Vol. 77 Friday, 

No. 174 September 7, 2012 

Part II 

Bureau of Consumer Financial Protection 

12 CFR Part 1026 

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

Proposed Rule 


srobinson on DSK4SPTVN1PROD with PROPOSALS2
55272 Federal Register / Vol. 77, No. 174 / Friday, September 7, 2012 / Proposed Rules 

1Public Law 111–203, 124 Stat. 1376. 

BUREAU OF CONSUMER FINANCIAL 

PROTECTION 

12 CFR Part 1026 

[Docket No. CFPB–2012–0037] 

RIN 3170–AA13 

Truth in Lending Act (Regulation Z); 

Loan Originator Compensation 

AGENCY: Bureau of Consumer Financial 

Protection. 

ACTION: Proposed rule with request for 

public comment. 

SUMMARY: The Bureau of Consumer 

Financial Protection is publishing for 

public comment a proposed rule 

amending Regulation Z (Truth in 

Lending) to implement amendments to 

the Truth in Lending Act (TILA) made 

by the Dodd-Frank Wall Street Reform 

and Consumer Protection Act (DoddFrank Act). The proposal would 

implement statutory changes made by 

the Dodd-Frank Act to Regulation Z’s 

current loan originator compensation 

provisions, including a new additional 

restriction on the imposition of any 

upfront discount points, origination 

points, or fees on consumers under 

certain circumstances. In addition, the 

proposal implements additional 

requirements imposed by the DoddFrank Act concerning proper 

qualification and registration or 

licensing for loan originators. The 

proposal also implements Dodd-Frank 

Act restrictions on mandatory 

arbitration and the financing of certain 

credit insurance premiums. Finally, the 

proposal provides additional guidance 

and clarification under the existing 

regulation’s provisions restricting loan 

originator compensation practices, 

including guidance on the application 

of those provisions to certain profitsharing plans and the appropriate 

analysis of payments to loan originators 

based on factors that are not terms but 

that may act as proxies for a 

transaction’s terms. 

DATES: Comments must be received on 

or before October 16, 2012, except for 

comments on the Paperwork Reduction 

Act analysis in part IX of this document, 

which must be received on or before 

November 6, 2012. 

ADDRESSES: You may submit comments, 

identified by Docket No. CFPB–2012– 

0037 or RIN 3170–AA13, by any of the 

following methods: 

• Electronic: http:// 

www.regulations.gov. Follow the 

instructions for submitting comments. 

• Mail/Hand Delivery/Courier: 

Monica Jackson, Office of the Executive 

Secretary, Consumer Financial 

Protection Bureau, 1700 G Street NW., 

Washington, DC 20552. 

Instructions: All submissions should 

include the agency name and docket 

number or Regulatory Information 

Number (RIN) for this rulemaking. 

Because paper mail in the Washington, 

DC area and at the Bureau is subject to 

delay, commenters are encouraged to 

submit comments electronically. In 

general, all comments received will be 

posted without change to http:// 

www.regulations.gov. In addition, 

comments will be available for public 

inspection and copying at 1700 G Street 

NW., Washington, DC 20552, on official 

business days between the hours of 10 

a.m. and 5 p.m. Eastern Time. You can 

make an appointment to inspect the 

documents by telephoning (202) 435– 

7275. 

All comments, including attachments 

and other supporting materials, will 

become part of the public record and 

subject to public disclosure. Sensitive 

personal information, such as account 

numbers or Social Security numbers, 

should not be included. Comments will 

not be edited to remove any identifying 

or contact information. 

FOR FURTHER INFORMATION CONTACT: 

Daniel C. Brown and Michael G. Silver, 

Counsels; Krista P. Ayoub and R. 

Colgate Selden, Senior Counsels; Paul 

Mondor, Senior Counsel & Special 

Advisor; Charles Honig, Managing 

Counsel: Office of Regulations, at (202) 

435–7700. 

SUPPLEMENTARY INFORMATION: 

I. Summary of the Proposed Rule 

A. Background 

The mortgage market crisis focused 

attention on the critical role that loan 

officers and mortgage brokers play in 

the loan origination process. Because 

consumers generally take out only a few 

home loans over the course of their 

lives, they often rely heavily on loan 

officers and brokers to guide them. But 

prior to the crisis, training and 

qualification standards for loan 

originators varied widely, and 

compensation was frequently structured 

to give loan originators strong incentives 

to steer consumers into more expensive 

loans. Often, consumers paid loan 

originators an upfront fee without 

realizing that their creditors also were 

paying the loan originators commissions 

that increased with the price of the loan. 

The Dodd-Frank Wall Street Reform 

and Consumer Protection Act (DoddFrank Act) 1 expanded on previous 

efforts by lawmakers and regulators to 

strengthen loan originator qualification 

requirements and regulate industry 

compensation practices. The Bureau is 

proposing new rules to implement the 

Dodd-Frank Act requirements, as well 

as to revise and clarify existing 

regulations and guidance on loan 

originator compensation. 

The Bureau is also proposing rules to 

implement a new Dodd-Frank Act 

requirement that appears to be designed 

to address broader consumer confusion 

about the relationship between certain 

upfront charges and loan interest rates. 

Specifically, for mortgage loans in 

which a brokerage firm or creditor pays 

a loan originator a transaction-specific 

commission, the Dodd-Frank Act would 

ban the imposition on consumers of 

discount points, origination points, or 

other upfront origination fees that are 

retained by the creditor, broker, or an 

affiliate of either. Although bona fide 

upfront payments to independent 

appraisers or other third parties would 

still be permitted, the Act would require 

creditors in the vast majority of 

transactions in today’s market to 

restructure their current pricing 

practices. 

However, the Bureau is proposing to 

use its exception authority under the 

Dodd-Frank Act to allow creditors to 

continue making available loans with 

points and/or fees, so long as they also 

make available a comparable, alternative 

loan, as described below. The Bureau 

believes this approach would benefit 

consumers and industry alike. Making 

both options available would make it 

easier for consumers to evaluate 

different pricing options, while 

preserving their ability to make some 

upfront payments if they want to reduce 

their periodic payments over time. And 

the proposed approach would promote 

stability in the mortgage market, which 

would otherwise face radical 

restructuring of its existing pricing 

structures and practices to comply with 

the new Dodd-Frank Act requirement. 

B. Restriction on Upfront Points and 

Fees 

The proposed rule would generally 

require that, before a creditor or 

mortgage broker may impose upfront 

points and/or fees on a consumer in a 

closed-end mortgage transaction, the 

creditor must make available to the 

consumer a comparable, alternative loan 

with no upfront discount points, 

origination points, or origination fees 

that are retained by the creditor, broker, 

or an affiliate of either (a ‘‘zero-zero 

alternative’’). The requirement would 

not be triggered by charges that are 

passed on to independent third parties 

that are not affiliated with the creditor 

or mortgage broker. The requirement 


srobinson on DSK4SPTVN1PROD with PROPOSALS2
Federal Register / Vol. 77, No. 174 / Friday, September 7, 2012 / Proposed Rules 55273 

2 2 Inside Mortg. Fin., The 2012 Mortgage Market 

Statistical Annual 7 (2012). 

would not apply where the consumer is 

unlikely to qualify for the zero-zero 

alternative. 

In transactions that do not involve a 

mortgage broker, the proposed rule 

would provide a safe harbor if, any time 

prior to application that the creditor 

provides a consumer an individualized 

quote for a loan that includes upfront 

points and/or fees, the creditor also 

provides a quote for a zero-zero 

alternative. In transactions that involve 

mortgage brokers, the proposed rule 

would provide a safe harbor under 

which creditors provide mortgage 

brokers with the pricing for all of their 

zero-zero alternatives. Mortgage brokers 

then would provide quotes to 

consumers for the zero-zero alternatives 

when presenting different loan options 

to consumers. 

The Bureau is seeking comment on a 

number of related issues, including: 

• Whether the Bureau should adopt 

as proposed a ‘‘bona fide’’ requirement 

to ensure that consumers receive value 

in return for paying upfront points and/ 

or fees and, if so, the relative merits of 

several alternatives on the details of 

such a requirement; 

• Whether additional adjustments to 

the proposal concerning the treatment of 

affiliate fees would make it easier for 

consumers to compare offers between 

two or more creditors; 

• Whether to take a different 

approach concerning situations in 

which a consumer does not qualify for 

the zero-zero alternative; and 

• Whether to require information 

about zero-zero alternatives to be 

provided not just in connection with 

informal quotes, but also in advertising 

and at the time that consumers are 

provided disclosures within three days 

after application. 

C. Restrictions on Loan Originator 

Compensation 

The proposal would adjust existing 

rules governing compensation to loan 

officers and mortgage brokers in 

connection with closed-end mortgage 

transactions to account for the DoddFrank Act and to provide greater clarity 

and flexibility. Specifically, the 

proposal would: 

• Continue the general ban on paying 

or receiving commissions or other loan 

originator compensation based on the 

terms of the transaction (other than loan 

amount), with some refinements: 

Æ The proposal would allow 

reductions in loan originator 

compensation to cover unanticipated 

increases in closing costs from nonaffiliated third parties under certain 

circumstances. 

Æ The proposal would clarify when a 

factor used as a basis for compensation 

is prohibited as a ‘‘proxy’’ for a 

transaction term. 

• Clarify and revise restrictions on 

pooled compensation, profit-sharing, 

and bonus plans for loan originators, 

depending on the potential incentives to 

steer consumers to different transaction 

terms. 

Æ The proposal would permit 

employers to make contributions from 

general profits derived from mortgage 

activity to 401(k) plans, employee stock 

plans, and other ‘‘qualified plans’’ 

under tax and employment law. 

Æ The proposal would permit 

employers to pay bonuses or make 

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 limited. The Bureau is 

proposing two alternatives, 25 percent 

or 50 percent of total revenues, as the 

applicable test. 

Æ Even though contributions and 

bonuses could be funded from general 

mortgage profits, the amounts of such 

contributions and bonuses could not be 

based on the terms of the transactions 

that the individual had originated. 

• Continue the general ban on loan 

originators being compensated by both 

consumers and other parties, with some 

refinements: 

Æ The proposal would allow mortgage 

brokerage firms that are paid by the 

consumer to pay their individual 

brokers a commission, so long as the 

commission is not based on the terms of 

the transaction. 

Æ The proposal would clarify that 

certain funds contributed toward 

closing costs by sellers, home builders, 

home-improvement contractors, or 

similar parties, when used to 

compensate a loan originator, are 

considered payments made directly to 

the loan originator by the consumer. 

D. Loan Originator Qualification 

Requirements 

The proposal would implement a 

Dodd-Frank Act provision requiring 

both individual loan originators and 

their employers to be ‘‘qualified’’ and to 

include their license or registration 

numbers on certain specified loan 

documents. 

• Where a loan originator is not 

already required to be licensed under 

the Secure and Fair Enforcement for 

Mortgage Licensing Act (SAFE Act), the 

proposal would require his or her 

employer to ensure that the loan 

originator meets character, fitness, and 

criminal background check standards 

that are equivalent to SAFE Act 

requirements and receives training 

commensurate with the loan originator’s 

duties. 

• Employers would be required to 

ensure that their loan originator 

employees are licensed or registered 

under the SAFE Act where applicable. 

• Employers and the individual loan 

originators that are primarily 

responsible for a particular transaction 

would be required to list their license or 

registration numbers on certain key loan 

documents. 

E. Other Provisions 

The proposal would implement 

certain other Dodd-Frank Act 

requirements applicable to both closedend and open-end mortgage credit: 

• The proposal would ban general 

agreements requiring consumers to 

submit any disputes that may arise to 

mandatory arbitration rather than filing 

suit in court. 

• The proposal would generally ban 

the financing of premiums for credit 

insurance. 

• In the preamble below, the Bureau 

describes rule text that may be included 

in the final rule to implement a DoddFrank Act requirement that the Bureau 

require depository institutions to 

establish and maintain procedures to 

assure and monitor compliance with 

many of the requirements described 

above and the registration procedures 

established under the SAFE Act. 

II. Background 

A. The Mortgage Market 

Overview of the Market and the 

Mortgage Crisis 

The mortgage market is the single 

largest market for consumer financial 

products and services in the United 

States, with approximately $10.3 trillion 

in loans outstanding.2 During the last 

decade, the market went through an 

unprecedented cycle of expansion and 

contraction. So many other parts of the 

American financial system were drawn 

into mortgage-related activities that, 

when the bubble collapsed in 2008, it 

sparked the most severe recession in the 

United States since the Great 

Depression. 

The expansion in the market was 

driven, in part, by an era of low interest 

rates and rising house prices. Interest 

rates dropped significantly—by more 

than 20 percent—from 2000 through 


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55274 Federal Register / Vol. 77, No. 174 / Friday, September 7, 2012 / Proposed Rules 

3See U.S. Dep’t of Hous. & Urban Dev., An 

Analysis of Mortgage Refinancing, 2001–2003, at 2 

(2004), available at: www.huduser.org/Publications/ 

pdf/MortgageRefinance03.pdf; Souphala 

Chomsisengphet & Anthony Pennington-Cross, The 

Evolution of the Subprime Mortgage Market, 88 Fed. 

Res. Bank of St. Louis Rev. 31, 48 (2006), available 

at: 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/ 

GPO–FCIC.pdf. 

5An Analysis of Mortgage Refinancing, 2001– 

2003, at 1. 

6The Federal Reserve Board on July 18, 2011 

issued a consent cease and desist order and 

assessed an $85 million civil money penalty against 

Wells Fargo & Company of San Francisco, a 

registered bank holding company, and Wells Fargo 

Financial, Inc., of Des Moines. The order addresses 

allegations that Wells Fargo Financial employees 

steered potential prime borrowers into more costly 

subprime loans and separately falsified income 

information in mortgage applications. In addition to 

the civil money penalty, the order requires that 

Wells Fargo compensate affected borrowers. See 

http://www.federalreserve.gov/newsevents/press/ 

enforcement/20110720a.htm. 

7 Inside Mortg. Fin., The 2011 Mortgage Market 

Statistical Annual (2011). 

8FCIC Report at 215–217. 

9Standard & Poors/Case-Shiller 20-City 

Composite, Bloomberg, LP, available at: http:// 

www.bloomberg.com (data service accessible only 

through paid subscription). 10PowerPoint Presentation, Lender Processing 

Servs., LPS Mortgage Monitor: May 2012 Mortgage 

Performance Observations, Data as of April 2012 

Month End, at 3, 11 (May 2012), available at: 

http://www.lpsvcs.com/LPSCorporateInformation/ 

CommunicationCenter/DataReports/Pages/ 

Mortgage-Monitor.aspx. 11Credit Forecast 2012, Moody’s Analytics 

(2012), available at, http://www.economy.com/ 

default.asp (reflects first-lien mortgage loans) (data 

service accessible only through paid subscription). 12 1 Inside Mortg. Fin., The 2012 Mortgage Market 

Statistical Annual 12 (2012). 13Credit Forecast 2012. The proportion of loans 

that are for purchases as opposed to refinancings 

varies with the interest rate environment. In 2011, 

refinance transactions comprised 65 percent of the 

market, and purchase money mortgage loans 

comprised 35 percent, by dollar volume. 1 Inside 

Mortg. Fin., The 2012 Mortgage Market Statistical 

Annual 17 (2012). Historically the distribution has 

been more even. In 2000, refinancings accounted for 

44 percent of the market as measured by dollar 

volume, while purchase money mortgage loans 

comprised 56 percent, and in 2005 the two types 

of mortgage loan were split evenly. Id. 

14Credit Forecast (2012). Using a home equity 

loan or line of credit, a homeowner uses home 

equity as collateral for a loan. The loan proceeds 

can be used, for example, to pay for home 

improvements or to pay off other debts. 

15 In some cases, mortgage brokers use a process 

called ‘‘table funding,’’ in which the wholesale 

creditor provides the funds to the settlement, but 

the loan is closed in the broker’s name. The broker 

simultaneously assigns the closed loan to the 

creditor. 

2003.3 Housing prices increased 

dramatically—about 152 percent— 

between 1997 and 2006.4 Driven by the 

decrease in interest rates and the 

increase in housing prices, the volume 

of refinancings was increasing, from 

about 2.5 million loans in 2000 to more 

than 15 million in 2003.5

Growth in the mortgage loan market 

was particularly pronounced in what 

are known as ‘‘subprime’’ and ‘‘Alt-A’’ 

products. Subprime products were sold 

primarily to borrowers with poor or no 

credit history, although there is 

evidence that some borrowers who 

would have qualified for ‘‘prime’’ loans 

were steered into subprime loans as 

well.6 The Alt-A category of loans 

permitted borrowers to take out 

mortgage loans while providing little or 

no documentation of income or other 

evidence of repayment ability. Because 

these loans involved additional risk, 

they were typically more expensive to 

borrowers than ‘‘prime’’ mortgages, 

although many of them had very low 

introductory interest rates. In 2003, 

subprime and Alt-A origination volume 

was about $400 billion; in 2006, it had 

reached $830 billion.7

So long as housing prices were 

continuing to increase, it was relatively 

easy for borrowers to refinance their 

loans to avoid interest rate resets and 

other adjustments. When housing prices 

began to decline in 2005, refinancing 

became more difficult and delinquency 

rates on these subprime and Alt-A 

products increased dramatically.8 The 

private securitization-backed subprime 

and Alt-A mortgage market ground to a 

halt in 2007 in the face of these rising 

delinquencies. Fannie Mae and Freddie 

Mac, which supported the mainstream 

mortgage market, experienced heavy 

losses and were placed in 

conservatorship by the Federal 

government in 2008. 

Four years later, the United States 

continues to grapple with the fallout. 

Home prices are down 35 percent from 

the peak nationally, as the national 

market appears at or near its bottom.9

Mortgage markets continue to rely on 

extraordinary U.S. government support, 

and distressed homeownership and 

foreclosure rates remain at 

unprecedented levels.10

Nevertheless, even with the economic 

downturn, approximately $1.28 trillion 

in mortgage loans were originated in 

2011.11 The overwhelming majority of 

homebuyers continue to use mortgage 

loans to finance at least some of the 

purchase price of their property. In 

2011, 93 percent of all new home 

purchases were financed with a 

mortgage loan.12 Purchase loans and 

refinancings together produced 6.3 

million new first-lien mortgage loan 

originations in 2011.13 Home equity 

loans and lines of credit resulted in an 

additional 1.3 million mortgage loan 

originations in 2011.14

The Mortgage Origination Process and 

Origination Channels 

Consumers must go through a 

mortgage origination process to obtain a 

mortgage loan. There are many actors 

involved in a mortgage origination. In 

addition to the creditor and the 

consumer, a transaction may involve a 

mortgage broker, settlement agent, 

appraiser, multiple insurance providers, 

local government clerks and tax offices, 

and others. Purchase money loans 

involve additional parties such as 

sellers and real estate agents. These 

third parties typically charge fees or 

commissions for the services they 

provide. 

Application. To obtain a mortgage 

loan, consumers must first apply 

through a loan originator. There are 

three different ‘‘channels’’ for mortgage 

loan origination in the current market: 

• Retail: The consumer deals with a 

loan officer that works directly for the 

mortgage creditor, such as a bank, credit 

union, or specialized mortgage finance 

company. The creditor typically 

operates a network of branches, but may 

also communicate with consumers 

through mail and the Internet. The 

entire origination transaction is 

conducted within the corporate 

structure of the creditor, and the loan is 

closed using funds supplied by the 

creditor. Depending on the type of 

creditor, the creditor may hold the loan 

in its portfolio or sell the loan to 

investors on the secondary market, as 

discussed further below. 

• Wholesale: The consumer deals 

with an independent mortgage broker, 

which may be an individual or a 

mortgage brokerage firm. The broker 

may seek offers from many different 

creditors, and then acts as a liaison 

between the consumer and whichever 

creditor ultimately makes the loan. At 

closing, the loan is funded using the 

creditor’s funds and the mortgage note 

is written in the creditor’s name.15

Again, the creditor may hold the loan in 

its portfolio or sell the loan on the 

secondary market. 

• Correspondent: The consumer deals 

with a loan officer that works directly 

for a ‘‘correspondent lender’’ that does 

not deal directly with the secondary 

market. At closing, the correspondent 

lender closes the loans using its own 

funds, but then immediately sells the 

loan to an ‘‘acquiring creditor,’’ which 

in turn either holds the loan in portfolio 

or sells it on the secondary market. 

Both loan officers and mortgage 

brokers generally help consumers 

determine what kind of loan best suits 

their needs, and will take their 


srobinson on DSK4SPTVN1PROD with PROPOSALS2
Federal Register / Vol. 77, No. 174 / Friday, September 7, 2012 / Proposed Rules 55275 

16The 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. 

17For 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. 

completed loan applications for 

submission to the creditor’s loan 

underwriter. The application includes 

consumer credit and income 

information, along with information 

about the home to be purchased. 

Consumers can work with multiple loan 

originators to compare the loan offers 

that loan originators may obtain on their 

behalf from creditors. Once the 

consumer has decided to move forward 

with a loan, the loan originator may 

request additional information or 

documents from the consumer to 

support the information in the 

application and obtain an appraisal of 

the property. 

Underwriting. The creditor’s loan 

underwriter uses the application and 

additional information to confirm initial 

information provided by the consumer. 

The underwriter will assess whether the 

creditor should take on the risk of 

making the mortgage loan. To make this 

decision, the underwriter considers 

whether the consumer can repay the 

loan and whether the home is worth 

enough to serve as collateral for the 

loan. If the underwriter finds that the 

consumer and the home qualify, the 

underwriter will approve the 

consumer’s mortgage application. 

Closing. After being approved for a 

mortgage loan, completing any closing 

requirements, and receiving necessary 

disclosures, the consumer can close on 

the loan. Multiple parties participate at 

closing, including the consumer, the 

creditor, and the settlement agent. 

Loan Pricing and Disposition of Closed 

Loans 

Mortgage loan pricing is an extremely 

complex process that involves a series 

of trade-offs for both the consumer and 

the creditor between upfront and longterm payments. Some of the costs that 

borrowers pay to close the loan—such 

as third-party appraisal fees, title 

insurance, taxes, etc.—are independent 

of the other terms of the loan. But costs 

that are paid to the creditor, broker, or 

affiliates of either company often vary in 

connection with the interest rate 

because the consumer can choose 

whether to pay more money up front 

(through discount points, origination 

points, or origination fees) or over time 

(through the interest rate, which drives 

monthly payments). Borrowers face a 

complex set of decisions around 

whether to pay upfront charges to 

reduce the interest rate they would 

otherwise pay and, if so, how much to 

pay in such charges to receive a specific 

rate reduction. 

Thus, from the consumer’s 

perspective, loan pricing depends on 

several elements: 

• Loan terms. The loan terms affect 

how the loan is to be repaid, including 

the type of loan ‘‘product,’’ 16 the 

interest rate, the payment amount, and 

the length of the loan term. 

• Discount points and cash rebates. 

Discount points are paid by consumers 

to the creditor to purchase a lower 

interest rate. Conversely, creditors may 

offer consumers a cash rebate at closing 

which can help cover upfront closing 

costs in exchange for paying a higher 

rate over the life of the loan. Both 

discount points and creditor rebates 

involve an exchange of cash now (in the 

form of a payment or credit at closing) 

for cash over time (in the form of a 

reduced or increased interest rate). 

• Origination points or fees. Creditors 

and/or loan originators also sometimes 

charge origination points or fees, which 

are typically presented as charges to 

apply for the loan. Origination fees can 

take a number of forms: A flat dollar 

amount, a percentage of the loan 

amount (i.e., an ‘‘origination point’’), or 

a combination of the two. Origination 

points or fees may also be framed as a 

single lump sum or as several different 

fees (e.g., application fee, underwriting 

fee, document preparation fee). 

• Closing costs. Closing costs are the 

additional upfront costs of completing a 

mortgage transaction, including 

appraisal fees, title insurance, recording 

fees, taxes, and homeowner’s insurance, 

for example. These closing costs, as 

distinct from upfront discount points 

and origination charges, often are paid 

to third parties other than the creditor 

or loan originator. 

In practice, both discount points and 

origination points or fees are revenue to 

the lender and/or loan originator, and 

that revenue is fungible. The existence 

of two types of fees and the many names 

lenders use for origination fees—some 

of which may appear to be more 

negotiable than others—has the 

potential to confuse consumers. 

