Vol. 78 Friday, 

No. 32 February 15, 2013 

Part II 

Bureau of Consumer Financial Protection 

12 CFR Part 1026 

Loan Originator Compensation Requirements Under the Truth in Lending 

Act (Regulation Z); Final Rule 


TKELLEY on DSK3SPTVN1PROD with RULES2
11280 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) 

AGENCY: Bureau of Consumer Financial 

Protection. 

ACTION: Final rule; official 

interpretations. 

SUMMARY: 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. 

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 

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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Federal Register / Vol. 78, No. 32 / Friday, February 15, 2013 / Rules and Regulations 11281 

1Fed. 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). 

2See 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.’’). 

3See 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. 

4U.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. 

5An Analysis of Mortgage Refinancing, 2001– 

2003, at 1. 

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 

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. 

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 


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11282 Federal Register / Vol. 78, No. 32 / Friday, February 15, 2013 / Rules and Regulations 

6For 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). 8FCIC Report at 215–217. 

9CoreLogic’s TrueStandings Servicing (reflects 

first-lien mortgage loans) (data service accessible 

only through paid subscription). 

10 Id. 

11 Id. at 217. 

12 Id. at 124. 

13The 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. 

14Lender 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. 

15HERA, 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. 

16The 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.’’ 

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 

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, 

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 


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Federal Register / Vol. 78, No. 32 / Friday, February 15, 2013 / Rules and Regulations 11283 

17The 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. 

18Moody’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). 

20Credit Forecast 2012. 

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. 

23Credit Forecast 2012 (reflects open-end and 

closed-end home equity loans). 

24Fed. 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. 

25FHFA 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. 

26FICO 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. 

27CoreLogic, 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. 

30A conforming mortgage is one that is eligible 

for purchase or credit guarantee by Fannie Mae or 

Freddie Mac. 

31Fed. Reserve Bd., Senior Loan Officer Opinion 

Survey on Bank Lending Practices, available at 

http://www.federalreserve.gov/boarddocs/ 

SnLoanSurvey/default.htm. 

32Federal 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. 

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

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 

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 

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 


TKELLEY on DSK3SPTVN1PROD with RULES2
11284 Federal Register / Vol. 78, No. 32 / Friday, February 15, 2013 / Rules and Regulations 

33FHA 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. 

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. 

35The 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. 

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 

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 

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 


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Federal Register / Vol. 78, No. 32 / Friday, February 15, 2013 / Rules and Regulations 11285 

36As used throughout this document, the term 

‘‘banks’’ also includes ‘‘savings associations.’’ 

37For 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. 

38For 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. 

39For 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. 

40The 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. 

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 

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 

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 


TKELLEY on DSK3SPTVN1PROD with RULES2
11286 Federal Register / Vol. 78, No. 32 / Friday, February 15, 2013 / Rules and Regulations 

41Susan 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. 

42Some 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 

the term and is instead more specifically describing 

the payment at issue. 43Mortgage 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. 

45The Board’s rule remains applicable to certain 

motor vehicle dealers. See 12 U.S.C. 5519 (Section 

1029 of the Dodd-Frank Act). 

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. 

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, 

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 

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 


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Federal Register / Vol. 78, No. 32 / Friday, February 15, 2013 / Rules and Regulations 11287 

46The 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). 

47As 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). 

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, 

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 

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 


TKELLEY on DSK3SPTVN1PROD with RULES2
11288 Federal Register / Vol. 78, No. 32 / Friday, February 15, 2013 / Rules and Regulations 

48The 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)). 

49U.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. 

50U.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. 

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. 

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 

(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 

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 

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 

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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11290 Federal Register / Vol. 78, No. 32 / Friday, February 15, 2013 / Rules and Regulations 

51Specifically, 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. 

52Of 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. 

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 

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 

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 


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53These 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. 

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 

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 

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. 


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54TILA section 129 contains requirements for 

certain high-cost mortgages, established by HOEPA, 

which are commonly called HOEPA loans. 

55Section 1403 of the Dodd-Frank Act also added 

new TILA section 129B(c)(3), which requires the 

Bureau to prescribe regulations to prohibit certain 

kinds of steering, abusive or unfair lending 

practices, mischaracterization of credit histories or 

appraisals, and discouraging consumers from 

shopping with other mortgage originators. 15 U.S.C. 

1639b(c)(3). This 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). 

A. The Truth in Lending Act 

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 

‘‘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. 

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. 


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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). 

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 

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 

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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56The 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. 

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 

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 

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


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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. 

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 

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 

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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57Specifically, 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.’’ 

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. 

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 

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 

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 


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58This 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). 

59Arrange 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. 

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 

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 

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 

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 


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11298 Federal Register / Vol. 78, No. 32 / Friday, February 15, 2013 / Rules and Regulations 

60The 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. 

61Another difference, not pertinent here, is that 

the SAFE Act’s ‘‘loan originator’’ includes only 

natural persons, whereas TILA’s ‘‘mortgage 

originator’’ can include organizations. 

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 

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, 

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 

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 

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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62The 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. 

63See the section-by-section analysis of 

§ 1026.36(f) and (g) below for additional 

background on the SAFE Act. 

64The 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. 

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 

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 

§ 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 


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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 

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 

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 

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 

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 

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 

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 

‘‘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 

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 

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. 

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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11306 Federal Register / Vol. 78, No. 32 / Friday, February 15, 2013 / Rules and Regulations 

65RESPA 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). 

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. 

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 

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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66Comment 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). 

67For 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. 

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, 

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 

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, 


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68The 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. 

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 

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 

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 


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Federal Register / Vol. 78, No. 32 / Friday, February 15, 2013 / Rules and Regulations 11309 

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 

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 

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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11310 Federal Register / Vol. 78, No. 32 / Friday, February 15, 2013 / Rules and Regulations 

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 

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 

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 12- 

month 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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Federal Register / Vol. 78, No. 32 / Friday, February 15, 2013 / Rules and Regulations 11311 

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 

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 

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 

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 

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 

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. 

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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69TILA 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. 

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 

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 

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 

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 

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 

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 

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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70The 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. 

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 

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 

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 12- 

month 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 


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11318 Federal Register / Vol. 78, No. 32 / Friday, February 15, 2013 / Rules and Regulations 

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 

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 

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 12- 

month 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 12- 

month 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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Federal Register / Vol. 78, No. 32 / Friday, February 15, 2013 / Rules and Regulations 11319 

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 12- 

month 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 

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 

(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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71The 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. 

72Moreover, 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. 

73The Board issued that final rule after passage 

of the Dodd-Frank Act, but acknowledged that a 

subsequent rulemaking would be necessary to 

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 

§ 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 

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


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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. 

75Congress 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. 76Existing 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. 

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. 

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, 

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 

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 

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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77Specifically, 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. 

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 

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 

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 


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78As 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. 

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 

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 

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 

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 

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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79The 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. 

80Section 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. 

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 

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 

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 


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Federal Register / Vol. 78, No. 32 / Friday, February 15, 2013 / Rules and Regulations 11327 

81Existing 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. 

82As discussed above, it is also not permissible 

to differentiate compensation based on credit 

product type, since products are simply a bundle 

of particular terms. 

83Commenters 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. 

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. 

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 

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 

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


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11328 Federal Register / Vol. 78, No. 32 / Friday, February 15, 2013 / Rules and Regulations 

85The 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). 

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 

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 


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Federal Register / Vol. 78, No. 32 / Friday, February 15, 2013 / Rules and Regulations 11329 

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 

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 

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 riskVerDate Mar<15>2010 19:22 Feb 14, 2013 Jkt 229001 PO 00000 Frm 00051 Fmt 4701 Sfmt 4700 E:\FR\FM\15FER2.SGM 15FER2

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11330 Federal Register / Vol. 78, No. 32 / Friday, February 15, 2013 / Rules and Regulations 

87A 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). 

88The 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. 

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). 

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 

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 


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Federal Register / Vol. 78, No. 32 / Friday, February 15, 2013 / Rules and Regulations 11331 

89Tolerance 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 

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). 

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) 

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 

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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11332 Federal Register / Vol. 78, No. 32 / Friday, February 15, 2013 / Rules and Regulations 

90As 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 

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.’’ 

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 

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.’’ 

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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Federal Register / Vol. 78, No. 32 / Friday, February 15, 2013 / Rules and Regulations 11333 

91For 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. 

92As noted above, the Bureau did receive several 

comments urging it to allow loan originator 

organizations to reduce their compensation to meet 

price competition. 

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 

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 

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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11334 Federal Register / Vol. 78, No. 32 / Friday, February 15, 2013 / Rules and Regulations 

93The 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. 

94As 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). 

95This 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). 

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. 

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 

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 


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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. 

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. 

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 

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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97The 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. 

98As 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. 

99As 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. 

100The 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. 

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 

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 profitsharing 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 


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101The 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. 

102As 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. 

103As 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. 

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 

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 12- 

month 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 

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 


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104This commenter based this assertion on 

several points, including that participation by 

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. 

105Several 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. 

106The 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. 

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 

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 

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 


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Federal Register / Vol. 78, No. 32 / Friday, February 15, 2013 / Rules and Regulations 11339 

107This 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. 

108As 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. 

109The 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. 

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 

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 

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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11340 Federal Register / Vol. 78, No. 32 / Friday, February 15, 2013 / Rules and Regulations 

110As 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). 

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 

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 

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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112As 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. 

113For 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. 

114As 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. 

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 

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 

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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11342 Federal Register / Vol. 78, No. 32 / Friday, February 15, 2013 / Rules and Regulations 

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, 

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 

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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116CFPB Bulletin 2012–2 defined ‘‘Qualified 

Plans’’ to include ‘‘qualified profit sharing, 401(k), 

and employee stock ownership plans.’’ 

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. 

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 

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 

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 


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11344 Federal Register / Vol. 78, No. 32 / Friday, February 15, 2013 / Rules and Regulations 

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 

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 

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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117See, e.g., 26 U.S.C. 72(t). 

118For 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. 

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 

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 

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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11346 Federal Register / Vol. 78, No. 32 / Friday, February 15, 2013 / Rules and Regulations 

119Proposed 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. 

120Proposed § 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. 

121Section 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. 

122Proposed 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. 

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 

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 

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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Federal Register / Vol. 78, No. 32 / Friday, February 15, 2013 / Rules and Regulations 11347 

123The 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. 

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 

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 

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 


TKELLEY on DSK3SPTVN1PROD with RULES2
11348 Federal Register / Vol. 78, No. 32 / Friday, February 15, 2013 / Rules and Regulations 

124See 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). 

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. 

126The 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 

governance of compensation, alignment of 

compensation with prudent risk-taking and 

effective supervisory oversight and stakeholder 

engagement in compensation. See id. at 2. 

127Similarly, 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. 

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, 

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

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 


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Federal Register / Vol. 78, No. 32 / Friday, February 15, 2013 / Rules and Regulations 11349 

128See 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. 

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 

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 

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 


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11350 Federal Register / Vol. 78, No. 32 / Friday, February 15, 2013 / Rules and Regulations 

129As 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. 

130The provisions of § 1026.36(d)(1)(iv)(B)(1) are 

sometimes hereinafter referred to as the ‘‘10-percent 

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. 

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 

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 

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


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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.’’ 

131See the IRS Instructions to Form W–2, 

available at http://www.irs.gov/pub/irs-pdf/ 

iw2w3.pdf. 

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 

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 

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 


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132See the IRS Instructions to Form 1099–MISC, 

available at http://www.irs.gov/pub/irs-pdf/ 

i1099msc.pdf. 

133Total 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. 

134Paying 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. 

134Paying 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. 

compensation on IRS form 1099– 

MISC132); 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 

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 

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 10- 

percent 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 


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135The 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. 

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 

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 

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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136The 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. 

137As 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. 

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 10- 

percent limit where the person paying 

the compensation subject to the 10- 

percent 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 

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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138See earlier discussion of the regulatory data on 

small savings institutions whose primary business 

focus is on residential mortgages that was cited in 

the proposal. 

139The impacts on small entities are described in 

more detail in the Final Regulatory Flexibility 

Analysis (FRFA) contained in part VII below. 

140Furthermore, 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. 

141As 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. 

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 10- 

percent 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 

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 10- 

percent 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 10- 

percent 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 

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 10- 

percent total compensation test does not 


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11356 Federal Register / Vol. 78, No. 32 / Friday, February 15, 2013 / Rules and Regulations 

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 

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 

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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Federal Register / Vol. 78, No. 32 / Friday, February 15, 2013 / Rules and Regulations 11357 

142As 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). 

§ 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 

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 10- 

percent 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 

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 


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11358 Federal Register / Vol. 78, No. 32 / Friday, February 15, 2013 / Rules and Regulations 

143The 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. 

144Some 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. 

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 

§ 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 

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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145Based 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). 

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 

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 

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. 

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). 

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 

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 

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 

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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11362 Federal Register / Vol. 78, No. 32 / Friday, February 15, 2013 / Rules and Regulations 

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 

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 

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 

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 

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. 

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 

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 

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 

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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11366 Federal Register / Vol. 78, No. 32 / Friday, February 15, 2013 / Rules and Regulations 

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 

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 

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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146The 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. 

147The term ‘‘bona fide discount points’’ for 

purposes of new TILA section 129C is defined in 

new TILA section 129C(b)(2)(C)(iii). 

148The Dodd-Frank Act amends existing TILA 

section 103(aa) and renumbers it as section 103(bb). 

149The 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. 

150The 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. 

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. 

36(d)(2)(ii) Exemption 

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 

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; 

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 

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 

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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Federal Register / Vol. 78, No. 32 / Friday, February 15, 2013 / Rules and Regulations 11369 

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 

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 

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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11370 Federal Register / Vol. 78, No. 32 / Friday, February 15, 2013 / Rules and Regulations 

152The 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. 

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 

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 

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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153Consumers can also reduce monthly payments 

by making a bigger down payment, in order to 

reduce the loan amount. Nonetheless, it may take 

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. 

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 

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 

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 

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 

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 

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 

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 

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 

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 

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. 

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 

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 

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 

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 

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 

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 

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 

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 

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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154See, e.g., EEOC, informal discussion letter, 

http://www.eeoc.gov/eeoc/foia/letters/2010/titleviiemployer-creditck.html. 

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 

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 

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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155While 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. 

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 

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 

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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11382 Federal Register / Vol. 78, No. 32 / Friday, February 15, 2013 / Rules and Regulations 

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 

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 

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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Federal Register / Vol. 78, No. 32 / Friday, February 15, 2013 / Rules and Regulations 11383 

156The 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. 

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 

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 

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 

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 

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 

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 

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 

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 

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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157See, 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.’’’). 

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 

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 

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 


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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. 

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 

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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Federal Register / Vol. 78, No. 32 / Friday, February 15, 2013 / Rules and Regulations 11389 

158See, 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. 

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) 

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 

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 

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 

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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159Specifically, 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. 

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 

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 

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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160The 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. 

161Sections 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. 

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 

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. 

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 


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162Consumers 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. 

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, 

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 

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 


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163The 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). 

164Similarly, 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 

highlight the difficulty in drawing conclusions from 

much of the empirical data. 

165Such 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. 

166The 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. 

167Conversely, 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. 

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. 

169Credible 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. 

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

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

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 


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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. 

