compensation would necessarily be
based on itself, and thus, based on a
transaction term. The Bureau believes
that Congress did not intend that the
prohibition in TILA section 129B(c)(1)
on compensation being paid based on
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the terms of the loan to prevent loan
originator organizations from receiving
compensation directly from a consumer
in all cases. In fact, TILA section
129B(c)(2) specifically contemplates
transactions where loan originators
would receive compensation directly
from the consumer.77 Thus, the final
rule amends comment 36(d)(1)–2 to
clarify that compensation paid to a loan
originator organization directly by a
consumer in a transaction is not
prohibited by § 1026.36(d)(1) simply
because that compensation itself is a
term of the transaction. Nonetheless,
that compensation may not be based on
any other term of the transaction or a
proxy for any other term of the
transaction. In addition, in a transaction
where a loan originator organization is
paid compensation directly by a
consumer, compensation paid by the
loan originator organization to
individual loan originators is not
prohibited by 1026.36(d)(1) simply
because it is based on the amount of
compensation paid directly by the
consumer to the loan originator
organization but the compensation to
the individual loan originator may not
be based on any other term of the
transaction or proxy for any other term
of the transaction.
Prohibition Against Payment Based on a
Factor That Is a Proxy for a Term of a
Transaction
In the 2010 Loan Originator Final
Rule, the Board adopted comment
36(d)(1)–2, which explains how the
prohibition on compensation based on a
transaction’s terms is also violated when
compensation is based on a factor that
is a proxy for a term of a transaction. As
an example, the comment notes that 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
77 Specifically, 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, however, 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, among other things, the
mortgage originator does not receive any
compensation directly from the consumer.
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conditions. The comment goes on to
clarify, however, that 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 comment also provides
an example of payments based on credit
score that would violate existing
§ 1026.36(d)(1). As previously
discussed, the Board realized the
compensation prohibition in
§ 1026.36(d)(1) could be circumvented
by compensating a loan originator based
on a substitute factor that is not a
transaction term or condition but
effectively mimics a transaction term or
condition.
Since the Board’s 2010 Loan
Originator Final Rule was promulgated,
the Board and the Bureau have received
numerous inquiries on the commentary
regarding proxies and whether
particular loan originator compensation
practices would be prohibited because
they set compensation based on factors
that are proxies for transaction terms.
Small entity representatives providing
input during the Small Business Review
Panel process also urged the Bureau to
use this rulemaking to clarify this issue.
While some industry stakeholders
sought guidance or approval of
particular compensation practices, the
Bureau also learned through its outreach
that a number of creditors felt that the
existing proxy commentary was
appropriate and should not in any event
be made more permissive. Some of these
institutions explained that they had
always paid their loan originators the
same commission—i.e., percentage of
the amount of credit extended—
regardless of type or terms of the
transactions originated. In their opinion,
changes in the Bureau’s approach to
proxies would allow unscrupulous loan
originators to employ compensation
practices that would violate the
principles of the prohibition against
compensation based on a transaction’s
terms.
Based on this feedback and its own
analysis, the Bureau proposed revisions
to § 1026.36(d)(1)(i) and comment
36(d)(1)–2.i to clarify how to determine
whether a factor is a proxy for a
transaction’s term to facilitate
compliance and prevent circumvention.
The proposal’s amendments to
§ 1026.36(d)(1)(i) would have clarified
in regulatory text that compensation
based on a proxy for a transaction’s
terms would be prohibited. In addition,
the proposed clarification in
§ 1026.36(d)(1)(i) and comment
36(d)(1)–2.i would have provided that a
factor (that is not itself a term of a
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transaction originated by the loan
originator) is a proxy for the
transaction’s terms if two conditions
were satisfied: (1) The factor
substantially correlates with a term or
terms of the transaction; and (2) the loan
originator can, directly or indirectly,
add, drop, or change the factor when
originating the transaction.78
As proposed, both prongs of the proxy
analysis would have to be met for a
factor to be a proxy. If the factor
substantially correlates with a term of a
transaction originated by the loan
originator, then the factor would be a
proxy only if the loan originator could,
directly or indirectly, add, drop, or
change the factor when originating the
transaction. In the supplementary
information to the proposal, the Bureau
noted that where a loan originator had
no or minimal ability directly or
indirectly to add, drop, or change a
factor, that factor would not be a proxy
for the transaction’s terms because the
loan originator would not be able to
steer consumers based on that factor.
The Bureau also proposed to delete
the example of credit score as a proxy
for a transaction’s terms or conditions in
existing comment 36(d)(1)–2. The
proposal explained that this example
created uncertainty for creditors and
loan originators and did not adequately
reflect the Bureau’s proposed treatment
of proxies. Under the proposal, a credit
score may or may not be a proxy for a
term of a transaction depending on the
facts and circumstances. Similarly, the
proposal would have removed the
example stating that loan-to-value ratio
would not be a term of a transaction to
conform to other aspects of the
proposal.
Instead, proposed comment 36(d)(1)–
2.i, provided three new examples to
illustrate use of the proposed proxy
standard and to facilitate compliance
with the rule.
The Bureau proposed to add comment
36(d)(1)–2.i.A to provide an example of
the application of the proposed proxy
78 As discussed in the proposal, 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 small entity
representatives during the Small Business Review
Panel process stated that ‘‘a factor is a proxy if: (1)
It substantially correlates with a term of a
transaction; and (2) the MLO has discretion to use
the factor to present credit to the consumer with
more costly or less advantageous term(s) than
term(s) of other credit available through the MLO
for which the consumer likely qualifies.’’ Upon
further consideration, the Bureau believed the
proxy proposal contained in the 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.
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definition to address whether
compensation based on a loan
originator’s employment tenure would
be considered a proxy for a transaction
term under the proposed definition. The
proposal explained that this factor
would likely not meet the first prong of
the proposed proxy definition because
employment tenure would likely have
little correlation with a transaction’s
term and thus not be ‘‘substantially
correlated’’ to a term of a transaction.
The Bureau proposed to add comment
36(d)(1)–2.i.B to provide an example of
the application of the proposed proxy
definition to address whether
compensation to a loan originator based
on whether an extension of credit would
be held in portfolio or sold into the
secondary market would be considered
a factor that is a proxy for a transaction
term under the proposed definition. The
example assumed an extension of credit
would be held in portfolio or sold into
the secondary market depending in
large part on whether it had a five-year
balloon feature or a 30-year term. Thus,
the factor would meet the first prong of
the proxy definition because whether an
extension of credit would be held in
portfolio or would be sold into the
secondary market would substantially
correlate with one or more transaction
terms (i.e., interest rate, term). The loan
originator in the example may be able to
change the factor indirectly by steering
the consumer to choose the five-year
balloon or the 30-year term. Thus,
whether an extension of credit is held
in portfolio or sold into the secondary
market would be a proxy for a
transaction’s terms under these
particular facts and circumstances.
The Bureau proposed to add comment
36(d)(1)–2.i.C to provide an example of
the application of the proposed proxy
definition to whether compensation to a
loan originator based on the geographic
location of the property securing a
refinancing would be considered a
proxy for a transaction term. In the
example, the loan originator would be
paid a higher commission for
refinancings secured by property in
State A than in State B. The first prong
of the proxy definition would be
satisfied because, under the facts
assumed in the example, refinancings
secured by property in State A would
have lower interest rates than credit
transactions secured by property in
State B; thus, the property’s location
would substantially correlate with a
term of a transaction (i.e., the interest
rate). However, the second prong of the
proxy definition would not be satisfied
because the loan originator would not
be able to change the presence or
absence of the factor (i.e., whether the
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refinancing is secured by property in
State A or State B). Thus, geographic
location, under the particular facts
assumed in the example, would have
not been considered a proxy for a
transaction’s term.
The Bureau believed that the
proposed changes would simplify and
reduce uncertainty regarding the proxy
analysis and, more generally, would
align the treatment of proxies with the
principles underlying the prohibition on
compensation based on a transaction’s
terms. The Bureau solicited comment on
the proposal, alternatives the Bureau
should consider, and whether any
action to revise the proxy concept and
analysis would be helpful and
appropriate. The Bureau also invited
specific comment on two aspects of the
first prong of the proxy definition: (1)
Whether ‘‘substantially’’ was sufficient
to explain the degree of correlation
necessary under the proxy definition
and, if not, what other term should be
considered; and (2) how ‘‘correlation’’ to
a term should be determined.
Many industry commenters opposed
the Bureau’s proposed amendments to
the proxy analysis and requested that
the existing analysis be removed. Other
commenters supported the Bureau’s
efforts to clarify the proxy analysis but
criticized the proposed standard or
requested additional guidance.
A large bank, a few lender trade
groups, and a number of credit unions
and credit union leagues commented
that the prohibition against
compensation based on transaction
terms in the Dodd-Frank Act was
sufficient to protect consumers without
the proxy concept. Many of these
commenters also stated that the DoddFrank Act prohibition on compensation
based on transaction terms was very
clear and did not include the concept of
a proxy analysis. These commenters
further stated that inclusion of the proxy
definition in the rule would impose a
compliance burden that was not
mandated by statute. Some of these
commenters also indicated that the
Bureau’s approach to proxies created
ambiguities that would make
compliance difficult, which was
particularly problematic given the
significant liability that TILA would
impose for non-compliance.
Another industry trade group stated
that, instead of addressing proxies, the
Dodd-Frank Act expressly addressed
steering and related conduct. Therefore,
it urged the Bureau to abandon the
proxy concept and focus instead on
implementing clear guidance for the
anti-steering provisions in the DoddFrank Act. One credit union also stated
that the final rule should clarify that
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incentive arrangements adopted
pursuant to NCUA regulations would be
permissible under Regulation Z.
One large national bank and an
industry trade group criticized the
proxy concept in the existing rule for
presuming the existence of a proxy
whenever a difference in transaction
terms was correlated with a difference
in compensation and the difference in
compensation could not otherwise be
justified on a permissible basis. One
credit union league commenter stated
that the Bureau’s proposed changes
would not reduce uncertainty and help
simplify application of the prohibition
of compensation based on transaction
terms and urged the Bureau to refrain
from amending the existing regulation
and commentary. Several commenters
stated that instead of, or in addition to,
providing further clarification and a
definition of proxies, the final rule
should simply: (1) Permit differences in
compensation based on cost differences
among products; (2) allow differences in
compensation to incentivize the offering
of socially beneficial credit products
such as state agency or Community
Reinvestment Act loans; and (3) contain
an inclusive list of proxies and
exceptions.
Several large industry groups, several
large creditors, several State industry
associations, and a credit union league
made comments that were generally
supportive of the Bureau’s efforts to
clarify the existing approach to proxies,
but requested that the Bureau offer a
more precise definition of the term
‘‘proxy.’’ Some of these commenters
stated that ‘‘substantially correlates with
a term or terms of a transaction’’ was too
speculative and subjective or required
more explanation. One large bank
commenter stated that the proposed
two-pronged proxy definition would
increase rather than reduce confusion.
Despite the opposition to the proposed
proxy definition voiced by the many
commenters, there were no comments
providing specific alternatives to the
proposal’s formulation.
With respect to the Bureau’s proposed
revisions to discussion in comment
36(d)(1)–2, most of the larger trade
groups representing creditors ranging
from community banks to the largest
banks agreed that credit score should
not be considered a proxy for a
transaction term. These commenters
noted that loan originators have no
discretion or influence over the credit
score even though the score influences
the secondary market value of the
extension of credit. One large national
bank commenter, however, was
concerned that, by not characterizing a
credit score as a proxy for transaction
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11325
terms, the proposal would permit
creditors to compensate loan originators
more for credit extended to consumers
with high credit scores. Credit scores,
the bank noted, invariably correlate
with a credit transaction’s interest rate.
In this commenter’s view, certain factors
that correlate with a transaction’s terms
should not be the basis of differences in
compensation. This commenter also
stated that debt-to-income ratio and the
collateral’s loan-to-value ratios were
common factors that affect the interest
rate and could typically be modified by
a loan originator, thus implying these
factors too should be considered proxies
for a transaction’s terms but may not be
under the proposal.
While the Bureau believes that the
new definition of a ‘‘term of a
transaction’’ in § 1026.26(d)(1)(ii) will
help clarify the permissibility of varying
compensation based upon many of the
factors that commenters raised
questions about, there will still be
factors that would not meet this
definition and thus be subject to the
analysis under the proxy definition.
Accordingly, the Bureau has revised the
proposed proxy definition in the final
rule, while preserving the proposal’s
basic approach. By prohibiting
compensation based on a factor that
serves as a proxy for a term of a
transaction, the Bureau believes that it
is within its specific authority under
TILA section 105(a) to issue regulations
to effectuate the purposes and prevent
evasion or circumvention of TILA. A
contrary approach would create an
enormous loophole if persons were able
to identify factors to base loan originator
compensation on that, although not
considered transaction terms, act in
concert with particular terms. For
example, many loan level price
adjustments are not transaction terms
per se, however, they often directly
impact the price investors are willing to
pay for a loan. Restated differently, the
amount investors are willing to pay now
for a stream of payments made by
consumers in the future is highly
dependent on the interest rate of the
note. To the extent a loan originator is
able to manipulate such factors the more
attractive they become as a proxy for
transaction terms upon which to base
compensation. The Bureau further
believes that by providing a proxy
definition, the Bureau is also acting
pursuant to its authority under TILA
section 105(a) to facilitate compliance
with TILA.
Revised § 1026.36(d)(1)(i) provides
that ‘‘[a] factor that is not itself a term
of a transaction is a proxy for a term of
a transaction if the factor consistently
varies with a term over a significant
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number of transactions, and the loan
originator has the ability, directly or
indirectly, to add, drop, or change the
factor in originating the transaction.’’
The final proxy definition revises the
proposed definition in two ways: (1)
Under the first prong, a factor is
analyzed by reference to whether it
‘‘consistently varies with a term over a
significant number of transactions’’
instead of whether it ‘‘substantially
correlates with a term’’; and (2) under
the second prong, the analysis focuses
on whether the loan originator ‘‘has the
ability to’’ manipulate the factor rather
than whether a loan originator ‘‘can’’
manipulate the factor. The Bureau also
maintains in the final rule two of the
three examples of the application of the
proxy analysis to specific compensation
and fact patterns. However, the proxy
examples have been renumbered given
the removal of the example in comment
36(d)(1)–2.i.A. The example proposed in
comment 36(d)(1)–2.i.A. analyzed a
hypothetical situation involving a
creditor that increased loan originator
compensation based on the loan
originator’s tenure with the creditor.
The final rule orients the focus of the
proxy analysis on factors substituted for
a term of the transaction. This example
involved facts that were unrelated to
this analysis and is not included in the
final rule to reduce confusion and
facilitate compliance. The remaining
examples are located in comment
36(d)(1)–2.ii instead of comment
36(d)(1)–2.i to accommodate a
reorganization of the comments to
facilitate compliance. The terminology
in these examples has additionally been
revised to reflect changes to the
definitions of a ‘‘term of a transaction’’
and ‘‘proxy’’ in the final rule.
As stated above, the final rule revises
the first prong of the proxy definition
from the proposed ‘‘substantially
correlates with a term’’ to ‘‘consistently
varies with a term over a significant
number of transactions.’’ First, the
change is meant to avoid use of the
word ‘‘correlates,’’ which is given many
conflicting technical meanings. Second,
the inclusion of ‘‘over a significant
number of transactions’’ is meant to
explain that the nexus between the
factor and a term of a transaction should
be established over a sample set that is
sufficiently large to ensure confidence
that the variation is indeed consistent.
Third, the emphasis on consistent
variation with a term, over a significant
number of transactions, like the use of
correlation as proposed, is intended to
make clear that there is no need to
establish causation to satisfy the first
prong. Finally, the consistent variation
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between the factor and term may be
positive or negative.
The Bureau has also made a minor
change to the proposed second prong of
the definition. The final rule replaces
‘‘can’’ with ‘‘has the ability’’ to
emphasize that the loan originator must
have substantive and not conjectural
capacity to add, drop, or change the
factor. That is, the ability to influence
the factor must be actual rather than just
hypothetical.
The Bureau believes that the new
definition for a ‘‘term of a transaction’’
and the revision to the proxy definition
should help clarify whether a particular
factor is a term of a transaction in the
first place or is a proxy for a term of a
transaction. To create further clarity, the
Bureau is providing additional
interpretation and examples on how the
two definitions function together when
applied to an analysis of the
permissibility of compensating loan
originators by reference to some of the
numerous factors identified by
commenters. Because the analysis of
whether a factor upon which a loan
originator would be compensated is a
proxy is often dependent on particular
facts, care should be taken before
concluding that the Bureau has
sanctioned any particular compensation
factor in all circumstances.
For example, the Bureau believes that
compensation based on which census
tract, county, state, or region of the
country the property securing a credit
transaction is located generally is not a
term of a transaction. However, the
geographic factors compensation is
based on, that is the census tract,
county, state, or region of the country,
would be subject to analysis under the
proxy definition.79 Location within a
broad geographic unit is unlikely to be
deemed a proxy for a term of a
transaction. The factor must satisfy both
prongs of the definition to be considered
a proxy. Loan originators have no ability
to change the location of property that
a consumer purchases. Thus, absent
very unusual circumstances, the second
prong and thus the larger test would not
be satisfied. Thus, the geographic
location in this example would not be
considered a proxy for a term of a
transaction.
For similar reasons, compensation
based on whether a consumer is a lowto moderate-income borrower would
also typically be neither compensation
based on a term of a transaction nor
79 The analysis would be different if, under
specific facts and circumstances, geographic
location were otherwise incorporated into the
agreements that together constitute the credit
transaction in a way that would satisfy the
definition of a term of the transaction.
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compensation based on a proxy for a
term of a transaction. First, whether a
consumer is a low-to moderate-income
borrower would typically not be a term
of a transaction. Income level is not a
right or obligation of the agreement.
Moreover, income level is not a fee or
charge. The determination of whether a
particular consumer fits the definition
of a low-to moderate-income borrower
would depend on that consumer’s
income and the definition of low-to
moderate-income pursuant to applicable
government standards. With regard to
the proxy text, credit extended to lowto moderate-income borrowers may tend
to consistently have certain pricing or
product features, but because a loan
originator is typically unable to change
whether a consumer is classified as a
low-to moderate-income borrower,
compensating based on this factor
would not satisfy the second prong of
the definition of a proxy.
Depending on the particular facts and
circumstances, compensation based on a
consumer’s debt-to-income or loan-tovalue ratio, although not typically a
term of a transaction, could be
considered compensation based on a
proxy for a term of a transaction. Debtto-income and loan-to-value ratios are
not typically transaction terms.
Applying the first prong of the proxy
definition, these factors could
consistently vary, over a significant
number of transactions, with a term of
a transaction such as the interest rate.
Depending on the particular facts and
circumstances, if either of these factors
does meet the first prong, the factors
could meet the second prong of the
proxy definition because a loan
originator could have the ability to alter
these factors by encouraging consumers
to take out larger or smaller amounts of
credit.80
A diverse variety of industry
commenters requested guidance on
whether compensation based on
variations in the amount of credit
extended for different products, such as
differentially compensating loan
originators for jumbo loans,
conventional loans, and credit extended
pursuant to government programs for
low-to moderate-income borrowers
(which typically have smaller amounts
of credit extended and smaller profit
margins) would be prohibited as
compensation based on a proxy for a
term of a transaction. Commenters
explained that loan originators paid as
a percentage of the amount of credit
80 Section 1026.36(d)(1)(ii) expressly permits
compensation based on the amount of credit
extended, but does not permit compensation based
on the amount of credit extended combined with
another factor.
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extended are de-incentivized to extend
credit to low-to moderate-income
consumers because these consumers
usually take out smaller amounts of
credit. Commenters also stated that
creditors cap the percentage of the
amount of credit extended they are
willing to pay loan originators for
originating jumbo loans.
This issue is not properly a question
that implicates a proxy analysis, but
instead a question of the breadth of the
exclusion of compensation based on a
term of a transaction in
§ 1026.36(d)(1)(ii) for compensation
based on the amount of credit extended.
To the extent that commenters are
asking whether it is permissible to
compensate loan originators on the
actual size of the amount of credit
extended using a fixed percentage of
credit extended as a factor, this is
clearly permitted by § 1026.36(d)(1)(ii).
On the other hand, § 1026.36(d)(1)(ii)
does not permit loan originators to be
compensated on a percentage that itself
varies based on the amount of credit
extended for a particular transaction.
For example, existing comment
36(d)(1)–9 prohibits payment to a loan
originator compensation that is 1.0
percent of the amount of credit
extended for credit transactions of
$300,000 or more, 2.0 percent for credit
transactions between $200,000 and
$300,000 and 3.0 percent on credit
transactions of $200,000 or less.81
Existing § 1026.36(d)(1)(ii) and
comment 36(d)(1)–9, however, also
provide a permissible method by which
a floor or ceiling may be placed on a
particular loan originator’s
compensation on a per transaction basis.
For example, a creditor may offer a loan
originator 1.0 percent of the amount of
credit extended for all credit
transactions the originator arranges for
the creditor, but not less than $1,000 or
greater than $5,000 for each credit
transaction.82
A mix of commenters requested
clarification on whether compensation
can vary based on the geographic
location of the individual loan
originator instead of the property so that
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81 Existing
comment 36(d)(1)–9 is consistent with
the Bureau’s interpretation of TILA section 129B(c).
To the extent there is any uncertainty in the statute
regarding whether loan originators are prohibited
from being compensated based on a percentage of
the loan that itself varies based on the amount of
credit extended for a particular transaction, the
Bureau relies on its interpretive authority under
TILA section 105(a) to effectuate the purposes of
TILA, prevent circumvention or evasion, and
facilitate compliance therewith.
82 As discussed above, it is also not permissible
to differentiate compensation based on credit
product type, since products are simply a bundle
of particular terms.
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for instance individual loan originators
located in a high cost of living area are
paid a higher fixed percentage of the
amount of credit extended relative to
individual loan originators located in
lower cost areas. The existing rule does
not apply to differences in
compensation between different
individual loan originators. The rule
applies to the compensation received by
a particular individual loan originator.
For example, this rule does not prohibit
a particular individual loan originator
located in New York City from receiving
compensation based on a higher
percentage of the amount of credit
extended than a loan originator located
in Knoxville, Tennessee. The final rule
does not change the existing rule in this
respect.
A diverse group of commenters also
requested clarification on whether
compensation based on whether an
extension of credit held in portfolio or
sold into the secondary market would
be considered compensation based on
transaction terms. The Bureau finalizes
as comment 36(d)(1)–2.ii.A the
proposed example, described above,
that discusses how, in specific
circumstances presented in the
example, compensation based on
whether an extension of credit is held
in portfolio or sold into the secondary
market would violate § 1026.36(d)(1).
Under the example, whether the
extensions of credit were held in
portfolio was a factor that consistently
varied with transaction terms over a
significant number of transactions (i.e.,
five-year term with a final balloon
payment or a 30-year term). In the
example, the loan originator also had
the ability to encourage consumers to
choose extensions of credit that were
either held in portfolio or sold in the
secondary market by steering them to
terms that corresponded to their future
status, e.g., the five-year term
transactions were destined for portfolio.
Thus, whether compensation could vary
based on these factors as described
above without violating § 1026.36(d)(1)
depends on the particular facts and
circumstances.83
Permissible Methods of Compensation
To reduce further regulatory
uncertainty surrounding the interplay
83 Commenters also requested clarification on
whether compensation could vary based on
whether an extension of credit was originated in
wholesale or retail channels or whether credit was
extended by a bank or the bank brokered the
extension of credit to another creditor. Assuming
that there was consistent variation between these
factors and transaction terms, the analysis would
depend on whether a loan originator could be
deemed to vary the channel or control the creditor’s
role in the transaction.
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between a term of a transaction and a
proxy for a term of a transaction and in
response to commenters’ inquiries
implicating the scope of the comment’s
examples, the final rule revises the
content of existing comment 36(d)(1)–3
and moves that content to comment
36(d)(1)–2.i for organizational purposes.
Existing comment 36(d)(1)–3 provides
nine ‘‘illustrative examples of
compensation methods that are
permissible’’ and are ‘‘not based on the
transaction’s terms or conditions.’’ The
final rule removes two of the examples,
clarifies the scope of several others, and
clarifies that the revised and remaining
examples are not subject to a proxy
analysis.
Existing comment 36(d)(1)–3 declares
compensation based on the following
methods permissible: ‘‘loan originator’s
overall loan volume * * * delivered to
the creditor’’; ‘‘the long-term
performance of the originator’s loans’’;
‘‘[a]n hourly rate of pay to compensate
the originator for the actual number of
hours worked’’; ‘‘[w]hether the
consumer is an existing customer of the
creditor or a new customer’’; a
‘‘payment that is fixed in advance for
every loan the originator arranges for the
creditor’’; the ‘‘percentage of
applications submitted by the loan
originator to the creditor that results in
consummated transactions’’; ‘‘the
quality of the loan originator’s loan files
(e.g., accuracy and completeness of the
loan documentation) submitted to the
creditor’’; a ‘‘legitimate business
expense, such as fixed overhead costs’’;
and ‘‘the amount of credit extended, as
permitted by § 1026.36(d)(1)(ii).’’
The 2010 Loan Originator Final Rule
did not explicitly address whether these
examples should be subject to a proxy
analysis. Nonetheless, the Board
strongly implied that compensation
based on these factors would not be
compensation based on a proxy for
transaction terms or conditions by
referring to them as ‘‘permissible’’
methods. The Bureau believes that
compensation based on these methods
is not compensation based on a term of
a transaction under § 1026.36(d)(1)(ii)
and should not be subjected to the
proxy analysis. Because the final rule
further develops the proxy concept and
places it in regulatory text, the Bureau
is revising the list to clarify that these
are still permissible bases of
compensation.84
84 In addition, the Bureau has removed the
language stating that the list is not exhaustive. The
Bureau believes there are factors not in the list that
would also not meet the definition of a term of the
transaction. These factors would be subject to
analysis under the proxy definition, however.
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The Bureau recognizes that there are
few ways to compensate loan originators
under this rule that are not subject to
proxy analysis. The Bureau further
acknowledges that some institutions
will not want to subject factors to the
proxy definition to determine if they
may be permissible because of the factdependent nature of the analysis. The
Bureau believes it is important to allow
persons to compensate loan originators
based on factors that the Bureau
considers to be neither a term of the
transaction nor a proxy for a term of the
transaction. The Bureau believes that,
although some of the compensation
methods may give rise to negligible
steering incentives, the benefits of
allowing a person to compensate under
these methodologies outweigh any such
potential steering incentives. For
example, periodically setting
compensation levels (i.e., commissions)
for loan originators based on the quality
of loan files or long term performance of
the credit transactions the loan
originator has arranged should
encourage behavior that benefits
consumers and industry alike. The
Bureau believes that providing this list
of compliant factors will facilitate
compliance with the rule.
The final rule list deletes the last
example that allows for compensation
based on the amount of credit extended.
The Bureau believes that this example is
unnecessary because, as the example
itself notes, this exception is expressly
set forth in § 1026.36(d)(1)(ii). Moreover,
the corollary to ‘‘amount of credit
extended’’ is embodied in the first
example on the list that permits
compensation based on the loan
originator’s overall loan volume, which
is further explained as either the ‘‘total
dollar amount of credit extended or total
number of loans originated.’’ The
Bureau has moved the regulatory crossreference to the first example.
The Bureau has also removed the
existing example that permits a loan
originator to be compensated based on
a legitimate business expense, such as
fixed overhead costs. The Bureau has
understood that the example applies to
loan originator organizations (which
incur business expenses such as fixed
overhead costs) and not to individual
loan originators. An example of the
application of this exception would be
a loan originator organization that has a
branch in New York City and another in
Oklahoma. The loan originator
organization would be able to receive
compensation from a creditor pursuant
to a formula that reflects the additional
overhead costs of maintaining an office
in New York City. While the Bureau
believes that this practice would
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normally not constitute compensation
based on a term of a transaction given
the definition adopted in this final rule,
the final rule removes this example
because the Bureau does not believe that
this method of compensation should be
insulated from a proxy analysis in every
instance. The Bureau is concerned that
under certain circumstances, differential
compensation for corporate loan
origination organization branches from
creditors could create steering
incentives that violate § 1026.36(e). For
example, loan originators working in a
call center for the loan originator
organization with the two branches
described above could be incentivized
to steer a consumer to the New York
City branch that only offers subprime
credit (and receives the most
compensation per transaction from the
creditor based on the additional
overhead costs) to increase the amount
of compensation the loan originator
organization would receive.
Many commenters, including large
industry associations, questioned the
extent of protection offered by existing
comment 36(d)(1)–3.iii, which provides
that an hourly rate of pay to compensate
the originator for the actual number of
hours worked is not compensation
based on transaction terms. Commenters
asked whether an employer would be
permitted under the comment to create
commissions for specific credit products
based on the estimated typical hours
needed to originate or process the
product. Commenters explained that the
ability to set a commission based on
estimated hours instead of actual hours
worked would eliminate costs that
would otherwise be expended on
tracking and documenting the actual
time spent on originating each
particular credit transaction.85
During outreach before the proposal,
the Bureau learned that historically loan
originators and processers generally
spend more time on certain credit
products. The outreach participants also
noted, however, that in the current
market there is no consistent variation
in the typical time needed to originate
or process different credit products,
such as an FHA loan or
nonconventional loan versus a
conventional loan. These participants
explained that stricter underwriting
requirements have caused many
conventional loans to take as long as, or
longer than, FHA loans or other
government program credit products.
For example, participants noted that
processing conventional loans for
consumers with a higher net worth but
little income or a higher income with
large amounts of debt often take longer
than processing FHA or other
nonconventional loans for low-to
moderate-income consumers.
Permitting a creditor or loan
originator organization to establish
different levels of compensation for
different types of products would create
precisely the type of risk of steering that
the Act seeks to avoid unless the
compensation were so carefully
calibrated to the level of work required
as to make the loan originators more-orless indifferent as to whether they
originated a product with a higher or
lower commission. The Bureau believes,
however, that periodic changes in the
market and underwriting requirements
and changing or unique consumer
characteristics would likely lead to
inaccurate estimates for the time a
specific credit product takes to originate
and thus lead to compensation
structures that create steering
incentives. The Bureau further believes
that the accuracy of the estimates would
be difficult to verify without recording
the actual number of hours worked on
particular credit products anyway. The
Bureau believes that this information
would be necessary not only to set the
estimate initially but also to calibrate
the estimate as market conditions and
consumer characteristics rapidly evolve
and to correct inaccuracies. The Bureau
believes that the potential for
inaccuracy or deliberate abuse and
burdens of remedying and tracking
inaccurate estimates outweighs any
benefit gained by permitting estimates
of the actual hours worked. These types
of estimates are not currently covered by
the exemption in comment 36(d)(1)–
3.iii, and the Bureau is not amending
the comment to permit them.86
To provide further clarification the
Bureau notes that certain ‘‘permissible
methods of compensation’’ specifically
allow compensation methods to be
calculated with reference to and applied
to a specific transaction while others
allow for compensation methods to be
calculated with reference to and applied
to multiple transactions. For example,
the permissible methods of
compensation in comment 36(d)(1)–
2.i.A (compensation adjustment for total
85 The comment from the industry groups urged
the Bureau ‘‘to clarify that if a creditor or broker
makes a good faith determination of the time and
effort to process a loan based upon the loan product
or process, then it may use that information to vary
loan originator compensation by product or
process.’’
86 If a loan originator’s compensation was
calculated on an estimate of hours worked for a
specific product, or by any other methodology to
determine time worked other than accounting for
actual hours worked, the methodology would be
permissible only if it did not meet the definition of
a proxy (and complied with other applicable laws).
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dollar amount or total number of
transactions), B (long term
performance), E (adjustment after
certain number of transactions), F (the
percentage of applications that result in
consummated transactions), and G
(quality of the loan files submitted to
the creditor) permit compensation
adjustments to be calculated with
reference to and applied to multiple
transactions. The other permissible
methods of compensation in comment
36(d)(1)–2.i.C (hourly rate of pay) and D
(existing or new customer) permit
compensation methods to be calculated
with reference to and applied to a
specific transaction. The Bureau further
notes that the permissible methods of
compensation to be calculated with
reference to and applied to multiple
transactions should be considered
together with existing comment
36(d)(1)–6 that provides interpretation
of ‘‘periodic changes in loan originator
compensation.’’ That comment gives as
an example 6-months as a permissible
period for revising compensation after
considering multiple transactions and
other variables over time.
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
existing § 1026.36(d)(1) is on
‘‘compensation in an amount that is
based on’’ the transaction’s terms and
conditions (emphasis added). In the
proposal, the Bureau stated its belief
that the meaning of the statute’s
reference to compensation that ‘‘varies’’
based on transaction terms is already
embodied in § 1026.36(d)(1). Thus, the
Bureau’s proposal would not have
revised § 1026.36(d)(1) to include the
word ‘‘varies.’’
The Bureau further stated its belief in
the proposal 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 would have
clarified these points. The Bureau
further proposed new comment
36(d)(1)–1 be adopted in place of
existing comment 36(d)(1)–1, the
substance of which would have been
moved to comment 36(a)–5, as
discussed above.
The proposed comment also would
have clarified that a difference between
the amount of compensation paid and
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the amount that would have been paid
for different terms might be shown by a
comparison of different transactions, but
a violation does not require a
comparison of multiple transactions.
The Bureau did not receive any
comments on this proposal. The Bureau
is adopting the substance of the
comment as proposed but further
clarifying that when there is a
compensation policy in place and the
objective facts and circumstances
indicate the policy was followed, the
determination of whether compensation
would have been different if a
transaction term had been different is
made by analysis of the policy. A
comparison of multiple transactions and
amounts of compensation paid for those
transactions is generally needed to
determine whether compensation would
have been different if a transaction term
had been different when there is no
compensation policy, or when a
compensation policy exists but has not
been followed. The revised comment is
intended to provide loan originator
organizations, creditors, and other
persons that maintain and follow
permissible loan originator
compensation policies greater certainty
about whether they are in compliance.
For the reasons discussed above, this
final rule adopts new comment
36(d)(1)–1 as proposed and moves
existing comment 36(d)(1)–1 to
comment 36(a)–5.
Pooled Compensation
Comment 36(d)(1)–2 currently
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 than one
another and originate loans with
different terms are prohibited under
§ 1026.36(d)(1) from pooling their
compensation and sharing in that
compensation pool. The Bureau
proposed to revise comment 36(d)(1)–
2.ii to make clear that, where loan
originators have different commission
rates or other compensation plans and
they each originate loans with different
terms, § 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 2 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 1
percent of the loan amount for each loan
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11329
that he or she originates and originates
loans that generally have lower interest
rates than the loans originated by Loan
Originator A. In this example, proposed
comment 36(d)(1)–2.ii would have
clarified that the compensation of the
two loan originators may not be pooled
so that the loan originators share in that
pooled compensation.
In the supplementary information to
the proposal, the Bureau stated its belief
that this type of pooling is prohibited by
§ 1026.36(d)(1) because each loan
originator receives compensation based
on the terms of the transactions they
collectively make. This type of pooling
arrangement could provide an incentive
for the participating loan originators to
steer some consumers to loan
originators that originate loans with less
favorable terms (for example, that have
higher interest rates) to maximize their
overall compensation.
The Bureau received only one
comment on this proposed revision, and
that commenter favored the proposal.
For the reasons discussed above, this
final rule adopts comment 36(d)(1)–2.ii
(redesignated as comment 36(d)(1)–2.iii)
as proposed in substance, although the
proposed language has been
streamlined.
Creditor’s Flexibility in Setting Loan
Terms
Comment 36(d)(1)–4 currently
clarifies that § 1026.36(d)(1) does not
limit the creditor’s ability to offer
certain loan terms. Specifically,
comment 36(d)(1)–4 specifies that
§ 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 § 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. The comment states, for
example, that § 1026.36(d)(1) does not
prohibit a creditor from charging an
interest rate of 6.0 percent where the
consumer pays some or all of the
transaction costs and an interest rate of
6.5 percent where the consumer pays
none of those costs. The comment also
clarifies that § 1026.36(d)(1) 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-
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based pricing to set the interest rate for
consumers). Finally, the comment notes
that a creditor is not prohibited under
§ 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
transaction). This interpretation
recognized that creditors that pay a loan
originator’s compensation generally
recoup that cost through a higher
interest rate charged to the consumer.
The Bureau proposed to revise
comment 36(d)(1)–4 to harmonize it
with the Bureau’s proposal to
implement TILA section
129B(c)(2)(B)(ii), which would have
prohibited consumers from paying
upfront points and fees on certain
transactions. As discussed in the
section-by-section analysis of
§ 1026.36(d)(2)(ii), the Bureau is not
adopting this restriction in the final
rule. Nevertheless, the Bureau believes
it is appropriate to revise this comment
for clarity. Specifically, as revised,
comment 36(d)(1)–4 provides that, if a
creditor pays compensation to a loan
originator in compliance with
§ 1026.36(d), the creditor may recover
the costs of the loan originator’s
compensation and other costs of the
transaction by charging the consumer
points or fees or a higher interest rate or
a combination of these. Thus, the final
comment clarifies the existing comment
that in such transactions, a creditor may
charge a higher interest rate to a
consumer who will pay fewer of the
costs of the transaction at or before
closing, or it may offer the consumer a
lower rate if the consumer pays more of
the transaction costs at or before closing.
For example, if the consumer pays half
of the transaction costs at or before
closing, a creditor may charge an
interest rate of 6.0 percent but, if the
consumer pays none of the transaction
costs at or before closing, a creditor may
charge an interest rate of 6.5 percent. In
transactions where a creditor pays
compensation to a loan originator in
compliance with § 1026.36(d), a creditor
also may offer different consumers
varying interest rates that include a
consistent interest rate premium to
recoup the loan originator’s
compensation through increased
interest paid by the consumer (such as
by consistently adding 0.25 percentage
points to the interest rate on each
transaction where the loan originator is
compensated based on a percentage of
the amount of the credit extended).
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Point Banks
The Bureau stated in the proposal that
it had considered proposing
commentary language addressing
whether there are any circumstances
under which point banks are
permissible under § 1026.36(d).87 Based
on the views expressed by the Small
Entity Representatives participating in
the Small Business Review Panel
process, other stakeholders during
outreach, and the Bureau’s own
analysis, the Bureau stated that it
believed that there should be no
circumstances under which point banks
are permissible, and the proposal would
have continued to prohibit them in all
cases. A few commenters, including a
community bank and an organization
representing State bank supervisors,
expressed support for the Bureau’s
decision not to allow point banks, and
no commenters objected to the Bureau’s
proposed approach. The Bureau is not
adopting in this final rule any provision
purporting to describe circumstances
under which point banks would be
permissible under § 1026.36(d)(1).
Pricing Concessions
As an outgrowth of the general ban on
varying compensation based on the
terms of a transaction, the Board’s 2010
Loan Originator Final Rule included
commentary that interprets
§ 1026.36(d)(1)(i) to prohibit changes in
loan originator compensation in
connection with a pricing concession,
i.e., a change in transaction terms.
Specifically, comment 36(d)(1)–5
clarifies 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). The
Board adopted the commentary out of
concern that permitting creditors to
decrease loan originator compensation
because of a change in terms favorable
to the consumer would result in
loopholes and permit evasions of the
rule. 75 FR 58509, 58524 (Sept. 24,
2010). In particular, the Board reasoned,
if a creditor could agree to set
originators’ compensation at a high level
generally and then subsequently lower
the compensation in selective cases
87 A point bank is a continuously maintained
accounting balance of basis points credited to a loan
originator by a creditor for originations. From the
point bank, amounts are debited when ‘‘spent’’ by
the loan originator to obtain pricing concessions
from the creditor on a consumer’s behalf for any
transaction. For further explanation of how point
banks operate, see the section-by-section analysis of
proposed § 1026.36(d)(1)(i). 77 FR 55294 (Sept. 7,
2012).
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based on the actual loan terms, that
practice could have the same effect as
increasing the originator’s compensation
for higher rate loans. Id. The Board
stated that such compensation practices
are harmful and unfair to consumers. Id.
The Bureau proposed three revisions
to the § 1026.36(d)(1) commentary
addressing whether a loan originator
may bear the cost of a pricing
concession through reduced
compensation.88 The first change
proposed by the Bureau was to revise
comment 36(d)(1)–5 to clarify that,
while the creditor may change loan
terms or pricing to match a competitor,
to avoid triggering high-cost mortgage
provisions, or for other reasons, the loan
originator’s compensation on that
transaction may not be changed for
those reasons. Revised comment
36(d)(1)–5 would have further clarified
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 mortgage
provisions. The revised comment also
would have included a cross-reference
to new proposed comment 36(d)(1)–7
for further interpretation, as discussed
below.
The proposal also would have
removed existing comment 36(d)(1)–7,
which states that the prohibition on
compensation based on transaction
terms does not apply to transactions in
which any loan originator receives
compensation directly from the
consumer (i.e., consumer-paid
compensation) under the existing rule.
As discussed above, the Dodd-Frank Act
now applies the prohibition on
compensation based on transaction
terms to consumer-paid compensation.
Thus, the Bureau stated that it believed
it was appropriate to propose to remove
existing comment 36(d)(1)–7 and to
interpret comment 36(d)(1)–5 as
applying to loan originator
organizations that receive compensation
directly from consumers as well as to
88 The revisions to comment 36(d)(1)–5 and
36(d)(1)–7 address the following scenarios: (1)
Where a creditor reduces the compensation paid to
an individual loan originator in connection with a
change in transaction terms; (2) where a creditor
reduces the compensation paid to a loan originator
organization in connection with a change in
transaction terms, with or without a corresponding
reduction by the loan originator organization in the
compensation paid to an individual loan originator;
or (3) in a transaction where the loan originator
organization receives compensation directly from
the consumer, where a loan originator organization
reduces its own compensation with or without a
corresponding reduction in compensation paid to
an individual loan originator. Thus, these revisions
do not address where a creditor or loan originator
organization alters transaction terms that do not
consist of or result in payment of loan originators.
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loan originators that receive
compensation from creditors.
Finally, in place of existing comment
36(d)(1)–7, the Bureau proposed to
include a new comment 36(d)(1)–7, to
clarify that the interpretation that
§ 1026.36(d)(1)(i) prohibits loan
originators from decreasing their
compensation to bear the cost of pricing
concessions does not apply where the
transaction terms change after the initial
offer due to an unanticipated increase in
certain closing costs. The Bureau
believed that it was appropriate to
propose this clarification because such
situations did not present a risk of
steering and could allow additional
flexibility to the parties to consummate
a transaction after unexpected
developments. Specifically, new
comment 36(d)(1)–7 would have
clarified that, notwithstanding comment
36(d)(1)–5, § 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 exceed
limits imposed under the RESPA
disclosure rules and other applicable
laws. The RESPA disclosure rules
(implemented in Regulation X) require
creditors to estimate the costs for
settlement services within a few days of
application, and restrict the amount of
cost increases beyond those estimates
(i.e., ‘‘tolerance’’ requirements 89)
89 Tolerance requirements (tolerances) are
accuracy standards under Regulation X, with
respect to the good faith estimate which
summarizes estimated settlement charges and is
provided to borrowers under RESPA section 5(c)
(RESPA GFE). See generally 12 CFR 1024.7(e) and
(f). Regulation X provides for three categories of
tolerances. Section 1024.7(e)(1) of Regulation X
provides that the actual settlement charges may not
exceed the amounts included on the RESPA GFE for
(1) the origination charge, (2) while the borrower’s
interest rate is locked, the credit or charge for the
interest rate chosen, (3) while the borrower’s
interest rate is locked, the adjusted origination
charge; and (4) transfer taxes (zero percent
tolerance). Section 1024.7(e)(2) provides that the
sum of the settlement charges for the following
services may not be greater than 10 percent above
the sum of the estimated charges for those services
included on the RESPA GFE for (1) lender-required
settlement services, where the lender selects the
third-party settlement service provider, (2) lenderrequired services, title services and required title
insurance, and owner’s title insurance, when the
borrower uses a settlement service provider
identified by the loan originator, and (3)
government recording charges (10 percent
tolerance). Section 1024.7(e)(3) provides that all
other estimated charges may change by any amount
prior to settlement (no tolerance). Under Regulation
X, the estimates included on the RESPA GFE
generally are binding within the tolerances. 12 CFR
1024.7(f). In limited instances, however, a revised
RESPA GFE may be provided reflecting an increase
in settlement charges (e.g., for changed
circumstances, defined in 12 CFR 1024.2(b), that
result in increased settlement charges or a change
in the borrower’s eligibility for the specific loan
terms identified in the RESPA GFE). Id. In the 2012
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depending on whether the settlement
service provider is selected by the
creditor, by the consumer from a list
provided by the creditor, or by the
consumer on the open market. Thus, the
proposed comment would have
permitted pricing concessions to cover
unanticipated increases in non-affiliated
third-party closing costs that exceed the
Regulation X tolerances, provided that
the creditor or the loan originator does
not know or should not reasonably be
expected to know the costs in advance.
Proposed comment 36(d)(1)–7 also
would have explained, 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 consumer is allowed
to choose from among only three preapproved third-party service providers.
In contrast, where a consumer is
permitted to shop for the third-party
service provider and selects a thirdparty service provider entirely
independently of any pre-approval or
recommendation of the creditor or loan
originator, the loan originator might not
be reasonably expected to know the
amount of the closing costs in advance
because of the lack of communication
and coordination between the loan
originator and the third-party service
provider prior to provision of the
estimate. The Bureau stated in the
proposal that if a loan originator
repeatedly reduces its compensation to
bear the cost of pricing concessions for
the same categories of closing costs
across multiple transactions based on a
series of purportedly unanticipated
expenses, proposed comment 36(d)(1)–7
would not apply to this situation
because the loan originator would be
reasonably expected to know the closing
costs across multiple transactions.
As noted above, the Bureau explained
it believed the new comment was
appropriate because reductions in loan
originator compensation to bear the cost
of pricing 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. The Bureau also stated that
this further clarification would have
effectuated the purposes of, and
facilitated compliance with, TILA
section 129B(c)(1) and § 1026.36(d)(1)(i)
because, without it, creditors and loan
TILA–RESPA Proposal, the Bureau proposed
certain changes to the tolerances, such as subjecting
settlement charges by lender-affiliated providers to
zero percent tolerance. See 77 FR 51169–72 (Aug.
23, 2012). For a discussion of tolerances more
generally, see the 2012 TILA–RESPA Proposal, 77
FR 51165–75 (Aug. 23, 2012).
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originators might incorrectly conclude
that a loan originator bearing the cost of
these pricing concessions would violate
those provisions, or creditors and loan
originators could face unnecessary
uncertainty with regard to compliance
with these provisions and other laws,
such as Regulation X’s tolerance
requirements (as applicable). The
Bureau further solicited comment on
whether the proposed revisions to the
§ 1026.36(d)(1) commentary would be
appropriate, too narrow, or create a risk
of undermining the principal
prohibition of compensation based on a
transaction’s terms.
The Bureau received approximately
20 comments regarding the proposed
revision to the § 1026.36(d)(1)
commentary to allow loan originators to
reduce their compensation to cover
unanticipated increases in non-affiliated
third-party closing costs that would
exceed applicable legal requirements.
Several consumer groups expressed
opposition to this proposal, asserting
that the Bureau should not allow
reductions in loan originator
compensation to bear the cost of pricing
concessions under any circumstances.
They stated that permitting loan
originators to reduce their compensation
to account for increases in third-party
fees will weaken the incentive for third
parties to provide accurate estimates of
their fees (thereby undermining the
transparency of the market); place
upward pressure on broker
compensation to absorb unanticipated
closing cost increases; and encourage
violations of RESPA section 8’s
prohibition on giving or accepting a fee,
kickback, or any other thing of value in
exchange for referrals of settlement
service business involving a federally
related mortgage loan. The consumer
groups also criticized as unrealistic the
proposal to permit reductions in loan
originator compensation to bear the cost
of pricing concessions only when a loan
originator does not know or should not
reasonably be expected to know the
amount of the closing cost in advance.
In the consumer groups views, loan
originators, by virtue of their
experience, will or should always know
the actual closing costs; thus, the
Bureau’s premise for the proposed
exception to the prohibition on reducing
loan originator compensation to bear the
cost of a pricing concession will never
occur in practice.
An organization commenting on
behalf of State bank supervisors
supported allowing reductions in
compensation to bear the cost of pricing
concessions made in response to
unforeseen events genuinely outside the
control of the loan originator. The group
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wrote that such reductions in loan
originator compensation should not
raise concerns about the potential for
steering consumers to particular
transaction terms. The group also stated
that the proposed changes to the
commentary to § 1026.36(d)(1) would
provide needed clarity and coherence in
this area.
Many industry commenters, including
large and medium-sized financial
institutions as well as several national
trade associations, supported in
principle the Bureau’s interpretation of
§ 1026.36(d)(1) to permit reductions in
loan originator compensation in the
circumstances described in proposed
revised comment 36(d)(1)–7. One
community bank stated its appreciation
for the Bureau providing better insight
into an area that, according to the bank,
has been vague since the existing
regulation went into effect and asserted
that the Bureau is correct in allowing for
reductions in loan originator
compensation to bear the cost of pricing
concessions in certain instances where
the consumer will not suffer material
harm. The bank, however, criticized the
circumstances described in proposed
revised comment 36(d)(1)–7 as too
subjective and narrow. A financial
holding company commented that the
language permitting a reduction in loan
originator compensation to bear the cost
of a pricing concession only if the loan
originator does not know or is not
reasonably expected to know the
amount of the closing costs in advance
was too ambiguous. A trade association
representing the mortgage industry
questioned the meaning in the proposed
commentary provision of the term
‘‘unanticipated expenses’’ because, the
association stated, these types of
additional expenses would typically
constitute changed circumstances,
which are already the subject of
redisclosure of the RESPA GFE.
Some industry commenters urged the
Bureau to allow reductions in loan
originator compensation to bear the cost
of pricing concessions under additional
circumstances, such as to cover closing
cost increases within the Regulation X
tolerance requirements (in contrast to
the proposal, which would permit
pricing concessions only where the
closing cost increase exceeds limits
imposed by applicable law); to avoid the
triggering of Federal and State high-cost
mortgage provisions; and to ensure that
a credit transaction is a qualified
mortgage under Federal ability-to-repay
provisions.90 One large depository
90 As discussed in part II.C above, the Bureau, as
part of the Title XIV Rulemakings, has issued the
2013 ATR Final Rule and the 2013 ATR Concurrent
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institution asked that the commentary
clarify that reductions in loan originator
compensation to bear the cost of pricing
concessions are permitted for closing
cost increases quoted by pre-approved
service providers if the increase was
caused by an event that neither the
service provider nor the loan originator
reasonably could have predicted in the
ordinary course of business. Several
individual loan originators asked to
allow reductions in loan originator
compensation to cover rate-lock
extensions. One mortgage broker
suggested a cap of $500 for reductions
in loan originator compensation to bear
the cost of pricing concessions.
Several industry commenters
requested that reductions in loan
originator compensation to bear the cost
of pricing concessions be permitted in
the case of loan originator ‘‘error,’’
though these commenters differed
slightly on some details. For instance,
one large depository institution urged
the Bureau to allow reductions in loan
originator compensation to bear the cost
of pricing concessions to cover expenses
incurred by the creditor as a result of
inadvertent errors by the individual
loan originator, such as misquoting a
creditor or third-party charge and
making clerical or other errors that
result in a demonstrable loss to the
creditor (e.g., where the loan originator
assures the consumer that the interest
rate is being locked but fails to do so).
In addition, the same depository
institution urged the Bureau to permit
reductions in loan originator
compensation to allow the creditor to
penalize loan originators for their failure
to comply with the creditor’s policies
and procedures even in the absence of
a demonstrable loss to the creditor.
Another large depository institution
asked the Bureau to allow reductions in
loan originator compensation to bear the
cost of pricing concessions where the
loan originator made an error on the
RESPA GFE. A national industry trade
association asked that a loan originator
be allowed to reduce compensation to
address an erroneous or mistaken charge
on the RESPA GFE, or where poor
customer service has been reported. One
financial institution also requested that
reductions in loan originator
compensation to bear the cost of pricing
concessions be permitted when there is
a misunderstanding over consumer
information or to cover ‘‘reduced,
waived, or uncollected third-party fees.’’
Proposal, which together would implement DoddFrank Act provisions requiring creditors to
determine that a consumer is able to repay a
mortgage loan and establishing standards for
compliance, such as by making a ‘‘qualified
mortgage.’’
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One trade association asked that
creditors be able to limit the discretion
of loan originators to reduce their
compensation to bear the cost of pricing
concessions to avoid disparate impact
issues under fair lending laws.
One large depository institution and
two national trade associations
commented that the Bureau should
allow reductions in loan originator
compensation to bear the cost of pricing
concessions granted to meet price
competition. One of the trade
associations commented that
prohibiting reductions in loan originator
compensation in these circumstances
punishes motivated and informed
consumers who are seeking more
competitive loan originator
compensation from the person closest to
the transaction, which is the individual
loan originator, by denying such
consumers the benefit of their wish to
bargain. A trade association
representing mortgage brokers similarly
stated that loan originators should be
permitted to reduce their compensation
to provide closing cost credits to a
consumer or to match a competitor’s
price quote. This trade association also
asserted that not allowing loan
originator organizations to reduce their
compensation to bear the cost of pricing
concessions for competition creates an
‘‘[un]level playing field’’ between loan
originator organizations and creditors.
A State housing finance authority
urged the Bureau not to impose the ban
on reducing loan originator
compensation to bear the cost of pricing
concessions for loans purchased or
originated by governmental
instrumentalities. The commenter stated
that, under its programs, creditors agree
to receive below-market servicing
release premiums, and they then pass
on some or all of that loss by paying
loan originators less for such
transactions. The commenter stated
further that the proposal would have
disruptive effects on its programs
because creditors have indicated that
they cannot afford to participate if, as
they interpret § 1026.36(d)(1)(i) as
mandating, they must absorb all of the
loss associated with the below-market
servicing release premiums. A mortgage
company asked that the Bureau allow it
to reduce the basis points it pays its
loan originators for originating jumbo
loans.
The Bureau has considered the
comments received and concluded that
it is appropriate to finalize the basic
approach to pricing concessions
outlined in the proposal, while
expanding the scope of circumstances in
which the compensation paid to a loan
originator may be reduced to bear the
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cost of pricing concessions provided to
consumers in response to unforeseen
settlement cost increases. The Bureau
believes that it is critical to continue
restricting reductions in loan originator
compensation to bear the cost of pricing
concessions to truly unforeseen
circumstances, because broader latitude
would create substantial opportunities
to evade the general rule. The Bureau
believes this approach will balance the
concerns of industry that the proposed
commentary provision regarding
permissible reductions in loan
originator compensation to bear the cost
of pricing concessions was too narrowly
crafted, and thus ultimately would have
hurt consumers and industry alike, with
the concerns of consumer groups that
any exception to the existing
prohibition would vitiate the underlying
rule.
In this final rule, the Bureau is
making only one substantive change and
several technical changes to its
proposed revisions to comment
36(d)(1)–5, which would have described
in more detail the interpretation that
§ 1026.36(d)(1)(i) prohibits reductions in
loan originator compensation to bear the
cost of pricing concessions. Comment
36(d)(1)–5 now clarifies that a loan
originator organization may not reduce
its own compensation in a transaction
where the loan originator organization
receives compensation directly from the
consumer (i.e., consumer-paid
compensation), with or without a
corresponding reduction in
compensation paid to an individual
loan originator. This language is
intended to make clearer that, in light of
the deletion of existing
§ 1026.36(d)(1)(iii) and the removal of
existing comment 36(d)(1)–7 (see
discussion below), comment 36(d)(1)–5
applies to loan originator organizations
that receive compensation directly from
consumers.
When a loan originator organization
charges consumers fees that are based
on the terms of a transaction, the
individual loan originators who work
for the organization will tend to sell
consumers the terms that generate
higher income for the loan originator
organization, even if the compensation
of the individual loan originator is not
based on those terms. That is
presumably why Congress elected to
extend the loan originator compensation
rule to cover consumer-paid
transactions.91 The same risk exists if
the loan originator organization
91 For more discussion regarding a consumer’s
payment to a loan originator organization, see this
section-by-section analysis of § 1026.36(d)(1)(i)
under the heading Prohibition Against Payments
Based on a Term of a Transaction.
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establishes a uniform fee structure but
then discounts its fees to fund pricing
concessions. Thus, the Bureau believes
that covering pricing concessions by a
loan originator organization is required
to faithfully implement the TILA section
129B(c)(1) prohibition on varying loan
originator compensation based on the
terms of a loan. While the Bureau bases
this clarification on its interpretation of
TILA section 129B(c)(1), it is also
supported by its authority under TILA
section 105(a) to prescribe rules
providing adjustments and exceptions
necessary or proper to facilitate
compliance. See the section-by-section
analysis of § 1026.36(d)(1)(iii) for further
discussion of these issues. As a
technical matter, this final rule
substitutes ‘‘transaction’’ for ‘‘loan,’’
‘‘high-cost mortgage’’ for ‘‘high-cost
loan,’’ and ‘‘credit’’ for ‘‘loan’’ where
appearing in existing comment 36(d)(1)–
5 to be consistent with terminology used
in this final rule and in Regulation Z
generally, and in a few instances the
word ‘‘originator’’ is replaced with
‘‘loan originator’’ for consistency
purposes.