Determining the appropriate trade-off 

between payments now and payments 

later requires a consumer to have a clear 

sense of how long he or she expects to 

stay in the home and in the particular 

loan. If the consumer plans to stay in 

the home for a number of years without 

refinancing, paying points to obtain a 

lower rate may make sense because the 

consumer will save more in monthly 

payments than he or she pays up front 

in discount points. If the consumer 

expects to move or refinance within a 

few years, however, then agreeing to pay 

a higher rate on the loan to reduce out 

of pocket expenses at closing may make 

sense because the consumer will save 

more up front than he or she will pay 

in increased monthly payments before 

moving or refinancing. There is a 

breakeven moment in time where the 

present value of a reduction/increase to 

the rate just equals the corresponding 

upfront points/credits. If the consumer 

moves or refinances earlier (in the case 

of discount points) or later (in the case 

of creditor rebates) than the breakeven 

moment, then the consumer will lose 

money compared to a consumer that 

neither paid discount points nor 

received creditor rebates. 

The creditor’s assessment of pricing— 

and in particular what different 

combinations of points, fees, and 

interest rates it is willing to offer 

particular consumers—is also driven by 

the trade-off between upfront and 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. 

One mechanism that has developed to 

manage this risk is the creation of the 

secondary market, which allows 

creditors to sell off their loans to 

investors, recoup the capital they have 

invested in the loans and recycle that 

capital into new loans. The investors 

then benefit from the payment streams 

over time, as well as bearing the risk of 

early payment or default. And the 

creditor can go on to make additional 

money from additional loans. Thus, 

although some banks and credit unions 

hold some loans in portfolio over time, 

many creditors prefer not to hold loans 

until maturity.17

When a creditor sells a loan into the 

secondary market, the creditor is 

exchanging an asset (the loan) that 


srobinson on DSK4SPTVN1PROD with PROPOSALS2
55276 Federal Register / Vol. 77, No. 174 / Friday, September 7, 2012 / Proposed Rules 

18For 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. 

19For 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. 

20The 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. 

21Susan E. Woodward, Urb. Inst., A Study of 

Closing Costs for FHA Mortgages10–11 (U.S. Dep’t 

of Hous. & Urban Dev. 2008), available at: http:// 

www.huduser.org/publications/pdf/ 

FHA_closing_cost.pdf. 

22Mortgage 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. 

23 James Lacko and Janis Pappalardo, Improving 

Consumer Mortgage Disclosures: An Empirical 

Assessment of Current and Prototype Disclosure 

Forms, Federal Trade Commission, p. 26 (June 

2007), available at: 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. 

produces regular cash flows (principal 

and interest) for an upfront cash 

payment from the buyer.18 That upfront 

cash payment represents the buyer’s 

present valuation of the loan’s future 

cash flows, using assumptions about the 

rate of prepayments due to moves and 

refinancings, the rate of expected 

defaults, the rate of return relative to 

other investments, and other factors. 

Secondary market buyers assume 

considerable risk in determining the 

price they are willing to pay for a loan. 

If, for example, loans prepay faster than 

expected or default at higher rates than 

expected, the investor will receive a 

lower return than expected. Conversely, 

if loans prepay more slowly than 

expected, or default at lower rates than 

expected, the investor will earn a higher 

return over time than expected.19

Secondary market mortgage prices are 

typically quoted as a multiple of the 

principal loan amount and are specific 

to a given interest rate. For illustrative 

purposes, at some point in time, a loan 

with an interest rate of 3.5 percent 

might earn 102.5 in the secondary 

market. This means that for every $100 

in initial loan principal amount, the 

secondary market buyer will pay 

$102.50. Of that amount, $100 is to 

cover the principal amount and $2.50 is 

revenue to the creditor in exchange for 

the rights to the future interest 

payments on the loan.20 The secondary 

market price of a loan increases or 

decreases along with the loan’s interest 

rate, but the relationship is not typically 

linear. In other words, using the above 

example at the same point in time, loans 

with interest rates higher than 3.5 

percent will typically earn more than 

102.5, and loans with interest rates less 

than 3.5 percent will typically earn less 

than 102.5. However, each subsequent 

0.125 percent increment in interest rate 

above or below 3.5 percent may not be 

associated with the same size increment 

in secondary market price.21

In some cases, secondary market 

prices can actually be less than the 

principal amount of the loan. A price of 

98.75, for example, means that for every 

$100 in principal, the selling creditor 

receives only $98.75. This represents a 

loss of $1.25 per $100 of principal just 

on the sale of the loan, before the 

creditor takes its expenses into account. 

This usually happens when the interest 

rate on the loan is below prevailing 

interest rates. But so long as discount 

points or other origination charges can 

cover the shortfall, the creditor will still 

make its expected return on the loan. 

The same style of pricing is used when 

correspondent lenders sell loans to 

acquiring creditors. 

Discount points are also valuable to 

creditors (and secondary market 

investors) for another reason: Because 

payment of discount points signals the 

consumer’s expectations about how long 

he or she expects to stay in the loan, 

they make prepayment risk easier to 

predict. The more discount points a 

consumer pays, the longer the consumer 

likely expects to keep the loan in place. 

This fact mitigates a creditor’s or 

investor’s uncertainty about how long 

interest payments can be expected to 

continue, which facilitates assigning a 

present value to the loan’s yield and, 

therefore, setting the loan’s price. 

Loan Originator Compensation 

Prior to 2010, compensation for 

individual loan officers and mortgage 

brokers was also often calculated and 

paid as a premium above every $100 in 

principal. This was typically called a 

‘‘yield spread premium.’’ The loan 

originator might keep the entire yield 

spread premium as a commission, or he 

or she might provide some of the yield 

spread premium to the borrower as a 

credit against closing costs.22

While this system was in place, it was 

common for loan originator 

commissions to mirror secondary 

market pricing closely. The ‘‘price’’ that 

the creditor quoted to its brokers and 

loan officers was somewhat lower than 

the price that the creditor expected to 

receive from the secondary market—the 

creditor kept the difference as corporate 

revenue. However, the underlying 

mechanics of the secondary market 

flowed through to the loan originator’s 

compensation. The higher the interest 

rate on the loan or the more in upfront 

charges the consumer pays to the 

creditor (or both), the greater the yield 

spread premium available to the loan 

originator. This created a situation in 

which the loan originator had a 

financial incentive to steer consumers 

into the highest interest rate possible or 

to impose on the consumer additional 

upfront charges payable to the creditor. 

In a perfectly competitive and 

transparent market, competition would 

ensure that this incentive would be 

countered by the need to compete with 

other loan originators to offer attractive 

loan terms to consumers. However, the 

mortgage origination market is neither 

always perfectly competitive nor always 

transparent, and consumers (who take 

out a mortgage only a few times in their 

lives) may be uninformed about how 

prices work and what terms they can 

expect.23 Moreover, prior to 2010, 

mortgage brokers were free to charge 

consumers directly for additional 

origination points or fees, which were 

generally described as compensating for 

the time and expense of working with 

the consumer to submit the loan 

application. This compensation 

structure was problematic both because 

the loan originator had an incentive to 

steer borrowers into less favorable 

pricing terms and because the consumer 

may have paid origination fees to the 

loan originator believing that the loan 

originator was working for the borrower, 

without knowing that the loan 

originator was receiving compensation 

from the creditor as well. 

The 2010 Loan Originator Final Rule 

In the aftermath of the mortgage crisis, 

regulators and lawmakers began 

focusing on concerns about the steering 

of consumers into less favorable loan 

terms than those for which they 

otherwise qualified. Both the Board of 

Governors of the Federal Reserve 

System (Board) and the Department of 

Housing and Urban Development (HUD) 

had explored the use of disclosures to 

inform consumers about loan originator 

compensation practices. HUD did adopt 

a new disclosure regime under the Real 

Estate Settlement Procedures Act 

(RESPA), in a 2008 final rule, which 

addressed among other matters the 


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Federal Register / Vol. 77, No. 174 / Friday, September 7, 2012 / Proposed Rules 55277 

24 73 FR 68204, 68222–27 (Nov. 17, 2008). 

25See 73 FR 1672, 1698–1700 (Jan. 9, 2008). 

26 73 FR 44522, 44564 (Jul. 30, 2008). The Board 

indicated that it would continue to explore 

available options to address potential unfairness 

associated with loan originator compensation 

practices. Id. at 44565. 

27 74 FR 43232, 43279–286 (Aug. 26, 2009). 

28Sections 1402 and 1403 of the Dodd-Frank Act, 

codified at 15 U.S.C. 1639b. 

29 75 FR 58509 (Sept. 24, 2010) (2010 Loan 

Originator Final Rule). 

30See generally 12 CFR 226.36(d). The CFPB 

restated this rule at 12 CFR 1026.36(d). 76 FR 79768 

(Dec. 22, 2011). 

31The Board’s rule remains applicable to certain 

motor vehicle dealers. See section 1029 of the 

Dodd-Frank, 12 U.S.C. 5519. 

32As 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). 

33Section 1029 of the Dodd-Frank Act excludes 

from this transfer of authority, subject to certain 

exceptions, any rulemaking authority over a motor 

vehicle dealer that is predominantly engaged in the 

sale and servicing of motor vehicles, the leasing and 

servicing of motor vehicles, or both. 12 U.S.C. 5519. 

Pursuant to the Dodd-Frank Act and TILA, as 

amended, the Bureau published for public comment 

an interim final rule establishing a new Regulation 

Z, 12 CFR part 1026, implementing TILA (except 

with respect to persons excluded from the Bureau’s 

rulemaking authority by section 1029 of the DoddFrank Act). 76 FR 79768 (Dec. 22, 2011). Similarly, 

the Bureau’s Regulations G and H are 

recodifications of predecessor agencies’ regulations 

implementing the SAFE Act. 76 FR 78483 (Dec. 19, 

2011). The Bureau’s Regulations G, H, and Z took 

effect on December 30, 2011. These rules did not 

impose any new substantive obligations but did 

make certain technical, conforming, and stylistic 

changes to reflect the transfer of authority and 

certain other changes made by the Dodd-Frank Act. 

disclosure of mortgage broker 

compensation.24 The Board, on the 

other hand, first proposed a disclosurebased approach to addressing concerns 

with mortgage broker compensation.25

The Board later determined, however, 

that the proposed approach presented a 

significant risk of misleading consumers 

regarding both the relative costs of 

brokers and creditors and the role of 

brokers in their transactions and, 

consequently, withdrew that aspect of 

the 2008 proposal as part of its 2008 

Home Ownership and Equity Protection 

Act (HOEPA) Final Rule.26

The Board in 2009 proposed new 

rules addressing in a more substantive 

fashion loan originator compensation 

practices.27 Although this proposal was 

prior to the enactment of the DoddFrank Act, Congress subsequently 

codified significant elements of the 

Board’s proposal.28 Specifically, the 

Board’s new proposal prohibited the 

payment and receipt of loan originator 

compensation based on transaction 

terms or conditions, and banned the 

receipt by a loan originator of 

compensation on a particular 

transaction from both the consumer and 

any other person; the Dodd-Frank Act 

substantially paralleled both of these 

provisions. The Board therefore decided 

in 2010 to finalize those rules, while 

acknowledging that some adjustments 

would need to be made to account for 

the statutory language.29 The Board’s 

2010 Loan Originator Final Rule took 

effect in April of 2011. 

Most notably, the Board’s 2010 Loan 

Originator Final Rule substantially 

restricted the use of yield spread 

premiums. Under the current 

regulations, creditors may not base a 

loan originator’s compensation on the 

transaction’s terms or conditions, other 

than the mortgage loan amount. In 

addition, the rule prohibits ‘‘dual 

compensation,’’ in which a loan 

originator is paid compensation by both 

the consumer and the creditor (or any 

other person).30 The existing rules, 

however, do not address broader 

consumer confusion regarding the 

relationship between loan originator 

compensation and general trade-offs 

between points, fees, and interest rates. 

B. TILA and Regulation Z 

Congress enacted the Truth in 

Lending Act (TILA) based on findings 

that the informed use of credit resulting 

from consumers’ awareness of the cost 

of credit would enhance economic 

stability and would strengthen 

competition among consumer credit 

providers. 15 U.S.C. 1601(a). One of the 

purposes of TILA is to provide 

meaningful disclosure of credit terms to 

enable consumers to compare credit 

terms available in the marketplace more 

readily and avoid the uninformed use of 

credit. Id. TILA’s disclosures differ 

depending on whether credit is an openend (revolving) plan or a closed-end 

(installment) loan. TILA also contains 

procedural and substantive protections 

for consumers. TILA is implemented by 

the Bureau’s Regulation Z, 12 CFR part 

1026, though historically the Board’s 

Regulation Z, 12 CFR part 226, has 

implemented TILA.31

On August 26, 2009, as discussed 

above, the Board published proposed 

amendments to Regulation Z to include 

new limits on loan originator 

compensation for all closed-end 

mortgages (Board’s 2009 Loan 

Originator Proposal). 74 FR 43232 (Aug. 

26, 2009). The Board considered, among 

other changes, prohibiting certain 

payments to a mortgage broker or loan 

officer based on the transaction’s terms 

or conditions, prohibiting dual 

compensation as described above, and 

prohibiting a mortgage broker or loan 

officer from ‘‘steering’’ consumers to 

transactions not in their interest, to 

increase mortgage broker or loan officer 

compensation. The Board issued the 

2009 Loan Originator Proposal using its 

authority to prohibit acts or practices in 

the mortgage market that the Board 

found to be unfair, deceptive, or (in the 

case of refinancings) abusive under 

TILA section 129(l)(2) (now redesignated as TILA section 129(p)(2), 15 

U.S.C. 1639(p)(2)). 

On September 24, 2010, the Board 

issued the 2010 Loan Originator Final 

Rule, which finalized the 2009 Loan 

Originator Proposal and included the 

above prohibitions. 75 FR 58509 (Sept. 

24, 2010). The Board acknowledged, 

however, that further rulemaking would 

be required to address certain issues and 

adjustments made by the Dodd-Frank 

Act, which was signed on July 21, 

2010.32 Public Law 111–203, 124 Stat. 

1376. 

C. The SAFE Act 

The Secure and Fair Enforcement for 

Mortgage Licensing Act of 2008 (SAFE 

Act) generally prohibits an individual 

from engaging in the business of a loan 

originator without first obtaining, and 

maintaining annually, a unique 

identifier from the Nationwide Mortgage 

Licensing System and Registry (NMLSR) 

and either a registration as a registered 

loan originator or a license and 

registration as a State-licensed loan 

originator. 12 U.S.C. 5103. Loan 

originators who are employees of 

depository institutions are generally 

subject to the registration requirement, 

which is implemented by the Bureau’s 

Regulation G, 12 CFR part 1007. Other 

loan originators are generally subject to 

the State licensing requirement, which 

is implemented by the Bureau’s 

Regulation H, 12 CFR part 1008, and by 

State law. 

D. The Dodd-Frank Act 

Effective July 21, 2011, the DoddFrank Act transferred rulemaking 

authority for TILA and the SAFE Act, 

among other laws, to the Bureau.33 See 

sections 1061 and 1100A of the DoddFrank Act. In addition, the Dodd-Frank 

Act added section 129B to TILA, which 


srobinson on DSK4SPTVN1PROD with PROPOSALS2
55278 Federal Register / Vol. 77, No. 174 / Friday, September 7, 2012 / Proposed Rules 

imposes two new duties on mortgage 

originators. The first such duty is to be 

‘‘qualified’’ and (where applicable) 

registered and licensed in accordance 

with the SAFE Act and other applicable 

State or Federal law. The second new 

duty of mortgage originators is to 

include on all loan documents the 

originator’s identifier number from the 

NMLSR. See section 1402 of the DoddFrank Act. 

In addition, the Dodd-Frank Act 

generally codified, but in some cases 

imposed new or different requirements 

than, the Board’s 2009 Loan Originator 

Proposal. Shortly after the legislation, 

the Board adopted the 2010 Loan 

Originator Final Rule, which prohibits 

loan originator compensation based on 

transactions’ terms or conditions and 

compensation from both the consumer 

and another person, as discussed above. 

Those regulatory provisions were 

consistent with some aspects of the 

Dodd-Frank Act. In addition, the DoddFrank Act generally prohibits any 

person from requiring consumers to pay 

any upfront discount points, origination 

points, or fees, however denominated, 

where a mortgage originator is being 

paid transaction-specific compensation 

by any person other than the consumer 

(subject to the Bureau’s express 

authority to make an exemption from 

the prohibition of such upfront charges 

if the Bureau finds such an exemption 

to be in the interest of consumers and 

the public). See section 1403 of the 

Dodd-Frank Act. Finally, the DoddFrank Act also added new restrictions 

on the financing of single-premium 

credit insurance and mandatory 

arbitration agreements. See section 1414 

of the Dodd-Frank Act. 

E. Other Rulemakings 

In addition to this proposal, the 

Bureau currently is engaged in six other 

rulemakings relating to mortgage credit 

to implement requirements of the DoddFrank Act: 

• TILA–RESPA Integration: On July 9, 

2012, the Bureau published a proposed 

rule and proposed integrated forms 

combining the TILA mortgage loan 

disclosures with the Good Faith 

Estimate (GFE) and settlement statement 

required under the Real Estate 

Settlement Procedures Act (RESPA), 

pursuant to Dodd-Frank Act section 

1032(f) and sections 4(a) of RESPA and 

105(b) of TILA, as amended by DoddFrank Act sections 1098 and 1100A, 

respectively. 12 U.S.C. 2603(a); 15 

U.S.C. 1604(b). The public has until 

November 6, 2012 to review and 

provide comments on most of this 

proposal, except that comments are due 

by September 7, 2012 for specific 

portions of the proposal. 

• HOEPA: The Bureau proposed on 

July 9, 2012 to implement Dodd-Frank 

Act requirements expanding protections 

for ‘‘high-cost’’ mortgage loans under 

the Home Ownership and Equity 

Protection Act (HOEPA), pursuant to 

TILA sections 103(bb) and 129, as 

amended by Dodd-Frank Act sections 

1431 through 1433. 15 U.S.C. 1602(bb) 

and 1639. The public has until 

September 7, 2012 to review and 

provide comment on this proposal, 

except comments on the Paperwork 

Reduction Act. 

• Servicing: The Bureau proposed on 

August 9, 2012 to implement DoddFrank Act requirements regarding forceplaced insurance, error resolution, and 

payment crediting, as well as forms for 

mortgage loan periodic statements and 

‘‘hybrid’’ adjustable-rate mortgage reset 

disclosures, pursuant to sections 6 of 

RESPA and 128, 128A, 129F, and 129G 

of TILA, as amended or established by 

Dodd-Frank Act sections 1418, 1420, 

1463, and 1464. 12 U.S.C. 2605; 15 

U.S.C. 1638, 1638a, 1639f, and 1639g. 

The Bureau also proposed rules on 

reasonable information management, 

early intervention for delinquent 

consumers, continuity of contact, and 

loss mitigation, pursuant to the Bureau’s 

authority to carry out the consumer 

protection purposes of RESPA in section 

6 of RESPA, as amended by Dodd-Frank 

Act section 1463. 12 U.S.C. 2605. The 

public has until October 9, 2012 to 

review and provide comment on these 

proposals, except comments on the 

Paperwork Reduction Act. 

• Appraisals: The Bureau, jointly 

with Federal prudential regulators and 

other Federal agencies, on August 15, 

2012 issued a proposal to implement 

Dodd-Frank Act requirements 

concerning appraisals for higher-risk 

mortgages, appraisal management 

companies, and automated valuation 

models, pursuant to TILA section 129H 

as established by Dodd-Frank Act 

section 1471, 15 U.S.C. 1639h, and 

sections 1124 and 1125 of the Financial 

Institutions Reform, Recovery, and 

Enforcement Act of 1989 (FIRREA) as 

established by Dodd-Frank Act sections 

1473(f), 12 U.S.C. 3353, and 1473(q), 12 

U.S.C. 3354, respectively. In addition, 

the Bureau on the same date issued 

rules to implement section 701(e) of the 

Equal Credit Opportunity Act (ECOA), 

as amended by Dodd-Frank Act section 

1474, to require that creditors provide 

applicants with a free copy of written 

appraisals and valuations developed in 

connection with applications for loans 

secured by a first lien on a dwelling. 15 

U.S.C. 1691(e). 

• Ability to Repay: The Bureau is in 

the process of finalizing a proposal 

issued by the Board to implement 

provisions of the Dodd-Frank Act 

requiring creditors to determine that a 

consumer can repay a mortgage loan 

and establishing standards for 

compliance, such as by making a 

‘‘qualified mortgage,’’ pursuant to TILA 

section 129C as established by DoddFrank Act sections 1411 and 1412. 15 

U.S.C. 1639c. 

• Escrows: The Bureau is in the 

process of finalizing a proposal issued 

by the Board to implement provisions of 

the Dodd-Frank Act requiring certain 

escrow account disclosures and 

exempting from the higher-priced 

mortgage loan escrow requirement loans 

made by certain small creditors, among 

other provisions, pursuant to TILA 

section 129D as established by DoddFrank Act sections 1461 and 1462. 15 

U.S.C. 1639d. 

With the exception of the TILA–RESPA 

Integration Proposal, the Dodd-Frank 

Act requirements will take effect on 

January 21, 2013 unless final rules 

implementing those requirements are 

issued on or before that date and 

provide for a different effective date. 

The Bureau regards the foregoing 

rulemakings as components of a single, 

comprehensive undertaking; each of 

them affects aspects of the mortgage 

industry and its regulation that intersect 

with one or more of the others. 

Accordingly, the Bureau is coordinating 

carefully the development of the 

proposals and final rules identified 

above. Each rulemaking will adopt new 

regulatory provisions to implement the 

various Dodd-Frank Act mandates 

described above. In addition, each of 

them may include other provisions the 

Bureau considers necessary or 

appropriate to ensure that the overall 

undertaking is accomplished efficiently 

and that it ultimately yields a 

comprehensive regulatory scheme for 

mortgage credit that achieves the 

statutory purposes set forth by Congress, 

while avoiding unnecessary burdens on 

industry. 

Thus, the Bureau intends that the 

rulemakings listed above function 

collectively as a whole. In this context, 

each rulemaking may raise concerns 

that might appear unaddressed if that 

rulemaking were viewed in isolation. 

The Bureau intends, however, to 

address issues raised by its mortgage 

rulemakings through whichever 

rulemaking is most appropriate, in the 

Bureau’s judgment, for addressing each 

specific issue. In some cases, the Bureau 

expects that one rulemaking may raise 

an issue and yet may not be the 

rulemaking that is most appropriate for 


srobinson on DSK4SPTVN1PROD with PROPOSALS2
Federal Register / Vol. 77, No. 174 / Friday, September 7, 2012 / Proposed Rules 55279 

34The 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)). 

35U.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 . 

36U.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. 

. 

addressing that issue. For example, the 

proposed requirement to include NMLS 

IDs on loan documents, discussed in 

Part V under § 1026.36(g), below, also is 

proposed to be addressed in part by the 

TILA–RESPA Integration Proposal. 

III. Outreach Conducted for This 

Rulemaking 

A. Early Stakeholder Outreach & 

Feedback on Existing Rules 

The Bureau conducted extensive 

outreach in developing the provisions in 

this proposed rule. Bureau staff met 

with and held in-depth conference calls 

with large and small bank and non-bank 

mortgage creditors, mortgage brokers, 

trade associations, secondary market 

participants, consumer groups, nonprofit organizations, and State 

regulators. Discussions covered existing 

business models and compensation 

practices and the impact of the existing 

Loan Originator Rule. They also covered 

the Dodd-Frank Act provisions and the 

impact on consumers, loan originators, 

lenders, and secondary market 

participants of various options for 

implementing the statutory provisions. 

The Bureau developed several of the 

proposed clarifications of existing 

regulatory requirements in response to 

compliance inquiries and with input 

from industry participants. 

B. Small Business Review Panel 

In May 2012, the Bureau convened a 

Small Business Review Panel with the 

Chief Counsel for Advocacy of the Small 

Business Administration (SBA) and the 

Administrator of the Office of 

Information and Regulatory Affairs 

(OIRA) within the Office of Management 

and Budget (OMB).34 As part of this 

process, the Bureau prepared an outline 

of the proposals then under 

consideration and the alternatives 

considered (Small Business Review 

Panel Outline), which the Bureau 

posted on its Web site for review by the 

general public as well as the small 

entities participating in the panel 

process.35 The Small Business Review 

Panel gathered information from 

representatives of small creditors, 

mortgage brokers, and not-for-profit 

organizations and made findings and 

recommendations regarding the 

potential compliance costs and other 

impacts of the proposed rule on those 

entities. These findings and 

recommendations are set forth in the 

Small Business Review Panel Report, 

which will be made part of the 

administrative record in this 

rulemaking.36 The Bureau has carefully 

considered these findings and 

recommendations in preparing this 

proposal and has addressed certain 

specific ones below. 