171Moral 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). 

172Such 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. 

173As 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. 

174Payments to designated retirement plans 

include, for example, employer contributions to 

employee 401(k) plans. 

175Bengt 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. 

176When 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 

Continued 

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 

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 

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 

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 


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11396 Federal Register / Vol. 78, No. 32 / Friday, February 15, 2013 / Rules and Regulations 

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.; 

177Economic 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 Holmstro ̈m 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. 

178Examples 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). 

179Some 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. 

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, 

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 

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. 


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180See footnotes 100 and 101 for a number of 

examples of research in this area. 

181Under 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. 

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 

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 

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 


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11398 Federal Register / Vol. 78, No. 32 / Friday, February 15, 2013 / Rules and Regulations 

182However, 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.’’ 

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. 

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. 

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 

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. 


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Federal Register / Vol. 78, No. 32 / Friday, February 15, 2013 / Rules and Regulations 11399 

183Approximately 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. 

184 5 U.S.C. 609. 

185The 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). 

187Final 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). 

189A 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. 

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. 

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. 

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 

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 


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11400 Federal Register / Vol. 78, No. 32 / Friday, February 15, 2013 / Rules and Regulations 

190The 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. 

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 

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 

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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Federal Register / Vol. 78, No. 32 / Friday, February 15, 2013 / Rules and Regulations 11401 

191The Bureau previously used the term 

‘‘qualified,’’ not ‘‘designated.’’ 

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. 

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 

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 

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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11402 Federal Register / Vol. 78, No. 32 / Friday, February 15, 2013 / Rules and Regulations 

192The current SBA size standards are available 

on the SBA’s Web site at http://www.sba.gov/ 

content/table-small-business-size-standards. 

193Savings institutions include thrifts, savings 

banks, mutual banks, and similar institutions. 

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-forprofit 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 

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. 

Category NAICS code Total entities Small entities 

Entities that 

originate any 

mortgage loans b

Small entities that 

originate any 

mortgage loans 

Commercial Banking .............................. 522110 6,505 3,601 a 6,307 a 3,466 

Savings Institutions ................................ 522120 930 377 a 922 a 373 

Credit Unions c ....................................... 522130 7,240 6,296 a 4,178 a 3,240 

Real Estate Credit d e .............................. 522292 2,787 2,294 2,787 a 2,294 

Mortgage Brokers .................................. 522310 8,051 8,049 f N/A f N/A 

Total g .............................................. .............................. 25,513 20,617 14,194 9,373 

Source: 2011 HMDA, Dec 31, 2011 Bank and Thrift Call Reports, Dec 31, 2011 NCUA Call Reports, 2010 and 2011 NMLSR. 

aFor 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. bEntities 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. 

gThe total may be overstated to the extent that some entities that act as mortgage brokers also appear in other entity categories. 


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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 

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 

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 

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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194Some 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. 

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 

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 

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 


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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 

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 

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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11406 Federal Register / Vol. 78, No. 32 / Friday, February 15, 2013 / Rules and Regulations 

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 

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. 

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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195See 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. 

196See 5 U.S.C. 603(d)(2)(B). 

197See 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. 

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 10- 

percent 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 10- 

percent 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 

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 

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 


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11408 Federal Register / Vol. 78, No. 32 / Friday, February 15, 2013 / Rules and Regulations 

198The 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. 

199There 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. 

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 

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 

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. 

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 


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200This check, more formally known as an 

individual’s FBI Identification Record, uses the 

individual’s fingerprint submission to collect 

information about prior arrests and, in some 

instances, federal employment, naturalization, or 

military service. 

201The Bureau has not been able to determine 

how many loan originators organizations qualify as 

bona fide nonprofit organizations or how many of 

their employee loan originators are not subject to 

SAFE Act licensing. Accordingly, the Bureau has 

estimated these numbers. 

202The organizations are also assumed to pay $50 

to get a national criminal background check. 

Several commercial services offer an inclusive fee, 

ranging between $48.00 and $50.00, for 

fingerprinting, transmission, and FBI processing. 

Based on a sample of three FBI-approved services, 

accessed on 2012–08–02: Accurate Biometrics, 

available at: http://www.accuratebiometrics.com/ 

index.asp; Daon Trusted Identity Servs., available 

at: http://daon.com/prints; and Fieldprint, available 

at http://www.fieldprintfbi.com/ 

FBISubPage_FullWidth.aspx?ChannelID=272. 

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 

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 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. 

For the requirement extending the 

record retention requirement for 

creditors from two years, as currently 

provided in Regulation Z, to three years, 

the Bureau assumes that there is no 

additional marginal cost. For most, if 

not all firms, the required records are in 

electronic form. The Bureau believes 

that, as a consequence, all creditors 

should be able to use their existing 

recordkeeping systems to maintain the 

required documentation for mortgage 

origination records for one additional 

year at a negligible cost of investing in 

new storage facilities. 

Loan originator organizations, but not 

creditors, will incur costs from the new 

requirement to retain records related to 

compensation. For the requirement that 

organizations retain records related to 

compensation on loan transactions, 

these firms will need to build the 

requisite reporting regimes. At some 

firms this may require the integration of 

information technology systems; for 

others simple reports can be generated 

from existing core systems. 

For the roughly 8,000 Bureau 

respondents that are non-depository 

loan originator organizations but not 

creditors, the one-time burden is 

estimated to total approximately 

163,400 hours, or approximately 20 

hours per organization, to review the 

regulation and establish the requisite 

systems to retain compensation 

information. The Bureau estimates the 

requirement for these Bureau 

respondents to retain documentation of 

compensation arrangements is assumed 

to require 64,400 ongoing burden hours, 

or approximately 8 hours per 

organization, annually. The Bureau has 

allocated to itself one-half of this 

burden. 

Those record-keeping requirements 

that would have arisen had the Bureau 

chosen to retain in its final rule the 

proposed requirement to make available 

a zero-zero alternative are now absent. 

The overall burden to covered persons 

created by this final rule, however, 

remains unchanged, since the Bureau 

found no additional cost or burden was 

created by that earlier provision. 

2. Requirement To Obtain Criminal 

Background Checks, Credit Reports, and 

Other Information for Certain Individual 

Loan Originators 

To the extent loan originator 

organizations hire new originators who 

are not required to be licensed under the 

SAFE Act, and who are not so licensed, 

the loan originator organizations are 

required to obtain a criminal 

background check and credit report for 

these individual loan originators. Loan 

originator organizations are also 

required to obtain from the NMLSR or 

individual loan originator information 

about any findings against such 

individual loan originator by a 

government jurisdiction. In general, the 

loan originator organizations that are 

subject to this requirement are 

depository institutions (including credit 

unions) and bona fide nonprofit 

organizations whose loan originators are 

not subject to State licensing because 

the State has determined to provide an 

exemption for bona fide nonprofit 

organizations and determined the 

organization to be a bona fide nonprofit 

organization. The burden of obtaining 

this information may be different for a 

depository institution than it is for a 

nonprofit organization because 

depository institutions already obtain 

criminal background checks for their 

loan originators to comply with 

Regulation G and have access to 

information about findings against such 

individual loan originator by a 

government jurisdiction through the 

NMLSR. 

a. Credit Check 

Both depository institutions and 

nonprofit organizations will incur costs 

related to obtaining credit reports for all 

loan originators that are hired or transfer 

into this function on or after January 10, 

2014. For the estimated 370 Bureau 

respondents, which include depository 

institutions over $10 billion, their 

depository affiliates, and nonprofit 

nondepository organizations, the 

estimated one time burden is roughly 25 

hours and the estimated on going 

burden is 90 hours. This includes the 

total burden for the depository 

institutions and one-half the estimated 

burdens for the nonprofit nondepository 

organizations. 

b. Criminal Background Check 

Nonprofit organizations will incur 

costs related to obtaining criminal 

background checks for all loan 

originators that are hired or transfer into 

this function on or after January 10, 

2014. Depository institutions already 

obtain criminal background checks for 

each of their individual loan originators 

through the NMLSR for purposes of 

complying with Regulation G. A 

criminal background check provided by 

the NMLSR to the depository institution 

is sufficient to meet the requirement to 

obtain a criminal background check in 

this rule. Accordingly, the Bureau 

believes they will not incur any 

additional burden. 

Non-depository loan originator 

organizations that do not have access to 

information about criminal history in 

the NMLSR, including bona fide 

nonprofit organizations, could satisfy 

the latter requirements by obtaining a 

national criminal background check.200

For the assumed 200 nonprofit 

originators,201 the one-time burden is 

estimated to be roughly 20 hours.202 The 

ongoing cost to perform the check for 

new hires is estimated to be 10 hours 

annually. The Bureau has allocated to 

itself one-half of these burdens. 

The Bureau did receive one comment 

from a nonprofit firm primarily 

involved in the purchase and 

rehabilitation of HUD–FHA REO homes, 

which queried the definition of a 

nonprofit firm used by the Bureau in its 

calculations. The Bureau included all 

affiliates and regional offices of a parent 

nonprofit firm in its original estimate of 

200 such firms that would be covered by 

the rule. After receiving this comment, 

however, the Bureau engaged in 

extensive research in order to create, 


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from information provided by 

government and private sources, a 

national census of nonprofit loan 

originators currently in operation. Such 

a census is currently unavailable from 

any public or private source. Based on 

this research, the Bureau found no 

evidence to support a change in its 

original estimate and continues to treat 

all affiliates and regional offices of a 

parent nonprofit firm as one respondent. 

The Bureau’s research on the number of 

nonprofit firms covered by the rule is, 

however, ongoing. 

c. Information About Findings Against 

the Individual by Government 

Jurisdictions 

The information for employees of 

nonprofit organizations is generally not 

in the NMLSR. Accordingly, under the 

rule a nonprofit organization will have 

to obtain this information using 

individual statements concerning any 

prior administrative, civil, or criminal 

findings. For the employees of bona-fide 

nonprofit organizations, the Bureau 

estimates that no more than 10 percent 

have any such findings by a 

governmental jurisdiction to describe. 

The one-time burden is estimated to be 

20 hours, and the annual burden to 

obtain the information from new hires is 

estimated to be two hours. The Bureau 

has allocated to itself one-half of these 

burdens. 

C. Summary of Burden Hours 

For all of the collections herein, the 

one-time burden for Bureau respondents 

is approximately 81,800 hours. The ongoing burden is approximately 32,300 

hours. 

The Consumer Financial Protection 

Bureau has a continuing interest in the 

public’s opinions of our collections of 

information. At any time, comments 

regarding the burden estimate, or any 

other aspect of this collection of 

information, including suggestions for 

reducing the burden, may be sent to: 

The Consumer Financial Protection 

Bureau (Attention: PRA Office), 1700 G 

Street NW., Washington, DC 20552, or 

by the internet to 

CFPB_Public_PRA@cfpb.gov. 

List of Subjects in 12 CFR Part 1026 

Advertising, Consumer protection, 

Credit, Credit unions, Mortgages, 

National banks, Reporting and 

recordkeeping requirements, Savings 

associations, Truth in lending. 

Authority and Issuance 

For the reasons stated in the 

preamble, the Bureau amends 

Regulation Z, 12 CFR part 1026, as set 

forth below: 

PART 1026—TRUTH IN LENDING 

(REGULATION Z) 

■ 1. The authority citation for part 1026 

continues to read as follows: 

Authority: 12 U.S.C. 2601; 2603–2605, 

2607, 2609, 2617, 5511, 5512, 5532, 5581; 15 

U.S.C. 1601 et seq. 

■ 2. Section 1026.25, as amended in a 

final rule published January 30, 2013, is 

further amended by adding paragraph 

(c)(2) to read as follows: 

§ 1026.25 Record retention. 

* * * * * 

(c) * * * 

(2) Records related to requirements for 

loan originator compensation. 

Notwithstanding paragraph (a) of this 

section, for transactions subject to 

§ 1026.36: 

(i) A creditor shall maintain records 

sufficient to evidence all compensation 

it pays to a loan originator, as defined 

in § 1026.36(a)(1), and the compensation 

agreement that governs those payments 

for three years after the date of payment. 

(ii) A loan originator organization, as 

defined in § 1026.36(a)(1)(iii), shall 

maintain records sufficient to evidence 

all compensation it receives from a 

creditor, a consumer, or another person; 

all compensation it pays to any 

individual loan originator, as defined in 

§ 1026.36(a)(1)(ii); and the 

compensation agreement that governs 

each such receipt or payment, for three 

years after the date of each such receipt 

or payment. 

* * * * * 

■ 3. Section 1026.36 is amended by: 

■ A. Revising the section heading, the 

heading of paragraph (a), and paragraph 

(a)(1); 

■ B. Adding paragraphs (a)(3), (a)(4), 

(a)(5), and (b); 

■ C. Revising paragraphs (d)(1), (d)(2), 

(e)(3)(i)(C), and (f); and 

■ D. Adding paragraphs (g) through (j). 

The additions and revisions read as 

follows: 

§ 1026.36 Prohibited acts or practices and 

certain requirements for credit secured by 

a dwelling. 

(a) Definitions. (1) Loan originator. (i) 

For purposes of this section, the term 

‘‘loan originator’’ means a person who, 

in expectation of direct or indirect 

compensation or other monetary gain or 

for direct or indirect compensation or 

other monetary gain, performs any of 

the following activities: 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; or through 

advertising or other means of 

communication represents to the public 

that such person can or will perform 

any of these activities. The term ‘‘loan 

originator’’ includes an employee, agent, 

or contractor of the creditor or loan 

originator organization if the employee, 

agent, or contractor meets this 

definition. The term ‘‘loan originator’’ 

includes a creditor that engages in loan 

origination activities if the creditor does 

not finance the transaction at 

consummation out of the creditor’s own 

resources, including by drawing on a 

bona fide warehouse line of credit or out 

of deposits held by the creditor. All 

creditors that engage in any of the 

foregoing loan origination activities are 

loan originators for purposes of 

paragraphs (f) and (g) of this section. 

The term does not include: 

(A) A person who does not take a 

consumer credit application or offer or 

negotiate credit terms available from a 

creditor, but who performs purely 

administrative or clerical tasks on behalf 

of a person who does engage in such 

activities. 

(B) An employee of a manufactured 

home retailer who does not take a 

consumer credit application, offer or 

negotiate credit terms available from a 

creditor, or advise a consumer on credit 

terms (including rates, fees, and other 

costs) available from a creditor. 

(C) A person that performs only real 

estate brokerage activities and is 

licensed or registered in accordance 

with applicable State law, unless such 

person is compensated by a creditor or 

loan originator or by any agent of such 

creditor or loan originator for a 

particular consumer credit transaction 

subject to this section. 

(D) A seller financer that meets the 

criteria in paragraph (a)(4) or (a)(5) of 

this section, as applicable. 

(E) A servicer or servicer’s employees, 

agents, and contractors who offer or 

negotiate terms for purposes of 

renegotiating, modifying, replacing, or 

subordinating principal of existing 

mortgages where consumers are behind 

in their payments, in default, or have a 

reasonable likelihood of defaulting or 

falling behind. This exception does not 

apply, however, to a servicer or 

servicer’s employees, agents, and 

contractors who offer or negotiate a 

transaction that constitutes a 

refinancing under § 1026.20(a) or 

obligates a different consumer on the 

existing debt. 