The Bureau is finalizing the removal
of existing comment 36(d)(1)–7, which
states that the prohibition on
compensation based on transaction
terms does not apply to transactions in
which any loan originator receives
compensation directly from the
consumer (i.e., consumer-paid
compensation) under the existing rule.
The Bureau did not receive any
comments addressing this specific
proposal.92 As discussed above, the
Dodd-Frank Act now applies the
prohibition on compensation based on
transaction terms to consumer-paid
compensation. Thus, the Bureau
continues to believe that it is
appropriate to propose to remove
existing comment 36(d)(1)–7. As
discussed above, the Bureau is also
revising comment 36(d)(1)–5 to clarify
its application to loan originator
organizations that receive compensation
directly from consumers.
In this final rule, comment 36(d)(1)–
7 largely follows the approach set forth
in the proposed comment 36(d)(1)–7,
which would have permitted loan
originators to reduce their compensation
to bear the cost of pricing concessions
in a very narrow set of circumstances
where there was an unanticipated
increase in certain settlement costs
beyond applicable tolerance
requirements. The Bureau believes that
92 As noted above, the Bureau did receive several
comments urging it to allow loan originator
organizations to reduce their compensation to meet
price competition.
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allowing reductions in loan originator
compensation in too permissive
circumstances would undermine the
prohibition against compensation based
on a transaction’s terms. Existing
comment 36(d)(1)–5 prevents creditors
and loan originators from evading the
prohibition in § 1026.36(d)(1) by
systematically setting loan originator
compensation at a non-competitive,
artificially high baseline and then
allowing discretion to loan originators
to lower their compensation (by giving
the concession) in selective cases, either
unilaterally or upon request by
consumers. More sophisticated
consumers who choose to negotiate the
loan originator compensation may
benefit from the ability of loan
originators to grant concessions. On the
other hand, if reductions in loan
originator compensation to bear the cost
of pricing concessions were allowed
under all circumstances, those
consumers who do not shop or who
otherwise lack the knowledge or
expertise to negotiate effectively may be
vulnerable to creditors or loan
originators that consistently inflate price
quotes. Thus, an interpretation of
§ 1026.36(d)(1)(i) to allow reductions in
loan originator compensation to bear the
cost of a pricing concession in a broad
set of circumstances could create an
opening to upcharge consumers across
the board.
For example, a creditor may have a
standard origination fee of $2,000 that,
pursuant to its arrangement with its
individual loan originators, is split
evenly between the creditor and the
individual loan originators. The creditor
budgets for this origination fee in terms
of its expected revenues on each
transaction. However, the creditor and
its individual loan originators might
have an additional arrangement
whereby: (1) The individual loan
originators initially estimate the
origination fee as $3,000 to every
consumer; (2) the individual loan
originators are permitted to make
pricing concessions to lower the quoted
origination fee to a minimum of $2,000;
and (3) the creditor and individual loan
originators split equally the actual
origination fee collected in each case,
with or without any pricing
concessions. Assume that sophisticated
consumer X, when quoted the $3,000
origination fee, recognizes that the fee is
not competitive and requests that the
individual loan originator with whom
the consumer is interacting to lower it,
to which the individual loan originator
agrees. On the other hand, less
sophisticated consumer Y, when quoted
the $3,000 origination fee, does not
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attempt to negotiate the fee. Consumer
Y would thus be vulnerable to this
means of evading § 1026.36(d)(1) that
would exist but for comment 36(d)(1)–
5 on reductions in loan originator
compensation to bear the cost of pricing
concessions.93 The Bureau is concerned
that this practice would significantly
undermine the prohibitions on
compensation based on transaction
terms in § 1026.36(d)(1) and the similar
statutory prohibition in Dodd-Frank Act
section 1403, which this final rule is
implementing.
In particular, the Bureau is not
interpreting § 1026.36(d)(1) to permit
loan originators to reduce their
compensation to bear the cost of a
pricing concession in connection with
matching a competitor’s credit terms, an
approach that was suggested by two
industry trade associations and one
large financial institution. The Bureau
believes this interpretation would
greatly undermine the general rationale
for the prohibition of pricing
concessions. As discussed above, a
primary purpose of existing comment
36(d)(1)–5 is to prevent creditors and
loan originators from effectively evading
§ 1026.36(d)(1) by doing indirectly what
it prohibits directly (i.e., paying loan
originators compensation that is based
on transaction terms). Although more
sophisticated consumers who shop and
seek alternative offers may benefit from
the ability of loan originators to reduce
their compensation in the case of price
competition, those consumers who do
not shop or who otherwise lack the
knowledge or expertise to negotiate
effectively may be vulnerable to
creditors or loan originators that
consistently inflate price quotes.
93 The Bureau believes that what would make this
kind of arrangement viable, but for the
interpretation in comment 36(d)(1)–5, is the fact
that the individual loan originator would have
discretion to reduce its compensation to bear the
cost of a selective pricing concession, as necessary
to retain sophisticated consumer X’s business. The
Bureau recognizes that, even with comment
36(d)(1)–5 in place, a creditor and individual loan
originator still could engage in a similar business
model involving non-competitive overall credit
pricing to support inflated loan originator
compensation—but they would have to be content
to limit their business exclusively to less
sophisticated consumers such as consumer Y
because their inability to reduce their compensation
to bear the cost of selective pricing concessions
would mean foregoing more sophisticated
consumers’ business. The Bureau is skeptical that
the regulatory limitations and market pressures
would permit such a model to work on a large scale,
if at all. Moreover, the 2013 ATR Final Rule and
the 2013 HOEPA Final Rule include loan originator
compensation in points and fees for the thresholds
for both qualified mortgages and high-cost
mortgages, so these points and fees limits impose
additional constraints on the ability of creditors and
loan originators to inflate loan originator
compensation.
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Moreover, in the 2010 Loan Originator
Final Rule, the Board recognized that in
some cases a creditor may be unable to
offer the consumer a more
competitively-priced loan without also
reducing the creditor’s own origination
costs, but the Board also noted that
creditors finding themselves in this
situation frequently will be able to
adjust their overall pricing and
compensation arrangements to be more
competitive generally with other
creditors in the market. 75 FR 58509,
58524 (Sept. 24, 2010). The Bureau
agrees with the Board’s rationale. In
light of these considerations, the Bureau
is not revising comment 36(d)(1)–7 to
permit reductions in loan originator
compensation to bear the cost of pricing
concessions for price competition.
Moreover, the Bureau also does not
agree with the assertion by one trade
association that loan originator
organizations should be entitled to
reduce their compensation for price
competition—even if they do not pass
along the cost of the pricing concession
to their individual loan originators—as
a means of attaining parity with
creditors. Under the existing regulation,
creditors may make pricing concessions
in specific cases but may not pass along
the cost of such concessions to their
individual loan originators or to loan
originator organizations. The Bureau
believes that changing this rule would
be inconsistent with TILA section
103(cc)(2)(F), which was added by
Dodd-Frank Act section 1401. TILA
section 103(cc)(2)(F) provides that the
definition of ‘‘mortgage originator’’
expressly excludes creditors (other than
creditors in table-funded transactions)
for purposes of TILA section
129B(c)(1).94 15 U.S.C. 1602(cc)(2)(F).
The Dodd-Frank Act thus contemplated
treating brokers and retail loan officers
equivalently—they are both individual
loan originators—but did not likewise
contemplate equivalent treatment
between creditors (other than those in
table-funded transactions) and loan
originator organizations. Therefore, the
Bureau is not permitting loan originator
organizations to reduce their
compensation to meet price
competition.
At the same time, the Bureau believes
it is appropriate to permit loan
originators to reduce their compensation
to bear the cost of pricing concessions
94 As noted earlier, TILA section 129B(c)(1), as
added by Dodd-Frank Act section 1403, provides
that 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).
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in additional circumstances that, when
appropriately cabined to prevent abuse,
do not present a risk of steering and
allow the parties to credit transactions
greater flexibility to close transactions,
which benefits consumers and industry
alike. For example, several commenters
questioned why the Bureau would
prohibit a loan originator from covering
a rate-lock extension fee when the
original rate lock has expired through
the loan originator’s fault. The Bureau
acknowledges that, even with the
proposed new comment 36(d)(1)–7, the
combined effect of Regulation X and
Regulation Z disclosure rules and the
prohibition on compensation based on
transaction terms in § 1026.36(d)(1)(i)
would have been to bar loan originators
from reducing their compensation to
bear the cost of pricing concessions in
these (and many other) circumstances,
which could prove detrimental to
consumers in some cases.95 Moreover,
the proposal would have allowed
reductions in loan originator
compensation to bear the cost of pricing
concessions only for unanticipated
increases in non-affiliated third-party
closing costs exceeding applicable legal
limits. Where an increase in an actual
settlement cost above that estimated on
the RESPA GFE is not in excess of
Regulation X tolerance limits, the
proposed rule would not have permitted
any reduction in loan originator
compensation to cover the increase or a
portion of it. Therefore, a consumer who
wants to negotiate down a higher-thanestimated settlement cost could benefit
from a loan originator being permitted
to reduce its compensation to bear the
cost of the reduction in the actual
settlement cost.
The Bureau balances these
considerations in the final rule. New
comment 36(d)(1)–7 clarifies that,
notwithstanding comment 36(d)(1)–5,
§ 1026.36(d)(1) does not prohibit a loan
originator from decreasing its
compensation in unforeseen
circumstances to defray the cost, in
whole or part, of an increase in an
actual settlement cost over an estimated
settlement cost disclosed to the
consumer pursuant to section 5(c) of
RESPA or an unforeseen actual
settlement cost not disclosed to the
95 This could occur, for example, if the consumer
enters into a rate-lock agreement with a creditor, a
changed circumstance occurs under Regulation X
the effect of which is a delay of the closing date,
and the rate-lock expires during the delay. In such
a scenario, if the consumer refuses to pay the ratelock extension fee and the creditor is neither
required nor willing to waive or reduce the fee, the
transaction may never be consummated if the loan
originator, although willing to do so, is not allowed
to reduce its compensation to bear the cost of the
rate-lock extension fee. See 12 CFR 1024.7(f).
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consumer pursuant to section 5(c) of
RESPA.
The comment explains that, for
purposes of comment 36(d)(1)–7, an
increase in an actual settlement cost
over an estimated settlement cost (or
omitted from that disclosure) is
unforeseen if the increase occurs even
though the estimate provided to the
consumer (or the omission from that
disclosure) is consistent with the best
information reasonably available to the
disclosing person at the time of the
estimate. The Bureau believes that
repeated increases in or omissions of
one or more categories of settlement
costs over multiple transactions may
indicate that the disclosing person is not
estimating the settlement cost consistent
with the best information reasonably
available, which in turn may suggest
that the person is systematically
underestimating (or omitting) such
cost.96 While the Bureau bases this
clarification on its interpretation of
TILA section 129B(c)(1), it is also
supported by its authority under TILA
section 105(a) to prescribe rules
providing adjustments and exceptions
necessary or proper to facilitate
compliance.
Comment 36(d)(1)–7 provides two
examples of reductions in compensation
to bear the cost of pricing concessions
that would be permitted under
§ 1026.36(d)(1). Comment 36(d)(1)–7.i
presents the example of a consumer
who agrees to lock an interest rate with
a creditor in connection with the
financing of a purchase-money
transaction. A title issue with the
property being purchased delays closing
by one week, which in turn causes the
rate lock to expire. The consumer
desires to re-lock the interest rate.
Provided that the title issue was
unforeseen, the loan originator may
decrease the loan originator’s
compensation to pay for all or part of
the rate-lock extension fee. Comment
36(d)(1)–7.ii presents the example of
when applying the tolerance
requirements under the regulations
implementing RESPA sections 4 and
5(c), there is a tolerance violation of $70
that must be cured. The comment
clarifies that, provided the violation was
unforeseen, the rule is not violated if the
individual loan originator’s
compensation decreases to pay for all or
part of the amount required to cure the
tolerance violation.
96 In addition to reductions in loan originator
compensation not being permitted under such
circumstances pursuant to comment 36(d)(1)–7,
such activity may also constitute a violation of the
RESPA section 5(c) requirement of a good faith
estimate.
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Regarding certain other comments
from industry, the Bureau has not, in
this final rule, tied the permissibility of
reducing loan originator compensation
to bear the cost of pricing concessions
to the specific type of transaction or the
nature of the originator or secondary
market purchaser, as two commenters
requested (i.e., by urging the Bureau to
exempt jumbo loans and loans
purchased or originated by
governmental instrumentalities). The
Bureau believes that allowing
reductions in loan originator
compensation to bear the cost of pricing
concessions on a categorical basis for
certain loan types and originator or
secondary market purchaser identity
would ignore the possibility of steering
incentives that may be present in such
circumstances. Moreover, the Bureau
believes that allowing reductions in
compensation to bear the cost of pricing
concessions for any reason up to a
specified dollar amount, as one
mortgage broker commenter suggested,
would be inappropriate. In cases in
which there are truly unforeseen
circumstances, there is no reason to cap
the dollar amount of the concession.
And in other cases, a generic
permissible amount of concessions
could create precisely the type of
incentive to upcharge across all
consumers that the general prohibition
is designed to prevent.
The Bureau has not revised comment
36(d)(1)–7 to permit expressly
reductions in loan originator
compensation to bear the cost of a
pricing concession for ‘‘clerical error.’’
As noted above, the commenters who
suggested the Bureau permit reductions
in compensation for ‘‘clerical error’’
gave different details about the scope of
the suggested exception. The Bureau
believes this term would be difficult to
define. Moreover, the Bureau believes
the scenarios cited by some commenters
in urging the Bureau to allow
concessions in these circumstances (e.g.,
where the loan originator assures the
consumer that the interest rate is being
locked but fails to do so) would already
be covered by revised comment
36(d)(1)–7, which allows reductions in
loan originator compensation to bear the
cost of pricing concessions where there
has been an unforeseen increase in a
settlement cost above that estimated on
the disclosure delivered to the
consumer pursuant to RESPA section
5(c) (or omitted from that disclosure).
The Bureau is not revising comment
36(d)(1)–7 to address expressly whether
loan originators may reduce their
compensation to bear the cost of pricing
concessions made to avoid the triggering
of Federal and State high-cost mortgage
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11335
provisions or to ensure that a credit
transaction is a qualified mortgage
under Federal ability-to-repay
provisions, as certain industry
commenters requested. The Bureau
believes that exceptions in these
circumstances to the general prohibition
on reducing loan originator
compensation in connection with
pricing concessions are not warranted
because the rationale underlying the
general prohibition is present. In other
words, such an approach could
incentivize creditors to systematically
overestimate pricing in all
circumstances and make selective
concessions (of which loan originators
would bear the cost) for the sole
purpose of avoiding high-cost mortgage
triggers or noncompliance with Federal
ability-to-repay provisions.
The Bureau also believes that
comment 36(d)(1)–7 need not address,
as one commenter suggested, reductions
in loan originator compensation to
penalize a loan originator for its failure
to comply with a creditor’s policies and
procedures in the absence of a
demonstrable loss to the creditor. In this
scenario, the consumer’s transaction
terms are not changing; there is no
pricing concession. Thus, unless the
proxy analysis under § 1026.36(d)(1)(ii)
applies, the Bureau believes a reduction
in loan originator compensation as a
penalty for the loan originator’s failure
to follow the creditor’s policies and
procedures where there is no
demonstrable loss to the creditor is
outside the scope of § 1026.36(d)(1)(i)
and thus need not be addressed by
comment 36(d)(1)–7. Regarding one
commenter’s suggestion that the Bureau
allow reductions in loan originator
compensation if poor customer service
is reported, the Bureau likewise does
not believe it is necessary to address
this issue in comment 36(d)(1)–7. Where
poor customer service is reported and
the creditor reduces the compensation
of the loan originator, but the
consumer’s transaction terms do not
change and the proxy analysis does not
apply, the reduction in compensation is
outside the scope of § 1026.36(d)(1)(i).
If, however, the creditor were to agree
to reduce its origination fee or change
another transaction term in response to
the complaint about poor customer
service, allowing reductions in
compensation under these
circumstances could lead to creditors
and loan originators systematically
overestimating settlement costs and
selectively reducing them in response to
complaints of poor customer service.
The baseline prohibition thus would
apply in that circumstance.
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Furthermore, the Bureau does not
believe that reductions in loan
originator compensation to bear the cost
of pricing concessions should be
permitted when, as one commenter
suggested, there is a ‘‘misunderstanding
over a consumer’s information’’ or to
cover ‘‘reduced, waived, or uncollected
third-party fees.’’ Regarding a
‘‘misunderstanding over consumer
information,’’ the principles the
commenter suggested are too vague to
be included as a separate rationale for
allowing pricing concessions in
comment 36(d)(1)–7, and thus
potentially would be over-inclusive and
confusing. However, these
circumstances may already be covered
by the language in comment 36(d)(1)–7
clarifying that the reduction in loan
originator compensation may be made
to defray an increase in an actual
settlement cost above the estimated
settlement cost disclosed to the
consumer pursuant to section 5(c) of
RESPA. Allowing reductions in loan
originator compensation to cover
reduced, waived, or uncollected thirdparty fees may not result in any
discernible benefit to consumers, and in
any event the reduction, waiver, or
collection of third-party fees is better
addressed separately by the loan
originator and creditor outside the
context of the transaction.
Finally, the Bureau has not revised
comment 36(d)(1)–7 to state that
creditors must control loan originators’
reductions in compensation to prevent
disparate impact issues under fair
lending laws, as one commenter
suggested. This clarification is not
necessary because nothing in comment
36(d)(1)–7 requires reductions in loan
originator compensation to bear the cost
of pricing concessions or prevents
creditors from exercising prudent
control over them. Thus, creditors may
prohibit their loan originators from
reducing their compensation to bear the
cost of concessions in certain
circumstances, such as to prevent
disparate impact issues under fair
lending laws.
Compensation Based on Multiple
Transactions of 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.’’ In the proposal, the
Bureau stated that it believes that
‘‘transaction’’ should be read to include
multiple transactions by a single
individual loan originator because
individual loan originators sometimes
receive compensation derived from
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multiple transactions. Existing comment
36(d)(1)–3 lists several examples of
compensation methods not based on
transaction terms that take into account
multiple transactions, including ‘‘[t]he
percentage of applications submitted by
the loan originator to the creditor that
results in consummated transactions.’’
See existing comment 36(d)(1)–3.vi. To
avoid any possible uncertainty,
however, the Bureau proposed to
clarify, as part of proposed comment
36(d)(1)–1.ii, that § 1026.36(d)(1)(i)
prohibits compensation based on the
terms of multiple transactions by an
individual loan originator. The Bureau
did not receive any comments regarding
this proposed clarification. The Bureau
interprets TILA section 129B(c)(1) to
prohibit compensation based on the
terms of multiple transactions by the
individual loan originator.97 Further,
the Bureau believes that its approach
will prevent circumvention or evasion
of the statute, consistent with TILA
section 105(a). Thus, the Bureau is
finalizing the clarification in proposed
comment 36(d)(1)–1.ii that
§ 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
Although existing § 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,’’ the existing
regulation and its commentary do not
expressly address whether a person may
pay compensation that is based on the
terms of multiple transactions of
multiple individual loan originators. As
a result, numerous questions have been
posed regarding the applicability of the
existing regulation to compensation
programs of creditors or loan originator
organizations, such as those that involve
payment of bonuses or other deferred
compensation under company profit97 The Bureau believes this interpretation of
section 129B(c)(1) is reasonable in light of the
common principle that singular words in a statute
refer to the plural, and vice versa. See 1 U.S.C. 1
(‘‘[U]nless the context indicates otherwise,’’ ‘‘words
importing the singular include and apply to several
persons, parties, or things; words importing the
plural include the singular.’’); see also
Congressional Research Report for Congress,
Statutory Interpretation: General Principles and
Recent Trends (Aug. 31, 2008) at 9, available at
http://www.fas.org/sgp/crs/misc/97-589.pdf.
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sharing plans 98 or contributions to
certain tax-advantaged retirement plans
under the Internal Revenue Code (such
as 401(k) plans),99 under which
individual loan originators may be paid
variable, additional compensation that
is based in whole or in part on
profitability of the creditor or loan
originator organization.100 As the
Bureau noted in the proposal, a profitsharing plan, bonus pool, or profit pool
set aside out of a portion of a creditor’s
or loan originator organization’s profits
from which bonuses are paid or
contributions are made to qualified
98 As discussed below, the proposal sometimes
used the term ‘‘profit-sharing plan’’ to describe
compensation programs (including ‘‘bonus plans,’’
‘‘profit pools,’’ and ‘‘bonus pools’’) under which
individual loan originators are paid additional
compensation based in whole or in part on the
profitability of the company, business unit, or
affiliate. As discussed below, this final rule
effectively substitutes the term ‘‘non-deferred
profits-based compensation plan’’ for ‘‘profitsharing plan’’ but the term has a somewhat different
meaning for purposes of § 1026.36(d)(1)(iv). When
referring to the proposal, the Small Business Panel
Review process, or comments in response thereto in
this section-by-section analysis, the term ‘‘profitsharing plan’’ is retained whereas when referring to
the provisions of this final rule, the term ‘‘nondeferred profits-based compensation plan’’ is used.
The discussion of the proposal, Small Business
Panel Review process, or comments in response
thereto also sometimes refers to ‘‘profit-sharing
bonuses,’’ whereas the final rule and the provisions
of this section-by-section analysis of the final rule
do not use that term.
99 As discussed below, the proposal sometimes
used the term ‘‘qualified plan’’ to describe certain
tax-advantaged defined benefit and defined
contribution plans. The proposal sometimes used
the term ‘‘non-qualified plan’’ to refer to other
defined benefit plans and defined contribution
plans. Final § 1026.36(d)(1)(iii) and its commentary
do not use the terms ‘‘qualified plan’’ and ‘‘nonqualified plan.’’ Instead, they use the terms
‘‘designated tax-advantaged plans’’ (or ‘‘designated
plans’’) and ‘‘non-designated plans,’’ respectively.
When referring to the proposal, the Small Business
Panel Review process, or comments in response
thereto in this section-by-section analysis, the terms
‘‘qualified plan’’ and ‘‘non-qualified plan’’ are
retained. When referring to the provisions of this
final rule, the terms ‘‘designated tax-advantaged
plan’’ (or ‘‘designated plan’’) and ‘‘non-designated
plan’’ are used.
100 The Bureau issued a bulletin on April 2, 2012
to address many of these questions. CFPB Bull. No.
2012–2, Payments to Loan Originators Based on
Mortgage Transaction Terms or Conditions under
Regulation Z (Apr. 2, 2012), available at http://
files.consumerfinance.gov/f/201204_cfpb_Loan
OriginatorCompensationBulletin.pdf (CFPB
Bulletin 2012–2). CFPB Bulletin 2012–2 stated that,
until this final rule was adopted, employers could
make contributions to certain ‘‘Qualified Plans’’
(defined in CFPB Bulletin 2012–2 to include
‘‘qualified profit sharing, 401(k), and employee
stock ownership plans’’) for individual loan
originator employees even if the contributions were
derived from profits generated by mortgage loan
originations. It explicitly did not address how the
rules applied to ‘‘profit-sharing arrangements/plans
that are not in the nature of Qualified Plans,’’ which
the Bureau wrote would be addressed in this
rulemaking. Until the final rule goes into effect, the
clarifications in CFPB Bulletin 2012–2 will remain
in effect.
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plans or non-qualified plans may reflect
transaction terms of multiple individual
loan originators taken in the aggregate.
Consequently, these types of
compensation programs create potential
incentives for individual loan
originators to steer consumers to
particular transaction terms based on
the interests of the loan originator rather
than the consumer, which is one of the
fundamental problems that TILA section
129B(c) and the existing regulation are
designed to address. Moreover, limiting
the scope of compensation restrictions
in § 1026.36(d)(1)(i) to an overly narrow
interpretation of ‘‘the transaction’’ could
undermine the rule. For example, a
creditor or loan originator organization
could restructure its compensation
policies to pay a higher percentage of
compensation through bonuses under
company profit-sharing plans, rather
than through compensation, such as
commissions, that is not based on the
terms of multiple transactions of
multiple individual loan originators.
To address these concerns, the Bureau
proposed a new comment 36(d)(1)–1.ii
in part to clarify that the prohibition on
payment and receipt of compensation
based on the transaction’s terms under
§ 1026.36(d)(1)(i) covers compensation
that directly or indirectly is based on
the terms of multiple transactions of
multiple individual loan originators
employed by the person. Proposed
comment 36(d)(1)–2.iii.C would have
provided further clarification on these
issues.
The Bureau stated in the section-bysection analysis of proposed
§ 1026.36(d)(1)(i) that the proposed
approach was necessary to implement
the statutory provisions, address the
potential incentives to steer consumers
to particular transaction terms that are
present with profit-sharing plans, and
prevent circumvention or evasion of the
statute. The Bureau noted, however, that
any standard would need to account for
circumstances where potential
incentives were sufficiently attenuated
to permit such compensation. To that
end, proposed § 1026.36(d)(1)(iii) would
have permitted contributions by
creditors or loan originator
organizations to qualified plans in
which individual loan originators
participate. The proposal also would
have permitted payment of bonuses
under profit-sharing plans and
contributions to non-qualified plans
even if the compensation were directly
or indirectly based on the terms of
multiple individual loan originators’
transactions, so long as: (1) The
revenues of the mortgage business did
not constitute more than a certain
percentage of the total revenues of the
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person or business unit to which the
profit-sharing plan applies, as
applicable, with the Bureau proposing
alternative threshold amounts of 25 and
50 percent, pursuant to proposed
§ 1026.36(d)(1)(iii)(B)(1); or (2) the
individual loan originator being
compensated was the originator for a de
minimis number of transactions (i.e., no
more than five transactions in a 12month period), pursuant to proposed
§ 1026.36(d)(1)(iii)(B)(2). In all
instances, however, the proposal stated
that the creditor or loan originator
organization could not take into account
the terms of the individual loan
originator’s transactions, pursuant to the
restriction on this compensation in
proposed § 1026.36(d)(1)(iii)(A). Thus,
the creditor or loan originator
organization could not vary the amount
of the contribution or distribution based
on whether the individual loan
originator is the loan originator for high
rate loans, for example. These aspects of
the proposal are discussed in more
detail in the section-by-section analysis
of § 1026.36(d)(1)(iii) and (iv) in this
final rule, below.
The Bureau sought comment on three
additional issues related to the proposed
commentary that would have clarified
that terms of multiple loan originators’
transactions were subject to the
compensation restrictions under
§ 1026.36(d)(1)(i). First, the proposal
recognized that the strength of potential
incentives to steer consumers to
particular transaction terms presented
in specific profit-sharing plans may vary
based on many factors, including the
organizational structure, size, diversity
of business lines, and compensation
arrangements. Thus, in certain
circumstances, a particular combination
of factors may substantially mitigate the
potential steering incentives arising
from profit-sharing plans.101 The Bureau
thereby solicited comment on the scope
of the steering incentive problem
presented by profit-sharing plans,
whether the proposal effectively
101 The Bureau discussed how, 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. 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.
The Bureau cited a number of economic studies
regarding this ‘‘free-riding’’ behavior. The Bureau
also stated that this may be particularly true at large
institutions with many individual loan originators
because the nexus among 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 in a large
organization.
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11337
addressed these issues, and whether a
different approach would better address
these issues. The Bureau also stated in
the proposal that it was cognizant of the
burdens compensation restrictions may
impose on creditors, loan originator
organizations, and individual loan
originators. In addition, the proposal
expressed the Bureau’s belief that
bonuses and contributions to defined
contribution and benefit plans, when
paid for legitimate reasons, could serve
as beneficial inducements for individual
loan originators to perform well and
become invested in the success of their
organizations. The Bureau solicited
comment on whether the proposed
restrictions accomplished the Bureau’s
objectives without unduly restricting
compensation arrangements that
addressed legitimate business needs.
Lastly, the Bureau noted that it was not
proposing any clarifications to existing
comment 36(d)(1)–1,102 which
addresses what constitutes
compensation and refers to salaries,
commissions, and similar payments,
because the payment of salary and
commissions from revenues earned from
a company’s mortgage business
typically does not raise the same types
of concerns about steering consumers to
different terms to increase the size of a
profit-sharing or bonus pool.103 The
Bureau sought comment on whether the
prohibition on compensation relating to
transaction terms of multiple individual
loan originators should encompass a
broader array of compensation
arrangements.
Consumer groups commenting on the
proposal generally supported the
clarification that the prohibition on
compensation based on transaction
terms would include the terms of
multiple transactions of multiple
individual loan originators. One
consumer group wrote that the proposal
generally would provide robust
protections and reform in loan
originator compensation, and that the
proposed comment 36(d)(1)–1.ii would
prevent the abuses associated with yield
spread premium payments to loan
originators. A housing advocacy
organization wrote that the Bureau
should state specifically that
102 As discussed in the section-by-section analysis
of proposed § 1026.36(a), the Bureau proposed to
move the text of this comment to proposed
comment 36(a)–5.
103 As the Bureau explained in the proposal,
salary and commission amounts are more likely
than bonuses to be set in advance. Salaries 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; and the salary
and commission amounts often are stipulated by an
employment or commission agreement.
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compensation from a loan originator
organization to an individual loan
originator cannot be tied to the terms of
any loan, individually or in the
aggregate. This organization cited two
U.S. Department of Justice actions, later
settled, that alleged that a large
depository institution and a large
mortgage company discriminated
against African-American and Hispanic
borrowers by steering them into
subprime mortgages as evidence of the
need of the Bureau to disallow any
‘‘loophole’’ in the final rule that could
encourage similar practices. A coalition
of consumer groups wrote that allowing
individual loan originators to profit
from compensation based on aggregate
terms of loans they broker, such as
higher interest rates, presents the same
risks to consumers as allowing
individual loan originators to profit
from compensation based on terms of a
single transaction. Anything short of a
complete prohibition on this practice,
they wrote, would permit a payment
structure that Congress intended to ban
and that makes loan originator
compensation even less transparent to
consumers.
An organization writing on behalf of
State bank supervisors noted that
interpretation of existing loan originator
compensation standards can be difficult
for regulators and consumers and that
adjustments to existing rules for
purposes of clarity and coherence
would be appropriate. The organization
was generally supportive of the proposal
to clarify and revise restrictions related
to pooled compensation, profit-sharing,
and bonus plans for originators,
depending on the potential incentives to
steer consumers to particular
transaction terms.
Industry commenters generally
opposed new comment 36(d)(1)–1.ii and
its underlying premise that
compensating individual loan
originators based on the terms of
multiple individual loan originators’
transactions likely creates steering risk.
A national trade association
representing community banks wrote
that the Bureau is right to be concerned
with creating conditions that could lead
some individual loan originators to steer
consumers into transactions that may
not be in the best interest of a consumer
but would benefit an individual loan
originator through greater bonus
compensation. The association asserted,
however, that the nature of any bonus
pool shared by multiple individuals or
deferred compensation of any type
inherently mitigates steering risk.104 A
104 This commenter based this assertion on
several points, including that participation by
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national trade association representing
the banking industry acknowledged that
bonuses can be improperly used as a
‘‘proxy’’ for transaction terms, but urged
the Bureau not to deem every revenuebased bonus decision to be a proxy.
Instead, the association asserted, the
possible use of bonuses as a subterfuge
for transaction terms should be a focus
for enforcement and examination.105 A
large depository institution commenter
acknowledged that each individual loan
originator whose bonus comes from a
profit-derived pool is indirectly
incentivized to increase profits and
thereby increase the pool’s size, but
stated that appropriately designed
bonus plans consistent with risk
management principles should be
permissible when the bonus award is
directly and primarily based on
legitimate factors and incentives (i.e.,
not directly based on the terms of the
transactions of each loan originator). A
national industry trade association
suggested that the Bureau permit
creditors and loan originator
organizations to pay a bonus to an
individual loan originator when the
awarding of the bonus and its amount
are ‘‘sufficiently attenuated’’ from the
terms of the transaction ‘‘so as not to
provide a material steering risk for the
consumer.’’ A State industry trade
association commented that
appropriately structured profit-sharing
and bonus plans incentivize loan
originators to make appropriate loans
without taking on excessive risk or
being overly cautious. Thus, the trade
association stated that severely
restricting certain types of profit-sharing
or bonus plans would not provide
consumers with significantly more
protection but, instead, would limit the
availability of credit to all but the most
multiple employees dilutes the impact and reward
for any one participant, the delayed nature of a
bonus pool payout erodes the incentive to steer for
quick gains, bonus pools merely supplement and
augment an employee’s compensation, and most
bonus plans—especially for community bank loan
originators—contain a variety of components other
than mortgage revenue.
105 Several commenters echoed this argument that
the types of practices the Bureau is regulating are
better suited for examination and enforcement. One
State trade association wrote that if bonuses are
improperly designed to reward specific individual
loan originators for transaction terms, this fact will
be ascertainable through examination. A national
trade association representing the mortgage
industry suggested the Bureau use its authority
under the Dodd-Frank Act to prevent unfair,
deceptive, or abusive acts or practices. A State
credit union trade association suggested the Bureau
enforce existing regulations before imposing new
regulations. One commenter claimed that the
Bureau overreached in its proposal and needed to
provide evidence that a profit motive in a
transparent cost environment could be an example
of an unfair or deceptive practice in order to
support the approach it followed in the proposal.
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creditworthy consumers. A law firm
that represents small and mid-sized
bank clients suggested that the Bureau
set forth factors that would be used to
determine whether a bonus under a
particular incentive compensation plan
would be permissible because it was
sufficiently attenuated from the terms of
multiple loan originators’ transactions.
Among industry commenters, credit
unions and their trade associations
expressed particular opposition to the
proposal. A national trade association
representing credit unions questioned
the Bureau’s authority to add comment
36(d)(1)–1.ii, stating that it stretched the
bounds of section 1403 of the DoddFrank Act by interpreting the statutory
prohibition against compensation that
varies based on the terms of the ‘‘loan’’
to apply to multiple transactions of
multiple individual loan originators. A
State credit union association wrote that
it was unnecessary to extend the
prohibitions to compensation based on
the terms of multiple loan originators’
transactions because: (1) Neither TILA
nor existing regulations addresses
payment of compensation based on
terms of multiple individual loan
originators; and (2) it would be
tremendously difficult to construct a
scheme to evade the existing
requirements. This association also
stated that the proposal was internally
inconsistent because the proposal’s
section-by-section analysis
acknowledged that profit-sharing plans
could be a useful and important
inducement by employers to individual
loan originators to perform well.
Another State credit union association
stated that credit unions merited special
treatment under the rule because there
was nothing in the Bureau’s
administrative record to connect credit
union compensation or salary practices
to the abuses or practices that
contributed to the financial crisis of
2008. This association also asserted that
National Credit Union Administration
(NCUA) regulations permit certain types
of compensation that would be
prohibited under the proposal and, thus,
urged the Bureau to state that a federally
insured credit union that adheres to
these regulations is deemed compliant
with the loan originator compensation
provisions.106 A State credit union
association commented that the Bureau
should exempt credit unions from the
106 The association specifically cited 12 CFR
701.21(c)(8)(iii), which permits credit unions to pay
bonuses or incentives to credit union employees
either based on the credit union’s overall financial
performance or in connection with a loan or loans,
provided that the credit union board of directors
establishes written policies and internal controls for
such incentives or bonuses.
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proposed restrictions because credit
unions were structured in a way that
significantly decreases steering risks
(i.e., credit unions provide loan services
to member-owners only and memberowners can file complaints in response
to any activity detrimental to loan
applicants).
Several commenters either asked for
clarification on whether compensation
tied to company-wide performance
would be permitted under the proposal
or stated their support for such an
approach. A financial holding company
suggested that bonus or incentive
programs of this sort should be
permitted because of the unlikelihood,
it asserted, that the loan originator
steering a consumer into a higher-profit
product would improve the profitability
of the entire bank. A large financial
services company commented that some
uncertainty remained as to when
‘‘indirect’’ compensation would be
sufficiently remote to be outside the
purview of the rule and, consequently,
requested an express exemption for
bonuses paid to individual loan
originators when the company: (1)
Calculates the bonuses under a
company-wide program that applies in
a similar manner to individuals who are
not loan originators; (2) uses
predetermined company performance
metrics to calculate the bonus; and (3)
does not take transaction terms directly
into account.107 A State trade
association representing creditors stated
that the Bureau should permit
compensation plans that relate not only
to the performance of an overall
organization, but also to the
performance of a specific team, branch,
or business unit.
A mortgage company wrote that
limiting compensation that was
indirectly based on terms of transactions
would cover almost any form of
compensation derived from lender
profitability, and the rulemaking instead
should focus on compensation specific
to the loan originator and the
transaction. This commenter also
disagreed with the Bureau’s statement
in the proposal that creditors would
restructure their compensation policies
to shift more compensation to bonuses
in an effort to evade the strictures of the
prohibition on compensation based on
107 This commenter also questioned the interplay
of the proposal with the 2012 HOEPA Proposal
insofar as the 2012 HOEPA Proposal would have
redefined points and fees to include certain
compensation paid to individual loan originators.
As noted earlier in the section-by-section analysis
of § 1026.36(a), however, the definition of points
and fees across the 2013 HOEPA Final Rule and the
2013 ATR Final Rule includes only compensation
that can be attributed to a particular transaction at
the time the interest rate is set.
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transaction terms because creating a
profit-sharing plan involved many more
considerations, particularly for
diversified companies.108
A few industry commenters raised
procedural criticisms and asked for
differential treatment for particular
institutions. One industry commenter
wrote that, based on the volume of
proposed rules and the relatively short
comment periods, it did not have
sufficient time to analyze fully and
comprehend the proposal and its
potential impact on the commenter’s
business. A community bank requested
that the Bureau exempt all savings
institutions with under $1 billion in
assets from the rule’s compensation
restrictions. Another community bank
asked the Bureau to make distinctions
between portfolio lenders and lenders
that generate most revenues from selling
loans.
Some industry commenters expressed
support for the Bureau’s proposed
approach on compensation based on
transaction terms. A mortgage banker
stated that any bonus pool or profitsharing plan should not be permitted to
be derived from the terms of loans
because ‘‘the overages [could] work
their way back into the pockets of loan
originators.’’ A mortgage company
affiliated with a national homebuilder
wrote that it was prudent practice not to
compensate loan originators on the
terms of the transaction other than the
amount of credit extended. A
community bank generally praised the
proposal for taking into account the
impacts of the Dodd-Frank Act on the
mortgage banking industry and raised
no specific objections to proposed
comment 36(d)(1)–1.ii. The bank,
however, stated that to attract talented
loan originators it needed the ability to
offer flexible and competitive
compensation programs that rewarded
loan production.109 A financial services
company wrote that the provisions in
the proposal provided helpful
additional commentary to elucidate the
rules, particularly because incentive
compensation plans at small to mid-size
financial institutions that may look to
108 As a general matter, this commenter suggested
an alternative approach whereby the creditor would
provide a disclosure—in bold face or larger font and
set off from other disclosures—urging the consumer
to be aware that the loan originator’s compensation
may increase or decrease based on the profitability
of the creditor and urging the consumer to shop for
credit to ensure that he or she has obtained the most
favorable loan terms.
109 The community bank commenter also argued
that, to attract quality loan originators without
having the ability to pay incentive compensation,
the bank would have to pay such a high salary that
it could risk creating a disincentive for the
individual loan originator to produce high volume.
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11339
profitability as a component often
include senior executive officers who
may be covered under the definition of
loan originator. Also, some industry
commenters that were generally critical
of proposed comment 36(d)(1)–1.ii
acknowledged that the Bureau’s concern
that individual loan originators would
steer consumers to obtain higher
bonuses was not misplaced.
The Bureau is finalizing the substance
of comment 36(d)(1)–1.ii largely as
proposed. However, the principle that
the terms of multiple transactions by an
individual loan originator, or the terms
of multiple transactions by multiple
individual loan originators are
encompassed by the baseline
prohibition in § 1026.36(d)(1)(i) is now
included in text of § 1026.36(d)(1)(i)
itself. The Bureau believes that it is
appropriate to state clearly in the
regulatory text that compensation based
on the terms of multiple transactions of
multiple individual loan originators is
invalid unless expressly permitted by
other provisions of this final rule. A
clear standard will enhance consumer
protections by reducing the potential for
abuse and evasion of the underlying
prohibition on compensation based on a
term of a transaction. Moreover, a clear
standard also will reduce industry
uncertainty about how the regulation
applies to bonuses from non-deferred
profits-based compensation plans and
contributions to designated plans or
non-designated plans in which
individual loan originators participate.
In the final rule, comment 36(d)(1)–
2.ii has been revised to clarify that
compensation to a loan originator that is
based upon profits that are determined
with reference to mortgage-related
business is considered compensation
that is based on the terms of
transactions of multiple individual loan
originators, and thus would be subject
to the prohibition on compensation
based on a term of a transaction under
§ 1026.36(d)(1)(i) (although it may be
permitted under § 1026.36(d)(1)(iii) or
(iv)). The comment cross-references
other sections of the regulatory text and
commentary for discussion of
exceptions permitting compensation
based upon profits pursuant to either a
‘‘designated tax-advantaged plan’’ or a
‘‘non-deferred profits-based
compensation plan,’’ and for
clarification about the term ‘‘mortgagerelated business.’’ This language has
been added to make more explicit the
Bureau’s rationale in the proposal that
profits from mortgage-related business
(i.e., from transactions subject to
§ 1026.36(d)) are inextricably linked to
the terms of multiple transactions of
multiple individual loan originators
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when taken in the aggregate and
therefore create potential incentives for
individual loan originators to steer
consumers to particular transaction
terms. The Bureau believes that creditor
or loan originator organization
profitability from mortgage-related
business usually, if not always, depends
on the terms of transactions of
individual loan originators working for
the creditor or loan originator
organization.110 Moreover, to the extent
a creditor or loan originator organization
wanted to demonstrate that there is no
nexus whatsoever between transaction
terms and profitability, it would have to
disaggregate the components of its
profitability. The Bureau is skeptical
that this would be feasible and, if so,
that it could be done in a way that
would not create challenges for
examination (by requiring substantial
analysis of, e.g., company revenues and
profits, and of relationships among
business lines and between affiliate
profits and revenues).
The Bureau agrees with industry
commenters that the payment of profitsharing bonuses and the making of
contributions to designated plans in
which individual loan originators
participate do not create steering
potential under all circumstances. As
the Bureau acknowledged in the
proposal,111 any regulation of loan
originator compensation needs to
account for the variation in organization
size, type, compensation scheme, and
other factors that, individually or
collectively, affect the calculus of
whether the steering risk is sufficiently
attenuated. For example, one
commenter asked the Bureau to permit
paying an individual loan originator a
bonus as part of a compensation
program that uses predetermined
performance metrics to determine
compensation for all company
employees. This type of compensation
program, depending on the
circumstances, may not be tied directly
or indirectly to transaction terms and
thus may not implicate the basic rule or,
even if tied to profits, may not be
structured in a manner that would
incentivize individual loan originators
to place consumers in mortgages with
110 As discussed above, many industry
commenters objected to the premise in the proposal
that compensation programs that feature profitsbased bonuses or contributions to qualified plans or
non-qualified plans presumptively create steering
incentives, but some of those that did so
acknowledged that bonuses can be improperly used
as a ‘‘proxy’’ for transaction terms and, in one case,
specifically stated that each individual loan
originator whose bonus comes from a profit-derived
pool is indirectly incentivized to increase profits
and thereby increase the pool’s size.
111 77 FR 55296 (Sept. 7, 2012).
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particular transaction terms. The
mitigation or absence of steering
potential with respect to this
compensation program in one particular
setting, however, does not mean that a
slightly different compensation program
in the same setting or the same
compensation program in a slightly
different setting would sufficiently
mitigate steering incentives.
The Bureau believes that it is
preferable to adopt a baseline clear
prohibition on the payment of
compensation based on the terms of
multiple transactions of multiple loan
originators (with commentary clarifying
that this encompasses compensation
that is based upon profits that are
determined with reference to mortgagerelated business) than to adopt any sort
of standard focused on attenuation,
materiality, or other legal principles (a
‘‘principles-based’’ standard or
approach) that would have to be applied
to the design and operation of each
company’s specific compensation
program, as suggested by some
commenters. Application of a
principles-based standard would
involve the application of the relevant
principles to the design and operation of
each company’s specific compensation
program. Because the application of
these principles would necessarily
involve a substantial amount of
subjectivity, and the design and
operation of these programs are varied
and complex, the legality of many
companies’ programs would likely be in
doubt. This uncertainty would present
challenges for industry compliance, for
agency supervision, and agency and
private enforcement of the underlying
regulation.
The Bureau believes, further, that the
disparate standards suggested by
industry commenters prove the inherent
difficulty of crafting a workable
principles-based approach. For
example, as noted earlier, one
commenter urged the Bureau to permit
the use of ‘‘appropriately designed
bonus plans consistent with risk
management principles’’ when the
bonus award is ‘‘directly and primarily
based on legitimate factors and
incentives’’ and where ‘‘sufficient
mitigating and attenuating factors’’
exist, and another industry commenter
suggested that the Bureau permit
creditors and loan originator
organizations to pay a bonus to an
individual loan originator when the
awarding of the bonus and its amount
are ‘‘sufficiently attenuated’’ from the
terms of the transaction ‘‘so as not to
provide a material steering risk for the
consumer.’’ These standards do not
have commonly understood meanings
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and would need to be defined by the
Bureau or left for elaboration through
supervisory and enforcement activities
and private litigation. Although these
definitional and line-drawing judgments
are not impossible, they would
inevitably add complexity to the rule.
The Bureau, furthermore, disagrees
with the industry commenters that
asserted that the relationship between
incentive compensation programs and
individual loan originator steering
behavior should be a focus of
examination and enforcement to the
exclusion of rulemaking. Given the
multiplicity and diversity of parties and
variability of compensation programs
potentially subject to this rulemaking,
robust supervision and enforcement in
this area would be extremely difficult, if
not impossible, without appropriate
clarity in the regulation. As noted
earlier, an organization commenting on
behalf of State banking supervisors
stated that the existing rules can be
difficult for regulators and consumers to
interpret and supported the proposed
changes to the existing regulation for
purposes of clarity and coherence.
The Bureau also shares the concerns
expressed by consumer groups that
failing to prohibit compensation based
on the terms of multiple transactions of
multiple individual loan originators
would potentially undermine the
existing prohibition on compensation
based on transaction terms in
§ 1026.36(d)(1)(i) and Dodd-Frank Act
section 1403. As the consumer groups
asserted, setting a baseline rule too
loosely could allow for a return of the
types of lending practices that
contributed to the recent mortgagelending crisis. This, in turn, would
significantly undermine the effect of the
Dodd-Frank Act reforms and the 2010
Loan Originator Final Rule. The Bureau
believes that defining ‘‘loan’’ to mean
only a single loan transaction by a single
individual loan originator is an overly
narrow interpretation of the statutory
text and could lead to evasion of the
rule. To this end, the Bureau disagrees
with the assertion by one commenter
that the Bureau lacks authority to
interpret the statute in this manner. The
Bureau is squarely within its general
interpretive authority to implement the
Dodd-Frank Act provision. The Bureau
is also fully within its specific authority
under TILA section 105(a) to issue
regulations to effectuate the purposes
and prevent evasion or circumvention of
TILA. Moreover, the Bureau disagrees
with the suggestion by one commenter
that it is unnecessary to clarify that
§ 1026.36(d)(1)(i) covers multiple
transactions by multiple individual loan
originators because neither TILA nor
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existing Regulation Z addresses
payment of compensation based on the
terms of multiple transactions of
multiple loan originators. The Bureau
believes that given the uncertainty
described by some commenters, about
the regulation’s application to bonuses
and qualified and non-qualified plans,
industry would benefit from
clarification.112
The Bureau declines to adopt a
special rule for credit unions as
proposed by two State credit union
associations. The Bureau recognizes that
credit unions as well as community
banks have a business model and a set
of incentives and constraints that set
them apart from other types of
institutions engaged in similar activities
and also are of a smaller scale than
many such institutions. However, the
Bureau does not believe that individual
loan originators who work for a credit
union or community bank are less
susceptible of steering influences if their
compensation can be based on the terms
of the transactions either directly or
indirectly as through bonuses or
contributions tied to profits generated
through mortgage-related business.
Thus, the Bureau does not believe that
it is appropriate to create a blanket
exemption for credit unions and
community banks from this rule.
Moreover, TILA generally is structured
around regulating the extension of
consumer credit based on the type of
transaction, not type of creditor. 12
U.S.C. 5511(b)(4). Absent a sufficiently
compelling reason, the Bureau declines
to introduce such a differentiation
contrary to that general approach.113 As
discussed below, the Bureau is,
however, adopting a special safe harbor
rule with respect to compensation under
a non-deferred profits-based
compensation plan to individual loan
originators who are loan originators for
ten or fewer transactions (under
§ 1026.36(d)(1)(iv)(B)(2)), which rule,
the Bureau expects, will be of particular
importance to credit unions and
community banks. Furthermore, the
Bureau disagrees with commenters who
argued that credit unions should be
treated differently because NCUA
regulations permit the payment of
112 As noted earlier, numerous questions by
industry to the Board and the Bureau precipitated
the Bureau issuing CFPB Bulletin 2012–2 and
clarifying these issues in this rulemaking.
113 For similar reasons, the Bureau has also not
made any changes to the proposal based on
comments requesting the Bureau exempt certain
institutions from the effect of § 1026.36(d), such as
those with under $1 billion in assets and those that
keep their loans in portfolio. The commenters
provided little to no evidence about why they
should be exempt and the factors that would
mitigate the steering incentives this rule addresses.
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certain incentives or bonuses to credit
union individual loan originators based
on the credit union’s overall financial
performance or in connection with
loans made by credit unions, some of
which incentives would be restricted
under the Bureau’s rule.114 Accepting
the commenters’ characterization of the
NCUA’s regulations as more permissive
than the Bureau’s, a credit union could
comply with both sets of regulations by
adhering to the more restrictive one.
Although the Bureau in this final rule
generally prohibits compensation that is
based on the terms of multiple
transactions of multiple individual loan
originators (as discussed above),
§ 1026.36(d)(1)(iii) and (iv) permit
compensation that is directly or
indirectly based on the terms of
multiple individual loan originators’
transactions provided that certain
conditions are satisfied. These
provisions effectively create exceptions
to the underlying prohibition on
compensation based on transaction
terms under appropriately tailored
circumstances. For the background
discussion of these provisions,
including a summary of comments
received to proposed § 1026.36(d)(1)(iii)
and the Bureau’s response to these
comments, see the section-by-section
analysis of proposed § 1026.36(d)(1)(iii)
and (iv).115
36(d)(1)(ii)
Amount of Credit Extended
As discussed above, § 1026.36(d)(1)(i)
currently 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
114 As noted earlier, 12 CFR 701.21(c)(8)(i)
generally prohibits officials or employees and their
immediate family members from receiving,
‘‘directly or indirectly, any commission, fee or other
compensation in connection with any loan made by
the credit union.’’ 12 CFR 701.21(c)(8)(iii) provides
that such prohibition does not cover, in relevant
part: (1) an incentive or bonus to an employee based
on the credit union’s overall financial performance;
and (2) an incentive or bonus to an employee in
connection with a loan or loans made by the credit
union, provided that the board of directors
establishes written policies and internal controls for
such incentives or bonuses.
115 In some cases, the Bureau’s response to the
comments summarized above regarding comment
36(d)(1)–1.ii is subsumed into the section-bysection analysis of § 1026.36(d)(1)(iii) and (iv)
because of the topic overlap.
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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 the 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.
However, the Bureau does not believe
that Congress intended ‘‘amount of the
principal’’ in this narrower, less
common way, 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 proposed to retain the phrase
‘‘amount of credit extended’’ in
§ 1026.36(d)(1)(ii) instead of replacing it
with the statutory phrase ‘‘amount of
the principal.’’ The Bureau believed that
using the same phrase that is in the
existing regulatory language will ease
compliance burden without diminishing
the consumer protection afforded by
§ 1026.36(d) in any foreseeable way.
Creditors already have developed
familiarity with the term ‘‘amount of
credit extended’’ in complying with the
existing regulation. The Bureau solicited
comment on its proposal to keep the
existing regulatory language in place
and its assumptions underlying the
proposal.
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The Bureau did not receive comment
on this aspect of the proposal. For the
reasons described above, this final rule
retains the phrase ‘‘amount of credit
extended’’ in § 1026.36(d)(1)(ii) as
proposed.
Fixed percentage with minimum and
maximum dollar amounts. Section
1026.36(d)(1)(ii) currently provides that
loan originator compensation paid as a
fixed percentage of the amount of credit
extended may be subject to a minimum
or maximum dollar amount. In contrast,
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 proposed to
retain the existing restrictions in
§ 1026.36(d)(1)(ii) governing 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
§ 1026.36(d)(1)(ii) continued 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
also proposed to retain existing
comment 36(d)(1)–9, which provides
clarification regarding this provision
and an example of its application.
The Bureau received comments on
this aspect of the proposal from two
industry commenters and one consumer
group commenter, and those comments
favored the proposal. This final rule
retains § 1026.36(d)(1)(ii) as proposed.
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,
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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
currently clarifies that § 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. The
comment also clarifies that
compensation that is based on a fixed
percentage of the amount of credit
extended may be subject to a minimum
or maximum dollar amount, as long as
the minimum and maximum dollar
amounts do not vary with each credit
transaction. The comment provides as
an example that a creditor may offer a
loan originator 1 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 1 percent of the amount of
credit extended for loans of $300,000 or
more, 2 percent of the amount of credit
extended for loans between $200,000
and $300,000, and 3 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
interpretation is consistent with and
furthers the statutory purposes of TILA.
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. The Bureau therefore is adopting
comment 36(d)(1)–9 as proposed.
Reverse mortgages. Industry
representatives have asked what the
phrase ‘‘amount of credit extended’’
means in the context of closed-end
reverse mortgages. Under the FHA’s
Home Equity Conversion Mortgage
(HECM) program, a creditor calculates a
‘‘maximum claim amount,’’ which is the
appraised value of the property, as
determined by the appraisal used in
underwriting the loan, or the applicable
FHA loan limit, whichever is less. See
24 CFR 206.3. For HECM loans, the
creditor then calculates the maximum
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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 HECM reverse
mortgages, a consumer 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
HECM reverse mortgages. The Bureau
indicated in the proposal that it believes
that the initial principal limit is the
most analogous amount to 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 proposed to add
comment 36(d)(1)–10 to provide that,
for closed-end reverse mortgage loans,
the ‘‘amount of credit extended’’ for
purposes of § 1036.36(d)(1) means the
maximum proceeds available to the
consumer under the loan, which is the
initial principal limit on a HECM loan.
The Bureau received only one
comment on this proposed revision, and
that commenter, an industry trade group
that represents the reverse mortgage
industry, favored the proposal. The
trade group supported the proposal but
noted that the terms ‘‘maximum claim
amount,’’ ‘‘principal limit factor,’’ and
‘‘initial principal limit’’ used by the
Bureau in the supplementary
information to the proposal are
primarily HECM terms and are not
terms used universally with all reverse
mortgage programs. This trade group
also requested that the Bureau expressly
state in the commentary that maximum
claim amount is not a proxy for a loan
term under § 1026.36(d)(1).
This final rule revises proposed
comment 36(d)(1)–10 to provide that for
closed-end reverse mortgages, the
‘‘amount of credit extended’’ for
purposes of § 1026.36(d)(1) means either
(1) the maximum proceeds available to
the consumer under the loan; or (2) the
maximum claim amount as defined in
24 CFR 206.3 if the loan is a HECM loan
or the appraised value of the property,
as determined by the appraisal used in
underwriting the loan, if the loan is not
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a HEMC loan. Upon further analysis, the
Bureau believes that it is appropriate to
consider these additional values to be
the ‘‘amount of credit extended’’ for a
closed-end reverse mortgage, as
applicable, for purposes of
§ 1026.36(d)(1). While the maximum
proceeds available to the consumer will
be the amount of proceeds that the
consumer borrows at consummation,
the maximum claim amount on a HECM
loan will be the maximum future value
of the loan to investors at repayment,
including compounded interest. For
non-HECM loans, this final rule allows
creditors to consider the appraised
value of the property, as determined by
the appraisal used in underwriting the
loan, to be considered the ‘‘amount of
credit extended.’’ The Bureau believes
that the final rule gives additional
flexibility to creditors, without raising
concerns that a creditor could
manipulate the ‘‘amount of credit
extended’’ in order to produce greater
compensation to the loan originator.
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36(d)(1)(iii)
Consumer Payments Based on
Transaction Terms
TILA section 129B(c)(1), which was
added by section 1403 of the DoddFrank 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.