In addition, the Bureau held 

roundtable meetings with other Federal 

banking and housing regulators, 

consumer advocacy groups, and 

industry representatives regarding the 

Small Business Review Panel Outline. 

At the Bureau’s request, many of the 

participants provided feedback, which 

the Bureau has considered in preparing 

this proposal. 

IV. Legal Authority 

The Bureau is issuing this proposed 

rule pursuant to its authority under 

TILA and the Dodd-Frank Act. On July 

21, 2011, section 1061 of the DoddFrank Act transferred to the Bureau the 

‘‘consumer financial protection 

functions’’ previously vested in certain 

other Federal agencies, including the 

Board. The term ‘‘consumer financial 

protection function’’ is defined to 

include ‘‘all authority to prescribe rules 

or issue orders or guidelines pursuant to 

any Federal consumer financial law, 

including performing appropriate 

functions to promulgate and review 

such rules, orders, and guidelines.’’ 12 

U.S.C. 5581(a)(1). TILA and title X of 

the Dodd-Frank Act are Federal 

consumer financial laws. Dodd-Frank 

Act section 1002(14), 12 U.S.C. 5481(14) 

(defining ‘‘Federal consumer financial 

law’’ to include the ‘‘enumerated 

consumer laws’’ and the provisions of 

title X of the Dodd-Frank Act); 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, as 

well as title X of the Dodd-Frank Act. 

A. The Truth in Lending Act 

TILA Section 105(a) 

As amended by the Dodd-Frank Act, 

TILA section 105(a), 15 U.S.C. 1604(a), 

directs the Bureau to prescribe 

regulations to carry out the purposes of 

TILA, and provides that such 

regulations may contain additional 

requirements, classifications, 

differentiations, or other provisions, and 

may provide for such adjustments and 

exceptions for all or any class of 

transactions, that the Bureau judges are 

necessary or proper to effectuate the 

purposes of TILA, to prevent 

circumvention or evasion thereof, or to 

facilitate compliance. The purpose of 

TILA is ‘‘to assure a meaningful 

disclosure of credit terms so that the 

consumer will be able to compare more 

readily the various credit terms 

available to him and avoid the 

uninformed use of credit.’’ TILA section 

102(a); 15 U.S.C. 1601(a). These stated 

purposes are tied to Congress’s finding 

that ‘‘economic stabilization would be 

enhanced and the competition among 

the various financial institutions and 

other firms engaged in the extension of 

consumer credit would be strengthened 

by the informed use of credit.’’ TILA 

section 102(a). Thus, strengthened 

competition among financial 

institutions is a goal of TILA, achieved 

through the effectuation of TILA’s 

purposes. In addition, TILA section 

129B(a)(2) establishes a purpose of TILA 

sections 129B and 129C to ‘‘assure 

consumers are offered and receive 

residential mortgage loans on terms that 

reasonably reflect their ability to repay 

the loans and that are understandable 

and not unfair, deceptive or abusive.’’ 

15 U.S.C. 1639b(a)(2). 

Historically, TILA section 105(a) has 

served as a broad source of authority for 

rules that promote the informed use of 

credit through required disclosures and 

substantive regulation of certain 

practices. However, Dodd-Frank Act 

section 1100A clarified the Bureau’s 

section 105(a) authority by amending 

that section to provide express authority 

to prescribe regulations that contain 

‘‘additional requirements’’ that the 

Bureau finds are necessary or proper to 

effectuate the purposes of TILA, to 

prevent circumvention or evasion 

thereof, or to facilitate compliance. This 

amendment clarified the authority to 

exercise TILA section 105(a) to 

prescribe requirements beyond those 

specifically listed in the statute that 

meet the standards outlined in section 

105(a). The Dodd-Frank Act also 

clarified the Bureau’s rulemaking 

authority over certain high-cost 

mortgages pursuant to section 105(a). As 


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37TILA section 129 contains requirements for 

certain high-cost mortgages, established by the 

Home Ownership and Equity Protection Act 

(HOEPA), which are commonly called HOEPA 

loans. 38Section 1403 of the Dodd-Frank Act also added 

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

Bureau to prescribe regulations to prohibit certain 

kinds of steering, abusive or unfair lending 

practices, mischaracterization of credit histories or 

appraisals, and discouraging consumers from 

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

1639b(c)(3). This proposed rule does not address 

those provisions. Because they are structured as a 

requirement that the Bureau prescribe regulations 

establishing the substantive prohibitions, 

notwithstanding Dodd-Frank Act section 1400(c)(3), 

15 U.S.C. 1601 note, the Bureau believes that the 

substantive prohibitions cannot take effect until the 

regulations establishing them have been prescribed 

and taken effect. The Bureau intends to prescribe 

such regulations in a future rulemaking. Until such 

time, no obligations are imposed on mortgage 

originators or other persons under TILA section 

129B(c)(3). 

39As discussed in Part VI.B, below, the final rule 

under this proposal also may implement new TILA 

section 129B(b)(2). 

amended by the Dodd-Frank Act, the 

Bureau’s TILA section 105(a) authority 

to make adjustments and exceptions to 

the requirements of TILA applies to all 

transactions subject to TILA, except 

with respect to the substantive 

protections of TILA section 129, 15 

U.S.C. 1639,37 which apply to the highcost mortgages referred to in TILA 

section 103(bb), 15 U.S.C. 1602(bb). 

For the reasons discussed in this 

notice, the Bureau is proposing 

regulations to carry out TILA’s purposes 

and is proposing such additional 

requirements, adjustments, and 

exceptions as, in the Bureau’s judgment, 

are necessary and proper to carry out 

the purposes of TILA, prevent 

circumvention or evasion thereof, or to 

facilitate compliance. In developing 

these aspects of the proposal pursuant 

to its authority under TILA section 

105(a), the Bureau has considered the 

purposes of TILA, including ensuring 

meaningful disclosures, facilitating 

consumers’ ability to compare credit 

terms, and helping consumers avoid the 

uninformed use of credit, as well as 

ensuring consumers are offered and 

receive residential mortgage loans on 

terms that reasonably reflect their ability 

to repay the loans and that are 

understandable and not unfair, 

deception or abusive. In developing this 

proposal and using its authority under 

TILA section 105(a), the Bureau also has 

considered the findings of TILA, 

including strengthening competition 

among financial institutions and 

promoting economic stabilization. 

TILA Section 129B(c) 

Dodd-Frank Act section 1403 

amended TILA section 129B by 

imposing two limitations on loan 

originator compensation to reduce or 

eliminate steering incentives for 

residential mortgage loans.38 15 U.S.C. 

1639b(c). First, it generally prohibits 

loan originators from receiving 

compensation for any residential 

mortgage loan that varies based on the 

terms of the loan, other than the amount 

of the principal. Second, TILA section 

129B generally allows only consumers 

to compensate loan originators, though 

an exception permits other persons to 

pay ‘‘an origination fee or charge’’ to a 

loan originator, but only if two 

conditions are met: (1) The loan 

originator does not receive any 

compensation directly from a consumer; 

and (2) the consumer does not make an 

upfront payment of discount points, 

origination points, or fees (other than 

bona fide third party fees that are not 

retained by the creditor, the loan 

originator, or the affiliates of either). 

The Bureau has authority to prescribe 

regulations to prohibit the above 

practices. In addition, TILA section 

129B(c)(2)(B)(ii) authorizes the Bureau 

to create exemptions from the 

exception’s second prerequisite, that the 

consumer must not make any upfront 

payments of points or fees, where the 

Bureau determines that doing so ‘‘is in 

the interest of consumers and in the 

public interest.’’ 

TILA Section 129(p)(2) 

HOEPA amended TILA by adding, in 

new section 129, a broad mandate to 

prohibit certain acts and practices in the 

mortgage industry. In particular, TILA 

section 129(p)(2), as re-designated by 

Dodd-Frank Act section 1433(a), 

requires the Bureau to prohibit, by 

regulation or order, acts or practices in 

connection with mortgage loans that the 

Bureau finds to be unfair, deceptive, or 

designed to evade the provisions of 

HOEPA. 15 U.S.C. 1639(p)(2). Likewise, 

TILA requires the Bureau to prohibit, by 

regulation or order, acts or practices in 

connection with the refinancing of 

mortgage loans that the Bureau finds to 

be associated with abusive lending 

practices, or that are otherwise not in 

the interest of the consumer. Id. 

The authority granted to the Bureau 

under TILA section 129(p)(2) is broad. 

It reaches mortgage loans with rates and 

fees that do not meet HOEPA’s rate or 

fee trigger in TILA section 103(bb), 15 

U.S.C. 1602(bb), as well as mortgage 

loans not covered under that section. 

TILA section 129(p)(2) is not limited to 

acts or practices by creditors, or to loan 

terms or lending practices. 

TILA Section 129B(e) 

Dodd-Frank Act section 1405(a) 

amended TILA to add new section 

129B(e), 15 U.S.C. 1639b(e). That 

section provides for the Bureau to 

prohibit or condition terms, acts, or 

practices relating to residential mortgage 

loans on a variety of bases, including 

when the Bureau finds the terms, acts, 

or practices are not in the interest of the 

consumer. In developing proposed rules 

under TILA section 129B(e), the Bureau 

has considered all of the bases for its 

authority set forth in that section. 

TILA Section 129C(d) 

Dodd-Frank Act section 1414(d) 

amended TILA to add new section 

129C(d), 15 U.S.C. 1639c(d). That 

section prohibits the financing of certain 

single-premium credit insurance 

products. As discussed more fully in the 

section-by-section analysis below, the 

Bureau is proposing to implement this 

prohibition in new § 1026.36(i). 

TILA Section 129C(e) 

Dodd-Frank Act section 1414(e) 

amended TILA to add new section 

129C(e), 15 U.S.C. 1639c(e). That 

section restricts mandatory arbitration 

agreements in residential mortgage loan 

transactions. As discussed more fully in 

the section-by-section analysis below, 

the Bureau is proposing to implement 

these restrictions in new § 1026.36(h). 

B. The Dodd-Frank Act 

Section 1022(b)(1) of the Dodd-Frank 

Act authorizes the Bureau to prescribe 

rules ‘‘as may be necessary or 

appropriate to enable the Bureau to 

administer and carry out the purposes 

and objectives of the Federal consumer 

financial laws, and to prevent evasions 

thereof[.]’’ 12 U.S.C. 5512(b)(1). Section 

1022(b)(2) of the Dodd-Frank Act 

prescribes certain standards for 

rulemaking that the Bureau must follow 

in exercising its authority under section 

1022(b)(1). 12 U.S.C. 5512(b)(2). As 

discussed above, TILA and title X of the 

Dodd-Frank Act are Federal consumer 

financial laws. Accordingly, the Bureau 

proposes to exercise its authority under 

Dodd-Frank Act section 1022(b) to 

prescribe rules under TILA that carry 

out the purposes and prevent evasion of 

TILA. See part VI for a discussion of the 

Bureau’s analysis and consultation 

pursuant to the standards for 

rulemaking under Dodd-Frank Act 

section 1022(b)(2). 

V. Section-by-Section Analysis 

This proposal implements new TILA 

sections 129B(b)(1), (c)(1), and (c)(2) and 

129C(d) and (e), as added by sections 

1402, 1403, 1414(d) and (e) of the DoddFrank Act.39 As discussed in more detail 

in the section-by-section analysis to 

proposed § 1026.36(f) and (g), TILA 


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40Prior to the Dodd-Frank Act amendment, TILA 

section 130(e) provided for a one year statute of 

limitations for civil actions to enforce TILA 

provisions. A civil action to enforce certain TILA 

provisions (including section 129B) brought by a 

State attorney general has a three year statute of 

limitations. 

section 129B(b)(1) requires each 

mortgage originator to be qualified and 

include unique identification numbers 

on loan documents. As discussed in 

more detail in the section-by-section 

analysis to proposed § 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 sectionby-section analysis to proposed 

§ 1026.36(i), TILA section 129C(d) 

creates prohibitions on single-premium 

credit insurance. Finally, as discussed 

in the section-by-section analysis to 

proposed § 1026.36(h), TILA section 

129C(e) provides restrictions on 

mandatory arbitration agreements. 

Section 1026.25 Record Retention 

Current § 1026.25 requires creditors to 

retain evidence of compliance with 

Regulation Z. The Bureau proposes to 

add § 1026.25(c)(2) and (3) to establish 

record retention requirements for 

compliance with § 1026.36(d). Proposed 

§ 1026.25(c)(2): (1) Extends the time 

period for retention by creditors of 

compensation-related records from two 

years to three years; (2) requires loan 

originator organizations (i.e., generally, 

mortgage broker companies) to maintain 

certain compensation-related records for 

three years; and (3) clarifies the types of 

compensation-related records that are 

required to be maintained under the 

rule. Proposed § 1026.25(c)(3) requires 

creditors to maintain records evidencing 

compliance with the requirements 

related to discount points and 

origination points or fees set forth in 

proposed § 1026.36(d)(2)(ii); it also 

extends the two-year requirement to 

three years. 

25(a) General Rule 

Current comment 25(a)–5 clarifies the 

nature of the record retention 

requirements under § 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 

would be presumed to be a record of the 

amount actually paid to the loan 

originator in connection with the 

transaction. 

The Bureau is proposing new 

§ 1026.25(c)(2), which sets forth certain 

new record retention requirements for 

loan originators as discussed below. 

New comments 25(c)(2)–1 and –2 are 

being proposed to accompany proposed 

§ 1026.25(c)(2), and those comments 

incorporate substantially the same 

guidance as existing comment 25(a)–5. 

Therefore, the Bureau proposes to delete 

existing comment 25(a)–5. 

25(c) Records Related to Certain 

Requirements for Mortgage Loans 

25(c)(2) Records Related to 

Requirements for Loan Originator 

Compensation Retention of Records for 

Three Years 

TILA does not contain requirements 

to retain specific records, but § 1026.25 

requires creditors to retain evidence of 

compliance with TILA for two years 

after the date disclosures are required to 

be made or action is required to be 

taken. Section 1404 of the Dodd-Frank 

Act amended TILA section 129B to 

provide a cause of action against any 

mortgage originator for failure to comply 

with the requirements of TILA section 

129B and any of its implementing 

regulations. 15 U.S.C. 1639b(d). Section 

1416(b) of the Dodd-Frank Act amended 

section 130(e) of TILA to extend the 

statute of limitations for a civil action 

alleging a violation of TILA section 

129B (along with sections 129 and 

129C) to three years beginning on the 

date of the occurrence of the violation.40

15 U.S.C. 1639b(d), 1640(e). In view of 

the statutory changes to TILA, the 

provisions of current § 1026.25, which 

require a two-year record retention 

period, do not reflect all applicable 

statutes of limitations for causes of 

action brought under TILA. Moreover, 

the record retention provisions in 

§ 1026.25 currently are limited to 

creditors, whereas TILA section 129B(e), 

as added by the Dodd-Frank Act, covers 

all loan originators and not solely 

creditors. 

Consequently, the Bureau proposes 

§ 1026.25(c)(2), which makes two 

changes to the current record retention 

provisions. First, a creditor must 

maintain records sufficient to evidence 

the compensation it pays to a loan 

originator organization or the creditor’s 

individual loan originators, and the 

governing compensation agreement, for 

three years after the date of payment. 

Second, a loan originator organization 

must maintain for three years records of 

the compensation (1) it receives from a 

creditor, a consumer, or another person, 

and (2) it pays to its individual loan 

originators. The loan originator 

organization must maintain records 

sufficient to evidence the compensation 

agreement that governs those receipts or 

payments, for three years after the date 

of the receipts or payments. The Bureau 

proposes these changes pursuant to its 

authority under section 105(a) of TILA 

to prevent circumvention or evasion of 

TILA by requiring records that can be 

used to establish compliance. The 

Bureau believes these proposed 

modifications will ensure records 

associated with loan originator 

compensation are retained for a time 

period commensurate with the statute of 

limitations for causes of action under 

TILA section 130 and are readily 

available for examination, which is 

necessary to prevent circumvention of 

and to facilitate compliance with TILA. 

However, the Bureau invites public 

comment on whether a record retention 

period of five years, rather than three 

years, would be appropriate. The 

Bureau believes that relevant actions 

and compensation practices that must 

be evidenced in retained records may in 

some cases occur prior to the beginning 

of the three-year period of enforceability 

that applies to a particular transaction. 

In addition, the running of the threeyear period may be tolled (i.e., paused) 

under some circumstances, resulting in 

a period of enforceability that ends more 

than three years following an 

occurrence of a violation of applicable 

requirements. Accordingly, a record 

retention period that is longer than three 

years may help ensure that consumers 

are able to avail themselves of TILA 

protections while imposing minimal 

incremental burden on creditors and 

loan originators. The Bureau notes that 

many State and local laws related to 

transactions involving real property may 

require a record retention period, or 

may depend on the information being 

available, for five years. Additionally, a 

five-year record retention period is 

consistent with provisions in the 

Bureau’s TILA–RESPA Integration 

Proposal. 

The Bureau believes that it is 

necessary to extend the record retention 

requirements to loan originator 

organizations, thus requiring both 

creditors and loan originator 

organizations to retain evidence of 

compliance with the requirements of 


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55282 Federal Register / Vol. 77, No. 174 / Friday, September 7, 2012 / Proposed Rules 

§ 1026.36(d)(1) for three years. Although 

creditors may retain some of the records 

needed to demonstrate compliance with 

TILA section 129B and its implementing 

regulations, in some circumstances, the 

records may be available solely from the 

loan originator organization. For 

example, if a creditor pays a loan 

originator organization a fee for 

arranging a loan and the loan originator 

organization in turn allocates a portion 

of that fee to the individual loan 

originator as a commission, the creditor 

may not possess a copy of the 

commission agreement setting forth the 

arrangement between the loan originator 

organization and the individual loan 

originator or any record of the payment 

of the commission. The Bureau believes 

that applying this proposed requirement 

to both creditors and loan originator 

organizations will prevent 

circumvention of and facilitate 

compliance with TILA, as amended by 

the Dodd-Frank Act. 

The Bureau recognizes that extending 

the record retention requirement for 

creditors from two years for specific 

information related to loan originator 

compensation, as currently provided in 

Regulation Z, to three years may result 

in some increase in costs for creditors. 

The Bureau believes, however, that 

creditors should be able to use existing 

recordkeeping systems to maintain the 

records for an additional year at 

minimal cost. Similarly, although loan 

originator organizations may incur some 

costs to establish and maintain 

recordkeeping systems, loan originator 

organizations may be able to use 

existing recordkeeping systems that they 

maintain for other purposes at minimal 

cost. During the Small Business Review 

Panel process, the small entity 

representatives were asked about their 

current record retention practices and 

the potential impact of the proposed 

enhanced record retention 

requirements. Of the few small entity 

representatives who gave feedback on 

the issue, one creditor small entity 

representative stated that it maintained 

detailed records of compensation paid 

to all of its employees and that a 

regulator already reviews its 

compensation plans regularly, and 

another creditor small entity 

representative reported that it did not 

believe the proposed record retention 

requirement would require it to change 

its current practices. 

Applying the current two-year record 

retention period to information 

specified in proposed § 1026.25(c) could 

adversely affect the ability of consumers 

to bring actions under TILA. The 

extension also would serve to reduce 

litigation risk and maintain consistency 

between creditors and loan originator 

organizations. The Bureau therefore 

believes it is appropriate to expand the 

time period for record retention to 

effectuate the three-year statute of 

limitations period established by 

Congress for actions against loan 

originators under section 129B of TILA. 

Exclusion of Individual Loan 

Originators 

The proposed recordkeeping 

requirements do not apply to individual 

loan originators. Although section 

129B(d) of TILA, as amended by the 

Dodd-Frank Act, permits consumers to 

bring actions against mortgage 

originators (which include individual 

loan originators), the Bureau believes 

that applying the proposed record 

retention requirements of § 1026.25 to 

individual loan originators is 

unnecessary. Under the proposed record 

retention requirements, loan originator 

organizations and creditors must retain 

certain records regarding all of their 

individual loan originator employees. 

Applying the same record retention 

requirements to the individual loan 

originator employees themselves would 

be duplicative. In addition, such a 

requirement may not be feasible in all 

cases, because individual loan 

originators may not have access to the 

types of records required to be retained 

under § 1026.25, particularly after they 

cease to be employed by the creditor or 

loan originator organization. An 

individual loan originator who is a sole 

proprietor, however, is responsible for 

compliance with provisions that apply 

to the proprietorship (which is a loan 

originator organization) and, as a result, 

is responsible for compliance with the 

proposed record retention requirements. 

Similarly, an individual who is a 

creditor is subject to the requirements 

that apply to creditors. 

Substance of Record Retention 

Requirements 

As discussed above, proposed 

§ 1026.25(c)(2) makes two changes to 

the current record retention provisions. 

First, proposed § 1026.25(c)(2)(i) 

requires a creditor to maintain records 

sufficient to evidence all compensation 

it pays to a loan originator organization 

or the creditor’s individual loan 

originators, and a copy of the governing 

compensation agreement. Second, 

proposed § 1026.25(c)(2)(ii) requires a 

loan originator organization to maintain 

records of all compensation that it 

receives from a creditor, a consumer, or 

another person or that it pays to its 

individual loan originators; it also 

requires the loan originator organization 

to maintain a copy of the compensation 

agreement that governs those receipts or 

payments. 

Proposed comment 25(c)(2)–1.i 

clarifies that, under proposed 

§ 1026.25(c)(2), records are sufficient to 

evidence that compensation was paid 

and received if they demonstrate facts 

enumerated in the comment. The 

comment gives examples of the types of 

records that, depending on the facts and 

circumstances, may be sufficient to 

evidence compliance. Proposed 

comment 25(c)(2)–1.ii clarifies that the 

compensation agreement, evidence of 

which must to be retained under 

1026.25(c)(2), is any agreement, written 

or oral, or course of conduct that 

establishes a compensation arrangement 

between the parties. Proposed comment 

25(c)(2)–1.iii provides an example 

where the expiration of the three-year 

retention period varies depending on 

when multiple payments of 

compensation are made. Proposed 

comment 25(c)(2)–2 provides an 

example of retention of records 

sufficient to evidence payment of 

compensation. 

25(c)(3) Records Related to 

Requirements for Discount Points and 

Origination Points or Fees 

Proposed § 1026.25(c)(3) requires 

creditors to retain records pertaining to 

compliance with the provisions of 

§ 1026.36(d)(2)(ii), regarding the 

payment of discount points and 

origination points or fees (see the 

section-by-section analysis to proposed 

§ 1026.36(d)(2)(ii), below, for further 

discussion of these proposed 

requirements). Specifically, it provides 

that, for each transaction subject to 

proposed § 1026.36(d)(2)(ii), the creditor 

must maintain records sufficient to 

evidence that the creditor has made 

available to the consumer the 

comparable, alternative loan that does 

not include discount points and 

origination points or fees as required by 

§ 1026.36(d)(2)(ii)(A) or if such a loan 

was not made available to the consumer, 

a good-faith determination that the 

consumer was unlikely to qualify for 

such a loan. The creditor must also 

maintain records to evidence 

compliance with the ‘‘bona fide’’ 

requirements under proposed 

§ 1026.36(d)(2)(ii)(C) (e.g., that the 

payment of discount points and 

origination points or fees leads to a bona 

fide reduction in the interest rate). For 

the same reasons discussed above under 

§ 1026.25(c)(2), the Bureau also 

proposes that creditors be required to 

retain records under § 1026.25(c)(3) for 

three years and also invites comment on 

whether the period of required record 


srobinson on DSK4SPTVN1PROD with PROPOSALS2
Federal Register / Vol. 77, No. 174 / Friday, September 7, 2012 / Proposed Rules 55283 

41This 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). 

42Arrange is defined by Merriam-Webster Online 

Dictionary to include: (1) ‘‘to put into a proper 

order or into a correct or suitable sequence, 

relationship, or adjustment;’’ (2) ‘‘to make 

preparations for;’’ (3) ‘‘to bring about an agreement 

or understanding concerning.’’ Arrange Definition, 

Merriam-Webster.com, available at: http://www.

merriam-webster.com/dictionary/arrange. 

retention for purposes of § 1026.25(c)(3) 

should be five years. 