(ii) An ‘‘individual loan originator’’ is 

a natural person who meets the 

definition of ‘‘loan originator’’ in 

paragraph (a)(1)(i) of this section. 

(iii) A ‘‘loan originator organization’’ 

is any loan originator, as defined in 


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paragraph (a)(1)(i) of this section, that is 

not an individual loan originator. 

* * * * * 

(3) Compensation. The term 

‘‘compensation’’ includes salaries, 

commissions, and any financial or 

similar incentive. 

(4) Seller financers; three properties. 

A person (as defined in § 1026.2(a)(22)) 

that meets all of the following criteria is 

not a loan originator under paragraph 

(a)(1) of this section: 

(i) The person provides seller 

financing for the sale of three or fewer 

properties in any 12-month period to 

purchasers of such properties, each of 

which is owned by the person and 

serves as security for the financing. 

(ii) 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. 

(iii) The person provides seller 

financing that meets the following 

requirements: 

(A) The financing is fully amortizing. 

(B) The financing is one that the 

person determines in good faith the 

consumer has a reasonable ability to 

repay. 

(C) The financing has 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. If the financing 

agreement has an adjustable rate, the 

rate is determined by the addition of a 

margin to an index rate and is subject 

to reasonable rate adjustment 

limitations. The index the adjustable 

rate is based on is a widely available 

index such as indices for U.S. Treasury 

securities or LIBOR. 

(5) Seller financers; one property. A 

natural person, estate, or trust that 

meets all of the following criteria is not 

a loan originator under paragraph (a)(1) 

of this section: 

(i) 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. 

(ii) 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 business of the 

person. 

(iii) The natural person, estate, or 

trust provides seller financing that 

meets the following requirements: 

(A) The financing has a repayment 

schedule that does not result in negative 

amortization. 

(B) The financing has 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. If the financing 

agreement has an adjustable rate, the 

rate is determined by the addition of a 

margin to an index rate and is subject 

to reasonable rate adjustment 

limitations. The index the adjustable 

rate is based on is a widely available 

index such as indices for U.S. Treasury 

securities or LIBOR. 

(b) Scope. Paragraph (c) of this section 

applies to closed-end consumer credit 

transactions secured by a consumer’s 

principal dwelling. Paragraphs (d), (e), 

(f), (g), (h), and (i) of this section apply 

to closed-end consumer credit 

transactions secured by a dwelling. This 

section does not apply to a home equity 

line of credit subject to § 1026.40, 

except that paragraphs (h) and (i) of this 

section apply to such credit when 

secured by the consumer’s principal 

dwelling. Paragraphs (d), (e), (f), (g), (h), 

and (i) of this section do not apply to 

a loan that is secured by a consumer’s 

interest in a timeshare plan described in 

11 U.S.C. 101(53D). 

* * * * * 

(d) * * * 

(1) Payments based on a term of a 

transaction. (i) Except as provided in 

paragraph (d)(1)(iii) or (iv) of this 

section, 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 a term of a 

transaction, the terms of multiple 

transactions by an individual loan 

originator, or the terms of multiple 

transactions by multiple individual loan 

originators. If a loan originator’s 

compensation is based in whole or in 

part on a factor that is a proxy for a term 

of a transaction, the loan originator’s 

compensation is based on a term of a 

transaction. A factor that is not itself a 

term of a transaction is a proxy for a 

term of the transaction if the factor 

consistently varies with that term over 

a significant number of transactions, 

and the loan originator has the ability, 

directly or indirectly, to add, drop, or 

change the factor in originating the 

transaction. 

(ii) For purposes of this paragraph 

(d)(1) only, a ‘‘term of a transaction’’ is 

any right or obligation of the parties to 

a credit transaction. The amount of 

credit extended is not a term of a 

transaction or a proxy for a term of a 

transaction, 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; however, such compensation 

may be subject to a minimum or 

maximum dollar amount. 

(iii) 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. In the case of a contribution to a 

defined contribution plan, the 

contribution shall not be directly or 

indirectly based on the terms of that 

individual loan originator’s 

transactions. As used in this paragraph 

(d)(1)(iii), ‘‘designated tax-advantaged 

plan’’ means any plan that meets the 

requirements of Internal Revenue Code 

section 401(a), 26 U.S.C. 401(a); 

employee annuity plan described in 

Internal Revenue Code section 403(a), 

26 U.S.C. 403(a); simple retirement 

account, as defined in Internal Revenue 

Code section 408(p), 26 U.S.C. 408(p); 

simplified employee pension described 

in Internal Revenue Code section 408(k), 

26 U.S.C. 408(k); annuity contract 

described in Internal Revenue Code 

section 403(b), 26 U.S.C. 403(b); or 

eligible deferred compensation plan, as 

defined in Internal Revenue Code 

section 457(b), 26 U.S.C. 457(b). 

(iv) An individual loan originator may 

receive, and a person may pay to an 

individual loan originator, 

compensation under a non-deferred 

profits-based compensation plan (i.e., 

any arrangement for the payment of 

non-deferred compensation that is 

determined with reference to the profits 

of the person from mortgage-related 

business), provided that: 

(A) The compensation paid to an 

individual loan originator pursuant to 

this paragraph (d)(1)(iv) is not directly 

or indirectly based on the terms of that 

individual loan originator’s transactions 

that are subject to this paragraph (d); 

and 

(B) At least one of the following 

conditions is satisfied: 

(1) The compensation paid to an 

individual loan originator pursuant to 

this paragraph (d)(1)(iv) does not, in the 

aggregate, exceed 10 percent of the 

individual loan originator’s total 

compensation corresponding to the time 

period for which the compensation 

under the non-deferred profits-based 

compensation plan is paid; or 

(2) The individual loan originator was 

a loan originator for ten or fewer 

transactions subject to this paragraph (d) 

consummated during the 12-month 

period preceding the date of the 

compensation determination. 


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(2) Payments by persons other than 

consumer. (i) Dual compensation. (A) 

Except as provided in paragraph 

(d)(2)(i)(C) of this section, if any loan 

originator receives compensation 

directly from a consumer in a consumer 

credit transaction secured by a dwelling: 

(1) No loan originator shall receive 

compensation, directly or indirectly, 

from any person other than the 

consumer 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) shall pay any 

compensation to a loan originator, 

directly or indirectly, in connection 

with the transaction. 

(B) Compensation received directly 

from a consumer includes payments to 

a loan originator made pursuant to an 

agreement between the consumer and a 

person other than the creditor or its 

affiliates, under which such other 

person agrees to provide funds toward 

the consumer’s costs of the transaction 

(including loan originator 

compensation). 

(C) If a loan originator organization 

receives compensation directly from a 

consumer in connection with a 

transaction, the loan originator 

organization may pay compensation to 

an individual loan originator, and the 

individual loan originator may receive 

compensation from the loan originator 

organization, subject to paragraph (d)(1) 

of this section. 

(ii) Exemption. 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. 

* * * * * 

(e) * * * 

(3) * * * 

(i) * * * 

(C) The loan with the lowest total 

dollar amount of discount points, 

origination points or origination fees (or, 

if two or more loans have the same total 

dollar amount of discount points, 

origination points or origination fees, 

the loan with the lowest interest rate 

that has the lowest total dollar amount 

of discount points, origination points or 

origination fees). 

* * * * * 

(f) Loan originator qualification 

requirements. A loan originator for a 

consumer credit transaction secured by 

a dwelling must, when required by 

applicable State or Federal law, be 

registered and licensed in accordance 

with those laws, including the Secure 

and Fair Enforcement for Mortgage 

Licensing Act of 2008 (SAFE Act, 12 

U.S.C. 5102 et seq.), its implementing 

regulations (12 CFR part 1007 or part 

1008), and State SAFE Act 

implementing law. To comply with this 

paragraph (f), a loan originator 

organization that is not a government 

agency or State housing finance agency 

must: 

(1) Comply with all applicable State 

law requirements for legal existence and 

foreign qualification; 

(2) Ensure that each individual loan 

originator who works for the loan 

originator organization is licensed or 

registered to the extent the individual is 

required to be licensed or registered 

under the SAFE Act, its implementing 

regulations, and State SAFE Act 

implementing law before the individual 

acts as a loan originator in a consumer 

credit transaction secured by a dwelling; 

and 

(3) For each of its individual loan 

originator employees who is not 

required to be licensed and is not 

licensed as a loan originator pursuant to 

§ 1008.103 of this chapter or State SAFE 

Act implementing law: 

(i) Obtain for any 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) and for 

any individual regardless of when hired 

who, based on reliable information 

known to the loan originator 

organization, likely does not meet the 

standards under § 1026.36(f)(3)(ii), 

before the individual acts as a loan 

originator in a consumer credit 

transaction secured by a dwelling: 

(A) A criminal background check 

through the Nationwide Mortgage 

Licensing System and Registry (NMLSR) 

or, in the case of an individual loan 

originator who is not a registered loan 

originator under the NMLSR, a criminal 

background check from a law 

enforcement agency or commercial 

service; 

(B) A credit report from a consumer 

reporting agency described in section 

603(p) of the Fair Credit Reporting Act 

(15 U.S.C. 1681a(p)) secured, where 

applicable, in compliance with the 

requirements of section 604(b) of the 

Fair Credit Reporting Act, 15 U.S.C. 

1681b(b); and 

(C) Information from the NMLSR 

about any administrative, civil, or 

criminal findings by any government 

jurisdiction or, in the case of an 

individual loan originator who is not a 

registered loan originator under the 

NMLSR, such information from the 

individual loan originator; 

(ii) Determine on the basis of the 

information obtained pursuant to 

paragraph (f)(3)(i) of this section and 

any other information reasonably 

available to the loan originator 

organization, for any 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) and for 

any individual regardless of when hired 

who, based on reliable information 

known to the loan originator 

organization, likely does not meet the 

standards under this § 1026.36(f)(3)(ii), 

before the individual acts as a loan 

originator in a consumer credit 

transaction secured by a dwelling, that 

the individual loan originator: 

(A)(1) Has not been convicted of, or 

pleaded guilty or nolo contendere to, a 

felony in a domestic or military court 

during the preceding seven-year period 

or, in the case of a felony involving an 

act of fraud, dishonesty, a breach of 

trust, or money laundering, at any time; 

(2) For purposes of this paragraph 

(f)(3)(ii)(A): 

(i) A crime is a felony only if at the 

time of conviction it was classified as a 

felony under the law of the jurisdiction 

under which the individual was 

convicted; 

(ii) Expunged convictions and 

pardoned convictions do not render an 

individual unqualified; and 

(iii) A conviction or plea of guilty or 

nolo contendere does not render an 

individual unqualified under this 

§ 1026.36(f) if the loan originator 

organization has obtained consent to 

employ the individual from the Federal 

Deposit Insurance Corporation (or the 

Board of Governors of the Federal 

Reserve System, as applicable) pursuant 

to section 19 of the Federal Deposit 

Insurance Act (FDIA), 12 U.S.C. 1829, 

the National Credit Union 

Administration pursuant to section 205 

of the Federal Credit Union Act (FCUA), 

12 U.S.C. 1785(d), or the Farm Credit 

Administration pursuant to section 

5.65(d) of the Farm Credit Act of 1971 

(FCA), 12 U.S.C. 227a–14(d), 

notwithstanding the bars posed with 

respect to that conviction or plea by the 


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FDIA, FCUA, and FCA, as applicable; 

and 

(B) Has demonstrated financial 

responsibility, character, and general 

fitness such as to warrant a 

determination that the individual loan 

originator will operate honestly, fairly, 

and efficiently; and 

(iii) Provide periodic training 

covering Federal and State law 

requirements that apply to the 

individual loan originator’s loan 

origination activities. 

(g) Name and NMLSR ID on loan 

documents. (1) For a consumer credit 

transaction secured by a dwelling, a 

loan originator organization must 

include on the loan documents 

described in paragraph (g)(2) of this 

section, whenever each such loan 

document is provided to a consumer or 

presented to a consumer for signature, 

as applicable: 

(i) Its name and NMLSR ID, if the 

NMLSR has provided it an NMLSR ID; 

and 

(ii) The name of the individual loan 

originator (as the name appears in the 

NMLSR) with primary responsibility for 

the origination and, if the NMLSR has 

provided such person an NMLSR ID, 

that NMLSR ID. 

(2) The loan documents that must 

include the names and NMLSR IDs 

pursuant to paragraph (g)(1) of this 

section are: 

(i) The credit application; 

(ii) [Reserved] 

(iii) The note or loan contract; and 

(iv) The security instrument. 

(3) For purposes of this section, 

NMLSR ID means a number assigned by 

the Nationwide Mortgage Licensing 

System and Registry to facilitate 

electronic tracking and uniform 

identification of loan originators and 

public access to the employment history 

of, and the publicly adjudicated 

disciplinary and enforcement actions 

against, loan originators. 

(h) Prohibition on mandatory 

arbitration clauses and waivers of 

certain consumer rights. (1) Arbitration. 

A contract or other agreement for a 

consumer credit transaction secured by 

a dwelling (including a home equity 

line of credit secured by the consumer’s 

principal dwelling) may not include 

terms that require arbitration or any 

other non-judicial procedure to resolve 

any controversy or settle any claims 

arising out of the transaction. This 

prohibition does not limit a consumer 

and creditor or any assignee from 

agreeing, after a dispute or claim under 

the transaction arises, to settle or use 

arbitration or other non-judicial 

procedure to resolve that dispute or 

claim. 

(2) No waivers of Federal statutory 

causes of action. A contract or other 

agreement relating to a consumer credit 

transaction secured by a dwelling 

(including a home equity line of credit 

secured by the consumer’s principal 

dwelling) may not be applied or 

interpreted to bar a consumer from 

bringing a claim in court pursuant to 

any provision of law for damages or 

other relief in connection with any 

alleged violation of any Federal law. 

This prohibition does not limit a 

consumer and creditor or any assignee 

from agreeing, after a dispute or claim 

under the transaction arises, to settle or 

use arbitration or other non-judicial 

procedure to resolve that dispute or 

claim. 

(i) Prohibition on financing singlepremium credit insurance. (1) A creditor 

may not finance, directly or indirectly, 

any premiums or fees for credit 

insurance in connection with a 

consumer credit transaction secured by 

a dwelling (including a home equity 

line of credit secured by the consumer’s 

principal dwelling). This prohibition 

does not apply to credit insurance for 

which premiums or fees are calculated 

and paid in full on a monthly basis. 

(2) For purposes of this paragraph (i), 

‘‘credit insurance’’: 

(i) Means credit life, credit disability, 

credit unemployment, or credit property 

insurance, or any other accident, loss-ofincome, life, or health insurance, or any 

payments directly or indirectly for any 

debt cancellation or suspension 

agreement or contract, but 

(ii) Excludes credit unemployment 

insurance for which the unemployment 

insurance premiums are reasonable, the 

creditor receives no direct or indirect 

compensation in connection with the 

unemployment insurance premiums, 

and the unemployment insurance 

premiums are paid pursuant to a 

separate insurance contract and are not 

paid to an affiliate of the creditor. 