As discussed above, § 1026.36(d)(1)
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, except
in transactions in which a loan
originator receives 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 § 1026.36(d)(2), a loan
originator organization that receives
compensation from a consumer may not
split that compensation with its
individual loan originator, existing
§ 1026.36(d)(1) does not prohibit a
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consumer’s payment of compensation to
the loan originator organization from
being based on the transaction’s terms
or conditions.
Consistent with TILA section
129B(c)(1), the Bureau proposed to
remove existing § 1026.36(d)(1)(iii) and
a related sentence in existing comment
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 § 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 the
terms of the transaction. Comment
36(d)(1)–7 addresses when payments to
a loan originator are considered
compensation received directly from the
consumer. The Bureau proposed to
remove the first sentence of this
comment and move the other content of
this comment to new comment
36(d)(2)(i)–2.i.
The Bureau did not receive comments
on its proposal to remove
§ 1026.36(d)(1)(iii). The Bureau did
receive comments on the ability of loan
originator organizations to make pricing
concessions in the amounts of
compensation they receive in individual
transactions, including in transactions
where these organizations receive
compensation directly from consumers,
as discussed in the section-by-section
analysis of § 1026.36(d)(1)(i). For the
reasons discussed above, this final rule
removes existing § 1026.36(d)(1)(iii) as
proposed.
The Bureau also did not receive any
comments on deleting the first sentence
of comment 36(d)(1)–7 and moving the
other content of that comment to new
comment 36(d)(2)(i)–2.i. The Bureau did
receive one comment on the substance
of proposed comment 36(d)(2)(i)–2.i,
which is discussed in the section-bysection analysis of § 1026.36(d)(2). This
final rule deletes the first sentence of
comment 36(d)(1)–7, moves the other
content of that comment to new
comment 36(d)(2)(i)–2.i, and makes
revisions to this other content as
discussed in the section-by-section
analysis of § 1026.36(d)(2).
Designated Tax-Advantaged Plans and
Non-Deferred Profits-Based
Compensation Plans
The Bureau proposed a new
§ 1026.36(d)(1)(iii), which would permit
the payment of compensation that is
directly or indirectly based on the terms
of transactions of multiple individual
loan originators in limited
circumstances. In this final rule, the
language in § 1026.36(d)(1)(iii) has been
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11343
revised to focus specifically on
designated tax-advantaged plans and a
new § 1026.36(d)(1)(iv) has been added
to address non-deferred profits-based
compensation plans as discussed further
below.
Designated Tax-Advantaged Plans. As
noted above, following a number of
inquiries about how the restrictions in
the existing regulation apply to
qualified retirement plans and other
bonus and profit-sharing plans, the
Bureau issued CFPB Bulletin 2012–2
stating that contributions to certain
qualified plans out of loan origination
profits were permissible under the
existing rules.116 The Bureau’s position
was based in part on certain structural
and operational requirements that the
Internal Revenue Code imposes on
qualified plans, including contribution
and benefit limits, deferral requirements
(regarding both access to and taxation of
the funds contributed), additional taxes
for early withdrawal, nondiscrimination provisions, and
requirements to allocate among plan
participants based on a definite
allocation formula. Consistent with its
position in CFPB Bulletin 2012–2, the
Bureau stated in the proposal that it
believed these structural and
operational requirements would greatly
reduce the likelihood that firms would
use such plans to provide steering
incentives.
Based on these considerations,
proposed § 1026.36(d)(1)(iii) would
have permitted a person to compensate
an individual loan originator through a
contribution to a qualified defined
contribution or defined benefit plan in
which an individual loan originator
participates, provided that the
contribution would not be directly or
indirectly based on the terms of that
individual loan originator’s
transactions. Proposed comments
36(d)(1)-2.iii.B and 36(d)(1)-2.iii.E
would have discussed the meaning of
qualified plans and other related terms
as relevant to the proposal.
Additionally, the Bureau solicited
comment on whether any other types of
retirement plans, profit-sharing plans, or
other tax-advantaged plans should be
treated similarly 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.
Industry commenters generally
supported the Bureau’s proposal to
permit creditors and loan originator
organizations to contribute to individual
116 CFPB Bulletin 2012–2 defined ‘‘Qualified
Plans’’ to include ‘‘qualified profit sharing, 401(k),
and employee stock ownership plans.’’
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loan originators’ qualified plan accounts
even if the contributions were based
directly or indirectly on the terms of
multiple individual loan originators’
transactions. For example, a national
trade association representing banking
institutions wrote that it especially
welcomed the ‘‘clean and
straightforward’’ proposed clarifications
regarding qualified plans. A national
trade association representing mortgage
lenders appreciated the clarification that
contributions to the qualified plan
accounts of individual loan originators
would be permitted. A financial holding
company commented that the proposal
to allow contributions to qualified plans
was necessary for creditors to
adequately compensate their individual
loan originators.
Several industry commenters,
however, questioned certain aspects of
how the Bureau proposed treating
qualified plans under proposed
§ 1026.36(d)(1)(iii). A group
commenting on behalf of community
mortgage lenders wrote that the IRS
governing rules and regulations
regarding qualified retirement plans
should govern whether any employees,
including loan originators, should be
eligible to participate in qualified plans.
The commenter stated that any
exclusion of a class of employees from
a qualified plan would render the plan
non-qualified under IRS regulations. A
large mortgage lending company wrote
that the Bureau’s attempt to regulate
employee benefit plans was
complicated, fraught, and imposed
unspecified ‘‘conditions’’ on the use of
qualified plans. Another commenter
specifically objected to the language in
proposed § 1026.36(d)(1)(iii) requiring
that the contribution to a qualified plan
‘‘not be directly or indirectly based on
the terms of that individual loan
originator’s transactions.’’ The
commenter reasoned that these
restrictions would interfere with other
agencies’ regulation of qualified plans
and could cause employers to incur
penalties under other regulations and
statutes, which must be accounted for in
pricing risk and could increase the costs
of credit. One trade association
expressed concern that smaller creditors
would be disadvantaged by a rule that
treats qualified plans more permissively
than non-qualified plans because
qualified plans can be prohibitively
expensive and smaller creditors thus
would likely be unable to take
advantage of the exception in
§ 1026.36(d)(i)(iii).
SBA Advocacy commented that the
Bureau should analyze the incentive
issues arising from qualified plans
before issuing clarifications on existing
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regulations or proposing new
regulations. SBA Advocacy also
reminded the Bureau of comments to
this effect made by Small Entity
Representatives during the Small
Business Review Panel process.
Consumer groups commenting on the
proposal did not specifically address
qualified plans. They stated as a general
matter, however, that permitting
compensation to loan originators based
on the terms of a transaction would be
in contravention of the Dodd-Frank Act
and would make loan originator
compensation even less transparent to
consumers. Three consumer groups, in
a joint letter, commented that bonuses
and retirement plan contributions
change the behavior of individual loan
originators and that permitting
compensation from profit pools would
not remove the danger that individual
loan originators would seek to originate
transactions with abusive terms to boost
their overall compensation packages.
These consumer groups also commented
that allowing individual loan originators
to profit from compensation based on
aggregate terms of transactions they
originate, such as higher interest rates,
presents the same risks to consumers as
allowing individual loan originators to
profit from compensation based on
terms in a single transaction. As
discussed above, a housing advocacy
organization expressed its concern that
the exceptions in the proposed
regulation would lead to a resurgence of
the same individual compensationdriven loan origination tactics that were
the subject of U.S. Department of Justice
actions, later settled, that alleged
steering of minority borrowers into
subprime mortgages.
An organization submitting comments
on behalf of State bank supervisors
wrote that, as a general matter,
adjustments to existing loan originator
compensation rules for purposes of
clarity and coherence are appropriate
because existing standards can be
difficult for regulators and consumers to
interpret. The organization further
stated that qualified plans are one of the
primary areas under the rule that needs
clarification, and it endorsed the
Bureau’s proposal to permit
contributions to qualified plans.
The Bureau is finalizing the
proposal’s treatment of ‘‘qualified
plans’’ (now referred to as ‘‘designated
tax-advantaged plans’’ in
§ 1026.36(d)(1)(iii) and as that term or,
alternatively, ‘‘designated plans’’ in this
preamble) with limited substantive
changes to clarify what plans can be
exempted from the baseline prohibition
in § 1026.36(d)(1)(i) of compensation
that is based on the terms of multiple
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transactions of multiple individual loan
originators. Section 1026.36(d)(1)(iii), as
clarified by comment 36(d)(1)-3.i,
provides that 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 that is a designated tax-advantaged
plan or a benefit under a defined benefit
plan that is a designated tax-advantaged
plan, even if the contribution or benefit,
as applicable, is directly or indirectly
based on the terms of the transactions of
multiple individual loan originators. In
the case of a contribution to a defined
contribution plan, however,
§ 1026.36(d)(1)(iii) provides that the
contribution must not be directly or
indirectly based on the terms of that
individual loan originator’s
transactions.
The final rule adds language to
§ 1026.36(d)(1)(iii) similar to what was
previously proposed in commentary and
also to define ‘‘designated taxadvantaged plans.’’ Specifically,
§ 1026.36(d)(1)(iii) defines the term to
include any plan that meets the
requirements of Internal Revenue Code
section 401(a), 26 U.S.C. 401(a);
employee annuity plans described in
Internal Revenue Code section 403(a),
26 U.S.C. 403(a); simple retirement
accounts, as defined in Internal Revenue
Code section 408(p), 26 U.S.C. 408(p);
simplified employee pensions described
in Internal Revenue Code section 408(k),
26 U.S.C. 408(k); annuity contracts
described in Internal Revenue Code
section 403(b), 26 U.S.C. 403(b); and
eligible deferred compensation plans, as
defined in Internal Revenue Code
section 457(b), 26 U.S.C. 457(b). The
term ‘‘designated tax-advantaged plan’’
corresponds to the proposed term
‘‘qualified plan,’’ and the set of plans
that qualify as ‘‘designated’’ plans under
the final rule is largely the same as those
that were ‘‘qualified’’ as described in
proposed comment 36(d)(1)–2.iii.E.
The Bureau has, however, also
substantially reorganized and clarified
the proposed commentary. In particular,
proposed comment 36(d)(1)–2.iii has
been moved into a new comment
36(d)(1)–3 and restructured for internal
consistency and clarity. New comment
36(d)(1)–3 clarifies that designated taxadvantaged plans are permitted even if
the compensation is directly or
indirectly based on the terms of
multiple transactions of multiple
individual loan originators. This
language clarifies that
§ 1026.36(d)(1)(iii) (as well as
§ 1026.36(d)(1)(iv), which is discussed
further below with regard to nondeferred profits-based compensation
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plans) permits certain types of
compensation that are otherwise
prohibited under § 1026.36(d)(1)(i). This
is a technical change to improve on the
consistency of the proposal’s language.
There are two categories of designated
tax-advantaged plans: (1) Designated
defined contribution plans; and (2)
designated defined benefit plans.
Comment 36(d)(1)–3.i explains that the
Bureau uses these terms as defined in
section 414 of the Internal Revenue
Code, 26 U.S.C. 414. Thus, a ‘‘defined
contribution plan’’ is one ‘‘which
provides for an individual account for
each participant and for benefits based
solely on the amount contributed to the
participant’s account, and any income,
expenses, gains and losses, and any
forfeitures of accounts of other
participants which may be allocated to
such participant’s account.’’ 26 U.S.C.
414(i). Any plans that do not meet this
definition are called defined benefit
plans. 26 U.S.C. 414(j).
Under the final rule, the Bureau
permits individual loan originators to
participate in designated defined
contribution plans, provided that
contributions to these plans are not
based on the terms of the specific
transactions of each individual loan
originator, pursuant to
§ 1026.36(d)(1)(iii). The Bureau
recognizes, as expressed by industry
commenters, that creditors, loan
originator organizations, and individual
loan originators derive substantial
benefits from being able to establish and
participate in designated defined
contributions plans. These types of
plans provide specific tax advantages
for employees saving for their eventual
retirement, are commonly used across
many markets and made available to
employees across many income classes,
and in a given firm generally are made
equally available to employees across
different job categories. The final rule
permits individual loan originators to
participate in these plans because the
Bureau believes that certain structural,
legal, and operational features of
designated defined contribution plans,
combined with the additional restriction
of § 1026.36(d)(1)(iii), will significantly
reduce the likelihood that participation
in these plans will provide individual
loan originators substantial incentives to
steer consumers.
First, withdrawals from designated
defined contribution plans are subject to
time deferral requirements, and tax
penalties generally apply to early
withdrawals.117 The fact that individual
loan originators may not receive funds
contributed to a designated defined
117 See,
e.g., 26 U.S.C. 72(t).
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contribution plan for years (or even
decades) without paying an additional
tax for early withdrawal reduces the
incentive for an individual loan
originator to steer consumers because
the potential benefit from the potential
steering can be so remote in time.
Second, designated defined contribution
plans are subject to limits in the Internal
Revenue Code on the contributions to
any individual participant’s account.118
This further reduces the degree to which
a designated defined contribution plan
can give an individual loan originator
an incentive to steer simply to increase
general company profits. Third, to
maintain their tax-advantaged status,
these plans are subject to a variety of
rules under the Internal Revenue Code
that limit their potential use as steering
incentives and complement and buttress
the anti-steering protections of
§ 1026.36(d)(1)(iii). These may include,
for example, depending on the type of
plan, rules about the manner in which
contributions are allocated to
participants and prohibitions on
discriminating between highlycompensated employees and other
employees.
Section 1026.36(d)(1)(iii) also permits
participation in the second category of
designated tax-advantaged plans, which
are defined benefit plans. In this final
rule, however, the Bureau has not
applied additional restrictions on
benefits payable under defined benefit
plans as it has done in
§ 1026.36(d)(1)(iii) with regard to
contributions under defined
contribution plans, as described above.
A defined benefit plan differs from a
defined contribution plan in that, under
the former, a participant’s benefits
depend on factors other than amounts
contributed to an account established
for that individual participant (and the
investment returns and expenses on
such amounts). Commonly, benefits are
paid to individuals at retirement or
another point of eligibility based on a
benefits formula. Indeed, employer
contributions to a defined benefit plan
are generally made to the plan as a
118 For example, for certain types of plan,
contributions to an individual loan originator’s
account are generally limited to the lesser of 100
percent of the individual loan originator’s yearly
compensation (as defined in Internal Revenue Code
section 415(c)(3)) or an annual dollar amount
($51,000 for 2013), which the IRS adjusts each year
to account for inflation. See 26 U.S.C. 415(c); IRS
Publication 560 at 15; Internal Revenue Service
Web site, ‘‘IRS Announces 2013 Pension Plan
Limitations; Taxpayers May Contribute Up To
$17,500 To Their 401(k) Plans in 2013,’’ http://
www.irs.gov/uac/2013-Pension-Plan-Limitations
(last accessed Dec. 17, 2012) (IRS 2013 Qualified
Plan Adjustments). The annual cap includes the
employee contributions, see 26 U.S.C. 415(c).),
which may be subject to a separate annual limit.
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11345
whole, rather than being allocated to the
accounts of individual participants. For
these reasons, the Bureau believes that
defined benefit plans further attenuate
any potential steering incentives a firm
might try to incorporate in a defined
benefit plan. In addition, attempts by
creditors or loan originator
organizations to structure such plans to
take into account the terms of the
transactions of the individual loan
originators participating in the plans
would likely present considerable
regulatory obstacles. The Bureau is
continuing to study the structural
differences in plan type and will issue
additional guidance or restrictions in
the future that are specific to the
particular structures of defined benefit
plans as necessary and appropriate to
effectuate the intent of the Dodd-Frank
Act in prohibiting steering incentives.
The Bureau disagrees with the few
commenters who suggested that the
Bureau’s proposal places unwarranted
restrictions on the use of designated
plans that potentially conflict with other
Federal regulations and adds
uncertainty regarding an individual loan
originator’s eligibility to participate in a
designated plan. To the contrary,
§ 1026.36(d)(1)(iii) explicitly
contemplates that individual loan
originators may participate in a
designated plan. The creditor or loan
originator organization would be free, to
the extent permitted by other applicable
law, to match an individual loan
originator’s contribution to a designated
plan account or pay a fixed percentage
of the individual loan originator’s
compensation in the form of a
contribution to a designated plan
account.
The rule simply prohibits a creditor or
loan originator organization from basing
the amount of contributions to an
individual loan originator’s designated
plan account, in the case of a defined
contribution plan, on the terms of that
individual loan originator’s
transactions. The Bureau believes that
implementing the statutory prohibition
on compensation based on the terms of
the loan under section 1403 of the
Dodd-Frank Act requires a regulation
that prohibits this practice.
Compensating any individual loan
originator more based on the terms of
his or her transactions is a core, direct
danger that the statute and this final
rule are designed to counteract. The
Bureau is not convinced that the
structure or operation of designated
defined contribution plans would
sufficiently mitigate the steering
incentives an employer could create by
using such a practice. Moreover, the
Bureau is not aware of any conflict
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between this final rule and other
applicable Federal laws and regulations
(e.g., the Internal Revenue Code and its
implementing regulations) that would
prevent compliance with all applicable
legal requirements.
Non-Deferred Profits-Based
Compensation Plans. In addition to
addressing qualified plans as described
above, proposed § 1026.36(d)(1)(iii)
would have provided that,
notwithstanding § 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
some other form of non-qualified plan
even if the compensation directly or
indirectly was based on the terms of the
transactions of multiple individual loan
originators, provided that the conditions
set forth in proposed
§ 1026.36(d)(1)(iii)(A) and (B) were
satisfied. Proposed
§ 1026.36(d)(1)(iii)(A) would have
prohibited payment of compensation to
an individual loan originator that
directly or indirectly was based on the
terms of that individual loan originator’s
transaction or transactions. The Bureau
explained in the section-by-section
analysis of the proposal that this
language was intended to prevent a
person from paying compensation to an
individual loan originator based on the
terms of that individual loan originator’s
transactions regardless of whether the
compensation would otherwise be
permitted in the limited circumstances
under § 1026.36(d)(1)(iii)(B).
Proposed § 1026.36(d)(1)(iii)(B)(1)
would have permitted compensation in
the form of a bonus or other payment
under a profit-sharing plan or a
contribution to a non-qualified plan,
even if the compensation related
directly or indirectly to the terms of the
transactions of multiple individual loan
originators, provided: (1) The conditions
set forth in proposed
§ 1026.36(d)(1)(iii)(A) were met; and (2)
not more than a certain percentage of
the total revenues of the person or
business unit to which the profitsharing plan applies, as applicable, were
derived from the person’s mortgage
business during the tax year
immediately preceding the tax year in
which the compensation is paid. The
Bureau proposed two alternatives for
the threshold percentage—50 percent,
under Alternative 1, or 25 percent,
under Alternative 2. The approach set
forth under proposed
§ 1026.36(d)(1)(iii)(B)(1) is sometimes
referred to as the ‘‘revenue test.’’
The Bureau explained in the proposal
that to meet the conditions under
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proposed § 1026.36(d)(1)(iii)(B)(1), a
person would measure the revenue of its
mortgage business divided by the total
revenue of the person or business unit,
as applicable.119 Proposed
§ 1026.36(d)(1)(iii)(B)(1) also would
have addressed how total revenues are
determined,120 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.121 Proposed comment
36(d)(1)–2.iii would have provided
additional interpretation of the terms
‘‘total revenue,’’ ‘‘mortgage business,’’
and ‘‘tax year’’ 122 used in proposed
§ 1026.36(d)(1)(iii)(B)(1).
Proposed comment 36(d)(1)–2.iii.A
would have clarified that the term
‘‘profit-sharing plans’’ includes ‘‘bonus
plans,’’ ‘‘bonus pools,’’ or ‘‘profit pools’’
from which individual loan originators
are paid bonuses or other compensation
with reference to company or business
119 Proposed comment 36(d)(1)–2.iii.G.1 would
have clarified that, under the proposed revenue test,
whether the revenues of the person or business unit
would be used would depend on the level within
the person’s organizational structure at which the
profit-sharing plan was established and whose
profitability was referenced for purposes of
compensation payment.
120 Proposed § 1026.36(d)(1)(iii)(B)(1) would have
provided that total revenues would be determined
through a methodology that: (1) 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;
and (2) as applicable, reflects an accurate allocation
of revenues among the person’s business units. The
Bureau solicited comment on: (1) Whether this
standard would be appropriate in light of the
diversity in size of the financial institutions that
would be subject to the requirement and, more
generally, on the types of income that should be
included; and (2) whether the definition of total
revenues should incorporate a more objective
standard.
121 Section 1026.36(d)(1)(iii)(B)(1) would have
provided that the revenues derived from mortgage
business are the portion of those total revenues that
are generated through a person’s transactions that
are subject to § 1026.36(d). Proposed comment
36(d)(1)–2.iii.G would have explained 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 also would have noted certain categories
of income and fees that would not be included
under the definition of mortgage-related revenues,
such as servicing income where the loans being
serviced were purchased by the person after their
origination by another person. The Bureau
requested comment on the scope of revenues
included in the definition of mortgage revenues.
122 Proposed comment 36(d)(1)–2.iii.G.1 would
have clarified that a tax year is the person’s annual
accounting period for keeping records and reporting
income and expenses.
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unit profitability, as applicable. The
proposed comment also would have
noted that a bonus made without
reference to profitability, such a
retention payment budgeted for in
advance, would not violate the
prohibition on compensation based on
transaction terms. Proposed comment
36(d)(1)–2.iii.C would have clarified
that compensation is ‘‘directly or
indirectly based’’ on the terms of
multiple transactions of multiple
individual loan originators when the
compensation, or its amount, results
from or is otherwise related to the terms
of multiple transactions of multiple
individual loan originators. The
proposed comment would have
provided that, if a creditor did not
permit its individual loan originators to
deviate from the creditor’s preestablished credit 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
would not be related to the transaction
terms of multiple individual loan
originators. The proposed comment also
would have clarified that, if a loan
originator organization whose revenues
were derived exclusively from fees paid
by the creditors that fund its
originations pays a bonus under a profitsharing plan, the bonus would be
permitted. Proposed comment 36(d)(1)–
2.iii.D would have clarified that, under
proposed § 1026.36(d)(1)(iii), the time
period for which the compensation was
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 was actually paid during
or after that time period.
In the proposal, the Bureau explained
that the revenue test was intended as a
bright-line rule to distinguish
circumstances in which a compensation
plan creates a substantial risk of
consumers being steered to particular
transaction terms from circumstances in
which a compensation plan creates only
an attenuated incentive and risk of
steering. The Bureau also explained that
the proposal would treat revenue as a
proxy for profitability and profitability
as a proxy for terms of multiple
transactions of multiple individual loan
originators. Furthermore, the Bureau
stated that it was proposing a threshold
of 50 percent because, if more than 50
percent of the person’s total revenues
were derived from the person’s
mortgage business, the mortgage
business revenues would predominate,
which would increase the likelihood of
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steering incentives. The Bureau
recognized, however, that a bright-line
rule with a 50 percent revenue test
threshold might still permit steering
incentives in light of the differing sizes,
organizational structures, and
compensation structures of the persons
affected by the proposed rule. The
Bureau thus proposed an alternative
threshold of 25 percent and more
generally solicited comment on which
threshold would best effectuate the
purposes of the rule.
The Bureau also sought comment on
the effect of this proposed provision on
small entities. The Bureau stated in the
proposal that it was aware of the
potential differential effects the revenue
test may have on small creditors and
loan originator organizations that
employ individual loan originators—
particularly those institutions that
originate mortgage loans as their
exclusive, or primary, line of business
(hereinafter referred to as ‘‘monoline
mortgage businesses’’)—when compared
to the effects on larger institutions that
are more likely to engage in multiple
business lines. In the proposal, the
Bureau noted the feedback it had
received during the Small Business
Review Panel process regarding these
issues.
The Bureau discussed in the proposal
three possible alternative approaches to
the revenue test in proposed
§ 1026.36(d)(1)(iii)(B)(1). First, the
Bureau solicited comment on whether
the formula under
§ 1026.36(d)(1)(iii)(B)(1) should be
changed from the consideration of
revenue to a consideration of profits.
Under this profits test, total profits of
the mortgage business would be divided
by the total profits of the person or
business unit, as applicable. The Bureau
further solicited comment on how
profits would be calculated if a profits
test were adopted. The Bureau stated
that it was soliciting comment on this
approach because the test’s use of
revenue and not profits may result in an
improper alignment with the steering
incentives to the extent that it would be
possible for a company to earn a large
portion of its profits from a
proportionally much smaller mortgagebusiness-related revenue stream.123 But
123 The Bureau posited an example where 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 proposed revenue test
this organization would be permitted to pay certain
compensation based on terms of multiple
individual loan originators’ transactions taken in
the aggregate.
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the Bureau stated that it recognized that
a profits test would create definitional
challenges and could lead to evasion if
a person were to allocate costs in a
manner across business lines that would
understate mortgage business profits for
purposes of the profits test.
Second, the Bureau solicited
comment on whether to establish a
‘‘total compensation’’ test either in
addition to or in lieu of the proposed
revenue test. The total compensation
test would cap the percentage of an
individual loan originator’s total
compensation that could be attributable
to the types of compensation addressed
by the proposed revenue test (i.e.,
bonuses under profit-sharing plans and
contributions to non-qualified plans).
The Bureau also solicited comment on
the appropriate threshold amount if the
Bureau were to adopt a total
compensation test. The Bureau solicited
comment on the total compensation test
because it believed the proportion of an
individual loan originator’s total
compensation that is attributable to
mortgage-related business would
provide one relatively simple and
broadly accurate metric of the strength
of individual loan originators’ steering
incentives.
Third, the Bureau solicited comment
on whether it should include an
additional provision under
§ 1026.36(d)(1)(iii)(B) that would permit
bonuses under a profit-sharing plan or
contributions to non-qualified plans
where the compensation bears an
‘‘insubstantial relationship’’ to the terms
of multiple transactions of multiple
individual loan originators. The Bureau
solicited comment on this approach
because it recognized that the terms of
multiple individual loan originators’
transactions taken in the aggregate
would not, in every instance, have a
substantial effect on profitability. The
Bureau stated, however, that any test
would likely be both under- and overinclusive, and it was unclear how such
a test would work in practice and what
standards would apply to determine if
compensation bore an insubstantial
relationship to the terms of multiple
transactions of multiple individual loan
originators.
Consumer groups generally criticized
the revenue test as too permissive with
regard to payment of compensation
through profit-sharing bonuses or
contributions to non-qualified plans. A
coalition of consumer groups stated that
the revenue test would merely create a
‘‘back door,’’ whereby there would be
indirect incentives to promote certain
credit terms for an individual loan
originator’s personal gain. They urged
the Bureau to restrict all profit-sharing
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11347
bonuses or contributions to nonqualified plans to those based on
volume of mortgages originated. One
consumer advocacy organization,
however, supported the revenue test
with a 25 percent threshold. This
commenter asserted that the larger the
percentage of revenue derived from a
company’s mortgage lending unit, the
more opportunity would exist for the
mortgage unit to skew the results of the
overall pool of funds available for
distribution as profit-sharing bonuses or
contributions to non-qualified plans.
Industry commenters, including small
and large institutions and trade
associations, nearly unanimously urged
the Bureau not to finalize the revenue
test. Industry opposition arose primarily
for three reasons. First, many industry
commenters asserted that the revenue
test was unduly complex and would be
very difficult to implement. Two large
financial institutions stated that large
creditors would face challenges in
calculating total revenue and mortgagerelated revenues under the revenue test
if the creditor had different origination
divisions or affiliates or typically
aggregated closed-end and open-end
transaction revenues. A national trade
association representing community
banks stated that community banks
would have faced difficultly complying
with the revenue test based on the
proposed requirement that the
determination of total revenue be
consistent with the reporting of Federal
tax filings and industry call reports,
because, the association stated, revenue
from various business units is not
separated out in bank ‘‘call reports,’’
and mortgage revenue comes from
multiple sources. One commenter
asserted that the terminology was
confusing, citing the example of the
proposal using the phrase ‘‘profitsharing plan’’ to refer to profit pools and
bonus pools in the non-qualified plan
context when such phrase has a
commonly understood meaning in the
context of qualified plans.
Second, numerous industry
commenters asserted that application of
the revenue test would have a disparate
negative impact on monoline mortgage
businesses. These businesses, the
commenters stated, would not be able to
pay profit-sharing bonuses or make
contributions to non-qualified plans
because, under the revenue test, their
mortgage-related revenue would always
exceed 50 percent of total revenues. A
trade association representing
community mortgage bankers
commented that the revenue test would
favor large institutions that have
alternate sources of income outside
mortgage banking. Another trade
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association asserted that the revenue
test would place smaller businesses at a
competitive disadvantage for recruiting
and retaining talented loan originators.
A law firm that represents small and
medium-sized financial institutions
expressed particular concern about the
impact of the revenue test on small
entities, citing data from briefing
materials circulated by the Bureau
during the Small Business Review Panel
process that a majority of small savings
institutions would fail the revenue test
if it were set at the higher proposed
threshold of 50 percent.124 This
commenter also asserted that a ‘‘not
insubstantial number’’ of savings
institutions with between $175 million
and $500 million in assets would also
fail the revenue test if the threshold
were set at 50 percent. One financial
holding company stated that the
revenue test would have a negative
impact on creditors that keep mortgage
loans in portfolio, which, it stated,
would likely disproportionately affect
smaller creditors and community banks,
because accrued interest on mortgages
the creditor had originated and held
over many years would count toward
the calculation of mortgage-related
revenues under the revenue test. The
commenter urged the Bureau to craft a
narrower definition of mortgage-related
revenues that would capture only recent
lending activity.
Third, several industry commenters
expressed concern that application of
the revenue test would lead to TILA
liability if an accounting error in
calculating total revenues or mortgage
revenues resulted in bonuses being paid
to loan originators improperly. A
national trade association stated that
none of its members would avail
themselves of the revenue test because
of their concern that, if the threshold
percentage numbers were miscalculated,
124 See Consumer Fin. Prot. Bureau, ‘‘Small
Business Review Panel for Residential Mortgage
Loan Origination Standards Rulemaking: Outline of
Proposals under Consideration and Alternatives
Considered’’ 18 (May 9, 2012), available at http://
files.consumerfinance.gov/f/201205_cfpb_MLO_
SBREFA_Outline_of_Proposals.pdf (Small Business
Review Panel Outline). In the Small Business
Review Panel Outline, the Bureau noted that at the
proposed threshold of 50 percent for the revenue
test then-under consideration, 56 percent of small
savings institutions whose primary business focus
is on residential mortgages would have been
restricted from paying bonuses based on mortgagerelated profits to their individual loan originators.
In the Small Business Review Panel Outline, the
Bureau noted that its estimate was based on 2010
call report data, and revenue from loan originations
was assumed to equal fee and interest income from
1–4 family residences as reported. The Bureau
noted that to the extent that other revenue on the
call reports is tied to loan originations, the numbers
may be underestimated. In the proposal, the Bureau
discussed the same data but updated the figure to
59 percent. See 77 FR 55272, 55347 (Sept. 7, 2012).
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the entire pool of loans originated by
that bank would be ‘‘poisoned,’’ the
compensation scheme would be deemed
defective, and the bank would be
subject to investor repurchase demands
and full TILA liability. One State
banking trade association expressed
concern about the personnel
repercussions of rescinding bonuses that
were found to have been made
improperly. A trade association that
represents loan originators (both
organizations and individuals)
expressed concern that the
compensation restrictions in the
revenue test would lead to
‘‘unacceptable litigation’’ for creditors
and loan originators.
A compensation consulting firm
commented that drawing a bright line at
50 or 25 percent would be inherently
subjective, would result in inequitable
treatment, and would actually create a
potential incentive for companies to
manipulate financial statements to fall
on the permissive side of the
measurement to ensure the continued
payment of profit-sharing bonuses or
making of contributions to non-qualified
plans. The commenter asserted that this
result would directly conflict with
interagency guidance provided on
incentive compensation policies,125 and
the commenter recommended that the
Bureau instead adopt an approach
modeled after the implementation of G–
20 task force recommendations
regarding incentive compensation.126
125 In the proposal, the Bureau noted 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 (Interagency Group). 75 FR
36395 (June 17, 2010) (Interagency Guidance). The
Bureau wrote that 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.
77 FR 55272, 55297 (Sept. 7, 2012). The Bureau
stated in the proposal that the Bureau’s proposed
rule would not affect the Interagency Guidance on
loan origination compensation. Id. In addition, the
Bureau stated that 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. Id. The Bureau reiterates
these statements for purposes of this final rule. The
Bureau also acknowledges that the same statements
apply with respect to the proposal by the
Interagency Group to implement rules consistent
with the standards set forth in the Interagency
Guidance. See 76 FR 21170 (Apr. 14, 2011). The
proposal by the Interagency Group has not yet been
finalized.
126 The G–20 recommendations to which the
commenter was referring appear to be the Financial
Stability Forum (FSF) Principles for Sound
Compensation Practices, issued in April 2009 (FSF
Principles). See http://www.financial
stabilityboard.org/publications/r_0904b.pdf. The
FSF Principles were intended to ensure effective
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Industry commenters who expressed a
preference, if the revenue test were
nonetheless adopted, primarily favored
a threshold of 50 percent rather than 25
percent. One large financial institution,
while criticizing the complexity of the
revenue test, recommended that the
Bureau consider adopting it as a safe
harbor. One mortgage company
commenter suggested exempting
organizations from the restrictions on
the payment of profit-sharing bonuses
and the making of contributions to nonqualified plans if they do not offer high
or higher-cost mortgages and their
individual loan originators have limited
pricing discretion because, the
commenter stated, the risk for steering
of consumers would be extremely low
or nonexistent.
SBA Advocacy urged the Bureau to
analyze the incentive issues arising from
non-qualified plans carefully before
clarifying existing or proposing new
regulations. SBA Advocacy reiterated
concerns raised by the small entity
representatives during the Small
Business Review Panel process that: (1)
Even if the revenue test threshold were
set at 50 percent, it may not provide
relief for many small businesses because
their revenues are often derived
predominately from mortgage
originations; (2) the Bureau should
consider relaxing the revenue test to
exclude revenue derived from existing
loans held in portfolio; (3) the Bureau
should provide further clarification on
the definition of revenue; and (4) the
Bureau should develop a mortgagerelated revenue limit that reflects the
unique business structure of smaller
industry members and provides relief to
small entities.127 SBA Advocacy also
referenced concerns raised at its
outreach roundtable that the definition
was too broad and that it would be
difficult to determine what is and is not
compensation. SBA Advocacy further
referenced concerns that if a mistake
was made on the compensation
structure, all loans sold on the
secondary market might be susceptible
to repurchase demands. SBA Advocacy
discussed the suggestion by participants
at its outreach roundtable of a safe
harbor to prevent one violation from
poisoning an entire pool of loans.
An organization writing on behalf of
State bank supervisors stated that the
Bureau’s proposed regulatory changes
governance of compensation, alignment of
compensation with prudent risk-taking and
effective supervisory oversight and stakeholder
engagement in compensation. See id. at 2.
127 Similarly, a law firm that represents small and
medium-sized banks commented that the Bureau
should consider a higher threshold under the
revenue test for small savings institutions.
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regarding profit-sharing bonuses and
contributions to non-qualified plans
were largely appropriate. The
organization noted, however, that
enforcing standards based on thresholds
for origination, such as the approach in
the proposed de minimis test, could be
problematic because the number of
transactions originated may have
differing degrees of significance in
different scenarios. The organization
encouraged the Bureau either to justify
the threshold levels through study or to
adopt a more flexible approach that
could be tailored to various situations
appropriately.
A few industry commenters proposed
alternative approaches to the revenue
test or specifically responded to
alternative approaches on which the
Bureau solicited comment. A trade
association representing independent
community banks recommended that
the Bureau not finalize the revenue test
and instead cap at 25 percent the
percentage of an individual loan
originator’s total cash compensation
paid during a calendar year from a nonqualified bonus plan. The association
asserted that this structure would be
easy to track, manage and monitor. A
law firm that represents small and
medium-sized banks discussed whether
to permit profit-sharing bonuses or
contributions to non-qualified plans
where the creditor or loan originator
organization can demonstrate that there
is an insubstantial relationship between
the compensation and the terms of
multiple transactions of multiple
individual loan originators. This
commenter agreed with the Bureau’s
assertion in the proposal that this test
would be difficult to implement in
practice. One bank commenter,
however, wrote that the marginal
difference in loan originator
compensation based on upcharging
consumers is not a significant incentive
to charge a customer a higher rate. The
commenter provided an example of a
loan originator receiving a $1,000 bonus
of which only $20 was attributable to
profit from transaction terms.
After consideration of comments
received to the proposal and additional
internal analysis, the Bureau has
decided not to adopt the revenue test in
this final rule. Based on this
consideration and analysis, the Bureau
believes the revenue test suffers from a
variety of flaws.
First, the Bureau believes that the
revenue test is not an effectively
calibrated means of measuring the level
of incentives present for individual loan
originators to steer consumers to
particular transaction terms. At a basic
level, revenues would be a flawed
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measure of the relationship between the
mortgage business and the profitability
of the firm. Indeed, the Bureau believes
that the revenue test would present a
substantial risk of evasion. For example,
if the revenue test were set at 50
percent, a creditor whose mortgage
origination division generates 40
percent of the creditor’s total revenues
but 90 percent of the creditor’s total
profits could set a profit-sharing plan at
the level of the entire company (rather
than the mortgage business division) so
that all company employees are eligible,
but then pay out 90 percent of the
bonuses to the individual loan
originators. Although this compensation
program would technically comply with
the revenue test because less than 50
percent of total revenues would have
been generated from mortgage business,
steering incentives might still exist
because individual loan originators
would receive a disproportionate
amount of bonuses relative to other
individuals working for the creditor or
loan originator organization. Moreover,
firms would also have incentives to
manipulate corporate structures to
minimize mortgage revenues. The
inherent misalignment between the
revenue test and company profitability,
which more directly drives decisions
about compensation, would result in a
rule that is both under-inclusive and
over-inclusive. The revenue test’s
under-inclusiveness is illustrated by the
example above in this paragraph. One
example of the revenue test’s overinclusiveness is the effect of the revenue
test on monoline mortgage businesses,
discussed below. The Bureau believes
that it would be difficult to fashion
additional provisions for the revenue
test to prevent such outcomes and any
such provisions would add further
complexity to a rule that as proposed
was already heavily criticized for its
complexity.
The Bureau believes that a test based
on profitability instead of revenues,
while designed to address the potential
misalignment between revenues and
profits discussed above, would present
substantial risks. In the proposal, the
Bureau solicited comment on this
alternative approach, while expressing
concern that using profitability as the
metric could encourage firms to allocate
costs across business lines to understate
mortgage business profits. While
revenues may be less prone to
accounting manipulation than profits, a
similar potential for accounting
manipulation would also be present if
the revenue test were adopted.
Second, the complexity of the rule
also would prove challenging for
industry compliance and supervision
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11349
and enforcement. The Bureau is
particularly mindful of the criticism by
some commenters that the complexity of
the proposal would have posed
compliance burdens of such
significance that creditors and loan
originator organizations would have
avoided paying profit-sharing bonuses
to individual loan originators or making
contributions to their non-qualified
plans. Moreover, monitoring for evasion
of the proposed rule would have
required substantial analysis of how the
company’s mortgage-related revenue
interplays with the revenue from other
lines of business across the company
and affiliates of the company (or a
similar analysis for profits if
profitability were used as an alternative
metric). Assessing the relationship
among different business lines within
the company and affiliates would have
been particularly challenging with a
large, multi-layered organization.
Third, the Bureau has concluded,
following consideration of the many
comments from industry and SBA
Advocacy, that the proposed revenue
test would disadvantage monoline
mortgage businesses, many of which are
small entities, by effectively precluding
them from paying profit-sharing
bonuses and making contributions to
non-qualified plans under any
circumstances regardless of the
particular aspects of their compensation
programs. The Bureau believes that, as
a general matter, steering incentives
may be present to a greater degree with
mortgage businesses that are small in
size because the incentive of individual
loan originators to upcharge likely
increases as the total number of
individual loan originators in an
organization decreases.128 The negative
effect of the proposed rule, however, on
monoline mortgage businesses would
have been uniform; regardless of where
128 See earlier discussion of ‘‘free-riding’’
behavior in the section-by-section analysis of
§ 1026.36(d)(1)(i); see also 77 FR 55272, 55296–97
(Sept 7. 2012). In the proposal, the Bureau also
noted that for small depository institutions and
credit unions (defined as those institutions with
assets under $175 million), regulatory data from
2010 indicate that for small savings institutions
whose primary business focus is on residential
mortgages, 59 percent of these firms would be
restricted from paying bonuses based on mortgagerelated profits to their individual loan originators
under the revenue test if set at 50 percent. The
Bureau noted that it 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, and as a
result, it was unclear the extent to which such
nonbank lenders will face restrictions on their
compensation practices. 77 FR 55272, 55347 (Sept.
7, 2012). While the Bureau has received additional
data regarding nonbank lenders from the NMLSR
confirming the original data, information regarding
the range of revenue sources is still incomplete.
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the threshold would have been set,
these businesses never would have been
able to ‘‘pass’’ the revenue test. Thus,
the revenue test would have been overinclusive with respect to monoline
mortgage businesses.
For these reasons, the Bureau does not
believe that the revenue test (or a test
that substitutes profitability for
revenues) can be structured in a way
that is sufficiently calibrated to prevent
steering incentives. Thus, the Bureau is
not adopting either type of test and,
instead, as discussed below, is adopting
a total compensation test consistent
with an alternative on which the Bureau
sought comment in the proposal.
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36(d)(1)(iv)
As noted above, proposed
§ 1026.36(d)(1)(iii) would have
permitted payment of compensation
that is directly or indirectly based on
the terms of transactions of multiple
individual loan originators in limited
circumstances. In this final rule, the
provisions that would have been
included in § 1026.36(d)(1)(iii)
regarding the payment of compensation
in the form of profit-sharing bonuses
and contributions to non-qualified plans
have been revised and redesignated as
§ 1026.36(d)(1)(iv), which addresses
payments of compensation under ‘‘nondeferred profits-based- compensation
plans’’ as defined in the rule. A nondeferred profits-based compensation
plan is any arrangement for the payment
of non-deferred compensation that is
determined with reference to profits of
the person from mortgage-related
business. The commentary clarifying
§ 1026.36(d)(1)(iv), previously contained
in proposed comment 36(d)(1)–2.iii.G,
has also been reorganized and
incorporated into comment 36(d)(1)–3.v
in the final rule.
36(d)(1)(iv)(A)
Proposed § 1026.36(d)(1)(iii)(A)
would have prohibited payment of
compensation to an individual loan
originator that directly or indirectly was
based on the terms of that individual
loan originator’s transaction or
transactions. The Bureau explained in
the section-by-section analysis of the
proposal that this language was
intended to prevent a person from
paying compensation to an individual
loan originator based on the terms of
that individual loan originator’s
transactions regardless of whether the
compensation would otherwise be
permitted in the limited circumstances
under § 1026.36(d)(1)(iii)(B). Proposed
comment 36(d)(1)–2.iii.F would have
clarified the provision by giving an
example and cross-referencing proposed
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comment 36(d)(1)–1 for further
interpretation concerning whether
compensation was ‘‘based on’’
transaction terms.
The Bureau did not receive comments
specifically addressing this provision.
The Bureau is finalizing this section and
comment 36(d)(1)–2.iii.F as proposed,
except that § 1026.36(d)(1)(iii)(A) has
been redesignated as
§ 1026.36(d)(1)(iv)(A) and comment
36(d)(1)–2.iii.F has been redesignated as
comment 36(d)(1)–3.iv for technical
reasons.
36(d)(1)(iv)(B)
36(d)(1)(iv)(B)(1)
Although the Bureau is not adopting
the revenue test, the Bureau still
believes that the final rule should
permit the payment of compensation
under non-deferred profits-based
compensation plans to individual loan
originators under limited circumstances
where the incentives for the individual
loan originators to steer consumers to
different loan terms are sufficiently
attenuated. As noted earlier, the Bureau
shares the concerns of consumer groups
that setting a baseline rule too loosely
would undermine the general
prohibition of compensation based on
transaction terms under TILA section
129B(c)(1) and § 1026.36(d)(1)(i), which
could allow for a return of the types of
lending practices that contributed to the
recent mortgage-market crisis. However,
as the Bureau stated above and in the
proposal, compensation under nondeferred profits-based compensation
plans does not always raise steering
concerns, and this form of
compensation, when appropriately
structured, can provide inducements for
individual loan originators to perform
well and to become invested in the
success of their organizations. The
Bureau believes that allowing payment
of compensation under non-deferred
profits-based compensation plans under
carefully circumscribed circumstances
would appropriately balance these
objectives. The Bureau also believes that
implementing the TILA section
129B(c)(1) prohibition on compensation
that varies based on loan terms to allow
for these types of carefully
circumscribed exceptions (with
clarifying interpretation in the
commentary) is consistent with the
Bureau’s interpretive authority under
the Dodd-Frank Act and the Bureau’s
authority under section 105(a) of TILA
to issue regulations to effectuate the
purposes of TILA, prevent
circumvention or evasion, or to facilitate
compliance. Neither the TILA
prohibition on compensation varying
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based on loan terms nor the existing
regulatory prohibition on compensation
based on transaction terms and
conditions expressly addresses nondeferred profits-based compensation
plans. Therefore, the clarity provided by
§ 1026.36(d)(1)(iv) and its commentary
will help prevent circumvention or
evasion of, and facilitate compliance
with, TILA by clearly stating when these
types of payments and contributions are
permissible.
The Bureau, additionally, believes
that a bright-line approach setting a
numerical threshold above which
compensation under a non-deferred
profits-based compensation plan is
prohibited is preferable to a principlesbased approach, which was suggested
by some commenters. Application of a
principles-based approach would
necessarily involve a substantial amount
of subjectivity. Because the design and
operation of these programs are varied
and complex, the legality of many of
them would likely be in doubt, creating
uncertainty and challenges for industry
compliance, agency supervision, and
agency and private enforcement of the
underlying regulation.129
Therefore, the Bureau is adopting, in
§ 1026.36(d)(1)(iv)(B)(1), a rule that
permits an individual loan originator to
receive, and a person to pay,
compensation under a non-deferred
profits-based compensation plan where
the compensation is determined with
reference to the profits of the person
from mortgage-related business,
provided that the compensation to the
individual loan originator under nondeferred profits-based compensation
plans does not, in the aggregate, exceed
10 percent of the individual loan
originator’s total compensation
corresponding to the same time period.
Section 1026.36(d)(1)(iv)(B)(1) permits
this compensation even if it is directly
or indirectly based on the terms of
transactions of multiple individual loan
originators, provided that, pursuant to
§ 1026.36(d)(1)(iv)(A), the compensation
is not directly or indirectly based on the
terms of the individual loan originator’s
transactions.130
129 As noted earlier, one commenter urged the
Bureau to look to the implementation of certain G–
20 task force recommendations on incentive
compensation practices (i.e., the FSF Principles) as
a model for a principles-based rather than a rulesbased approach. However, the FSF Principles are
primarily focused on compensation programs at
significant financial institutions that incentivize
imprudent risk-taking, which is not the subject of
this rulemaking. FSF Principles at 1–2. Thus, the
Bureau believes this suggested precedent for a
qualitative, principles-based approach is
inapposite.
130 The provisions of § 1026.36(d)(1)(iv)(B)(1) are
sometimes hereinafter referred to as the ‘‘10-percent
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Proposed comment 36(d)(1)–2.iii.A,
which would have clarified the meaning
of ‘‘profit-sharing plan’’ under proposed
§ 1026.36(d)(1)(iii), has been revised to
clarify the meaning of ‘‘non-deferred
profits-based compensation plan’’ under
§ 1026.36(d)(1)(iv) and is adopted as
comment 36(d)(1)–3.ii. The Bureau is
adopting in this final rule much of the
language in the proposed comment,
with a few exceptions (in addition to
technical changes and reorganization).
The comment clarifies that a nondeferred profits-based compensation
plan is any compensation arrangement
where an individual loan originator may
be paid variable, additional
compensation based in whole or in part
on the profits of the mortgage-related
business of the person paying the
compensation. However, the comment
now clarifies that a non-deferred profitsbased compensation plan does not
include a designated tax-advantaged
plan (as defined in § 1026.36(d)(1)(iii)),
or a deferred compensation plan that is
not a designated plan as defined in the
rule, including plans under Internal
Revenue Code section 409A, 26 U.S.C.
409A.
The Bureau proposed to treat profitsbased deferred compensation under
non-qualified plans in the same manner
as non-deferred profit-sharing payments
(e.g., bonuses). Although the proposal
preamble discussion focused primarily
on profit-sharing bonus programs, the
reference to non-qualified plans also
potentially could have included certain
deferred-compensation plans (such as
plans covered by Internal Revenue Code
section 409A, 26 U.S.C. 409A) that do
not receive the same tax-advantaged
status as the plans covered by
§ 1026.36(d)(1)(iii) of the final rule. The
Bureau also solicited comment on
whether there are additional types of
non-qualified plans that should be
treated similar to qualified plans under
the rule. The Bureau received only one
response that specifically focused on
this issue by urging that the Bureau not
place restrictions on ‘‘nonqualified
retirement arrangements’’ that restore
benefits that are limited under
designated tax-advantaged plans. The
commenter asserted that companies use
these agreements in an attempt to give
favorable treatment to highlycompensated employees under their
company retirement plans, but provided
total compensation test’’ or the ‘‘10-percent total
compensation limit’’; and the restrictions on
compensation contained within the rule are
sometimes hereinafter referred to as the ‘‘10-percent
limit.’’ Compensation paid under a non-deferred
profits-based compensation plan is sometimes
hereinafter referred to as ‘‘non-deferred profitsbased compensation.’’
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no data regarding how frequently they
are used to compensate loan originators.
The Bureau has considered the
comment but declines to either include
such plans within the exception for
non-deferred compensation plans or to
provide a separate exception to
§ 1026.36(d)(1) for such deferred
compensation plans at this time.
Applying the 10 percent cap on
compensation under non-deferred
profits-based compensation plans to
compensation under non-designated
plans in general would be
administratively complex given the
variety of such plans and the
consequent difficulty of constructing
formulae for including them in the
calculations of income required to apply
the 10 percent cap. Nor is the Bureau
prepared to create a separate rule for
deferred compensation plans that are
not designated plans. The Bureau
understands that such plans are
generally quite rare and has no detailed
evidence as to the extent or nature of
their use in compensating loan
originators. The Bureau also notes that
they are not generally subject to many
of the same restrictions that apply to the
designated tax-advantaged plans
discussed in the section by section
analysis of § 1026.36(d)(1)(iii). The
Bureau also does not have enough
information regarding the structure of
non-designated plans to determine what
measures would be appropriate or
necessary to cabin any potential for
them to create steering incentives.
Accordingly, the Bureau does not
believe that it would be appropriate to
provide an exception for such plans at
this time.
Comment 36(d)(1)–3.ii further
clarifies that under a non-deferred
profits-based compensation plan, the
individual loan originator may, for
example, be paid directly in cash, stock,
or other non-deferred compensation,
and the amount to be paid out under the
non-deferred profits-based
compensation 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., such person may elect not to make
any payments under the non-deferred
profits-based compensation plan in a
given year), provided the compensation
is not directly or indirectly based on the
terms of the individual loan originator’s
transactions. The comment further
elaborates that, as used in
§ 1026.36(d)(1)(iv) and its commentary,
non-deferred profits-based
compensation plans include, without
limitation, bonus pools, profits pools,
bonus plans, and profit-sharing plans
established by the person, a business
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11351
unit within the person’s organizational
structure, or any affiliate of the person
or business unit within the affiliate’s
organizational structure. The comment
also provides examples illustrating
application of this interpretation to
certain types of non-deferred profitsbased compensation plans.
Comment 36(d)(1)–3.ii (proposed as
comment 36(d)(1)–2.iii.A) has been
revised in several additional respects.
The comment now clarifies that
compensation under a non-deferred
profits-based compensation plan could
include, without limitation, annual or
periodic bonuses, or awards of
merchandise, services, trips, or similar
prizes or incentives where the bonuses,
contributions, or awards are determined
with reference to the profitability of the
person, business unit, or affiliate, as
applicable. Reference to ‘‘any affiliate’’
has been added to include
compensation programs where
compensation is paid through an
affiliate of the person. Moreover, in the
proposal, the term ‘‘business unit’’ was
included in this comment without
elaboration. The final comment clarifies
that the term ‘‘business unit’’ as used in
§ 1026.36(d)(1)(iv) and its commentary
means a division, department, or
segment within the overall
organizational structure of the person or
affiliate, as applicable, that performs
discrete business functions and that the
person treats separately for accounting
or other organizational purposes. The
examples in the comment have been
revised to reflect that a performance
bonus paid out of a bonus pool set aside
at the beginning of the company’s
annual accounting period as part of the
company’s operating budget does not
violate the baseline prohibition on
§ 1026.36(d)(1)(i), meaning that the
limitations of § 1026.36(d)(1)(iv) do not
apply to such bonuses. Finally, several
technical changes have been made to
the comment.
Comment 36(d)(1)–3.v (which was
proposed as comment 36(d)(1)–2.iii.G)
contains six paragraphs and clarifies a
number of aspects of the regulatory text
in § 1026.36(d)(1)(iv)(B)(1). Comment
36(d)(1)–3.v.A clarifies that the
individual loan originator’s total
compensation (i.e., the denominator
under the 10-percent total compensation
test) consists of the sum total of: (1) all
wages and tips reportable for Medicare
tax purposes in box 5 on IRS form W–
2 131 (or, if the individual loan originator
is an independent contractor, reportable
131 See the IRS Instructions to Form W–2,
available at http://www.irs.gov/pub/irs-pdf/
iw2w3.pdf.
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compensation on IRS form 1099–
MISC 132); 133 and (2) at the election of
the person paying the compensation, all
contributions by the creditor or loan
originator organization to the individual
loan originator’s accounts in designated
tax-advantaged plans that are defined
contribution plans.
The Bureau believes that linking the
definition of total compensation to the
types of compensation required to be
included on the IRS W–2 or 1099–MISC
forms, as applicable, will make the
calculation simpler for the 10-percent
total compensation limit because loan
originator organizations and creditors
already must prepare W–2 and 1099–
MISC forms for their employees and
independent contractors, if any. Thus,
creditors and loan originator
organizations presumably already have
systems in place to track and aggregate
the types and amounts of individual
loan originator compensation that are
required to be reported on the IRS
forms. Moreover, as explained in
comment 36(d)(1)–3.v, a creditor or loan
originator organization is not required to
factor into the calculation of total
compensation any contribution to a
designated defined contribution plan
other than amounts reported on the W–
2 or 1099–MISC forms. In addition, the
Bureau believes this approach will yield
a more precise ratio of compensation
paid under non-deferred profits-based
compensation plans determined with
reference to mortgage-related profits to
total compensation than a definition
that selectively includes or excludes
certain types of compensation, and this
more accurate result will more closely
align with the incentives of loan
originators.
Comment 36(d)(1)–3.v.B clarifies the
requirement under
§ 1026.36(d)(1)(iv)(B)(1) that
compensation paid to the individual
loan originator that is determined with
reference to the profits of the person
from mortgage-related business is
subject to the 10-percent total
132 See the IRS Instructions to Form 1099–MISC,
available at http://www.irs.gov/pub/irs-pdf/
i1099msc.pdf.
133 Total compensation of individual loan
originators employed by the creditor or loan
originator organization would be reflected on a W–
2, whereas total compensation of an individual loan
originator working for a creditor or loan originator
organization as an independent contractor would be
reflected on a 1099–MISC form. If an individual
loan originator has some compensation that is
reportable on the W–2 and some that is reportable
on the 1099–MISC, the total compensation is the
sum total of what is reportable on each of the two
forms.
134 Paying a year-end bonus after the end of the
calendar year does not render the bonus a form of
deferred compensation since the bonus, once paid,
is immediately taxable to the recipient.
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compensation limit (i.e., the
‘‘numerator’’ of the 10-percent total
compensation limit). The comment
clarifies that ‘‘profits of the person’’
include, as applicable depending on
where the non-deferred profits-based
compensation plan is set, profits of the
person, the business unit to which the
individual loan originators are assigned
for accounting or other organizational
purposes, or an affiliate of the person.
The comment notes that profits from
mortgage-related business are any
profits of the person or the business unit
to which the individual loan originators
are assigned for accounting or other
organizational purposes that are
determined with reference to revenue
generated from transactions subject to
§ 1026.36(d), and that pursuant to
§ 1026.36(b) and comment 36(b)–1,
§ 1026.36(d) applies to closed-end
consumer credit transactions secured by
dwellings.
The comment further notes this
revenue would include, without
limitation, and as applicable based on
the nature of the business of the person,
business unit, or affiliate origination
fees and interest associated with
dwelling-secured transactions for which
individual loan originators working for
the person were loan originators,
income from servicing of such
transactions, and proceeds of secondary
market sales of such transactions. The
non-exhaustive list of mortgage-related
business revenue provided in the
comment largely parallels the definition
of ‘‘mortgage-related revenue’’ that the
Bureau had proposed in
§ 1026.36(d)(1)(iii)(B)(1) as part of the
revenue test approach. The comment
also clarifies that, if the amount of the
individual loan originator’s
compensation under non-deferred
profits-based compensation plans for a
time period does not, in the aggregate,
exceed 10 percent of the individual loan
originator’s total compensation
corresponding to the same time period,
compensation under non-deferred
profits-based compensation plans may
be paid under § 1026.36(d)(1)(iv)(B)(1)
regardless of whether or not it was
determined with reference to the profits
of the person from mortgage-related
business.