Section 36 Prohibited Acts or Practices 

and Certain Requirements for Credit 

Secured by a Dwelling 

36(a) Loan Originator, Mortgage Broker, 

and Compensation Defined 

As discussed above, this proposed 

rule would implement new TILA 

sections 129B(b)(1), (c)(1) and (c)(2) and 

129C(d) and (e), as added by sections 

1402, 1403, and 1414(d) and (e) of the 

Dodd-Frank Act. TILA section 103(cc), 

which was added by section 1401 of the 

Dodd-Frank Act, contains definitions for 

‘‘mortgage originator’’ and ‘‘residential 

mortgage loan.’’ These definitions are 

relevant to the implementation of loan 

originator compensation restrictions, 

limitations on discount points and 

origination points or fees, and loan 

originator qualification provisions 

under this proposal. The statutory 

definitions largely parallel the existing 

regulation’s coverage, in terms of both 

persons and transactions subject to its 

requirements. As discussed below, the 

Bureau is seeking to retain the existing 

regulatory terms, to maximize 

continuity, while adjusting as necessary 

to reflect statutory differences, to reflect 

the fact that they now relate to more 

than just loan originator compensation 

limitations, and to facilitate the 

additional interpretation and 

clarification being proposed under 

existing rules. 

Current § 1026.36 uses the term ‘‘loan 

originator.’’ Dodd-Frank Act 

amendments to TILA being addressed in 

this proposed rulemaking use the term 

‘‘mortgage originator’’ as defined in 

TILA section 103(cc)(2). The Bureau 

does not propose to change the existing 

terminology in § 1026.36, although the 

Bureau is proposing certain clarifying 

amendments to the definition and its 

commentary. As discussed in more 

detail below, the Bureau believes that 

the definition of ‘‘loan originator’’ set 

forth in existing § 1026.36(a)(1) is 

consistent with the definition of 

‘‘mortgage originator’’ in TILA section 

103(cc) as amended by the Dodd-Frank 

Act. The Bureau also believes that the 

term ‘‘loan originator’’ has been in wide 

use since first adopted by the Board in 

2010. Any changes to the ‘‘loan 

originator’’ terminology could require 

stakeholders to make equivalent 

revisions in many aspects of their 

operations, including in policies and 

procedures, compliance materials, and 

software and training. In addition, for 

the reasons discussed below, the Bureau 

is proposing two new definitions, in 

proposed § 1026.36(a)(1)(ii) and (iii), to 

establish the terms ‘‘loan originator 

organization’’ and ‘‘individual loan 

originator.’’ 

The Bureau also proposes to add new 

§ 1026.36(a)(3) to define compensation. 

The proposal transfers guidance on the 

meaning of the term ‘‘compensation’’ in 

current comment 36(d)(1)– to 

§ 1026.36(a)(3). Other guidance 

regarding the term ‘‘compensation’’ in 

comment 36(d)(1)–1 is proposed to be 

transferred to new comment 36(a)–5 and 

revised. 

36(a)(1) Loan Originator 

36(a)(1)(i) 

The Bureau is proposing to redesignate § 1026.36(a)(1) as 

§ 1026.36(a)(1)(i) and to make certain 

amendments to it and its commentary, 

as discussed below, to reflect new TILA 

section 103(cc)(2). TILA section 

103(cc)(2)(A) defines ‘‘mortgage 

originator’’ to mean: ‘‘any person who, 

for direct or indirect compensation or 

gain, or in the expectation of direct or 

indirect compensation or gain—(i) takes 

a residential mortgage loan application; 

(ii) assists a consumer in obtaining or 

applying to obtain a residential 

mortgage loan; or (iii) offers or 

negotiates terms of a residential 

mortgage loan.’’ TILA section 

103(cc)(2)(B) further defines a mortgage 

originator as including ‘‘any person who 

represents to the public, through 

advertising or other means of 

communicating or providing 

information (including the use of 

business cards, stationery, brochures, 

signs, rate lists, or other promotional 

items), that such person can or will 

provide any of the services or perform 

any of the activities described in 

subparagraph A.’’ TILA section 

103(cc)(2)(C) through (G) provides 

certain exclusions from the general 

definition of mortgage originator, as 

discussed below. 

In current § 1026.36(a)(1), the term 

‘‘loan originator’’ means ‘‘with respect 

to a particular transaction, a person who 

for compensation or other monetary 

gain, or in expectation of compensation 

or other monetary gain, arranges, 

negotiates, or otherwise obtains an 

extension of consumer credit for another 

person.’’ The Bureau broadly interprets 

the phrase ‘‘arranges, negotiates, or 

otherwise obtains an extension of 

consumer credit for another person’’ in 

the definition of ‘‘loan originator.’’ 41

The Bureau believes the phrase includes 

the specific activities set forth in TILA 

section 103(cc)(2)(A), including: (1) 

Takes a loan application; (2) assists a 

consumer in obtaining or applying to 

obtain a loan; or (3) offers or negotiates 

terms of a loan. 

The meaning of the term ‘‘arranges’’ is 

very broad,42 and the Bureau believes 

that it includes any part of the process 

of originating a credit transaction, 

including advertising or communicating 

to the public that one can perform loan 

origination services and referrals of a 

consumer to another person who 

participates in the process of originating 

a transaction (subject to administrative, 

clerical and other applicable exclusions 

discussed in more detail below). That is, 

the definition includes persons who 

participate in arranging a credit 

transaction with others and persons 

who arrange the transaction entirely, 

including initial contact with the 

consumer, assisting the consumer to 

apply for a loan, taking the application, 

offering and negotiating loan terms, and 

consummation of the credit transaction. 

These statutory refinements to the 

phrase, ‘‘assists a consumer in obtaining 

or applying to obtain a residential 

mortgage loan,’’ suggest that minor 

actions, e.g., accepting a completed 

application form and delivering it to a 

loan officer, without assisting the 

consumer in completing it, processing 

or analyzing the information, or 

discussing loan terms, would not be 

included in the definition. In this 

situation, the person is not engaged in 

any action specific to actively aiding or 

further achieving a complete loan 

application or collecting information on 

behalf of the consumer specific to a 

mortgage loan. This interpretation is 

also consistent with the exclusion in 

TILA section 103(cc)(2)(C)(i) for certain 

administrative and clerical persons, 

which is discussed in more detail 

below. 

Nevertheless, the Bureau proposes to 

add ‘‘takes an application’’ and ‘‘offers,’’ 

as used in the definition of ‘‘mortgage 

originator’’ in TILA section 

103(cc)(2)(A), to the definition of ‘‘loan 

originator’’ in current § 1026.36(a). The 

Bureau believes that, even though the 

definition of ‘‘loan originator’’ in 

current § 1026.36(a) includes the 

meaning of these terms, expressly 

stating them clarifies that the definition 


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55284 Federal Register / Vol. 77, No. 174 / Friday, September 7, 2012 / Proposed Rules 

of ‘‘loan originator’’ in § 1026.36(a) 

includes the core elements of the 

definition of ‘‘mortgage originator’’ in 

TILA section 103(cc)(2)(A). Inclusion of 

the terms also facilitates compliance 

with TILA by removing any risk of 

uncertainty on this point. 

Arranges, Negotiates, or Otherwise 

Obtains 

TILA section 103(cc)(2) defines 

‘‘mortgage originator’’ to include a 

person who ‘‘takes a residential 

mortgage loan application’’ and ‘‘assists 

a consumer in obtaining or applying to 

obtain a residential mortgage loan.’’ 

TILA section 103(cc)(4) provides that a 

person ‘‘assists a consumer in obtaining 

or applying to obtain a residential 

mortgage loan’’ by taking actions such 

as ‘‘advising on residential mortgage 

loan terms (including rates, fees, and 

other costs), preparing residential 

mortgage loan packages, or collecting 

information on behalf of the consumer 

with regard to a residential mortgage 

loan.’’ The Bureau proposes comment 

36(a)–1.i.A to provide further guidance 

on the existing phrase ‘‘arranges, 

negotiates, or otherwise obtains,’’ as 

used in § 1026.36(a)(1), to clarify the 

phrase’s applicability in light of these 

statutory provisions. Specifically, the 

Bureau proposes to clarify in comment 

36(a)–1.i.A that ‘‘takes an application, 

arranges, offers, negotiates, or otherwise 

obtains an extension of consumer credit 

for another person’’ includes ‘‘assists a 

consumer in obtaining or applying for 

consumer credit by advising on credit 

terms (including rates, fees, and other 

costs), preparing application packages 

(such as a loan or pre-approval 

application or supporting 

documentation), or collecting 

information on behalf of the consumer 

to submit to a loan originator or 

creditor, and includes a person who 

advertises or communicates to the 

public that such person can or will 

provide any of these services or 

activities.’’ 

Advising on Residential Mortgage Loan 

Terms 

TILA section 103(cc)(2)(A)(ii) 

provides that a mortgage originator 

includes a person who ‘‘assists a 

consumer in obtaining or applying to 

obtain a residential mortgage loan.’’ 

TILA section 103(cc)(4) defines this 

phrase to include persons ‘‘advising on 

residential mortgage loan terms 

(including rates, fees, and other costs).’’ 

Thus, this section applies to persons 

advising on credit terms (including 

rates, fees, and other costs) advertised or 

offered by that person on its own behalf 

or for another person. The Bureau 

believes that the definition of ‘‘mortgage 

originator’’ does not include bona fide 

third-party advisors such as 

accountants, attorneys, registered 

financial advisors, certain housing 

counselors, or others who do not receive 

or are paid no compensation for 

originating consumer credit 

transactions. Should these persons 

receive payments or compensation from 

loan originators, creditors, or their 

affiliates in connection with a consumer 

credit transaction, however, they could 

be considered loan originators. 

Advertises or Communicates 

TILA section 103(cc)(2)(B) provides 

that a mortgage originator ‘‘includes any 

person who represents to the public, 

through advertising or other means of 

communicating or providing 

information (including the use of 

business cards, stationery, brochures, 

signs, rate lists, or other promotional 

items), that such person can or will 

provide any of the services or perform 

any of the activities described in 

subparagraph (A).’’ The Bureau believes 

the current definition of ‘‘loan 

originator’’ in § 1026.36(a) includes 

persons who in expectation of 

compensation or other monetary gain 

communicate or advertise loan 

origination activities or services to the 

public. 

The Bureau therefore proposes to 

amend comment 36(a)–1.i.A to clarify 

that a loan originator ‘‘includes a person 

who in expectation of compensation or 

other monetary gain advertises or 

communicates to the public that such 

person can or will provide any of these 

[loan origination] services or activities.’’ 

The Bureau notes that the phrase 

‘‘advertises or communicates to the 

public’’ is very broad and includes, but 

is not limited to, the use of business 

cards, stationery, brochures, signs, rate 

lists, or other promotional items listed 

in TILA section 103(cc)(2)(B) if these 

items advertise or communicate to the 

public that a person can or will provide 

loan origination services or activities. 

The Bureau believes this clarification 

furthers TILA’s goal in section 

129B(a)(2) of ensuring that responsible, 

affordable credit remains available to 

consumers. The Bureau also invites 

comment on this clarification to the 

definition of loan originator. 

Manufactured Home Retailers 

The definition of ‘‘mortgage 

originator’’ in TILA section 

103(cc)(2)(C)(ii) also expressly excludes 

certain employees of manufactured 

home retailers. The definition of ‘‘loan 

originator’’ in current § 1026.36(a)(1) 

does not address such employees. The 

Bureau proposes to implement the new 

statutory exclusion by revising the 

definition of ‘‘loan originator’’ in 

§ 1026.36(a)(1) to exclude employees of 

a manufactured home retailer who assist 

a consumer in obtaining or applying to 

obtain consumer credit, provided such 

employees do not take a consumer 

credit application, offer or negotiate 

terms of a consumer credit transaction, 

or advise a consumer on credit terms 

(including rates, fees, and other costs). 

Creditors 

Current § 1026.36(a) includes in the 

definition of loan originator only 

creditors that do not finance the 

transaction at consummation out of the 

creditor’s own resources, including, for 

example, drawing on a bona fide 

warehouse line of credit, or out of 

deposits held by the creditor (tablefunded creditors). TILA section 129B(b), 

as added by section 1402 of the DoddFrank Act, imposes new qualification 

and loan document unique identifier 

requirements that apply under certain 

circumstances to all creditors, including 

non-table-funded creditors, which are 

not loan originators for other purposes. 

Section 1401 of the Dodd-Frank Act 

amended TILA to add section 

103(cc)(2)(F), which provides that the 

definition of ‘‘mortgage originator’’ 

expressly excludes creditors (other than 

creditors in table-funded transactions) 

for purposes of section 129B(c)(1), (2), 

and (4). Those provisions contain 

restrictions on steering activities and 

rules of construction for the statute. 

Thus, the term ‘‘mortgage originator’’ 

includes creditors for purposes of other 

TILA provisions that use the term, such 

as section 129B(b), as added by section 

1402 of the Dodd-Frank Act. Section 

129B(b) imposes on mortgage 

originators new qualification and loan 

document unique identifier 

requirements, discussed below under 

§ 1026.36(f) and (g). The Bureau 

therefore proposes to amend the 

definition of loan originator in 

§ 1026.36(a)(1)(i) to include creditors 

(other than creditors in table-funded 

transactions) for purposes of those 

provisions only. 

The Bureau also proposes to make 

technical amendments to comment 

36(a)–1.ii on table funding to clarify the 

applicability of TILA section 129B(b)’s 

new requirements to all creditors. Nontable-funded creditors are included in 

the definition of loan originator only for 

the purposes of § 1026.36(f) and (g). The 

proposed revisions additionally clarify 

the applicability of § 1026.36 to tablefunded creditors. 


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43RESPA 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). 

Servicers 

TILA section 103(cc)(2)(G) defines 

‘‘mortgage originator’’ not to include ‘‘a 

servicer or servicer employees, agents 

and contractors, including but not 

limited to those who offer or negotiate 

terms of a residential mortgage loan for 

purposes of renegotiating, modifying, 

replacing or subordinating principal of 

existing mortgages where borrowers are 

behind in their payments, in default or 

have a reasonable likelihood of being in 

default or falling behind.’’ The term 

‘‘servicer’’ is defined by TILA section 

103(cc)(7) as having the same meaning 

as ‘‘servicer’’ ‘‘in section 6(i)(2) of the 

Real Estate Settlement Procedures Act of 

1974 [RESPA] (12 U.S.C. 2605(i)(2)).’’ 

RESPA defines the term ‘‘servicer’’ as 

‘‘the person responsible for servicing of 

a loan (including the person who makes 

or holds a loan if such person also 

services the loan).’’43 The term 

‘‘servicing’’ is defined to mean 

‘‘receiving any scheduled periodic 

payments from a borrower pursuant to 

the terms of any loan, including 

amounts for escrow accounts described 

in section 2609 of this title [Title 12], 

and making the payments of principal 

and interest and such other payments 

with respect to the amounts received 

from the borrower as may be required 

pursuant to the terms of the loan.’’ 12 

U.S.C. 2605(i)(3). 

Current comment 36(a)–1.iii provides 

that the definition of ‘‘loan originator’’ 

does not ‘‘apply to a loan servicer when 

the servicer modifies an existing loan on 

behalf of the current owner of the loan. 

The rule only applies to extensions of 

consumer credit and does not apply if 

a modification of an existing 

obligation’s terms does not constitute a 

refinancing under § 1026.20(a).’’ The 

Bureau proposes to amend comment 

36(a)–1.iii to clarify how the definition 

of loan originator applies to servicers 

and to implement the Dodd-Frank Act’s 

definition of mortgage originator. 

The Bureau believes the exception in 

TILA section 103(cc)(2)(G) narrowly 

applies to servicers, servicer employees, 

agents and contractors only when 

engaging in limited servicing activities 

with respect to a particular transaction 

after consummation, including loan 

modifications that do not constitute a 

refinancing. The Bureau does not 

believe, however, that the statutory 

exclusion was intended to shield from 

coverage companies that intend to act as 

servicers on loans when they engage in 

loan origination activities prior to 

consummation or servicers of existing 

loans that refinance such loans. The 

Bureau believes that exempting such 

companies merely because of the 

general status of ‘‘servicer’’ with respect 

to some loans would not reflect 

Congress’s intended statutory scheme. 

The Bureau’s interpretation rests on 

analyzing the two distinct parts of the 

statute. Under TILA section 

103(cc)(2)(G), the definition of 

‘‘mortgage originator’’ does not include: 

(1) ‘‘a servicer’’ or (2) ‘‘servicer 

employees, agents and contractors, 

including but not limited to those who 

offer or negotiate terms of a residential 

mortgage loan for purposes of 

renegotiating, modifying, replacing and 

subordinating principal of existing 

mortgages where borrowers are behind 

in their payments, in default or have a 

reasonable likelihood of being in default 

or falling behind.’’ Under a textual 

analysis of this provision in 

combination with the definition of 

‘‘servicer’’ under RESPA in 12 U.S.C. 

2605(i)(2), which is referenced by TILA 

section 103(cc)(7), a servicer that is 

responsible for servicing a loan or that 

makes a loan and services it is excluded 

from the definition of ‘‘mortgage 

originator’’ for that particular loan after 

the loan is consummated and the 

servicer becomes responsible for 

servicing it. ‘‘Servicing’’ is defined 

under RESPA as ‘‘receiving and making 

payments according to the terms of the 

loan.’’ Thus, a servicer cannot be 

responsible for servicing a loan that 

does not exist. A loan exists only after 

consummation. Therefore, for purposes 

of TILA section 103(cc)(2)(G), a person 

is a servicer with respect to a particular 

transaction only after it is consummated 

and that person retains or obtains its 

servicing rights. 

The Bureau believes this 

interpretation of the statute is the most 

consistent with the definition of 

‘‘mortgage originator’’ in TILA section 

103(cc)(2). A person cannot be a servicer 

until after consummation of a 

transaction. A person taking an 

application, assisting a consumer in 

obtaining or applying to obtain a loan, 

or offering or negotiating terms of a 

loan, or funding the transaction prior to 

and through the time of consummation, 

is a mortgage originator or creditor 

(depending upon the person’s role). 

Thus, a person that funds a loan from 

the person’s own resources or a tablefunded creditor is subject to the 

appropriate provisions in TILA section 

103(cc)(2)(F) for creditors until the 

person becomes responsible for 

servicing the loan after consummation. 

The Bureau believes this interpretation 

is also consistent with the definition of 

‘‘loan originator’’ in current § 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 creditor until 

after consummation of the refinancing 

when responsibility for servicing the 

refinanced loan arises. 

The Bureau believes the second part 

of the statutory provision applies to 

individuals (i.e., natural persons) who 

are employees, agents or contractors of 

the servicer, ‘‘including but not limited 

to those who offer or negotiate terms of 

a residential mortgage loan for purposes 

of renegotiating, modifying, replacing 

and subordinating principal of existing 

mortgages where borrowers are behind 

in their payments, in default or have a 

reasonable likelihood of being in default 

or falling behind.’’ The Bureau further 

believes that, to be considered 

employees, agents or contractors of the 

servicer for the purposes of TILA 

section 103(cc)(2)(G), the person for 

whom the employees, agent or 

contractors are working first must be a 

servicer. Thus, as discussed above, the 

particular loan must have already been 

consummated before such employees, 

agents, or contractors can be excluded 

from the statutory term, ‘‘mortgage 

originator’’ under TILA section 

103(cc)(2)(G). 

The Bureau interprets the phrase 

‘‘including but not limited to those who 

offer or negotiate terms of a residential 

mortgage loan for purposes of 

renegotiating, modifying, replacing and 

subordinating principal of existing 

mortgages where borrowers are behind 

in their payments, in default or have a 

reasonable likelihood of being in default 

or falling behind’’ to be an example of 

the types of activities the individuals 

are permitted to engage in that satisfy 

the purposes of TILA section 

103(cc)(2)(G). However, the Bureau 

believes that ‘‘renegotiating, modifying, 

replacing and subordinating principal of 

existing mortgages’’ or any other related 

activities that occur must not be a 

refinancing, as defined in § 1026.20(a), 

for the purposes of TILA section 

103(cc)(2)(G). Under the Bureau’s view, 

a servicer may modify an existing loan 

in several ways without being 

considered a loan originator. A formal 

satisfaction of the existing obligation 

and replacement by a new obligation is 

a refinancing. But, short of that, a 


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55286 Federal Register / Vol. 77, No. 174 / Friday, September 7, 2012 / Proposed Rules 

44Comment 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). 

45For example, the top ten U.S. lenders by 

mortgage origination volume in 2011 held 72.7 

percent of the market share. 1 Inside Mortg. Fin., 

The 2012 Mortgage Market Statistical Annual 52– 

53 (2012) (these percentages are based on the dollar 

amount of the loans). These same ten lenders held 

60.8 percent of the market share for servicing 

mortgage loans. 1 Inside Mortg. Fin., The 2012 

Mortgage Market Statistical Annual 185–186 (2012) 

(these percentages are based on the dollar amount 

of the loans). Most of the largest lenders do not 

ordinarily sell loans into the secondary market with 

servicing released. 

servicer may modify a loan without 

being considered a loan originator. 

The Bureau interprets the term 

‘‘replacing’’ in TILA section 

103(cc)(2)(G) not to include refinancings 

of consumer credit. The term 

‘‘replacing’’ is not defined in TILA or 

Regulation Z, but the Bureau believes 

the term ‘‘replacing’’ in this context 

means replacing existing debt without 

also satisfying the original obligation. 

For example, a first- and second-lien 

loan may be ‘‘replaced’’ by a single, new 

loan with a reduced interest rate and 

principal amount, the proceeds of 

which do not satisfy the full obligation 

of the prior loans. In such a situation, 

the agreement for the new loan may 

stipulate that the consumer is 

responsible for the remaining 

outstanding balances of the prior loans 

if the consumer refinances or defaults 

on the replacement loan within a stated 

period of time. This is conceptually 

distinct from a refinancing as described 

in § 1026.20(a), which refers to 

situations where an existing ‘‘obligation 

is satisfied and replaced by a new 

obligation.’’ 44 (Emphasis added.) 

The ability to repay provisions of 

TILA section 129C, which were added 

by section 1411 of the Dodd-Frank Act, 

make numerous references to certain 

‘‘refinancings’’ for exemptions from the 

income verification requirement of 

section 129C. TILA section 128A, as 

added by section 1419 of the DoddFrank Act, contains a disclosure 

requirement that includes a 

‘‘refinancing’’ as an alternative for 

consumers of hybrid adjustable rate 

mortgages to pursue before the interest 

rate adjustment or reset after the fixed 

introductory period ends. Moreover, 

TILA’s text prior to Dodd-Frank Act 

amendments contained the term 

‘‘refinancing’’ in numerous provisions. 

For example, TILA section 106(f)(2)(B) 

provides finance charge tolerance 

requirements specific to a 

‘‘refinancing,’’ TILA section 125(e)(2) 

exempts certain ‘‘refinancings’’ from 

right of rescission disclosure 

requirements, and TILA section 

128(a)(11) requires disclosure of 

whether the borrower is entitled to a 

rebate upon ‘‘refinancing’’ an obligation 

in full that involves a precomputed 

finance charge. For these reasons the 

Bureau believes that, if Congress 

intended for ‘‘replacing’’ to include or 

mean a ‘‘refinancing’’ of consumer 

credit, Congress would have used the 

existing term, ‘‘refinancing,’’ as 

Congress did for sections 1411 and 1419 

of the Dodd-Frank Act and in prior 

TILA legislation. Instead, without any 

additional guidance from Congress, the 

Bureau defers to the current definition 

of ‘‘refinancing’’ in § 1026.20(a), where 

part of the definition of ‘‘refinancing’’ 

requires both replacement and 

satisfaction of the original obligation as 

separate and distinct elements of the 

defined term. 

Furthermore, the above interpretation 

of ‘‘replacing’’ better accords with the 

surrounding statutory text, which 

provides that servicers include persons 

offering or negotiating a residential 

mortgage loan for the purposes of 

‘‘renegotiating, modifying, replacing or 

subordinating principal of existing 

mortgages where borrowers are behind 

in their payments, in default or have a 

reasonable likelihood of being in default 

or falling behind.’’ Taken as a whole, 

this text applies to distressed consumers 

for whom replacing and fully satisfying 

the existing obligation(s) is not an 

option. The situation covered by the text 

is distinct from a refinancing in which 

a consumer would simply use the 

proceeds from the refinancing to satisfy 

an existing loan or existing loans. 

The Bureau believes this 

interpretation gives full effect to the 

exclusionary language as Congress 

intended, to avoid undesirable impacts 

on servicers’ willingness to modify 

existing loans to benefit distressed 

consumers, without undermining the 

new protections generally afforded by 

TILA section 129B. A broader 

interpretation that excludes servicers 

and their employees, agents, and 

contractors from those protections 

solely by virtue of their coincidental 

status as servicers is not the best reading 

of the statute as a whole and likely 

would frustrate rather than further 

congressional intent. 