(j) Policies and procedures to ensure 

and monitor compliance. (1) A 

depository institution must establish 

and maintain written policies and 

procedures reasonably designed to 

ensure and monitor the compliance of 

the depository institution, its 

employees, its subsidiaries, and its 

subsidiaries’ employees with the 

requirements of paragraphs (d), (e), (f), 

and (g) of this section. These written 

policies and procedures must be 

appropriate to the nature, size, 

complexity, and scope of the mortgage 

lending activities of the depository 

institution and its subsidiaries. 

(2) For purposes of this paragraph (j), 

‘‘depository institution’’ has the 

meaning in section 1503(2) of the SAFE 

Act, 12 U.S.C. 5102(2). For purposes of 

this paragraph (j), ‘‘subsidiary’’ has the 

meaning in section 3 of the Federal 

Deposit Insurance Act, 12 U.S.C. 1813. 

* * * * * 

■ 4. In Supplement I to Part 1026— 

Official Interpretations: 

■ A. Under Section 1026.25—Record 

Retention: 

■ i. Under 25(a) General rule, paragraph 

5 is removed. 

■ ii. 25(c)(2) Records related to 

requirements for loan originator 

compensation and paragraphs 1 and 2 

are added. 

■ B. The heading for Section 1026.36 is 

revised. 

■ C. Under newly designated Section 

1026.36: 

■ i. Paragraphs 1 and 2 are removed. 

■ ii. The heading for 36(a) is revised. 

■ iii. Under newly designated 36(a): 

■ a. Paragraphs 1 and 4 are revised, and 

paragraph 5 is added. 

■ b. 36(a)(4) Seller financers; three 

properties and paragraphs 1 and 2 are 

added. 

■ c. 36(a)(5) Seller financers; one 

property and paragraph 1 are added. 

■ iv. 36(b) Scope and paragraph 1 are 

added. 

■ v. Under 36(d) Prohibited payments to 

loan originators: 

■ a. Paragraph 1 is revised. 

■ b. The heading for 36(d)(1) is revised. 

■ c. Under newly designated 36(d)(1), 

paragraphs 1 through 8 are revised and 

paragraph 10 is added. 

■ d. Under 36(d)(2) Payments by 

persons other than consumer, 

paragraphs 1 and 2 are removed, and 

36(d)(2)(i) Dual compensation and 

paragraphs 1 and 2 are added. 

■ vi. Under 36(e)(3) Loan options 

presented, paragraph 3 is revised. 

■ vii. 36(f) Loan originator qualification 

requirements and 36(g) Name and 

NMLSR ID on loan documents are 

added. 

The revisions and additions read as 

follows: 

Supplement I to Part 1026—Official 

Interpretations 

* * * * * 

Subpart D—Miscellaneous 

§ 1026.25—Record Retention 

* * * * * 

25(c) Records Related to Certain 

Requirements for Mortgage Loans 

25(c)(2) Records Related to 

Requirements for Loan Originator 

Compensation 

1. Scope of records of loan originator 

compensation. Section 1026.25(c)(2)(i) 


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requires a creditor to maintain records 

sufficient to evidence all compensation 

it pays to a loan originator, as well as 

the compensation agreements that 

govern those payments, for three years 

after the date of the payments. Section 

1026.25(c)(2)(ii) requires that a loan 

originator organization maintain records 

sufficient to evidence all compensation 

it receives from a creditor, a consumer, 

or another person and all compensation 

it pays to any individual loan 

originators, as well as the compensation 

agreements that govern those payments 

or receipts, for three years after the date 

of the receipts or payments. 

i. Records sufficient to evidence 

payment and receipt of compensation. 

Records are sufficient to evidence 

payment and receipt of compensation if 

they demonstrate the following facts: 

The nature and amount of the 

compensation; that the compensation 

was paid, and by whom; that the 

compensation was received, and by 

whom; and when the payment and 

receipt of compensation occurred. The 

compensation agreements themselves 

are to be retained in all circumstances 

consistent with § 1026.25(c)(2)(i). The 

additional records that are sufficient 

necessarily will vary on a case-by-case 

basis depending on the facts and 

circumstances, particularly with regard 

to the nature of the compensation. For 

example, if the compensation is in the 

form of a salary, records to be retained 

might include copies of required filings 

under the Internal Revenue Code that 

demonstrate the amount of the salary. If 

the compensation is in the form of a 

contribution to or a benefit under a 

designated tax-advantaged retirement 

plan, records to be maintained might 

include copies of required filings under 

the Internal Revenue Code or applicable 

provisions of the Employee Retirement 

Income Security Act of 1974 (ERISA), 29 

U.S.C. 1001 et seq., relating to the plans, 

copies of the plan and amendments 

thereto in which individual loan 

originators participate and the names of 

any loan originators covered by such 

plans, or determination letters from the 

Internal Revenue Service regarding such 

plans. If the compensation is in the 

nature of a commission or bonus, 

records to be retained might include a 

settlement agent ‘‘flow of funds’’ 

worksheet or other written record or a 

creditor closing instructions letter 

directing disbursement of fees at 

consummation. Where a loan originator 

is a mortgage broker, a disclosure of 

compensation or broker agreement 

required by applicable State law that 

recites the broker’s total compensation 

for a transaction is a record of the 

amount actually paid to the loan 

originator in connection with the 

transaction, unless actual compensation 

deviates from the amount in the 

disclosure or agreement. Where 

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 reasons for it. 

ii. Compensation agreement. For 

purposes of § 1026.25(c)(2), a 

compensation agreement includes any 

agreement, whether oral, written, or 

based on a course of conduct that 

establishes a compensation arrangement 

between the parties (e.g., a brokerage 

agreement between a creditor and a 

mortgage broker, provisions of 

employment contracts between a 

creditor and an individual loan 

originator employee addressing 

payment of compensation). 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. Creditors and loan 

originators are free to specify what 

transactions are governed by a particular 

compensation agreement as they see fit. 

For example, they may provide, by the 

terms of the agreement, that the 

agreement governs compensation 

payable on transactions consummated 

on or after some future effective date (in 

which case, a prior agreement governs 

transactions consummated in the 

meantime). For purposes of applying the 

record retention requirement to 

transaction-specific commissions, the 

relevant compensation agreement for a 

given transaction is the agreement 

pursuant to which compensation for 

that transaction is determined. 

iii. Three-year retention period. The 

requirements in § 1026.25(c)(2)(i) and 

(ii) that the records be retained for three 

years after the date of receipt or 

payment, as applicable, means that the 

records are retained for three years after 

each receipt or payment, as applicable, 

even if multiple compensation 

payments relate to a single transaction. 

For example, if a loan originator 

organization pays an individual loan 

originator a commission consisting of 

two separate payments of $1,000 each 

on June 5 and July 7, 2014, then the loan 

originator organization is required to 

retain records sufficient to evidence the 

two payments through June 4, 2017, and 

July 6, 2017, respectively. 

2. Example. An example of the 

application of § 1026.25(c)(2) to a loan 

originator organization is as follows: 

Assume a loan originator organization 

originates only transactions that are not 

subject to § 1026.36(d)(2), thus all of its 

origination compensation is paid 

exclusively by creditors that fund its 

originations. Further assume that the 

loan originator organization pays its 

individual loan originator employees 

commissions and annual bonuses. The 

loan originator organization must retain 

a copy of the agreement with any 

creditor that pays the loan originator 

organization compensation for 

originating consumer credit transactions 

subject to § 1026.36 and documentation 

evidencing the specific payment it 

receives from the creditor for each 

transaction originated. In addition, the 

loan originator organization must retain 

copies of the agreements with its 

individual loan originator employees 

governing their commissions and their 

annual bonuses and records of any 

specific commissions and bonuses paid. 

* * * * * 

Subpart E—Special Rules for Certain 

Home Mortgage Transactions 

* * * * * 

§ 1026.36—Prohibited Acts or Practices 

and Certain Requirements for Credit 

Secured by a Dwelling 

36(a) Definitions 

1. Meaning of loan originator. i. 

General. A. Section 1026.36(a) defines 

the set of activities or services any one 

of which, if done for or in the 

expectation of compensation or gain, 

makes the person doing such activities 

or performing such services a loan 

originator, unless otherwise excluded. 

The scope of activities covered by the 

term loan originator includes: 

1. Referring a consumer to any person 

who participates in the origination 

process as a loan originator. Referring 

includes 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. See comment 36(a)–4 with 

respect to certain activities that do not 

constitute referring. 

2. Arranging a credit transaction, 

including initially contacting and 

orienting the consumer to a particular 

loan originator’s or creditor’s origination 

process or credit terms, assisting the 

consumer to apply for credit, taking an 

application, offering or negotiating 


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Federal Register / Vol. 78, No. 32 / Friday, February 15, 2013 / Rules and Regulations 11415 

credit terms, or otherwise obtaining or 

making an extension of credit. 

3. Assisting a consumer in obtaining 

or applying for consumer credit by 

advising on specific credit terms 

(including rates, fees, and other costs), 

filling out an application form, 

preparing application packages (such as 

a credit application or pre-approval 

application or supporting 

documentation), or collecting 

application and supporting information 

on behalf of the consumer to submit to 

a loan originator or creditor. A person 

who, acting on behalf of a loan 

originator or creditor, collects 

information or verifies information 

provided by the consumer, such as by 

asking the consumer for documentation 

to support the information the consumer 

provided or for the consumer’s 

authorization to obtain supporting 

documents from third parties, is not 

collecting information on behalf of the 

consumer. See also comment 36(a)–4.i 

through iv with respect to applicationrelated administrative and clerical tasks 

and comment 36(a)–1.v with respect to 

third-party advisors. 

4. Presenting for consideration by a 

consumer particular credit terms, or 

communicating with a consumer for the 

purpose of reaching a mutual 

understanding about prospective credit 

terms. 

5. Advertising or communicating to 

the public that one can or will perform 

any loan origination services. 

Advertising the services of a third party 

that engages or intends to engage in loan 

origination activities does not make the 

advertiser a loan originator. 

B. The term ‘‘loan originator’’ 

includes employees, agents, and 

contractors of a creditor as well as 

employees, agents, and contractors of a 

mortgage broker that satisfy this 

definition. 

C. The term ‘‘loan originator’’ 

includes any creditor that satisfies the 

definition of loan originator but makes 

use of ‘‘table funding’’ by a third party. 

See comment 36(a)–1.ii discussing table 

funding. Solely for purposes of 

§ 1026.36(f) and (g) concerning loan 

originator qualifications, the term loan 

originator includes any creditor that 

satisfies the definition of loan 

originator, even if the creditor does not 

make use of table funding. Such a 

person is a creditor, not a loan 

originator, for general purposes of this 

part, including the provisions of 

§ 1026.36 other than § 1026.36(f) and (g). 

D. A ‘‘loan originator organization’’ is 

a loan originator other than a natural 

person. The term includes any legal 

person or organization such as a sole 

proprietorship, trust, partnership, 

limited liability partnership, limited 

partnership, limited liability company, 

corporation, bank, thrift, finance 

company, or credit union. An 

‘‘individual loan originator’’ is limited 

to a natural person. (Under 

§ 1026.2(a)(22), the term ‘‘person’’ 

means a natural person or an 

organization.) 

E. The term ‘‘loan originator’’ does not 

include consumers who obtain 

extensions of consumer credit on their 

own behalf. 

ii. Table funding. Table funding 

occurs when the creditor does not 

provide the funds for the transaction at 

consummation out of the creditor’s own 

resources, including, for example, by 

drawing on a bona fide warehouse line 

of credit or out of deposits held by the 

creditor. Accordingly, a table-funded 

transaction is consummated with the 

debt obligation initially payable by its 

terms to one person, but another person 

provides the funds for the transaction at 

consummation and receives an 

immediate assignment of the note, loan 

contract, or other evidence of the debt 

obligation. Although 

§ 1026.2(a)(17)(i)(B) provides that a 

person to whom a debt obligation is 

initially payable on its face generally is 

a creditor, § 1026.36(a)(1) provides that, 

solely for the purposes of § 1026.36, 

such a person is also considered a loan 

originator. For example, if a person 

closes a transaction in its own name but 

does not fund the transaction from its 

own resources and assigns the 

transaction after consummation to the 

person providing the funds, it is 

considered a creditor for purposes of 

Regulation Z and also a loan originator 

for purposes of § 1026.36. However, if a 

person closes in its own name and 

finances a consumer credit transaction 

from the person’s own resources, 

including drawing on a bona fide 

warehouse line of credit or out of 

deposits held by the person, and does 

not assign the loan at closing, the person 

is a creditor not making use of table 

funding but is included in the definition 

of loan originator for the purposes of 

§ 1026.36(f) and (g) concerning loan 

originator qualifications. 

iii. Servicing. A loan servicer or a loan 

servicer’s employees, agents, or 

contractors that otherwise meet the 

definition of ‘‘loan originator’’ are 

excluded from the definition when 

modifying or offering to modify an 

existing loan on behalf of the current 

owner or holder of the loan (including 

an assignee or the servicer, if 

applicable). Other than § 1026.36(c), 

§ 1026.36 applies to extensions of 

consumer credit. Thus, other than 

§ 1026.36(c), § 1026.36 does not apply if 

a person renegotiates, modifies, 

replaces, or subordinates an existing 

obligation or its terms, unless the 

transaction constitutes a refinancing 

under § 1026.20(a) or obligates a 

different consumer on the existing debt. 

iv. Real estate brokerage. The 

definition of ‘‘loan originator’’ does not 

include a person that performs only real 

estate brokerage activities (e.g., does not 

perform mortgage broker or consumer 

credit referral activities or extend 

consumer credit) if the person is 

licensed or registered under applicable 

State law governing real estate 

brokerage, unless such person is paid by 

a loan originator or a creditor for a 

particular consumer credit transaction 

subject to § 1026.36. Such a person is 

not paid by a loan originator or a 

creditor if the person is paid by a loan 

originator or creditor on behalf of a 

buyer or seller solely for performing real 

estate brokerage activities. Such a 

person is not paid for a particular 

consumer credit transaction subject to 

§ 1026.36 if the person is paid 

compensation by a loan originator or 

creditor, or affiliate of the loan 

originator or creditor, solely for 

performing real estate brokerage 

activities in connection with a property 

owned by that loan originator or 

creditor. 

v. Third-party advisors. The 

definition of ‘‘loan originator’’ does not 

include bona fide third-party advisors 

such as accountants, attorneys, 

registered financial advisors, housing 

counselors, or others who do not receive 

compensation for engaging in loan 

origination activities. Advisory activity 

not constituting loan originator activity 

would include, for example, licensed 

accountants advising clients on tax 

implications of credit terms, registered 

financial advisors advising clients on 

potential effects of credit terms on client 

finances, HUD-approved housing 

counselors assisting consumers with 

understanding the credit origination 

process and various credit terms or 

collecting and organizing documents to 

support a credit application, or a 

licensed attorney assisting clients with 

consummating a real property 

transaction or with divorce, trust, or 

estate planning matters. Such a person, 

however, who advises a consumer on 

credit terms offered by either the person 

or the person’s employer, or who 

receives compensation or other 

monetary gain, directly or indirectly, 

from the loan originator or creditor on 

whose credit offer the person advises a 

consumer, generally would be a loan 

originator. A referral by such a person 

does not make the person a loan 

originator, however, where the person 


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11416 Federal Register / Vol. 78, No. 32 / Friday, February 15, 2013 / Rules and Regulations 

neither receives nor expects any 

compensation from a loan originator or 

creditor for referring the consumer. 