Comment 36(d)(1)–3.v.C discusses
how to determine the applicable time
period under § 1026.36(d)(1)(iv)(B)(1).
The comment also clarifies that a
company may pay compensation subject
to the 10-percent limit during different
time periods falling within the
company’s annual accounting period for
keeping records and reporting income
and expenses, which may be a calendar
year or a fiscal year depending on the
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person’s annual accounting period, but
in such instance, the 10-percent limit
applies both as to each time period and
cumulatively as to the annual
accounting period. Comment 36(d)(1)–
3.v.C also illustrates the clarification in
the comment through two examples.
The Bureau believes that the time
period for which the individual loan
originator’s performance, loan volume,
or other factors was evaluated for
purposes of determining the bonus that
the individual loan originator is to
receive is the most appropriate and
practicable measuring period for the 10percent total compensation limit. For
example, the Bureau considered using
as the measuring period for applying the
10-percent total compensation limit the
time period during which the
compensation subject to the 10-percent
limit is actually paid. This measuring
period would track when the bonuses
are reportable as Federal income by the
individual loan originators. However, if
this measuring period were used, a yearend bonus determined with respect to
one year and paid during January of the
following year would result in the
company having to project the total
compensation for the entire year in
which the bonus was paid to assess
whether the bonus determined with
reference to the previous year met the
10-percent limit.134 This would make
compliance difficult, if not impossible,
and also lead to imprecision between
the numerator (which is an actual
amount) and the denominator (which is
an estimated amount). Designating the
measuring period as an annual period
(whether a calendar or fiscal year) in all
circumstances, for example, would raise
similar issues about the need to project
total compensation over a future period
to determine whether a periodic bonus
(such as a quarterly bonus) is in
compliance with the 10-percent total
compensation limit.
The Bureau acknowledges that the
approach reflected in this final rule may
require some adjustments to creditors’
and loan originator organizations’
systems of accounting and payment of
bonuses if they do not pay
compensation under a non-deferred
profits-based compensation plan until
after a quarter, calendar year, or other
benchmark measuring period for which
the compensation is calculated (namely,
to ensure that total compensation in a
given time period is net of any
compensation under a non-deferred
profits-based compensation plan paid
134 Paying a year-end bonus after the end of the
calendar year does not render the bonus a form of
deferred compensation since the bonus, once paid,
is immediately taxable to the recipient.
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during that given time period but
attributable to a previous time period).
The Bureau believes that no other
approach would align entirely with
current industry practice, however.135
Comment 36(d)(1)–3.v.D discusses
how profits-based awards of
merchandise, services, trips, or similar
prizes or incentives are treated for
purposes of the 10-percent total
compensation test. This comment
clarifies that, if any compensation paid
to an individual loan originator under
§ 1026.36(d)(1)(iv) pursuant to a nondeferred profits-based compensation
plan consists of an award of
merchandise, services, trips, or similar
prizes or incentives, the cash value of
the award is factored into the
calculations of the compensation subject
to the 10-percent limit and the total
compensation under
§ 1026.36(d)(1)(iv)(B)(1). This comment
also gives an example illustrating how
the award of a trip to an individual loan
originator would be treated under the
rule in contrast to a cash bonus. The
Bureau believes that this comment will
ensure that non-cash bonus awards
made with reference to mortgage-related
business profits will be included and
appropriately valued for purposes of
calculating the 10-percent compensation
and the total compensation under
§ 1026.36(d)(1)(iv)(B)(1).
Comment 36(d)(1)–3.v.E clarifies that
the 10-percent total compensation limit
under § 1026.36(d)(1)(iv) does not apply
if the compensation under a nondeferred profits-based compensation
plan is determined solely with reference
to profits from non-mortgage-related
business as determined in accordance
with reasonable accounting principles.
The comment further notes that
reasonable accounting principles: (1)
Reflect an accurate allocation of
revenues, expenses, profits, and losses
among the person, any affiliate of the
person, and any business units within
the person or affiliates; and (2) are
consistent with the accounting
principles utilized by the person or the
affiliate with respect to, as applicable,
its internal budgeting and auditing
functions and external reporting
requirements. The comment also notes
examples of external reporting and
filing requirements that may be
applicable to creditors and loan
originator organizations are Federal
income tax filings, Federal securities
135 The Bureau understands there is variation in
the market about whether creditors and loan
originator organizations typically pay non-deferred
profits-based compensation near the end of, but
within, the time period evaluated for purposes of
paying the non-deferred profits-based compensation
or during a subsequent time period.
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law filings, or quarterly reporting of
income, expenses, loan origination
activity, and other information required
by GSEs.
To the extent a company engages in
both mortgage-related and nonmortgage-related business, the potential
exists for commingling of mortgage- and
non-mortgage-related business profits.
In this instance, the Bureau believes that
non-deferred profits-based
compensation for individual loan
originators is to be exempt from the
general rule under § 1026.36(d)(1), the
determination of the amount of the nonmortgage-related business profits must
be made in accordance with reasonable
accounting principles. The Bureau does
not believe this requirement will be
burdensome because if a creditor or loan
originator organization chooses to
separately calculate profits from
mortgage and non-mortgage related
businesses either for internal accounting
purposes, public reporting, or simply for
the purposes of paying compensation
under a non-deferred profits-based
compensation plan pursuant to this
regulation, the firm will do so in
accordance with reasonable accounting
principles. Where the firm does not
segregate its profits in this way for
Regulation Z purposes, all profits will
be regarded as being from mortgagerelated business.
Comment 36(d)(1)–3.v.F.1 provides an
additional example of the application of
1026.36(d)(1)(iv)(B)(1). The comment
assumes that, in a given calendar year,
a loan originator organization pays an
individual loan originator employee
$40,000 in salary and $125,000 in
commissions, and makes a contribution
of $15,000 to the individual loan
originator’s 401(k) plan (for a total of
$180,000). At the end of the year, the
loan originator organization pays the
individual loan originator a bonus based
on a formula involving a number of
performance metrics, to be paid out of
a profit pool established at the level of
the company but that is derived in part
through the company’s mortgage
originations. The loan originator
organization derives revenues from
sources other than transactions covered
by § 1026.36(d). The comment notes
that, in this example, the performance
bonus would be directly or indirectly
based on the terms of multiple
individual loan originators’ transactions
pursuant to § 1026.36(d)(1)(i), as
clarified by comment 36(d)(1)–1.ii,
because it is being funded out of a profit
pool derived in part from mortgage
originations. Thus, the comment notes
that the bonus is permissible under
§ 1026.36(d)(1)(iv)(B)(1) only if it does
not exceed 10 percent of the loan
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11353
originator’s total compensation, which,
in this example, consists of the
individual loan originator’s salary,
commissions, and may include the
performance bonus. The comment
concludes that the loan originator
organization may pay the individual
loan originator a performance bonus of
up to $20,000 (i.e., 10 percent of
$200,000 in total compensation).
Comment 36(d)(1)–3.v.F also gives an
example of the different treatment under
§ 1026.36(d)(1)(iv)(B)(1) of two different
profits-based bonuses for an individual
loan originator working for a creditor: a
‘‘performance’’ bonus based on the
individual loan originator’s aggregate
loan volume for a calendar year that is
paid out of a bonus pool determined
with reference to the profitability of the
mortgage origination business unit, and
a year-end ‘‘holiday’’ bonus in the same
amount to all company employees that
is paid out of a company-wide bonus
pool. As explained in the comment,
because the performance bonus is paid
out of a bonus pool that is determined
with reference to the profitability of the
mortgage origination business unit, it is
compensation that is determined with
reference to mortgage-related business
profits, and the bonus is therefore
subject to the 10-percent total
compensation limit. The comment notes
that the ‘‘holiday’’ bonus is also subject
to the 10-percent total compensation
limit if the company-wide bonus pool is
determined, in part, with reference to
the profits of the creditor’s mortgage
origination business unit. The comment
further clarifies that the ‘‘holiday’’
bonus is not subject to the 10-percent
total compensation limit if the bonus
pool was not determined with reference
to the profits of the mortgage origination
business unit as determined in
accordance with reasonable accounting
principles. The comment also clarifies
that, if the ‘‘performance’’ bonus and the
‘‘holiday’’ bonus in the aggregate do not
exceed 10 percent of the individual loan
originator’s total compensation, such
bonuses may be paid under
§ 1026.36(d)(1)(iv)(B)(1) without the
necessity of determining from which
bonus pool they were paid or whether
they were determined with reference to
the profits of the creditor’s mortgage
origination business unit.
Comment 36(d)(1)–3.v.G clarifies that
an individual loan originator is deemed
to comply with its obligations regarding
receipt of compensation under
§ 1026.36(d)(1)(iv)(B)(1) if the
individual loan originator relies in good
faith on an accounting or a statement
provided by the person who determined
the individual loan originator’s
compensation under a non-deferred
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profits-based compensation plan under
§ 1026.36(d)(1)(iv)(B)(1) and where the
statement or accounting is provided
within a reasonable time period
following the person’s determination.
This comment is intended to reduce the
compliance burdens on individual loan
originators by providing a safe harbor
for complying with the restrictions on
receiving compensation under a nondeferred profits-based compensation
plan under § 1026.36(d)(1)(iv)(B)(1).136
The safe harbor will be available to any
individual loan originator receiving
compensation that is subject to the 10percent limit where the person paying
the compensation subject to the 10percent limit elects to provide the
individual loan originator with an
accounting or statement in accordance
with the specifications in the safe
harbor and the individual relies in good
faith on the accounting or statement.
In the proposal, the Bureau indicated
that it crafted the proposal so as to
implement the Dodd-Frank Act
provisions on loan originator
compensation in a way that would
reduce the compliance burdens on
covered persons. Furthermore, the
Bureau sought comment on 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. As noted above, a trade
association that represents loan
originators (both organizations and
individuals) expressed concern that the
compensation restrictions in the
revenue test would lead to
‘‘unacceptable litigation’’ for individual
loan originators (in addition to creditors
and loan originator organizations).
In developing the final rule, the
Bureau has paid particular attention to
the compliance burdens on individual
loan originators with respect to
complying with the restrictions on
receiving compensation subject to the
10-percent total compensation limit
under § 1026.36(d)(1)(iv). The Bureau
has crafted the final rule to facilitate the
compliance of individual loan
originators without undue burden or
cost. The Bureau believes that in most
cases, individual loan originators would
not have the knowledge of or control
over the information that would enable
them to determine their compliance,
and the Bureau does not believe it
would be reasonable to expect them to
do so. The Bureau has also crafted the
final rule to avoid subjecting these
individuals to unnecessary litigation
and agency enforcement actions.137
The Bureau does not believe a similar
safe harbor is warranted for creditors
and loan originator organizations that
elect to pay compensation under
§ 1026.36(d)(1)(iv). Creditors and loan
originator organizations can choose
whether or not to pay this type of
compensation, and if they do they
should be expected to comply with the
provisions. Moreover, in contrast to a
recipient of compensation, a payer of
compensation has full knowledge and
control over the numerical and other
information used to determine the
compensation. The Bureau
acknowledges that in response to the
proposed revenue test, several industry
commenters as well as SBA Advocacy
(on behalf of participants at its
roundtable) expressed concern about
potential TILA liability or repurchase
risk where an error is made under the
revenue test calculation. Under the
revenue test, an error in determining the
amount of total revenues or mortgagerelated revenues could have potentially
impacted all awards of compensation
under a non-deferred profits-based
compensation plan to individual loan
originators for a particular time period.
Because the 10-percent total
compensation test focuses on
compensation at the individual loan
originator level, however, the potential
liability implications of a calculation
error largely would be limited to the
effect of that error alone. In other words,
in contrast to the revenue test, an error
under the 10-percent total compensation
test would not likely have downstream
liability implications as to other
compensation payments across the
company or business unit. The Bureau
also believes that creditors and loan
originator organizations will develop
policies and procedures to minimize the
possibility of such errors.
The Bureau is adopting the 10-percent
total compensation test because the
Bureau believes it will more effectively
restrict the compensation programs that
actually incentivize steering behavior on
the part of individual loan originators
than the proposed revenue test. Like the
proposed revenue test, the 10-percent
total compensation test clarifies the
treatment of profits-based bonuses and
aims to limit their payment to
circumstances where incentives to
individual loan originators to steer
consumers to different loan terms are
small. However, the Bureau believes
136 The restrictions on non-deferred profits-based
compensation under § 1026.36(d)(1)(iv)(B)(1)
impose obligations on both the person paying the
compensation and on the individual loan originator
receiving the compensation.
137 As noted earlier, the Dodd-Frank Act extended
the limitations period for civil liability under TILA
section 130 from one year to three years and also
made mortgage originators civilly liable for
violations of TILA.
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that the 10 percent compensation test
will be more effective at accomplishing
that goal because it calibrates the
restriction not based on a general
measurement of the company’s profits
or revenues, but rather on the amount of
money paid to the individual loan
originator, which provides the most
concrete form of incentive. Moreover,
the Bureau believes that the 10-percent
total compensation test will avoid the
revenue test’s disparate impact on
certain segments of the industry, will be
less complex, and will be less prone to
circumvention and manipulation.
Furthermore, the constitution of the
individual loan originator’s
compensation package, including the
presence and relative distribution of
compensation under non-deferred
profits-based compensation plans
compared to other components of the
total compensation, is a more direct and
accurate indicator than company
revenues or profitability of an
individual loan originator’s incentive to
steer consumers to different loan terms.
In contrast, a revenue or profitability
test would completely bar all individual
loan originators working for creditors or
loan originator organizations that are
above the relevant thresholds from
certain compensation irrespective of the
differential effects particular
compensation arrangements would have
on each individual’s loan originator’s
incentives. Conversely, a revenue or
profitability test would allow
unchecked bonus and other
compensation under a non-deferred
profits-based compensation plan for
individual loan originators working for
a creditor or loan originator organization
that falls below the relevant threshold.
By their nature, these types of tests
would create substantial problems of
under- and over-inclusiveness.
The 10-percent total compensation
test, unlike the revenue test, will not
disadvantage creditors and loan
originator organizations that are
monoline mortgage businesses. The
Bureau also believes that it will have
less burdensome impact on small
entities than the revenue test. As
discussed above, the revenue test would
have effectively precluded monoline
mortgage businesses from paying profitsharing bonuses to their individual loan
originators or making contributions to
those individuals’ non-qualified plans
because these institutions’ mortgagerelated revenues as a percentage of total
revenues would always exceed 50
percent. A test focused on compensation
at the individual loan originator level,
rather than revenues at the level of the
company or the division within the
company at which the compensation
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program is set up, would be available to
all companies regardless of the diversity
of their business lines. Moreover, as the
Bureau noted in the proposal, creditors
and loan originator organizations that
are monoline mortgage businesses
disproportionately consist of small
entities.138 Unlike the revenue test, the
10-percent total compensation test will
place restrictions on compensation
under a non-deferred profits-based
compensation plan (such as bonuses)
that are neutral across entity size. The
Bureau also believes that the relative
simplicity of the 10-percent total
compensation test in comparison to the
revenue test or a principles-based
approach suggested by some
commenters will also benefit small
entities.139
Moreover, the 10-percent total
compensation test establishes a bright
line rule that is less complex than the
revenue test. The 10-percent total
compensation test does not require the
Bureau to establish, and industry to
comply with, a definition of total
revenues or assess how the revenues of
affiliates would be treated for purposes
of the test. If a mortgage business wishes
to provide compensation to its loan
originators up to the 10-percent limit, it
need only determine the amount of
compensation under a non-deferred
profits-based compensation plan and
the amount of total compensation. As
described above, the denominator of the
test, total compensation, consists of the
sum total of compensation that is
reportable on box 5 of the IRS W–2 (or,
as applicable, the 1099–MISC form)
filed with respect to the individual loan
originator plus any contributions to the
individual loan originator’s account
under designated tax-advantaged
defined contribution plans where the
contributions are made by the person
sponsoring the plan. Creditors and loan
originator organizations presumably
already have systems in place to track
and aggregate this information.
Creditors and loan originator
organizations would need to calculate
non-mortgage-related business profits
only if they are paying compensation
under a non-deferred profits-based
compensation plan outside of the 10percent limit. The Bureau expects that
this will be largely unnecessary because
of the ample other methods to
compensate individual loan originators
and the principle that most creditors
138 See earlier discussion of the regulatory data on
small savings institutions whose primary business
focus is on residential mortgages that was cited in
the proposal.
139 The impacts on small entities are described in
more detail in the Final Regulatory Flexibility
Analysis (FRFA) contained in part VII below.
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and loan originator organizations will
wish to compensate their individual
loan originators from a non-deferred
profits-based compensation plan that is
established with reference to mortgagerelated business profits (i.e., to align the
individual loan originators’ incentives
properly).140
The Bureau acknowledges that the 10percent total compensation test is not
completely without complexity and that
some institutions may have more
difficulty than others determining
which bonuses are subject to the
regulation. For example, as noted above,
the 10-percent total compensation test
requires creditors or loan originator
organizations that wish to pay
compensation under a non-deferred
profits-based compensation plan to their
individual loan originators in excess of
the 10-percent limit to determine
whether the non-deferred profits-based
compensation is determined with
reference to non-mortgage-related
business profits, in accordance with
reasonable accounting principles.
Comment 36(d)(1)–3.v.E provides
clarifications as to these requirements,
as described above. As noted above,
however, the Bureau believes that
creditors and loan originator
organizations that are subject to this
final rule and that choose to pay nondeferred profits-based compensation
determined with reference to nonmortgage-related business profits
already use, or would in the normal
course use, reasonable accounting
principles to make these calculations.
Firms also could simply account for
profits on a company-wide basis for
purposes of meeting the 10-percent total
compensation limit, which would
negate the need for specifically
calculating mortgage-related profits.
The Bureau believes that the 10percent total compensation test also
presents less complexity than the
alternative principles-based standards
suggested by some commenters. As
discussed in the section-by-section
analysis of § 1026.36(d)(1)(i),
application of a principles-based
standard as a general matter would
necessarily involve a substantial amount
of subjectivity and present challenges
for industry compliance, agency
supervision, and agency and private
enforcement of the underlying
regulation. Moreover, the disparate
standards suggested by industry
commenters reveal the inherent
difficulty of crafting a workable
140 Furthermore, many individual loan originators
who originate loans infrequently and not typically
as part of their job will be otherwise exempt
pursuant to the de minimis test.
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principles-based approach. These
standards would need to be defined by
the Bureau to be applied consistently
across creditors and loan originator
organizations. The complexity involved
in crafting such principles would make
it difficult to calibrate properly the
countervailing interests for industry
compliance, agency supervision and
enforcement, and private enforcement.
Some commenters supported the
principles behind a test involving limits
on individual loan originator’s nondeferred profits-based compensation
based on the Bureau’s solicitation of
comment on such an approach as an
alternative to the revenue test. As noted
above, a national trade association of
community banks and depositories
supported limiting compensation from a
non-qualified bonus plan to no more
than 25-percent of an individual loan
originator’s total compensation. As
discussed above, a mortgage company
commented that limiting compensation
that is indirectly based on terms would
cover almost any form of compensation
determined with reference to lender
profitability and urged that, instead, the
rulemaking focus on compensation
specific to the loan originator and the
transaction.141 As with any line-drawing
exercise, there is no universally
acceptable place to draw the line that
definitively separates payments that
have a low likelihood of causing
steering behavior from those that create
an unacceptably high likelihood. This
Bureau believes, however, that the
steering incentives would be too high
were loan originators permitted to
receive up to 25 percent of their
compensation from mortgage-related
profits, especially given the availability
of compensation from mortgage-related
profits through contributions to a
designated tax-advantaged plan. Instead,
a bonus of up to 10 percent of the
individual loan originator’s
compensation will achieve the positive
effects thought to be associated with
non-deferred profits-based
compensation plans.
The Bureau acknowledges that the 10percent total compensation test does not
141 As noted above, this commenter
recommended an alternative disclosure approach to
make the consumer aware that the loan originator’s
compensation may increase or decrease based on
the profitability of the creditor and urging the
consumer to shop for credit to ensure that he or she
has obtained the most favorable loan terms. The
Bureau believes that this suggestion, while creative,
would not have been feasible because there would
have been no time to engage in consumer testing
prior to the statutory deadline for issuing a final
rule. Moreover, the Bureau does not believe a
disclosure-only approach would implement the
statute as faithfully, which as a substantive matter
prohibits loan originator compensation that varies
based on loan terms.
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fully reflect that different types of nondeferred profits-based compensation
plans in particular market settings might
be shown to create substantially fewer
steering incentives. As noted above, this
final rule is not without complexity,
particularly regarding the definition of
the numerator of the 10-percent total
compensation test. On balance,
however, the Bureau believes this
approach is less complex than the
revenue test, and the burdens for both
compliance and supervision will be
reduced in comparison to the revenue
test.
Finally, the Bureau believes that the
potential for circumvention and
manipulation are less pronounced than
under the revenue test. The revenue test
would have required all regulated
persons to calculate mortgage-related
revenues and non-mortgage-related
revenues separately to determine the
relative contribution of the two to the
firm’s total revenues. Here, however, the
Bureau believes that most creditors and
loan originator organizations will not
choose to account for their profits across
business lines and instead will choose
to limit the payment of non-deferred
profits-based compensation to 10
percent of total compensation. For the
firms that choose to do such
disaggregated accounting, comment
36(d)(1)–3.v.E clarifies that they are to
use reasonable accounting principles. If,
notwithstanding the commentary, firms
were to attempt to use unreasonable
accounting principles or manipulate
corporate structures to circumvent the
rule, the Bureau will consider
appropriate action.
In this final rule, the Bureau has made
other changes to the commentary to
§ 1026.36(d)(1) that reflect substantive
or technical changes from language that
was in the proposal. The Bureau has
made several technical changes to
comment 36(d)(1)–1.ii. For example,
where applicable, reference to
‘‘transaction terms’’ in this comment
(and others) has been replaced with ‘‘a
term of a transaction,’’ consistent with
the substitution of this term throughout
§ 1026.36(d)(1) and its commentary.
In addition to being redesignated as
comment 36(d)(1)–3, proposed comment
36(d)(1)–2.iii has been revised in several
respects from the proposal. Reference to
§ 1026.36(d)(1)(iv) has been added to the
commentary to § 1026.36(d), where
applicable, to track the distinctions
between designated plan provisions in
§ 1026.36(d)(1)(iii) and non-deferred
profits-based compensation plans in
§ 1026.36(d)(1)(iv). Moreover, language
has been added clarifying that subject to
certain restrictions, § 1026.36(d)(1)(iii)
and (iv) permits the payment of certain
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compensation that otherwise would be
prohibited by § 1026.36(d)(1)(i), because
it is directly or indirectly based on the
terms of multiple transactions of
multiple individual loan originators.
The cross-references to other sections
and commentary clarifying the scope of
§ 1026.36(d) have been excluded from
the comment, because this clarification
of the scope of § 1026.36(d) is not
necessary in light of other changes to
the regulatory text of § 1026.36(d) in this
final rule. Several technical changes
were made as well.
In this final rule, proposed comment
36(d)(1)–2.iii.B has been adopted as
comment 36(d)(1)–3.i. This comment
clarifies the meaning of defined benefit
and defined contribution plans as such
terms are used in § 1026.36(d)(1)(iii).
The Bureau has not finalized the
portion of proposed comment 36(d)(1)–
2.iii.C that would have clarified that if
a creditor did 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 would not be related
to the transaction terms of multiple
individual loan originators, and thus
would be outside the scope of the
prohibition on compensation based on
terms under § 1026.36(d)(1)(i). Upon
further consideration of the issues
addressed in this proposed comment,
the Bureau believes that inclusion of the
comment does not appropriately clarify
the restrictions under § 1026.36(d)(1)(i)
as clarified by comment 36(d)(1)–1.ii.
The existence of a potential steering risk
where loan originator compensation is
based on the terms of multiple
transactions of multiple individual loan
originators is not predicated exclusively
on whether an individual loan
originator has the ability to deviate from
pre-established loan terms. This is
because the individual loan originator
may have the ability to steer consumers
to different loan terms at the preapplication stage, when the presence or
absence of a loan originator’s ability to
deviate from pre-established loan terms
would not yet be relevant during these
interactions. For example, a consumer
might contact the individual loan
originator for a preliminary price quote
or, if the process is further along, the
consumer and individual loan originator
might meet so that the individual loan
originator can begin gathering the items
necessary to constitute a loan
application under RESPA (which
triggers the RESPA good faith estimate
and TILA early disclosure
requirements). All of these interactions
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would take place prior to the
application and underwriting. Yet,
steering potential would exist to the
extent the individual loan originator
might have the ability, for example, to
suggest the consumer consider different
loan products based on the individual
loan originator’s knowledge and
experience of the market or his or her
anticipation of the underwriting
decision based on the information
delivered by the consumer. The Bureau
recognizes that certain industry
commenters supported the proposed
comment. However, the Bureau believes
that the comment could potentially lead
to confusion and misinterpretation
about the applicability of the underlying
prohibition on compensation based on
transaction terms.
The last sentence of proposed
comment 36(d)(1)–2.iii.C (adopted as
comment 36(d)(1)–3.iii in the final rule)
also has been revised from the proposal.
The proposed comment would have
permitted a loan originator organization
to pay a bonus to or contribute to a nonqualified profit-sharing plan of its loan
originator employees from all its
revenues provided those revenues were
derived exclusively from fees paid by a
creditor to the loan origination
organization for originating loans
funded by the creditor. The comment
explains that a bonus or contribution in
these circumstances would not be
directly or indirectly based on multiple
individual loan originators’ transaction
terms because § 1026.36(d)(1)(i)
precludes the creditor from paying a
loan originator organization
compensation based on the terms of the
loans it is purchasing. The Bureau is
finalizing this portion of the comment
as proposed, with three substantive
changes. First, the comment now
clarifies that loan originator
organizations covered by the comment
are those whose revenues are ‘‘from
transactions subject to § 1026.36(d),’’ to
emphasize that the revenues at issue are
those determined with reference to
transactions covered by this final rule.
Second, the comment clarifies that such
revenues must be ‘‘exclusively derived
from transactions covered by
§ 1026.36(d)’’ not that such revenues
must be ‘‘derived exclusively from fees
paid by creditors that fund its
originations.’’ This change reflects that
the compensation referenced in the
comment may not necessarily be called
a fee and may come from creditors or
consumers or both. Third, the Bureau
has added some additional language to
the portion of the comment clarifying
that if a loan originator organization’s
revenues from transactions subject to
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§ 1026.36(d) are exclusively derived
from transactions subject to § 1026.36(d)
(whether paid by creditors, consumers,
or both), and that loan originator
organization pays its individual loan
originators a bonus under a nondeferred profits-based compensation
plan, the bonus is not considered to be
directly or indirectly based on the terms
of multiple transactions of multiple
individual loan originators. The Bureau
also has made a few additional technical
changes to the comment; no substantive
change is intended.
This final rule does not include
proposed comment 36(d)(1)–2.iii.D,
which clarified that under
§ 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 determination (e.g.,
calendar year, quarter, month), whether
or not the compensation is actually paid
during or after the time period. This
comment clarified the measuring period
for total revenues and mortgage-related
revenue under the revenue test. Because
the revenue test is not being finalized,
this comment is not applicable. The
commentary under § 1026.36(d)(1)
reflects a re-designation of comment
subsection references as a consequence
of this proposed comment not being
included in this final rule (e.g.,
proposed comment 36(d)(1)–2.iii.E has
been redesignated as comment 36(d)(1)–
3.iv).
The final rule has made only a few
technical changes to proposed comment
36(d)(1)–2.iii.F, which has been adopted
as comment 36(d)(1)–3.iv in the final
rule. The many revisions to proposed
comment 36(d)(1)–2.iii.G (adopted as
comment 36(d)(1)–3.v) are discussed
earlier in this section-by-section
analysis.
36(d)(1)(iv)(B)(2)
Proposed § 1026.36(d)(1)(iii)(B)(2)
would have permitted a person to pay,
and an individual loan originator to
receive, compensation in the form of a
bonus or other payment under a profitsharing plan sponsored by the person or
a contribution to a non-qualified plan if
the individual is a loan originator (as
defined in proposed § 1026.36(a)(1)(i))
for five or fewer transactions subject to
§ 1026.36(d) during the 12-month period
preceding the compensation decision.
This compensation would have been
permitted even when the payment or
contribution relates directly or
indirectly to the terms of the
transactions subject to § 1026.36(d) of
multiple individual loan originators.
Proposed § 1026.36(d)(1)(iii)(B)(2) is
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sometimes hereinafter referred to as the
‘‘de minimis origination exception.’’
The Bureau stated in the proposal that
the intent of proposed
§ 1026.36(d)(1)(iii)(B)(2) would have
been to exempt individual loan
originators who engage in a de minimis
number of transactions subject to
§ 1026.36(d) from the restrictions on
payment of bonuses and making of
contributions to non-qualified plans. An
individual loan originator who is a loan
originator for five or fewer transactions,
the Bureau stated in the proposal, is not
truly active as a loan originator and,
thus, is insufficiently incentivized to
steer consumers to different loan terms.
The de minimis origination exception
was intended to cover, in particular,
branch or unit managers at creditors or
loan originator organizations who act as
loan originators on an occasional, oneoff basis to, for example, cover for
individual loan originators who are out
sick, on vacation, or need assistance
resolving issues on loan applications.
Existing comment 36(a)–4 clarifies that
the term ‘‘loan originator’’ as used in
§ 1026.36 does not include 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. In the proposal, the Bureau
proposed to clarify in comment 36(a)–4
that a ‘‘producing manager’’ who also
arranges, negotiates, or otherwise
obtains an extension of consumer credit
for another person is a loan originator
and that a producing manager’s
compensation thus is subject to the
restrictions of § 1026.36. The proposed
regulatory text and commentary to
§ 1026.36(d)(1)(iii)(B)(2) did not
distinguish among managers and
individual loan originators who act as
originators for five or fewer transactions
in a given 12-month period, however.
The Bureau solicited 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 solicited 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 10percent total compensation test on
which the Bureau is soliciting comment,
discussed in the section-by-section
analysis of proposed
§ 1026.36(d)(1)(iii)(B)(1). The Bureau,
finally, solicited comment on whether
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11357
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.
Proposed comment 36(d)(1)–2.iii.H
also would have provided an example of
the de minimis origination exception as
applied to a loan originator organization
employing six individual loan
originators. Proposed comment
36(d)(1)–2.iii.I.1 and –2.iii.I.2 would
have illustrated the effect of proposed
§ 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
§ 1026.36(d)(1)(iii).
Consumer groups generally opposed
permitting creditors and loan originator
organizations to pay profit-sharing
bonuses and make contributions to nonqualified plans where the individual
loan originator is the loan originator for
a de minimis number of transactions. A
coalition of consumer groups asserted—
consistent with their comments to the
qualified plan and revenue test aspects
of the proposal—that there should be no
exceptions to the underlying prohibition
on compensation based on transaction
terms other than for volume of
mortgages originated. These groups
expressed concern that the proposal
would allow an individual loan
originator to be compensated based on
the terms of its transactions so long as
the individual loan originator is the
originator for five or fewer
transactions.142
Industry commenters generally either
did not object to the proposed de
minimis origination exception or
expressly supported the exception if the
threshold were set at a number greater
than five. A national trade association
representing the banking industry
supported establishing a de minimis
origination exception but asked that the
threshold be increased to 15. The
association reasoned that a threshold of
five would not have been high enough
to capture managers in community
banks and smaller mortgage companies
across jurisdictions who step in to act as
loan originators on an ad hoc basis to
assist individual loan originators under
142 As discussed below, proposed
§ 1026.36(d)(1)(iii)(A) prohibits an individual loan
originator from being compensated based directly or
indirectly on the terms of the individual loan
originator’s transactions, and this prohibition
applies to individual loan originators who
otherwise would fall under the de minimis
origination exception in proposed
§ 1026.36(d)(1)(iii)(B)(2).
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their employ. In most instances, the
association stated, these so called ‘‘nonproducing managers’’ would not receive
transaction-specific compensation, yet
under the proposal their participation in
a few transactions would have
potentially disqualified them from
incentive compensation programs in
which other managers could participate.
The association stated that should the
Bureau deem 15 as too high of a
threshold, it could adopt 15 as the
threshold applicable to managers and
administrative staff only. A bank and a
credit union commenter urged the
Bureau to increase the threshold to 25
for similar reasons (i.e., to allow
managers who occasionally originate
loans more flexibility to participate in
bonus programs).
A few industry commenters criticized
the de minimis origination exception.
One national trade association stated
that the exception would be of only
limited use and benefit, e.g., for branch
managers who assist with originations
in very rare circumstances. A trade
association representing community
mortgage lenders commented that the de
minimis exception, in conjunction with
the revenue test, would have disparate
impacts on small mortgage lenders that
do not have alternate revenue sources.
A compensation consulting firm stated
that, similar to its comment on the
revenue test, any bright line threshold
will result in inequitable treatment.143
As discussed previously with respect
to comments received on the revenue
test, an organization writing on behalf of
State bank supervisors stated that the
Bureau’s proposed regulatory changes
regarding profit-sharing bonuses and
contributions to non-qualified plans
were largely appropriate, but the
organization noted that enforcing
standards based on thresholds for
origination can be problematic because
the number of transactions originated
may have differing degrees of
significance in different scenarios. The
organization specifically noted the de
minimis origination exception as an
example of a potentially problematic
threshold. The organization encouraged
the Bureau either to justify the threshold
levels through study or adopt a more
flexible approach that can be tailored to
various situations appropriately.
The Bureau is finalizing
§ 1026.36(d)(1)(iii)(B)(2) as proposed
with four changes. First, the Bureau has
redesignated proposed
§ 1026.36(d)(1)(iii)(B)(2) as
143 The commenter posited an example of a
branch manager who originates five loans with an
aggregate principal amount of $2 million and
another branch manager who originates six loans
with aggregate principal amount of $1 million.
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§ 1026.36(d)(1)(iv)(B)(2) in the final rule.
This change was made to distinguish
the regulatory text addressing nondeferred profits-based compensation
plans from the regulatory text
addressing designated plans.
Second, § 1026.36(d)(1)(iv)(B)(2) now
reads ‘‘a’’ loan originator rather than
‘‘the’’ loan originator, as proposed. This
change was made to emphasize that a
transaction may have more than one
loan originator under the definition of
loan originator in § 1026.36(a)(1)(i).
Third, § 1026.36(d)(1)(iii)(B)(2)
clarifies that the ‘‘transactions’’ subject
to the minimis threshold are those
transactions that are consummated.
Where the term is used in § 1026.36 and
associated commentary, ‘‘transaction’’ is
deemed to be a consummated
transaction; this clarification merely
makes the point expressly clear for
purposes of the de minimis origination
exception, where the counting of
transactions is critical toward
establishing the application of the
exception to a particular individual loan
originator.
Fourth, the Bureau has increased the
de minimis origination exception
threshold number from five to ten
transactions in a 12-month period. The
Bureau is persuaded by feedback from
several industry commenters that the
proposed threshold number of five
would likely have been too low to
provide relief for managers who
occasionally act as loan originators in
order, for example, to fill in for
individual loan originators who are sick
or on vacation.144 The higher threshold
will allow additional managers (or other
individuals working for the creditor or
loan originator organization) who act as
loan originators only on an occasional,
one-off basis to be eligible for nondeferred profits-based compensation
plans that are not limited by the
restrictions in § 1026.36(d)(1)(iv).
Without a de minimis exception, for
example, a manager or other individual
who is a loan originator for a very small
number of transactions per year may,
depending on the application of the
144 Some commenters referred to the individuals
that the de minimis origination exception is
intended in part to cover as ‘‘non-producing
managers.’’ In this final rule, comment 36(a)–4 has
been revised to clarify that a loan originator
includes a manager who takes an application,
offers, arranges, assists a consumer with obtaining
or applying to obtain, negotiate, or otherwise obtain
or make a particular extension of credit for another
person, if the person receives or expects to receive
compensation for these activities. The comment
further clarifies that an individual who performs
any of these activities in the ordinary course of
employment is deemed to be compensated for these
activities. Therefore, the de minimis exception is
intended to cover producing managers as the term
is used in comment 36(a)–1.4.v.
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restrictions on non-deferred profitsbased compensation under
§ 1026.36(d)(1)(iv), be ineligible to
participate in a company-wide bonus
pool or other bonus pool that is
determined in part with reference to
mortgage-related profits. The Bureau
believes this exception is appropriate
because the risk that the manager or
other individual will steer consumers to
particular transaction terms is more
attenuated than for individuals working
for the creditor or loan originator
organization whose loan origination
activities constitute a primary or even
secondary (as opposed to occasional)
portion of their job responsibilities. The
steering risk is also more attenuated,
because managers or other individuals
who act as loan originators for a small
number of closed transactions per year
are less likely to be able to significantly
influence the amount of funds available
from which to pay these individuals
bonuses or other compensation under
non-deferred profits-based
compensation plans.
In the proposal, the Bureau solicited
comment on the appropriate threshold
number for the de minimis origination
exception. The Bureau received no
quantitative data on the number of
originations typically engaged in by
managers, however, and little to no
anecdotal data generally. The
commenters who requested 15 and 25 as
the threshold amount did not provide
data on why that number was
appropriate.
The Bureau has chosen ten as the
threshold amount, rather than 15 or 25
as suggested by some commenters,
because the Bureau believes those
numbers stray too far from a threshold
that suggests only occasional loan
originator activity (which, in turn,
suggests insufficient incentive to steer
consumers to different loan terms). The
Bureau stated in the proposal that an
individual engaged in five or fewer
transactions per calendar year is not
truly active as an individual loan
originator, citing by analogy the TILA
provision implemented in
§ 1026.2(a)(17)(v) providing that a
person does not ‘‘regularly extend
credit’’ unless, for transactions there are
five such transactions in a calendar year
with respect to consumer credit
transactions secured by a dwelling. The
Bureau continues to believe that the
TILA provision is a useful analogue to
determining when an individual loan
originator would be active and thus
sufficiently incentivized to steer
consumers to different loan terms, but
the analogue is not determinative, and
the Bureau is sensitive to the industry
comments regarding the capture of
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managers under the exception. In light
of these countervailing considerations,
the Bureau is raising the threshold to
ten.
The Bureau is not aware of available
data or estimates of the typical number
of originations by producing managers.
The Bureau is similarly not aware of
available data or estimates of the
distribution of origination activity by
originators of different asset size classes.
In aggregate, however, loan originators
at depository institutions are estimated
to originate 43 loans per year.145 As
such, the Bureau believes that an
origination threshold of 10 would not
capture a typical individual loan
originator who acts as loan originator in
a regular or semi-regular capacity for a
typical institution of any asset class. In
light of the limited data, however, the
Bureau does not believe these data
provide sufficient evidence to justify
raising the threshold number to higher
than ten.
The Bureau acknowledges that
increasing the threshold number from
five to ten may exempt from the
restrictions on non-deferred profitsbased compensation under
§ 1026.36(d)(1)(iv) individual loan
originators who act as loan originators
in a relatively small number of
transactions but do so in a regular
capacity. The Bureau believes that the
steering incentives for such individuals
would be minimal because their
origination activity is low, regardless of
the fact that loan origination is a regular
or semi-regular part of their job
description, and they thus will not
substantially increase the availability of
mortgage-related profits or expect to
gain much compensation from these
profits. Moreover, based on the data
noted above, the Bureau does not
believe that increasing the threshold
number from five to ten would capture
more than a marginal amount of these
types of additional individual loan
originators.
The Bureau has also made some
technical changes to the provision. In
§ 1026.36(d)(1)(iv)(B)(2), the words
‘‘payment or contribution’’ have been
145 Based on data from HMDA and Call Report
data, the Bureau estimates that there were
approximately 5.6 million closed-end mortgage
originations by depository institutions in 2011. Data
from the BLS indicate that there were 132,400 loan
officers at depository institutions in 2011. Thus,
these estimates imply an aggregate ratio of roughly
43 originations per loan originator. Bureau
estimates using other methodologies yield similar
results. The Bureau also notes that loan originators
at the threshold of 10 loans, would earn roughly
$19,000 per year assuming compensation of one
point per loan and an average loan size of $190,000
(approximately the average loan amount of homesecured mortgages reported in the 2011 HMDA
data).
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replaced with ‘‘compensation’’ to reflect
a change in terminology in an earlier
portion of the regulatory provision. The
phrase ‘‘compensation decision’’ has
been replaced with ‘‘compensation
determination’’ to be consistent with the
wording of § 1026.36(d)(1)(iv)(B)(1) and
commentary regarding the time period
for which compensation is
‘‘determined.’’ In the final rule,
comment 36(d)(1)–2.iii.H has been
redesignated as comment 36(d)(1)–3.vi
and has been revised to reflect the
Bureau’s decision to raise the de
minimis origination exception threshold
number from five to ten, including the
examples illustrating where certain
individual loan originators would fall
above or below the threshold. The
examples presented in the comment
also have been revised to reflect that one
of the individual loan originators is a
manager, to illustrate that managers will
be covered by § 1026.36(d)(1)(iv)(B)(2)
depending on the circumstances.
In this final rule, proposed comment
36(d)(1)–2.iii.I has been deleted because
it is duplicative with other comments
providing illustrative examples of the
provisions of § 1026.36(d)(1)(iii) and
(iv).
36(d)(2) Payments by Persons Other
Than the Consumer
36(d)(2)(i) Dual Compensation
Background
Existing § 1026.36(d)(2) restricts loan
originators from receiving compensation
in connection with a transaction from
both the consumer and other persons.
As discussed in more detail below,
section 1403 of the Dodd-Frank Act
amended TILA to codify the same basic
prohibition against dual compensation,
though it also imposed additional
requirements related to consumers’
payment of upfront points and fees that
could significantly change the rule’s
scope and impact.
Specifically, § 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. When
the Dodd-Frank Act was enacted, this
provision had been proposed but not
finalized; the Board subsequently
adopted § 1026.36(d)(2) in its 2010 Loan
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Originator Final Rule, which is
discussed in more detail in part I.
Comment 36(d)(2)–1 currently
clarifies that the restrictions imposed
under § 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 § 1026.36(d)(2)
does not refer to salaries, hourly wages,
or other forms of compensation that are
not tied to a specific transaction.
Thus, under existing § 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 (i.e., a loan
originator organization) receives
compensation directly from the
consumer in a mortgage transaction
subject to existing § 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 in
connection with that particular
transaction, such as a transactionspecific commission. Consequently,
under existing rules, in the example
above, the loan originator organization
must pay individual loan originators
only in the form of a salary or an hourly
wage or other compensation that is not
tied to the particular transaction. As a
result of the 2010 Loan Originator Final
Rule, loan originator organizations have
expressed concern that currently it is
difficult to structure transactions where
consumers pay loan originator
organizations compensation directly,
because it is not economically feasible
for the organizations to pay their
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individual loan originators purely a
salary or hourly wage, instead of a
commission that is tied to the particular
transaction either alone or in
combination with a base salary.
The Dodd-Frank Act
Section 1403 of the Dodd-Frank Act
added TILA section 129B(c) which
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. TILA
section 129B(c)(2)(A); 12 U.S.C.
1639b(c)(2)(A). 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, however, 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 origination fees where it
determines that doing so is in the
interest of consumers and in the public
interest.
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The Bureau’s Proposal
Setting aside the ban on payment of
certain points and fees as explained in
more detail below, the Bureau interprets
the general restrictions on dual
compensation set forth in TILA section
129B(c)(2) to be consistent with the
restrictions on dual compensation set
forth in existing § 1026.36(d)(2) despite
the fact that the statute is structured
differently and uses different
terminology than existing
§ 1026.36(d)(2).
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Nonetheless, the Bureau proposed
several changes to existing
§ 1026.36(d)(2) (redesignated as
§ 1026.36(d)(2)(i)) to provide additional
clarity and flexibility to loan originators.
For example, § 1026.36(d)(2) currently
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 loan officers), 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 proposed to
revise § 1026.36(d)(2) (redesignated as
§ 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 believed 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.
As discussed in more detail below,
the Bureau also explained in the
proposal that it believes the original
purpose of the restriction in existing
§ 1026.36(d)(2) that prevents loan
originator organizations from paying
compensation in connection with a
transaction to individual loan
originators if the loan originator
organization has received compensation
directly from the consumer in that
transaction is addressed separately by
other revisions pursuant to the DoddFrank Act. Under existing
§ 1026.36(d)(1)(iii), compensation paid
directly by a consumer to a loan
originator effectively is free to be based
on transaction terms or 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
likely would receive if compensated by
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the creditor subject to the restrictions of
§ 1026.36(d)(1). The Dodd-Frank Act,
however, amended TILA to prohibit
compensation based on loan terms even
when a consumer is paying
compensation directly to a mortgage
originator. Thus, under the statute and
the final rule, 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, may not be
based on transaction terms.
In addition, the Bureau explained that
it believed relaxing the rule might make
more loan originator organizations
willing to structure transactions where
consumers pay loan originator
compensation directly. The Bureau
believed 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 Final Rule
As discussed in more detail below,
the final rule adopts the Bureau’s
proposals relating to dual compensation
with some revisions.
Compensation in connection with the
transaction. Under existing
§ 1026.36(d)(2), if any loan originator
receives compensation directly from a
consumer in a transaction, no person
other than the consumer may provide
any compensation to a loan originator,
directly or indirectly, in connection
with that particular credit transaction.
The Bureau believes that additional
clarification may be needed about the
term ‘‘in connection with’’ for purposes
of § 1026.36(d)(2) (redesignated as
§ 1026.36(d)(2)(i)). Accordingly, the
final rule revises comment 36(d)(2)–1
(redesignated as comment 36(d)(2)(i)–1)
to clarify that, for purposes of
§ 1026.36(d)(2)(i), compensation is
considered ‘‘in connection with’’ a
particular transaction, regardless of
whether this compensation is paid
before, at, or after consummation. The
Bureau believes that limiting the term
‘‘in connection with’’ a particular
transaction for purposes of
§ 1026.36(d)(2) to compensation that is
paid at or before consummation could
allow creditors to evade the restriction
in § 1026.36(d)(2) by simply paying the
compensation after consummation, to
the detriment of consumers.
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The Bureau also believes that
additional clarification is needed on
whether the prohibition on dual
compensation in § 1026.36(d)(2)
(redesignated as § 1026.36(d)(2)(i))
restricts a creditor from providing any
funds for the benefit of the consumer in
a transaction, if the loan originator
receives compensation directly from a
consumer in connection with that
transaction. The final rule amends
comment 36(d)(2)–1 (redesignated as
comment 36(d)(2)(i)–1) to provide that
in a transaction where a loan originator
receives compensation directly from a
consumer, a creditor still may provide
funds for the benefit of the consumer in
that transaction, provided such funds
are applied solely toward costs of the
transaction other than loan originator
compensation. See the section-bysection analysis of § 1026.36(a)(3) for a
discussion of the definition of
‘‘compensation.’’
Compensation received directly from
the consumer. As discussed above,
under existing § 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 interprets 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 of
§ 1026.36(d)(1)(iii), consistent with
TILA section 129B(c)(1), the Bureau
proposed to remove existing
§ 1026.36(d)(1)(iii), which allowed a
loan originator to receive compensation
based on any of the terms or conditions
of a transaction, if the loan originator
received compensation directly from the
consumer in connection with the
transaction and no other person
provides compensation to a loan
originator in connection with that
transaction. The Bureau also proposed
to remove the first sentence of existing
comment 36(d)(1)–7, which stated that
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the prohibition in § 1026.36(d)(1)(i) that
restricts a loan originator from receiving
compensation based on the terms or
conditions of a transaction does not
apply to transactions in which any loan
originator receives compensation
directly from the consumer. The Bureau
proposed to delete this first sentence as
no longer relevant given that the Bureau
proposed to remove § 1026.36(d)(1)(iii).
The Bureau also proposed to move the
other content of this comment to
proposed comment 36(d)(2)(i)–2.i; no
substantive change was intended.
The Bureau received one comment on
proposed comment 36(d)(2)(i)–2.i. One
industry commenter that specializes in
the financing of manufactured housing
indicated that the comment was
confusing because its first sentence
states that 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. The
commenter believed that the second
sentence of the proposed comment
seemed to contradict the first sentence
by stating that 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. The commenter requested that
the Bureau make clear that when a
creditor, in establishing a charge to be
imposed on a consumer, considers the
average cost incurred by the creditor to
originate residential mortgage loans of
that type (including the compensation
paid to an employee in connection with
that particular transaction), then that
compensation is deemed to be paid by
the creditor and will not trigger any
dual compensation prohibitions.
This final rule revises the first two
sentences of proposed comment
36(d)(2)(i)–2.i, and deletes the third
sentence of that proposed comment. The
Bureau believes that these revisions will
clarify that, while payments by a
consumer to a loan originator from loan
proceeds are considered compensation
received directly from the consumer,
payments 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 in cash or out of the loan
proceeds.
Existing comment 36(d)(2)–2
references Regulation X, which
implements RESPA, and provides that a
yield spread premium paid by a creditor
to the loan originator may be
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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
§ 1026.36(d)(2). The Bureau proposed to
move this clarification to proposed
comment 36(d)(2)(i)–2.ii and revise it,
eliminating the reference to yield spread
premiums and instead using the terms
‘‘rebate’’ and ‘‘credit.’’ Rebates are
disclosed as ‘‘credits’’ under the existing
Regulation X disclosure regime.
The Bureau did not receive comments
specifically on this aspect of the
proposal. This final rule, however,
revises proposed comment 36(d)(2)(i)–
2.ii to further clarify the intent of the
comment. Specifically, comment
36(d)(2)(i)–2.ii as adopted provides that
funds from the creditor that will be
applied to reduce the consumer’s
settlement charges, including
origination fees paid by a creditor to the
loan originator, that are characterized on
the disclosures made pursuant to
RESPA as a ‘‘credit’’ are nevertheless
not considered to be received by the
loan originator directly from the
consumer for purposes of
§ 1026.36(d)(2)(i).
The Bureau also proposed to add
§ 1026.36(d)(2)(i)(B) and comment
36(d)(2)(i)–2.iii to provide additional
clarity on the meaning of 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
§ 1026.36(d)(2) (as redesignated
proposed § 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 consumer by
a person other than the creditor are
considered compensation received
directly from a consumer for purposes
of existing § 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.
The Bureau proposed in
§ 1026.36(d)(2)(i)(B) to interpret the
phrase ‘‘compensation directly from the
consumer,’’ as used in new TILA section
129B(c)(2)(B) and proposed
§ 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
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36(d)(2)(i)–2.iii would have clarified
that whether there is an agreement
between the parties will depend on
State law. See § 1026.2(b)(3). Also,
proposed comment 36(d)(2)(i)–2.iii
would have clarified that the parties do
not have to agree specifically that the
payments will be used to pay for the
loan originator’s compensation, just that
the person will make a payment toward
the consumer’s closing costs. For
example, assume that a non-creditor
seller has an agreement with the
consumer to pay $1,000 of the
consumer’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 the $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).
A few commenters raised concerns
about these proposed revisions. A trade
group representing mortgage brokers
raised concerns that, without guidance
on how and where to apply
contributions from sellers and others,
these proposed revisions would
generate uncertainty leading to further
frustration of both consumers and
industry participants.
Three consumer groups, in a joint
letter, indicated that the people the
Bureau identifies—such as sellers, home
improvement contractors, and home
builders—have been implicated in every
form of abusive lending. They cited as
a risk of this proposal that third parties
will simply inflate their charges by the
amount of the payment toward the
closing costs. They also stated that, in
recent years, HUD has spent
considerable energy investigating
kickback arrangements between
creditors and home builders. These
consumer groups suggested an
alternative to the proposal whereby, if a
consumer and a third party have an
agreement of the kind envisioned by the
proposal, the third party can simply
give the consumer a check, rather than
permitting these payments to be
‘‘laundered’’ through the closing.
After consideration of the comments
received, the Bureau has decided to
revise proposed § 1026.36(d)(2)(i)(B) to
clarify the intent of the provision.
Specifically, § 1026.36(d)(2)(i)(B) is
revised to provide that compensation
received directly from a consumer
includes payments to a loan originator
made pursuant to an agreement between
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the consumer and a third party (i.e., the
seller or some other person that is not
the creditor, loan originator, or an
affiliate of either), under which such
other person agrees to provide funds
toward the consumer’s cost of the
transaction (including loan originator
compensation). This final rule also
revises related comments to provide
additional interpretation. Specifically,
comment 36(d)(2)(i)–2.i is revised to
state that payments by the consumer to
the creditor are not considered
payments to the loan originator that are
received directly from the consumer.
Accordingly, comment 36(d)(2)(i)–2.iii
has been revised to also state that
payments in the transaction to the
creditor on behalf of the consumer by a
person other than the creditor or its
affiliates are not considered payments to
the loan originator that are received
directly from the consumer. As
proposed, comment 36(d)(2)(i)–2.iii
stated that payments by a person other
than the creditor or its affiliates to the
loan originator pursuant to an
agreement with the consumer are
compensation directly by the consumer.
Comment 36(d)(2)(i)–2.iii has been
revised to state also that payments by a
person other than the creditor or its
affiliates to the creditor are not
considered payments of compensation
to the loan originator directly by the
consumer. The Bureau believes that
these revisions will help avoid the
uncertainty cited by the industry
commenters.
With regard to the comments received
from several consumer groups discussed
above, the Bureau notes that RESPA will
still apply to these transactions to
prevent illegal kickbacks, including
kickbacks between the loan originator
and a person that is not the creditor or
its affiliate. For purposes of the dual
compensation rules set forth in
§ 1026.36(d)(2), the Bureau continues to
believe that arrangements where a
person other than a creditor or its
affiliate pays compensation to a loan
originator on behalf of the consumer 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 prevent 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
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loan originator organization charges the
consumer a direct fee for originating 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 § 1026.36(d)(2)(i)(B) and
comment 36(d)(2)(i)–2.iii. Under the
final rule, a payment by a person other
than a creditor or its affiliates to the
loan originator is considered received
directly from the consumer for purposes
of § 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, the consumer will
be aware of the payment to the loan
originator. In addition, because this
payment to the loan originator would be
considered compensation directly
received from the consumer, the
consumer remains the only person
permitted to pay compensation in
connection with the transaction to the
loan originator, in accordance with
§ 1026.36(d)(2)(i). For example, the
creditor or its affiliates could not pay
compensation in connection with the
transaction to the loan originator.
Moreover, the Bureau believes that
§ 1026.36(d)(2)(i)(B) and comment
36(d)(2)(i)–2.iii also benefit consumers
in transactions where the consumer
directly pays compensation to the loan
originator. If a payment to the loan
originator by a person other than the
creditor or its affiliates were not deemed
to be compensation coming directly
from the consumer, the person would be
prevented under existing § 1026.36(d)(2)
from paying some of the compensation
to the loan originator on behalf of the
consumer pursuant to an agreement, if
the consumer also pays some of the
compensation to the loan originator.
Thus, consumers could not receive the
benefit of contributions by persons other
than the creditor or its affiliates in these
transactions unless such contributions
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were at least large enough to cover the
loan originator’s entire compensation.
As adopted in this final rule, under
§ 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, or home improvement
contractor, to a loan originator is not
deemed to be made directly by the
consumer for purposes of
§ 1026.36(d)(2)(i), even if the payment is
made pursuant to an agreement between
the consumer and the affiliate. That is,
for example, if a home builder is an
affiliate of a creditor, § 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
final rule is consistent with existing
§ 1026.36(d)(3), which states that for
purposes of § 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
made directly by the consumer could
allow creditors to circumvent the
restrictions in § 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
consumer. As discussed above, under
existing § 1026.36(d)(2), a loan
originator that receives compensation
directly from the consumer in a closedend 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. Existing comment
36(d)(2)–1 provides that, for purposes of
§ 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 § 1026.36(d)(2). Because the
loan originator organization is receiving
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compensation directly from the
consumer in this transaction, the loan
originator organization is prohibited
under § 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.
The Bureau generally proposed to
retain the prohibition described above
in existing § 1026.36(d)(2) (redesignated
as proposed § 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, TILA
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, in the proposal, the Bureau
proposed to interpret ‘‘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. In the
proposal, the Bureau explained its belief
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), which prohibits
compensation based on loan terms.
Thus, the Bureau explained that, like
existing § 1026.36(d)(2), TILA section
129B(c)(2) prohibits a mortgage
originator that receives compensation
directly from the consumer in a closedend consumer credit transaction secured
by a dwelling from receiving
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compensation, directly or indirectly,
from any person other than the
consumer in connection with the
transaction.