Indeed, if persons are not included in 

the definition of mortgage originator 

when making but prior to servicing a 

loan or based on a person’s status as a 

servicer under the definition of 

‘‘servicer,’’ at least two-thirds of 

mortgage lenders (and their originator 

employees) nationwide could be 

excluded from the definition of 

‘‘mortgage originator’’ in TILA section 

103(cc)(2)(G). Many, if not all, of the top 

ten mortgage lenders by volume either 

hold and service loans they originated 

in portfolio or retain servicing rights for 

the loans they originate and sell into the 

secondary market.45 Under an 

interpretation that would categorically 

exclude a person who makes and 

services a loan or whose general 

‘‘status’’ is a ‘‘servicer,’’ these lenders 

would be excluded as ‘‘servicers’’ from 

the definition of ‘‘mortgage originator.’’ 

Thus, their employees and agents would 

also be excluded from the definition 

under this interpretation. 

The Bureau believes this result would 

be not only contrary to the statutory text 

but also contrary to Congress’s stated 

intent in section 1402 of the Dodd-Frank 

Act to ensure that responsible, 

affordable mortgage credit remains 

available to consumers by regulating 

practices related to residential mortgage 

loan origination. For example, based on 

the top ten mortgage lenders by 

origination and servicing volume alone, 

as much as 61 percent of the nation’s 

loan originators could not only be 

excluded from prohibitions on dual 

compensation and compensation based 

on loan terms but also from the new 

qualification requirements added by the 

Dodd-Frank Act. 

The Bureau proposes to amend 

comment 36(a)–1.iii to reflect the 

Bureau’s interpretation of the statutory 

text, to facilitate compliance, and to 

prevent circumvention. The Bureau 

interprets the statement in existing 

comment 36(a)–1.iii that the ‘‘definition 

of ‘loan originator’ does not apply to a 

loan servicer when the servicer modifies 

an existing loan on behalf of the current 

owner of the loan’’ as consistent with 

the definition of mortgage originator as 

it relates to servicers in TILA section 

103(cc)(2)(G). Proposed comment 36(a)– 

1.iii thus clarifies that the TILA section 

103(cc)(2)(G) definition of ‘‘loan 

originator’’ includes a servicer or a 

servicer’s employees, agents, and 

contractors when offering or negotiating 

terms of a particular existing loan 

obligation on behalf of the current 

owner for purposes of renegotiating, 

modifying, replacing, or subordinating 

principal of such a debt where the 

borrower(s) is not current, in default, or 

has a reasonable likelihood of becoming 

in default or not current. The Bureau 

proposes to amend comment 36(a)–1.iii 

to clarify that § 1026.36 ‘‘only applies to 


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46The 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. 

47The three core elements in the definition of 

mortgage originator in TILA section 103(cc)(2)(A) 

are: ‘‘(i) Takes a residential mortgage loan 

application; (ii) assists a consumer in obtaining or 

applying to obtain a residential mortgage loan; or 

(iii) offers or negotiates terms of a residential 

mortgage loan.’’ (Emphasis added). 

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).’’ 

Real Estate Brokers 

TILA section 103(cc)(2)(D) states that 

the definition of ‘‘mortgage originator’’ 

does not ‘‘include a person or entity that 

only performs real estate brokerage 

activities and is licensed or registered in 

accordance with applicable State law, 

unless such person or entity is 

compensated by a lender, a mortgage 

broker, or other mortgage originator or 

by any agent of such lender, mortgage 

broker, or other mortgage originator.’’ 

Thus, the statute provides that real 

estate brokers are not included in the 

definition of ‘‘mortgage originator’’ if 

they: (1) Only perform real estate 

brokerage activities, (2) are licensed or 

registered under applicable State law to 

perform such activities, and (3) do not 

receive compensation from loan 

originators, creditors, or their agents. 

Therefore, a real estate broker that 

performs loan originator activities or 

services as defined by proposed 

§ 1026.36(a) is a loan originator for the 

purposes of § 1026.36.46 The Bureau 

proposes to add comment 36(a)–1.iv to 

clarify that the term loan originator does 

not include certain real estate brokers. 

The Bureau believes the text of TILA 

section 103(cc)(2)(D) related to 

payments to a real estate broker ‘‘by a 

lender, a mortgage broker, or other 

mortgage originator or by any agent of 

such lender, mortgage broker, or other 

mortgage originator’’ is directed at 

payments by such persons in 

connection with the origination of a 

particular consumer credit transaction 

secured by a dwelling. Each of the three 

core elements in the definition of 

mortgage originator in TILA section 

103(cc)(2)(A) describes activities related 

to a residential mortgage loan.47

Moreover, if real estate brokers are 

deemed mortgage originators simply by 

receiving compensation from a creditor, 

then a real estate broker would be 

considered a mortgage originator if the 

real estate broker received 

compensation from a creditor for 

reasons wholly unrelated to loan 

origination (e.g., if the real estate broker 

found new office space for the creditor). 

The Bureau does not believe that either 

the definition of ‘‘mortgage originator’’ 

in TILA section 103(cc)(2) or the 

statutory purpose of TILA section 

129B(a)(2) to ‘‘assure consumers are 

offered and receive residential mortgage 

loans on terms that reasonably reflect 

their ability to repay the loans and that 

are understandable and not unfair, 

deception or abusive,’’ demonstrate that 

Congress intended for TILA section 

129B to cover this type of real estate 

brokerage activity. Thus, for a real estate 

broker to be included in the definition 

of ‘‘mortgage originator,’’ the real estate 

broker must receive compensation in 

connection with performing one or more 

of the three core ‘‘mortgage originator’’ 

activities for a particular consumer 

credit transaction secured by a dwelling. 

For example, assume XYZ Bank pays 

a real estate broker for a broker price 

opinion in connection with a pending 

modification or default of a mortgage 

loan for consumer A. In an unrelated 

transaction, consumer B compensates 

the same real estate broker for assisting 

consumer B with finding and 

negotiating the purchase of a home. 

Consumer B also obtains credit from 

XYZ Bank to purchase the home. This 

real estate broker is not a loan originator 

under these facts. Proposed comment 

36(a)–1.iv clarifies this point. The 

proposed comment also clarifies that a 

payment is not from a creditor, a 

mortgage broker, other mortgage 

originator, or an agent of such persons 

if the payment is made on behalf of the 

consumer to pay the real estate broker 

for real estate brokerage activities 

performed for the consumer. 

The Bureau notes that the definition 

of ‘‘mortgage originator’’ in the statute 

does not ‘‘include a person or entity that 

only performs real estate brokerage 

activities and is licensed or registered in 

accordance with applicable State law.’’ 

The Bureau believes that, if applicable 

State law defines real estate brokerage 

activities to include activities that fall 

within the definition of loan originator 

in § 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). The Bureau invites 

comment on this proposed clarification 

of the meaning of ‘‘loan originator’’ for 

real estate brokers. 

Seller Financing 

TILA section 103(cc)(2)(E) provides 

that the term ‘‘mortgage originator’’ does 

not include: 

with respect to a residential mortgage loan, 

a person, estate, or trust that provides 

mortgage financing for the sale of 3 

properties in any 12-month period to 

purchasers of such properties, each of which 

is owned by such person, estate, or trust and 

serves as security for the loan, provided that 

such loan—(i) is not made by a person, 

estate, or trust that has constructed, or acted 

as a contractor for the construction of, a 

residence on the property in the ordinary 

course of business of such person, estate, or 

trust; (ii) is fully amortizing; (iii) is with 

respect to a sale for which the seller 

determines in good faith and documents that 

the buyer has a reasonable ability to repay 

the loan; (iv) has a fixed rate or an adjustable 

rate that is adjustable after 5 or more years, 

subject to reasonable annual and lifetime 

limitations on interest rate increases; and (v) 

meets any other criteria the Bureau may 

prescribe. 

This provision must be read in 

conjunction with the existing 

exceptions in Regulation Z 

(§ 1026.2(a)(17)(v)), which provide that 

the definition of creditor: (1) Does not 

include persons that extend credit 

secured by a dwelling (other than 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. Based on the definition of 

mortgage originator as described above 

and the exception for creditor together, 

the Bureau believes that persons, 

estates, or trusts are not included in the 

definition of ‘‘mortgage originator’’ 

when engaged in such described 

activities. That is, any person, estate, or 

trust who otherwise would be a 

mortgage originator under the statutory 

definition on the basis of engaging in 

activities other than those described 

above is a mortgage originator. Thus, 

only persons whose activity is financing 

sales of their own properties as 

described above are excluded under 

TILA section 103(cc)(2)(E). A person 

who finances sales of property, if such 

financing is subject to a finance charge 

or payable in more than four 

installments, generally is a creditor 

under § 1026.2(a)(17)(i) (except where 

excluded by virtue of the person’s 

annual transaction volume). 

Moreover, TILA section 103(cc)(2)(F) 

provides that the definition of mortgage 

originator does not include creditors 

(other than creditors in table-funded 

transactions), except for purposes of 

TILA section 129B(c)(1), (2), and (4). 

Thus, those creditors that are not 

included in the definition of mortgage 


srobinson on DSK4SPTVN1PROD with PROPOSALS2
55288 Federal Register / Vol. 77, No. 174 / Friday, September 7, 2012 / Proposed Rules 

originator as a result of TILA section 

103(cc)(2)(E) are still subject to the 

remaining provisions of TILA section 

129B. Of these provisions of TILA 

section 129B, only section 129B(b)(1) 

imposes any substantive requirements 

on creditors: the qualification 

requirements and the requirement to 

include a unique identifier on loan 

documents, implemented by proposed 

§ 1026.36(f) and (g). 

The proposed definition of loan 

originator, however, would not include 

seller financers who finance three or 

fewer sales in any 12-month period 

without extending high-cost mortgage 

financing. The proposed definition of 

the term loan originator includes ‘‘a 

creditor for the transaction if the 

creditor does not finance the transaction 

at consummation out of the creditor’s 

own resources, including drawing on a 

bona fide warehouse line of credit, or 

out of deposits held by the creditor’’ 

(emphasis added). The term ‘‘creditor 

for the transaction’’ is intended to apply 

to persons who would otherwise be a 

‘‘creditor’’ as defined in § 1026.2(a)(17) 

but for the exception for not regularly 

extending consumer credit. Therefore, 

such a seller financer who finances 

three or fewer sales with a non-high cost 

mortgage in any 12-month period is a 

‘‘creditor for the transaction,’’ and is 

included neither in the definition of 

loan originator in § 1026.36(a) nor the 

definition of creditor in § 1026.2(a)(17). 

Thus, these persons are not subject to 

TILA and Regulation Z, including 

§ 1026.36. 

Section 1026.2(a)(17)(v) excludes 

from the definition of creditor persons 

that extend credit secured by a dwelling 

(other than high-cost mortgages) five or 

fewer times in the preceding calendar 

year. This has two implications. First, if 

a person’s activity is limited to 

financing sales of three or fewer 

properties in any 12-month period by 

making extensions of credit that are not 

high-cost mortgages, the person cannot 

exceed the five-loan threshold in 

§ 1026.2(a)(17)(v) to be deemed a 

creditor and therefore be subject to any 

provision of Regulation Z, including 

§ 1026.36. Second, a person who 

finances the sale of no more than one 

property in any 12-month period by 

making an extension of one high-cost 

mortgage also is not a creditor under 

§ 1026.2(a)(17)(v). Thus, this person is 

not a creditor for the purposes of being 

included in the definition of ‘‘mortgage 

originator’’ as described by TILA section 

103(cc)(2)(F). This person also is not 

subject to Regulation Z, including 

§ 1026.36. 

Given all of the foregoing, the only 

persons that are not included in the 

definition of mortgage originator as 

provided in TILA section 103(cc)(2)(E), 

but are creditors for the purposes of 

Regulation Z, are persons, estates, or 

trusts that finance the sale of their own 

properties by extending high-cost 

mortgages either twice or three times in 

a calendar year. Thus, such persons are 

not subject to § 1026.36(f) and (g) 

because, they are not a loan originator 

and thus also are not subject to the other 

provisions of § 1026.36. Nevertheless, to 

reflect this interpretation that a narrow 

category of persons are not included in 

the definition of loan originator in 

§ 1026.36(a), the Bureau is proposing 

new comment 36(a)–1.v. 

Proposed comment 36(a)–1.v tracks 

the criteria set forth in TILA section 

103(cc)(2)(E). The comment provides 

that the definition of ‘‘loan originator’’ 

does not include a natural person, 

estate, or trust that finances the sale of 

three or fewer properties in any 12- 

month period owned by such natural 

person, estate, or trust where each 

property serves as a security for the 

credit transaction. It further states that 

the natural person, estate, or trust also 

must not have constructed or acted as a 

contractor for the construction of the 

dwelling in its ordinary course of 

business. The natural person, estate, or 

trust must additionally determine in 

good faith and document that the buyer 

has a reasonable ability to repay the 

credit transaction. Finally, the proposed 

comment states that the credit 

transaction must be fully amortizing, 

have a fixed rate or an adjustable rate 

that adjusts only after five or more 

years, and be subject to reasonable 

annual and lifetime limitations on 

interest rate increases. 

The Bureau also is proposing to 

include further guidance in the 

comment as to how a person may satisfy 

the requirement to determine in good 

faith that the buyer has a reasonable 

ability to repay the credit transaction. 

The comment would provide that the 

natural person, estate, or trust makes 

such a good faith determination by 

complying with the requirements of 

§ 1026.43. This refers to the 

requirements applicable generally to 

credit extensions secured by a dwelling, 

as proposed by the Board in its 2011 

ATR Proposal. Those requirements 

implement TILA section 129C, and the 

language of section 129C(a)(1) parallels 

in almost identical language the ability 

to repay requirement in TILA section 

103(cc)(2)(E). Any creditor seeking to 

rely on proposed comment 36(a)–1.v to 

avoid inclusion in the definition of loan 

originator (i.e., creditors as defined by 

§ 1026.2(a)(17)(v) making a second or a 

third high-cost mortgage in a calendar 

year) already must comply with the 

requirements of proposed § 1026.43 as 

well as the provisions of Regulation Z 

other than § 1026.36. 

Administrative or Clerical Tasks 

TILA section 103(cc)(2)(C) defines 

‘‘mortgage originator’’ to exclude 

persons who are not otherwise 

described by the three core elements of 

the mortgage originator definition or 

communicate to the public or advertise 

they can perform or provide the services 

described in those elements and who 

perform purely administrative or 

clerical tasks on behalf of mortgage 

originators. Existing comment 36(a)–4 

clarifies that managers, administrative 

staff, and similar individuals who are 

employed by a creditor or loan 

originator but do not arrange, negotiate, 

or otherwise obtain an extension of 

credit for a consumer, or whose 

compensation is not based on whether 

any particular loan is originated, are not 

loan originators. The Bureau believes 

the existing comment is largely 

consistent with TILA section 

103(cc)(2)(C)’s treatment of 

administrative and clerical tasks. 

The Bureau proposes a minor 

technical revision to comment 36(a)–4, 

however, to implement the exclusion 

from ‘‘mortgage originator’’ in TILA 

section 103(cc)(2)C), by including 

‘‘clerical’’ staff. The proposed revisions 

would also clarify that producing 

managers who also meet the definition 

of a loan originator would be considered 

a loan originator. Producing managers 

generally are managers of an 

organization (including branch 

managers and senior executives) that in 

addition to their management duties 

also originate loans. Thus, 

compensation received by producing 

managers would be subject to the 

restrictions of § 1026.36. Non-producing 

managers (i.e., managers, senior 

executives, etc., who have a 

management role in an organization 

including, but not limited to, managing 

loan originators, but who do not 

otherwise meet the definition of loan 

originator) would not be considered a 

loan originator. 

36(a)(1)(ii); 36(a)(1)(iii) 

Certain provisions of TILA section 

129B, such as the qualification and loan 

document unique identifier 

requirements, as well as certain new 

guidance in the Bureau’s proposal, 

necessitate a distinction between loan 

originators that are natural persons and 

those that are organizations. The Bureau 

therefore proposes to establish the 

distinction by creating new definitions 

for ‘‘individual loan originator’’ and 


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48See 12 CFR 1024.8(b). 

‘‘loan originator organization’’ in new 

§ 1026.36(a)(1)(ii) and (iii). 

The Bureau proposes to revise 

comment 36(a)–1.i.B to clarify that the 

term ‘‘loan originator organization’’ is a 

loan originator other than a natural 

person, including but not limited to a 

trust, sole proprietorship, partnership, 

limited liability partnership, limited 

partnership, limited liability company, 

corporation, bank, thrift, finance 

company, or a credit union. The Bureau 

understands that States have recognized 

many new business forms over the past 

10 to 15 years. The Bureau believes that 

the additional examples should help to 

facilitate compliance with § 1026.36 by 

clarifying the types of persons that fall 

within the definition of ‘‘loan originator 

organization.’’ The Bureau invites 

comment on whether other examples 

would be helpful for these purposes. 

36(a)(2) Mortgage Broker 

Existing § 1026.36(a)(2) defines 

‘‘mortgage broker’’ as ‘‘any loan 

originator that is not an employee of the 

creditor.’’ As noted elsewhere, under 

this proposal the meaning of loan 

originator is expanded for purposes of 

§ 1026.36(f) and (g) to include all 

creditors. The Bureau is therefore 

proposing a conforming amendment to 

exclude such creditors from the 

definition of ‘‘mortgage broker’’ even 

though for certain purposes such 

creditors are loan originators. Proposed 

§ 1026.36(a)(2) provides that a mortgage 

broker is ‘‘any loan originator that is not 

a creditor or the creditor’s employee.’’ 

36(a)(3) Compensation 

The Bureau proposes to define the 

term ‘‘compensation’’ in new 

§ 1026.36(a)(3) to include ‘‘salaries, 

commissions, and any financial or 

similar incentive provided to a loan 

originator for originating loans.’’ 

Sections 1401 and 1403 of the DoddFrank Act contain multiple references to 

the term ‘‘compensation’’ but do not 

define the term. The current rule does 

not define the term in regulatory text. 

Existing comment 36(d)(1)–1, however, 

provides guidance on the meaning of 

compensation. The Bureau’s proposal 

reflects the basic principle of that 

guidance in proposed § 1026.36(a)(3). 

The further guidance in comment 

36(d)(1)–1 would be transferred to new 

comment 36(a)–5. 

The Bureau proposes to add comment 

36(a)–5.iii (re-designated from comment 

36(d)(1)–1.iii and essentially the same 

as that comment, except as noted below) 

to be consistent with provisions set 

forth in TILA section 129B(c)(2), as 

added by section 1403 of the DoddFrank Act. Specifically, TILA section 

129B(c)(2)(A) provides that, for any 

residential mortgage loan, a mortgage 

originator generally may not receive 

from any person other than the 

consumer any origination fee or charge 

except bona fide third-party charges not 

retained by the creditor, the mortgage 

originator, or an affiliate of either. 

Likewise, no person, other than the 

consumer, who knows or has reason to 

know that a consumer has directly 

compensated or will directly 

compensate a mortgage originator, may 

pay a mortgage originator any 

origination fee or charge except bona 

fide third-party charges as described 

above. In addition, section TILA 

129B(c)(2)(B) provides that a mortgage 

originator may receive an origination fee 

or charge from a person other than the 

consumer if, among other things, the 

mortgage originator does not receive any 

compensation directly from the 

consumer. As discussed in more detail 

in the section-by-section analysis to 

proposed § 1026.36(d)(2)(ii), the Bureau 

interprets ‘‘origination fee or charge’’ to 

mean compensation that is paid in 

connection with the transaction, such as 

commissions that are specific to, and 

paid solely in connection with, the 

transaction. 

Nonetheless, TILA section 129B(c)(2) 

does not appear to prevent a mortgage 

originator from receiving payments from 

a person other than the consumer for 

bona fide third-party charges not 

retained by the creditor, mortgage 

originator, or an affiliate of either, even 

if the mortgage originator also receives 

loan originator compensation directly 

from the consumer. For example, 

assume that a mortgage originator 

receives compensation directly from a 

consumer in a transaction. TILA section 

129B(c)(2) does not restrict the mortgage 

originator from receiving payment from 

a person other than the consumer (e.g., 

a creditor) for bona fide and reasonable 

charges, such as title insurance or 

appraisals, where those amounts are not 

retained by the loan originator but are 

paid to a third party that is not the 

creditor, its affiliate, or the affiliate of 

the loan originator. 

Consistent with TILA section 

129B(c)(2) and pursuant to the Bureau’s 

authority under TILA section 105(a) to 

effectuate the purposes of TILA and 

facilitate compliance with TILA, the 

Bureau proposes to retain in new 

comment 36(a)–5.iii essentially the 

same guidance as set forth in current 

comment 36(d)(1)–1.iii. Thus, the new 

comment clarifies that the term 

‘‘compensation’’ as used in § 1026.36(d) 

and (e) does not include amounts a loan 

originator receives as payment for bona 

fide and reasonable charges, such as 

title insurance or appraisals, where 

those amounts are not retained by the 

loan originator but are paid to a third 

party that is not the creditor, its affiliate, 

or the affiliate of the loan originator. 

Accordingly, under proposed 

§ 1026.36(d)(2)(i) and comment 36(a)– 

5.iii, a loan originator that receives 

compensation directly from a consumer 

would not be restricted from receiving 

a payment from a person other than the 

consumer for such bona fide and 

reasonable charges. In addition, a loan 

originator would not be deemed to be 

receiving compensation directly from a 

consumer for purposes of 

§ 1026.36(d)(2) where the originator 

imposes such a bona fide and 

reasonable third-party charge on the 

consumer. 

Proposed comment 36(a)–5.iii also 

recognizes that, in some cases, amounts 

received for payment for such thirdparty charges may exceed the actual 

charge because, for example, the 

originator cannot determine with 

accuracy what the actual charge will be 

before consummation when the charge 

is imposed on the consumer. In such a 

case, under proposed comment 36(a)– 

5.iii, the difference retained by the 

originator would not be deemed 

compensation if the third-party charge 

collected from a person other than the 

consumer was bona fide and reasonable, 

and also complies with State and other 

applicable law. On the other hand, if the 

originator marks up a third-party charge 

and retains the difference between the 

actual charge and the marked-up charge, 

the amount retained is compensation for 

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

guidance parallels that in existing 

comment 36(d)(1)–1. 

Proposed comment 36(a)–5.iii, like 

current comment 36(d)(1)–1.iii, contains 

two illustrations. The illustrations in 

proposed comment 36(a)–5.iii.A and B 

are similar to the ones contained in 

current comment 36(d)(1)–1.iii.A and B 

except that the illustrations are 

amended to clarify that the charges 

described in those illustrations are not 

paid to the creditor, its affiliates, or the 

affiliate of the loan originator. The 

proposed illustrations also simplify the 

current illustrations. 

The first illustration, in proposed 

comment 36(a)–5.iii.A, assumes a loan 

originator will receive compensation 

directly from either a consumer or a 

creditor. The illustration further 

assumes the loan originator uses average 

charge pricing in accordance with 

Regulation X 48 to charge the consumer 


srobinson on DSK4SPTVN1PROD with PROPOSALS2
55290 Federal Register / Vol. 77, No. 174 / Friday, September 7, 2012 / Proposed Rules 

49The Board adopted this prohibition on certain 

compensation practices based on its finding that 

compensating loan originators based on a loan’s 

terms or conditions, other than the amount of credit 

extended, is an unfair practice that causes 

substantial injury to consumers. Id. The Board 

stated that it was relying on authority under TILA 

section 129(l)(2) (since re-designated as section 

129(p)(2)) to prohibit acts or practices in connection 

with mortgage loans that it finds to be unfair or 

deceptive. Id. The Board decided to issue its 2010 

Loan Originator Final Rule even though a 

subsequent rulemaking was necessary to implement 

TILA section 129B(c). See 75 FR at 58509. As 

discussed below, Dodd-Frank Act section 1403 

provides an additional express statutory base of 

authority for the Bureau’s rulemaking. 

a $25 credit report fee for a credit report 

provided by a third party that is not the 

loan originator, creditor, or affiliate of 

either. At the time the loan originator 

imposes the credit report fee on the 

consumer, the loan originator is 

uncertain of the cost of the credit report 

because the cost of a credit report from 

the consumer reporting agency is paid 

in a monthly bill and varies between 

$15 and $35 depending on how many 

credit reports the originator obtains that 

month. Later, the cost for the credit 

report is determined to be $15 for this 

consumer’s transaction. In this case, the 

$10 difference between the $25 credit 

report fee imposed on the consumer and 

the actual $15 cost for the credit report 

is not deemed compensation for 

purposes of § 1026.36(d) and (e), even 

though the $10 is retained by the loan 

originator. Proposed comment 36(a)– 

5.iii.B provides a second illustration 

that explains that, in the same example 

above, the $10 difference would be 

compensation for purposes of 

§ 1026.36(d) and (e) if the credit report 

fees vary between $10 and $15. 