HUD-approved housing counselors who 

simply assist a consumer in obtaining or 

applying to obtain consumer credit from 

a loan originator or creditor are not loan 

originators if the compensation is not 

contingent on referrals or on engaging in 

additional loan origination activities 

and either of two alternative conditions 

is satisfied: The first alternative 

condition is that the 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)). The second alternative 

condition is that the compensation is a 

fixed sum received from a creditor, loan 

originator, or the affiliate of a loan 

originator or a creditor as a result of 

agreements between creditors or loan 

originators and local, State, or Federal 

agencies. However, HUD-approved 

housing counselors are loan originators 

if, for example, they receive 

compensation that is contingent on 

referrals or on engaging in loan 

originator activity other than assisting a 

consumer in obtaining or applying to 

obtain consumer credit from a loan 

originator or creditor. 

* * * * * 

4. Managers, administrative and 

clerical staff. For purposes of § 1026.36, 

managers, administrative and clerical 

staff, and similar individuals who are 

employed by (or contractor or agent of) 

a creditor or loan originator organization 

and take an application, offer, arrange, 

assist a consumer in obtaining or 

applying to obtain, negotiate, or 

otherwise obtain or make a particular 

extension of credit for another person 

are loan originators. The following 

examples describe activities that, in the 

absence of any other activities, do not 

render a manager, administrative or 

clerical staff member, or similar 

employee a loan originator: 

i. Application-related administrative 

and clerical tasks. The definition of loan 

originator does not include persons who 

at the request of the consumer provide 

an application form to the consumer; 

accept a completed application form 

from the consumer; or, without assisting 

the consumer in completing the 

application, processing or analyzing the 

information, or discussing specific 

credit terms or products available from 

a creditor with the consumer, deliver 

the application to a loan originator or 

creditor. A person does not assist the 

consumer in completing the application 

if the person explains to the consumer 

filling out the application the contents 

of the application or where particular 

consumer information is to be provided, 

or generally describes the loan 

application process to a consumer 

without discussion of particular credit 

terms or products available from a 

creditor. 

ii. Responding to consumer inquiries 

and providing general information. The 

definition of loan originator does not 

include persons who: 

A. Provide general explanations, 

information, or descriptions in response 

to consumer queries, such as explaining 

credit terminology or lending policies or 

who confirm written offer terms already 

transmitted to the consumer; 

B. 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 credit terms available from a 

creditor 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 credit transactions 

to consumers with those financial 

characteristics; 

C. Describe other product-related 

services; or 

D. Explain or describe the steps that 

a consumer would need to take to obtain 

an offer of credit, including providing 

general guidance on qualifications or 

criteria that would need to be met that 

is not specific to that consumer’s 

circumstances. 

iii. Loan processing. The definition of 

loan originator does not include persons 

who, acting on behalf of a loan 

originator or a creditor: 

A. Compile and assemble credit 

application packages and supporting 

documentation; 

B. Verify information provided by the 

consumer in a credit application such as 

by asking the consumer for supporting 

documentation or the consumer’s 

authorization for the person to obtain 

supporting documentation from other 

persons; 

C. Arrange for consummation of the 

credit transaction or for other aspects of 

the credit transaction process, including 

by communicating with a consumer 

about those arrangements, provided that 

any communication that includes a 

discussion about credit terms available 

from a creditor only confirms credit 

terms already agreed to by the 

consumer; 

D. Provide a consumer with 

information unrelated to credit terms, 

such as the best days of the month for 

scheduling consummation; or 

E. Communicate on behalf of a loan 

originator that a written credit offer has 

been sent to a consumer without 

providing any details of that offer. 

iv. Underwriting, credit approval, and 

credit pricing. The definition of loan 

originator does not include persons 

who: 

A. Receive and evaluate a consumer’s 

information to make underwriting 

decisions on whether a consumer 

qualifies for an extension of credit and 

communicate decisions to a loan 

originator or creditor, provided that 

only a loan originator communicates 

such underwriting decisions to the 

consumer; 

B. Approve credit terms or set credit 

terms available from the creditor in offer 

or counter-offer situations, provided 

that only a loan originator 

communicates to or with the consumer 

regarding these specific credit terms, an 

offer, or provides or engages in 

negotiation, a counter-offer, or approval 

conditions; or 

C. Establish credit pricing that the 

creditor offers generally to the public, 

via advertisements or other marketing or 

via other persons that are loan 

originators. 

v. Producing managers. Managers that 

work for creditors or loan originator 

organizations sometimes engage 

themselves in loan origination activities, 

as set forth in the definition of loan 

originator in § 1026.36(a)(1)(i) (such 

managers are sometimes referred to as 

‘‘producing managers’’). The definition 

of loan originator includes persons, 

including managers, who are employed 

by a creditor or loan originator 

organization and take an application, 

offer, arrange, assist a consumer with 

obtaining or applying to obtain, 

negotiate, or otherwise obtain or make a 

particular extension of credit for another 

person, even if such persons are also 

employed by the creditor or loan 

originator organization to perform 

duties that are not loan origination 

activities. Thus, such producing 

managers are loan originators. 

5. Compensation. i. General. For 

purposes of § 1026.36, compensation is 

defined in § 1026.36(a)(3) as salaries, 

commissions, and any financial or 

similar incentive. For example, the term 

‘‘compensation’’ includes: 

A. An annual or other periodic bonus; 

or 

B. Awards of merchandise, services, 

trips, or similar prizes. 

ii. Name of fee. Compensation 

includes amounts the loan originator 

retains and is not dependent on the 

label or name of any fee imposed in 

connection with the transaction. For 

example, if a loan originator imposes a 


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‘‘processing fee’’ in connection with the 

transaction and retains such fee, it is 

compensation for purposes of § 1026.36, 

including § 1026.36(d) and (e), whether 

the originator expends the time to 

process the consumer’s application or 

uses the fee for other expenses, such as 

overhead. 

iii. Amounts for third-party charges. 

Compensation does not include 

amounts the loan originator receives as 

payment for bona fide and reasonable 

charges, such as credit reports, where 

those amounts are passed on to a third 

party that is not the creditor, its affiliate, 

or the affiliate of the loan originator. See 

comment 36(a)–5.v. 

iv. Amounts for charges for services 

that are not loan origination activities. 

A. Compensation 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 but are paid to the 

creditor, its affiliate, or the affiliate of 

the loan originator organization. See 

comment 36(a)–5.v. 

B. Compensation includes any 

salaries, commissions, and any financial 

or similar incentive, regardless of 

whether it is labeled as payment for 

services that are not loan origination 

activities. 

C. Loan origination activities for 

purposes of this 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). 

v. Amounts that exceed the actual 

charge for a service. 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 the Real Estate Settlement 

Procedures Act). In such a case, 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 originator 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). For example: 

A. Assume a loan originator 

organization receives compensation 

directly from either a consumer or a 

creditor. Further assume the loan 

originator organization uses average 

charge pricing in accordance with the 

Real Estate Settlement Procedures Act 

and, based on its past average cost for 

credit reports, charges the consumer $25 

for a credit report provided by a third 

party. Under the loan originator 

organization’s agreement with the 

consumer reporting agency, the cost of 

the credit report is to be paid in a 

month-end bill and will vary between 

$15 and $35 depending on how many 

credit reports the originator obtains that 

month. Assume the $25 for the credit 

report is paid by the consumer or is paid 

by the creditor with proceeds from a 

rebate. At the end of the month, the cost 

for the credit report is determined to be 

$15 for this consumer’s transaction, 

based on the loan originator 

organization’s credit report volume that 

month. In this case, the $10 difference 

between the $25 credit report fee 

imposed on the consumer and the actual 

$15 cost for the credit report is not 

compensation for purposes of § 1026.36, 

even though the $10 is retained by the 

loan originator organization. 

B. Using the same example as in 

comment 36(a)–5.v.A, the $10 difference 

would be compensation for purposes of 

§ 1026.36 if the price for a credit report 

varies between $10 and $15. 

vi. Returns on equity interests and 

dividends on equity holdings. The term 

‘‘compensation’’ for purposes of 

§ 1026.36(d) and (e) also includes, for 

example, awards of stock, stock options 

and equity interests. Thus, the awarding 

of stock, stock options, or equity 

interests to loan originators is subject to 

the restrictions in § 1026.36(d) and (e). 

For example, a person may not award 

additional stock or a preferable type of 

equity interest to a loan originator based 

on the terms of a consumer credit 

transaction subject to § 1026.36 

originated by that loan originator. 

However, bona fide returns or dividends 

paid on stock or other equity holdings, 

including those paid to owners or 

shareholders of a loan originator 

organization who own such stock or 

equity interests, are not compensation 

for purposes of § 1026.36(d) and (e). 

Bona fide returns or dividends are those 

returns and dividends that are paid 

pursuant to documented ownership or 

equity interests and that are not 

functionally equivalent to 

compensation. Ownership and equity 

interests must be bona fide. Bona fide 

ownership and equity interests are 

allocated according to a loan originator’s 

respective capital contribution where 

the allocation is not a mere subterfuge 

for the payment of compensation based 

on terms of a transaction. Ownership 

and equity interests also are not bona 

fide if the formation or maintenance of 

the business from which returns or 

dividends are paid is a mere subterfuge 

for the payment of compensation based 

on the terms of a transaction. For 

example, assume that three individual 

loan originators form a loan originator 

organization that is a limited liability 

company (LLC). The three individual 

loan originators are members of the LLC, 

and the LLC agreement governing the 

loan originator organization’s structure 

calls for regular distributions based on 

the members’ respective equity 

interests. If the members’ respective 

equity interests are allocated based on 

the members’ terms of transactions, 

rather than according to their respective 

capital contributions, then distributions 

based on such equity interests are not 

bona fide and, thus, are compensation 

for purposes of § 1026.36(d) and (e). 

36(a)(4) Seller Financers; Three 

Properties 

1. Reasonable ability to repay safe 

harbors. A person in good faith 

determines that the consumer to whom 

the person extends seller financing has 

a reasonable ability to repay the 

obligation if the person complies with 

§ 1026.43(c) of this part or complies 

with the alternative criteria discussed in 

this comment. 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 


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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 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 

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 

rely on copies of tax returns the 

consumer filed with the Internal 

Revenue Service or a State taxing 

authority. 

2. Adjustable rate safe harbors. i. 

Annual rate increase. An annual rate 

increase of two percentage points or less 

is reasonable. 

ii. Lifetime increase. 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 

1. Adjustable rate safe harbors. For a 

discussion of reasonable annual and 

lifetime interest rate increases, see 

comment 36(a)(4)–2. 

36(b) Scope. 

1. Scope of coverage. Section 

1026.36(c) applies to closed-end 

consumer credit transactions secured by 

a consumer’s principal dwelling. 

Paragraphs (h) and (i) of § 1026.36 apply 

to home equity lines of credit under 

§ 1026.40 secured by a consumer’s 

principal dwelling. Paragraphs (d), (e), 

(f), (g), (h), and (i) of § 1026.36 apply to 

closed-end consumer credit transactions 

secured by a dwelling. Closed-end 

consumer credit transactions include 

transactions secured by first or 

subordinate liens, and reverse mortgages 

that are not home equity lines of credit 

under § 1026.40. See § 1026.36(b) for 

additional restrictions on the scope of 

§ 1026.36, and §§ 1026.1(c) and 

1026.3(a) and corresponding 

commentary for further discussion of 

extensions of credit subject to 

Regulation Z. 

* * * * * 

36(d) Prohibited Payments to Loan 

Originators 

1. Persons covered. Section 1026.36(d) 

prohibits any person (including a 

creditor) from paying compensation to a 

loan originator in connection with a 

covered credit transaction, if the amount 

of the payment is based on a term of a 

transaction. For example, a person that 

purchases an extension of credit from 

the creditor after consummation may 

not compensate the loan originator in a 

manner that violates § 1026.36(d). 

* * * * * 

36(d)(1) Payments Based on a Term of 

a Transaction 

1. Compensation that is ‘‘based on’’ a 

term of a transaction. i. Objective facts 

and circumstances. Whether 

compensation is ‘‘based on’’ a term of a 

transaction does not require a 

comparison of multiple transactions or 

proof that any person subjectively 

intended that there be a relationship 

between the amount of the 

compensation paid and a transaction 

term. Instead, the determination is 

based on the objective facts and 

circumstances indicating that 

compensation would have been 

different if a transaction term had been 

different. Generally, 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. In the 

absence of a compensation policy, or 

when a compensation policy is not 

followed, the determination may be 

made based on a comparison of 

transactions originated and the amounts 

of compensation paid. 

ii. Single or multiple transactions. 

The prohibition on payment and receipt 

of compensation under 

§ 1026.36(d)(1)(i) encompasses 

compensation that directly or indirectly 

is based on the terms of a single 

transaction of a single individual loan 

originator, the terms of multiple 

transactions of that single individual 

loan originator, or the terms of 

transactions of multiple individual loan 

originators. Compensation to a loan 

originator that is based upon profits 

determined with reference to a 

mortgage-related business is considered 

compensation that is based on the terms 

of transactions of multiple individual 

loan originators. For exceptions 

permitting compensation based upon 

profits determined with reference to 

mortgage-related business pursuant to 

either a designated tax-advantaged plan 

or a non-deferred profits-based 

compensation plan, see comment 

36(d)(1)–3.i and ii. For clarification 

about ‘‘mortgage-related business,’’ see 

comment 36(d)(1)–3.v.E. 

A. Assume that a creditor pays a 

bonus to an individual loan originator 

out of a bonus pool established with 

reference to the creditor’s profits and 

the profits are determined with 

reference to the creditor’s revenue from 

origination of closed-end consumer 

credit transactions secured by a 

dwelling. In such instance, the bonus is 

considered compensation under a nondeferred profits-based compensation 

plan. Therefore, the bonus is prohibited 

under § 1026.36(d)(1)(i), unless it is 

otherwise permitted under 

§ 1026.36(d)(1)(iv). 

B. Assume that an individual loan 

originator’s employment contract with a 

creditor guarantees a quarterly bonus in 

a specified amount conditioned upon 

the individual loan originator meeting 

certain performance benchmarks (e.g., 

volume of originations monthly). A 

bonus paid following the satisfaction of 

those contractual conditions is not 

directly or indirectly based on the terms 

of a transaction under 1026.36(d)(1)(i), 

as clarified by this comment 36(d)(1)– 

1.ii, because the creditor is obligated to 

pay the bonus, in the specified amount, 

regardless of the terms of transactions of 

the individual loan originator or 

multiple individual loan originators and 

the effect of those multiple terms of 

transactions on the creditor’s profits. 