Several industry trade groups and
individual creditors disagreed with the
Bureau’s interpretation of the statutory
term ‘‘origination fee or charge.’’ Two
trade groups believed that the Bureau
should interpret the term ‘‘origination
charge or fee’’ to include compensation
paid in connection with a transaction
only when that compensation is paid by
the consumer to the creditor or the loan
originator organization, or is paid by the
creditor to the loan originator
organization. These trade groups argued
that the term ‘‘origination fee or charge’’
commonly refers to an amount paid to
a creditor or loan originator
organization, and is not generally
understood to mean an amount of
compensation paid to an individual
loan originator. In addition, one of these
trade groups indicated that there is no
indication that Congress intended
‘‘origination fee or charge’’ to be
considered compensation in connection
with a transaction. This trade group
commenter argued that Congress
separately uses the term ‘‘origination fee
or charge,’’ the term ‘‘compensation,’’
and the term ‘‘compensation that varies
based on the terms of the loan,’’ and that
therefore, if Congress intended an
origination fee or charge to be
considered compensation in connection
with a transaction, it could easily have
written the statute that way. The other
trade group argued that the statute’s use
of a variety of specific terms (i.e.,
‘‘origination fees or charges,’’
‘‘compensation,’’ and ‘‘discount points,
origination points, or fees’’) in TILA
section 129B(c)(2) indicates that the
provision was intended to apply only to
circumstances in which a broker is
involved and the creditor seeks to pay
the broker’s compensation. This
commenter argued that, under that
scenario, TILA section 129B(c)(2) would
make sense, as typically a broker may
receive amounts labeled as ‘‘origination
fees or charges,’’ or amounts labeled as
‘‘compensation.’’ This commenter also
argued that it is unlikely Congress
intended to address circumstances in
which a third party pays an origination
fee or charge to an individual loan
originator of the creditor, which is not
a common practice.
In addition, a creditor commenter
argued that the Bureau should interpret
‘‘origination fee or charge’’ to exclude
compensation paid in connection with a
transaction by a creditor to an
individual loan originator. The creditor
commenter noted that Regulation Z
treats an origination fee or charge paid
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by the consumer to the creditor as a part
of the finance charge but excludes
salaries and commissions paid by
creditors to retail loan originators from
the finance charge. This commenter
pointed out that other consumer credit
laws and regulations, including statutes
and regulations now administered by
the Bureau, do not use the terms
‘‘origination fee’’ and ‘‘charge’’ to cover
salaries or commissions paid to retail
loan originators.
The Bureau continues to believe that
the best interpretation of the statutory
term ‘‘origination fee or charge’’ is that
it means compensation that is paid ‘‘in
connection with the transaction,’’ such
as commissions, that are specific to, and
paid solely in connection with, the
transaction. While the finance charge
includes payments by the consumer to
the creditor or mortgage broker, the
Bureau does not believe that the finance
charge is dispositive or, accordingly,
that limiting the term ‘‘origination fee or
charge’’ to payments by the consumer to
the creditor or mortgage broker for
purposes of this statutory provision is
appropriate. TILA section 129B(c)(2)
clearly contemplates that an
‘‘origination fee or charge’’ includes
payments to a loan originator by a
person other than the consumer. The
provision in TILA section 129B(c)(2)
prohibiting a loan originator from
receiving an ‘‘origination fee or charge’’
from a person other than the consumer
except in certain circumstances would
be meaningless if the term ‘‘origination
fee or charge’’ did not include payments
from a person other than the consumer
to a loan originator.
Because the term ‘‘origination fee or
charge’’ must include payments from a
person other than the consumer to at
least some loan originators, the Bureau
believes that the better reading of this
term is to treat payments to loan
originators consistently, regardless of
whether the loan originator is an
individual loan originator or a loan
originator organization. Otherwise,
compensation paid in connection with a
transaction (such as a commission) paid
by a creditor to a loan originator
organization would be considered an
‘‘origination fee or charge,’’ but a similar
payment to an individual loan
originator by the creditor would not be
considered an ‘‘origination fee or
charge.’’ The Bureau notes that other
provisions in TILA section 129B(c),
such as the prohibition on loan
originators receiving compensation
based on loan terms, apply to loan
originators uniformly, regardless of
whether the loan originator is an
individual loan originator or a loan
originator organization.
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TILA section 129B(c)(2) does not
prohibit a mortgage originator from
receiving payments from a person other
than the consumer for bona fide thirdparty 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 bar 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
§ 1026.36(d).
Consistent with TILA section
129B(c)(2), the Bureau proposed to
amend existing comment 36(d)(1)–1.iii
(redesignated 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 § 1026.36(d)(2)(i)
and comment 36(a)–5.iii, a loan
originator that receives compensation
directly from a consumer would be
permitted to 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 affiliate, 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 but the loan originator does
not retain this $25. Instead, the loan
originator pays the $25 to the third party
for the credit report. The loan originator
in that transaction is not prohibited by
proposed § 1026.36(d)(2)(i) from
receiving the $25 from the creditor, even
though the consumer paid
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compensation to the loan originator in
the transaction.
In addition, under proposed
§ 1026.36(d)(2)(i) and comment 36(a)–
5.iii, 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 affiliate, 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 to the loan originator but
the loan originator does not retain this
$25. Instead, the loan originator pays
the $25 to the third party for the credit
report. The loan originator in that
transaction is not prohibited by
proposed § 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 of proposed
§ 1026.36(a), proposed comment 36(a)–
5.iii also recognized that, in some cases,
amounts received for payment for such
third-party charges may exceed the
actual charge because, for example, the
loan originator cannot determine
precisely what the actual charge will be
at the time the charge is imposed and
instead uses average charge pricing (in
accordance with RESPA). In such a case,
under proposed comment 36(a)–5.iii,
the difference retained by the originator
would not have been 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 complied 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 (a practice
known as ‘‘upcharging’’), the amount
retained is compensation for purposes
of § 1026.36(d) and (e). Proposed
comment 36(a)–5.iii contained two
illustrations, which are discussed in
more detail in the section-by-section
analysis of § 1026.36(a).
As discussed in more detail in the
section-by-section analysis of
§ 1026.36(a), the final rule adopts 36(a)–
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5.iii as proposed in substance, except
that the interpretation discussing
situations where the amounts received
for payment for third-party charges
exceeds the actual charge has been
moved to comment 36(a)–5.v.
In addition, the final rule adds
comment 36(a)–5.iv to clarify whether
payments for services that are not loan
origination activities are compensation
under § 1026.36(a)(3). As adopted in the
final rule, comment 36(a)–5.iv.A
clarifies that the term ‘‘compensation’’
for purposes of § 1026.36(a)(3) does not
include: (1) A payment received by a
loan originator organization for bona
fide and reasonable charges for services
it performs that are not loan origination
activities; (2) a payment received by an
affiliate of a loan originator organization
for bona fide and reasonable charges for
services it performs that are not loan
origination activities; or (3) a payment
received by a loan originator
organization for bona fide and
reasonable charges for services that are
not loan origination activities where
those amounts are not retained by the
loan originator organization but are paid
to the creditor, its affiliate, or the
affiliate of the loan originator
organization. Comment 36(a)–5.iv.C as
adopted clarifies that loan origination
activities, for purposes of that comment
means activities described in
§ 1026.36(a)(1)(i) (e.g., taking an
application, arranging, assisting,
offering, negotiating, or otherwise
obtaining an extension of consumer
credit for another person) that would
make a person performing those
activities for compensation a loan
originator as defined in
§ 1026.36(a)(1)(i).
Thus, under § 1026.36(d)(2)(i) and
comment 36(a)–5.iv as adopted in the
final rule, a loan originator organization
that receives compensation in
connection with a transaction from a
person other than the consumer (e.g.,
creditor) would not be prohibited under
§ 1026.36(d)(2)(i) from receiving a
payment from the consumer for a bona
fide and reasonable charge for services
that are not loan origination activities
where (1) the loan originator
organization itself performs those
services; or (2) the payment amount is
not retained by the loan originator
organization but is paid to the creditor,
its affiliate, or the affiliate of the loan
originator organization, as described in
comment 36(a)–5.iv.A.1 and .3.
Likewise, a loan originator organization
that receives compensation directly
from a consumer would not be
prohibited under § 1026.36(d)(2)(i) from
receiving a payment from a person other
than the consumer for bona fide and
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reasonable charges for services that are
not loan origination activities as
described above.
In addition, a loan originator
organization’s affiliate would not be
prohibited under § 1026.36(d)(2)(i) from
receiving from a consumer a payment
for bona fide and reasonable charges for
services it performs that are not loan
origination activities; as described in
comment 36(a)–5.iv.A.2, even if the loan
originator organization receives
compensation in connection with a
transaction from a person other than the
consumer (e.g., the creditor). Similarly,
a loan originator organization’s affiliate
would not be prohibited under
§ 1026.36(d)(2)(i) from receiving from a
person other than the consumer (e.g., a
creditor) a payment for bona fide and
reasonable charges for services the
affiliate performs that are not loan
origination activities; as described in
comment 36(a)–5.iv.A.2, even if the loan
originator organization receives
compensation directly from a consumer
in connection with a transaction.
Moreover, as discussed above, the
final rule moves the interpretation in
proposed comment 36(a)–5.iii
discussing situations where the amounts
received for payment for third-party
charges exceeds the actual charge to
comment 36(a)–5.v, and revises it. The
final rule also extends this
interpretation to amounts received by
the loan originator organization for
payment for services that are not loan
origination activities where those
amounts are not retained by the loan
originator but are paid to the creditor,
its affiliate, or the affiliate of the loan
originator organization. See the sectionby-section analysis of § 1026.36(a)(3) for
a more detailed discussion.
If any loan originator receives
compensation directly from the
consumer, no other loan originator may
receive compensation in connection
with the transaction. Under existing
§ 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
§ 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
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11365
as commissions, in connection with that
particular transaction. Nonetheless, the
loan originator organization may pay
individual loan originators a salary or
hourly wage or other compensation that
is not tied to the particular transaction.
See existing 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 DoddFrank Act, generally is consistent with
the above prohibition in existing
§ 1026.36(d)(2) (redesignated as
proposed § 1026.36(d)(2)(i)). 12 U.S.C.
1639b(c)(2). 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).’’ As discussed above, 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
individual loan originator is the one that
is receiving compensation in connection
with a transaction 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 origination 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
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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 origination fees,
where it determines that doing so is in
the interest of consumers and in the
public interest. Pursuant to this waiver
or exemption authority, the Bureau
proposed to add § 1026.36(d)(2)(i)(C) to
provide that, even if a loan originator
organization receives compensation
directly from a consumer in connection
with a transaction (i.e., in the form of
the upfront payment of discount points,
origination points or origination fees),
the loan originator organization may pay
compensation to individual loan
originators, and the individual loan
originators may receive compensation
from the loan originator organization
(but the individual loan originators may
not receive compensation directly from
the consumer). The Bureau also
proposed to amend comment 36(d)(2)–
1 (redesignated as proposed comment
36(d)(2)(i)–1) to be consistent with
proposed § 1026.36(d)(2)(i)(C).
In the supplementary information to
the proposal, the Bureau stated its belief
that the risk of harm to consumers that
the existing restriction was intended to
address would be likely no longer
present, in light of new TILA section
129B(c)(1). Under existing
§ 1026.36(d)(1)(iii), compensation paid
directly by a consumer to a loan
originator is permitted to be based on
transaction terms or conditions. Thus, if
a loan originator organization were
allowed to pay an individual loan
originator it employs a commission in
connection with a transaction, the
individual loan originator could have
incentives to steer the consumer into a
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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
any compensation based on loan terms,
including compensation paid by a
consumer directly to a mortgage
originator. 12 U.S.C. 1639b(c)(1). Thus,
pursuant to TILA section 129B(c)(1),
and under proposed § 1026.36(d)(1) as
amended in this final rule, even if an
individual loan originator is 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 transaction terms.
In the supplementary information to
the proposal, the Bureau also stated its
belief that it would be in the interest of
consumers and in the public interest 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 believed the risk of the harm to
the consumer that the restriction was
intended to address would be remedied
by the statutory amendment prohibiting
even compensation that is paid by the
consumer from being based on the terms
of the transaction. With that protection
in place, allowing this type of
compensation to the individual loan
originator no longer would present 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 might be willing to
structure transactions where consumers
pay loan originator compensation
directly. Loan originator organizations
had expressed concern that currently it
is difficult to structure transactions
where consumers pay loan originator
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organizations compensation directly,
because it is not economically feasible
for the organizations to pay their
individual loan originators purely a
salary or hourly wage, instead of a
commission that is tied to the particular
transaction either alone or in
combination with a base salary. The
Bureau believed that this proposal
would 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. In a transaction 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 up front, 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.
The Bureau received comments from
two trade groups representing mortgage
brokers, which favored this aspect of the
proposal. In addition, in the Bureau’s
outreach, consumer groups agreed that
loan originator 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, such as
a commission. For the reasons discussed
above, the final rule adopts
§ 1026.36(d)(2)(i)(C) and related
provisions in comment 36(d)(2)(i)–1 as
proposed. The Bureau has determined
that it is in the interest of consumers
and in the public interest to allow a loan
originator organization to pay
individual loan originators
compensation in connection with the
transaction. It is in the public interest
even when the loan originator
organization has received compensation
in connection with the transaction
directly from the consumer, given that
neither the organization’s nor the
individual originator’s compensation
may be based on the terms of the
transaction.
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36(d)(2)(ii) Exemption
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The Dodd-Frank Act
The Dodd-Frank Act contains a
number of discrete provisions
addressing points and fees paid by
consumers in connection with
mortgages. Section 1412 of the DoddFrank Act adds new TILA section
129C(b) which defines the criteria for a
‘‘qualified mortgage’’ as to which there
is a presumption of compliance with the
new ability-to-repay rules prescribed in
accordance with TILA section 129C(a),
as added by section 1411 of the DoddFrank Act. Under new TILA section
129C(b), one of the criteria for a
qualified mortgage is that the total
‘‘points and fees’’ paid do not exceed 3
percent of the loan amount.146 See TILA
section 129C(b)(2)(A)(vii), as added by
section 1412 of the Dodd-Frank Act. In
making this calculation, up to two
‘‘bona fide discount points’’ may be
excluded from the 3 percent
threshold.147 TILA section
129C(b)(2)(C)(ii). In a similar vein,
section 1431 of the Dodd-Frank Act
amends TILA section 103(aa)(1) to
create a new definition of ‘‘high cost
mortgage.’’ 148 Under that new
definition, a mortgage qualifies as a
‘‘high cost mortgage’’ if any of the
prescribed coverage tests are met,
including if the ‘‘points and fees’’
charged on the mortgage exceed defined
thresholds.149 TILA section 103(bb)(1).
For these purposes too, up to two ‘‘bona
fide discount points’’ may be
excluded.150 TILA section 103(dd).
At the same time that Congress
enacted these provisions, new TILA
section 129B(c)(2) was added by section
1403 of the Dodd-Frank Act. That new
TILA section provides in relevant part
that a mortgage originator can receive an
‘‘origination fee or charge’’ from
someone other than a consumer (e.g.
from a creditor or loan originator
organization) if, but only if, ‘‘the
mortgage originator does not receive any
compensation directly from the
consumer’’ and the consumer ‘‘does not
make an upfront payment of discount
146 The term ‘‘points and fees’’ for purposes of
new TILA section 129C(b) is defined in new TILA
section 129C(b)(2)(C), as added by section 1412 of
the Dodd-Frank Act.
147 The term ‘‘bona fide discount points’’ for
purposes of new TILA section 129C is defined in
new TILA section 129C(b)(2)(C)(iii).
148 The Dodd-Frank Act amends existing TILA
section 103(aa) and renumbers it as section 103(bb).
149 The term ‘‘points and fees’’ for purposes of
TILA section 103(bb)(1) is defined in TILA section
103(bb)(4), as revised by section 1431 of the DoddFrank Act.
150 The term ‘‘bona fide discount points’’ for
purposes of TILA section 103(bb)(1) is defined in
new TILA section 103(dd), as added by section
1431 of the Dodd-Frank Act.
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points, origination points, or fees (other
than bona fide third-party charges not
retained by the mortgage originator,
creditor or an affiliate of the creditor or
originator’’).’’ However, TILA section
129B(c)(2)(B), as amended by section
1100A of the Dodd-Frank Act, also
provides the Bureau authority to waive
or create exemptions from this
prohibition on consumers paying
upfront discount points, origination
points or origination fees where the
Bureau determines that doing so ‘‘is in
the interest of consumers and in the
public interest.’’
The Bureau understands and
interprets the phrase ‘‘origination fee or
charge’’ as used in new TILA section
129B(c)(2) 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,
if the statutory ban were allowed to go
into effect as it reads, the prohibition in
TILA section 129B(c)(2)(B)(ii) on the
consumer paying upfront discount
points, origination points, or origination
fees would apply in residential
mortgage transactions where: (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.151 The prohibition in TILA
section 129B(c)(2)(B)(ii) on the
consumer paying upfront discount
points, origination points, or origination
fees in a residential mortgage
transaction generally would not apply
where: (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;
151 In this final rule, the Bureau uses 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, so long
as the individual loan originator does not receive
compensation directly from the consumer. See the
section-by-section analysis of § 1026.36(d)(2)(i) for
a detailed discussion. Nonetheless, these
transactions would be subject to the restriction on
upfront points and fees in TILA section
129B(c)(2)(B)(ii), unless the Bureau exercises its
exemption authority.
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or (2) 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.
The Bureau understands that in most
mortgage transactions today, loan
originators typically receive
compensation tied to a particular
transaction (such as a commission) from
a person other than the consumer. For
example, in transactions that involve
loan originator organizations, creditors
typically pay a commission to the loan
originator organization. In addition, in
transactions that do not involve loan
originator organizations, creditors
typically pay a commission to the
individual loan originators that work for
the creditors. Thus, absent a waiver or
exemption by the Bureau, substantially
all mortgage transactions would be
covered by TILA section 129B(c)(2) and
would be subject to the statutory ban on
upfront points and fees.
Such a ban on upfront points and fees
would have two foreseeable impacts.
First, the ban would result in a
predictable increase in mortgage interest
rates. Creditors incur significant costs in
originating a mortgage, including
marketing, sales, underwriting, and
closing costs. Typically, creditors
recover some or all of those costs
through upfront charges paid by the
consumer. These charges can take the
form of flat fees (such as an application
fee or underwriting fee) or fees stated as
a percentage of the mortgage
(‘‘origination points’’). If creditors were
prohibited from assessing these upfront
charges, creditors would necessarily
need to increase the interest rate on the
loan to recoup the upfront costs.
Creditors who hold loans in portfolio
would then earn back these fees over
time through higher monthly payments;
creditors who sell loans into the
secondary market would expect to earn
through the sale what would otherwise
have been earned through upfront
points and fees.
Second, implementation of the
statutory ban on points and fees would
necessarily limit the range of pricing
options available to consumers.
Creditors today typically offer a variety
of pricing options on closed-end
mortgages, such that consumers
generally have the ability to buy down
the interest rate on a loan by paying
‘‘discount points.’’ i.e., upfront charges,
stated as a percentage of the loan
amount, and offered in return for a
reduction in the interest rate. For
creditors who hold loans in portfolio,
discount points are intended to make up
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for the revenue that will be foregone
over time due to lower monthly
payments; for creditors who sell loans
into the secondary market, the discount
points are designed to compensate for
the lower purchase price that the
mortgage will attract because of its
lower interest rate. In a similar vein,
many creditors offer consumers the
opportunity to, in essence, buy ‘‘up’’ the
interest rate in order to reduce or
eliminate the upfront costs that would
otherwise be assessed. If the statutory
ban were allowed to go into effect,
creditors would no longer be able to
offer pricing options to consumers in
any transaction in which a loan
originator is paid compensation (e.g.,
commission) tied to the transaction.
The Bureau’s Proposal
In developing its proposal, the Bureau
concluded that, in light of concerns
about the impact of the statutory ban on
the price of mortgages, the range of
consumers’ choices in mortgage pricing,
and consumers’ access to credit, it
would not be in the interest of
consumers or in the public interest to
permit the prohibition to take effect.
The Bureau sought instead to develop
an alternative which would establish
conditions under which upfront points
and fees could be charged that would
better serve the interest of consumers
and the public interest than simply
waiving the prohibition or allowing it to
take effect.
During the Small Business Review
Panel process, as discussed in part II,
the Bureau sought comment on an
alternative which would have allowed
creditors to charge discount points and
origination fees that could not vary with
the size of the transaction (i.e., flat fees)
but would not have permitted creditors
to charge origination points. The
alternative would have also required
creditors to provide consumers with a
bona fide reduction in the interest rate
for each discount point paid and to offer
an option of a no discount point loan.
The intent of this alternative was to
address potential consumer confusion
between discount points, which are
paid by the consumer at the consumer’s
option to obtain a reduction in the
interest rate, and other origination
charges which the originator assesses.
The Small Entity Representatives who
participated in the Small Business
Review Panel process were unanimous
in opposing the requirement that fees
could not vary with the size of the
transaction and generally opposed the
bona fide discount point requirement.
The Bureau also reviewed the
alternative with various industry and
consumer stakeholders. The industry
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stakeholders were also generally
opposed to both the requirement that
fees could not vary with the size of the
transaction and the bona fide discount
point fee requirement, while consumer
groups held mixed views. As a result of
the lack of general support for the
Bureau’s approach to flat fees, the view
that some costs do vary with the size of
the transaction, and the fact that the
distinction between origination and
discount points may not be the most
relevant one from the consumer’s
perspective, the Bureau abandoned the
flat fee aspect of the alternative in
developing its proposal.
Instead, proposed § 1026.36(d)(2)(ii)
would have generally required that,
before a creditor or loan originator
organization may impose upfront points
or fees on a consumer in a closed-end
mortgage transaction in which the
creditor or loan originator organization
will also pay a loan originator
compensation tied to the 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 have been triggered if the only
upfront charges paid by a consumer are
charges that are passed on to
independent third parties that are not
affiliated with the creditor or loan
originator organization. The
requirement also would not have
applied where the consumer is unlikely
to qualify for the zero-zero alternative.
To facilitate shopping based on the zerozero alternative, the proposal would
have provided a safe harbor for
compliance with the requirement to
make available the zero-zero alternative
to a consumer if any time prior to
providing the disclosures required by
RESPA after application that the
creditor provides a consumer an
individualized quote for the interest rate
or other key terms for a loan that
includes upfront points and fees, the
creditor also provides a quote for a zerozero alternative.
Thus, the Bureau proposed to
structure the use of its exemption
authority to enable consumers to receive
the benefits of obtaining loans that do
not include discount points, origination
points or origination fees, while
preserving consumers’ ability to choose
a loan with upfront points and fees. The
Bureau believed the proposal would
address the problems in the current
mortgage market that the Bureau
believes the prohibition on discount
points, origination points or origination
fees was designed to address by
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advancing two goals: (1) Facilitating
consumer shopping by enhancing the
ability of consumers to make
comparisons using transactions that do
not include discount points, origination
points or origination fees available from
different creditors as a basis for
comparison; and (2) enhancing
consumer decision-making by
facilitating a consumer’s ability to
understand and make meaningful tradeoffs on transactions available from a
particular creditor of paying discount
points, origination points or origination
fees in exchange for a lower interest
rate. Underlying both these goals was
the concern that some consumers may
be harmed by paying points and fees in
certain circumstances.
The Bureau also sought comment on
a number of related issues, including:
Æ Whether the Bureau should adopt 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;
Æ 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;
Æ Whether to require that a consumer
may not pay upfront points and fees
unless the consumer qualifies for the
zero-zero alternative; and
Æ Whether to require information
about the zero-zero alternative to be
provided not just in connection with
customized quotes given prior to
application, but also in advertising and
at the time that consumers are provided
disclosures within three days after
application.
Comments Received on the Proposal
Consumer group commenters. There
was no consensus among consumer
groups on whether, and how, the
Bureau should use its exemption
authority regarding the statutory ban on
consumers paying upfront points and
fees. Four consumer groups argued that
the Bureau should allow the statutory
ban to go into effect. These consumer
groups asserted that paying points is
generally a bad idea for most consumers
given the time it takes to recoup the
cost, the difficulty of predicting whether
the consumer will refinance or sell
before that time comes, the
mathematical difficulty of calculating
when that time is, and the difficulty of
comparing a variety of different offers.
These consumer groups indicated that
in transactions where the creditor
compensates the loan originator,
creditors typically increase the interest
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rate to some extent to recoup at least in
part the compensation paid to the loan
originators. These consumer groups
indicated that consumers pay fees in the
expectation of decreasing the interest
rate. The consumer groups asserted that
when both upfront fees and interest
rates that are increased to pay loan
originator compensation are present in
the transaction, the consumer’s payment
of cash, paid to buy down the interest
rate, is wasted because the creditor has
brought the interest rate up. These
consumer groups also asserted that this
‘‘see-saw’’ of incentive payments
obscures the cost of credit to consumers
and results in higher costs for
consumers.
These consumer groups also opposed
the Bureau’s proposal on the zero-zero
alternative based on concerns that the
Bureau’s proposal would be a very
difficult rule to enforce and very easy to
manipulate. These consumer groups
indicated that additional rules to
address these risks will only add greater
complexity to the rules. These consumer
groups stated that if the Bureau decides
to use its exemption authority, creditors
should only be allowed to offer or
disclose a loan with upfront points and
fees upon a consumer’s written request.
Other consumer groups, however,
advocated different approaches. One
consumer group supported the Bureau’s
use of its exemption authority because
this group believed that use of
origination fees to cover origination
costs and discount points to reduce the
interest rate for a loan can provide value
to the borrower in certain circumstances
and that other protections regarding
points and fees in the Dodd-Frank Act
will decrease the risks to consumers
from paying upfront points and fees.
Specifically, this commenter pointed
out additional protections on points and
fees contained in the Dodd-Frank Act,
such as limits on points and fees for
qualified mortgages as implemented by
the 2013 ATR Final Rule, and new
disclosures to be issued by the Bureau
when the 2012 TILA–RESPA Proposal is
finalized that will provide a clearer
description of points and fees paid on
loans. Nonetheless, this consumer group
did not support the Bureau’s proposal
regarding the zero-zero alternative. This
consumer group believed that requiring
creditors to offer a product with no
upfront origination fees or discount
points would not provide significant
protections to borrowers, would likely
be confusing to consumers, and could
also harm creditors. For example, this
commenter stated that while the zerozero alternative offered by a particular
creditor may be less complicated than
other options that creditors offer, it may
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not be the best deal for the consumer.
Because the zero-zero alternative would
be a required disclosure, creditors may
be discouraged from making the case to
the consumer that a zero-zero
alternative is less advantageous, even
when it really is. This consumer group
suggested that in lieu of the zero-zero
alternative, creditors should be required
to disclose all points and fees charged
when they give a quote to a borrower.
Other consumer groups generally
supported the Bureau’s use of its
exemption authority and supported the
proposal regarding the zero-zero
alternative with some revisions.
Suggestions for revisions included
requiring information about zero-zero
alternatives to be provided at the time
that consumers are provided disclosures
within three days after application.
Industry commenters. All of the
industry commenters stated that the
Bureau should use its exemption
authority so that the statutory ban on
upfront points and fees does not go into
effect. Most industry commenters raised
concerns about access to credit if the
statutory ban on upfront points and fees
went into effect, or if a creditor was
restricted in making a loan with upfront
points and fees unless the creditor also
makes available the zero-zero
alternative. Several industry
commenters indicated that some
consumers will not qualify for the loans
without upfront points and fees because
of debt-to-income requirements. If the
statutory ban were allowed to go into
effect, these consumers would not have
the opportunity to pay upfront points
and fees to lower the interest rate so that
they could qualify for the loan.
Some industry commenters also
indicated that loans without upfront
points and fees are not always feasible
for all consumers and all types of loans.
In some cases, creditors cannot recover
foregone origination fees by increasing
the interest rate on the loan because the
incremental premium paid by the
secondary market for loans with higher
interest rates may be insufficient,
especially for smaller loans or higherrisk borrowers. In addition, one GSE
indicated that an increase in loans
without upfront points and fees could
have an impact on prepayment speed
which could reduce the value of
mortgage securities and thereby drive
up mortgage prices (interest rates). Some
industry commenters also noted that
some mortgage programs, particularly
those designed for lower income people,
do not allow the creditor to vary
origination fees, or may cap the interest
rate on the loan such as it would be
difficult for the creditor to recoup the
entire origination costs through a higher
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interest rate. Many industry commenters
also raised concerns that the loans
without points and fees and higher
interest rates might trigger APR
thresholds for high-cost loans under
§ 1026.32 and/or similar state laws, and
state that creditors typically are not
willing to make these types of high-cost
loans.
In addition, some industry
commenters also raised concerns about
managing prepayment risk for portfolio
lending if they were limited in their
ability to impose upfront points and fees
(especially because they will be limited
in imposing prepayment penalties
under the 2013 ATR Final Rule and the
2013 HOEPA Final Rule). One industry
trade group noted that financial
institution prudential regulators have
previously warned institutions about
offering zero-zero loans, as they tend to
have significantly higher prepayment
speeds.
One industry trade group commenter
also stated that if the statutory ban on
upfront points and fees were to go into
effect, it would require creditors in the
vast majority of transactions in today’s
market to restructure their current
pricing practices or compensation. This
trade group indicated that some
community bankers have informed it
that those community banks will
discontinue their mortgage lines. The
trade group indicated that the shortterm effects would be very damaging, as
mortgage sources would shrink, and
rates would rise since originators that
cannot receive upfront points or fees
from the consumer would be forced to
recoup their origination costs through
higher rates. Several credit union
commenters also were concerned about
the cost of complying with the proposal
requiring a zero-zero alternative and a
bona fide trade-off, indicating that
implementation, training and system
changes would be expensive and
resource intensive. These credit union
commenters indicated that some smaller
institutions like credit unions and
community banks may deem the cost
too high and exit the mortgage business,
leaving the largest mortgage loan
operators with more market share and
consumers with fewer choices.
Nearly all of the industry commenters
also stated that the zero-zero alternative
as proposed was unworkable or
undesirable. Industry commenters
raised a number of compliance and
operational issues, such as the difficulty
in determining pre-application whether
a consumer is likely to qualify for the
zero-zero alternative.
Some industry commenters also
questioned whether the zero-zero
alternative, as proposed, would be
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beneficial to consumers. Several
commenters raised concerns that
consumers when they are given
information about the zero-zero
alternative might be confused about
why they are receiving such information
and might believe that the zero-zero
loan was always the best option for
them even when it is not. Some
commenters expressed concern that
consumers may be confused by
receiving information about a zero-zero
alternative that they did not request.
Some commenters also indicated that
including information about the zerozero alternative in advertisements might
not in fact enable consumers properly to
determine the lowest cost loan,
especially if affiliates’ fees were treated
as upfront points and fees, but nonaffiliates, third-party fees were not.
Some of these commenters also urged
the Bureau to conduct consumer testing
on the zero-zero alternative, similar to
what it has done to prepare to integrate
the existing mortgage loan disclosures
under TILA and RESPA.
Many industry commenters suggested
that the Bureau should provide a
complete exemption. These commenters
generally believed that the Bureau
should continue to study the impact of
regulating points and fees instead of
finalizing an approach in January 2013.
Some of these commenters stated that
the Bureau should study the impacts of
the other Title XIV rulemakings on the
mortgage market before adopting any
new regulation on upfront points and
fees, while other commenters stated that
the Bureau should address the issue as
part of finalizing the 2012 TILA–RESPA
Proposal. Other industry commenters
did not advocate for a complete
exemption, but instead advocated for
various different approaches than the
zero-zero alternative as proposed.
Suggested alternatives included
requiring creditors to provide a generic
disclosure stating that additional
options for rates, fees, and payments are
available, to make the zero-zero
alternative available only upon request
of the consumer, or to disclose the loan
with the fewest points and fees for
which the consumer is likely to qualify.
Finally, other industry commenters
stated that the zero-zero alternative
approach was unworkable but did not
suggest alternative approaches.
State bank supervisor commenters. A
group submitting comments on behalf of
State bank supervisors supported the
zero-zero alternative without suggesting
any revisions.
The Final Rule
Use of the Bureau’s exemption
authority. As discussed in more detail
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below, the Bureau adopts in this final
rule a complete exemption to the
statutory ban on upfront points and fees
set forth in TILA section
129B(c)(2)(B)(ii). Specifically, this final
rule revises proposed § 1026.36(d)(2)(ii)
to provide that a payment to a loan
originator that is otherwise prohibited
by section 129B(c)(2)(A) of the Truth in
Lending Act is nevertheless permitted
pursuant to section 129B(c)(2)(B) of the
Act, regardless of whether the consumer
makes any upfront payment of discount
points, origination points, or fees, as
described in section 129B(c)(2)(B)(ii) of
the Act, as long as the loan originator
does not receive any compensation
directly from the consumer as described
in section 129B(c)(2)(B)(i) of the Act.
The Bureau is including
§ 1026.36(d)(2)(ii) in the final rule under
its authority in TILA section
129B(c)(2)(B), as amended by section
1100A of the Dodd-Frank Act, to waive
or create exemptions from this
prohibition on consumers paying
upfront discount points, origination
points or origination fees where the
Bureau determines that doing so is in
the interest of consumers and in the
public interest.152 The Bureau has
determined that it is in the interest of
consumers and in the public interest to
exercise its exemption authority in this
way, to avoid the detrimental effect of
the statutory ban on consumers paying
upfront points and fees. The Bureau’s
exercise of the exemption authority will
preserve access to credit and consumer
choice. The complete exemption also
will allow the Bureau to continue to
conduct consumer testing and market
research to improve its ability to
regulate upfront points and fees in a
way that maximizes consumer
protection while preserving access to
credit and empowering consumer
choice. The Bureau is concerned that
the alternative it proposed might not
serve consumers or the public.
Accordingly, the proposed exemption
from the statutory prohibition as
described above, and contained in
proposed § 1026.36(d)(2)(ii), is not
adopted.
As explained above, eliminating
upfront points and fees would result in
an increase in interest rates and thus in
monthly payments. The Bureau is
concerned that, at the margins, some
152 The Bureau’s inclusion of § 1026.36(d)(2)(ii) of
the final rule is also an exercise of its exemption
authority under TILA section 105(a). This
exemption will effectuate the purpose stated in
TILA section 129B of ensuring that responsible,
affordable mortgage credit remains available to
consumers by preserving access to credit and
consumer choice in credit as explained in this
supplementary information.
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consumers would not qualify for the
loans at the higher interest rate because
of debt-to-income ratio underwriting
requirements. If the statutory ban were
allowed to go into effect, these
consumers would not have the
opportunity to pay upfront points and
fees to lower the interest rate so that
they could qualify for the loan.
In addition, the Bureau is concerned
that it may not always be feasible for a
creditor to offer loans without upfront
points and fees to all consumers and
various types of loan products. In some
cases, increasing the interest rate on a
loan will not generate sufficient
incremental premium to allow creditors
to cover their costs, especially for
smaller loans or higher-risk borrowers.
For example, one commenter indicated
that historical data shows that
premiums paid by the secondary market
for 30-year fixed-rate mortgages have, at
times, made it difficult for creditors to
recover foregone upfront charges by
increasing the interest rate. The
commenter noted, for example, that
prior to 2009, when the Board was not
generally a purchaser of mortgagebacked securities, creditors had
difficulty offering zero-zero alternatives
for 30-year fixed-rate mortgages. While
it is possible that if the statutory ban
were to go into effect the secondary
market might adjust so as to enable
creditors to recoup origination costs by
interest rate increases that generate
sufficient increases in the premium paid
by the secondary market, the Bureau
remains concerned that this may not
happen for all segments of the market,
and as a result access to credit for some
consumers may be impaired.
The Bureau also is concerned that
creditors may curtail certain types of
portfolio lending if the statutory ban
were to go into effect. Community banks
and some credit unions, in particular,
tend to make loans to their customers or
members, which cannot be sold into the
secondary market because of, for
example, unique features of the property
or the consumer’s finances. These
creditors may not be able to afford to
wait to recoup their origination costs
over the life of the loan and, even if they
can, they may have difficulty managing
prepayment risk, especially because
creditors will be limited in imposing
prepayment penalties under the DoddFrank Act, the 2013 ATR Final Rule and
the 2013 HOEPA Final Rule. For
example, one credit union indicated
that it currently makes many short-term
(10- to 12-year) fixed-rate loans held in
portfolio where it charges a relatively
small ($250–$500) flat origination fee to
offset its direct costs. The credit union
does not offer a zero-zero alternative in
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these instances because it does not sell
the loan into the secondary market or
generate any upfront revenue. The
credit union indicated that it would
reconsider originating this type of loan
if it was not allowed to charge upfront
fees on these loans.
The Bureau also notes that some
Federal and State mortgage programs,
particularly those designed for lowerincome people, do not allow the
creditor to vary origination fees, or may
cap the interest rate on the loan such
that it would be difficult for the creditor
to recoup the entire origination costs
through a higher interest rate. While it
may be possible in some cases for these
Federal and State mortgage programs to
be restructured to accommodate zerozero alternatives, the Bureau remains
concerned that it might not always be
feasible to do so, which could impair
access to credit for lower income
consumers that these programs are
designed to help.
In sum, the Bureau believes that
allowing the statutory ban in TILA
section 129B(c)(2)(B)(ii) to go into effect
has the potential to curtail access to
credit for consumers, which would be
particularly detrimental to consumers
given the current fragile state of the
mortgage market. Given the current tight
underwriting standards and limited
supply of credit, driving up interest
rates and thus monthly payments, and
constricting the number of creditors in
the market, could be particularly
damaging to consumers who are already
having difficulty qualifying for credit.
The Bureau also believes that
allowing the statutory ban on upfront
points and fees in TILA section
129B(c)(2)(B)(ii) to go into effect would
significantly limit consumer choice for
financial products to the detriment of
consumers. Some mortgage consumers
may want the lowest rate possible on
their loans. For example, given today’s
low interest rate environment, a
consumer who has purchased a house in
which the consumer plans to live for
many years may be best served by
paying upfront origination charges in
order to get the full benefit of the
current low interest rates or even paying
discount points to buy down that rate.
In addition, some mortgage consumers
may prefer to lower the future monthly
payment on the loan below some
threshold amount, and paying discount
points, origination points or origination
fees would allow consumers to achieve
this lower monthly payment by
reducing the interest rate.153 This is
153 Consumers can also reduce monthly payments
by making a bigger down payment, in order to
reduce the loan amount. Nonetheless, it may take
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possible today as creditors typically
offer a variety of pricing options on
mortgages, such as the ability of a
consumer to pay less in upfront points
and fees in exchange for a higher
interest rate or to pay more in upfront
points and fees in exchange for a lower
interest rate. Creditors also may offer
loans without upfront points and fees to
some, but not all, consumers.
Finally, the Bureau believes that
preserving the ability of consumers to
pay upfront points and fees enhances
the efficiency of the mortgage market.
Investors in mortgage securities face the
risk that in declining interest rate
environments consumers will prepay
their mortgages. Investors factor in this
prepayment risk in determining how
much they will pay for a mortgage
backed security. Consumers who pay
discount points and secure a lower rate
‘‘signal’’ to investors their reduced
likelihood to prepay. This signaling, in
turn, facilitates a more efficient market
in which creditors are able to provide
such consumers with a better deal.
The Bureau has carefully considered
the countervailing considerations noted
by some, although by no means all,
consumer groups. The Bureau
recognizes that some consumers—
particularly less sophisticated
consumers—may be harmed because
they do not fully understand the
complexity of the financial trade-offs
when they pay upfront points and fees
and thus do not get fair value for them.
Additionally, other consumers may
misperceive their likelihood of
prepaying their mortgage (either as the
result of a refinance or a home sale) and,
as a result, may make decisions that
prove not to be in their long-term
economic self-interest. The Bureau also
recognizes that there is some evidence
that consumers pay lower, all-in costs
when they do not pay any upfront costs
although the Bureau notes that the
leading study of this phenomenon was
based on a period of time when the
compensation paid to originators could
vary with the terms of the transaction.
Nevertheless, the Bureau also
believes, for the reasons discussed
above, that, most consumers generally
a significant increase in the down payment to
achieve the desired reduction in the monthly
payment. In other words, if the consumer applied
the same funds that he or she would otherwise pay
in discount points, origination points, or origination
fees and applied it to a larger down payment to
reduce the loan amount, the consumer may not gain
as large a reduction in the monthly payment as if
the consumer used that money to pay discount
points, origination points or origination 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.
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benefit from having a mix of pricing
options available, so that consumers can
select financial products that best fit
their needs. Allowing the statutory ban
to go into effect would prohibit the
payment of points and fees irrespective
of the circumstances of their payment,
which the Bureau believes would
significantly restrict consumers’ choices
in mortgage products and, in aggregate,
acts to the detriment of consumers and
the public interest. While the Bureau
believes that additional study may show
that additional restrictions on upfront
points and fees are needed beyond the
restrictions that are contained in the
Title XIV Rulemakings, the Bureau
believes that it would be imprudent at
this time to restrict consumers’ choices
of mortgage products to only one type—
those without upfront points and fees—
especially because this limitation may
impair consumers’ access to credit, as
discussed above. Thus, the Bureau has
determined that it is in the interest of
consumers and the public interest to
provide a complete exemption at this
time, to avoid the detrimental effects of
the statutory ban on consumers.
As part of the Bureau’s ongoing
monitoring of the mortgage market and
for the purposes of the Dodd-Frank Act
section 1022(d) five-year review, the
Bureau will assess how the complete
exemption of the prohibition on points
and fees is affecting consumers, and the
impact of the other Title XIV
Rulemakings and the final rule to be
adopted under the 2102 TILA–RESPA
Proposal on consumers’ understanding
of points and fees. If the Bureau were to
determine over this time that
eliminating or narrowing the exemption
is in the interest of consumers and in
the public interest, the Bureau would
issue a new proposal for public notice
and comment. The Bureau notes,
however, that although it is providing a
complete exemption to the statutory ban
on upfront points and fees in TILA
section 129B(c)(2)(B)(ii) at this time, the
Bureau will continue to ensure that
creditors are complying with all existing
restrictions on upfront points and fees.
In the event that problems develop in
the marketplace, the Bureau may use its
enforcement authority, such as authority
to prevent unfair, deceptive, or abusive
acts or practices (UDAAP) under section
1031 of the Dodd-Frank Act, as well as
considering further action under section
1031 or other authority.
Zero-zero alternative. The Bureau also
does not believe it is prudent at this
time to adopt the proposal regarding the
zero-zero alternative. As discussed
above, the Bureau proposed to structure
the use of its exemption authority to
enable consumers to receive the benefits
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of obtaining loans that do not include
discount points, origination points or
origination fees, but also to preserve
consumers’ ability to choose a loan with
such points and fees. Based on
comments received on the zero-zero
alternative and its own further analysis,
the Bureau has concerns whether the
zero-zero alternative as proposed would
accomplish what the Bureau believes to
be the objectives of the statute, which is
to facilitate consumer shopping and
enhance consumer decision-making.
The Bureau is concerned that some
consumers might find the zero-zero
alternative confusing, and it believes
that testing would be needed to
determine whether a variant of the zerozero alternative can be fashioned to
provide information and protections to
consumers that outweigh possible
disadvantages. Several commenters
raised concerns that when consumers
are given information about the zerozero alternative, they might be confused
about why they are receiving such
information and might believe that a
zero-zero alternative was always the
best option for them even when it is not.
For example, one consumer group
commenter stated that while the zerozero alternative offered by a particular
creditor may be less complicated than
other options that creditor offers, it may
not be the best deal for the consumer.
The Bureau also solicited comment on
adopting rules that would require
creditors to advertise the zero-zero
alternative when advertising loans with
upfront points and fees. Through the
proposal, the Bureau had intended to
facilitate consumer shopping by
enhancing the ability of consumers to
make comparisons using loans that do
not include discount point, origination
points or origination fees made available
by different creditors as a basis for
comparison. As discussed above, for
transactions that do not involve a loan
originator organization, under the
proposal a creditor would be deemed to
be making the zero-zero alternative
available if, in providing a consumer
with an interest rate quote specific to
the consumer for a loan which included
points or fees, the creditor also provided
a quote for a comparable, alternative
loan that did not include points and fees
(unless the consumer is unlikely to
qualify for the loan). In putting this
proposal forward, the Bureau
recognized that by the time a consumer
receives a quote from a particular
creditor for an interest rate specific to
that consumer the consumer may have
already completed his or her shopping
in comparing rates from different
creditors. Thus, the Bureau suggested,
without a specific proposal, that
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revising the advertising rules in
§ 1026.24(d) might be a critical building
block to enable consumers to make
comparisons using loans that does not
include discount points, origination
points or origination fees made available
by different creditors as a basis for
comparison.
Some industry commenters argued
that requiring information about the
zero-zero alternative in advertisements
would present the serious risk of
providing too much information for
consumers to digest and may only
confuse consumers. Some industry
commenters also indicated that
including information about the zerozero alternative in advertisements might
not in fact enable consumers properly to
determine the lowest cost loan,
especially if affiliates’ fees were treated
as upfront points and fees, but nonaffiliate, third-party fees were not. To
address this further issue and facilitate
shopping on zero-zero alternatives made
available by multiple creditors, the
proposal also had solicited comment on
which fees to include in the definition
of upfront points and fees, including
whether to include fees irrespective of
affiliate status or fees based on the type
of service provided. Comments on the
proposal, however, did not point to a
clear way to resolve these interlinked
issues. Moreover, the Bureau has not
conducted consumer testing on how
advertising rules could be structured
and the definition of points and fees
adjusted to facilitate shopping and
reduce consumer confusion or whether
requiring a zero-zero price quote
without modifying the advertising rules
would facilitate consumer shopping.
Finally, based on comments received,
the Bureau has concerns whether a zerozero alternative can be crafted that is not
easily evaded by creditors. In
developing its proposal, the Bureau
recognized that because a loan with no
upfront points and fees will carry a
higher interest rate, not every consumer
can qualify for both a loan with upfront
costs and a loan with none. Under the
Bureau’s proposal, therefore, the
creditor was not required to make
available the zero-zero alternative to
consumers that were unlikely to qualify
for it. In including this provision, the
Bureau was concerned that creditors
that do not wish to make available loans
without upfront points and fees to
certain consumers could possibly
manipulate their underwriting
standards so that those consumers
would not qualify for such loans or
could set the interest rates on their
purported alternatives without upfront
points and fees high enough for certain
consumers that those consumers could
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not satisfy the creditor’s underwriting
standards. Thus, the Bureau solicited
comment on another alternative,
whereby a creditor would be permitted
to make available a loan that includes
discount points, origination points or
origination fees only when the
consumer also qualifies for the zero-zero
alternative. The Bureau was concerned,
however, that adoption of such an
alternative could impair access to credit
to the extent there were consumers who
could only qualify for a loan with
upfront points or fees. The Bureau
solicited comment on this issue.
Industry commenters indicated that
the alternative approach would limit
access to credit to some consumers,
similar to the types of risks to
consumers’ access to credit that would
result if the statutory provision was
implemented unaltered, as discussed
above. In addition, several consumer
group commenters argued that the
‘‘unlikely to qualify’’ standard would be
difficult to enforce and very easy to
manipulate. These commenters
expressed concern that creditors may be
dishonest about how they decide who is
unlikely to qualify for the zero-zero
alternative, may manipulate
underwriting standards, or may set
interest rates high for certain consumers
to avoid being required to offer the zerozero alternative, which they
additionally argued could pose risks for
violations of fair lending laws. The
Bureau is concerned that the zero-zero
alternative as proposed may not provide
the intended benefits if the requirement
can be easily evaded by creditors.
The Bureau has gained substantial
knowledge from these discussions about
the zero-zero alternative and believes
that there is some potential in the future
to adopt some variant of the zero-zero
alternative that sufficiently mitigates the
concerns discussed above and that
strikes the appropriate balance between
these competing considerations. The
Bureau believes, however, that
finalizing now any particular variant of
the zero-zero alternative absent further
study on a variety of unsettled issues
and further notice and comment on a
refined proposal would risk harm to
consumer interests and the public
interest in a period of market fragility
and concurrent fundamental changes in
the regulatory framework.
There remain unresolved many
crucial issues relating to the design,
operation, and likely effects of adopting
the zero-zero alternative, including
whether disclosing the zero-zero
alternative to consumers either pre- or
post-application or both is in fact
beneficial to consumers in shopping for
a mortgage and consumer understanding
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of trade-offs; how best to structure
advertising rules, post-application
disclosures, and the bona fide
requirement if they are determined to be
valuable to consumers; and the
assessment of the effects on consumer
and market behaviors of the other Title
XIV Rulemakings and the final rule to
be adopted under the 2102 TILA–
RESPA Proposal. The Bureau, while
mindful of its goal to help consumers
make better informed decisions, is not
currently able to judge whether and how
to structure the zero-zero alternative or
whether a different approach to the
regulation of upfront points or fees
would be more effective to advance
Congress’s purposes in enacting the
points and fees provision.
Additional study needed. The Bureau
considers the issues presented in this
rulemaking related to the payment of
points and fees to be a crucial
unresolved piece of its Title XIV
Rulemaking efforts to reform the
mortgage market after the consumer
abuses that contributed to the mortgage
crisis and its negative impact on the
U.S. economy. The Bureau is committed
to determining what additional steps, if
any, are warranted to advance the
interests of consumers and the public.
The mortgage market has undergone
significant shifts in the past few years,
and the Bureau believes it will continue
to do so as the Title XIV protections are
implemented and the new disclosureregime in the 2012 TILA–RESPA
Proposal is finalized and implemented.
For example, the Board’s 2010 Loan
Originator Final Rule reshaped how
loan originators may be compensated,
and this rulemaking, while continuing
the basic approach of that earlier
rulemaking, makes significant
adjustments to remove loan originators’
incentives to steer consumers to
particular loans to their detriment. In
addition, as noted above, the 2013 ATR
Final Rule imposes limits on the points
and fees for a qualified mortgage, the
2013 HOEPA Final Rule lowers the
points and fees threshold for high-cost
loans, and both rules include loan
originator compensation in the
calculation of points and fees.
Moreover, the Bureau also is in the
process of finalizing its 2012 TILA–
RESPA Proposal to revise loan
disclosures for closed-end mortgages,
including the Loan Estimate, which
would be given within three days after
application and is designed to enhance
consumers’ understanding of points and
fees charged on the loan and to facilitate
consumer shopping. The Bureau also is
in the process of receiving comments on
its 2013 ATR Concurrent Proposal
which will address the issue of how
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loan originator compensation should be
factored in to the calculation of points
and fees which determines whether a
loan can be a qualified mortgage or
whether a loan is covered by HOEPA.
Without experience under the new
regulatory regime and without
consumer testing and market research,
the Bureau is uncertain whether
finalizing a version of the zero-zero
alternative or some other alternative
would benefit consumers. Once the new
rules take effect, the Bureau intends to
direct its testing and research to identify
the impact of the rules on the
prevalence and size of upfront points
and fees, consumers’ understanding of
those charges and the alternatives to
them, and the choices consumers make,
including whether consumers
understand and make informed choices
based on the trade-off between the
payment of upfront points and fees and
the interest rate. Based on the results of
that research and analysis, the Bureau
will consider whether some additional
actions, such as proposing a different
version of the zero-zero alternative, are
appropriate to enhance consumer
decision making and consumer choice
and, if so, how to best effectuate those
goals.
The Bureau is required by section
1022(d) of the Dodd-Frank Act to
conduct an assessment of the
effectiveness of each significant rule the
Board issues and to publish a report of
that assessment within five years of the
effective date of each such rule. To
prepare for such an assessment, the
Bureau intends to conduct baseline
research to understand consumers’
current understanding and decision
making with respect to the tradeoffs
between upfront charges and interest
rates. The Bureau will undertake further
research once this rule, and the related
rules discussed above, take effect.
Through this research, the Bureau will
assess how the complete exemption of
the prohibition on points and fees is
affecting consumers and how best to
further consumer protection in this area.
36(e) Prohibition on Steering
36(e)(3) Loan Options Presented
Existing § 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
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11373
loan originators may use to comply with
the prohibition set forth in
§ 1026.36(e)(1). Specifically,
§ 1026.36(e)(2) provides that a
transaction does not violate
§ 1026.36(e)(1) if the consumer is
presented with loan options that meet
certain conditions set forth in
§ 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 § 1026.36(e)(3), to
qualify for the safe harbor in
§ 1026.36(e)(2), a 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) the 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. Under
§ 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.
Discount Points, Origination Points and
Origination Fees
As discussed above, to qualify for the
safe harbor in § 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 loan
originator has a good faith belief that the
consumer likely qualifies. See
§ 1026.36(e)(3)(i)(C) and (e)(3)(ii). For
consistency, the Bureau proposed to
revise § 1026.36(e)(3)(i)(C) to use the
terminology ‘‘discount points and
origination points or fees,’’ a defined
term in proposed § 1026.36(d)(2)(ii)(B).
In addition, the Bureau proposed to
amend § 1026.36(e)(3)(i)(C) to address
the situation where two or more loans
have the same total dollar amount of
discount points, origination points or
origination fees. This situation would
have been more likely to occur in
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transactions subject to proposed
§ 1026.36(d)(2)(ii). As discussed above,
proposed § 1026.36(d)(2)(ii)(A) would
have required, as a prerequisite to a
creditor, loan originator organization, or
affiliate of either imposing any discount
points, origination points or origination
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,
origination points or origination fees,
unless the consumer is unlikely to
qualify for such a loan. Under the
proposal, for transactions that involve a
loan originator organization, a creditor
would make available to the consumer
a comparable, alternative loan that does
not include discount points, origination
points or origination fees if the creditor
communicates to the loan originator
organization the pricing for all loans
that do not include discount points,
origination points or origination fees,
unless the consumer is unlikely to
qualify for such a loan. Thus, under the
proposal, each creditor with whom a
loan originator organization regularly
does business generally would have
been communicating pricing to the loan
originator organization for all loans that
do not include discount points,
origination points or origination fees.
Proposed § 1026.36(e)(3)(i)(C), read in
conjunction with § 1026.36(e)(3)(ii),
provided 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, origination points or origination
fees, the loan originator must present
the loan from among those alternatives
that has the lowest interest rate for
which the loan originator has a good
faith belief that the consumer likely
qualifies.
The Bureau did not receive any
comments on this aspect of the
proposal. This final rule adopts
proposed § 1026.36(e)(3)(i)(C) with one
revision. As discussed above, this final
rule does not adopt the proposed
requirement that, as a prerequisite to a
creditor, loan originator organization, or
affiliate of either imposing any discount
points, origination points or origination
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,
origination points or origination fees,
unless the consumer is unlikely to
qualify for such a loan. In addition, this
final rule does not adopt the definition
of ‘‘discount points and origination
points or fees’’ as proposed in
§ 1026.36(d)(2)(ii)(B). Accordingly,
§ 1026.36(e)(3)(i)(C), as adopted in this
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final rule, does not use the term
‘‘discount points and origination points
or fees’’ as proposed in
§ 1026.36(e)(3)(i)(C). As adopted,
§ 1026.36(e)(3)(i)(C) is revised to use the
phrase ‘‘discount points, origination
points or origination fees’’ to make more
clear which points and fees are included
for purposes of this provision. Even
though the provision in
§ 1026.36(d)(2)(ii) regarding the
comparable, alternative loan is not
adopted in this final rule, the Bureau
believes that the additional clarification
added to § 1026.36(e)(3)(i)(C) is still
useful. The Bureau believes that there
still may be cases where two or more
loans available to be presented to a
consumer by a loan originator for
purposes of the safe harbor in
§ 1026.36(e)(2) have the same total
dollar amount of discount points,
origination points or origination fees. In
these cases, § 1026.36(e)(i)(3)(C) as
adopted in this final rule, and read in
conjunction with § 1026.36(e)(ii), would
provide that the loan originator must
present the loan with the lowest interest
rate that has the lowest total dollar
amount of discount points, origination
points or origination fees for which the
loan originator has a good faith belief
that the consumer likely qualifies.
The Loan With the Lowest Interest Rate
As discussed above, to qualify for the
safe harbor in § 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 loan originator has a good
faith belief that the consumer likely
qualifies. See § 1026.36(e)(3)(i)(A) and
(e)(3)(ii). Mortgage creditors and other
industry representatives have asked for
additional guidance on how to identify
the loan with the lowest interest rate, as
set forth in § 1026.36(e)(3)(i)(A), given
that a consumer generally can obtain a
lower rate by paying discount points. To
provide additional clarification, the
Bureau proposed 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.
The Bureau did not receive any
comments on this aspect of the
proposal. The final rule adopts
comment 36(e)(3)–3 as proposed in
substance, with several revisions to
clarify the intent of the comment.
Comment 36(e)(3)–3 is revised to clarify
that the loan with the lowest interest
rate for which the consumer likely
qualifies is the loan with the lowest rate
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the consumer can likely obtain,
regardless of how many discount points,
origination points or origination fees the
consumer must pay to obtain it. As
adopted in this final rule, comment
36(e)(3)–3 uses the phrase ‘‘discount
points, origination points or origination
fees,’’ consistent with
§ 1026.36(e)(3)(i)(C), as discussed above.