The Bureau solicits comment on 

proposed comment 36(a)–5.iii. 

Specifically, the Bureau requests 

comment on whether the term 

‘‘compensation’’ should exclude 

payment from the consumer or from a 

person other than the consumer to the 

loan originator, as opposed to a third 

party, for certain services that 

unambiguously relate to ancillary 

services rather than core loan 

origination services, such as title 

insurance or appraisal, if the loan 

originator, creditor or the affiliates of 

either performs those services, so long 

as the amount paid for those services is 

bona fide and reasonable. The Bureau 

further solicits comment on how such 

ancillary services might be described 

clearly enough to distinguish them from 

the core origination charges that would 

not be excluded under such a provision. 

The Bureau also proposes new 

comment 36(a)–5.iv to clarify that the 

definition of compensation for purposes 

of § 1026.36(d) and (e) includes stocks, 

stock options, and equity interests that 

are provided to individual loan 

originators and that, as a result, the 

provision of stocks, stock options, or 

equity interests to individual loan 

originators is subject to the restrictions 

in § 1026.36(d) and (e). The proposed 

comment further clarifies that bona fide 

returns or dividends paid on stocks or 

other equity holdings, including those 

paid to loan originators who own such 

stock or equity interests, are not 

considered compensation for purposes 

of § 1026.36(d) and (e). The comment 

explains that: (1) Bona fide returns or 

dividends are those returns and 

dividends that are paid pursuant to 

documented ownership or equity 

interests allocated according to capital 

contributions and where the payments 

are not mere subterfuges for the 

payment of compensation based on loan 

terms and (2) bona fide ownership or 

equity interests are ownership or equity 

interests not allocated based on the 

terms of a loan originator’s transactions. 

The comment gives an example of a 

limited liability company (LLC) loan 

originator organization that allocates its 

members’ respective equity interests 

based on the member’s transaction 

terms; in that instance, the distributions 

are not bona fide and, thus, are 

considered compensation for purposes 

of § 1026.36(d) and (e). The Bureau 

believes the clarification provided by 

proposed comment 36(a)–5.iv is 

necessary to distinguish legitimate 

returns on ownership from returns on 

ownership in companies that 

manipulate business ownership 

structures as a means to circumvent the 

restrictions on compensation in 

§ 1026.36(d) and (e). 

The Bureau invites comment on 

comment 36(a)–5.iv as proposed and on 

whether other forms of corporate 

structure or returns on ownership 

interest should be specifically addressed 

in the definition of ‘‘compensation.’’ 

The Bureau also seeks comment 

generally on other methods of providing 

incentives to loan originators that the 

Bureau should consider specifically 

addressing in the proposed guidance on 

the definition of ‘‘compensation.’’ 

36(d)) Prohibited Payments to Loan 

Originators 

36(d)(1) Payments Based on Transaction 

Terms 

Section 1026.36(d)(1)(i), which was 

added to Regulation Z by the Board’s 

2010 Loan Originator Final Rule, 

provides that, in connection with a 

consumer credit transaction secured by 

a dwelling, ‘‘no loan originator shall 

receive and no person shall pay to a 

loan originator, directly or indirectly, 

compensation in an amount that is 

based on any of the transaction’s terms 

or conditions.’’ Section 1026.36(d)(1)(ii) 

states that the amount of credit 

extended is not deemed to be a 

transaction term or condition, provided 

compensation received by or paid to a 

loan originator, directly or indirectly, is 

based on a fixed percentage of the 

amount of credit extended; the 

provision also states that such 

compensation may be subject to a 

minimum or maximum dollar amount. 

Section 1026.36(d)(1)(iii) provides that 

§ 1026.36(d)(1)(i) does not apply to any 

transaction subject to § 1026.36(d)(2) 

(i.e., where a consumer pays a loan 

originator directly). 

In adopting its 2010 Loan Originator 

Final Rule, the Board noted that 

‘‘compensation payments based on a 

loan’s terms or conditions create 

incentives for loan originators to 

provide consumers loans with higher 

interest rates or other less favorable 

terms, such as prepayment penalties,’’ 

citing ‘‘substantial evidence that 

compensation based on loan rate or 

other terms is commonplace throughout 

the mortgage industry, as reflected in 

Federal agency settlement orders, 

congressional hearings, studies, and 

public proceedings.’’ 75 FR 58520. 

Among the Board’s stated concerns was: 

‘‘Creditor payments to brokers based on 

the interest rate give brokers an 

incentive to provide consumers loans 

with higher interest rates. Large 

numbers of consumers are simply not 

aware this incentive exists.’’ 49 Id. The 

official commentary to § 1026.36(d)(1) 

provides further guidance regarding the 

general prohibition on loan originator 

compensation based on terms and 

conditions of loans. 

Since the Board’s 2010 Loan 

Originator Final Rule was promulgated, 

the Board and the Bureau (following the 

transfer of authority over TILA to the 

Bureau under the Dodd-Frank Act) have 

received numerous interpretive 

questions about the provisions of 

§ 1026.36(d)(1). First, questions have 

arisen about the application of the 

Board’s rule to payments that are based 

on factors that may be ‘‘proxies’’ for 

loan terms. The Bureau understands 

there has been considerable uncertainty 

on this issue. Furthermore, mortgage 

creditors and others have raised 

questions about whether § 1026.36(d)(1) 

prohibits the pooling of compensation 

and sharing in such pooled 

compensation by loan originators that 

are compensated differently and 

originate loans with different terms. 

The Board and the Bureau also have 

received a number of questions about 


srobinson on DSK4SPTVN1PROD with PROPOSALS2
Federal Register / Vol. 77, No. 174 / Friday, September 7, 2012 / Proposed Rules 55291 

50U.S. Consumer Fin. Prot. Bureau, CFPB Bull. 

No. 2012–2, Payments to Loan Originators Based on 

Mortgage Transaction Terms or Conditions under 

Regulation Z (Apr. 2, 2012), available at: http://files.

consumerfinance.gov/f/201204_cfpb_Loan

OriginatorCompensationBulletin.pdf. 

51TILA section 129B(c)(4) also states that nothing 

in TILA section 129B(c) shall be deemed to limit 

or affect the amount of compensation received by 

a creditor upon the sale of a consummated loan to 

a subsequent purchaser. 12 U.S.C. 1639b(c)(4)(B). 

Moreover, a consumer is not restricted from 

financing at his or her option, including through 

principal or rate, any origination fees or costs 

permitted under TILA section 129B(c)(4), and a 

mortgage originator may receive such fees or costs, 

including compensation (subject to other provisions 

of TILA section 129B(c)), so long as such fees or 

costs do not vary based on the terms of the loan 

(other than the amount of the principal) or the 

consumer’s decision as to whether to finance the 

fees or costs. 12 U.S.C. 1639b(c)(4)(C). 

52Comment 36(d)(1)–3 already clarifies that the 

loan originator’s overall loan volume delivered to 

the creditor is an example of permissible 

compensation for purposes of the regulation. 

53The latter two differences are discussed in the 

section-by-section analysis of proposed 

§ 1026.36(a), above. 

whether, and how, the current 

regulation applies to employer 

contributions to profit-sharing, 401(k), 

and employee stock ownership plans 

(ESOPs) that are qualified under section 

401(a) of the Internal Revenue Code and 

how the regulation applies to 

compensation paid pursuant to 

employer-sponsored profit-sharing 

plans that are not qualified plans. These 

questions have arisen because often the 

amount of payments to individual loan 

originators under profit-sharing plans 

and of contributions to qualified or nonqualified plans in which individual loan 

originators participate will depend 

substantially on the profits of the 

creditors and the loan originator 

organizations, which in turn often may 

depend in part on the terms of the loans 

generated by the individual loan 

originators, such as the interest rate. In 

response to these questions, the Bureau 

issued a bulletin on April 2, 2012 (CFPB 

Bulletin 2012–2), clarifying that, until 

the Bureau adopts final rules 

implementing the Dodd-Frank Act 

provisions regarding loan originator 

compensation, an employer may make 

contributions to a qualified retirement 

plan out of a pool of profits derived 

from loans originated by the company’s 

loan originator employees. CFPB 

Bulletin 2012–02 (Apr. 2, 2012).50 The 

Bureau did not believe it was practical 

at the time, however, to provide 

guidance on the application of the 

current rules to plans that are not 

qualified plans because such questions 

are fact-specific in nature. Id. The 

Bureau noted that it anticipated 

providing greater clarity on these 

arrangements in connection with a 

proposed rule on the loan origination 

provisions in the Dodd-Frank Act. Id. 

This proposed rule is intended, in part, 

to provide such clarity. 

As discussed earlier, section 1403 of 

the Dodd-Frank Act added new TILA 

section 129B(c). This new statutory 

provision builds on, but in some cases 

imposes new or different requirements 

than, the current Regulation Z 

provisions established by the Board’s 

2010 Loan Originator Final Rule. Under 

TILA section 129B(c)(1), for any 

residential mortgage loan, no mortgage 

originator shall receive from any person 

and no person shall pay to a mortgage 

originator, directly or indirectly, 

compensation that varies based on the 

terms of the loan (other than the amount 

of the principal). 12 U.S.C. 1639b(c)(1). 

Further, TILA section 129B(c)(4)(A) 

provides that nothing in section 129B(c) 

of TILA permits yield spread premiums 

or other similar compensation that 

would, for any residential mortgage 

loan, permit the total amount of direct 

and indirect compensation from all 

sources permitted to a mortgage 

originator to vary based on the terms of 

the loan (other than the amount of the 

principal). 12 U.S.C. 1639b(c)(4)(A).51

The statute also provides that nothing in 

TILA section 129B(c) prohibits 

incentive payments to a mortgage 

originator based on the number of 

residential mortgage loans originated 

within a specified period of time. 12 

U.S.C. 1639b(c)(4)(D).52 The statute 

serves as an additional express base of 

authority for the Bureau to undertake 

this rulemaking. 

Although the language in section 1403 

of the Dodd-Frank Act amending TILA 

and addressing mortgage originator 

compensation that varies based on terms 

of the transaction generally mirrors the 

current regulatory text and commentary 

of § 1026.36(d)(1), the statutory and 

regulatory provisions differ in several 

respects. First, unlike 

§ 1026.36(d)(1)(iii), the statute does not 

contain an exception to the general 

prohibition on compensation varying 

based on loan terms for transactions 

where the mortgage originator receives 

compensation directly from the 

consumer. Second, while 

§ 1026.36(d)(1) prohibits compensation 

that is based on a transaction’s ‘‘terms 

or conditions,’’ TILA section 129B(c)(1) 

refers only to compensation that varies 

based on ‘‘terms.’’ Finally, 

§ 1026.36(d)(1)(i) provides that the loan 

originator may not receive and no 

person shall pay compensation in an 

amount ‘‘that is based on’’ any of the 

transaction’s terms or conditions, 

whereas TILA section 129B(c)(1) 

prohibits compensation that ‘‘varies 

based on’’ the terms of the loan.53

In view of the differences in the 

statutory and regulatory provisions 

prohibiting loan originator 

compensation based on transaction 

terms and the interpretive questions that 

have arisen with regard to the current 

regulations noted above, the Bureau is 

proposing revisions to § 1026.36(d)(1) 

and its commentary to harmonize the 

regulatory provisions with the language 

added to TILA by the Dodd-Frank Act. 

Moreover, the Bureau is proposing 

certain revisions to § 1026.36(d)(1) and 

its commentary to address the 

interpretive issues that have arisen 

under the current regulations. 

36(d)(1)(i) 

Terms or Conditions 

As noted previously, § 1026.36(d)(1)(i) 

provides that, in connection with a 

consumer credit transaction secured by 

a dwelling, ‘‘no loan originator shall 

receive and no person shall pay to a 

loan originator, directly or indirectly, 

compensation in an amount that is 

based on any of the transaction’s terms 

or conditions.’’ The Dodd-Frank Act 

section 1403 amendments, which added 

TILA section 129B(c), limits restrictions 

on mortgage originator compensation to 

‘‘terms of the loan’’ only. Current 

§ 1026.36(d)(1)(i) and commentary 

provide that a loan originator may not 

receive and no person may pay to a loan 

originator compensation that is based on 

any of the ‘‘transaction’s terms or 

conditions.’’ 

The Bureau proposes to retain the 

word ‘‘transaction,’’ rather than use the 

statutory term ‘‘loan,’’ to preserve 

consistency within Regulation Z. The 

Bureau makes this proposal pursuant to 

its authority under TILA section 105(a) 

to prescribe regulations that provide for 

such adjustments and exceptions for all 

or any class of transactions, that the 

Bureau judges are necessary or proper to 

effectuate the purposes of TILA, to 

prevent circumvention or evasion 

thereof, or to facilitate compliance. The 

Bureau believes that ‘‘transaction’’ and 

‘‘loan,’’ as that term is used in TILA 

section 129B(c), have consistent 

meanings and, therefore, that preserving 

the use of ‘‘transaction’’ in 

§ 1026.36(d)(1)(i) will facilitate 

compliance for creditors by avoiding the 

need to contend with a distinct, but 

duplicative, defined term. 

On the other hand, the Bureau 

proposes to revise the phrase ‘‘terms or 

conditions’’ to delete the word 


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54The Bureau specifically sought input during 

the Small Business Review Panel process on 

clarifying the rule’s application to proxies. The 

proxy proposal under consideration presented to 

the SERs during the Small Business Review Panel 

process stated that ‘‘a factor is a proxy if: (1) It 

substantially correlates with a loan term; and (2) the 

MLO has discretion to use the factor to present a 

loan to the consumer with more costly or less 

advantageous term(s) than term(s) of another loan 

available through the MLO for which the consumer 

likely qualifies.’’ After further consideration, the 

Bureau believes the proxy proposal contained in 

this proposed rule would be easier to apply 

uniformly and would better addresses cases where 

the loan originator does not ‘‘use’’ the factor than 

the specific proposal presented to the Small 

Business Review Panel. The Bureau, however, 

welcomes comment on how best to address proxies. 

‘‘conditions’’ for § 1026.36(d)(1)(i) 

where applicable in both the regulatory 

text and commentary. The Bureau is 

also proposing conforming amendments 

to § 1026.36(d)(1)(ii). The Bureau 

believes that removal of the term 

‘‘conditions’’ from ‘‘transaction terms or 

conditions’’ clarifies § 1026.36(d)(1) but 

does not materially amend the 

provision’s scope. The Bureau also 

proposes to revise the discussion about 

proxies, discussed in more detail below, 

to aid in determining whether a factor 

is a proxy for a transaction’s terms. 

Varies Based On 

TILA section 129B(c)(1) prohibits a 

mortgage originator from receiving, and 

any person from paying a mortgage 

originator, ‘‘compensation that varies 

based on’’ the terms of the loan 

(emphasis added). The prohibition in 

current § 1026.36(d)(1) is on 

‘‘compensation in an amount that is 

based on’’ the transaction’s terms and 

conditions (emphasis added). The 

Bureau believes the meaning of the 

statute’s reference to compensation that 

‘‘varies’’ based on loan terms is already 

embodied in § 1026.36(d)(1). Thus, the 

Bureau does not propose to revise 

§ 1026.36(d)(1) to include the word 

‘‘varies.’’ 

The Bureau believes that 

compensation to loan originators 

violates the prohibition if the amount of 

the compensation is based on the terms 

of the transaction (that is, a violation 

does not require a showing of any 

person’s subjective intent to relate the 

amount of the payment to a particular 

loan term). Proposed new comment 

36(d)(1)–1.i clarifies these points. The 

Bureau is proposing new comment 

36(d)(1)–1 in place of existing comment 

36(d)(1)–1, which is being moved to 

comment 36(a)–5, as discussed above. 

The proposed comment also clarifies 

that a difference between the amount of 

compensation paid and the amount that 

would have been paid for different 

terms might be shown by a comparison 

of different transactions with different 

terms made by the same loan originator, 

but a violation does not require a 

comparison of multiple transactions. 

Proxy for Loan Terms 

The Bureau also proposes revisions to 

§ 1026.36(d)(1) and comment 36(d)(1)–2 

to provide guidance for determining 

whether a factor is a proxy for a 

transaction’s term and also provide 

examples. As stated above, 

§ 1026.36(d)(1)(i) provides that, in 

connection with a consumer credit 

transaction secured by a dwelling, no 

loan originator shall receive and no 

person shall pay to a loan originator, 

directly or indirectly, compensation in 

an amount that is based on any of the 

transaction’s terms or conditions. 

Existing comment 36(d)(1)–2 further 

elaborates on the prohibition by stating: 

The rule also prohibits compensation 

based on a factor that is a proxy for a 

transaction’s terms or conditions. For 

example, a consumer’s credit score or similar 

representation of credit risk, such as the 

consumer’s debt-to-income ratio, is not one 

of the transaction’s terms or conditions. 

However, if a loan originator’s compensation 

varies in whole or in part with a factor that 

serves as a proxy for loan terms or 

conditions, then the originator’s 

compensation is based on a transaction’s 

terms or conditions. 

The existing comment also illustrates 

the guidance by providing an example 

of payments based on credit score that 

would violate § 1026.36(d)(1). 

Since the Board’s 2010 Loan 

Originator Final Rule was promulgated, 

the Board and the Bureau have received 

numerous inquiries on whether 

particular loan originator payment 

structures are based on factors that are 

proxies for loan terms. Small Entity 

Representatives (SERs) on the Small 

Business Review Panel also urged the 

Bureau to use this rulemaking to clarify 

when a factor used to determine 

compensation for a loan originator is a 

proxy for a loan term. The Bureau does 

not believe that any departure from the 

approach to proxies in current comment 

36(d)(1)–2 is necessitated by the DoddFrank Act. The Bureau also believes that 

current § 1026.36(d)(1)(i) prohibits 

compensation based on a factor that is 

a proxy for a transaction’s terms. 

However, the Bureau understands there 

has been considerable uncertainty on 

this issue and proposes clarifications in 

§ 1026.36(d)(1)(i) and comment 

36(d)(1)–2.i to help creditors and loan 

originators determine whether a factor 

on which compensation would be based 

is a proxy for a transaction’s terms. 

The proposal clarifies in 

§ 1026.36(d)(1)(i), rather than 

commentary only, that compensation 

based on a proxy for a transaction’s 

terms is prohibited. The proposed 

clarification in § 1026.36(d)(1)(i) and 

comment 36(d)(1)–2.i also provides that 

a factor (that is not itself a term of a 

transaction originated by the loan 

originator) is a proxy for the 

transaction’s terms if: (i) The factor 

substantially correlates with a term or 

terms of the transaction and (ii) the loan 

originator can, directly or indirectly, 

add, drop, or change the factor when 

originating the transaction.54

Both conditions must be satisfied for 

a factor to be considered a proxy for a 

transaction’s terms. If a factor does not 

‘‘substantially’’ correlate with a term of 

a transaction originated by the loan 

originator, the factor is not a proxy for 

a transaction’s terms. The Bureau 

proposes to use the term ‘‘substantially’’ 

but invites comment on whether this 

term is sufficiently clear and, if not, 

what other terms should be considered. 

The Bureau also seeks comment on how 

correlation to a term should be 

determined. 

If the factor does substantially 

correlate with a term of a transaction 

originated by the loan originator, then 

the factor must be analyzed under the 

second condition, whether the loan 

originator can, directly or indirectly, 

add, drop, or change the factor when 

originating the transaction. The Bureau 

believes that, where a loan originator 

has no or minimal ability directly or 

indirectly to add, drop, or change a 

factor, that factor cannot be a proxy for 

the transaction’s terms because such a 

factor cannot be the basis for incentives 

to steer consumers inappropriately. For 

example, loan originators cannot change 

a property’s location, thus property 

location cannot be a proxy for a 

transaction’s terms. Arguably, a loan 

originator could indirectly change the 

property location by steering a 

consumer to choose a property in a 

particular location. However, the ability 

for loan originators to steer consumers 

to a particular property location with 

such frequency to serve as an incentive 

for steering consumers is minimal. In 

proposed comment 36(d)(1)–2.i, the 

Bureau provides three new examples to 

illustrate use of the proposed proxy 

standard and to facilitate compliance 

with the rule. 

The Bureau also proposes to delete 

the current proxy example in the 

comment that identifies credit scores as 

a proxy for a transaction’s terms. The 

Bureau believes the current credit score 

proxy example is confusing and created 

uncertainty for creditors and loan 

originators depending on their 


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particular facts and circumstances. 

Moreover, under the guidance discussed 

above, a credit score may or may not be 

a proxy for a transaction’s terms, 

depending on the facts and 

circumstances; it is not automatically a 

proxy, as many creditors and loan 

originators have inferred from the 

existing comment’s example. 

The Bureau proposes to add comment 

36(d)(1)–2.i.A which provides an 

example of compensation based on a 

loan originator’s employment tenure. 

This factor likely has little (if any) 

correlation to loan terms. This example 

illustrates how, if a factor that 

compensation is based on has little to 

no correlation to a transaction’s term or 

terms, it is not a proxy for a 

transaction’s terms. 

Proposed comment 36(d)(1)–2.i.B 

provides an example illustrating how a 

loan originator’s compensation varies 

based on whether a loan is held in 

portfolio or sold into the secondary 

market. In this case, the example 

assumes a loan is held in portfolio or 

sold into the secondary market 

depending in large part on whether the 

loan is a five-year balloon loan or a 

thirty-year loan. Thus, whether a loan is 

held in portfolio or sold into the 

secondary market substantially 

correlates with the transaction’s terms. 

The loan originator in the example may 

be able to change the factor indirectly by 

steering the consumer to choose the 

five-year loan or the thirty-year loan. 

Thus, whether a loan is held in portfolio 

or sold into the secondary market is a 

proxy for a transaction’s terms under 

these particular facts and circumstances. 

Proposed comment 36(d)(1)–2.i.C 

illustrates an example where 

compensation is based on the 

geographic location of the property 

securing a refinancing. The loan 

originator is paid a higher commission 

for refinancings secured by property in 

State A than in State B. Even if 

refinancings secured by property in 

State A have lower interest rates than 

loans secured by property in State B, the 

property’s location substantially 

correlates with loan terms. However, the 

loan originator cannot change the 

presence or absence of the factor (i.e., 

whether the refinancing is secured by 

property in State A or State B). Thus, 

geographic location, under these 

particular facts and circumstances, 

would not be considered a proxy for a 

transaction’s terms. 

Other proposed revisions to comment 

36(d)(1)–2 include clarifying that the 

rule does not prohibit compensating 

loan originators differently on different 

transactions, provided such differences 

in compensation are not based on a 

transaction’s terms or a proxy for a 

transaction’s terms. The Bureau also 

proposes to delete ‘‘conditions’’ from 

the comment where applicable and the 

existing guidance that the loan-to-value 

ratio is not a term of the transaction to 

conform to the proposed amendment 

discussed above concerning the 

prohibition on compensation based on 

the transaction’s ‘‘terms.’’ 

The Bureau believes that the proposed 

changes and the addition of new 

commentary should reduce uncertainty 

and help simplify application of the 

prohibition on compensation based on 

the transaction’s terms. The Bureau has 

learned through outreach, however, that 

a number of creditors pay loan 

originators the same commission 

regardless of loan product or type. Many 

of these institutions have expressed 

concerns about revising the proxy 

guidance. They argue that unscrupulous 

loan originators will attempt to use any 

specific proxy guidance to justify 

compensation schemes that violate the 

principles of the rule. The Bureau 

therefore solicits comment on the 

proposal, alternatives the Bureau should 

consider, or whether any action to 

revise the proxy concept and analysis is 

helpful and appropriate. 

Pooled Compensation 

Comment 36(d)(1)–2 provides 

examples of compensation that is based 

on transaction terms or conditions. 