Because this type of bonus is not 

directly or indirectly based on a term of 

a transaction, as described in 

§ 1026.36(d)(1)(i) (as clarified by 

comment 36(d)(1)–1.ii), it is not subject 

to the 10-percent total compensation 

limit described in 

§ 1026.36(d)(1)(iv)(B)(1). 

iii. Transaction term defined. A ‘‘term 

of a transaction’’ under 

§ 1026.36(d)(1)(ii) is any right or 

obligation of any of the parties to a 

credit transaction. A ‘‘credit 

transaction’’ is 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 definition 

includes: 

A. 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 


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incorporated by reference in the note, 

contract, or security instrument; 

B. The payment of any loan originator 

or creditor fees or charges for the credit, 

or for a product or service provided by 

the loan originator or creditor related to 

the extension of that credit, imposed on 

the consumer, including any fees or 

charges financed through the interest 

rate; and 

C. 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. 

D. The fees and charges described 

above in paragraphs B and C can only 

be a term of a transaction if the fees or 

charges are required to be disclosed in 

either the Good Faith Estimate and the 

HUD–1 or HUD–1A (and subsequently 

in any integrated disclosures 

promulgated by the Bureau under TILA 

section 105(b) (15 U.S.C. 1604(b)) and 

RESPA section 4 (12 U.S.C. 2603) as 

amended by sections 1098 and 1100A of 

the Dodd-Frank Act). 

2. Compensation that is or is not 

based on a term of a transaction or a 

proxy for a term of a transaction. 

Section 1026.36(d)(1) does not prohibit 

compensating a loan originator 

differently on different transactions, 

provided the difference is not based on 

a term of a transaction or a proxy for a 

term of a transaction. The rule prohibits 

compensation to a loan originator for a 

transaction based on, among other 

things, that transaction’s interest rate, 

annual percentage rate, collateral type 

(e.g., condominium, cooperative, 

detached home, or manufactured 

housing), or the existence of a 

prepayment penalty. The rule also 

prohibits compensation to a loan 

originator that is based on any factor 

that is a proxy for a term of a 

transaction. 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. 

i. Permissible methods of 

compensation. Compensation based on 

the following factors is not 

compensation based on a term of a 

transaction or a proxy for a term of a 

transaction: 

A. The loan originator’s overall dollar 

volume (i.e., total dollar amount of 

credit extended or total number of 

transactions originated), delivered to the 

creditor. See comment 36(d)(1)–9 

discussing variations of compensation 

based on the amount of credit extended. 

B. The long-term performance of the 

originator’s loans. 

C. An hourly rate of pay to 

compensate the originator for the actual 

number of hours worked. 

D. Whether the consumer is an 

existing customer of the creditor or a 

new customer. 

E. A payment that is fixed in advance 

for every loan the originator arranges for 

the creditor (e.g., $600 for every credit 

transaction arranged for the creditor, or 

$1,000 for the first 1,000 credit 

transactions arranged and $500 for each 

additional credit transaction arranged). 

F. The percentage of applications 

submitted by the loan originator to the 

creditor that results in consummated 

transactions. 

G. The quality of the loan originator’s 

loan files (e.g., accuracy and 

completeness of the loan 

documentation) submitted to the 

creditor. 

ii. Proxies for terms of a transaction. 

If the loan originator’s compensation is 

based in whole or in part on a factor that 

is a proxy for a term of a transaction, 

then the loan originator’s compensation 

is based on a term of a transaction. 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 or terms of the 

transaction over a significant number of 

transactions, and the loan originator has 

the ability, directly or indirectly, to add, 

drop, or change the factor when 

originating the transaction. For example: 

A. Assume a creditor pays a loan 

originator a higher commission for 

transactions to be held by the creditor 

in portfolio than for transactions sold by 

the creditor into the secondary market. 

The creditor holds in portfolio only 

extensions of credit that have a fixed 

interest rate and a five-year term with a 

final balloon payment. The creditor sells 

into the secondary market all other 

extensions of credit, which typically 

have a higher fixed interest rate and a 

30-year term. Thus, whether an 

extension of credit is held in portfolio 

or sold into the secondary market for 

this creditor consistently varies with the 

interest rate and whether the credit has 

a five-year term or a 30-year term 

(which are terms of the transaction) over 

a significant number of transactions. 

Also, the loan originator has the ability 

to change the factor by, for example, 

advising the consumer to choose an 

extension of credit a five-year term. 

Therefore, under these circumstances, 

whether or not an extension of credit 

will be held in portfolio is a proxy for 

a term of a transaction. 

B. Assume a loan originator 

organization pays loan originators 

higher commissions for transactions 

secured by property in State A than in 

State B. For this loan originator 

organization, over a significant number 

of transactions, transactions in State B 

have substantially lower interest rates 

than transactions in State A. The loan 

originator, however, does not have any 

ability to influence whether the 

transaction is secured by property 

located in State A or State B. Under 

these circumstances, the factor that 

affects compensation (the location of the 

property) is not a proxy for a term of a 

transaction. 

iii. Pooled compensation. Section 

1026.36(d)(1) prohibits the sharing of 

pooled compensation among loan 

originators who originate transactions 

with different terms and are 

compensated differently. For example, 

assume that Loan Originator A receives 

a higher commission than Loan 

Originator B and that loans originated 

by Loan Originator A generally have 

higher interest rates than loans 

originated by Loan Originator B. Under 

these circumstances, the two loan 

originators may not share pooled 

compensation because each receives 

compensation based on the terms of the 

transactions they collectively make. 

3. Interpretation of § 1026.36(d)(1)(iii) 

and (iv). Subject to certain restrictions, 

§ 1026.36(d)(1)(iii) and 

§ 1026.36(d)(1)(iv) permit contributions 

to or benefits under designated taxadvantaged plans and compensation 

under a non-deferred profits-based 

compensation plan even if the 

contributions, benefits, or 

compensation, respectively, are based 

on the terms of multiple transactions of 

multiple individual loan originators. 

i. Designated tax-advantaged plans. 

Section 1026.36(d)(1)(iii) permits an 

individual loan originator to receive, 

and a person to pay, compensation in 

the form of contributions to a defined 

contribution plan or benefits under a 

defined benefit plan provided the plan 

is a designated tax-advantaged plan (as 

defined in § 1026.36(d)(1)(iii)), even if 


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contributions to or benefits under such 

plans are directly or indirectly based on 

the terms of multiple transactions of 

multiple individual loan originators. In 

the case of a designated tax-advantaged 

plan that is a defined contribution plan, 

section 1026.36(d)(1)(iii) does not 

permit the amount of the contribution to 

be directly or indirectly based on the 

terms of that individual loan originator’s 

transactions. A defined contribution 

plan has the meaning set forth in 

Internal Revenue Code section 414(i), 26 

U.S.C. 414(i). A defined benefit plan has 

the meaning set forth in Internal 

Revenue Code section 414(j), 26 U.S.C. 

414(j). 

ii. Non-deferred profits-based 

compensation plans. As used in 

§ 1026.36(d)(1)(iv), a ‘‘non-deferred 

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 mortgagerelated profits of the person paying the 

compensation, any affiliate, or a 

business unit within the organizational 

structure of the person or the affiliate, 

as applicable (i.e., depending on the 

level within the person’s or affiliate’s 

organization at which the non-deferred 

profits-based compensation plan is 

established). A non-deferred profitsbased compensation plan does not 

include a designated tax-advantaged 

plan or other forms of deferred 

compensation that are not designated 

tax-advantaged plans, such as those 

created pursuant to Internal Revenue 

Code section 409A. Thus, if 

contributions to or benefits under a 

designated tax-advantaged plan or other 

form of deferred compensation are 

determined based upon the mortgagerelated profits of the person making the 

contribution, the contribution or 

benefits are not permitted by 

§ 1026.36(d)(1)(iv) (although, in the case 

of contribution to or benefits under a 

designated tax-advantaged plan, the 

benefits or contributions may be 

permitted by § 1026.36(d)(iii)). Under a 

non-deferred profits-based 

compensation plan, the individual loan 

originator may, for example, be paid 

directly in cash, stock, or other nondeferred compensation, and the amount 

to be paid out from 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., the person 

may elect not to pay compensation 

under a non-deferred profits-based 

compensation plan in a given year), 

provided the distributions are not 

directly or indirectly based on the terms 

of the individual loan originator’s 

transactions. As used in 

§ 1026.36(d)(1)(iv) and this commentary, 

non-deferred profits-based 

compensation plans include, without 

limitation, bonus pools, profits pools, 

bonus plans, and profit-sharing plans. 

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. As used in 

§ 1026.36(d)(1)(iv) and this commentary, 

a business unit is a division, 

department, or segment within the 

overall organizational structure of the 

person or the person’s affiliate that 

performs discrete business functions 

and that the person or the affiliate treats 

separately for accounting or other 

organizational purposes. For example, a 

creditor that pays its individual loan 

originators bonuses at the end of a 

calendar year based on the creditor’s 

average net return on assets for the 

calendar year is operating a profitsbased compensation plan under 

§ 1026.36(d)(1)(iv). A bonus that is paid 

to an individual loan originator from a 

source other than a non-deferred profitsbased compensation plan, such as a 

retention bonus budgeted for in advance 

or 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 

prohibition on payment of 

compensation based on the terms of 

transactions of multiple individual loan 

originators under § 1026.36(d)(1)(i), as 

clarified by comment 36(d)(1)–1.ii; 

therefore, § 1026.36(d)(1)(iv) does not 

apply to such bonuses. 

iii. Compensation that is not directly 

or indirectly based on the terms of 

transactions of multiple individual loan 

originators. The compensation 

arrangements addressed in 

§ 1026.36(d)(1)(iii) and (iv) are 

permitted even if they are directly or 

indirectly based on the terms of 

transactions of multiple individual loan 

originators. See comment 36(d)(1)–1.i 

and ii.A for additional interpretation. If 

a loan originator organization’s revenues 

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 directly or 

indirectly based on the terms of 

multiple transactions of multiple 

individual loan originators if 

§ 1026.36(d)(1)(i) is otherwise complied 

with. 

iv. Compensation based on terms of 

an individual loan originator’s 

transactions. Under both 

§ 1026.36(d)(1)(iii), with regard to 

contributions made to a defined 

contribution plan that is a designated 

tax-advantaged plan, and 

§ 1026.36(d)(1)(iv), with regard to 

compensation under a non-deferred 

profits-based compensation plan, the 

payment of compensation to an 

individual loan originator may not be 

directly or indirectly based on the terms 

of that individual loan originator’s 

transaction or transactions. 

Consequently, the compensation 

payment may not take into account, for 

example, the fact that the individual 

loan originator’s transactions during the 

relevant calendar year had higher 

interest rate spreads over the creditor’s 

minimum acceptable rate on average 

than similar transactions for other 

individual loan originators employed by 

the creditor. 

v. Compensation under non-deferred 

profits-based compensation plans. 

Assuming that the conditions in 

§ 1026.36(d)(1)(iv)(A) are met, 

§ 1026.36(d)(1)(iv)(B)(1) permits certain 

compensation to an individual loan 

originator under a non-deferred profitsbased compensation plan. Specifically, 

if the compensation is determined with 

reference to the profits of the person 

from mortgage-related business, 

compensation under a non-deferred 

profits-based compensation plan is 

permitted provided the compensation is 

not more than 10 percent of the 

individual loan originator’s total 

compensation corresponding to the time 

period for which compensation under 

the non-deferred profits-based 

compensation plan is paid. The 

compensation restrictions under 

§ 1026.36(d)(1)(iv)(B)(1) are sometimes 

referred to in this commentary as the 

‘‘10-percent total compensation limit;’’ 

and the restrictions on compensation 

contained within the rule are sometimes 

referred to in this commentary as the 

‘‘10-percent limit.’’ 

A. Total compensation. For purposes 

of § 1026.36(d)(1)(iv)(B)(1), the 

individual loan originator’s total 

compensation consists of the sum total 

of: (1) All wages and tips reportable for 

Medicare tax purposes in box 5 on IRS 

form W–2 (or, if the individual loan 

originator is an independent contractor, 

reportable compensation on IRS form 


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203 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. 

1099–MISC); 203 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. 

B. Profits of the Person. Under 

§ 1026.36(d)(1)(iv), a plan is a nondeferred profits-based compensation 

plan if compensation is paid, based in 

whole or in part, on the profits of the 

person paying the compensation. As 

used in § 1026.36(d)(1)(iv)(B)(1), 

‘‘profits of the person’’ include, as 

applicable depending on where the nondeferred 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 any affiliate of the person. 

Profits from mortgage-related business 

are profits determined with reference to 

revenue generated from transactions 

subject to § 1026.36(d). Pursuant to 

§ 1026.36(b) and comment 36(b)–1, 

§ 1026.36(d) applies to closed-end 

consumer credit transactions secured by 

dwellings. This revenue includes, 

without limitation, and as applicable 

based on the particular sources of 

revenue 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. If the amount of the 

individual loan originator’s 

compensation under non-deferred 

profits-based compensation plans paid 

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. 

C. Time period for which the 

compensation under the non-deferred 

profits-based compensation plan and 

the total compensation are determined. 

Under § 1026.36(d)(1)(iv)(B)(1), to 

determine whether profits-based 

compensation complies with the 10- 

percent total compensation limit 

requires a measurement of the ratio of 

compensation subject to the 10-percent 

limit and the total compensation during 

the relevant time period. The time 

period for which the compensation is 

determined is the time period with 

respect to which the profits from which 

compensation is paid are calculated. It 

does not matter whether the 

compensation subject to the 10-percent 

limit and the total compensation are 

actually paid during that particular time 

period. For example, assume that for 

calendar year 2013 a creditor pays an 

individual loan originator compensation 

in the following amounts: $80,000 in 

commissions based on the individual 

loan originator’s performance and 

volume of loans generated during 

calendar year; and $10,000 in an 

employer contribution to a designated 

tax-advantaged defined contribution 

plan on behalf of the individual loan 

originator. The employer desires to pay 

the individual loan originator a year-end 

profit-related bonus of $10,000. The 

commissions are paid and employer 

contributions to the qualified plan are 

made during calendar year 2013, but the 

year-end bonus will be paid in January 

2014. For purposes of the 10-percent 

total compensation limit, the year-end 

bonus is counted as part of both the 

compensation subject to the 10-percent 

limit and the total compensation for 

calendar year 2013 even though it is not 

actually paid until 2014. Therefore, for 

calendar year 2013 the individual loan 

originator’s compensation that is subject 

to the 10-percent limit would be 

$10,000 (i.e., the year-end bonus) and 

the total compensation would be 

$100,000 (i.e., the sum of the 

commissions, designated plan 

contribution, and the projected bonus); 

the bonus would be permissible under 

§ 1026.36(d)(1)(iv) because it does not 

exceed 10 percent of total 

compensation. The determination of 

total compensation corresponding to 

2013 also would not take into account 

any bonus that is actually paid in 2013 

but attributable to a different calendar 

year (e.g., an annual bonus for 2012 that 

is paid in January 2013). A company, 

business unit, or affiliate, as applicable, 

may pay compensation subject to the 

10-percent limit during different time 

periods falling within its annual 

accounting period for keeping records 

and reporting income and expenses, 

which may be a calendar year or a fiscal 

year depending on the annual 

accounting period. In such instances, 

however, the 10-percent limit applies 

both as to each time period and 

cumulatively as to the annual 

accounting period. For example, assume 

that a creditor uses a calendar-year 

accounting period. If the creditor pays 

an individual loan originator a bonus at 

the end of each quarter under a nondeferred profits-based compensation 

plan, the payment of each quarterly 

bonus is subject to the 10-percent limit 

measured with respect to each quarter. 