In addition, the first sentence of the
comment is revised to reference the
requirement in § 1026.36(e)(3)(ii) that
the loan originator must have a good
faith belief that the options presented to
the consumer under § 1026.36(e)(3)(i)
are loans for which the consumer likely
qualifies.
36(f) Loan Originator Qualification
Requirements
Section 1402(a)(2) of the Dodd-Frank
Act added TILA section 129B(a) and
(b)(1), 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. It also
added TILA section 129B(b)(2), which,
as amended by section 1100A of the
Dodd-Frank Act, requires the Bureau to
prescribe regulations requiring
depository institutions to establish and
maintain procedures reasonably
designed to assure and monitor the
compliance of such depository
institutions, the subsidiaries of such
institutions, and the employees of such
institutions or subsidiaries with the
requirements of TILA section 129B and
the registration procedures established
under section 1507 of the SAFE Act, 12
U.S.C. 5101, et seq.
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.
TILA section 129B(b)(1)(A) also
authorizes the Bureau’s regulations to
require mortgage originators to be
‘‘qualified.’’ As discussed in the sectionby-section analysis of § 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 of mortgage originator 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,
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and other loan originators are generally
required to obtain a State license and
also comply with registration.
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 and registration requirements
on loan originators who are employees
of a bona fide nonprofit organization. 12
CFR 1008.103(e)(7). The SAFE Act
requires individuals who are subject to
SAFE Act registration or State licensing
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,
section 1505 of the SAFE Act, 12 U.S.C.
5104, requires the State to 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 20 hours of prelicensing 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
loan originators under their SAFE Actcompliant licensing regimes. Separately
from their SAFE Act-compliant
licensing regimes, most States also
require licensing or registration of loan
originator organizations.
Section 1507 of the SAFE Act, 12
U.S.C. 5106, generally requires
individual loan originators who are
employees of depository institutions to
register with the NMLSR by submitting
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
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also provide for the depository
institution to review employee criminal
background reports and to take
appropriate action consistent with
Federal law, including the criminal
background standards for depository
employees in section 19 of the Federal
Deposit Insurance Act (FDIA), 12 U.S.C.
1829, section 206 of the Federal Credit
Union Act, 12 U.S.C. 1786(i), and
section 5.65(d) of the Farm Credit Act of
1971, as amended, 12 U.S.C. 2277a–
14(a). 12 CFR 1007.104(h).
Proposed § 1026.36(f) would have
implemented, 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 § 1026.36(f)
tracked the TILA requirement that
mortgage originators comply with State
and Federal licensing and registration
requirements, including those of the
SAFE Act, where applicable. Proposed
comment 36(f)–1 noted that the
definition of loan originator includes
individuals and organizations and, for
purposes of § 1026.36(f), includes
creditors. Proposed comment 36(f)–2
clarified that § 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
proposed § 1026.36(f) set forth standards
that loan originator organizations would
have to meet to comply with the TILA
requirement that they and their
employees be qualified, as discussed
below.
Proposed § 1026.36(f) also would have
provided that its requirements do not
apply to government agencies and State
housing finance agencies, employees of
which are not required to be licensed or
registered under the SAFE Act. The
Bureau proposed this differentiation
pursuant to TILA section 105(a) to
effectuate the purposes of TILA, which,
as provided in TILA section 129B(a)(2),
include ensuring 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 stated
in the proposal that it does not believe
that it is necessary to apply the
proposed qualification requirements to
employees of government agencies and
State housing finance agencies because
the agencies directly regulate and
control the manner of their employees’
loan origination activities, thereby
providing consumers adequate
protection from these types of harm.
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One nonprofit loan originator
organization that has been designated a
bona fide nonprofit organization by
several States objected to the proposal’s
lack of an exemption for nonprofit loan
originator organizations from the
requirements of proposed § 1026.36(f).
The commenter’s objection was based
on the concern that the effect of
applying the proposed TILA
qualification standards to it and other
nonprofit loan originator organizations
would be to alter and add to the
standards that State regulators must
apply in opting not to require an
employee of a bona fide nonprofit loan
originator organization to be licensed
under the SAFE Act and Regulation H.
In addition, the commenter expressed
concern that the qualification standard
would call into question the
commenter’s individual loan
originators’ exemption from State
licensing requirements in States that
have granted exemptions. The
commenter noted that nonprofit loan
originators and State regulators had
worked together extensively to
implement the processes for nonprofit
organizations to apply for exemption
under, and demonstrate compliance
with, the Regulation H standards for
bona fide nonprofits, as well as
processes for State examination
procedures to ensure that bona fide
nonprofit organizations continue to
meet the standards. The commenter was
concerned that the proposal would
require those processes to be developed
all over again. The commenter suggested
that, to reduce possible uncertainty, the
Bureau should at least revise
§ 1026.36(f) to require that, to be
qualified, a loan originator must be
registered or licensed ‘‘when required
by,’’ rather than ‘‘in accordance with’’
the SAFE Act.
An association of State bank
regulators also urged that bona fide
nonprofit organizations should be fully
exempt from the qualification standards,
just as government agencies and State
housing finance agencies would be
exempted under the proposal. The
commenter recommended that an
organization that has been determined
to meet the Regulation H standards for
bona fide nonprofit organizations has
been determined to have a public or
charitable purpose, to offer loan
products that are favorable to borrowers,
and to meet other standards, such that
the nonprofit should not have to apply
further standards to determine whether
its individual loan originator employees
meet the proposed qualification
standards.
The Bureau does not believe that a
complete exemption of bona fide
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nonprofit organizations from the TILA
qualification standards is warranted, for
the reasons discussed further below.
However, in response to the concerns of
the bona fide nonprofit organization, the
Bureau emphasizes that the TILA
qualification standards do not change
existing law regarding which entities or
individuals must be licensed under
Federal or State law. Accordingly, for
instance, the standards for States to
determine whether a particular
organization is a bona fide nonprofit
and whether to require such a
nonprofit’s employees to be licensed
under the SAFE Act and Regulation H
are not affected by the final rule. As
proposed comment 36(f)–2 stated
§ 1026.36(f) does not affect the scope of
individuals and organizations that are
subject to State and Federal licensing
and registration requirements. To
emphasize and explain further how this
principle applies in the context of bona
fide nonprofit organizations, the final
rule removes the statement from
comment 36(f)–2 and adds it to a new
comment 36(f)–3. Comment 36(f)–3 goes
on to explain that, if an individual is an
employee of an organization that a State
has determined to be a bona fide
nonprofit organization and the State has
not subjected the employee to that
State’s SAFE Act loan originator
licensing, the State may continue not to
subject the employee to that State’s
SAFE Act licensing even if the
individual meets the definition of loan
originator in § 1026.36(a)(1) and is
therefore subject to the requirements of
§ 1026.36. It states that the qualification
requirements imposed under
§ 1026.36(f) do not add to or affect the
criteria that States must consider in
determining whether an organization is
a bona fide nonprofit organization under
the SAFE Act.
The Bureau is also adopting, in part,
the commenter’s suggestion to revise the
regulatory text to provide that a loan
originator must be registered or licensed
‘‘when required by’’ State or Federal
law, including the SAFE Act, to
eliminate any further uncertainty.
However, the final rule, like the
proposal, specifies that, where State or
Federal law requires the loan originator
to be registered or licensed, the
registration or licensing must be ‘‘in
accordance with’’ those laws.
As discussed below, the TILA
qualification standards primarily
require the loan originator organization
to screen its individual loan originators
for compliance with criminal, financial
responsibility, character, and general
fitness standards and to provide
periodic training to its individual loan
originators commensurate with their
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loan origination activities. For these
reasons, the Bureau disagrees with the
comment of the association of State
banking regulators that the TILA
qualification standards are unnecessary
for bona fide nonprofit organizations.
The standards that a State must apply in
determining whether an organization is
a bona fide nonprofit organization all
pertain to the mission and activities of
the organization, but they do not
address the background or knowledge of
the organization’s individual loan
originators. The Bureau believes that the
standards will be minimally
burdensome for bona fide nonprofit
organizations to implement and that
consumers who obtain residential
mortgage loans from them will benefit
from increased screening and training of
individual loan originators.
36(f)(1)
Proposed § 1026.36(f)(1) would have
required 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 a State. Proposed comment
36(f)(1)–1 stated, by way of example,
that the provision encompassed
requirements for incorporation or other
type of formation and for maintaining
an agent for service of process. The
Bureau explained that the 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.
One commenter asked the Bureau to
confirm that the provision does not
imply that State law requirements for
formation and legal existence apply to
Federally chartered lending institutions.
The Bureau is adopting § 1026.36(f)(1)
and comment 36(f)(1)–1 as proposed.
The final rule does not affect the extent
to which Federally chartered lending
institutions must comply with State law
but rather, like the proposal, includes
the qualifier ‘‘applicable’’ to
acknowledge there are situations where
certain State law requirements may not
apply.
36(f)(2)
Proposed § 1026.36(f)(2) would have
required 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 noted that the loan originator
organization can comply with the
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requirement by verifying information
that is available on the NMLSR
consumer access Web site.
One nondepository institution
commenter objected to the proposed
requirement that it ensure that its
individual loan originators are licensed
in compliance with the SAFE Act and
applicable State licensing laws. The
commenter noted that having to
determine that its employee loan
originators are properly licensed would
be burdensome because licensing
requirements vary by State.
The Bureau disagrees. First, the
Bureau notes that employers are
generally already responsible under
State law for ensuring their employees
comply with all State licensing
requirements that apply to activities
within the scope of their employment.
The proposed provision imposes the
same duty under TILA and simply
renders it somewhat more universal. In
any case, imposing this duty on loan
originator organizations will benefit
consumers by giving them recourse if an
individual who has failed to obtain a
loan originator license nonetheless acts
as a loan originator for the benefit of the
loan originator organization and causes
harm to a consumer in originating the
loan. The Bureau believes that it is not
an unreasonable burden for a loan
originator organization to ensure that
the individual loan originators through
which it conducts its business are not
acting in violation of the law. As
proposed, comment 36(f)(2)–1 stated
that a loan originator organization can
confirm the licensing or registration
status of individual loan originators on
the NMLSR consumer access Web site.
The Bureau therefore is adopting
§ 1026.36(f)(2) as proposed, except that
it is clarifying that a loan originator
organization must ensure its individual
loan originator are in compliance with
SAFE Act licensing and registration
requirements before the individuals act
as a loan originator in a consumer credit
transaction secured by a dwelling. It
also clarifies that the individual loan
originators whose licensing or
registration status the loan originator
organization must verify are those
individual loan originators who work
for the loan originator organization.
Comment 36(f)(2)–1 clarifies that
individual loan originators who work
for the loan originator organization
include employees or independent
contractors who operate under a
brokerage agreement with the loan
originator organization. The Bureau
notes that the requirement to ensure that
each individual loan originator who
works for the loan origination
organization is licensed or registered to
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the extent applicable applies regardless
of the date the loan originator began
working directly for the loan originator
organization.
36(f)(3)
Proposed § 1026.36(f)(3) set forth
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 under Regulation G and
organizations that a State has
determined to be bona fide nonprofit
organizations, in accordance with
criteria in Regulation H, 12 CFR
1008.103(e)(7).
The proposed requirements in
§ 1026.36(f)(3)(ii) applied to unlicensed
individual loan originators two of the
core standards from SAFE Act State
licensing requirements: the criminal
background standards and the financial
responsibility, character, and general
fitness standards. Proposed
§ 1026.36(f)(3)(iii) would also have
required 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.
As explained in the proposal, the
Bureau believes its approach is
consistent with both the SAFE Act’s
application of the less stringent
registration standards to employees of
depository institutions and Regulation
H’s provision for States to exempt
employees of bona fide nonprofit
organizations from State licensing (and
registration). The Bureau believes that
the decision in both cases not to apply
the full SAFE Act licensing, training,
and screening requirements was based
in part on an assumption that these
institutions already carry out basic
screening and training of their employee
loan originators to comply with
prudential regulatory requirements or to
ensure a minimum level of protection of
and service to consumers (consistent
with the charitable or similar purposes
of nonprofit organizations). The Bureau
explained that the proposed
requirements in § 1026.36(f)(3) would
help ensure that this assumption is in
fact accurate and that all individual loan
originators meet core standards of
integrity and competence, regardless of
the type of loan originator organization
for which they work, without imposing
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undue or duplicative obligations on
depository institutions and bona fide
nonprofit employers.
The Bureau did not propose to apply
to employees of depository institutions
and bona fide nonprofit organizations
the more stringent requirements that
apply to individuals seeking a SAFE
Act-compliant State license: to pass a
standardized test and to be covered by
a surety bond. The Bureau explained
that it had not found evidence that
consumers who obtain mortgage loans
from depository institutions and bona
fide nonprofit organizations face risks
that are not adequately addressed
through existing safeguards and
proposed safeguards in the proposal.
However, the Bureau stated that it will
continue to monitor the market to
consider whether additional measures
are warranted.
Several bank and credit union
commenters objected to the Bureau
imposing any qualification standards on
their individual loan originators,
arguing that doing so is inconsistent
with the SAFE Act’s statutory
exemption of employees of depository
institutions from licensing
requirements. One commenter stated
that a better way to increase standards
for loan originators would be for
Congress to amend the SAFE Act rather
than through a regulation. Several bank
commenters objected to qualification
standards, which they perceived as
requiring their individual loan
originator employees to meet all of the
standards of loan originators who are
subject to State licensing. One
commenter stated it is inappropriate to
impose any standards that apply under
State licensing to depository institution
employees because those standards
were intended for nondepository
creditors and brokers, which the
commenter stated use questionable
business practices. Several credit union
and bank trade associations stated that
compliance with SAFE Act registration
should constitute ‘‘equivalent
compliance’’ with the Dodd-Frank Act
requirement for loan originators to be
qualified. One commenter stated that
the qualification standards should apply
only to nondepository institutions that
fail to comply with the SAFE Act.
Many bank and credit union
commenters stated that the proposed
qualification standards were both
duplicative of practices that they
already routinely undertake and would
also be burdensome for them to
implement because of the cost of
ensuring compliance and demonstrating
compliance to examiners. Some bank
commenters stated that the Bureau had
cited no evidence that their individual
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loan originators were not qualified or
that the proposed standards would
benefit consumers. Other commenters
encouraged the Bureau to study the
issue further. One bank stated that it
would be unfair to impose TILA liability
on depository institutions for failing to
ensure their employees meet the
qualification standards, but not on
nondepository institutions. The
commenter stated that, if SAFE Act
licensing standards are burdensome for
nondepository institutions, then the
solution is for Congress to repeal them.
One State association of banks stated
that its member banks do not object to
this part of the proposal because they
already comply with the proposed
screening and training standards.
Several commenters supported the
proposal as a step toward more equal
treatment of depository institutions and
nondepository institutions through the
establishment of basic loan originator
qualification standards and also
recognized that depository institutions
already provide training to their loan
originator employees. A State
association of mortgage bankers
supported the proposal because it
would prevent unsuitable and
unscrupulous individuals from seeking
employment at institutions with lower
standards.
Numerous nondepository institution
commenters supported the qualification
standards in the proposal but were
critical of the proposal for not imposing
more rigorous requirements on
depository institutions. One commenter
stated that the Bureau had committed to
fully ‘‘leveling the playing field’’
between depository and nondepository
institutions but had failed to do so in
the proposal. Commenters stated that,
when they have hired former depository
institution employees as loan
originators, they have found them to be
highly unprepared. Several commenters
objected that the proposal did not
include a requirement for loan
originators employed by depository
institutions to take the standardized test
that applicants for State loan originator
licenses must take. One commenter
stated that depository institution loan
originators are not capable of passing
the standardized test, and that those
who do take and fail the test simply
continue to serve consumers poorly at a
bank. Others objected that the proposal
did not require depository institutions’
individual loan originator employees to
take the minimum number of hours of
NMLSR-approved classes that State
license applicants and licensees must
take. One commenter who reported
working at both depository and
nondepository institutions stated that
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the training at depository institutions is
inferior.
Still other commenters objected that
the proposal permitted depository
institutions to self-police (i.e., to
determine whether their own individual
loan originator employees meet the
proposed standards); some commenters
stated that the rule should impose State
licensing on all loan originators to
require State regulators to make these
determinations. Several commenters
stated that any disparity between the
standards that apply to depository and
nondepository loan originators creates
an unfair competitive advantage for
depository institutions. One association
of mortgage brokers stated that
consumers assume that banks provide
screening and training to their loan
originators but that the assumption is
incorrect.
The Bureau disagrees with the
assertion that the promulgation of
qualification standards is inconsistent
with Congressional intent. In enacting
the SAFE Act, Congress imposed
licensing (and registration) requirements
on individual loan originators who are
not employees of depository institutions
and imposed less stringent registration
requirements for individual loan
originators who are employees of
depository institutions. In enacting the
Dodd-Frank Act, Congress then
mandated all loan originators ‘‘when
required’’ comply with the licensing
and registration requirements of other
applicable State or Federal law,
including the SAFE Act, and also
imposed an additional requirement that
they be ‘‘qualified.’’ Congress left
significant discretion to the Bureau to
determine what additional standards a
loan originator must meet to
demonstrate compliance with the new
‘‘qualified’’ requirement, but the Bureau
believes that Congress would not have
imposed the requirement in the first
place if it had not intended to create a
meaningful protection for consumers.
The Bureau also does not assume that
Congress intended to disturb the basic
framework of the SAFE Act with regard
to licensing and registration, given that
it limited the duty to be licensed only
to situations ‘‘when required’’ by other
law. The Bureau declines to read the
latter provision out of the Dodd-Frank
Act or to perpetuate uncertainty by
leaving the statutory requirement
undefined.
As it explained in the proposal, the
Bureau sought to define certain
minimum qualification standards for all
loan originators to allow consumers to
be confident that all loan originators
meet core standards of integrity and
competence, regardless of the type of
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institution for which they work. The
standards also serve to ensure that
depository institutions in fact carry out
basic screening and provide basic
training to their employee loan
originators because the assumption that
they do so was, in the Bureau’s view, a
critical component of Congress’s
decision to exempt them from State
licensing requirements of the SAFE Act.
Moreover, the standards implement
Congress’s determination reflected in
the Dodd-Frank Act that all loan
originators, including depository loan
originators who are exempt from SAFE
Act licensing, must be qualified. In this
sense, one purpose of the proposal was
to help equalize the treatment of and
compliance burdens on depository and
nondepository institutions.
The Bureau emphasizes, however,
that the provisions of the final rule are
not intended to achieve a perfectly level
playing field, such as by imposing
requirements on depository institutions
for the sake of mechanically equalizing
certain burdens and costs faced by
depository and nondepository
institutions. Nor do the provisions
impose on depository institution
individual loan originators all of the
requirements of full licensing, as some
nonbank commenters suggested.
Instead, the provisions are intended to
ensure that consumers receive certain
basic benefits and protections,
regardless of the type of institution with
which they transact business. For this
reason, the Bureau declines to adopt the
bank commenter’s suggestion that
compliance with the SAFE Act be
deemed to be adequate to comply with
the separate requirement for loan
originators to be qualified. Similarly, the
Bureau is declining to apply the
qualification standards only to
nondepository institutions whose
individual loan originators act in
violation of the SAFE Act and State
licensing laws, as suggested by one
commenter.
In proposing to define the minimum
qualification standards, the Bureau
carefully evaluated the benefits of these
requirements as well as the burdens to
loan originators. The Bureau continues
to believe that the proposed standards,
as further clarified below, will not
impose significant burdens on loan
originator organizations and will
provide important consumer
protections. As many bank and credit
union commenters stated, most
depository institutions already comply
with the criminal background and
screening provisions and provide
training to their loan originators as a
matter of sound business practice and to
comply with the requirements and
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guidance of prudential regulators. The
qualification standards build on these
requirements and provide greater parity
and clarity for criminal background and
character standards across types of
institution. The Bureau recognizes that
the consequences for an individual who
is determined not to meet the standards
is significant, but it does not believe that
many individual loan originators will be
affected. The Bureau’s view is that there
is no reason why a consumer should
expect that a loan originator who fails
to meet the criminal background and
character standards for loan originators
at one class of institution should be able
to act as a loan originator for that
consumer at another class of institution.
The Bureau disagrees with some
commenters’ assertions that the
provisions would result in significantly
higher compliance burden compared
with existing requirements. For
example, as further discussed below, a
depository institution will not be
required to obtain multiple criminal
background reports or undertake
multiple reviews of a criminal
background report. Instead, the required
criminal background report is the same
report the institution already obtains
under Regulation G after submission of
the individual’s fingerprints to the
NMLSR (12 CFR 1007.103(d)(1)(ix) and
1007.104(h)). In reviewing the criminal
background report, the institution will
be required to apply somewhat broader
criteria for disqualifying crimes.
Similarly, the training provisions
comport with consumers’ legitimate
expectations that a loan originator
should be knowledgeable of the legal
protections and requirements that apply
to the types of loans that the individual
originates. As further discussed below,
the provisions seek to ensure this
outcome while avoiding imposition of
training requirements that needlessly
duplicate training that loan originators
already receive.
The Bureau also disagrees with one
commenter’s assertion that the
provisions unfairly impose TILA
liability for compliance with the
qualifications requirements on
depository institutions, but not on
nondepository institutions. As
discussed above, § 1026.36(f)(2) imposes
a TILA obligation on all loan originator
organizations—mortgage brokers and
both nondepository and depository
institution mortgage creditors—to
ensure that their individual loan
originators are licensed or registered to
the extent required under the SAFE Act,
its implementing regulations, and State
SAFE Act implementing laws.
The Bureau is not adopting a
requirement, advocated by several
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commenters, that all loan originators
take and pass the NMLSR-approved
standardized test that currently applies
only to applicants for State loan
originator licenses. The Bureau
recognizes that independent testing of
loan originators’ knowledge provides a
valuable consumer protection and that
individual loan originators at depository
institutions are not currently required to
take and pass the test. Imposing such a
requirement for all individual loan
originators, however, would carry with
it significant costs and burdens for
depository institutions. In addition, the
Bureau does not at this time have
evidence to show that combining
existing bank practices with the new
training requirements contained in this
final rule will be inadequate to ensure
that the knowledge of depository loan
originators is comparable to that of loan
originators who pass the standardized
test. In light of the short rulemaking
timeline imposed by the Dodd-Frank
Act, and cognizant of the potential
burdens on the NMLSR and its
approved testing locations that could
result from expansion of the test
requirement to bank and credit union
employees, the Bureau believes it is
prudent to continue studying the issue
to determine if further qualification
requirements are warranted.
The Bureau is not adopting the
suggestion of some commenters to
impose State licensing requirements on
all loan originators. The commenters
suggested that such a measure was
needed because it is not appropriate for
depository institutions to ‘‘self-police’’
by making the required determinations
about their own loan originator
employees. The Bureau believes
requiring registration and licensing only
‘‘when required’’ already under other
State or Federal law, including the
SAFE Act, is more faithful to the
statutory directive in section
129B(b)(1)(A) of TILA. That statutory
language in that section makes clear that
Congress intended to require
compliance with existing State and
Federal licensing requirements but did
not intend to create new licensing
requirements.
36(f)(3)(i)
Proposed § 1026.36(f)(3)(i) provided
that the loan originator organization
must obtain for each individual loan
originator who is not required to be
licensed and is not licensed as a loan
originator 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
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Fair Credit Reporting Act (FCRA), 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
clarified that loan originator
organizations that do not have access to
this information in the NMLSR
(generally, bona fide nonprofit
organizations) could satisfy the
requirement for a criminal background
check by obtaining a criminal
background check from a law
enforcement agency or commercial
service. It also clarified that 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 directly to the loan
originator organization. The Bureau
noted 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 invited
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.
One commenter stated that
performing a criminal background check
is no longer necessary for loan
originators because they can no longer
be compensated based on the terms of
a residential mortgage loan.
A bank commenter requested that the
Bureau clarify the proposed regulatory
text requiring a ‘‘State and national
criminal background check’’ because it
could be read to require a separate State
criminal background check for each
State in which the loan originator
operates. The commenter asked for
clarification that the FBI criminal
background check obtained from the
NMLSR is sufficient.
A bank commented that it was not
clear what protection was achieved by
requiring a depository institution to
review the credit report of a prospective
individual loan originator. The
commenter speculated that the only
reason the SAFE Act requires review of
credit reports of prospective individual
loan originator licensees may be that
mortgage brokers, unlike banks, are
often thinly capitalized, such that the
financial circumstances of the
individual applicant are relevant. The
commenter urged that, in a depository
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11379
institution, the financial circumstances
of a loan originator are not relevant to
consumer protection.
An association of banks stated that the
consumer benefit of requiring review of
credit reports of prospective loan
originators is outweighed by the
expense and burden to the bank. A
credit union stated that credit history
rarely correlates with operating unfairly
or dishonestly and therefore there is no
benefit to reviewing it. An association of
credit unions stated that all credit
unions already use credit reports to
evaluate prospective employees.
Finally, commenters requested
clarification on how to reconcile the
requirement to review credit reports
with FCRA provisions and Equal
Employment Opportunity Commission
(EEOC) guidance on employer credit
checks. They also requested clarification
of language that could have been read to
suggest that credit reports should be
obtained from the NMLSR.
The Bureau disagrees with the
comment that screening for criminal
background is no longer warranted for
loan originators merely because loan
originator compensation cannot vary
based on loan terms. Steering a
consumer to a particular loan based on
the compensation the loan originator
expects to receive is not the only way
in which a loan originator could cause
harm to a consumer. The Bureau’s view
is that consumers should not have their
financial well-being subject to the
influence of a loan originator with a
recent history of felony convictions.
The Bureau is adopting
§ 1026.36(f)(3)(i)(A) as proposed but
with the bank commenter’s suggested
clarification to prevent any
misunderstanding that multiple State
criminal background checks are
required for an individual. The Bureau
is revising the regulatory text to refer
simply to ‘‘a criminal background check
from the NMLSR’’ (or in the case of a
loan originator organization without
access to the NMLSR, ‘‘a criminal
background check’’) and adding an
express statement to comment
36(f)(3)(i)–1 that a loan originator
organization with access to the NMLSR
satisfies the requirement by reviewing
the standard criminal background check
that the loan originator receives upon
submission of the individual loan
originator’s fingerprints to the NMLSR.
The Bureau is also making minor
organizational revisions to the comment
to prevent any implication that the
credit report must be obtained from the
NMLSR.
The Bureau disagrees with the
commenter’s statement that the only
reason the SAFE Act requires review of
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a credit report of an applicant for a State
license is the thin capitalization of
mortgage brokers and that, therefore,
there is no consumer protection
achieved by requiring a loan originator
organization to review the credit report
of an individual employed by a
depository institution. Instead, the
Bureau believes the credit report is
useful for determining whether an
individual meets the criteria for
financial responsibility, which is a
requirement under the SAFE Act and, as
further discussed below, this final rule.
The Bureau believes the cost of
obtaining a credit report is modest and,
as a number of commenters stated,
many credit unions and depository
institutions already obtain credit reports
as part of established hiring and
screening procedures.
Finally, the Bureau agrees that the
credit report must be obtained in
compliance with provisions of the
FCRA on employer credit checks. The
Bureau is not aware of any conflict
between its rule and EEOC guidance on
obtaining credit reports for employment
screening.154 Accordingly, it is adopting
§ 1026.36(f)(3)(i)(B) as proposed,
requiring that the credit report be
obtained in compliance with section
604(b) of the FCRA.
The Bureau is providing in
§ 1026.36(f)(3)(i) and in comments
36(f)(3)(i)–1 and 36(f)(3)(i)–2 that the
requirement to obtain the specified
information only applies to an
individual whom the loan originator
organization hired on or after January
10, 2014 (or whom the loan originator
organization hired before this date but
for whom there were no applicable
statutory or regulatory background
standards in effect at the time of hire or
before January 10, 2014, used to screen
the individual). Since these provisions
track similar provisions in
§ 1026.36(f)(3)(ii) and related comments,
they are discussed in more detail in the
section-by-section analysis of those
provisions.
36(f)(3)(ii)
Proposed § 1026.36(f)(3)(ii) specified
the standards that a loan originator
organization must apply in reviewing
the information it is required to obtain.
The standards were 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 clarified that the scope of
the required review includes the
154 See, e.g., EEOC, informal discussion letter,
http://www.eeoc.gov/eeoc/foia/letters/2010/titleviiemployer-creditck.html.
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information required to be obtained
under § 1026.36(f)(3)(i) as well as
information the loan originator
organization has obtained or would
obtain as part of its reasonably prudent
hiring practices, including information
from application forms, candidate
interviews, and reference checks.
36(f)(3)(ii)(A)
Under proposed § 1026.36(f)(3)(ii)(A),
a loan originator organization would be
required to 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
stated that it does not believe that
depository institutions or bona fide
nonprofit organizations currently
employ many individual loan
originators who would be disqualified
by the proposed provision, but that 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
was 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 recognized 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 invited public
comment on what, if any, further
clarifications the Bureau should provide
for this provision.
One commenter observed that
criminal background checks, credit
reports, and the NMLSR information on
disciplinary and enforcement actions
could contain errors. Another
commenter stated that an individual
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must be allowed to correct any incorrect
information in the report. Several
commenters asked for clarification
about what information a loan originator
organization must or may consider in
making the determination and
specifically asked the Bureau to clarify
that it should be able to rely on
information and explanations provided
by the individual.
Several bank commenters stated that
they already perform criminal
background checks pursuant to the
FDIA and that the proposed standard
would be duplicative and unnecessary.
Commenters stated that the provision
would be especially burdensome if they
were required to apply it to current
employees who have already been
screened for compliance with the FDIA.
One commenter objected to the
provision disqualifying individuals for
seven years following the date of
conviction for felonies not involving
fraud, dishonesty, breach of trust, or
money laundering. The commenter
stated that the provision was too strict
and that the standard should consider
all the relevant factors, including
whether these types of crimes are
relevant to a loan originator’s job. Other
commenters stated that criminal
background standards have a disparate
impact on minorities and that EEOC
enforcement guidelines state that
standards for felonies should only
exclude individuals convicted of crimes
that relate to their jobs. One commenter
requested clarification on how pardoned
and expunged convictions would be
treated. Depository institutions noted
that the look-back periods under the
FDIA and Federal Credit Union Act for
certain enumerated crimes are ten years.
The Bureau agrees with the
commenter’s observation that criminal
background checks, as well as credit
reports and NMLSR information on
enforcement actions, could contain
errors. For this reason, the loan
originator organization can and should
permit an individual to provide
additional evidence to demonstrate that
the individual meets the standard,
consistent with the requirement in
§ 1026.36(f)(3)(ii) that the loan
originator organization consider any
‘‘other information reasonably
available’’ to it. To clarify this, the
Bureau is revising comment 36(f)(3)(ii)–
1 to state expressly that this other
information includes, in addition to
information from candidate interviews,
‘‘other reliable information and
evidence provided by a candidate.’’
The Bureau disagrees that the
requirement to review a criminal
background check to determine
compliance with the SAFE Act criminal
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background standard is duplicative of
existing requirements of prudential
regulators or of Regulation G. As
discussed above, the provision does not
require a depository institution to obtain
multiple criminal background checks or
to conduct multiple reviews. A
depository institution could meet the
requirement in this final rule by
obtaining the same criminal background
check required by the prudential
regulators and Regulation G and
reviewing it one time for compliance
with applicable criminal background
standards, including the standard of this
final rule.
The Bureau disagrees with the
commenters that urged using a shorter
cutoff time and narrower list of
disqualifying crimes. Congress has
judged the standard as directly relevant
to the job of being a loan originator. As
discussed above, the standard is largely
the same standard that the SAFE Act
imposes for applicants for State loan
originator licenses. The Bureau sees no
reason why a loan originator who
categorically fails to meet the criminal
background and character standards for
loan originators at one class of
institution should categorically be
permitted to act as a loan originator at
another class of institution. The Bureau
believes a seven-year prohibition period
is not too strict of a standard to protect
consumers from the risk that such
individuals could present to them.
In view of these considerations, the
Bureau does not believe it would be
appropriate to establish standards in
this rule that are materially different
from those applicable under the SAFE
Act. However, as noted by commenters,
other regulators, including the Federal
Deposit Insurance Corporation (FDIC),
are already empowered to consent to the
employment of individuals who would
otherwise be barred under the Federal
Deposit Insurance Act or other relevant
laws because of certain prior
convictions. To harmonize the
qualification standards with those of
other regulators, the Bureau is providing
in the final rule that a conviction (or
plea of guilty or nolo contendere) does
not render an individual unqualified
under § 1026.36(f) if the FDIC (or the
Board of Governors of the Federal
Reserve System, as applicable) pursuant
to section 19 of the Federal Deposit
Insurance Act, 12 U.S.C. 1829, the
National Credit Union Administration
pursuant to section 205 of the Federal
Credit Union Act, 12 U.S.C. 1785(d), or
the Farm Credit Administration
pursuant to section 5.65(d) of the Farm
Credit Act of 1971, 12 U.S.C. 227a–
14(d), has granted consent to employ the
individual notwithstanding the
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conviction or plea that would have
rendered the individual barred under
those laws.
In response to commenter requests,
the Bureau is clarifying in
§ 1026.36(f)(3)(ii)(A)(2) that a crime is a
felony only if, at the time of conviction,
it was classified as such under the law
of the jurisdiction under which the
individual was convicted, and that
expunged and pardoned convictions do
not render an individual unqualified.
These clarifications are consistent with
implementation of the SAFE Act
criminal background standards in
§ 1008.105(b)(2) of Regulation H.
However, the Bureau is not adopting the
provision in the proposal that would
have disqualified an individual from
acting as a loan originator because of a
felony conviction under the law of a
foreign jurisdiction. The Bureau is
concerned that loan originator
organizations might not be able to
determine whether a foreign jurisdiction
classifies crimes as felonies, and foreign
convictions may be unlikely to be
included in a criminal background
check.
The Bureau is adopting
§ 1026.36(f)(3)(ii)(A) with these
revisions and clarifications.
36(f)(3)(ii)(B)
Under proposed § 1026.36(f)(3)(ii)(B),
a loan originator organization would
have been required to 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.155 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 are ‘‘such
as to command the confidence of the
community.’’ The Bureau believes that
responsible depository institutions and
bona fide nonprofit organizations
already apply similar standards when
hiring or transferring any individual
into a loan originator position. The
proposed requirement formalized this
practice to ensure that the
determination considers reasonably
available, relevant information to ensure
155 While the proposed regulatory text also
included the requirement to determine that the
individual’s financial responsibility, character, and
general fitness are ‘‘such as to command the
confidence of the community,’’ the preamble
indicated that this requirement would not be
included. 77 FR at 55327. The inclusion of that
language in the regulatory text was inadvertent.
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that, as with the case of the proposed
criminal background standards,
consumers could 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 clarified 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 for financial obligations. As
an example, the comment stated 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 distinguished
delinquent debts that arise from
extravagant spending from those that
arise, for example, from medical
expenses. The proposal stated the
Bureau’s view that an individual with a
history of dishonesty or a pattern of
irresponsible use of credit or of
disregard for 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 recognized that, even
with the proposed comment, any
standards for financial responsibility,
character, and general fitness inherently
include subjective components. During
the Small Business Review Panel, some
Small Entity Representatives expressed
concern that the proposed standard
could lead to uncertainty whether a loan
originator organization was meeting it.
The proposed standard excluded the
phrase ‘‘such as to command the
confidence of the community’’ to reduce
the potential for such uncertainty.
Nonetheless, in light of the civil liability
imposed under TILA, the Bureau
invited 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, the Bureau asked whether a
loan originator organization that reviews
the required information and documents
a rational explanation for why relevant
negative information does not show that
the standard is violated should be
presumed to have complied with the
requirement.
Several depository institution
commenters stated that the proposed
standards for financial responsibility,
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character, and general fitness were too
subjective. One civil rights organization
commenter expressed concern that the
standards could be used by loan
originator organizations as a pretext for
discriminating against job applicants.
Several bank and credit union
commenters stated that subjective or
vague standards could lead to litigation
by rejected applicants. Many of the
same commenters requested that the
Bureau include a safe harbor under the
standard, such as a minimum credit
score. One bank commenter noted it
already follows FDIC guidance that calls
on depository institutions to establish
written procedures for screening
applicants. Some depository
commenters stated that an individual
could have negative information in his
or her credit report resulting from
divorce or the death of a spouse, and
that it is usually not possible to
determine from a credit report whether
negative information was the result of
dishonesty or profligate spending, rather
than situations beyond the control of the
individual. One commenter agreed with
the Bureau’s view that the language
from the SAFE Act standard requiring
that an individual ‘‘command the
confidence of the community’’ is
especially vague and should be omitted.
The Bureau appreciates and agrees
with the concerns expressed in several
of the public comments. The Bureau
continues to believe that it is important
for covered loan originator organizations
to evaluate carefully the financial
responsibility, character, and general
fitness of individuals before employing
them in the capacity of a loan originator,
but the Bureau also agrees that loan
originator organizations should not face
increased litigation risk or uncertainty
about whether they are properly
implementing a standard that
necessarily includes a subjective
component. Accordingly, although the
Bureau is adopting § 1026.36(f)(3)(ii)(B)
as described above, it is revising
comment 36(f)(3)(ii)(B)–1 to provide
further interpretation concerning factors
to consider in making the required
determinations. In addition, the Bureau
is adding comment 36(f)(3)(ii)(B)–2 to
provide a procedural safe harbor so that
loan originator organizations can have
greater certainty that they are in
compliance.
Comment 36(f)(3)(ii)(B)–1 is revised to
remove references to factors that may
not be readily determined from the
information that the loan originator
organization is required to obtain under
§ 1026(f)(3)(i) and to conform the
comment more closely to the factors that
State regulators use in making the
corresponding determinations for loan
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originator licensing applicants. For
example, it is revised to avoid any
implication that a loan originator
organization is expected to be able to
determine from a credit report whether
an individual’s spending has been
extravagant or has acted dishonestly or
subjectively decided to disregard
financial obligations. The comment
enumerates factors that can be
objectively identified for purposes of the
financial responsibility determination,
including the presence or absence of
current outstanding judgments, tax
liens, other government liens,
nonpayment of child support, or a
pattern of bankruptcies, foreclosures, or
delinquent accounts. Following the
practice of many States, the comment
specifies that debts arising from medical
expenses do not render an individual
unqualified. It further specifies that a
review and assessment of character and
general fitness is sufficient if it
considers, as relevant factors, acts of
dishonesty or unfairness, including
those implicated in any disciplinary
actions by a regulatory or professional
licensing agency as may be evidenced in
the NMLSR. The comment, however,
does not mandate how a loan originator
organization must weigh any
information that is relevant under the
specified factors. It clarifies that no
single factor necessarily requires a
determination that the individual does
not meet the standards for financial
responsibility, character, or general
fitness, provided that the loan originator
organization considers all relevant
factors and reasonably determines that,
on balance, the individual meets the
standards.
As the Bureau anticipated in the
proposal, even with clarifications about
the factors that make a loan originator
organization’s review and assessment of
financial responsibility, character, and
fitness sufficient, the provision still
requires significant subjective judgment.
Accordingly, the Bureau believes that a
procedural provision is warranted to
ensure that loan originator organizations
have reasonable certainty that they are
complying with the requirement.
Accordingly, comment 36(f)(3)(ii)(B)–2
clarifies that a loan originator
organization that establishes written
procedures for determining whether
individuals meet the financial
responsibility, character, and general
fitness standards under
§ 1026.36(f)(3)(ii)(B) and follows those
written procedures for an individual is
deemed to have complied with the
requirement for that individual. The
comment specifies that such procedures
may provide that bankruptcies and
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foreclosures are considered under the
financial responsibility standard only if
they occurred within a timeframe
established in the procedures. In
response to the suggestion in public
comments, the comment provides that,
although review of a credit report is
required, such procedures are not
required to include a review of a credit
score.
The Bureau declines to provide the
safe harbor suggested by the commenter
that further review and assessment of
financial responsibility is not required
for an individual with a credit score
exceeding a high threshold. The Bureau
is concerned that credit scores are
typically developed for the purpose of
predicting the likelihood of a consumer
to repay an obligation and for similar
purposes. A credit score may not
correlate to the criteria for financial
responsibility in this final rule. It is the
Bureau’s understanding that, for this
reason, the major consumer reporting
agencies do not provide credit scores on
credit reports obtained for the purpose
of employment screening.
The procedural safe harbor provides a
mechanism for a loan originator
organization to specify how it will
weigh information under the factors
identified in comment 36(f)(3)(ii)(B)–1,
including instances identified by the
commenters, such as financial
difficulties arising from divorce or the
death of a spouse or outstanding debts
or judgments that the individual is in
the process of satisfying.
The Bureau notes that, as further
discussed below, the final rule requires
in § 1026.36(j) that depository
institutions must establish and maintain
procedures for complying with
§ 1026.36(d), (e), (f), and (g), including
the requirements to make the
determinations of financial
responsibility, character, and general
fitness. The Bureau expects that a
depository institution could have a
single set of procedures to comply with
these two provisions, as well as, for
example, those under § 1007.104 of
Regulation G and those in the
regulations and guidance of prudential
regulators, such as the FDIC guidance
on screening candidates identified by
the commenter.
The proposal would not have required
employers of unlicensed individual loan
originators to obtain the covered
information and make the required
determinations on a periodic basis.
Instead, it contemplated that these
employers would obtain the information
and make the determinations under the
criminal, financial responsibility,
character, and general fitness standards
before an individual acts as a loan
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originator in a closed-end consumer
credit transaction secured by a dwelling.
However, the Bureau invited 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.
Commenters urged the Bureau to
clarify that a loan originator
organization is required to make the
determinations only once, rather than
periodically, or a second time only if the
loan originator organization learns the
individual loan originator has been
convicted of a felony after the initial
determination. Several commenters
asked the Bureau to clarify that loan
originator organizations are not required
to make the determinations for
individual loan originators who are
already employed and have already
been screened by the loan originator
organization. Large bank commenters
stated that having to make the
determinations for current loan
originator employees would be
extremely burdensome.
The Bureau agrees that it would be
burdensome and somewhat duplicative
for a loan originator organization to
have to obtain a credit report, a new
criminal background check, and
information about enforcement actions
and apply retroactively the criminal
background, financial responsibility,
character, and general fitness standards
of this final rule to individual loan
originators that it had already hired and
screened prior to the effective date of
this final rule under the then-applicable
standards, and is now supervising on an
ongoing basis. As explained in the
proposal, the Bureau believes that most
loan originator organizations were
already screening their individual loan
originators under applicable background
standards, and the Bureau does not seek
to impose duplicative compliance
burdens on loan originator organizations
with respect to individual loan
originators that they hired and in fact
screened under standards in effect at the
time of hire. Accordingly, this final rule
clarifies in § 1026.36(f)(3)(i) and (ii) and
in new comment 36(f)(3)(ii)–2 that the
requirements apply for an individual
that the loan originator organization
hires on or after January 10, 2014, the
effective date of these provisions, as
well as for individuals hired prior to
this date but for whom there were no
applicable statutory or regulatory
background standards in effect at the
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time of hire or before January 10, 2014,
used to screen the individual.156
Additional revisions to
§ 1026.36(f)(3)(i) and (ii) and new
comment 36(f)(3)(ii)–3 respond to the
commenter’s concerns about when a
loan originator organization is required
to make subsequent determinations.
They specify that such determinations
are required only if the loan originator
organization has knowledge of reliable
information indicating that the
individual loan originator likely no
longer meets the required standards,
regardless of when the individual loan
originator was previously hired and
screened. As an example, comment
36(f)(3)(ii)–3 states that if the loan
originator organization has knowledge
of criminal conduct of its individual
loan originator from a newspaper
article, a previously obtained criminal
background report, or the NMLSR, the
loan originator organization must
determine whether any resulting
conviction, or any other information,
causes the individual to fail to meet the
standards in § 1026.36(f)(3)(ii),
regardless of when the loan originator
was hired or previously screened.
The Bureau believes that comments
36(f)(3)(ii)–2 and 36(f)(3)(ii)–3, taken
together, provide an appropriate balance
for determining when a loan originator
organization is required to screen an
individual loan originator hired prior to
January 10, 2014, under the standards in
§ 1026.36(f)(3)(i) and (ii). The approach
recognizes that, as the Bureau stated in
the proposal, many loan originator
organizations already screened their
employees under applicable statutory or
regulatory standards for criminal
background, character, fitness, and
financial responsibility that are similar
to those in this final rule, prior to the
this rule’s effective date. To the extent
that an individual was determined to
meet such standards in effect at the time
the individual was hired, but does not
meet the standards of this final rule, the
Bureau believes the loan originator
organization is likely to have knowledge
of reliable information indicating that
may be the case. For example, the
criminal background check that the loan
originator organization previously
obtained or an entry in the NMLSR may
have indicate a felony conviction
covered by this rule. Likewise, the loan
originator organization is highly likely
to have knowledge of the individual
156 The Bureau’s decision not to apply certain
qualification requirements otherwise imposed by
this rule to loan originators hired before January 10,
2014, is also an exercise of the Bureau’s authority
under TILA section 105(a). This rule differentiates
loan originators based on their date of hire to
facilitate compliance.
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loan originator’s character and fitness as
a result of monitoring the individual’s
performance over the course of the
individual’s employment.
The Bureau does not agree that the
subsequent review should apply only if
the loan originator organization learns
that the individual has committed a
felony because such a rule would
categorically exclude information that
seriously implicates the financial
responsibility, character, and general
fitness standards. However, the Bureau
notes that the procedural safe harbor
discussed above provides a mechanism
for loan originator organizations to
adopt specific procedures for when and
how such information is considered in
subsequent determinations.
36(f)(3)(iii)
In addition to the screening
requirements discussed above, proposed
§ 1026.36(f)(3)(iii) would have required
loan originator organizations to provide
periodic training to their individual
loan originators who are not licensed
under the SAFE Act and thus not
covered by that Act’s training
requirements. The proposal provided
that the training must cover the Federal
and State law requirements that apply to
the individual loan originator’s loan
origination activities. The proposed
requirement was 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 20 hours of pre-licensing
education and 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
loan originator organizations engage and
for which covered individuals are
responsible. For example, the proposed
training provision would have applied
to a large depository institution
providing complex mortgage loan
products as well as a nonprofit
organization providing only basic home
purchase assistance loans secured by a
subordinate lien on a dwelling. The
proposed provision also recognized that
covered individuals may already
possess a wide range of knowledge and
skill levels. Accordingly, it required
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
differed from the analogous SAFE Act
requirement by not including a
requirement to provide training on
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ethical standards beyond those that
amount to State or Federal legal
requirements. In light of the civil
liability imposed under TILA, the
Bureau solicited public comment on
whether there exist ethical standards for
loan originators that are sufficiently
concrete and widely applicable to allow
loan originator organizations 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
included explanations of the training
requirement and also described the
flexibility available under
§ 1026.36(f)(3)(iii) regarding how the
required training is delivered. It
clarified that training may be delivered
by the loan originator organization or
any other party through online or other
technologies. In addition, it stated 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 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. It further
stated 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 recognized 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 clarified that
§ 1026.36(f)(3)(iii) did not require
training that is duplicative of training
that loan originator organizations are
already providing if that training meets
the standard in § 1026.36(f)(3)(iii).
These clarifications were intended to
respond to questions that Small Entity
Representatives raised during the Small
Business Review Panel discussed above.
Several bank and credit union
commenters stated that they already
provide the training required under the
proposal to comply with the
requirements of prudential regulators.
One commenter stated that more
specific requirements are needed so that
loan originator organizations can be
certain they are in compliance. One
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commenter stated that the standard
should cover training in legal
requirements only and not in ethics.
One credit union association expressed
concern that regardless of what the rule
provided, agency examiners would
ultimately require credit union loan
originators to take eight hours of
NMLSR classes annually. A provider of
NMLSR-approved training urged the
Bureau to require loan originators to
take 20 hours of NMLSR-approved
classes initially and five hours annually
thereafter, including classes in ethics.
The commenter stated that depository
institution employees should have to
take NMLSR-approved training because
many of the worst loan originators who
contributed to the subprime lending
crisis were employed by depository
institutions. One bank commenter stated
that a loan originator who opts to take
and passes the national component of
the NMLSR standardized test should be
exempt from periodic training
requirements, and that a loan originator
who does receive training should be
able to do so before or after obtaining a
unique identifier issued by the NMLSR
(also referred to as an NMLSR ID). The
same commenter asked for clarification
that a national bank-employed loan
originator need not be trained in state
legal requirements, and that a bankemployed loan originator should be
presumed to be well trained and
qualified.
As stated in the proposal, the Bureau
agrees that the training that many
depository institutions already provide
to comply with prudential regulator
requirements will be sufficient to meet
the proposed requirement in
§ 1026.36(f)(3)(iii), which the Bureau is
adopting without change. The Bureau
did not propose to require covered
individual loan originators to take a
fixed number of NMLSR-approved
classes initially or each year precisely
out of the concern that such training
could be largely duplicative of training
that individual loan originators already
receive. Accordingly, the Bureau is not
adopting the commenter’s suggestion
that it require NMLSR-approved
training. The Bureau notes that
comment 36(f)(3)(iii)–1 clarifies that a
loan originator organization may satisfy
the training requirement by taking the
NMLSR-approved continuing education
class. The Bureau is not in a position to
address the commenter’s concern that
prudential regulators would require
individual loan originators to take
NMLSR-approved classes
notwithstanding the flexibility of
Bureau’s training requirement.
The Bureau also declines to adopt a
provision that any individual loan
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originator employed by a bank, or an
individual loan originator who opts to
take and passes the NMLSR
standardized test, should be deemed
trained and qualified and therefore
exempt from periodic training. The
requirement that training be provided
on a periodic basis addresses the fact
that legal requirements change over time
and that an individual’s memory and
knowledge of applicable requirements
may fade over time. Taking and passing
a test one time would therefore not be
an adequate substitute for periodic
training. Finally, the Bureau notes that
the provision does not specify that
training must be provided after a loan
originator receives an NMLSR ID. It also
does not provide for training to be
reported to or tracked through the
NMLSR.
The Bureau did not receive
substantive comments indicating that
there exists a definable body of ethical
standards specific for loan originators
and is not expanding the training
requirement to mandate training in
ethical standards in addition to the
proposed training in legal requirements.
Finally, the Bureau does not believe it
is necessary or practical to specify in a
generally applicable rule which laws
apply to the wide range of loans
originated by loan originators at various
loan originator organizations, and
therefore what subject matter must be
included in an individual loan
originator’s training. The Bureau
believes each loan originator
organization should know the types of
loans that each of its individual loan
originators originates and which
substantive legal requirements
(including provisions of State law, to
the extent applicable) apply to those
loans. The Bureau notes that the
training requirements under
§ 1026.36(f)(3)(iii) apply individual loan
originators regardless of when they were
hired.
36(g) Name and NMLSR Identification
Number on Loan Documents
TILA section 129B(b)(1)(B), which
was added by Dodd-Frank Act section
1402(a), provides that ‘‘subject to
regulations’’ issued by the Bureau, a
mortgage originator shall include on ‘‘all
loan documents any unique identifier of
the mortgage originator’’ issued by the
NMLSR. 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 § 1026.36(g), as
described further below, would have
implemented the statutory requirement
that mortgage originators must include
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their NMLSR ID on loan documents and
would have provided several
clarifications. The Bureau stated its
belief 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 § 1026.36(g)(1) provided
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. The
proposal explained that 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. The Bureau
explained that it believed that this was
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 clarified, 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. For example, an individual
loan originator who works for a bona
fide nonprofit organization is not
required to obtain an NMLSR ID, but if
the individual was issued an NMLSR ID
for purposes of a previous job, that
NMLSR ID must be included. Proposed
§ 1026.36(g)(1) also provided that the
name and NMLSR IDs must be included
each time any of these documents is
provided to a consumer or presented to
a consumer for signature.
Proposed comment 36(g)(1)–1
clarified that for purposes of
§ 1026.36(g), creditors would not be
excluded from the definition of ‘‘loan
originator.’’ Proposed comment
36(g)(1)–2 clarified that the proposed
requirement applied regardless of
whether the organization or individual
loan originator is required to obtain an
NMLSR ID under the SAFE Act or
otherwise. Proposed § 1026.36(g)(1)(ii),
recognizing that there may be
transactions in which more than one
individual meets the definition of a loan
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originator, provided 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 Proposal, the
Bureau proposed to integrate TILA and
RESPA mortgage disclosure documents
as mandated by sections 1032(f), 1098,
and 1100A of the Dodd-Frank Act. 12
U.S.C. 5532(f); 12 U.S.C. 2603(a); 15
U.S.C. 1604(b). As discussed below, the
loan documents that would be required
to include the name and NMLSR IDs
include these mortgage disclosure
documents. That separate rulemaking
also addresses inclusion of the name
and NMLSR IDs on the proposed
integrated disclosures, as well as the
possibility that in some circumstances
more than one individual may meet the
criteria that require inclusion of the
NMLSR ID. To ensure harmonization
between the two rules, proposed
comment 36(g)(1)(ii)–1 stated that, if
more than one individual acts as a loan
originator for the transaction, the
requirement in § 1026.36(g)(1)(ii) may
be met by complying with the
applicable provision governing
disclosure of NMLSR IDs in rules issued
by the Bureau pursuant to Dodd-Frank
Act sections 1032(f), 1098, and 1100A.
Commenters generally supported the
proposed provision as a way to increase
accountability. One commenter urged
the Bureau to change the format of
NMLSR IDs to allow consumers to
determine whether the loan originator is
licensed or registered because the
commenter was concerned that a
consumer might incorrectly assume that
all loan originators are licensed. Several
commenters asked for more clarity on
how to determine which loan originator
has primary responsibility for a
transaction and has to include his or her
name and NMLSR ID on a document.
Commenters stated that the loan
originator with primary responsibility
should be, variously, the person who
took a consumer’s application, the
person whose name appears on the loan
application under Federal Housing
Finance Agency requirements, the
person who is the consumer’s point of
contact, or the person reasonably
determined by the loan originator
organization. One commenter asked for
clarification that the names and NMLSR
IDs must appear only once on each loan
document rather than on every page of
the loan document. Another commenter
urged the Bureau to standardize exactly
where on each loan document the
names and NMLSR IDs must appear.
Another commenter asked the Bureau to
confirm that if the loan originator with
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11385
primary responsibility for a transaction
changes during the course of the
transaction, issued loan documents do
not have to be reissued merely to change
the name and NMLSR on those
documents.
In response to commenters’ requests
for more specificity on how to
determine which individual loan
originator has primary responsibility,
the Bureau is clarifying in comment
36(g)(1)(ii)–1 that a loan originator
organization that establishes and
follows a reasonable, written policy for
determining which individual loan
originator has primary responsibility for
the transaction at the time the document
is issued complies with the
requirement. The Bureau notes that, as
further discussed below, the final rule
requires in § 1026.36(j) that depository
institutions must establish and maintain
procedures for complying with
§ 1026.36(d), (e), (f), and (g) of this
section, including the requirement to
include names and NMLSR IDs on loan
documents. The Bureau is also
clarifying in comment 36(g)(1)–2 that,
even if the loan originator does not have
an NMLSR ID, the loan originator must
still include his or her name on the
covered loan documents.
The Bureau agrees with the comment
urging that the names and NMLSR IDs
should be required to appear only once
on each loan document rather than on
each page of a loan document. New
comment 36(g)(1)–3 includes this
clarification. The Bureau does not agree
that it should mandate exactly where
the names and NMLSR IDs must appear
on the credit application, note, and
security instrument. Doing so would be
impractical because State and local law
may specify placement of items on
documents that are to be recorded, such
as the note and security instrument, and
revising the format of the most
commonly used credit application forms
would implicate other rules beyond the
scope of this rulemaking.
Finally, the Bureau agrees that, if the
loan originator with primary
responsibility for a transaction changes
during the course of the transaction,
previously issued loan documents do
not have to be reissued merely to change
the names and NMLSR IDs on those
documents. This clarification is
included in comment 36(g)(1)(ii)–1.
36(g)(2)
Proposed § 1026.36(g)(2) identified
the documents that must include loan
originators’ names and NMLSR IDs as
the credit application, the disclosure
provided under section 5(c) of RESPA,
the disclosure provided under TILA
section 128, the note or loan contract,
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the security instrument, and the
disclosure provided to comply with
section 4 of RESPA. Proposed comment
36(g)(2)–1 clarified that the name and
NMLSR ID must be included on any
amendment, rider, or addendum to the
note or loan contract or security
instrument. These clarifications were
provided in response to concerns that
Small Entity Representatives expressed
in the Small Business Review Panel 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 was
intended to ensure that loan originators’
names and 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
§ 1026.36(g)(2) is arguably a ‘‘loan
document,’’ the Bureau stated that it
was specifying an exhaustive list of loan
documents that must include loan
originators’ names and NMLSR IDs
using its authority under 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.
The proposal explained that this final
rule implementing the proposed
requirements to include names and
NMLSR IDs on loan documents might
be issued, and might generally become
effective, prior to the effective date of a
final rule implementing the Bureau’s
2012 TILA–RESPA Integration Proposal.
As a result, the requirement to include
the name and NMLSR ID would apply
to the current RESPA GFE and
settlement statement and TILA
disclosure until the issuance of the
integrated disclosures. The Bureau
recognized 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 name
and NMLSR IDs on the current
disclosures even though those
disclosures will be replaced in the
future by the integrated disclosures.