Mortgage creditors and others have 

raised questions about whether loan 

originators that are compensated 

differently and originate loans with 

different terms are prohibited under 

§ 1026.36(d)(1) from pooling their 

compensation and sharing in that 

compensation pool. For example, 

assume that Loan Originator A receives 

a commission of two percent of the loan 

amount for each loan that he or she 

originates and originates loans that 

generally have higher interest rates than 

the loans that Loan Originator B 

originates. In addition, assume Loan 

Originator B receives a commission of 

one percent of the loan amount for each 

loan that he or she originates and 

originates loans that generally have 

lower interest rates than the loans 

originated by Loan Originator A. The 

Bureau proposes to revise comment 

36(d)(1)–2 to make clear that, where 

loan originators are compensated 

differently and they each originate loans 

with different terms, § 1026.36(d)(1) 

does not permit the pooling of 

compensation so that the loan 

originators share in that pooled 

compensation. In this example, 

proposed comment 36(d)(1)–2.ii 

clarifies that the compensation of the 

two loan originators may not be pooled 

so that the loan originators share in that 

pooled compensation. The Bureau 

believes that this type of pooling is 

prohibited by § 1026.36(d)(1) because 

each loan originator is being paid based 

on loan terms, with each loan originator 

receiving compensation based on the 

terms of the loans made by the loan 

originators collectively. This type of 

pooling arrangement could provide an 

incentive for the loan originators 

participating in the pooling arrangement 

to steer some consumers to loan 

originators that originate loan with less 

favorable terms (for example, that have 

a higher interest rate), to maximize their 

compensation. 

Creditor’s Ability to Offer Certain Loan 

Terms 

Comment 36(d)(1)–4 clarifies that 

§ 1026.36(d)(1) does not limit the 

creditor’s ability to offer certain loan 

terms. Specifically, comment 36(d)(1)–4 

makes clear that § 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. For example, a creditor may 

charge an interest rate of 6.0 percent 

where the consumer pays some or all of 

the transaction costs but may charge an 

interest rate of 6.5 percent where the 

consumer pays none of those costs 

(subject to the requirements of proposed 

§ 1026.36(d)(2)(ii), discussed below). 

Section 1026.36(d)(1) also does not limit 

a creditor from offering or providing 

different loan terms to the consumer 

based on the creditor’s assessment of 

credit and other risks (such as where the 

creditor uses risk-based pricing to set 

the interest rate for consumers). Finally, 

a creditor is not prohibited under 

§ 1026.36(d)(1) from charging 

consumers interest rates that include an 

interest rate premium to recoup the loan 

originator’s compensation through 

increased interest paid by the consumer 

(such as by adding a 0.25 percentage 

point to the interest rate on each loan). 

This guidance recognizes that creditors 

that pay a loan originator’s 

compensation generally recoup that cost 

through a higher interest rate charged to 

the consumer. 


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As discussed in the section-by-section 

analysis to proposed § 1026.36(d)(2)(ii), 

for transactions subject to proposed 

§ 1026.36(d)(2)(ii), a creditor, a loan 

originator organization, or affiliates of 

either may not impose on the consumer 

any discount points and origination 

points or fees unless the creditor 

complies with § 1026.36(d)(2)(ii)(A). As 

discussed below, proposed 

§ 1026.36(d)(2)(ii)(A) requires, as a 

prerequisite to a creditor, loan originator 

organization, or affiliates of either 

imposing any discount points and 

origination points or fees on a consumer 

in a transaction, that the creditor also 

make available to the consumer a 

comparable, alternative loan that does 

not include discount points and 

origination points or fees, unless the 

consumer is unlikely to qualify for such 

a loan. Because of these restrictions in 

proposed § 1026.36(d)(2)(ii), the Bureau 

proposes to revise comment 36(d)(1)–4 

to clarify that charging different interest 

rates, such as in accordance with riskbased pricing policies, relates only to 

§ 1026.36(d)(1) and is not intended to 

override the restrictions in proposed 

§ 1026.36(d)(2)(ii). 

Point Banks 

Based on numerous inquiries 

received, the Bureau considered 

proposing commentary language 

addressing whether there are any 

circumstances under which point banks 

are permissible under § 1026.36(d). The 

Bureau received and considered the 

views of SERs participating in the Small 

Business Review Panel process as well 

as the views expressed by other 

stakeholders during outreach. Based on 

those views and the Bureau’s own 

considerations, the Bureau believes that 

there are no circumstances under which 

point banks are permissible, and they 

therefore continue to be prohibited. 

Point banks operate as follows: Each 

time a loan originator closes a 

transaction, the creditor contributes 

some agreed upon, small percentage of 

that transaction’s principal amount (for 

example, 0.15 percent, or 15 ‘‘basis 

points’’) into the loan originator’s point 

bank account. This account is not 

actually a deposit account with the 

creditor or any depository institution 

but is only a continuously maintained 

accounting balance of basis points 

credited for originations and amounts 

debited when ‘‘spent’’ by the loan 

originator. The loan originator may 

spend any amount up to the current 

balance in the point bank to obtain 

pricing concessions from the creditor on 

the consumer’s behalf for any 

transaction. For example, the loan 

originator may pay discount points to 

the creditor from the loan originator’s 

point bank to obtain a lower rate for the 

consumer. 

Payments to point banks serve as a 

form of loan originator compensation 

because they enable additional 

transactions to be consummated and 

loan originators to receive compensation 

on these transactions. Accordingly, they 

are a financial incentive to the loan 

originator and, therefore, compensation 

as proposed § 1026.36(a)(3) defines that 

term. To the extent such payments are 

based on the transaction’s terms or a 

factor that operates as a proxy for the 

transaction’s terms, they violate 

§ 1026.36(d)(1) directly. Even if the 

contribution to a loan originator’s point 

bank for a given transaction is not based 

on the transaction’s terms (or a proxy 

therefor), the loan originator’s 

subsequent spending of amounts from 

the point bank on other transactions 

violates § 1026.36(d)(1) as an 

impermissible pricing concession 

pursuant to comment 36(d)(1)–5, 

discussed below. The Bureau believes 

that even a point bank whose funds are 

reserved for use in the unique 

circumstances described in proposed 

new comment 36(d)(1)–7 where pricing 

concessions would be permitted, 

discussed below, cannot be legitimate 

because the criteria set forth in 

comment 36(d)(1)–7 limit such 

concessions to unusual and infrequent 

cases of unforeseen increases in closing 

costs; by definition, a point bank 

contemplates routine use, which is 

contrary to the premises of comment 

36(d)(1)–7. 

The Bureau’s decision not to propose 

to allow point banks was also informed 

by the uniformly negative view of SERs 

participating in the Small Business 

Review Panel process and negative 

views expressed by many other 

stakeholders in further outreach. The 

SERs listed a number of concerns, 

including the risk that points bank 

would create incentives for loan 

originators to upcharge some consumers 

to create flexibility for themselves to 

provide concessions to other consumers; 

the possibility that point banks would 

permit loan officers to treat consumers 

differently, which could lead to fair 

lending concerns; and the prospect of 

mortgage brokers steering consumers to 

the lender that provided them with the 

greatest point bank contributions. For 

the reasons stated above, the Bureau is 

not proposing to provide guidance 

describing circumstances under which 

point banks are permissible under 

§ 1026.36(d). 

Pricing Concessions 

The Bureau proposes two revisions to 

the § 1026.36(d)(1) commentary 

addressing loan originator pricing 

concessions. Comment 36(d)(1)–5 

discusses the effect of modifying loan 

terms on loan originator compensation. 

The existing comment provides that a 

creditor and loan originator may not 

agree to set the originator’s 

compensation at a certain level and then 

subsequently lower it in selective cases 

(such as where the consumer is offered 

a reduced rate to meet a quote from 

another creditor), i.e., the compensation 

is not subject to change (increase or 

decrease) based on whether different 

loan terms are negotiated. The Bureau is 

proposing a revision to this comment. 

The revised comment provides that, 

while the creditor may change loan 

terms or pricing, for example to match 

a competitor, avoid triggering high-cost 

loan provisions, or for other reasons, the 

loan originator’s compensation on that 

transaction may not be changed. Thus, 

the revised comment clarifies that a loan 

originator may not agree to reduce its 

compensation or provide a credit to the 

consumer to pay a portion of the 

consumer’s closing costs, for example, 

to avoid high-cost loan provisions. The 

revised comment also includes a crossreference to comment 36(d)(1)–7 for 

further guidance. 

The Bureau proposes to delete 

existing comment 36(d)(1)–7, which 

clarifies that the prohibition in 

§ 1026.36(d)(1) does not apply to 

transactions in which any loan 

originator receives compensation 

directly from the consumer (i.e., 

‘‘consumer-paid transactions’’). Like the 

language in current § 1026.36(d)(1)(iii) 

(discussed later in this section-bysection analysis), this comment has 

been superseded by the Dodd-Frank 

Act, which applies the prohibition on 

compensation based on transaction 

terms to consumer-paid transactions. 

In its place, the Bureau proposes to 

include a new comment 36(d)(1)–7 

addressing a discrete issue related to 

pricing concessions. The proposed 

comment provides that, 

notwithstanding comment 36(d)(1)–5, 

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

originators from decreasing their 

compensation to cover unanticipated 

increases in non-affiliated third-party 

closing costs that result in the actual 

amounts of such closing costs exceeding 

limits imposed by applicable law (e.g., 

tolerance violations under Regulation 

X). This interpretation of § 1026.36(d)(1) 

does not apply if the creditor or the loan 

originator knows or should reasonably 

be expected to know the amount of any 


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third-party closing costs in advance. 

Proposed comment 36(d)(1)–7 explains, 

by way of example, that a loan 

originator is reasonably expected to 

know the amount of the third-party 

closing costs in advance if the loan 

originator allows the consumer to 

choose from among only three preapproved third-party service providers. 

The Bureau believes that such 

concessions, when made in response to 

unforeseen events outside the loan 

originator’s control to comply with 

otherwise applicable legal requirements, 

do not raise concerns about the 

potential for steering consumers to 

different loan terms. That is, if the 

excess closing cost is truly 

unanticipated and results in the loan 

originator having to take less 

compensation to cure the violation of 

applicable law, no steering issues are 

present because the loan originator’s 

compensation is being decreased afterthe-fact. Thus, a loan originator’s 

reduced compensation in such cases is 

not in fact based on the transaction’s 

terms and does not violate 

§ 1026.36(d)(1). This further 

clarification effectuates the purposes of, 

and facilitates compliance with, TILA 

section 129B(c)(1) and § 1026.36(d)(1)(i) 

because, without it, creditors and loan 

originators might incorrectly conclude 

that such concessions being borne by a 

loan originator would violate those 

provisions, or they could face 

unnecessary uncertainty with regard to 

compliance with these provisions and 

other laws, such as Regulation X’s 

tolerance requirements. 

Under the proposed comment, a loan 

originator cannot make a pricing 

concession where the loan originator 

knows or reasonably is expected to 

know the amount of the third-party 

closing costs in advance. If a loan 

originator makes repeated pricing 

concessions for the same categories of 

closing costs across multiple 

transactions, based on a series of 

purportedly unanticipated expenses, the 

Bureau believes proposed comment 

36(d)(1)–7 does not apply because the 

loan originator is reasonably expected to 

know the closing costs across multiple 

transactions. In that instance, the 

pricing concessions would raise the 

same concerns that resulted in the 

guidance under current comment 

36(d)(1)–5 that pricing concessions are 

not permissible under § 1026.36(d)(1)(i) 

(i.e., because loan originators could 

knowingly overestimate the closing 

costs and then selectively reduce the 

closing costs as a concession). 

The Bureau solicits comment on 

whether this interpretation is 

appropriate, too narrow, or creates a risk 

of undermining the principal 

prohibition of compensation based on a 

transaction’s terms. 

Compensation Based on Terms of 

Multiple Transactions by an Individual 

Loan Originator 

Section 1026.36(d)(1)(i) prohibits 

payment of an individual loan 

originator’s compensation that is 

directly or indirectly based on the terms 

of ‘‘the transaction.’’ The Bureau 

believes that ‘‘transaction’’ necessarily 

includes multiple transactions by a 

single individual loan originator 

because the payment of compensation is 

not always tied to a single transaction. 

Current comment 36(d)(1)–3 lists 

several examples of compensation 

methods not based on transaction terms 

that take into account multiple 

transactions, including compensation 

based on overall loan volume and the 

long-term performance of the individual 

loan originator’s loans. Moreover, 

multiple transactions by definition 

comprise the individual transactions. 

Thus, the Bureau believes that the 

singular word ‘‘transaction’’ in 

§ 1026.36(d)(1)(i) includes multiple 

transactions by a single individual loan 

originator. To avoid any possible 

uncertainty, however, the Bureau 

proposes to clarify, as part of proposed 

comment 36(d)(1)–1.ii, that 

§ 1026.36(d)(1)(i) prohibits 

compensation based on the terms of 

multiple transactions by an individual 

loan originator. 

Compensation Based on Terms of 

Multiple Individual Loan Originators’ 

Transactions 

As noted above, current 

§ 1026.36(d)(1)(i) prohibits payment of 

an individual loan originator’s 

compensation that is ‘‘directly or 

indirectly’’ based on the terms of ‘‘the 

transaction,’’ and TILA (as amended by 

the Dodd-Frank Act) similarly prohibits 

compensation that ‘‘directly or 

indirectly’’ varies based on the terms of 

‘‘the loan.’’ However, the current 

regulation and its commentary do not 

expressly address whether a person may 

pay compensation by considering the 

terms of multiple transactions subject to 

§ 1026.36(d) of multiple individual loan 

originators employed by the person 

during the time period for which the 

compensation is being paid. 

Compensation in the form of a bonus, 

for example, may be based indirectly on 

the terms of multiple individual loan 

originators’ transactions. For example, 

assume that a creditor employs six 

individual loan originators and offers 

loans at a minimum rate of 6.0 percent 

and a maximum rate of 8.0 percent 

(unrelated to risk-based pricing). 

Assuming relatively constant loan 

volume and amounts of credit extended 

and relatively static market rates, if the 

six individual loan originators’ 

aggregate transactions in a given 

calendar year average a rate of 7.5 

percent rather than 7.0 percent, creating 

a higher interest rate spread over the 

creditor’s minimum acceptable rate of 

6.0 percent, the creditor will generate 

higher amounts of interest revenue if the 

loans are held in portfolio and increased 

proceeds from secondary market 

purchasers if the loans are sold. Assume 

that the increased revenues lead to 

higher profits for the creditor (i.e., 

expenses do not increase so as to negate 

the effect of higher revenues). If the 

creditor pays a bonus to an individual 

loan originator out of a bonus pool 

established with reference to the 

creditor’s profitability that, all other 

factors being equal, is higher than it 

would have been if the average rate of 

the six individual loan originators’ 

transactions was 7.0 percent, then the 

bonus is indirectly related to the terms 

of multiple transactions of multiple loan 

originators. 

Because neither TILA (as amended by 

the Dodd-Frank Act) nor the current 

regulations expressly addresses the 

payment of compensation that is based 

on the terms of multiple loan 

originators’ transactions, numerous 

questions have been posed regarding the 

applicability of the current regulation to 

qualified plans and profit-sharing and 

retirement plans that are not qualified 

plans. In CFPB Bulletin 2012–2, the 

Bureau stated that it was permissible to 

pay contributions to qualified plans if 

the contributions to the qualified plans 

are derived from profits generated by 

mortgage loan originations but did not 

address how the rules applied to nonqualified plans. CFPB Bulletin 2012–2 

stated further that guidance on the 

payment of compensation out of profits 

generated by mortgage loan originations 

would be forthcoming. The proposed 

rule reflects the Bureau’s views on this 

issue. 

The Bureau believes that 

compensation that directly or indirectly 

is based on the terms of multiple 

transactions subject to § 1026.36(d) of 

multiple individual loan originators 

poses the same fundamental problems 

that the Dodd-Frank Act and the current 

regulation address with regard to the 

individual loan originator’s 

transactions. A profit-sharing plan, 

bonus pool, or profit pool set aside out 

of a portion of a creditor or loan 

originator organization’s profits, from 

which bonuses are paid or contributions 

to qualified or non-qualified plans are 


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55296 Federal Register / Vol. 77, No. 174 / Friday, September 7, 2012 / Proposed Rules 

55See Bd. of Governors of the Fed. Reserve Sys., 

Incentive Compensation Practices: A Report on the 

Horizontal Review of Practices at Large Banking 

Organizations 15 (2011), available at: http:// 

www.federalreserve.gov/publications/other-reports/ 

incentive-compensation-report-201110.htm 

(discussing bottom-up and top-down bonus 

structures). 

56This ‘‘free-riding’’ behavior has long been 

observed by economists. See, e.g., Martin 

L.Weitzman. Incentive Effects of Profit Sharing 

(1980); Robert M. Axelrod, The Evolution of 

made, may readily and directly reflect 

transaction terms of multiple individual 

loan originators taken in the aggregate. 

As a result, this type of compensation 

creates potential incentives for 

individual loan originators to steer 

consumers to different loan terms. 

In view of such matters, the framing 

of compensation restrictions in current 

§ 1026.36(d)(1)(i) in terms of ‘‘the 

transaction’’ permits an interpretation 

that could undermine the purpose of the 

rule. The prohibition in current 

§ 1026.36(d)(1)(i) means that a creditor 

or loan originator organization cannot 

differentially distribute compensation 

among individual loan originators based 

on each individual loan originator’s 

transaction terms. Because the current 

regulation does not expressly address 

compensation based on the terms of 

multiple individual loan originators’ 

transactions, however, creditors and 

loan originator organizations could 

establish compensation policies that 

evade the intent of § 1026.36(d)(1)(i). 

For example, creditors and loan 

originator organizations could 

restructure their compensation policies 

to pay a higher percentage of the 

individual loan originator’s 

compensation through bonuses under 

profit-sharing plans rather than through 

salary, commissions, or other forms of 

compensation that are not based on 

aggregate transaction terms of multiple 

individual loan originators. 

Through outreach with creditors and 

loan originator organizations, the 

Bureau is aware that their bonus 

structures take a multitude of forms, 

including payment of so-called ‘‘topdown’’ and ‘‘bottom-up’’ bonuses. In a 

top-down process, management 

determines the size of a bonus pool for 

the firm as a whole at or near the end 

of the performance year, splits the 

bonus pool into sub-pools for each line 

of business, and then allocates the subpools to individual employees in a 

manner related to their individual 

performance. In contrast, a bottom-up 

bonus is paid following the firm’s 

assessment of each employee’s 

performance and assignment of an 

incentive compensation award, with the 

firm’s total amount of incentive 

compensation for the year being the sum 

of the individual incentive 

compensation awards. For many large 

banks, the processes are a mixture of 

top-down and bottom-up, but the 

emphasis can differ markedly.55

Although the potential incentive for 

steering consumers to different loan 

terms is clearly present with top-down 

bonuses, where an actual profit pool is 

set up, steering incentives exist with 

regard to bottom-up bonuses as well. 

This is because the profitability of the 

company could be one of several factors 

taken into account in awarding a bonus 

package for an individual loan 

originator, making it clear to the 

individual loan originators that the 

employers are basing the amount of any 

bonuses paid on a factor (profits) which 

is substantially correlated to the terms 

of multiple transactions. Moreover, the 

Bureau understands that many 

companies utilize a mix of bottom-up 

and top-down bonuses, so drawing a 

distinction between top-down and 

bottom-up bonuses for regulatory 

purposes may be artificial and underinclusive. 

In light of the foregoing, the Bureau is 

proposing a new comment 36(d)(1)–1.ii 

to clarify that the prohibition on 

payment and receipt of compensation 

based on the transaction’s terms under 

§ 1026.36(d)(1)(i) covers compensation 

that directly or indirectly is based on 

the terms of multiple transactions 

subject to § 1026.36(d) of multiple 

individual loan originators employed by 

the person. Proposed comment 36(d)(1)– 

1.ii also gives examples illustrating the 

application of this guidance. Proposed 

comment 36(d)(1)–2.iii.C provides 

further clarification on these issues. The 

Bureau believes this approach is 

necessary to implement the statutory 

provisions and is appropriate to address 

the potential incentives to steer 

consumers to different loan terms that 

are present with profit-sharing plans 

and to prevent circumvention or evasion 

of the statute. 

The Bureau believes this proposed 

clarification sets a bright-line standard 

with regard to compensating individual 

loan originators through bonuses and 

contributions to qualified or nonqualified plans based on the terms of 

multiple loan transactions by multiple 

individual loan originators. As 

discussed below, the Bureau believes it 

is appropriate to create additional rules 

to take into account circumstances 

where any potential incentives are 

sufficiently attenuated to permit such 

compensation. Specifically, the 

Bureau’s proposal would permit 

employer contributions made to 

qualified plans in which individual loan 

originators participate, pursuant to 

§ 1026.36(d)(1)(iii), discussed below. 

The proposal also would permit 

payment of bonuses under profitsharing plans and contributions to nonqualified defined benefit and 

contribution plans even if the 

compensation is directly or indirectly 

based on the terms of multiple 

individual loan originators’ transactions 

where: (1) The revenues of the mortgage 

business do not predominate with 

respect to the total revenues of the 

person or business unit to which the 

profit-sharing plan applies, as 

applicable (pursuant to proposed 

§ 1026.36(d)(1)(iii)(B)(1)) or (2) the 

individual loan originator being 

compensated was the loan originator for 

a de minimis number of transactions 

(pursuant to proposed 

§ 1026.36(d)(1)(iii)(B)(2)). The sectionby-section analysis of proposed 

§ 1026.36(d)(1)(iii), below, discusses 

these additional provisions in more 

detail. In all instances, the 

compensation cannot take into account 

an individual loan originator’s 

transaction terms, pursuant to 

§ 1026.36(d)(1)(iii)(A). Because the 

Bureau is proposing to permit 

compensation based on multiple 

individual loan originators’ terms in 

certain circumstances under proposed 

§ 1026.36(d)(1)(iii), the Bureau is 

proposing to revise § 1026.36(d)(1)(i) to 

include the language ‘‘Except as 

provided in [§ 1026.36(d)(1)(iii)]’’ to 

emphasize that the compensation 

restrictions in § 1026.36(d)(1)(i) are 

subject to the provisions in proposed 

§ 1026.36(d)(1)(iii). 

The Bureau recognizes that the 

potential incentives to steer consumers 

to different loan terms that are inherent 

in profit-sharing plans may vary based 

on many factors, including the 

organizational structure, size, diversity 

of business lines, and compensation 

arrangements. In certain circumstances, 

a particular combination of factors may 

substantially mitigate the potential 

steering incentives arising from profitsharing plans. For example, the 

incentive of individual loan originators 

to upcharge likely diminishes as the 

total number of individual loan 

originators contributing to the profit 

pool increases. That is, the incentives 

may be mitigated because: (1) Each 

individual loan originator’s efforts will 

have increasingly less impact on 

compensation paid under profit-sharing 

plans; and (2) the ability of an 

individual loan originator to coordinate 

efforts with the other individual loan 

originators will decrease.56 This may be 


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Federal Register / Vol. 77, No. 174 / Friday, September 7, 2012 / Proposed Rules 55297 

Cooperation (1984); Oliver Hart & Bengt 

Holmstrom, The Theory of Contracts, in Advanced 

Economic Theory (T. Bewley ed., 1987); Douglas L. 

Kruse, Profit Sharing and Employment Variability: 

Microeconomic Evidence on Weizman Theory, 44 

Indus. and Lab. Rel. Rev., 437 (1991); Haig R. 

Nalbantian, Incentive Compensation in Perspective, 

in Incentive Compensation and Risk Sharing (Haig 

R. Nalbantian ed., 1987); and Roy Radner, The 

Internal Organization of Large Firms, 96 Econ. J. 1 

(1986). Quantifying these trade-offs has been 

difficult for practical applications, however. See 

Sumit Agarwal & Itzhak Ben-David, Do Loan 

Officers’ Incentives Lead to Lax Lending Standards? 

(Fisher Coll. of Bus. Working Paper No. 2012–03– 

007, 2012); Stefan Grosse, Louis Putterman & 

Bettina Rockenbach, Monitoring in Teams, 9 J. Eur. 

Econ. Ass’n. 785 (2011); and Claude Meidenger, 

Jean-Louis Rulliere & Marie-Claire Villeval, Does 

Team-Based Compensation Give Rise to Problems 

when Agents Vary in Their Ability? (GATE Groupe, 

Working Paper No. W.P. 01–13, 2001). 

57The Bureau notes that incentive compensation 

practices at large depository institutions were the 

subject of final guidance issued in 2010 by the 

Board, the Office of the Comptroller of the 

Currency, the Federal Deposit Insurance 

Corporation, and the Office of Thrift Supervision. 

75 FR 36395 (Jun. 17, 2010) (the Interagency 

Guidance). The Interagency Guidance was issued to 

help ensure that incentive compensation policies at 

large depository institutions do not encourage 

imprudent risk-taking and are consistent with the 

safety and soundness of the institutions. Id. The 

Bureau’s proposed rule does not affect the 

Interagency Guidance on loan origination 

compensation. In addition, to the extent a person 

is subject to both the Bureau’s rulemaking and the 

Interagency Guidance, compliance with Bureau’s 

rulemaking is not deemed to be compliance with 

the Interagency Guidance. 