The creditor can also pay an annual 

bonus under the non-deferred profitsbased compensation plan that does not 

exceed the difference of 10 percent of 

the individual loan originator’s total 

compensation corresponding to the 

calendar year and the aggregate amount 

of quarterly bonuses. 

D. Awards of merchandise, services, 

trips, or similar prizes or incentives. If 

any compensation paid to an individual 

loan originator under § 1026.36(d)(1)(iv) 

consists of an award of merchandise, 

services, trips, or similar prize or 

incentive, the cash value of the award 

is factored into the calculations of the 

10-percent total compensation limit. For 

example, during a given calendar year, 

individual loan originator A and 

individual loan originator B are each 

employed by a creditor and paid 

$40,000 in salary, $44,000 in 

commissions, and other benefits that 

have a cash value of $1,000. The 

creditor also contributes $5,000 to a 

designated tax-advantaged defined 

contribution plan for each individual 

loan originator. Neither individual loan 

originator is paid any other form of 

compensation by the creditor. In 

December of the calendar year, the 

creditor rewards both individual loan 

originators for their performance during 

the calendar year out of a bonus pool 

established with reference to the profits 

of the mortgage origination business 

unit. Individual loan originator A is 

paid a $10,000 cash bonus, meaning that 

individual loan originator A’s total 

compensation is $100,000. Individual 

loan originator B is paid a $7,500 cash 

bonus and awarded a vacation package 

with a cash value of $3,000, meaning 

that individual loan originator B’s total 

compensation is $100,500. Under 

§ 1026.36(d)(1)(iv)(B)(1), individual loan 

originator A’s $10,000 bonus is 

permissible because the bonus would 

not constitute more than 10 percent of 

the individual loan originator A’s total 

compensation for the calendar year. The 

creditor may not pay individual loan 

originator B the $7,500 bonus and award 

the vacation package, however, because 

the total value of the bonus and the 

vacation package would be $10,500, 

which is greater than 10 percent (10.45 

percent) of individual loan originator 

B’s total compensation for the calendar 

year. One way to comply with 

§ 1026.36(d)(1)(iv)(B)(1) would be if the 


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11422 Federal Register / Vol. 78, No. 32 / Friday, February 15, 2013 / Rules and Regulations 

amount of the bonus were reduced to 

$7,000 or less or the vacation package 

were structured such that its cash value 

would be $2,500 or less. 

E. Compensation determined only 

with reference to non-mortgage-related 

business profits. Compensation under a 

non-deferred profits-based 

compensation plan is not subject to the 

10-percent total compensation limit 

under § 1026.36(d)(1)(iv) if the nondeferred profits-based compensation 

plan is determined with reference only 

to profits from business other than 

mortgage-related business, as 

determined in accordance with 

reasonable accounting principles. 

Reasonable accounting principles 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 are consistent with the 

accounting principles applied by the 

person or the affiliate with respect to, as 

applicable, its internal budgeting and 

auditing functions and external 

reporting requirements. Examples of 

external reporting and filing 

requirements that may be applicable to 

creditors and loan originator 

organizations are Federal income tax 

filings, Federal securities law filings, or 

quarterly reporting of income, expenses, 

loan origination activity, and other 

information required by governmentsponsored enterprises. As used in 

§ 1026.36(d)(1)(iv)(B)(1), profits means 

positive profits or losses avoided or 

mitigated. 

F. Additional examples. 1. Assume 

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. At the end of 

the year, the loan originator 

organization wishes to pay 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. Assume that the loan 

originator organization derives revenues 

from sources other than transactions 

covered by § 1026.36(d). In this 

example, the performance bonus would 

be directly or indirectly based on the 

terms of multiple individual loan 

originators’ transactions as described in 

§ 1026.36(d)(1)(i), because it is being 

funded out of a profit pool derived in 

part from mortgage originations. Thus, 

the bonus is permissible under 

§ 1026.36(d)(1)(iv)(B)(1) if it does not 

exceed 10 percent of the loan 

originator’s total compensation, which 

in this example consists of the 

individual loan originator’s salary, 

commissions, contribution to the 401(k) 

plan (if the loan originator organization 

elects to include the contribution in 

calculating total compensation), and the 

performance bonus. Therefore, if the 

loan originator organization elects to 

include the 401(k) contribution in total 

compensation for these purposes, 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); if the loan originator 

organization does not include the 401(k) 

contribution in calculating total 

compensation, the bonus may be up to 

$18,333.33. 

2. Assume that the compensation 

during a given calendar year of an 

individual loan originator employed by 

a creditor consists of only salary, 

commissions, and benefits, and the 

individual loan originator does not 

participate in a designated defined 

contribution plan. Assume further that 

the creditor uses a calendar-year 

accounting period. At the end of the 

calendar year, the creditor pays the 

individual loan originator two bonuses: 

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. 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 mortgagerelated business profits, and the bonus 

is therefore subject to the 10-percent 

total compensation limit. If the 

company-wide bonus pool from which 

the ‘‘holiday’’ bonus is paid is derived 

in part from profits of the creditor’s 

mortgage origination business unit, then 

the combination of the ‘‘holiday’’ bonus 

and the performance bonus are subject 

to the 10-percent total compensation 

limit. The ‘‘holiday’’ bonus is not 

subject to the 10-percent total 

compensation limit if the bonus pool is 

determined with reference only to the 

profits of business units other than the 

mortgage origination business unit, as 

determined in accordance with 

reasonable accounting principles. If the 

‘‘performance’’ bonus and the ‘‘holiday’’ 

bonus in the aggregate do not exceed 10 

percent of the individual loan 

originator’s total compensation, the 

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. 

G. Reasonable reliance by individual 

loan originator on accounting or 

statement by person paying 

compensation. 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 profitsbased compensation 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. 

vi. Individual loan originators who 

originate ten or fewer mortgage loans. 

Subject to the conditions in 

§ 1026.36(d)(1)(iv) and (d)(1)(iv)(A), 

§ 1026.36(d)(1)(iv)(B)(2) permits 

compensation to an individual loan 

originator under a non-deferred profitsbased compensation plan even if the 

payment or contribution is directly or 

indirectly based on the terms of 

multiple individual loan originators’ 

transactions if the individual is a loan 

originator (as defined in 

§ 1026.36(a)(1)(i)) for ten or fewer 

transactions during the 12-month period 

preceding the compensation 

determination. For example, assume a 

loan originator organization employs 

two individual loan originators who 

originate transactions subject to 

§ 1026.36 during a given calendar year. 

Both employees are individual loan 

originators under § 1026.36(a)(1)(ii), but 

only one of them (individual loan 

originator B) acts as a loan originator in 

the normal course of business, while the 

other (individual loan originator A) is 

called upon to do so only occasionally 

and regularly performs other duties 

(such as serving as a manager). In 

January of the following calendar year, 

the loan originator organization formally 

determines the financial performance of 

its mortgage business for the prior 

calendar year. Based on that 

determination, the loan originator 

organization on February 1 decides to 

pay a bonus to the individual loan 

originators out of a company bonus 

pool. Assume that, between February 1 

of the prior calendar year and January 

31 of the current calendar year, 

individual loan originator A was the 


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loan originator for eight transactions, 

and individual loan originator B was the 

loan originator for 15 transactions. The 

loan originator organization may award 

the bonus to individual loan originator 

A under § 1026.36(d)(1)(iv)(B)(2). The 

loan originator organization may not 

award the bonus to individual loan 

originator B relying on the exception 

under § 1026.36(d)(1)(iv)(B)(2) because 

it would not apply, although it could 

award a bonus pursuant to the 10- 

percent total compensation limit in 

§ 1026.36(d)(1)(iv)(B)(1). 

4. Creditor’s flexibility in setting loan 

terms. Section 1026.36(d) also does not 

limit a creditor from offering or 

providing different loan terms to the 

consumer based on the creditor’s 

assessment of the credit and other 

transactional risks involved. 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, in these 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, the 

creditor may charge an interest rate of 

6.5 percent. In these transactions, 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). 

5. Effect of modification of 

transaction terms. Under 

§ 1026.36(d)(1), a loan originator’s 

compensation may not be based on any 

of the terms of a credit transaction. 

Thus, a creditor and a loan originator 

may not agree to set the loan originator’s 

compensation at a certain level and then 

subsequently lower it in selective cases 

(such as where the consumer is able to 

obtain a lower rate from another 

creditor). When the creditor offers to 

extend credit with specified terms and 

conditions (such as the rate and points), 

the amount of the originator’s 

compensation for that transaction is not 

subject to change (increase or decrease) 

based on whether different credit terms 

are negotiated. For example, if the 

creditor agrees to lower the rate that was 

initially offered, the new offer may not 

be accompanied by a reduction in the 

loan originator’s compensation. Thus, 

while the creditor may change credit 

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. A loan originator 

therefore may not agree to reduce its 

compensation or provide a credit to the 

consumer to pay a portion of the 

consumer’s closing costs, for example, 

to avoid high-cost mortgage provisions. 

A loan originator organization may not 

reduce its own compensation in a 

transaction where the loan originator 

organization receives compensation 

directly from the consumer, with or 

without a corresponding reduction in 

compensation paid to an individual 

loan originator. See comment 36(d)(1)– 

7 for further interpretation. 

6. Periodic changes in loan originator 

compensation and terms of 

transactions. Section 1026.36 does not 

limit a creditor or other person from 

periodically revising the compensation 

it agrees to pay a loan originator. 

However, the revised compensation 

arrangement must result in payments to 

the loan originator that are not based on 

the terms of a credit transaction. A 

creditor or other person might 

periodically review factors such as loan 

performance, transaction volume, as 

well as current market conditions for 

originator compensation, and 

prospectively revise the compensation it 

agrees to pay to a loan originator. For 

example, assume that during the first six 

months of the year, a creditor pays 

$3,000 to a particular loan originator for 

each loan delivered, regardless of the 

loan terms or conditions. After 

considering the volume of business 

produced by that originator, the creditor 

could decide that as of July 1, it will pay 

$3,250 for each loan delivered by that 

particular originator, regardless of the 

loan terms or conditions. No violation 

occurs even if the loans made by the 

creditor after July 1 generally carry a 

higher interest rate than loans made 

before that date, to reflect the higher 

compensation. 

7. Permitted decreases in loan 

originator compensation. 

Notwithstanding comment 36(d)(1)–5, 

§ 1026.36(d)(1) does not prohibit a loan 

originator from decreasing its 

compensation 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 an unforeseen actual 

settlement cost not disclosed to the 

consumer pursuant to section 5(c) of 

RESPA. For purposes of comment 

36(d)(1)–7, an increase in an actual 

settlement cost over an estimated 

settlement cost or a cost not disclosed 

is unforeseen if the increase occurs even 

though the estimate provided to the 

consumer is consistent with the best 

information reasonably available to the 

disclosing person at the time of the 

estimate. For example: 

i. Assume that a consumer 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. 

ii. Assume that 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. 

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. 

8. Record retention. See comment 

25(c)(2)–1 and –2 for commentary on 

complying with the record retention 

requirements of § 1026.25(c)(2) as they 

apply to § 1026.36(d)(1). 

* * * * * 

10. Amount of credit extended under 

a reverse mortgage. For closed-end 

reverse mortgage loans, the ‘‘amount of 

credit extended’’ for purposes of 

§ 1026.36(d)(1) means either: 

i. The maximum proceeds available to 

the consumer under the loan; or 

ii. The maximum claim amount as 

defined in 24 CFR 206.3 if the mortgage 

is subject to 24 CFR part 206, or the 

appraised value of the property, as 

determined by the appraisal used in 

underwriting the loan, if the mortgage is 

not subject to 24 CFR part 206. 

36(d)(2) Payments by Persons Other 

Than Consumer 

36(d)(2)(i) Dual Compensation 

1. Compensation in connection with a 

particular transaction. Under 

§ 1026.36(d)(2)(i)(A), if any loan 

originator receives compensation 


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11424 Federal Register / Vol. 78, No. 32 / Friday, February 15, 2013 / Rules and Regulations 

directly from a consumer in a 

transaction, no other person may 

provide any compensation to any loan 

originator, directly or indirectly, in 

connection with that particular credit 

transaction, whether before, at, or after 

consummation. See comment 

36(d)(2)(i)–2 discussing compensation 

received directly from the consumer. 

The restrictions imposed under 

§ 1026.36(d)(2)(i) 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. 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. Section 

1026.36(d)(2)(i)(C) provides that, if a 

loan originator organization receives 

compensation directly from a consumer, 

the loan originator organization may 

provide compensation to individual 

loan originators, and the individual loan 

originator may receive compensation 

from the loan originator organization, 

subject to the restriction in 

§ 1026.36(d)(1). (See comment 36(a)(1)– 

1.i for an explanation of the use of the 

term ‘‘loan originator organization’’ and 

‘‘individual loan originator’’ for 

purposes of § 1026.36(d)(2)(i)(C).) For 

example, payments by a mortgage 

broker to an individual loan originator 

as compensation for originating a 

specific credit transaction do not violate 

§ 1026.36(d)(2)(i)(A) even if the 

consumer directly pays the mortgage 

broker a fee in connection with that 

transaction. However, neither the 

mortgage broker nor the individual loan 

originator can receive compensation 

from the creditor in connection with 

that particular credit transaction. 

2. Compensation received directly 

from a consumer. i. Payments by a 

consumer to a loan originator from loan 

proceeds are considered compensation 

received directly from the consumer, 

while payments derived from an 

increased interest rate are not 

considered compensation received 

directly from the consumer. However, 

payments by a 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. See the definition of 

‘‘compensation’’ in § 1026.36(a)(3) and 

related commentary. 

ii. 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 the 

Real Estate Settlement Procedures Act 

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). 

iii. Section 1026.36(d)(2)(i)(B) 

provides that compensation received 

directly from a consumer includes 

payments to a loan originator made 

pursuant to an agreement between the 

consumer and a person other than the 

creditor or its affiliates, under which 

such other person agrees to provide 

funds toward the consumer’s costs of 

the transaction (including loan 

originator compensation). 

Compensation to a loan originator is 

sometimes 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 or agent. Such payments to a 

loan originator are considered 

compensation received directly from the 

consumer for purposes of 

§ 1026.36(d)(2) if they are made 

pursuant to an agreement between the 

consumer and the person other than the 

creditor or its affiliates. State law 

determines whether there is an 

agreement between the parties. See 

§ 1026.2(b)(3). The parties do not have 

to agree specifically that the payments 

will be used to pay for the loan 

originator’s compensation, but just that 

the person will make a payment to the 

loan originator toward the consumer’s 

costs of the transaction, or ‘‘closing 

costs’’ and the loan originator retains 

such payment. For example, assume 

that a non-creditor seller (that is not the 

creditor’s affiliate) 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 

paid by the non-creditor seller to the 

loan originator and constitutes 

‘‘compensation’’ as defined in 

§ 1026.36(a)(3) to the loan originator is 

compensation received directly from the 

consumer, even if the agreement does 

not specify that some or all of $1,000 

must be used to compensate the loan 

originator. Nonetheless, payments by 

the consumer to the creditor are not 

payments to the loan originator that are 

received directly from the consumer. 

See comment 36(d)(2)(i)–2.i. 

Accordingly, payments in the 

transaction to the creditor on behalf of 

the consumer by a person other than the 

creditor or its affiliates are not payments 

to the loan originator that are received 

directly from the consumer. 