Accordingly, the Bureau solicited 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.
One commenter opposed what it
perceived as a requirement to include
the NMLSR ID in the RESPA settlement
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costs information booklet provided to
consumers. Another commenter stated
that the NMLSR should be required only
on the application, note, and security
instrument. One commenter stated that
the names and NMLSR IDs should not
be required on amendments, riders, or
addenda to the note or security
instruments because the note and
security instrument will already have
the names and NMLSR IDs on them.
Several commenters urged the Bureau
not to require the names and NMLSR
IDs on the current RESPA GFE and
settlement statement because those
forms do not currently have space for
the information and will be
discontinued soon. For the same reason,
several commenters urged the Bureau to
delay the effective date of the provision
until after the integrated forms and
regulations are issued and effective.
The Bureau agrees that the loan
originator names and NMLSR IDs
should not be required to be included
on the current RESPA GFE and HUD–
1 (or HUD–1A) forms. The current
RESPA GFE form has a designated space
for the originator’s name but not for the
NMLSR ID. The current HUD–1 form
(and HUD–1A form) has a designated
space for the lender’s name, but not for
the originator’s name and NMLSR ID.
While the Bureau has no objection to
loan originator names and NMLSR IDs
being included on the current forms
where not required, the Bureau believes
it would be duplicative and
unnecessarily expensive for the issuers
of these forms to have to revise their
systems only to have to revise them
again once the Bureau implements its
2012 TILA–RESPA Integration Proposal.
For this reason, the Bureau is generally
implementing all Title XIV disclosure
requirements to take effect at the same
time.
Accordingly, the Bureau expects to
adopt the requirement to include loan
originator names and NMLSR IDs on the
integrated disclosures at the same time
that the rules implementing the 2012
TILA–RESPA Integration Proposal are
adopted. The Bureau is adopting
§ 1026.36(g)(2) with § 1026.36(g)(2)(ii),
reserved in this final rule. The Bureau
expects to adopt references to the
integrated disclosures in
§ 1026.36(g)(2)(ii) in the final rule
implementing the 2012 TILA–RESPA
Integration Proposal. In response to the
commenter’s concern that the loan
originator names and NMLSR IDs
should not be required to be included
on preprinted booklets, the final rule,
like the proposal, does not require
inclusion on the booklets. The revisions
to § 1026.36(g)(2) described above are
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expected to prevent any such
misinterpretation.
The Bureau disagrees that the loan
originator names and NMLSR IDs
should be required only on the
application, note, and security
instrument. To promote accountability
of loan originators throughout the
course of the transaction, it is important
for the names and NMLSR IDs to appear
on the integrated loan estimate and
closing disclosure as well, because these
loan documents include the loan terms
offered or negotiated by loan originators.
However, as clarified above, the names
and NMLSR IDs will not be required to
be included on these additional loan
documents until the use of those
documents becomes mandatory under
the Bureau’s upcoming final rule on
TILA–RESPA Integration.
The Bureau agrees with the
commenter that the loan originator
names and NMLSR IDs should not be
required on amendments, riders, or
addenda to the note or security
instruments, as such documents will be
attached the note or security instrument,
which themselves are required to
include the names and NMLSR IDs.
Accordingly, the Bureau is not adopting
proposed comment 36(g)(2)–1. Removal
of this requirement is consistent with
the Bureau’s clarification in comment
36(g)(1)–3 that for any loan document,
the names and NMLSR IDs are required
to be included only one time, and not
on each page.
36(g)(3)
Proposed § 1026.36(g)(3) defined
‘‘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). The
Bureau did not receive any public
comments on this definition and is
adopting it as proposed.
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)(1), which
prohibits a closed-end consumer credit
transaction secured by a dwelling or an
extension of open-end consumer credit
secured by the consumer’s principal
dwelling from containing terms that
require arbitration or any other nonjudicial procedure as the method for
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resolving disputes arising out of the
transaction. TILA section 129C(e)(2)
provides that, subject to TILA section
129C(e)(3) a consumer and creditor or
any assignee may nonetheless agree,
after a dispute arises, to use arbitration
or other non-judicial procedure to
resolve the dispute. The statute further
provides in section 129C(e)(3) that no
covered transaction secured by a
dwelling, and no related agreement
between the consumer and creditor,
may be applied or interpreted to bar a
consumer from bringing a claim in court
in connection with any alleged violation
of Federal law.
The Bureau proposed § 1026.36(h) to
implement these statutory provisions,
pursuant to TILA section 105(a) and
section 1022(b) of the Dodd-Frank Act.
Proposed § 1026.36(h)(2) would have
clarified the interaction between TILA
sections 129C(e)(2) and (e)(3), and the
section-by-section analysis noted that
TILA section 129C(e)(3) and
§ 1026.36(h)(2) do not address State law
causes of action.
Commenters generally supported the
proposal. Although some commenters
addressed details of the substance of the
proposal, many commenters addressed
the timing of the provisions’
implementation. For example, several
consumer groups stated that the
proposal did not make any substantive
changes to the statutory provisions and
should be withdrawn because there was
no reason to delay the effective date of
the statutory provisions. One
commenter acknowledged that the
provisions were mandated by the DoddFrank Act but urged the Bureau to
encourage mandatory arbitration
anyway. SBA Advocacy stated that
some Small Entity Representatives did
not understand why the provisions were
being included in this rule and asked
the Bureau to consider adopting it at a
later date. A bank association
commenter urged the Bureau to delay
the provisions until after it completed
its required general study of arbitration
clauses in consumer transactions,
pursuant to section 1028 of the DoddFrank Act.
One commenter requested
clarification on whether the provisions
apply to waivers of rights to a jury trial.
Other commenters questioned variously
whether the proposal altered the
statutory provisions: By applying the
provision on waivers of causes of action
to post-dispute agreements; by applying
that provision to loans other than
residential mortgage loans and open-end
consumer credit plans secured by a
principal dwelling; by limiting it to
Federal causes of action; or by
prohibiting mandatory arbitration
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clauses in contracts and agreements
other than the note and agreements
related to the note. One commenter
stated that the applicability of the
proposed rule provisions was confusing
because the provisions refer to
consumer transactions secured by a
dwelling but their scope is also
addressed separately in proposed
§ 1026.36(j). (Proposed § 1026.36(j) is
finalized as § 1026.36(b) of the rule.)
Finally, one commenter suggested that
the statute and the rule would prohibit
nonjudicial foreclosures and prevent a
servicer from settling a dispute with a
consumer through a settlement
agreement.
The provisions on mandatory
arbitration and waiver are contained in
the Dodd-Frank Act. Absent action by
the Bureau, they would take effect on
January 21, 2013. The Bureau believes
that it is necessary and appropriate to
provide implementing language to
facilitate compliance with the statute.
At the same time, the Bureau recognizes
the point made by several commenters
regarding the importance of these
consumer protections. The fact that the
Bureau is implementing the provisions
by regulation does not require the
Bureau to delay the provisions’ effective
date for an extended period, as the
commenters may have assumed.
Instead, the Bureau is providing an
effective date of June 1, 2013. The
Bureau believes this effective date will
give consumers the benefit of these
statutory protections within a short
timeframe, while also providing
industry time to adjust its systems and
practices. The Bureau does not believe
that industry needs a longer period
because the prohibitions on mandatory
arbitration agreements and waivers of
Federal claims have been known since
the Dodd-Frank Act was enacted, and
this final rule will not require extensive
changes to origination systems.
Furthermore, Fannie Mae and Freddie
Mac do not accept loans that require
arbitration or other nonjudicial
procedures to resolve disputes, so the
Bureau believes this aspect of the statute
and final rule will not necessitate
significant changes to current practices
in most circumstances. The Bureau is
not providing that the provision become
effective immediately, however, in order
to provide industry a short period to
make any needed adjustments.
In response to the comments, the
Bureau does not interpret TILA section
129C(e)(3) to limit waivers of rights to
a jury trial because bench trials are
judicial procedures, not nonjudicial
procedures. The Bureau does not
interpret TILA section 129C(e)(1) to
limit deeds of trust providing for
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11387
nonjudicial foreclosure because such
instruments are not agreements to use
nonjudicial procedures to resolve
controversies or settle claims arising out
of the transaction, in contrast with
agreements to use arbitration,
mediation, and other forms of
alternative dispute resolution. Nor does
the Bureau interpret TILA section
129C(e)(3) to limit nonjudicial
foreclosures because nonjudicial
foreclosures still allow consumers to
bring actions in court alleging violations
of Federal law.
Similarly, the Bureau does not
interpret the statute to bar settlement
agreements. Such a result would be a
highly unusual—perhaps
unprecedented—prohibition, and the
Bureau believes that Congress would
have spoken expressly about settlement
agreements if that was the result it
intended.157 Instead, the Bureau reads
the statute to mean that if a consumer
and creditor or assignee agree, after a
dispute or claim arises, to settle the
dispute or claim, the settlement
agreement may be applied or interpreted
to waive the consumer’s right to bring
that dispute or claim in court, even if it
is a Federal law claim. Accordingly, the
Bureau is revising the regulatory text to
clarify that § 1026.36(h) does not limit a
consumer and creditor or any assignee
from agreeing, after a dispute or claim
under the transaction arises, to settle
that dispute or claim. Under TILA
section 129C(e)(3) and § 1026.36(h)(2),
however, no settlement agreement may
be applied or interpreted to bar the
consumer from bringing an action in
court for any other alleged violation of
Federal law.
The Bureau is further revising the
regulatory text to address the belief of
some commenters that the Bureau had
altered the scope of the statutory
provision. As discussed above, TILA
section 129C(e)(2) provides that the
exception for post-dispute agreements
from the prohibition on mandatory
arbitration agreements is itself subject to
the prohibition on waivers of rights to
bring Federal causes of action in court.
The proposal specified that a postdispute agreement to use arbitration or
other nonjudicial procedure could not
limit the ability of the consumer to bring
a covered claim through the agreedupon procedure. This final rule clarifies
that, consistent with the discussion of
waivers of causes of action in settlement
157 See, e.g., Robinson v. Shelby Cnty. Bd. of
Educ., 566 F.3d 642, 648 (6th Cir. 2009) (‘‘[I]t is also
well-established that ‘[p]ublic policy strongly favors
settlement of disputes without litigation. * * *
Settlement agreements should therefore be upheld
whenever equitable and policy considerations so
permit.’’’).
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agreements above, the Bureau interprets
the statute to mean that if a consumer
and creditor or assignee agree, after a
dispute or claim arises, to use
arbitration or other nonjudicial
procedure to resolve that dispute or
claim, the agreement may be applied or
interpreted to waive the consumer’s
right to bring that dispute or claim in
court, even if it is a Federal law claim.
The Bureau believes that, in such an
instance, the consumer is aware of the
specific dispute or claim at issue and is
therefore in a better position to make a
knowing decision whether to resolve the
dispute or claim without bringing an
action in court. But no post-dispute
agreement to use arbitration or other
nonjudicial procedure may be applied
or interpreted to bar the consumer from
bringing an action in court for any other
alleged violation of Federal law.
The Bureau disagrees with
commenters who stated it had expanded
the scope of TILA section 129C(e) to
cover open-end consumer credit plans
other than those secured by the
principal dwelling of the consumer.
Proposed § 1026.36(j) (implemented in
this final rule as § 1026.36(b)) clarifies
the scope of each of the other
substantive paragraphs in § 1026.36 and
provides that the only open-end
consumer credit plans to which
§ 1026.36(h) applies are those secured
by the principal dwelling of the
consumer. However, to reduce
uncertainty, the Bureau is including a
statement in § 1026.36(h) that it is
applicable to ‘‘a home equity line of
credit secured by the consumer’s
principal dwelling.’’
The Bureau also disagrees that the
proposed language changed the scope of
the prohibition on waivers of causes of
action by including the word ‘‘Federal’’
in the paragraph (h)(2) heading, ‘‘No
waivers of Federal statutory causes of
action.’’ The contents of paragraph
(h)(2) and the corresponding statutory
paragraph (e)(3) both provide that the
prohibition applies to alleged violations
of Section 129C of TILA, any other
provision of TILA, or any other Federal
law. Thus, the scope of the statutory
prohibition is limited to Federal law,
and the implementing regulation is
properly so limited.
Finally, the Bureau disagrees that the
prohibition on agreements to use
mandatory arbitration applies only to
the note itself. TILA section 129C(e)(1)
provides that it applies to the terms of
a residential mortgage loan and to an
extension of credit under an open-end
consumer credit plan secured by the
principal dwelling of the consumer. The
terms of such transactions are frequently
memorialized in multiple documents.
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Plainly, the prohibition cannot be
evaded simply by including a provision
for mandatory arbitration in a document
other than the note if that document is
executed as part of the transaction. The
prohibition applies to the terms of the
whole transaction, regardless of which
particular document contains those
terms. However, to prevent any
misunderstanding that the prohibition
applies to agreements that are not part
of the credit transaction, the Bureau is
replacing the phrase ‘‘contract or
agreement in connection with a’’
consumer credit transaction with the
phrase ‘‘contract or other agreement for’’
a consumer credit transaction.
36(i) Prohibition on Financing SinglePremium 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 a closed-end consumer
credit transaction secured by a dwelling
or an extension of open-end consumer
credit secured by the consumer’s
principal dwelling. The prohibition
applies to credit life, credit disability,
credit unemployment, credit property
insurance, and other similar products.
The same provision states, however,
that the prohibition does not apply to
credit insurance for which premiums or
fees are calculated and paid in full on
a monthly basis or to credit
unemployment insurance for which the
premiums are reasonable, the creditor
receives no compensation, and the
premiums are paid pursuant to a
separate insurance contract and are not
paid to the creditor’s affiliate.
Proposed § 1026.36(i) would have
implemented these statutory provisions.
The authority to implement these
statutory provisions by rule is TILA
section 105(a) and section 1022(b) of the
Dodd-Frank Act. Rather than repeating
Dodd-Frank Act section 1414’s list of
covered credit insurance products, the
proposed language cross-referenced the
existing description of insurance
products in § 1026.4(d)(1) and (3). The
Bureau explained that the proposal was
not intended to make any substantive
change to the statutory provision’s
scope of coverage. The proposal stated
the Bureau’s belief that these provisions
are sufficiently straightforward that they
require no further clarification. The
Bureau requested comment, however,
on whether any issues raised by the
provision require clarification and, if so,
how they should be clarified. The
Bureau also solicited comment on when
the provision should become effective,
for example, 30 days following
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publication of the final rule, or at a later
time.
Commenters generally supported the
proposed provision. Two commenters
asked the Bureau to permit financing of
credit insurance when doing so would
be beneficial to a consumer. SBA
Advocacy stated that some Small Entity
Representatives did not understand why
the provision was being included and
asked the Bureau to consider adopting
it at a later date.
Several consumer groups stated that
the proposal did not make any
substantive changes to the statutory
provision and stated that there is no
reason to delay the effective date of the
statutory provision. The same
commenters asked the Bureau to clarify
that a creditor cannot evade the
prohibition by charging a fixed monthly
payment that does not decrease as the
principal is paid off or by adding the
monthly charge to the loan balance. The
commenters stated that the crossreference to credit insurance products
described elsewhere in Regulation Z
could be read to narrow the scope of the
prohibition and asked the Bureau to
clarify what a ‘‘reasonable’’ credit
unemployment insurance premium is.
A credit union sought clarification
that the prohibition does not apply to
mortgage insurance premiums. Finally,
one commenter requested that the
effective date of the prohibition be
delayed for six months so that software
programmers could program appropriate
warnings and blockages in their loan
originating systems.
The prohibition of financing of credit
insurance is required by the Dodd-Frank
Act. Absent action by the Bureau, they
would take effect on January 21, 2013.
The Bureau agrees with the commenters
who stated that the provision is an
important consumer protection that
should not be delayed without good
reason. The fact that the Bureau is
implementing the provision by
regulation does not require it to delay
the provision’s effective date for a long
period, as the commenters may have
assumed. Instead, the Bureau is
providing an effective date of June 1,
2013. The Bureau believes this effective
date will give consumers the benefit of
this important protection within a short
timeframe, while also providing
industry time to adjust its systems and
practices. The Bureau does not believe
that industry needs a longer period of
time because the prohibition, which is
not substantially changed by this final
rule, has been known since the DoddFrank Act was enacted and the codified
regulation will not require extensive
calibration of origination systems.
Furthermore, Freddie Mac and Fannie
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Mae have prohibited the same practice
for years.158 The Bureau is not
providing that the provision become
effective immediately, however, because
industry may need to make some
adjustments based on the clarifications
made in this final rule.
The Bureau is adopting the consumer
groups’ suggestion to incorporate the
full list of covered insurance products
from TILA section 129C(d) to prevent
any perception that the Bureau did not
intend for the regulatory provision to
cover all of those insurance products.
As revised, the final rule provides that
the listed types of insurance are what
insurance ‘‘means,’’ not just what it
‘‘includes,’’ because the list provided in
the statute seems to be exclusive. The
Bureau declines to define at this time
what insurance premiums are
‘‘reasonable’’ for purposes of the
exception for certain credit
unemployment insurance products
because the Bureau does not currently
have sufficient data and other
information to make this judgment for a
rule of general applicability.
With regard to the requests for
clarification that a creditor cannot evade
the prohibition by charging a fixed
monthly payment that does not decrease
as the principal is paid off or by adding
the monthly charge to the loan balance,
the Bureau believes that the two
practices identified would directly
violate the prohibition. Adding a
monthly charge for the insurance to the
loan balance would amount to financing
the premiums for credit insurance rather
than paying them in full on a monthly
basis. Similarly, charging a fixed
monthly charge for the credit insurance
that does not decline as the loan balance
declines would fail to meet the
requirement for the premium to be
‘‘calculated * * * on a monthly basis.’’
As a result, this practice would fail to
satisfy the conditions for the exclusion
from what constitutes ‘‘financ[ing],
directly or indirectly’’ credit insurance
premiums.
The Bureau agrees with the
commenter that the provision does not
apply to mortgage insurance. Mortgage
insurance is not listed in TILA section
129C(d). Credit insurance generally
insures a consumer in the event of a
specified event, and the benefit
provided is to make the consumer’s
periodic payments while the consumer
is unable to make them. Mortgage
insurance is distinguishable in that it
insures a creditor (or its assignee)
158 See, e.g., 2000 Freddie Mac policy, at http://
www.freddiemac.com/sell/guide/bulletins/pdf/
421indltr.pdf and 2004 Fannie Mae policy,
https://www.fanniemae.com/content/
announcement/04-05.pdf.
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against loss in the event of default by
the consumer or in other specified
events.
36(j) Depository Institution Compliance
Procedures
Dodd-Frank Act section 1402(a)(2)
added TILA section 129B(b)(2), which
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). The Bureau notes
that one week after the Dodd-Frank Act
was signed into law, the Federal
prudential regulatory agencies for
banks, thrifts, and credit unions jointly
issued a final rule requiring the
institutions they regulate, among other
things, to adopt and follow written
policies and procedures designed to
assure compliance with the registration
requirements of the SAFE Act. That
final rule was inherited by the Bureau
and is designated as Regulation G. The
Bureau believes that Regulation G
largely satisfies the provision under
TILA section 129B(b)(2) for regulations
requiring compliance policies and
procedures, with regard to mortgage
originator qualification requirements.
TILA section 129B(b)(2) also requires
the Bureau to prescribe regulations
requiring depository institutions to
establish and maintain procedures
reasonable designed to assure and
monitor compliance with all of TILA
section 129B.
The proposal did not contain specific
regulatory language to implement TILA
section 129B(b)(2), but the Bureau stated
that it might adopt such language in this
final rule. Accordingly, it described the
language it was considering in detail
and solicited comment on the described
text.
Specifically, the proposal stated the
Bureau’s expectation that such a rule
would require depository institutions to
establish and maintain procedures
reasonably designed to ensure and
monitor the compliance of themselves,
their subsidiaries, and the employees of
both with the requirements of
§ 1026.36(d), (e), (f), and (g). The Bureau
stated that 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. The
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Bureau solicited public comment on
whether it should define ‘‘depository
institution’’ using the FDIA’s definition
(which does not include credit unions),
the SAFE Act’s definition (which
includes credit unions), or some other
definition.
The Bureau further noted 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, the proposal noted that it
may be appropriate to apply the duty to
ensure 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 section 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
requirements.
Finally, the proposal questioned
whether 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 more equal compliance
responsibilities among types of creditor.
The Bureau discussed whether
exercising TILA section 105(a) authority
in this way is necessary or proper to
effectuate the purpose stated in TILA
section 129B(a)(2) of ensuring that
consumers are offered and receive
residential mortgage loans that are not
unfair, deceptive, or abusive.
The Bureau therefore solicited
comment on whether a regulation
requiring procedures to comply with
TILA section 129B 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 solicited
comment on whether it should apply
the duty to ensure 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 solicited 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
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duty of care requirements (i.e., the
qualifications and loan document
provisions) in TILA section 129B(b)(1),
or with respect to procedures for all the
requirements of TILA section 129B,
including the compensation and
steering provisions and those added by
section 1402 of the Dodd-Frank Act.
The Bureau also recognized 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. See 15 U.S.C. 1640. The
Bureau anticipated concerns on the part
of depository institutions regarding their
ability to avoid such liability risk and
therefore sought comment on the
appropriateness of establishing a safe
harbor that would demonstrate
compliance with the rule requiring
procedures. It stated that 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
§ 1026.36(d), (e), (f), or (g).
The Bureau did not receive any public
comments on the contemplated
provision requiring compliance
procedures. The Bureau is adopting the
contemplated provision to implement
TILA section 129B(b)(2) in § 1026.36(j),
which requires compliance policies and
procedures corresponding only to the
substantive requirements of TILA
section 129B implemented through this
final rule, namely those in § 1026.36(d),
(e), (f), and (g). The adopted provision
clarifies that the required procedures
must be ‘‘written’’ to promote
transparency, consistency, and
accountability. The Bureau is adopting,
for purposes of § 1026.36(j), the
definition of ‘‘depository institution’’ in
the SAFE Act, which includes credit
unions, because the substantive
provisions in § 1026.36(d), (e), (f), and
(g) apply to credit unions. The Bureau
notes that provisions implicating the
contents of the written procedures that
a depository institution establishes and
maintains pursuant to § 1026.36(j) are
included in § 1026.36(f)(3)(ii)(B)(3) and
comment 36(g)(1)(ii)–1.
VI. Effective Date
The amendments to § 1026.36(h) and
(i) of this final rule are effective on June
1, 2013. The rule applies to transactions
for which the creditor received an
application on or after that date. All
other provisions of the rule are effective
on January 10, 2014. As discussed above
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in part III.G, the Bureau believes that
this approach is consistent with the
timeframes established in section
1400(c) of the Dodd-Frank Act and, on
balance, will facilitate the
implementation of the rules’
overlapping provisions, while also
affording creditors sufficient time to
implement the more complex or
resource-intensive new requirements.
In the proposal, the Bureau
recognized that this rulemaking
addresses issues important for consumer
protection and thus should be
implemented as soon as practical. The
Bureau also recognized, however, that
creditors and loan originators will need
time to make systems changes, establish
appropriate policies and procedures,
and retrain their staff to address the
Dodd-Frank Act provisions and other
requirements implemented through this
rulemaking. The Bureau stated that
ensuring that industry has sufficient
time to properly implement the
necessary changes will inure to the
benefit of consumer through better
industry compliance, and solicited
comment on an appropriate
implementation period for the final rule
in light of these competing
considerations.
In response to the proposal, the
Bureau received approximately 20
comments from industry participants
with respect to the appropriate effective
date for the requirements in the
proposed rule. The majority of
commenters, including large and small
banks, credit unions, non-depository
creditors, and State and national trade
associations, requested that the Bureau
provide the industry with ample time to
implement the requirements of the final
rule, but did not suggest a specific
effective date or timeframe. For
example, one State trade association
representing banks and a mortgage
company did not propose a specific
effective date, but urged the Bureau to
carefully consider the challenges
involved with implementing such
massive changes and to make every
effort to avoid significant adverse
impact on consumers, creditor, and the
economy as a whole. Two commenters
also noted that their software vendors
were concerned about their ability to
meet potential effective dates. A State
trade association representing credit
unions expressed concern about the
number of changes required by the rule
and suggested that the Bureau delay the
effective date until all of the related
proposals have been finalized. Further,
another trade association representing
credit unions stated that, if credit
unions were not exempt from the new
regulations, the Bureau should apply
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maximum flexibility in determining the
implementation and effective dates of
the final rule.
For commenters requesting a specific
date for implementation, the time
periods suggested ranged from 12 to 36
months. One large and one small credit
union indicated that the Bureau should
establish an implementation period of
18 months, while a leading industry
trade association and a large bank
advocated for an effective date of 18 to
24 months and 24 months, respectively.
Further, one trade association
representing manufactured housing
providers requested that the Bureau use
its authority to extend the effective date
to the greatest extent possible and
suggested an implementation date of up
to 36 or 48 months after issuance of the
rule. Each of the commenters generally
stated that the requested time was
necessary to effectively implement the
regulations because of the complexity of
the proposed rules, the impact on
systems changes and staff training, and
the cumulative impact of the proposed
loan originator compensation rules
when combined with other
requirements imposed by the DoddFrank Act or proposed by the Bureau.
One major trade association referred to
the complexity faced by HUD in
implementing the RESPA reform rules
from 2009 to 2011 and urged the Bureau
to provide industry with an opportunity
to review the rule and have
uncertainties and ambiguities addressed
before the implementation period
begins. Similarly, another bank
recommended that the Bureau establish
an internal group to respond to industry
questions and concerns regarding
implementation.
The Bureau received three comments
specifically regarding the effective date
for § 1026.36(g), which requires the loan
originator’s name and NMLSR ID on all
loan documents. One trade association
requested that the Bureau delay the
effective date for including the NMLSR
IDs on forms until the rule
implementing the TILA–RESPA
integrated disclosure forms takes effect.
The commenter urged that a delayed
effective date would eliminate
unnecessary costs for creditor to update
the technology related to disclosures for
this rule and then again once the new
integrated disclosures are finalized. A
large bank stated that the new NMLSR
ID requirement, if adopted, should
become effective no sooner than January
2014 to provide industry with enough
time to make document forms and
system changes. The bank commenter
also recommended that a 12-month
implementation period may not be
adequate if banks do not timely receive
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updated note and security interest forms
supplied by the Government Sponsored
Enterprises (‘‘GSEs’’) and federal
agencies. One information services
company did not propose a timeframe,
but sought clarification of the effective
date to ensure consistency across the
industry.
Additionally, the Bureau received two
comments from consumer groups
specifically regarding the effective date
of the ban on mandatory arbitration
clauses in § 1026.36(h) and certain
financing practices for single-premium
credit insurance in § 1026.36(i). One of
the consumer groups stated that the
proposed regulation adds little to the
statutory requirements and, thus, should
take effect no later than January 21,
2013. The other consumer group did not
propose a specific implementation date,
but stated generally that the ban on
mandatory arbitration clauses in section
1414 of the Dodd-Frank Act should be
implemented immediately.
For the reasons already discussed
above, the Bureau believes that an
effective date of January 10, 2014 for
most of the other title XIV final rules
and all provisions of this final rule
except § 1026.36(h) regarding
mandatory arbitration and waivers of
federal claims and § 1026.36(i) regarding
certain financing practices for singlepremium credit insurance will ensure
that consumers receive the protections
in these rules as soon as reasonably
practicable. These effective dates take
into account the timeframes established
by the Dodd-Frank Act, the need for a
coordinated approach to facilitate
implementation of the rules’
overlapping provisions, and the need to
afford loan originators, creditors and
other affected entities sufficient time to
implement the more complex or
resource-intensive new requirements.
Accordingly, except for § 1026.36(h) and
(i), the effective date for implementation
of the regulations adopted in this notice
is January 10, 2014. This time period is
consistent with: (1) The request for the
majority of comments for an ample
amount of time to implement the
requirements: (2) outreach conducted by
the Bureau with vendors and systems
providers regarding timeframes for
updating core systems: and (3) the
implementation period for other
requirements imposed by the DoddFrank Act or regulations issued by the
Bureau that may have a cumulative
impact on loan originators and
creditors. Although some commenters
requested a longer time period to come
into compliance with this rule, the
Bureau believes that the implementation
period adopted appropriately balances
the need of industry to have a sufficient
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amount of time to bring their systems
and practices into compliance with the
goal of providing consumers the benefits
of these new protections as soon as
practical.
With respect to the Dodd-Frank Act’s
ban on mandatory arbitration clauses,
waivers of Federal claims, and certain
financing practices for single-premium
credit insurance, the Bureau agrees with
commenters that these requirements
should be implemented without further
delay. Accordingly, the requirements
banning mandatory arbitration clauses,
waivers of Federal claims, and certain
financing practices for single-premium
credit insurance in § 1026.36(h) and (i)
take effect June 1, 2013. Thus,
compliance with these provisions of this
final rule will be mandatory nearly eight
months earlier than the January 21, 2014
baseline mandatory compliance date
that the Bureau is adopting for the other
parts of this final rule and most of the
Title XIV Rulemakings, as discussed
above in part III.G. As that discussion
notes, the Bureau is carefully
coordinating the implementation of the
Title XIV Rulemakings, including their
mandatory compliance dates. The
Bureau is including § 1026.36(h) and (i)
of this final rule, however, among a
subset of the new requirements of the
Title XIV Rulemakings that will have
earlier effective dates because the
Bureau believes that they do not present
significant implementation burdens for
industry.
VII. Dodd-Frank Act Section 1022(b)(2)
In developing the final rule, the
Bureau has considered potential
benefits, costs, and impacts.159 The
proposed rule set forth a preliminary
analysis of these effects, and the Bureau
requested and received comments on
this analysis. In addition, the Bureau
has consulted or offered to consult with
the prudential regulators, HUD, the
FHFA, and the Federal Trade
Commission, including regarding
consistency with any prudential,
market, or systemic objectives
administered by such agencies.
In this rulemaking, the Bureau
amends Regulation Z to implement
amendments to TILA made by the
Dodd-Frank Act. The amendments to
Regulation Z implement certain
provisions in Dodd-Frank Act sections
159 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.
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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(a)
(restrictions on the financing of singlepremium credit insurance products and
mandatory arbitration agreements and
waivers of Federal claims in residential
mortgage loan transactions). The final
rule also provides clarification of certain
provisions in the 2010 Loan Originator
Final Rule, including the application of
those provisions to certain profit-based
compensation plans and the appropriate
analysis of other payments made to loan
originators.
The Board and Congress acted in
2010, as discussed in Part II above, to
address concerns that certain methods
of compensating loan originators could
create potential moral hazard in the
residential mortgage market, creating
incentives for originators to persuade
consumers to agree to loan terms, such
as higher interest rates, that are more
profitable to originators but detrimental
to consumers. The final rule will
continue the protections provided in the
2010 Loan Originator Final Rule while
implementing additional provisions
Congress included in the Dodd-Frank
Act that, as discussed previously,
improve the transparency of mortgage
loan originations, preserve consumer
choice and access to credit, and enhance
the ability of consumers to accurately
interpret and select among the
alternative loan terms available to them.
A. Provisions To Be Analyzed
The analysis below considers the
benefits, costs, and impacts of the
following major provisions:
1. A complete exemption, pursuant to
Dodd-Frank Act section 1403 and other
authority, from the statutory prohibition
in section 1403 on consumers paying
upfront points and fees in all loan
transactions where a loan originator
receives compensation from someone
other than a consumer for that particular
transaction.
2. Clarification of the applicability of
the prohibition on payment and receipt
of loan originator compensation based
on transaction terms to compensation by
creditors or loan originator
organizations through designated taxadvantaged plans in which individual
loan originators participate and to
payment of non-deferred profits-based
compensation.
3. New requirements for loan
originators, including requirements
related to their licensing, registration,
and qualifications, and a requirement to
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include their identification numbers
and names on loan documents.
The prohibition of mandatory
arbitration clauses and waivers of
Federal claims in residential mortgage
contracts and restrictions on the
financing of single-premium credit
insurance are also discussed.
The analysis considers the benefits
and costs to consumers and covered
persons from each of these provisions.
The analysis also addresses comments
the Bureau received on the proposed
1022(b)(2) analysis as well as certain
other comments on the benefits or costs
of provisions of the proposed rule when
doing so is helpful to understanding the
section 1022(b)(2) analysis. Comments
that mention the benefits or costs of a
provision of the rule in the context of
commenting on the merits of that
provision are addressed in the sectionby-section analysis for that provision.
The analysis also addresses the benefits,
costs, and impacts of certain alternative
provisions that were considered by the
Bureau in the development of the final
rule, including in response to
comments. Broader and more detailed
discussions of these alternative
provisions, including the requirement to
make available to the consumer an
alternative loan that would not include
discount points, origination points, or
origination fees and the use of a revenue
test to determine circumstances under
which loan originators may receive
certain compensation on the basis of
profits from mortgage origination
activities, can also be found in the
section-by-section analysis above.
As noted, section 1022 of the DoddFrank Act requires that the Bureau, in
adopting the rule, consider potential
benefits and costs to consumers and
covered persons resulting from the rule,
including the potential reduction of
access by consumers to consumer
financial products or services resulting
from the rule, as noted above; it also
requires the Bureau to consider the
impact of proposed rules on covered
persons and the impact on consumers in
rural areas. These potential benefits and
costs, and these impacts, however, are
not generally susceptible to
particularized or definitive calculation
in connection with this rule. The
incidence and scope of such potential
benefits and costs, and such impacts,
will be influenced very substantially by
economic cycles, market developments,
and business and consumer choices that
are substantially independent from
adoption of the rule. No commenter has
advanced data or methodology that it
claims would enable precise calculation
of these benefits, costs, or impacts.
Moreover, the potential benefits of the
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rule on consumers and covered persons
in creating market changes anticipated
to address market failures are especially
hard to quantify.
In considering the relevant potential
benefits, costs, and impacts, the Bureau
has utilized the available data discussed
in this preamble, where the Bureau has
found it informative, and applied its
knowledge and expertise concerning
consumer financial markets, potential
business and consumer choices, and
economic analyses that it regards as
most reliable and helpful, to consider
the relevant potential benefits and costs,
and relevant impacts. The data relied
upon by the Bureau includes the public
comment record established by the
proposed rule.160 However, the Bureau
notes that for some aspects of this
analysis, there are limited data available
with which to quantify the potential
costs, benefits, and impacts of the final
rule. The absence of public data
regarding the specific distribution of
loan products offered to consumers, for
example, eliminates the ability to
estimate precisely any empirical
benefits from increased consumer
choice.
In light of these data limitations, the
analysis below generally provides a
qualitative discussion of the benefits,
costs, and impacts of the final rule.
General economic principles, together
with the limited data that are available,
provide insight into these benefits,
costs, and impacts. Where possible, the
Bureau has made quantitative estimates
based on these principles and the data
that are available. For the reasons stated
in this preamble, the Bureau considers
that the rule as adopted faithfully
implements the purposes and objectives
of Congress in the statute. Based on each
and all of these considerations, the
Bureau has concluded that the rule is
appropriate as an implementation of the
Act.
160 The Bureau noted in the mortgage proposals
issued in summer 2012 that it sought to obtain
additional data to supplement its consideration of
the rulemakings, including additional data from the
National Mortgage License System (NMLS) and the
NMLS Mortgage Call Report, loan file extracts from
various lenders, and data from the pilot phases of
the National Mortgage Database. Each of these data
sources was not necessarily relevant to each of the
rulemakings. The Bureau used the additional data
from NMLS and NMLS Mortgage Call Report data
to better corroborate its estimate of the contours of
the non-depository segment of the mortgage market.
The Bureau has received loan file extracts from
three lenders, but at this point, the data from one
lender is not usable and the data from the other two
is not sufficiently standardized nor representative
to inform consideration of the final rules.
Additionally, the Bureau has thus far not yet
received data from the National Mortgage Database
pilot phases. The Bureau also requested that
commenters submit relevant data. All probative
data submitted by commenters are discussed in this
document.
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B. Baseline for Analysis
The amendments to TILA in sections
1403 and 1414(a) of the Dodd-Frank Act
would have taken effect automatically
on January 21, 2013, in the absence of
these final rules implementing those
requirements.161 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 any affiliate of
either to collect from the consumer
upfront discount points, origination
points, or origination fees in a
transaction in which the mortgage
originator receives from a person other
than the consumer an origination fee or
charge, would have taken effect
automatically unless the Bureau
exercised 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 singlepremium credit insurance, and TILA
section 129C(e) provides restrictions on
mandatory arbitration agreements and
waivers of Federal claims. These
statutory amendments to TILA also
would have taken effect automatically
in the absence of the Bureau’s instant
regulation.
In some instances, this final rule
provides exemptions to certain statutory
provisions. These exemptions are made
to enhance the benefits received by
consumers relative to allowing the TILA
amendments to take effect
automatically. In particular, the DoddFrank Act prohibits consumer payment
of upfront discount points, origination
points, and origination fees in all
residential mortgage 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 section
1403 of 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,
and other authority, the Bureau’s final
rule does not prohibit the use of upfront
points and fees. In exercising its
exemption authority, the Bureau
maintains the current degree of choice
available to consumers and the current
161 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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methods by which creditors can hedge
prepayment risk inherent in mortgage
loans.
Thus, many costs and benefits of the
provisions of the final rule arise largely
or entirely from the statute, and not
from the final rule. The final rule would
provide substantial benefits compared
to allowing these provisions to take
effect by clarifying parts of the statute
that are ambiguous. Greater clarity on
these issues should reduce the
compliance burdens on covered persons
by reducing costs for attorneys and
compliance officers as well as potential
costs of over-compliance and
unnecessary litigation. In addition, the
final rule would provide substantial
benefits by granting the exemptions to
the statute described above that will
benefit consumers and avoid disruption
to the mortgage industry. Section 1022
of the Dodd-Frank Act permits the
Bureau to consider the benefits and
costs of the rule solely compared to the
state of the world in which the statute
takes effect without an implementing
regulation. To provide the public better
information about the benefits and costs
of the statute, however, the Bureau has
nonetheless chosen to evaluate the
benefits, costs, and impacts of the major
provisions of the final rule against a prestatutory baseline. That is, the Bureau’s
analysis below considers the benefits,
costs, and impacts of the relevant
provisions of the Dodd-Frank Act
combined with the final rule
implementing those provisions relative
to the regulatory regime that pre-dates
the Act and remains in effect until the
final rule takes effect. The one exception
is the analysis of the Bureau’s adoption
in the final rule of a complete
exemption to the statutory ban on
upfront points and fees. Evaluating this
provision relative to a pre-statutory
baseline would be an empty exercise, as
the exemption preserves the pre-statute
status-quo.
C. Coverage of the Final Rule
The final rule applies to loan
originators, as that term is defined in
§ 1036.36(a)(1)(i). The new qualification
and document identification
requirements also apply to creditors that
finance transactions from their own
resources and meet the definition of a
loan originator. The required
compliance procedures only apply to
depository institutions. Like existing
§ 1026.36(d) and (e), the 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 new arbitration, waiver,
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and single-premium credit insurance
provisions apply to both closed-end
consumer credit transactions secured by
a dwelling and HELOCs subject to
§ 1026.40 and secured by the
consumer’s principal dwelling.
D. Potential Benefits and Costs of the
Final Rule to Consumers and Covered
Persons
1. Full Exemption of Discount Points
and Origination Points or Fees
The Dodd-Frank Act prohibits
consumer payment of upfront points
and fees in all residential mortgage loan
transactions, except those where a loan
originator does not receive
compensation that is tied to the specific
transaction (e.g., a commission) from
someone other than a consumer.
Pursuant to its authority under
section 1403 of 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 earlier proposed to provide
that a creditor or loan originator
organization may charge a consumer
discount points or fees when someone
other than the consumer pays a loan
originator transaction-specific
compensation, but only if the creditor
also makes available to the consumer a
comparable, alternative loan that
excludes discount points, origination
points, or origination fees. The proposal
to require the creditor to satisfy this
prerequisite was termed the ‘‘zero-zero
alternative.’’
The Bureau chooses, at this time, to
adopt a complete exemption to the
statutory ban on upfront points and fees
in the final rule, rather than the
proposed zero-zero alternative. The
Bureau believes that providing a
complete exemption at this time, while
preserving its ability to revisit the scope
of the exemption in the future, will
benefit consumers and the public
interest by maintaining access to credit
and the range of alternative mortgage
products available to consumers at this
time, and by avoiding any unanticipated
effects on the nascent recovery of
domestic mortgage and housing
markets.
The Bureau strongly believes,
however, that while an exemption from
the statutory restrictions on points and
fees is, at this time and under the
current state of knowledge of the
mortgage market, in the consumer and
the public interests, future research
could indicate that amending the
existing regulations regarding points
and fees would benefit consumers and
the public. The Bureau intends to
conduct research into this issue over the
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next five years. This five-year timeframe
corresponds to the Bureau’s
responsibility to conduct a five-year
review of the rule as required by the
Dodd-Frank Act. Based on its research
findings, the Bureau would, as part of
this review, assess consumer and public
welfare under a complete exemption of
the statutory prohibition on points and
fees. This five-year review period will
allow the Bureau, as part of its research
on points and fees, to assess effects on
the mortgage market arising from the
new disclosures to be issued by the
Bureau when the 2012 TILA–RESPA
Integration Proposal is finalized, the
2013 ATR Final Rule, the 2013 HOEPA
Final Rule, and other relevant Title XIV
rulemakings. The Bureau notes that
these Title XIV rulemakings are likely to
have a significant impact on how points
and fees are structured in the mortgage
market. If the Bureau determines over
this period that additional requirements
are needed, the Bureau would issue a
new proposal for public notice and
comment.
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.162 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.
In many instances, creditors or loan
originators will charge consumers an
origination point or fee. When many
loan originator organizations serve a
mortgage market, competition between
them drives these upfront payments to
a level just sufficient to cover the cover
the labor and material costs the
organization incurs from processing the
loan and these payments do not
represent a source of economic profit for
that loan originator organization. Here
too, the loan originator could offer the
162 Consumers who expect to pay the balance of
their loan prior to maturity 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. Creditors
exchange rights with consumers but in the opposite
direction with ‘‘callable’’ bonds. This type of bond
exhibits 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.
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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 final
rule offers consumers greater choice
over the terms of the coupon payments
on their loans and a choice between
paying discount points or a higher rate
for the purchase of the prepayment
option embedded in their loans.163 In
theory consumers make this choice, at
least in part, based on how long they
will stay in the particular loan. This, in
turn, will depend primarily on how long
they expect to stay in the property and
their beliefs about future conditions in
the mortgage market. At the time of
origination, however, consumers
necessarily have some uncertainty about
future events; the actual outcome of
such events could induce these
consumers to pay off their loan after a
shorter period than planned.
Consequently, the benefits the consumer
actually obtains at the termination of the
loan may be less than those the
consumer expected at the time of
origination and could even result in the
consumer suffering a realized loss.164
163 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. See, e.g., 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 optionembedded mortgages in a continuous-time
environment).
164 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. See 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
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Greater choice over the terms of
transactions and greater choice over
how to pay for the prepayment option
should, under all but rare
circumstances, increase the ex ante
welfare of consumers.165 The degree to
which individual consumers ultimately
benefit after origination will depend on
their individual circumstances and their
relative degree of financial acuity.166
Relative to permitting the statutory
provision to go into effect unaltered, the
Bureau’s exemption 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’ purchase of
discount points signals to creditors that
the expected maturity of their loans is
longer than those loans taken out by
consumers who do not purchase
discount points. This results in the
consumer being offered a rate below the
rate that would be offered if the ratepoint trade-off did not incorporate the
signal about the likely length of time
that consumers paying points will hold
the loan. Creditors respond by offering
a lower average rate on each class of
mortgages over which creditors have
discretion in pricing.167
highlight the difficulty in drawing conclusions from
much of the empirical data.
165 Such a circumstance includes, for example,
the case in which the need to understand and
decide among loans with different points and fees
combinations imposes a burden on some
consumers. The existence of increased choice made
available by this provision would, in this case, be
itself a cost to the consumer. Based on standard
economic reasoning, the Bureau believes, however,
that the circumstances in which the exercise of its
exemption authority has the potential to reduce
consumer welfare, relative to the statutory
prohibition, are, for the most part, quite rare.
166 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. 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 be reversed when consumers have a
more accurate knowledge of their financial abilities
than does the creditor.
167 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 consumers.
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Potential Benefits and Costs to Covered
Persons
Relative to implementation of the
general statutory prohibition on points
and fees without exercise of Bureau’s
exception authority, the ability to trade
a lower loan rate to consumers in
exchange for the upfront payment of
discount points and origination points
or fees is of significant benefit to all
creditors participating in loan
origination. When purchasing a
mortgage, consumers also receive an
option to prepay their mortgage balance
at a time only they choose. While this
‘‘prepayment’’ option is valuable to
consumers, it is also a source of risk to
creditors, which lose future interest rate
payments should the consumer prepay
the consumer’s loan prior to the loan’s
maturity. The potential for a mutually
beneficial exchange of lower rates for
current payment of points and fees
allows a creditor to recoup a portion of
the (market) value of this option, which
is equivalent to the creditor’s cost of
bearing prepayment risk. This is a
primary means by which a creditor can
hedge the risk posed by fixed-rate
mortgages, whether held or sold, to its
portfolio and the value of its
business.168
A related benefit for creditors arises
from the presence of adverse selection
among consumers in the mortgage
market, which compounds the risks
borne from early repayment. Allowing
consumers to purchase discount points
allows them to signal to creditors that
they expect to make payments on their
loans 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.169 Increasing a
creditor’s ability to measure more
precisely the prepayment risk and credit
risk posed by an individual consumer
allows it to more precisely adjust the
prices or loans to correspond to the
particular risk presented by each
168 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. Absent other means of
hedging prepayment risk, creditors would either
need to reduce the volume of loans they originate
or incur greater costs of raising capital to fund such
loans, owing to the increased risk to their business
and, consequently, to their solvency.
169 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.
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individual consumer. By charging
different loan rates to consumers who
pose different degrees of risk, creditors
will earn a greater overall return from
funding mortgage loans.170
Both creditors and consumers,
consequently, benefit from the role of
discount points as a credible signal.
This enhances the economic efficiency
of the mortgage markets. 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, the final rule benefits
covered persons by avoiding the
imposition of transition costs, including
such things as internal accounting
procedures and origination software
systems, which would have been
imposed had the full statutory
prohibition taken effect.
Finally, mindful of the state of the
United States housing and mortgage
markets, the final rule also reduces the
chance that potential disruptions to the
mortgage market might arise from the
significant changes to the regulations
under which loan originators, creditors,
and consumers operate. This final rule
should help promote the recovery and
stability of those markets.
2. Compensation Based on Transaction
Terms
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Restricting the means by which a loan
originator receives compensation is a
way to mitigate potential harm to
consumers arising from moral hazard on
the part of loan originators.171 Similar to
the existing rule, the Dodd-Frank Act
includes such restrictions to mitigate
the potential harm to consumers arising
from such moral hazard.
The Dodd-Frank Act generally follows
the existing rule’s prohibition on
compensating an individual loan
originator based on the terms of a
transaction. Although the statute and
the existing rule are clear that an
170 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.
171 Moral hazard, in the current context of
mortgage origination, depends fundamentally on
the advantage the loan originator has in knowing
the least expensive transaction terms acceptable to
creditors and greater overall knowledge of the
functioning of mortgage markets. See Holden Lewis,
‘‘Moral Hazard’’ Helps Shape Mortgage Mess,
Bankrate (Apr. 18, 2007), available at http://
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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individual loan originator cannot be
compensated differently based on the
terms of the individual loan originator’s
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
individual loan originators employed by
the same creditor or loan originator
organization.
The Bureau is aware that loan
originator organizations may be unsure
of how the restrictions on compensation
in the current rule apply to
compensation based on the profits of the
organization.172 The final rule and
commentary address this uncertainty by
clarifying the scope of the compensation
restrictions in existing
§ 1026.36(d)(1)(i).173 The final rule
treats different methods of
compensation differently based on an
analysis of the incentives for originators
to engage in moral hazard, as created for
originators by each such method. The
final rule permits a creditor or loan
originator organization to make
contributions to designated taxadvantaged plans (which include
defined benefit and contribution plans
that satisfy the qualification
requirements of Internal Revenue Code
section 401(a) or certain other Internal
Revenue Code sections), even if the
contributions are made out of mortgagerelated business profits. The final rule
also permits compensation under nondeferred profits-based compensation
plans even if the amounts paid are
funded through mortgage-related
business profits, if: (1) The percentage of
a loan originator’s compensation
attributable to such compensation is
equal to or less than 10 percent of total
compensation; or (2) the individual loan
originator has been a loan originator for
ten 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 final rule,
however, generally reaffirms the
existing rule insofar as it does not
permit, under non-deferred profit-based
compensation plans and designated
172 Such compensation includes bonuses paid
under profit-sharing plans, and contributions by
creditors and loan originator organizations to
designated and non-designated benefit and
contribution plans.
173 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 designated
plans and non-designated plans, and this regulation
is intended in part to provide further clarity on
such issues. Until the final rule goes into effect, the
clarifications in CFPB Bulletin 2012–2 will remain
in effect.
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11395
defined contribution plans, that
individual loan originators be
compensated based on the terms of their
individual transactions.
Potential Benefits and Costs to
Consumers
The final rule benefits consumers by
clarifying the existing rule to address
and mitigate the moral hazard inherent
in the nature of profits-based
compensation and other types of
compensation that are directly or
indirectly based on the terms of
multiple transactions of an individual
loan originator (these are referred to in
this section and the next section as
‘‘profits-based compensation’’). Limiting
such profits-based compensation for
many firms limits the incentives to steer
consumers into more expensive loans.
To the extent that the existing rule
already prohibits a type of
compensation plan for loan originators,
the final rule’s prohibition of such a
plan will not result in any new benefits
to consumers. The Bureau’s approach
permits compensation under nondeferred profits-based compensation
plans and compensation through
designated tax-advantaged plans 174
only in cases in which the relationship
between transaction terms and such
forms of compensation are sufficiently
weak to render insignificant any
potential for steering incentives.
These forms of compensation are
designed to provide individual loan
originators and other individuals
working for the creditor or loan
originator organization with greater
performance incentives and to align
their interests with those of the owners
of the entity they work for.175 When
moral hazard exists, however, such
compensation determined with
reference to profits could lead to
misaligned incentives on the part of
individual loan originators with respect
to consumers. The magnitude of adverse
incentives arising from profits-based
compensation, however, depends on
several variables.176 These include the
174 Payments to designated retirement plans
include, for example, employer contributions to
employee 401(k) plans.
175 Bengt Holmstrom, Moral Hazard and
Observability, Bell Journal of Economics 74 (1979),
provides the first careful analysis of the effects such
compensation methods have on employee
incentives.
176 When multiple originators are working for a
given loan originator organization or creditor, the
compensation to each individual loan originator
will depend upon on the aggregate efforts of all the
loan originators working for this entity, rather than
directly on the individual loan originator’s own
performance. Consequently, if we compare the
efforts of an individual loan originator working for
a smaller entity with those of another individual at
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number of individual loan originators
working for the creditor or loan
originator organization that contributes
to the funds available for profits-based
compensation, the means by which
shares of the profits are distributed to
the individual loan originators working
for the same firm, and the ability of
owners to monitor the current value of
a loan on an ongoing basis.
The Bureau received a number of
comments from industry disagreeing
with the premise that profits-based
compensation could create incentives
for individual loan originators to
persuade consumers to accept
transactions terms that are costly for the
consumer but more profitable for the
loan originator. Some industry
commenters admitted that such
incentives existed but believed that,
with regard to profits-based
compensation, the incentives were
insignificant. Commenters from
consumer groups generally asserted that
profits-based compensation creates
incentives for individual loan
originators to steer consumers into loans
that are more costly to the consumer.
The Bureau recognizes that the
potential that profits-based
compensation has to create adverse
incentives for individual loan
originators depends, in general, on both
how the efforts of individual loan
originators affect profits and how those
profits affect the compensation
distributed to individual loan
originators. The Bureau also recognizes
that, depending on the particular
environment in which a particular
individual loan originator conducts
business, these adverse incentives could
decline as the number of individual
loan originators involved in the
specified profit-sharing plan increases.
The Bureau, however, notes that the
current state of academic research has
not provided an unequivocal answer to
the question of whether any given
profit-based compensation arrangement
will produce incentives sufficiently
strong for individual loan originators to
engage in consumer steering. The
Bureau also notes that this research,
a larger entity, the effort by the individual at the
larger entity will be less than the effort of the
individual at the smaller entity, owing to the
smaller influence any individual at the larger entity
has on the amount of compensation awarded to the
individual. This relationship between individual
effort and the total number of peers in a given entity
is termed ‘‘free-riding.’’ 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 http://
ws1.ad.economics.harvard.edu/faculty/weitzman/
files/IncentiveEffectsProfitSharing.pdf.;
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whether based on theoretical or
empirical methods, shows that the
potential for any profit-sharing plan to
create adverse incentives are acutely
sensitive to the specific features of the
working environment and the means by
which such profits are distributed to the
relevant individual loan originators.177
Finally, the Bureau notes that any
potential reduction in the strength of
these incentives is almost surely
insufficient, under all realistic
circumstances, to eliminate them
entirely.178
Despite the uncertainties the remain
in the economic literature, the Bureau
believes that the approach taken in the
final rule will benefit consumers by
mitigating the moral hazard inherent in
compensation systems that are based,
directly or indirectly, on the terms of
mortgage loan transactions, including
those based on multiple transactions.
Potential Benefits and Costs to Covered
Persons
As described above, considering the
benefits, costs, and impacts of this
177 Economic research has established the general
principle that the amount of work individuals put
into a given task, in response to remuneration based
on the sharing of profits, declines as the number of
their peers increases (‘‘free-riding.’’). No principle
with such generality has been shown, however, in
regard to the rate of this decline and the amount
of individual work effort for any particular group
of employees. Features of the means by which
profits are distributed to individuals and the
individual’s environment within a given firm, such
as the individual’s ability to observe the
performance of his peers and the frequency of
managerial monitoring of individual performance,
strongly affect these variables, as shown in a
number of recent studies, including empirical and
experimental research papers: Susan Helper, et al.,
Analyzing Compensation Methods in
Manufacturing: Piece Rates, Time Rates, or GainSharing?, (NBER Working Paper No. 16540, 2010);
R. Mark Isaac & James M. Walker, Group Size
Effects in Public Goods Provision: The Voluntary
Contributions Mechanism, Quarterly Journal of
Economics, 1988, 103 (1), 179–199; Xavier Gine &
Dean Karlan Peer Monitoring and Enforcement:
Long Term Evidence from Microcredit Lending
Groups with and without Group Liability, (2008);
and in a vast number of theoretical research papers,
¨
such as that of Bengt Holmstrom and Paul Milgrom,
1991, Multitask Principal Agent Analyses: Incentive
Contracts, Asset Ownership and Job Design, Journal
of Law, Economics and Organizations. Several
surveys of this research have been published,
including that of Candice Prendergast, The
Provision of Incentives in Firms, J Econ. Literature,
7, 37 (1999), among others.
178 Examples of empirical evidence of the
persistence of moral hazard among employees in
commercial and retail lending, include originators
of residential mortgages, appears in Sumit Agarwal
& Itzhak Ben-David, Do Loan Officers’ Incentives
Lead to Lax Lending Standards?, (Federal Reserve
Bank of Chicago, Working Paper, 2012); Aritje
Berndt, et al., The Role of Mortgage Brokers in the
Subprime Crisis, (Carnegie Mellon University,
Working Paper, 2010). Shawn Coleet, et al.,
Rewarding Calculated Risk-Taking: Evidence from a
Series of Experiments with Commercial Bank Loan
Officers, (Harvard Business School, Working Paper,
2010).
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provision requires the understanding of
current industry practice against which
to measure any changes. As discussed,
the Bureau is aware, based in part on
outreach to and inquiries received from
industry, that originator organizations
may be unclear about the application of
the existing rule to profits-based
compensation plans, including nondeferred profits-based compensation
and employer compensation through
designated plans. In light of this lack of
clarity, the Bureau believes that
industry practice likely varies and
therefore any determination of the costs
and benefit of the final rule depend
critically on assumptions about current
firm practices.
Firms that currently offer profitsbased compensation for individual loan
originators that would continue to be
allowed under the final rule should
incur no costs from the final rule. They
could, however, benefit from the
presence of a regulation and
accompanying official commentary that
clarifies which methods of loan
originator compensation are
permissible. Notably, the final rule
explicitly states that employer
contributions to designated defined
contribution plans in which individual
loan originators participate are
permitted, provided that the
contributions are not based on the terms
of the individual loan originator’s
transactions. 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 creditor or loan
originator organization for whom they
work and to reduce the potential for
increased costs arising from adverse
selection in the retention of more
productive individual loan originators.