* * * * * 

36(e) Prohibition on Steering. 

* * * * * 

36(e)(3) Loan Options Presented 

* * * * * 

3. Lowest interest rate. To qualify 

under the safe harbor in § 1026.36(e)(2), 

for each type of transaction in which the 

consumer has expressed an interest, the 

loan originator must present the 

consumer with loan options that meet 

the criteria in § 1026.36(e)(3)(i) for 

which the loan originator has a good 

faith belief that the consumer is likely 

to qualify. The criteria are: the loan with 

the lowest interest rate; the loan with 

the lowest total dollar amount of 

discount points, origination points or 

origination fees; and a loan with the 

lowest interest rate without negative 

amortization, a prepayment penalty, a 

balloon payment in the first seven years 

of the loan term, shared equity, or 

shared appreciation, or, in the case of a 

reverse mortgage, a loan without a 

prepayment penalty, shared equity, or 

shared appreciation. 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, origination points or 

origination fees the consumer must pay 

to obtain it. To identify the loan with 

the lowest interest rate, for any loan that 

has an initial rate that is fixed for at 

least five years, the loan originator uses 

the initial rate that would be in effect at 

consummation. For a loan with an 

initial rate that is not fixed for at least 

five years: 

i. If the interest rate varies based on 

changes to an index, the originator uses 

the fully-indexed rate that would be in 

effect at consummation without regard 

to any initial discount or premium. 

ii. For a step-rate loan, the originator 

uses the highest rate that would apply 

during the first five years. 

* * * * * 

36(f) Loan Originator Qualification 

Requirements 

1. Scope. Section 1026.36(f) sets forth 

qualification requirements that a loan 

originator must meet. As provided in 

§ 1026.36(a)(1) and accompanying 

commentary, the term ‘‘loan originator’’ 

includes natural persons and 

organizations and does not exclude 

creditors for purposes of the 

qualification requirements in 

§ 1026.36(f). 


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2. Licensing and registration 

requirements. Section 1026.36(f) 

requires loan originators to comply with 

applicable State and Federal licensing 

and registration requirements, including 

any such requirements imposed by the 

SAFE Act and its implementing 

regulations and State laws. SAFE Act 

licensing and registration requirements 

apply to individual loan originators, but 

many State licensing and registration 

requirements apply to loan originator 

organizations as well. 

3. No effect on licensing and 

registration requirements. Section 

1026.36(f) does not affect which loan 

originators must comply with State and 

Federal licensing and registration 

requirements. For example, the fact that 

the definition of loan originator in 

§ 1026.36(a)(1) differs somewhat from 

that in the SAFE Act does not affect 

who must comply with the SAFE Act. 

To illustrate, assume 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. If that same individual meets 

the definition of loan originator in 

§ 1026.36(a)(1), the individual is subject 

to the requirements of § 1026.36, but the 

State may continue not to subject the 

employee to that State’s SAFE Act 

licensing requirements. Similarly, the 

qualification requirements imposed 

under § 1026.36(f) do not add to or 

affect the criteria that States must 

consider in determining whether a loan 

originator organization is a bona fide 

nonprofit organization under the SAFE 

Act. 

Paragraph 36(f)(1) 

1. Legal existence and foreign 

qualification. Section 1026.36(f)(1) 

requires a loan originator organization 

to comply with applicable State law 

requirements governing the legal 

existence and foreign qualification of 

the loan originator organization. 

Covered State law requirements include 

those that must be complied with to 

bring the loan originator organization 

into legal existence, to maintain its legal 

existence, to be permitted to transact 

business in another State, or to facilitate 

service of process. For example, covered 

State law requirements include those for 

incorporation or other type of legal 

formation and for designating and 

maintaining a registered agent for 

service of process. State law 

requirements to pay taxes and other 

requirements that do not relate to legal 

accountability of the loan originator 

organization to consumers are outside 

the scope of § 1026.36(f)(1). 

Paragraph 36(f)(2) 

1. License or registration. Section 

1026.36(f)(2) requires the loan originator 

organization to ensure that individual 

loan originators who work for it are 

licensed or registered in compliance 

with the SAFE Act and other applicable 

law. The individual loan originators 

who work for a loan originator 

organization include individual loan 

originators who are its employees or 

who operate under a brokerage 

agreement with the loan originator 

organization. Thus, for example, a 

brokerage is responsible for verifying 

that the loan originator individuals who 

work directly for it are licensed and 

registered in accordance with applicable 

law, whether the individual loan 

originators are its employees or 

independent contractors who operate 

pursuant to a brokerage agreement. A 

loan originator organization can meet 

this duty by confirming the registration 

or license status of an individual at 

www.nmlsconsumeraccess.org. 

Paragraph 36(f)(3) 

1. Unlicensed individual loan 

originators. Section 1026.36(f)(3) sets 

forth actions that a loan originator 

organization must take for any of its 

individual loan originator employees 

who are not required to be licensed and 

are not licensed as a loan originator 

pursuant to the SAFE Act. Individual 

loan originators who are not subject to 

SAFE Act licensing generally include 

employees of depository institutions 

and their Federally regulated 

subsidiaries and employees of bona fide 

nonprofit organizations that a State has 

exempted from licensing under the 

criteria in 12 CFR 1008.103(e)(7). 

Paragraph 36(f)(3)(i) 

1. Criminal and credit histories. 

Section 1026.36(f)(3)(i) requires the loan 

originator organization to obtain, for any 

of its individual loan originator 

employees who is not required to be 

licensed and is not licensed as a loan 

originator pursuant to the SAFE Act, a 

criminal background check, a credit 

report, and information related to any 

administrative, civil, or criminal 

determinations by any government 

jurisdiction. The requirement applies to 

individual loan originator employees 

who were 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). A credit report may be 

obtained directly from a consumer 

reporting agency or through a 

commercial service. A loan originator 

organization with access to the NMLSR 

can meet the requirement for the 

criminal background check by 

reviewing any criminal background 

check it receives upon compliance with 

the requirement in 12 CFR 

1007.103(d)(1) and can meet the 

requirement to obtain information 

related to any administrative, civil, or 

criminal determinations by any 

government jurisdiction by obtaining 

the information through the NMLSR. 

Loan originator organizations that do 

not have access to these items through 

the NMLSR may obtain them by other 

means. For example, a criminal 

background check may be obtained from 

a law enforcement agency or 

commercial service. Information on any 

past administrative, civil, or criminal 

findings (such as from disciplinary or 

enforcement actions) may be obtained 

from the individual loan originator. 

2. Retroactive obtaining of 

information not required. Section 

1026.36(f)(3)(i) does not require the loan 

originator organization to obtain the 

covered information for an individual 

whom the loan originator organization 

hired as a loan originator on or before 

January 10, 2014, and screened under 

applicable statutory or regulatory 

background standards in effect at the 

time of hire. However, if the individual 

subsequently ceases to be employed as 

a loan originator by that loan originator 

organization, and later resumes 

employment as a loan originator by that 

loan originator organization (or any 

other loan originator organization), the 

loan originator organization is subject to 

the requirements of § 1026.36(f)(3)(i). 

Paragraph 36(f)(3)(ii) 

1. Scope of review. Section 

1026.36(f)(3)(ii) requires the loan 

originator organization to review the 

information that it obtains under 

§ 1026.36(f)(3)(i) and other reasonably 

available information to determine 

whether the individual loan originator 

meets the standards in 

§ 1026.36(f)(3)(ii). Other reasonably 

available information includes any 

information the loan originator 

organization has obtained or would 

obtain as part of a reasonably prudent 

hiring process, including information 

obtained from application forms, 

candidate interviews, other reliable 

information and evidence provided by a 

candidate, and reference checks. The 

requirement applies to individual loan 

originator employees who were hired on 

or after January 10, 2014 (or whom the 

loan originator organization hired before 

this date but for whom there were no 


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applicable statutory or regulatory 

background standards in effect at the 

time of hire or before January 10, 2014, 

used to screen the individual). 

2. Retroactive determinations not 

required. Section 1026.36(f)(3)(ii) does 

not require the loan originator 

organization to review the covered 

information and make the required 

determinations for an individual whom 

the loan originator organization hired as 

a loan originator on or before January 

10, 2014 and screened under applicable 

statutory or regulatory background 

standards in effect at the time of hire. 

However, if the individual subsequently 

ceases to be employed as a loan 

originator by that loan originator 

organization, and later resumes 

employment as a loan originator by that 

loan originator organization (or any 

other loan originator organization), the 

loan originator organization employing 

the individual is subject to the 

requirements of § 1026.36(f)(3)(ii). 

3. Subsequent determinations. The 

loan originator organization must make 

the required determinations for an 

individual before the individual acts as 

a loan originator. Subsequent reviews 

and assessments are required only if the 

loan originator organization knows of 

reliable information indicating that the 

individual loan originator likely no 

longer meets the required standards in 

§ 1026.36(f)(3). For example, if the loan 

originator organization has knowledge 

of criminal conduct of its individual 

loan originator through 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. 

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

1. Financial responsibility, character, 

and general fitness. The determination 

of financial responsibility, character, 

and general fitness required under 

§ 1026.36(f)(3)(ii)(B) requires an 

assessment of all information obtained 

pursuant to paragraph (f)(3)(i) and any 

other reasonably available information, 

including information that is known to 

the loan originator organization or 

would become known to the loan 

originator organization as part of a 

reasonably prudent hiring process. The 

absence of any significant adverse 

information is sufficient to support an 

affirmative determination that the 

individual meets the standards. A 

review and assessment of financial 

responsibility is sufficient if it 

considers, as relevant factors, the 

existence of current outstanding 

judgments, tax liens, other government 

liens, nonpayment of child support, or 

a pattern of bankruptcies, foreclosures, 

or delinquent accounts. A review and 

assessment of financial responsibility is 

not required to consider debts arising 

from medical expenses. A review and 

assessment of character and general 

fitness is sufficient if it considers, as 

relevant factors, acts of unfairness or 

dishonesty, including dishonesty by the 

individual in the course of seeking 

employment or in connection with 

determinations pursuant to the 

qualification requirements of 

§ 1026.36(f), and any disciplinary 

actions by regulatory or professional 

licensing agencies. 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. 

2. Written procedures for making 

determinations. 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 comment 

36(f)(3)(ii)(B)–1 and follows those 

written procedures for an individual 

and complies with the requirement for 

that individual. Such procedures may 

provide that bankruptcies and 

foreclosures are considered under the 

financial responsibility standard only if 

they occurred within a recent timeframe 

established in the procedures. Such 

procedures are not required to include 

review of a credit score. 

Paragraph 36(f)(3)(iii) 

1. Training. The periodic training 

required in § 1026.36(f)(3)(iii) must be 

sufficient in frequency, timing, 

duration, and content to ensure that the 

individual loan originator has the 

knowledge of State and Federal legal 

requirements that apply to the 

individual loan originator’s loan 

origination activities. The training must 

take into consideration the particular 

responsibilities of the individual loan 

originator and the nature and 

complexity of the mortgage loans with 

which the individual loan originator 

works. An individual loan originator is 

not required to receive training on 

requirements and standards that apply 

to types of mortgage loans that the 

individual loan originator does not 

originate, or on subjects in which the 

individual loan originator already has 

the necessary knowledge and skill. 

Training may be delivered by the loan 

originator organization or any other 

person and may utilize workstation, 

internet, teleconferencing, or other 

interactive technologies and delivery 

methods. Training that a government 

agency or housing finance agency has 

established for an individual to 

originate mortgage loans under a 

program sponsored or regulated by a 

Federal, State, or other government 

agency or housing finance agency 

satisfies the requirement in 

§ 1026.36(f)(3)(iii), to the extent that the 

training covers the types of loans the 

individual loan originator originates and 

applicable Federal and State laws and 

regulations. Training that the NMLSR 

has approved to meet the licensed loan 

originator continuing education 

requirement at § 1008.107(a)(2) of this 

chapter satisfies the requirement of 

§ 1026.36(f)(3)(iii), to the extent that the 

training covers the types of loans the 

individual loan originator originates and 

applicable Federal and State laws and 

regulations. The training requirements 

under § 1026.36(f)(3)(iii) apply to 

individual loan originators regardless of 

when they were hired. 

36(g) Name and NMLSR ID on Loan 

Documents 

Paragraph 36(g)(1) 

1. NMLSR ID. Section 1026.36(g) 

requires a loan originator organization 

to include its name and NMLSR ID and 

the name and NMLSR ID of the 

individual loan originator on certain 

loan documents. As provided in 

§ 1026.36(a)(1), the term ‘‘loan 

originator’’ includes creditors that 

engage in loan originator activities for 

purposes of this requirement. Thus, for 

example, if an individual loan originator 

employed by a bank originates a loan, 

the names and NMLSR IDs of the 

individual and the bank must be 

included on covered loan documents. 

The NMLSR ID is a number generally 

assigned by the NMLSR to individuals 

registered or licensed through NMLSR 

to provide loan origination services. For 

more information, see the SAFE Act 

sections 1503(3) and (12) and 1504 (12 

U.S.C. 5102(3) and (12) and 5103), and 

its implementing regulations (12 CFR 

1007.103(a) and 1008.103(a)(2)). A loan 

originator organization may also have an 

NMLSR unique identifier. 

2. Loan originators without NMLSR 

IDs. An NMLSR ID is not required by 

§ 1026.36(g) to be included on loan 

documents if the loan originator is not 

required to obtain and has not been 

issued an NMLSR ID. For example, 


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certain loan originator organizations and 

individual loan originators who are 

employees of bona fide nonprofit 

organizations may not be required to 

obtain a unique identifier under State 

law. However, some loan originators 

may have obtained NMLSR IDs, even if 

they are not required to have one for 

their current jobs. If a loan originator 

organization or an individual loan 

originator has been provided a unique 

identifier by the NMLSR, it must be 

included on the covered loan 

documents, regardless of whether the 

loan originator organization or 

individual loan originator is required to 

obtain an NMLSR unique identifier. In 

any event, the name of the loan 

originator is required by § 1026.36(g) to 

be included on the covered loan 

documents. 

3. Inclusion of name and NMLSR ID. 

Section 1026.36(g)(1) requires the 

inclusion of loan originator names and 

NMLSR IDs on each loan document. 

Those items need not be included more 

than once on each loan document on 

which loan originator names and 

NMLSR IDs are required, such as by 

including them on every page of a 

document. 

Paragraph 36(g)(1)(ii) 

1. Multiple individual loan 

originators. If more than one individual 

meets the definition of a loan originator 

for a transaction, the name and NMLSR 

ID of the individual loan originator with 

primary responsibility for the 

transaction at the time the loan 

document is issued must be included. 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. If the individual 

loan originator with primary 

responsibility for a transaction at the 

time a document is issued is not the 

same individual loan originator who 

had primary responsibility for the 

transaction at the time that a previously 

issued document was issued, the 

previously issued document is not 

required to be reissued merely to change 

a loan originator name and NMLSR ID. 

* * * * * 

Dated: January 20, 2013. 

Richard Cordray, 

Director, Bureau of Consumer Financial 

Protection. 

[FR Doc. 2013–01503 Filed 2–1–13; 4:15 pm] 

BILLING CODE 4810–AM–P 


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