Firms that do not offer such plans
would benefit, with the increased clarity
of the final rule, from the opportunity to
do so should they so choose.179
Similarly, some firms may currently
compensate their individual loan
originators through methods, such as
designated defined benefit plans, the
legality of which may have been
unclear, with different originator
organizations interpreting the existing
rule differently. The final rule benefits
these firms by clarifying the legality of
various compensation practices.
179 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 profits-based
compensation plans.
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As discussed above, the final rule
permits compensation under nondeferred profits-based compensation
plans, including bonuses, to be paid
from mortgage-related profits if such
compensation for an individual loan
originator does not, in the aggregate,
exceed 10 percent of the individual loan
originator’s total compensation. This
will benefit firms that would prefer to
pay these types of bonuses or make
these types of contributions out of
mortgage-related profits, but do not
because of uncertainty about the
application of the existing rule. Firms
that currently compensate individual
loan originators through non-deferred
profits-based compensation plans in
excess of 10 percent of individual loan
originators’ total compensation might
have to adjust their non-deferred profitsbased compensation to comply with the
10-percent total compensation test
under the final rule. This may impose
some adjustment costs or may make it
more costly to attract or retain qualified
loan originators.
The final rule also contains a de
minimis provision exempting
individuals who originate ten or fewer
loans per year from limitations on nondeferred profits-based compensation.
This provision is intended to avoid
penalizing those individuals whose
compensation from the origination of a
small number of loans is insufficient to
give them incentives inimical to the
welfare of consumers. Industry
commenters generally favored the de
minimis exception, although a few
commenters preferred a higher value for
the de minimis threshold (e.g., one trade
association representing banks
requested a threshold of 15). The
Bureau’s survey of recent research into
the relation of the total number of
employees in a given firm, the value of
total compensation to any individual
employee, and the effects on the
behavior of individual employees of
compensation that is based on the
profits arising from the collective effort
of all employees of that firm
corroborates the judgment that any
adverse incentives from profits-based
compensation to an individual under
the final rule’s de minimis threshold are
insignificant and do not affect the
welfare of consumers.180
3. Qualification Requirements for Loan
Originators
Section 1402 of the Dodd-Frank Act
amends TILA to impose a duty on loan
originators to be ‘‘qualified’’ and, where
applicable, registered or licensed as a
180 See footnotes 100 and 101 for a number of
examples of research in this area.
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loan originator under State law and the
Federal SAFE Act. Employees of
depositories, certain of their
subsidiaries, and bona fide nonprofit
organizations currently do not have to
meet the SAFE Act standards that apply
to licensing, such as taking prelicensure classes, passing a test, meeting
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 final rule
requires 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 similar 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 final rule mandates
training appropriate for the actual
lending activities of the individual loan
originator and does not impose a
minimum number of training hours.
Industry commenters to the proposal
disagreed that there is a need for
individual loan officers to meet
qualification standards because loan
originators already must comply with
the requirements of prudential
regulations. The Bureau also received a
number of requests from industry
representatives to refrain from adopting
mandatory testing and education
requirements in favor of instead
requiring taking courses and passing
examinations approved by the NMLSR.
Finally, an association of mortgage
bankers requested that the Bureau
explore imposing a national test for all
bank employees or employees of
creditors that offer loans.
The Bureau notes that it is not
opposed to the idea of future testing for
all bank employees or employees of
creditors who offer loans. Conditional
on the current state of the mortgage
market, however, the Bureau believes
that the burden imposed by
comprehensive testing might, at this
time, be sufficiently burdensome to
further decrease benefits to consumers,
and covered persons as a whole.
Potential Benefits and Costs to
Consumers
The primary benefit to consumers of
the qualification provisions of the final
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11397
rule are that tighter qualifications will
screen out, on an ongoing basis after
implementation of the final rule and
with regard to some loan officers
currently employed who have not
previously been screened, those
individual originators with backgrounds
suggesting they could pose risks to
consumers and will raise the level of
loan originator expertise regarding the
origination process. Both of these effects
will likely decrease the harm that could
be borne, unknowingly at the time of
origination, by any individual
consumer.
Several industry representatives,
including national and State industry
trade associations and large depository
institutions, expressed doubt about
whether consumers would receive
significant benefits from the change in
qualification requirements.
The Bureau believes that its
qualification requirement will improve
consumer welfare because it will help
ensure that any individual loan
originator with whom a consumer
negotiates a loan will possess levels of
expertise and integrity no less than
those required in the final rule and
assures consumer that they bear
relatively little risk of encountering a
loan originator who lacks these
qualifications. While measuring the
magnitude of this benefit is impossible
with currently available public data, the
Bureau notes that the its qualification
requirement will not only convey a
direct benefit to consumers, it will, in
addition, benefit both consumers and
covered persons through the reduction
of this source of adverse selection
among new originators. This reduction
will increase economic efficiency in the
market and allow more mutually
beneficial loan transactions to occur.
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 final rule.181
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. If the
requirements, as expected, reduce the
likelihood that consumers will
encounter loan originators with
181 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.
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inadequate expertise or integrity, this
may lead to an increase in consumer
confidence and may possibly increase
the number of consumers willing to
engage in these transactions. Some
entities could, however, face increased
recruitment, training, and related costs
in complying with these new
requirements.
In addition, relative to current market
conditions, the final rule would create
a more level ‘‘playing field’’ between
non-depository institutions and
depository and nonprofit institutions
with regard to the enhanced training
requirements and background checks
that would be required of depository
institutions. This may help mitigate
possible adverse selection in the market
for individual originators, in which
individuals who cannot meet the
requirements for non-depository
institutions might seek employment by
depository and nonprofit institutions.
These requirements may also slightly
limit the pool of employees from which
to hire, relative to the pool from which
they can hire under existing
requirements. Similarly, the
requirement for credit checks for new
hires (and those who were not screened
under standards in effect at the time of
hire) will result in some minimal
increased costs. Bona fide nonprofit
institutions not currently subject to the
SAFE Act will have to incur the costs
of both the criminal background check
and the credit check.
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4. Mandatory Arbitration and Waivers of
Federal Claims
Section 1414 of the Dodd-Frank Act
added section 129C(e) to TILA. Section
129C(e)(1) prohibits the inclusion of
terms in any contract or agreement for
a residential mortgage loan (as defined
in the Dodd-Frank Act) or extension of
open-end credit secured by the
principal dwelling of the consumer that
require arbitration or any other nonjudicial procedure as the method for
resolving any controversy or settling any
claims arising out of the transaction.
Section 129C(e)(2) provides that a
consumer and creditor may nonetheless
agree, after a dispute arises, to use
arbitration or other non-judicial
procedure to resolve the dispute. The
statute further provides in section
129C(e)(3) that no covered transaction
secured by a dwelling, and no related
agreement between the consumer and
creditor, may bar a consumer’s ability to
bring a claim in court in connection
with any alleged violation of Federal
law. Section 1026.36(h) of the final rule
implements and clarifies these statutory
provisions.
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The restrictions on mandatory
arbitration and waiver of Federal claims
are imposed by the Dodd-Frank Act.
The Bureau is implementing these
protections by regulation. The Bureau
believes that implementing regulations
provide benefits to consumers and
covered persons by providing clarity
and thereby facilitating compliance with
the statutory provisions.
The Bureau received one comment
from an industry association asserting
that the prohibition of mandatory
arbitration as a means of resolving
disputes between consumer and
creditor, and instead allowing the
consumer to seek resolution through the
court system would increase the cost of
credit to consumers. One member of
industry also speculated that, by
allegedly expanding the statutory
prohibition of mandatory arbitration to
cover open-end consumer credit plans
other than those secured by the
principal dwelling of the consumer, the
final rule could impose significant costs
on those creditors making open-ended
and other forms of credit available to
consumers. Several consumer groups
expressed concern regarding the timing
of the implementation of the provision,
asserting that, since the proposal made
no substantive changes to the statutory
provision, the effective date of
implementation provided by the statute
should also be maintained.
To the extent that contractual terms
requiring mandatory arbitration and
restricting waiver Federal claims benefit
covered persons by reducing litigation
and other expenses, the statute and
implementing regulation will create
costs for covered persons. The Bureau
notes, however, that covered persons
and consumers will still be permitted to
agree, after a dispute has arisen, to
submit that dispute to arbitration. The
Bureau also notes that, to its knowledge,
no compelling empirical evidence
supports the comments that consumer
access to the court system for the
resolution of disputes would increase
the cost of such mortgages to
consumers. In addition, no evidence
supporting this prediction was
presented by the industry association
making this assertion or by any other
industry or consumer representative.
The Bureau disagrees with the
assertion that the final rule would
impose costs on those creditors
marketing open-ended loans and other
forms of credit not secured by principal
dwelling of the consumer. Since
proposed § 1026.36(j), implemented in
the final rule as § 1026.36(b), clarifies
that the only open-end consumer credit
plans to which § 1026.36(h) applies are
those secured by the principal dwelling
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of the consumer, no additional litigation
cost is imposed on these creditors from
this source.182
5. Creditor Financing of ‘‘Single
Premium’’ Credit Insurance
Dodd-Frank Act section 1414 added
section 129C(d) to TILA. Section
129C(d) 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 final rule
implements the relevant statutory
provision of the Dodd-Frank Act. Owing
to the lack of transparency consumers
may experience in negotiating a
mortgage loan with a creditor while
simultaneously needing to decide to
finance their insurance, such as through
an increase in their mortgage payments,
with this same creditor, the Bureau
believes there is significant potential for
such a combined transaction to harm
the consumer. The final rule should, on
this basis, benefit consumers.
6. Additional Potential Benefits and
Costs
Covered persons will have to incur
some costs in reviewing the final rule
and adapting their business practices to
any new requirements. The Bureau
notes that many of the provisions of the
final rule do not require significant
changes to current practice, since many
of the provisions in this final rule are
also in the existing rule, and therefore
these costs should be minimal for most
covered persons.
The Bureau has considered whether
the final rule would lead to a potential
reduction in access to consumer
financial products and services. Firms
will not have to incur substantial
operational costs nor any potential loss
owing to adverse selection among loan
originators. As a result, the Bureau does
not anticipate any material impact on
existing consumer access to mortgage
credit. The Bureau, however, does note
that its final rule precludes any
reduction in credit access that could
otherwise occur without its exemption
from the statutory prohibition on points
and fees.
182 However, to reduce uncertainty, the Bureau is
including a statement in § 1026.36(h) that it is
applicable to ‘‘a home equity line of credit secured
by the consumer’s principal dwelling.’’
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E. Potential Specific Impacts of the
Final Rule
1. Depository Institutions and Credit
Unions With $10 Billion or Less in Total
Assets, as Described in Section 1026 183
The Bureau believes that its final rule
will provide significant benefits to
smaller creditors. Although some
creditors could incur potential costs
associated with stricter qualification
standards for newly hired loan officers,
because of the Bureau’s use of its
exemption authority, smaller creditors
will receive a significant benefit from
their ability to continue to hedge the
prepayment risk inherent in fixed-rate
mortgages through the sale of discount
points to their consumers. Smaller
creditors normally use this method to
hedge such risk because the relatively
small volume of loans they finance
make prohibitive the costs they incur in
using other means of hedging, such as
the sale of their loans in the secondary
market or through transactions in swap
and other derivatives markets. Absent
the Bureau’s use of its exemption
authority, the statue’s prohibition on the
sale of discount points combined with
extensive restrictions on prepayment
penalties would have resulted in
virtually all smaller creditors choosing
to either originate a smaller volume of
mortgage loans or bearing a higher
degree of portfolio risk. This would
result in the average smaller creditor
being far less competitive with their
larger rivals, losing market share, paying
higher costs of funds, and bearing a
greater risk of insolvency. The
consequence of these disadvantages
would inevitably be higher frequencies
among small creditors of both
bankruptcy and absorption by large
financial holding companies. This
would result in higher interest rates and
reduced access to credit to consumers.
The final rule saves smaller creditors
from these potential costs by exempting
them from the ban on points and fees.
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2. Impact on Consumers in Rural Areas
Consumers in rural areas are unlikely
to experience benefits or costs from the
final rule that significantly differ from
those experienced by consumers in
general. To the extent that consumers in
rural areas may depend more heavily on
small creditors, however, they may be
more affected by the effects of the rule
on small creditors, as described above.
183 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.
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VIII. Regulatory Flexibility Act
The Regulatory Flexibility Act (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. The Bureau is
also subject to certain additional
procedures under the RFA involving the
convening of a panel to consult with
small business representatives prior to
proposing a rule for which an IRFA is
required.184 The Small Business
Administration (SBA) designates an
entity as ‘‘small’’ based on whether the
primary products or services it offers are
within thresholds for these products
and services set by the North American
Industry Classification System (NAICS).
An entity is considered ‘‘small’’ if it is
an insured depository institution or
credit union and holds $175 million or
less in assets, or, if it is a non-depository
mortgage lender, a mortgage brokerage
or a mortgage servicer, if it generates $7
million or less in annual receipts.185
The Bureau did not certify that the
proposed rule would have no significant
economic impact on a substantial
number of small entities. The Bureau,
consequently, convened a Small
Business Review Panel to obtain advice
and recommendations of representatives
of the regulated small entities. The
section-by-section analysis in the
proposal included detailed information
on the Small Business Review Panel.186
The Panel’s advice and
recommendations may be found in the
Small Business Review Panel Report.187
The section-by-section analysis in the
proposal also included discussion of
each Small Business Review Panel
Report recommendation, and many of
recommendations were included in the
proposal.
The proposal contained an Initial
Regulatory Flexibility Analysis
(IRFA),188 pursuant to section 603 of the
RFA. In the IRFA, the Bureau solicited
comment on the impact to small entities
that would have resulted from the
proposed provisions regarding record
retention; the prohibition on the
payment of upfront points and fees; the
184 5
U.S.C. 609.
current SBA size standards are found on
SBA’s Web site at http://www.sba.gov/content/
table-small-business-size-standards.
186 77 FR 55272, 55341–55343 (Sept. 7, 2012).
187 Final Panel Report available in the Proposed
Rule Docket: Docket ID No. CFPB–2012–0037,
available at http://www.regulations.gov/
#!documentDetail;D=CFPB-2012-0037-0001.
188 77 FR 55272, 55341–55343 (Sept. 7, 2012).
185 The
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11399
prohibition on compensation based on a
transaction’s terms; the use of
mandatory arbitration in mortgage loan
agreements; the prohibition on creditor
financing of single premium credit
insurance; loan originator qualification
requirements; the prohibition of dual
compensation of loan originators;
restrictions on reducing loan originator
compensation to cover the cost of
pricing concessions; and the prohibition
on compensation of loan originators
based on a proxy for a relevant term in
the mortgage transaction. Comments
addressing the impacts of record
retention, the prohibition on the
payment of upfront points and fees, the
prohibition on compensation based on a
mortgage transaction’s terms, the use of
mandatory arbitration in mortgage loan
transactions, and the prohibition on
creditor financing of single premium
credit insurance are discussed below.
Comments addressing loan originator
qualification requirements, the dual
compensation of loan originators, the
reduction in loan originator
compensation to bear the cost of pricing
concessions, and the compensation of
loan originators based on a proxy for a
term in the mortgage transaction are
addressed in the section-by-section
analysis above. The section-by-section
analysis above also notes the exemption
granted by the Bureau under DoddFrank Act section 1403 and other
authority in the final rule of all entities,
including small entities, from the
statutory ban on upfront points and fees.
Based on the comments received, and
for the reasons stated below, the Bureau
is not certifying that the final rule will
not have a significant economic impact
on a substantial number of small
entities. Accordingly, the Bureau has
prepared the following final regulatory
flexibility analysis pursuant to section
604 of the RFA.
A. A Statement of the Need for, and
Objectives of, the Rule
During the aftermath of the recent
crisis in financial markets, in 2010 the
Board issued the 2010 Loan Originator
Final Rule. Authority for that rule now
resides with the Bureau.189
The 2010 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 resembled
189 A prior description of the details of the origin
and nature of the 2010 Loan Originator Final Rule
may be found in Background, Part II, appearing
above.
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those in the 2010 Loan Originator Final
Rule, but also added further provisions.
The Board noted, in adopting the
2010 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), (b)(2) (requiring depository
institution compliance procedures),
(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 singlepremium credit insurance and
providing restrictions on mandatory
arbitration agreements and waivers of
Federal claims), as added by sections
1402, 1403, and 1414 of the Dodd-Frank
Act.
The Bureau, in undertaking this
rulemaking, is also clarifying certain
provisions of the 2010 Loan Originator
Final Rule to provide additional clarity
and reduce uncertainty to both
consumers and covered persons.
The Dodd-Frank Act and TILA
authorize the Bureau to adopt
implementing regulations for the
statutory provisions provided by
sections 1402, 1403, and 1414 of the
Dodd-Frank Act. The Bureau is using
this authority to issue regulations to
provide creditors and loan originators
with clarity about their obligations
under these provisions. The Bureau is
also adjusting or providing 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.190
The objectives of this rulemaking are:
(1) To revise current § 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 of the Dodd-Frank Act;
(2) to clarify ambiguities resulting from
differences between current § 1026.36
and the new TILA amendments; (3) to
adjust existing rules governing
190 The new statutory requirements relating to
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.
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compensation to individual loan
originators to account for Dodd-Frank
Act amendments to TILA; and (4) to
provide greater clarity and flexibility on
several issues.
The Bureau adopts, in the final rule,
a complete exemption to the DoddFrank Act ban on the consumer paying
upfront points and fees that would
otherwise apply to all covered
transactions in which anyone other than
the consumer pays compensation to a
loan originator. Specifically, the final
rule amends § 1026.36(d)(2)(ii) to
provide that a payment to a loan
originator that is otherwise prohibited
by section 129B(c)(2)(A) of the Truth in
Lending Act is nevertheless permitted
pursuant to section 129B(c)(2)(B) of the
Act, regardless of whether the consumer
makes any upfront payment of discount
points, origination points, or fees, as
described in section 129B(c)(2)(B)(ii) of
the Act, as long as the mortgage
originator does not receive any
compensation directly from the
consumer as described in section
129B(c)(2)(B)(i) of the Act. Accordingly,
the Bureau does not adopt the portion
of the proposal that would have
required creditors or loan originator
organizations to generally make
available an alternative loan without
discount points or origination points or
fees where they offer a loan with
discount points or origination points or
fees. This complete exemption is being
implemented by the Bureau under
Dodd-Frank Act section 1403 because,
as explained in the section-by-section
analysis, it is in the interest of
consumers and the public interest, as
well as under other authority.
The final rule also implements certain
other Dodd-Frank Act requirements
applicable to closed-end consumer
credit transactions secured by a
dwelling and open-end extensions of
consumer credit secured by a
consumer’s principal dwelling.
Specifically, the rule codifies TILA
section 129C(d), which creates
prohibitions on financing of premiums
for single-premium credit insurance.
The provisions of this rule also
implement TILA section 129C(e), which
restricts agreements requiring
consumers to submit any disputes to
arbitration and limits waivers of Federal
claims, thereby preserving consumers’
ability to seek redress through the court
system after a dispute arises. The final
rule also implements 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
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with the requirements of TILA section
129B and the registration procedures
established under section 1507 of the
SAFE Act.
In addition, the Dodd-Frank Act
extended previous efforts by lawmakers
and regulators to strengthen loan
originator qualifications 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 final rule implements
this section and expands 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, hired on or
after the rule’s effective date (or
otherwise not screened according to
procedures in place when they were
hired), meet character and fitness and
criminal background standards similar
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 final rule adjusts
existing rules governing compensation
to individual loan originators in
connection with closed-end mortgage
transactions to account for Dodd-Frank
Act amendments to TILA and provide
greater clarity and flexibility.
Specifically, the final rule preserves,
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 persons in the
same transaction. To further reduce
potential steering incentives for loan
originators created by certain
compensation arrangements, the final
rule also clarifies and revises
restrictions on profits-based
compensation for loan originators,
depending on the potential for
incentives to steer consumers to
different transaction terms.
Finally, the final rule makes two
changes to the current record retention
provisions of § 1026.25 of TILA. The
revised provisions: (1) Require a
creditor to maintain records of the
compensation paid to a loan originator,
and the governing compensation
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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. 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
modifications to the existing
recordkeeping provisions will prevent
circumvention or evasion of TILA and
facilitate compliance.
The legal basis for the final rule is
discussed in detail in the legal authority
analysis in the section-by-section
analysis above.
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B. Summary of Issues Raised by
Comments in Response to the Initial
Regulatory Flexibility Analysis.
In accordance with section 3(a) of the
RFA, the Bureau prepared an IRFA. In
the IFRA, the Bureau estimated the
possible compliance costs for small
entities from each major component of
the rule against a pre-statute baseline.
The Bureau requested comments on the
IRFA but did not receive any such
comments. The Bureau did receive some
comments describing in general terms
the impact of the proposed rule on small
creditors and loan originator
organizations and the need for
exemptions for small entities from
various provisions of the proposed rule.
These comments, and the responses, are
discussed in the section-by-section
analysis.
C. Response to the Comment From the
Small Business Administration Office of
Advocacy
SBA Advocacy provided a formal
comment letter to the Bureau in
response to the proposal. Among other
things, the letter expressed concern
about the following issues: Record
retention; the prohibition of consumer
payment of upfront points and fees; the
restrictions on compensation based on
transaction terms; and the mandatory
arbitration, waiver of Federal claims,
and credit insurance provisions.
1. Record Retention
SBA Advocacy noted that the Small
Entity Representatives had expressed
concern that the proposed requirements
for a loan originator organization or
creditor to retain for three years
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documents evidencing the amount of
compensation paid to a loan originator
were unclear and overbroad, especially
given the broad definition of
‘‘compensation’’ in the proposed rule.
The Bureau disagrees that the record
retention requirements are either
unclear or overbroad, and the Bureau
provides examples in the commentary
to § 1026.25(c)(2) of the types of records
that could be sufficient to satisfy the
record-retention requirements,
depending on the type of compensation.
2. Upfront Points and Fees
SBA Advocacy relayed the Small
Entity Representatives’ strong support of
the Bureau’s proposed use of its
exemption authority under the DoddFrank Act to allow consumers to pay
upfront discount and origination points
and fees. SBA Advocacy noted that the
Small Entity Representatives were
concerned, however, that the proposal’s
requirement for creditors or loan
originator organizations to offer an
alternative loan without discount points
or origination points or fees (the ‘‘zerozero alternative’’) would have been
unrealistic for small entities. For
reasons discussed in the section-bysection analysis, the Bureau is not
implementing the zero-zero alternative
and is instead exercising its authority
under the points and fees provision to
effect a complete exemption to the
prohibition on consumer payment of
upfront points and fees.
3. Compensation Based on Transaction
Terms
SBA Advocacy expressed concern
with the portion of the proposal that
would have permitted bonuses and
contributions to non-designated plans
from mortgage-related profits only if the
mortgage-business revenue component
of total revenues is below a certain
threshold.191 For reasons discussed in
the section-by-section analysis, the final
rule does not include this provision.
Instead, the Bureau is implementing a
final rule that permits compensation
under non-deferred profits-based
compensation plans, in which the
compensation is determined with
reference to profits from mortgagerelated business, provided that the
compensation is not directly or
indirectly based on the terms of the
individual’s residential mortgage loan
transactions and the compensation is
equal to or less than 10 percent of the
loan originator’s total compensation.
SBA Advocacy also expressed
concern that any mistake in
191 The Bureau previously used the term
‘‘qualified,’’ not ‘‘designated.’’
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11401
compensation structure might result in
loans being returned from the secondary
market and a massive buyback. To the
extent that violations of the rule could
lead to this result, it is possible that
such an event could occur today
because Regulation Z already contains
provisions that prohibit the payment of
compensation based on transaction
terms as well as payment of loan
originator compensation by both a
consumer and a person other than the
consumer on the same transaction. The
final rule provides clarifications and
grants relief under certain
circumstances with respect to these
existing restrictions.
The Bureau believes that the
application of the 10-percent total
compensation test will be less likely to
result in the scenarios described by SBA
Advocacy than the proposed revenue
test. The Bureau acknowledges that
several industry commenters expressed
concern about potential TILA liability
where an error is made under the
revenue test calculation; SBA
Advocacy’s concern about buyback is
related to these concerns. As a threshold
matter, creditors and loan originator
organizations can choose whether or not
to pay this type of compensation, and a
payer of compensation has full
knowledge and control over the
numerical and other information used to
determine the compensation. That said,
the Bureau is sensitive to SBA
Advocacy’s concerns but believes they
are not warranted to nearly the same
degree with the 10-percent total
compensation test. Under the revenue
test, an error in determining the amount
of total revenues or mortgage-related
revenues could have potentially
impacted all awards of profits-based
compensation to individual loan
originators for a particular time period.
Because the 10-percent total
compensation test focuses on
compensation at the individual loan
originator level, however, the potential
liability implications of a calculation
error largely would be limited to the
effect of that error alone. In other words,
in contrast to the revenue test, an error
under the 10-percent total compensation
test would not likely have downstream
liability implications as to other
compensation payments across the
company or business unit and,
therefore, would be extremely unlikely
to result in the ‘‘massive buyback’’
described by SBA Advocacy. The
Bureau also believes that creditors and
loan originator organizations will
develop policies and procedures to
minimize the possibility of such errors.
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4. Mandatory Arbitration, Waivers of
Federal Claims, and Credit Insurance
SBA Advocacy commented that it was
uncertain why the mandatory
arbitration and credit insurance
provisions were addressed in the loan
originator compensation rule. The
provisions in the final rule are intended
to clarify the prohibitions on mandatory
arbitration, waivers of Federal claims,
and creditor financing of single
premium credit insurance in the DoddFrank Act.
D. Description and, Where Feasible,
Provision of an Estimate of the Number
of Small Entities to Which the Final
Rule Will Apply
As discussed in the Small Business
Review Panel Report, for purposes of
assessing the impacts of the regulations
being implemented on small entities,
‘‘small entities’’ are defined in the RFA
to include small businesses, small
nonprofit 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.192 5 U.S.C. 601(3). A
‘‘small organization’’ is any ‘‘not-forCategory
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).
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); 193
• credit unions (NAICS 522130);
• firms providing real estate credit
(NAICS 522292);
• mortgage brokers (NAICS 522310);
and
• small nonprofit 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 nonprofit organization is any
not-for-profit enterprise that is
independently owned and operated and
is not dominant in its field. Small
nonprofit organizations engaged in loan
NAICS code
Total entities
origination typically perform a number
of activities directed at increasing the
supply of affordable housing in their
communities. Some small nonprofit
organizations originate mortgage loans
for low and moderate-income
individuals while others purchase loans
originated by local community
development lenders.
The Bureau’s estimated number of
affected and small entities by NAICS
Code and engagement in loan
origination appears in the table below.
The estimates in this analysis are based
upon data and statistical analyses
performed by the Bureau. To estimate
counts and properties of mortgages for
entities that do not report under HMDA,
the Bureau has matched HMDA data to
Call Report data and NMLS and has
statistically projected estimated loan
counts for those depository institutions
that do not report these data either
under HMDA or on the NCUA call
report. The Bureau has projected
originations of higher-priced mortgage
loans for depositories that do not report
HMDA in a similar fashion. These
projections use Poisson regressions that
estimate loan volumes as a function of
an institution’s total assets,
employment, mortgage holdings and
geographic presence.
Small entities
Entities that
originate any
mortgage loans b
Commercial Banking ..............................
Savings Institutions ................................
Credit Unions c .......................................
Real Estate Credit d e ..............................
Mortgage Brokers ..................................
522110
522120
522130
522292
522310
6,505
930
7,240
2,787
8,051
3,601
377
6,296
2,294
8,049
a 6,307
Total g ..............................................
..............................
25,513
20,617
Small entities that
originate any
mortgage loans
a 3,466
a 922
a 373
a 4,178
a 3,240
2,787
f N/A
a 2,294
14,194
9,373
f N/A
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Source: 2011 HMDA, Dec 31, 2011 Bank and Thrift Call Reports, Dec 31, 2011 NCUA Call Reports, 2010 and 2011 NMLSR.
a For HMDA reporters, loan counts from HMDA 2011. 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.
c Does not include cooperatives operating in Puerto Rico. The Bureau has limited data about these institutions, which are subject to Regulation
Z, or their mortgage activities.
d NMLSR Mortgage Call Report (‘‘MCR’’) for 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 any institutions with missing revenue values, the probability that the institution was a small entity is estimated based on the count and amount of originations and the count and amount of brokered
loans.
e Data do not distinguish nonprofit from for-profit organizations, but Real Estate Credit presumptively includes nonprofit organizations.
f Mortgage brokers do not originate (back as a creditor) loans.
g The total may be overstated to the extent that some entities that act as mortgage brokers also appear in other entity categories.
192 The current SBA size standards are available
on the SBA’s Web site at http://www.sba.gov/
content/table-small-business-size-standards.
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193 Savings institutions include thrifts, savings
banks, mutual banks, and similar institutions.
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E. Projected Reporting, Recordkeeping,
and Other Compliance Requirements of
the Final 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
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1. Reporting Requirements
The final 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 final rule requires creditors
to retain these records for a three-year
period, rather than for a two-year period
as currently required. The rule applies
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 revised
recordkeeping requirements, however,
do not apply to individual loan
originators.
As discussed in the section-by-section
analysis, the Bureau recognizes that
increasing the period a creditor must
retain records for specific information
related to loan originator compensation
from two years, as currently provided in
Regulation Z, to three years may impose
some marginal increase in the creditor’s
compliance burden in the form of the
incremental cost of storage. 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 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
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that the record retention requirements
will create undue burden for small
entity creditors and loan originator
organizations.
3. Compliance Requirements
As discussed in detail in the sectionby-section analysis, the final rule
imposes new compliance requirements
on creditors and loan originator
organizations. The possible compliance
costs for small entities from each major
component of the final 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. The analysis below
considers the benefits, costs, and
impacts of the following major
provisions on small entities: (1) Upfront
points and fees; (2) compensation based
on a term of a transaction; and (3)
qualification requirements for loan
originations. It also discusses other
provisions in less detail.
a. Upfront Points and Fees
The Dodd-Frank Act prohibits
consumer payment of upfront points
and fees in all residential mortgage loan
transactions except those where no one
other than the consumer pays a loan
originator compensation tied to the
transaction (e.g., a commission) and
provides the Bureau authority to waive
or create exemptions from this
prohibition if doing so is in the interest
of consumer and in the public interest.
As discussed in the Background and
section-by-section analysis, the Bureau
adopts in the final rule a complete
exemption to the statutory ban on
upfront points and fees. Specifically, the
final rule amends § 1026.36(d)(2) to
provide that a payment to a loan
originator that is otherwise prohibited
by section 129B(c)(2)(A) of TILA is
nevertheless permitted pursuant to
section 129B(c)(2)(B) of TILA, regardless
of whether the consumer makes any
upfront payment of discount points,
origination points, or fees, as described
in section 129B(c)(2)(B)(ii) of TILA, as
long as the mortgage originator does not
receive any compensation directly from
the consumer as described in section
129B(c)(2)(B)(i) of TILA.
Benefits to Small Entities
The final rule’s treatment of the
payment of upfront points and fees has
a number of potential benefits for small
entities. First, relative to the complete
prohibition on the payment of points
and fees that the Dodd-Frank Act would
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11403
have applied absent the exercise of the
Bureau’s exemption authority, the final
rule maintains the opportunity during
origination for the current wide choice
consumers have in selecting a specific
mortgage product from the current
variety of mortgage products available to
them. The ability of creditors and loan
originator organizations, particularly
small ones, to offer consumers this wide
variety of choices, relative to that
available under the baseline, occurs
primarily because under the final rule
consumers and particularly small
creditors and loan originator
organizations retain the opportunity to
exchange, at the time of origination, a
mutually agreeable share of the financial
risk inherent in the future payments
required by any given mortgage loan.
Consumers, in this exchange, may
decide to purchase discount points from
the loan originator and in return receive
a reduced loan rate which is
commensurate with the lower degree of
credit and prepayment risk now borne
by the creditor holding the loan.
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 upfront 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 DoddFrank Act mandate takes effect as
written.
Costs to Small Entities
The Bureau’s exercise of its statutory
authority to create a full exemption from
the Dodd-Frank Act prohibition on
consumer payment of upfront points
and fees maintains the current financial
environment in which small creditors
operate. Small creditors, and indirectly,
loan originator organizations funding
their loans through such creditors, have,
relative to their larger rivals, limited
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means of hedging the costs of all the
financial (credit and interest rate/
prepayment) risk posed to them by the
origination of a mortgage. These costs
are borne by a creditor retaining such
mortgages in its portfolio, but they are
also borne by those that sell their
mortgages in the secondary market,
owing to the lower price investors will
pay for mortgage pools with higher
credit and prepayment risk.
Small creditors bear relatively high
costs of participating in ancillary
markets for financial instruments
through which their larger rivals can
more easily hedge mortgage risk. The
primary means by which these small
institutions can hedge this type of risk
is by allowing consumers to purchase
discount points. The sale of discount
points to consumers in exchange for
lower interest rates on loans can still
cost smaller creditors relatively more,
per dollar of current loan value, than
their larger rivals, but, to the extent it
exists, this relative cost posed to small
creditors is far lower than that of using
alternative means of hedging. If the
Bureau had decided to finalize the
prohibition on the payment of discount
points, it would have, in combination
with current regulatory restrictions on
prepayment penalties, entirely
eliminated the ability of small
institutions to hedge risk at a price that
allows them to compete with larger
financial institutions. This inability to
compete could conceivably have
resulted in a significant reduction in the
number of small creditors, whether
through dissolution or through
absorption by larger financial firms.
This ability to hedge risk through the
continued ability of consumers to
purchase discount points, however,
could inflict losses to small creditors.
These losses, while relatively minor in
comparison to those benefits previously
described, could nevertheless be of
significant concern.
First, limiting the advantage of larger
creditors in offering different
combinations of points and fees would
aid the competitiveness of small
creditors.
Second, small creditors most often
serve relatively specialized markets that
are distinguished by several criteria,
including a relatively more stable
consumer base. Implementation of the
prohibition on consumer payment of
upfront points and fees without exercise
of exemption authority could have
further increased both the stability and
size of this base, by enhancing
consumer perceptions of the greater
degree of transparency exhibited by
small creditors in comparison to larger
institutions in the provision of all
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financial services. Larger creditors, for
example, would have an incentive to
offset any risk to mortgage profits from
the statutory ban on points and fees by
charging additional service fees to
borrowers, depositors, and other clients.
Since small creditors engage in these
activities to a lesser extent,
implementation of the prohibition on
consumer payment of upfront points
and fees could have enhanced the
favorable reputation of small creditors
in all lines of their business, allowing
them to preserve their relatively larger
percentage of long-term consumer
relationships while potentially
increasing the size of all of the financial
markets they serve.
Third, even in periods of significant
interest rate volatility, small creditors
often exhibit a relatively greater
willingness to hold mortgages in
portfolio rather than selling them in the
secondary market, as do larger
institutions. This propensity mitigates
the need for small creditors to follow
the practices imposed by the secondary
market on larger creditors. Mortgage
pooling, for example, which is
necessary to securitization, requires
larger creditors to focus on lending to
consumers with relatively standard
credit profiles. The comparative
advantage of smaller creditors in serving
consumers exhibiting a wider array of
credit histories could conceivably
increase when the variety of mortgage
products offered by larger creditors
decreases and, consequently, the value
of diversity in consumers served
increases.
b. Compensation Based on Transaction
Terms
The final rule clarifies and revises
restrictions on profits-based
compensation from mortgage-related
business profits for loan originators
based on the analysis of the potential
incentives that loan originators have to
steer consumers to different transaction
terms in a variety of contexts. As
discussed in the section-by-section
analysis, § 1026.3(d)(1)(iii) permits
creditors or loan originators
organizations to make contributions
from mortgage-related profits to
‘‘designated tax-advantaged plans’’ as
listed in that paragraph.
As discussed in the section-by-section
analysis, § 1026.36(d)(1)(iii) permits
creditors or loan originator
organizations to make contributions
from mortgage-related profits to 401(k)
plans, and other ‘‘designated taxadvantaged plans,’’ such as Simplified
Employee Pensions (SEPs) and savings
incentive match plans for employees
(SIMPLE plans), provided the
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contributions are not based on the terms
of the individual loan originator’s
transactions. Section 1026.36(d)(1)(iv)
permits creditors or loan originator
organizations to pay compensation
under non-deferred profits-based
compensation plans from mortgagerelated business profits if: (1) The
individual loan originator is the loan
originator for ten or fewer mortgage
transactions during the preceding 12
months (a de minimis number of
originations); or (2) the percentage of an
individual loan originator’s
compensation under a non-deferred
profits-based compensation plan is
equal to or less than 10 percent of that
individual loan originator’s total
compensation. While such contributions
and bonuses can be funded from general
mortgage profits, the amounts paid to
individual loan originators cannot be
based on the terms of the transactions
that the individual had originated.
Benefits to Small Entities
Small entities have, through outreach
and inquiries, expressed concern over
the potential costs they could incur
owing to their difficulty, particularly in
contrast to large institutions, in
interpreting the restrictions the existing
rule imposes on methods of
compensation for individual loan
originators, such as compensation under
non-deferred profits-based
compensation plans paid to individual
loan originators or compensation by
creditors or loan originator
organizations through designated taxadvantaged plans. Small entities will
benefit, in both absolute and relative
terms, from clarification regarding
permissible forms of loan originator
compensation. Such clarification will
reduce legal and related costs of
interpreting the existing rule and the
risk of unintended violations of that
regulation.
Small entities engaging in
compensating individual loan
originators through contributions to
designated tax-advantaged plans in
which the individual loan originators
participate will also continue to benefit
from this practice under the final rule.
Those small entities that do not
currently offer such plans would
benefit, with the increased clarity of the
final rule, from the opportunity to do so
should they so choose.194 For small
entities that currently do not pay
bonuses out of mortgage-related profits
194 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 profits-based
compensation plans.
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because of uncertainty about the
application of the existing rule, the final
rule will allow these types of
compensation up to the 10-percent cap
or under the de minimis exception. A
final benefit is provided to those small
entities that have working for them
individual loan originators who are the
loan originators for no more than 10
transactions per year, owing to the de
minimis provision in the final rule that
exempts these employees from
limitations on profits-based bonuses.
The Bureau believes that small entities
are more likely than larger institutions
to have producing managers or other
employees whose day-to-day
responsibilities are diverse and fluid, in
which case they are more likely to act
as a loan originator on occasion outside
of their primary or secondary
responsibilities. As a result, small
entities for which such individuals
work, as well as the individuals
themselves, would benefit from the de
minimis exception to allow their
participation in profits-based
compensation from mortgage-related
business profits for which they might
otherwise not be eligible under the other
restrictions in the final rule.
Costs to Small Entities
Small entities that currently
compensate their individual loan
originators through profits-based
compensation, such as by compensation
under a non-deferred profits-based
compensation plan limited by the final
rule, will incur compliance costs if they
currently pay, or wish to pay in the
future, compensation under a nondeferred profits-based compensation
plan to individual loan originators
outside of the 10-percent cap or the de
minimis exception set forth in the final
rule. Small entities that currently
compensate individual loan originators
through non-deferred profits-based
compensation in excess of 10 percent of
individual loan originators’ total
compensation might have to adjust their
profits-based compensation to comply
with the 10-percent total compensation
test under the final rule. This cost to
comply will likely be minimal to
nominal, however, because the final
rule allows firms to pay profits-based
compensation from non-mortgage
related business above the 10-percent
limits so long as those profits are
determined in accordance with
reasonable accounting methods and the
compensation is not based on the terms
of that individual’s residential mortgage
transactions. Thus, this would
presumably create a compliance cost
only for small entities that do not
currently utilize reasonable accounting
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methods for internal accounting or other
purposes: For these entities, the costs of
compliance with the final rule could
include making needed revisions to
internal accounting practices, renegotiating the remuneration terms in
the contracts of individual loan
originators currently working for the
small entity, and updating any other
practices essential to these methods of
compensation. Owing to their current
usage of these compensation programs,
these firms may encounter higher
retention costs and possibly lower levels
of ability on the part of new hires,
relative to the average ability displayed
by the loan originators they currently
employ.
c. Loan Originator Qualification
Requirements
The final rule implements a DoddFrank Act provision requiring both
individual loan originators and loan
originator organizations to be
‘‘qualified’’ and to include their license
or registration numbers on loan
documents. Loan originator
organizations are required to ensure that
individual loan originators who work
for them are licensed or registered under
the SAFE Act where applicable. Loan
originator organizations and the
individual loan originators that are
primarily responsible for a particular
transaction are required to list their
license or registration numbers on key
loan documents along with their names.
Loan originator organizations are
required to ensure that their loan
originator employees meet applicable
character, fitness, and criminal
background check requirements.
Benefits to Small Entities
Benefits from an enhanced reputation
among consumers will accrue to those
small entities employing originators not
currently required to be licensed under
the SAFE Act. Increased consumer
confidence in such institutions arises
from the knowledge that the small entity
has ensured that the loan originators it
employs have satisfied training
requirements commensurate with their
responsibilities as originators and they
have met the character, fitness, and
criminal background check
requirements similar to those specified
for licensees in the SAFE Act.
Costs to Small Entities
The final rule requires small entities,
such as many depositories and bona fide
nonprofit organizations, to adopt
standards similar to those of the SAFE
Act in regard to ongoing training, and
the satisfaction of character and fitness
standards, including having no felony
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11405
convictions within the previous seven
years. The Bureau estimates the costs of
compliance with these standards to
include the cost of obtaining a criminal
background check and credit reports for
new hires and existing employees who
were not screened at the time of hire,
and the time involved in checking
employment and character references of
any such individuals and evaluating the
information. The additional time and
cost required to provide occasional,
appropriate training to individual loan
originators will vary as a consequence of
the skill and experience level of those
individuals.
The Bureau believes that virtually all
small depositories and nonprofit
organizations have already adopted
such screening and training
requirements as a matter of good
business practice and the Bureau
anticipates that the training that many
individual originators employed by
small depositories and nonprofits
already receive will be adequate to meet
the requirement. The Bureau expects
that in no case would the training
needed to satisfy the 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 names
and NMLSR identifiers of originators on
loan documents may impose some
additional costs relative to current
practice. These costs, however, may be
mitigated by the existing requirement of
the Federal Housing Finance Agency to
include the NMLSR numerical identifier
of individual loan originators and loan
originator organizations on all
applications for Fannie Mae and
Freddie Mac loans.
d. Other Provisions
The final rule adjusts existing rules
governing compensation to loan
originators in connection with closedend mortgage transactions to implement
Dodd-Frank Act amendments to TILA,
to provide greater clarity on the 2010
Loan Originator Final Rule, and to
provide loan originator increased
flexibility to engage in certain
compensation practices. These
provisions prohibit the compensation of
loan originators by both consumers and
other persons in the same transaction.
They also preserve the current
prohibition on the payment or receipt of
commissions or other compensation
based on the ‘‘transaction terms’’
governing the mortgage loan or factors
that, for purposes of compensation,
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serve an equivalent role and may
consequently be regarded as ‘‘proxies’’
for any of these transactions terms. The
final rule, however, clarifies the existing
prohibition by providing a new and
explicit definition of a ‘‘term of a
transaction’’ and explicitly addresses
the criteria that determine whether a
factor appearing in the loan is
prohibited by its role as a proxy for a
loan term and serving as a basis for
compensation.
The final rule also clarifies several
additional aspects of compensation
provided to a loan originator. First, the
final rule revises the existing rule to
allow ‘‘broker splits’’ by permitting a
loan originator organization receiving
compensation directly from a consumer
in connection with a given transaction
to pay and an individual loan originator
to receive compensation in connection
with this transaction (e.g., a
commission). Second, the final rule
clarifies 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 real estate broker, 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. Third, the
final rule allows reductions in loan
originator compensation where there are
unforeseen circumstances to defray the
cost, in whole or part, of an increase in
the actual settlement cost above an
estimated settlement cost disclosed to
the consumer pursuant to section 5(c) of
RESPA or omitted from that disclosure.
These provisions will provide greater
clarity and flexibility, relative to the
statutory provisions of the Dodd-Frank
Act, for the purposes of compliance
with the final rule. They should lower
the costs of compliance for small
entities. The final rule’s allowance of
broker splits, for example, provides
small entities a greater degree of
flexibility in their choice of
compensation practices than under the
2010 Loan Originator Rule. Small
entities, by virtue of their size, often
have a disadvantage in competing with
larger institutions in the market for
skilled labor. The final rule will, as a
consequence, lower the overall costs
incurred by the small entity in retaining
the individual loan originators they
currently employ as well as the hiring
of new originators. Greater clarity
provided by the final rule in the
definition of a ‘‘term of a transaction’’
and by explicitly addressing factors on
which compensation cannot be based
because they are ‘‘proxies’’ for a term of
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a transaction, will significantly reduce
the uncertainty faced by small entities
in their adoption of compensation
procedures and in negotiating
compensation with individual loan
originators. They also serve, at the same
time, to reduce the risk to small entities,
particularly in relation to large
institutions employing specialized staff,
of unintentional violations of prohibited
compensation practices. The final rule
also bestows a similar benefit to small
entities, in regard to the risk and
consequent costs of unintentional
noncompliance, by clarifying the nature
of payments to an individual originator
from unaffiliated third parties in a loan
transaction which serve as
compensation paid by the consumer to
that individual.
The final rule also implements the
Dodd-Frank Act requirement that
prohibits mandatory arbitration clauses
in mortgage loan agreements. It also
implements the Dodd-Frank Act
requirement concerning waivers of
Federal claims in court. Finally, the
final rule implements the Dodd-Frank
Act requirement that prohibit the
financing of single-premium credit
insurance. Firms may incur some costs
to comply with each of these
prohibitions, such as amending
standard contract forms.
F. 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 final
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 final rule are the
same or similar to those required in the
ordinary course of business of the small
entities affected by the final rule.
Compliance by the small entities that
will be affected by the final rule will
require continued performance of the
basic functions that they perform today.
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G. Description of the Steps the Agency
Has Taken To Minimize the Significant
Economic Impact on Small Entities
1. 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 DoddFrank 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
adopts in the final rule a complete
exemption to the statutory ban on
upfront points and fees under its DoddFrank Act authority to create such an
exemption in the interest of consumers
and in the public interest, and other
authority. Specifically, the final rule
amends § 1026.36(d)(2)(ii) to provide
that a payment to a loan originator that
is otherwise prohibited by section
129B(c)(2)(A) of TILA is nevertheless
permitted pursuant to section
129B(c)(2)(B) of TILA, regardless of
whether the consumer makes any
upfront payment of discount points,
origination points, or fees, as described
in section 129B(c)(2)(B)(ii) of TILA, as
long as the mortgage originator does not
receive any compensation directly from
the consumer as described in section
129B(c)(2)(B)(i) of TILA. The Bureau has
attempted to mitigate the burden of the
more limited exemption in the proposal
that would have required creditors or
loan originator organizations to
generally make available an alternative
loan without discount points or
origination points or fees, where they
offer a loan with discount points or
origination points or fees.
2. Compensation Based on Transaction
Terms
The final rule clarifies and revises
restrictions on profits-based
compensation from mortgage-related
business profits for loan originators,
depending on the potential incentives to
steer consumers to different transaction
terms. As discussed in the section-bysection analysis, the final rule permits
creditors or loan origination
organizations to make contributions
from profits derived from mortgagerelated business to 401(k) plans, and
other ‘‘designated tax-advantaged
plans’’ as long as the compensation is
not based on the terms of that
individual loan originator’s residential
mortgage loan transactions. Because
these designated plans include
Simplified Employee Pensions (SEPs)
and savings incentive match plans for
employees (SIMPLE plans) that may
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particularly benefit small entities who
are eligible to set them up, the impact
of this provision on small entities is
minimized.
The final rule also permits creditors
or loan originator organizations to pay
non-deferred profits-based
compensation from mortgage-related
business profits if the compensation is
not based on the terms of that
individual loan originator’s residential
mortgage loan transactions and if: (1)
The individual loan originator affected
has been the loan originator for ten or
fewer mortgage transactions during the
prior 12 months; or (2) the percentage of
an individual loan originator’s
compensation that may be attributable
to the bonuses is equal to or less than
10 percent of that loan originator’s total
compensation. The Bureau attempted to
minimize the burden of these
requirements by modifying the final rule
from the proposed requirements in two
respects.
First, the Bureau is not adopting the
proposed revenue test and is instead
adopting the 10-percent total
compensation test. The Bureau believes
that, relative to the revenue test, the 10percent total compensation test reduces
the cost of the compensation restrictions
to small entities. As described earlier in
the section-by-section analysis, the
Bureau received a number of comments
asserting that the revenue test would
disadvantage creditors and loan
originator organizations that are
monoline mortgage businesses. The
revenue test would have effectively
precluded monoline mortgage
businesses from paying profits-based
bonuses to their individual loan
originators or making contributions to
those individuals’ non-designated plans
because these institutions’ mortgagerelated revenues as a percentage of total
revenues would always exceed 25 or 50
percent (the alternative thresholds
proposed). A test focused on
compensation at the individual loan
originator level, rather than companywide, would be available to all
companies regardless of the diversity of
their business lines. Further, as the
Bureau noted in the Small Business
Review Panel Outline (and as stated by
at least one commenter), creditors and
loan originator organizations that are
monoline mortgage businesses
disproportionately consist of small
entities. Unlike the revenue test, the 10percent total compensation test will
place restrictions on profits-based
compensation (such as non-deferred
profits-based compensation) that are
neutral across entity size. The Bureau
also believes that the relative simplicity
of the 10-percent total compensation
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test in comparison to the revenue test—
e.g., calculation of total revenues is not
required—will also benefit small
entities.
Second, the Bureau, as described in
the section-by-section analysis above,
has increased the threshold of the de
minimis origination exception under
§ 1026.36(d)(1)(iv)(B)(2) from five to ten
consummated transactions. As noted
earlier in this FRFA, the Bureau believes
that small entities are more likely than
larger institutions to have producing
managers or other employees whose
day-to-day responsibilities are diverse
and fluid, in which case they are more
likely to act as loan originators on
occasion outside of their primary or
secondary responsibilities. As a result,
small entities for which such
individuals work, as well as the
individuals themselves, would benefit
from the de minimis exception to allow
their participation in non-deferred
profits-based compensation from
mortgage-related business profits for
which they might otherwise not be
eligible under the other restrictions in
the final rule. The final rule has
expanded slightly the scope of this
exception to capture potentially more
individuals who work for covered
persons, including small entities.
3. Broker Splits
The final rule revises the existing
Loan Originator 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. As discussed in the
section-by-section analysis, this
mitigates the burden of the existing rule
on loan originator organizations.
H. Description of the Steps the Agency
Has Taken To Minimize Any Additional
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 Small
Entity Representatives 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
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11407
of credit for small entities.195 The
Bureau sought information from the
Small Entity Representatives during the
Small Business Review Panel Outreach
Meeting regarding the potential impact
on the cost of business credit, since the
Small Entity Representatives, as small
providers of financial services, could
also provide valuable input on any such
impact related to the proposed rule.196
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.
At the Small Business Review Panel
Outreach Meeting, the Bureau asked the
Small Entity Representatives a series of
questions regarding any potential
increase in the cost of business credit.
Specifically, the Small Entity
Representatives 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 under
consideration that could minimize such
costs while accomplishing the statutory
objectives addressed by the proposal.197
Although some Small Entity
Representatives expressed the concern
that any additional Federal regulations,
in general, had the potential to increase
credit and other costs, all Small Entity
Representatives 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. After
receiving feedback from Small Entity
Representatives at the Small Business
Review Panel Outreach Meeting, the
Bureau had no evidence that the
proposed rule would result in an
195 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.
196 See 5 U.S.C. 603(d)(2)(B).
197 See Final Panel Report available in the
Proposed Rule Docket: Docket ID No. CFPB–2012–
0037, available at. http://www.regulations.gov/
#!documentDetail;D=CFPB–2012–0037–0001.
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increase in the cost of credit for small
business entities.
In the IRFA, the Bureau asked
interested parties to provide data and
other factual information regarding
whether the proposed rule would have
any impact on the cost of credit for
small entities. The Bureau did not
receive any comments on this issue. In
summary, the Bureau believes that the
Final Rule will leave the cost of credit
paid by small entities unchanged from
its current value and, as a consequence,
avoid those additional costs to those
entities, created by an inability to hedge
mortgage risk and other restrictions, that
are an inevitable consequence under the
baseline.
IX. Paperwork Reduction Act
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A. Overview
The Bureau’s collection of
information requirements contained in
this rule, and identified as such, were
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). Further, the PRA (44 U.S.C
3507(a), (a)(2) and (a)(3)) requires that a
Federal agency may not conduct or
sponsor a collection of information
unless OMB approved the collection
under the PRA and the OMB control
number obtained is displayed.
Notwithstanding any other provision of
law, no person is required to comply
with, or is subject to any penalty for
failure to comply with, a collection of
information does not display a currently
valid OMB control number (44 U.S.C.
3512).
This Final Rule contains revised
information collection requirements that
have not been approved by the OMB
and, therefore, are not effective until
OMB approval is obtained. The
information collection requirements
contained in this rule are described
below. The Bureau will publish a
separate notice in the Federal Register
announcing the submission of these
information collection requirements to
OMB as well as OMB’s action on these
submissions; including, the OMB
control number and expiration date.
This rule amends 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 1026). As described below, the rule
amends certain collections of
information currently in Regulation Z.
On September 7, 2012, a notice of
proposed rulemaking was published in
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the Federal Register (77 FR 55271). In
the proposed rule, the Bureau invited
comment on: (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. The comment period for the
proposed rule expired on November 6,
2012. In conjunction with the notice of
proposed rulemaking, the Bureau
received one comment addressing the
Bureau’s PRA analysis. This comment,
received from a nonprofit loan
originator organization, related to the
Bureau’s estimated number of
respondents and is discussed in section
B(2)(b) below.
The title of this information collection
is: Loan Originator Compensation. The
frequency of response is on-occasion.
The information collection required
provides benefits for consumers and is
mandatory. See 15 U.S.C. 1601, et seq.
Because the Bureau does not collect any
information under the rule, no issue of
confidentiality arises. The likely
respondents are commercial banks,
savings institutions, credit unions,
mortgage companies (non-bank
creditors), mortgage brokers, and
nonprofit organizations that make or
broker closed-end mortgage loans for
consumers.
Under the rule, the Bureau generally
accounts 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
administrative enforcement authority
over non-depository institutions for
Regulation Z. Accordingly, the Bureau
has allocated to itself half of its
estimated burden for 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.
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It should be noted that the Bureau’s
estimation of burdens arising from those
provisions of the final rule regarding
loan originator qualifications takes into
account the prior screening activities in
which, the Bureau believes, most loan
originator organizations have previously
engaged, including obtaining credit
reports, criminal background checks,
and information about prior
administrative, civil, or criminal
findings by any government jurisdiction
actions. This estimation of burdens,
consequently, avoids including any
costs associated with performing
criminal background, financial
responsibility, character, and general
fitness standards for individual loan
originators that loan originator
organizations had already hired and
screened prior to the effective date of
this final rule under the then-applicable
statutory or regulatory background
standards, except for those individual
loan originators already employed but
about whom the loan originator
organization knows of reliable
information indicating that the
individual loan originator likely no
longer meets the required standards,
regardless of when that individual was
hired and screened.198
Using the Bureau’s burden estimation
methodology, the total estimated burden
for the approximately 22,800
institutions subject to the rule,
including Bureau respondents,199 is
approximately 64,600 hours annually
and 164,700 one-time hours. The
aggregate estimates of total burden
presented in this part IX are based on
estimated costs that are averages across
respondents. The Bureau expects that
198 The final rule clarifies, in § 1026.36(f)(3)(i) and
(ii) and in new comments 36(f)(3)(ii)–2 and
36(f)(3)(ii)–3, that these requirements apply for an
individual that the loan originator organization
hires on or after January 10, 2014, the effective date
of these provisions, as well as for individuals hired
prior to this date who were not screened under
standards in effect at the time of hire.
199 There are 153 depository institutions (and
their depository affiliates) that are subject to the
Bureau’s administrative enforcement authority. In
addition there are 146 privately insured credit
unions that are subject to the Bureau’s
administrative enforcement authority. For purposes
of this PRA analysis, the Bureau’s respondents
under Regulation Z are 135 depository institutions
that originate closed-end mortgages; 77 privately
insured credit unions that originate closed-end
mortgages; an estimated 2,787 non-depository
institutions that originate closed-end mortgages and
that are subject to the Bureau’s administrative
enforcement authority, an assumed 230 not-for
profit originators (which may overlap with the other
non-depository creditors), and 8,051 loan originator
organizations. Unless otherwise specified, all
references to burden hours and costs for the Bureau
respondents for the collection under Regulation Z
are based on a calculation that includes one half of
burden for all respondents except the depository
institutions.
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the amount of time required to
implement each of the changes for a
given institution may vary based on the
size, complexity, and practices of the
respondent.
B. Information Collection Requirements
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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 final rule requires creditors
to retain these records for a three-year
period, rather than for a two-year period
as currently required. The rule ap