58As discussed in the section-by-section analysis 

of § 1026.36(a), the Bureau is proposing to move the 

text of this comment to proposed comment 36(a)– 

5. 

particularly true for large depository 

institution creditors or large nondepository loan originator organizations 

that employ many individual loan 

originators.57 In such a large 

organization, moreover, the nexus 

between the terms of the transactions of 

the multiple individual loan originators, 

the revenues of the organization, the 

profits of the organization, and the 

compensation decisions may be more 

diffuse. The Bureau thus solicits 

comment on the scope of the steering 

incentive problem presented by profitsharing plans, whether the proposal 

effectively addresses these issues, and 

whether a different approach would 

better address these issues. 

The Bureau is further cognizant of the 

burdens that restrictions on 

compensation may impose on creditors, 

loan originator organizations, and 

individual loan originators. The Bureau 

believes that, when paid for legitimate 

reasons, bonuses and contributions to 

defined contribution and benefit plans 

can be useful and important 

inducements for individual loan 

originators to perform well. Profitsharing plans, moreover, are a means for 

individual loan originators to become 

invested in the success of the 

organization as a whole. The Bureau 

solicits comment on whether the 

proposed restrictions on bonuses and 

other compensation paid under profitsharing plans and contributions to 

defined contribution and benefit plans 

accomplish the Bureau’s objectives 

without unduly restricting 

compensation approaches that address 

legitimate business needs. 

Current comment 36(d)(1)–1 58

provides guidance on what constitutes 

compensation and refers to salaries, 

commissions and similar payments. The 

Bureau is not proposing any 

clarifications to this existing guidance. 

In general, salary and commission 

amounts are more likely than bonuses to 

be set in advance. Salaries, unlike 

bonuses, are typically paid out of 

budgeted operating expenses rather than 

a ‘‘profit pool.’’ Commissions typically 

are paid for individual transactions and 

without reference to the person’s 

profitability. Thus, payment of fixed 

percentage or fixed dollar amount 

commissions typically does not raise the 

potential issue of individual loan 

originators steering consumers to 

different loan terms. Also, the amounts 

of the individual loan originator’s salary 

and commission often are stipulated by 

an employment contract, commission 

agreement, or similar agreement, the 

terms of which the employer agrees to 

satisfy so long as the employee meets 

the conditions set forth in the agreement 

or other employment performance 

requirements. The Bureau seeks 

comment on whether the prohibition on 

compensation relating to aggregate 

transaction terms of multiple individual 

loan originators should encompass a 

broader array of compensation methods, 

including, e.g., salaries and 

commissions. 

36(d)(1)(ii) 

Amount of Credit Extended 

As discussed above, § 1026.36(d)(1)(i) 

provides that a loan originator may not 

receive and a person may not pay to a 

loan originator, directly or indirectly, 

compensation in an amount that is 

based on any of the transaction’s terms 

or conditions. Section 1026.36(d)(1)(ii) 

provides that the amount of credit 

extended is not deemed to be a 

transaction term or condition, provided 

compensation is based on a fixed 

percentage of the amount of credit 

extended. Such compensation may be 

subject to a minimum or maximum 

dollar amount. 

Use of the term ‘‘amount of credit 

extended.’’ TILA section 129B(c)(1), 

which was added by section 1403 of the 

Dodd-Frank Act, provides that a 

mortgage originator may not receive 

(and no person may pay to a mortgage 

originator), directly or indirectly, 

compensation that varies based on the 

terms of the loan (other than the amount 

of principal). 12 U.S.C. 1639b(c)(1). 

Thus, TILA section 129B(c)(1) permits 

mortgage originators to receive (and a 

person to pay mortgage originators) 

compensation that varies based on the 

‘‘amount of the principal’’ of the loan. 

Section 1026.36(d)(1)(ii) currently uses 

the phrase ‘‘amount of credit extended’’ 

instead of the phrase ‘‘amount of the 

principal’’ as set forth in TILA section 

129B(c)(1). Those phrases, however, 

typically are used to describe the same 

amount and generally have the same 

meaning. The term ‘‘principal,’’ in 

certain contexts, sometimes may mean 

only the portion of the total credit 

extended that is applied to the 

consumer’s primary purpose, such as 

purchasing the home or paying off the 

existing balance in the case of a 

refinancing. When used in this sense, 

the ‘‘amount of the principal’’ might 

represent only a portion of the amount 

of credit extended, for example where 

the consumer also borrows additional 

amounts to cover transaction costs. The 

Bureau does not believe that Congress 

intended ‘‘amount of the principal’’ in 

this narrower, less common way, 

however, because the exception appears 

intended to accommodate existing 

industry practices, under which loan 

originators generally are compensated 

based on the total amount of credit 

extended without regard to the purposes 

to which any portions of that amount 

may be applied. 

For the foregoing reasons, pursuant to 

its authority under TILA section 105(a) 

to facilitate compliance with TILA, the 

Bureau proposes to retain the phrase 

‘‘amount of credit extended’’ in 

§ 1026.36(d)(1)(ii) instead of replacing it 

with the statutory phrase ‘‘amount of 

the principal.’’ The Bureau believes that 

using the same phrase that is in the 

current regulatory language will ease 

compliance burden without diminishing 

the consumer protection afforded by 

§ 1026.36(d) in any foreseeable way. 

Creditors already have developed 

familiarity with the term ‘‘amount of 

credit extended’’ in complying with the 

current regulation. The Bureau solicits 

comment on these beliefs and this 

proposal to keep the existing regulatory 

language in place. 

Fixed percentage with minimum and 

maximum dollar amounts. Section 

1026.36(d)(1)(ii) provides that loan 

originator compensation paid as a fixed 

percentage of the amount of credit 

extended may be subject to a minimum 


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55298 Federal Register / Vol. 77, No. 174 / Friday, September 7, 2012 / Proposed Rules 

or maximum dollar amount. On the 

other hand, TILA section 129B(c)(1), as 

added by section 1403 of the DoddFrank Act, permits mortgage originators 

to receive (and a person to pay the 

mortgage originator) compensation that 

varies based on the ‘‘amount of the 

principal’’ of the loan, without 

addressing the question of whether such 

compensation may be subject to 

minimum or maximum limits. 12 U.S.C. 

1639b(c)(1). Pursuant to its authority 

under TILA section 105(a) to facilitate 

compliance with TILA, the Bureau 

proposes to retain the current 

restrictions in § 1026.36(d)(1)(ii) on 

when loan originators are permitted to 

receive (and when persons are 

permitted to pay loan originators) 

compensation that is based on the 

amount of credit extended. Specifically, 

proposed § 1026.36(d)(1)(ii) continues to 

provide that the amount of credit 

extended is not deemed to be a 

transaction term, provided 

compensation received by or paid to a 

loan originator is based on a fixed 

percentage of the amount of credit 

extended; however, such compensation 

may be subject to a minimum or 

maximum dollar amount. 

The Bureau believes that permitting 

creditors to set a minimum and 

maximum dollar amount is consistent 

with, and therefore furthers the 

purposes of, the statutory provision 

allowing compensation based on a 

percentage of the principal amount, 

consistent with TILA section 105(a). As 

noted above, the Bureau believes the 

purpose of excluding the principal 

amount from the ‘‘terms’’ on which 

compensation may not be based is to 

accommodate common industry 

practice. The Bureau also believes that, 

for some creditors, setting a maximum 

and minimum dollar amount also is 

common and appropriate because, 

without such limits, loan originators 

may be unwilling to originate very small 

loans and could receive unreasonably 

large commissions on very large loans. 

The Bureau therefore believes that, 

consistent with TILA section 105(a), 

permitting creditors to set minimum 

and maximum commission amounts 

may facilitate compliance and also may 

benefit consumers by ensuring that loan 

originators have sufficient incentives to 

originate particularly small loans. 

In addition, comment 36(d)(1)–9 

provides that § 1026.36(d)(1) does not 

prohibit an arrangement under which a 

loan originator is compensated based on 

a percentage of the amount of credit 

extended, provided the percentage is 

fixed and does not vary with the amount 

of credit extended. However, 

compensation that is based on a fixed 

percentage of the amount of credit 

extended may be subject to a minimum 

and/or maximum dollar amount, as long 

as the minimum and maximum dollar 

amounts do not vary with each credit 

transaction. For example, a creditor may 

offer a loan originator one percent of the 

amount of credit extended for all loans 

the originator arranges for the creditor, 

but not less than $1,000 or greater than 

$5,000 for each loan. On the other hand, 

as comment 36(d)(1)–9 clarifies, a 

creditor may not compensate a loan 

originator one percent of the amount of 

credit extended for loans of $300,000 or 

more, two percent of the amount of 

credit extended for loans between 

$200,000 and $300,000, and three 

percent of the amount of credit 

extended for loans of $200,000 or less. 

For the same reasons discussed above, 

consistent with TILA section 105(a), the 

Bureau believes this guidance is 

consistent with and furthers the 

statutory purposes and therefore 

proposes to retain it. To the extent a 

creditor seeks to avoid disincentives to 

originate small loans and unreasonably 

high compensation amounts on larger 

loans, the Bureau believes the ability to 

set minimum and maximum dollar 

amounts meets such goals. 

Reverse mortgages. Industry 

representatives have asked what the 

phrase ‘‘amount of credit extended’’ 

means in the context of closed-end 

reverse mortgages. For closed-end 

reverse mortgages, a creditor typically 

calculates a ‘‘maximum claim amount.’’ 

Under the Federal Housing 

Administration’s (FHA’s) Home Equity 

Conversion Mortgage program, the 

‘‘maximum claim amount’’ is the home 

value at origination (or applicable FHA 

loan limit, whichever is less). The 

creditor then calculates the maximum 

dollar amount the consumer is 

authorized to borrow (typically called 

the ‘‘initial principal limit’’) by 

multiplying the ‘‘maximum claim 

amount’’ by an applicable ‘‘principal 

limit factor,’’ which is calculated based 

on the age of the youngest borrower and 

the interest rate. The initial principal 

limit sets the maximum proceeds 

available to the consumer for the reverse 

mortgage. For closed-end reverse 

mortgages, a consumer often borrows 

the ‘‘initial principal limit’’ in a lump 

sum at closing. There can also be 

payments from the loan proceeds on 

behalf of the consumer such as to pay 

off existing tax liens. 

Reverse mortgage creditors have 

requested guidance on whether the 

‘‘maximum claim amount’’ or the 

‘‘initial principal limit’’ is the ‘‘amount 

of credit extended’’ in the context of 

closed-end reverse mortgages. The 

Bureau believes that the ‘‘initial 

principal limit’’ most closely resembles 

the amount of credit extended on a 

traditional, ‘‘forward’’ mortgage. Thus, 

consistent with Dodd-Frank Act section 

1403 and pursuant to its authority under 

TILA section 105(a) to facilitate 

compliance with TILA, the Bureau 

proposes to add comment 36(d)(1)–10 to 

provide that, for closed-end reverse 

mortgage loans, the ‘‘amount of credit 

extended’’ for purposes of 

§ 1036.36(d)(1) means the maximum 

proceeds available to the consumer 

under the loan, which is the ‘‘initial 

principal limit.’’ 

36(d)(1)(iii) 

Consumer Payments Based On Loan 

Terms 

As discussed above, § 1026.36(d)(1)(i) 

currently provides that no loan 

originator may receive and no person 

may pay to a loan originator 

compensation based on any of the 

transaction’s terms or conditions. 

Section 1026.36(d)(1)(iii), however, 

currently provides that the prohibition 

in § 1026.36(d)(1)(i) does not apply to 

transactions in which a loan originator 

received compensation directly from the 

consumer and no other person provides 

compensation to a loan originator in 

connection with that transaction. Thus, 

even though, in accordance with 

§ 1026.36(d)(2), a loan originator 

organization that receives compensation 

from a consumer may not split that 

compensation with its individual loan 

originator, current § 1026.36(d)(1) does 

not prohibit a consumer’s payment of 

compensation to the loan originator 

organization from being based on the 

transaction’s terms or conditions. 

TILA section 129B(c)(1), which was 

added by section 1403 of the 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. 

Consistent with TILA section 

129B(c)(1), the Bureau proposes to 

delete existing § 1026.36(d)(1)(iii) and a 

related sentence in existing comment 


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Federal Register / Vol. 77, No. 174 / Friday, September 7, 2012 / Proposed Rules 55299 

59See Internal Revenue Serv., U.S. Dep’t of the 

Treasury, Publication 560, Retirement Plans for 

Small Businesses (2012). 

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 any 

of the transaction’s terms. Comment 

36(d)(1)–7 provides guidance on when 

payments to a loan originator are 

considered compensation received 

directly from the consumer. As 

discussed in more detail in the sectionby-section analysis to proposed 

§ 1026.36(d)(2)(i), the Bureau proposes 

to delete the first sentence of this 

comment and move the other content of 

this comment to new comment 

36(d)(2)(i)–2.i. 

Profit-Sharing and Related Plans 

The Bureau proposes a new 

§ 1026.36(d)(1)(iii), which permits in 

limited circumstances the payment of 

compensation that directly or indirectly 

is based on the terms of transactions 

subject to § 1026.36(d) of multiple 

individual loan originators. 

Qualified plans. As noted above, 

following a number of inquiries about 

how the restrictions in the current 

regulation apply to qualified retirement 

and profit-sharing plans, the Bureau 

issued a Bulletin stating that bonuses 

and contributions to qualified plans out 

of loan origination profits were 

permissible under the current rules. The 

Bureau’s position was based in part on 

certain structural and operational 

requirements that the Internal Revenue 

Code (IRC) imposes on qualified plans, 

including contribution and benefit 

limits, deferral requirements (regarding 

both access to and taxation of the funds 

contributed), the considerable tax 

penalties for non-compliance, nondiscrimination provisions, and 

requirements to allocate among plan 

participants based on a definite 

formula.59 Employers also may receive 

tax deductions for contributions to 

defined contribution plans up to 

defined limits, which typically places 

upward limits on the compensation 

awarded to individual loan originators 

through qualified plans. Consistent with 

its position in CFPB Bulletin 2012–2, 

the Bureau believes that these structural 

and operational requirements greatly 

reduce the likelihood of steering 

incentives. 

Based on these considerations, 

proposed § 1026.36(d)(1)(iii) permits a 

person to compensate an individual 

loan originator through a contribution to 

a qualified defined contribution or 

benefit plan in which an individual loan 

originator employee participates, 

provided that the contribution is not 

directly or indirectly based on the terms 

of that individual loan originator’s 

transactions subject to § 1026.36(d). 

Proposed comment 36(d)(1)–2.iii.E 

clarifies the types of plans that are 

considered qualified plans for purposes 

of § 1026.36(d)(1)(iii) (i.e., plans, such as 

401k plans, that satisfy the qualification 

requirements of section 401(a) of the 

IRC and applicable terms of the 

Employee Retirement Income Security 

Act of 1974 (ERISA), 29 U.S.C. 1001, et 

seq., the requirements for tax-sheltered 

annuity plans under IRC section 403(b), 

or governmental deferred compensation 

plans under IRC section 457(b)). 

Proposed comment 36(d)(1)–2.iii.B 

clarifies the meaning of defined benefit 

plan and defined contribution plan as 

such terms are used in 

§ 1026.36(d)(1)(iii). The proposed 

comment cross-references proposed 

comments 36(d)(1)–2.iii.E and –2.iii.G 

for guidance on the distinction between 

qualified and non-qualified plans and 

the relevance of such distinction to the 

provisions of proposed 

§ 1026.36(d)(1)(iii). 

The Bureau solicits comment on 

whether any other types of retirement 

plan, profit-sharing plan, or other 

defined benefit or contribution plans 

should be treated similarly to qualified 

plans for purposes of permitting 

contributions to such plans, even if the 

compensation relates directly or 

indirectly to the transaction terms of 

multiple individual loan originators. For 

example, the Bureau understands that 

some non-qualified pension plans limit 

distribution of funds to participating 

employees until their separation of 

service from their employer, which 

would seem to present more limited 

incentives to steer consumers to 

different loan terms. 

Non-qualified plans. Proposed 

§ 1026.36(d)(1)(iii) provides 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 

a defined benefit or contribution plan 

other than a qualified plan in certain 

circumstances. Specifically, the 

proposed rule permits such 

compensation even if the compensation 

directly or indirectly is based on the 

terms of the transactions subject to 

§ 1026.36(d) of multiple individual loan 

originators, provided that the conditions 

set forth in proposed 

§ 1026.36(d)(1)(iii)(A) and (B) are 

satisfied. 

Proposed comment 36(d)(1)–2.iii.A 

provides guidance on the definition of 

profit-sharing plan as that term is used 

in proposed § 1026.36(d)(1)(iii). The 

proposed comment clarifies that for 

purposes of the rule, profit-sharing 

plans include so-called ‘‘bonus plans,’’ 

‘‘bonus pools,’’ or ‘‘profit pools’’ from 

which a person or the business unit, as 

applicable, pays individual loan 

originators employed by the person (as 

well as other employees, if it so elects) 

bonuses or other compensation with 

reference to the profitability of the 

person or business unit, as applicable 

(i.e., depending on the level within the 

company at which the profit-sharing 

plan is established). The proposed 

comment gives an example of a 

compensation structure that is a profitsharing plan under § 1026.36(d)(1)(iii). 

The proposed comment also notes that 

a bonus that is made without reference 

to profitability, such a retention 

payment budgeted for in advance, does 

not violate the prohibition on payment 

of compensation based on transaction 

terms under § 1026.36(d)(1)(i), as 

clarified by proposed comment 

36(d)(1)–1.ii, meaning that the 

provisions of proposed 

§ 1026.36(d)(1)(iii) do not apply. 

Proposed comment 36(d)(1)–2.iii.C 

clarifies that the compensation 

addressed in proposed 

§ 1026.36(d)(1)(iii) directly or indirectly 

is based on the terms of transactions of 

multiple individual loan originators 

when the compensation, or its amount, 

results from or is otherwise related to 

the terms of multiple transactions 

subject to § 1026.36(d). The proposed 

comment provides that if a creditor does 

not permit its individual loan originator 

employees to deviate from the creditor’s 

pre-established loan terms, such as the 

interest rate offered, then the creditor’s 

payment of a bonus at the end of a 

calendar year to an individual loan 

originator under a profit-sharing plan is 

not related to the transaction terms of 

multiple individual loan originators. 

The proposed comment also clarifies 

that if a loan originator organization 

whose revenues are derived exclusively 

from fees paid by the creditors that fund 

its originations (i.e., ‘‘creditor-paid 

transactions’’) pays a bonus under a 

profit-sharing plan, the bonus is 

permitted. Proposed comment 36(d)(1)– 

2.iii.C cross-references proposed 

comment 36(d)(1)–1.i and –1.ii for 

further guidance on when a payment is 

‘‘based on’’ transaction terms. 

Proposed comment 36(d)(1)–2.iii.D 

clarifies that, under proposed 


srobinson on DSK4SPTVN1PROD with PROPOSALS2
55300 Federal Register / Vol. 77, No. 174 / Friday, September 7, 2012 / Proposed Rules 

§ 1026.36(d)(1)(iii), the time period for 

which the compensation is paid is the 

time period for which the individual 

loan originator’s performance was 

evaluated for purposes of the 

compensation decision (e.g., calendar 

year, quarter, month), whether the 

compensation is actually paid during or 

after that time period. The proposed 

comment provides an example where a 

‘‘pre-holiday’’ bonus paid in November 

is ‘‘based on’’ multiple individual loan 

originators’ terms during the entire 

calendar year because it is paid 

following an accounting of multiple 

individual loan originators’ transaction 

terms during the first three quarters of 

a calendar year and projected similar 

transaction terms for the remainder of 

the calendar year. 

36(d)(1)(iii)(A) 

Proposed § 1026.36(d)(1)(iii)(A) 

prohibits payment of compensation to 

an individual loan originator that 

directly or indirectly is based on the 

terms of that individual loan originator’s 

transaction or transactions. This 

language is intended to underscore the 

fact that a person cannot pay 

compensation to an individual loan 

originator based on the terms of that 

individual loan originator’s transactions 

regardless of whether the compensation 

is of the type that is permitted in limited 

circumstances under 

§ 1026.36(d)(1)(iii)(B). Proposed 

comment 36(d)(1)–2.iii.F clarifies the 

provision by giving an example and 

cross-referencing proposed comment 

36(d)(1)–1 for further guidance on 

determining whether compensation is 

‘‘based on’’ transaction terms. 

36(d)(1)(iii)(B) 

36(d)(1)(iii)(B)(1) 

Proposed § 1026.36(d)(1)(iii)(B)(1) 

permits a creditor or a loan originator 

organization to pay compensation in the 

form of a bonus or other payment under 

a profit-sharing plan (including bonus 

or profit pools) or a contribution to a 

non-qualified defined benefit or 

contribution plan where the steering 

incentives are sufficiently attenuated, 

even if the compensation is directly or 

indirectly based on the terms of 

transactions of multiple individual loan 

originators employed by the person. As 

described above, the Bureau is 

concerned that the current regulation 

does not provide the requisite clarity to 

address the potential steering incentives 

present where creditors or loan 

originator organizations reward their 

individual loan originator employees 

through compensation that is directly or 

indirectly based on the terms of 

multiple transactions of multiple 

individual loan originator employees. 

That said, the Bureau recognizes the 

challenges of developing a clear and 

practical standard to determine whether 

the particular compensation method 

creates incentives for individual loan 

originators to steer consumers into 

different loan terms. The Bureau is 

cognizant that a formulaic approach 

may pose challenges given the plethora 

of different entities that will be affected 

by this proposed rule, which vary 

greatly in size, organizational structure, 

diversity of business lines, and 

compensation structures. Depending on 

the circumstances, any or all of these 

factors could accentuate or mitigate the 

prevalence of steering incentives. 

The Bureau also acknowledges the 

difficulty of establishing a direct nexus 

between the multiple individual loan 

originators’ actions that may adversely 

affect consumers and the payment and 

receipt of bonuses or other 

compensation that directly or indirectly 

is based on the terms of those individual 

loan originators’ transactions. Creditors 

and loan originator organizations use a 

variety of revenue and profitability 

measures, and each organization 

presumably employs methods of 

compensation that are tailored to fit 

their business needs. Therefore, a 

regulatory approach that addresses the 

potential steering incentives created by 

compensation methods that reward 

individual loan originators based on the 

collective terms of multiple transactions 

of multiple individual loan originators 

must be flexible enough to take such 

factors into account. 

With these considerations in mind, 

the Bureau believes that proposed 

§ 1026.36(d)(1)(iii)(B)(1) balances the 

need for a bright-line rule with the 

recognition that a rigid, one-size-fits-all 

approach may not be workable in light 

of the wide spectrum of size, type, and 

business line diversity of the companies 

that would be subject to the 

requirement. Assuming that the 

conditions set forth in proposed 

§ 1026.36(d)(1)(iii)(A) have been met, 

proposed § 1026.36(d)(1)(iii)(B)(1) 

permits compensation in the form of a 

bonus or other payment under a profitsharing plan or a contribution to a nonqualified defined benefit or contribution 

plan, even if the compensation relates 

directly or indirectly to the terms of the 

transactions subject to § 1026.36(d) of 

multiple individual loan originators, so 

long as not more than a certain 

percentage of the total revenues of the 

person or business unit to which the 

profit-sharing plan applies, as 

applicable, are derived from the 

person’s mortgage business during the 

tax year immediately preceding the tax 

year in which the compensation is paid. 

As described below, the Bureau is 

proposing two alternatives for the 

threshold percentage—50 percent, 

under Alternative 1 proposed by the 

Bureau, or 25 percent, under Alternative 

2 proposed by the Bureau. To ascertain 

whether the conditions under 

§ 1026.36(d)(1)(iii)(B)(1) are met, a 

person measures the revenue of the 

mortgage business divided by the total 

revenue of the person or business unit, 

as applicable. Section 

1026.36(d)(1)(iii)(B)(1) explains how 

total revenues are determined, when the 

revenues of a person’s affiliates are or 

are not taken into account, and how 

total revenues derived from the 

mortgage business are determined. 

Proposed comment 36(d)(1)–2.iii 

provides additional guidance on the 

meaning of the terms total revenue, 

mortgage business, and tax year under 

proposed § 1026.36(d)(1)(iii)(B)(1), all 

discussed below. 

The proposed revenue test is intended 

as a bright-line rule to distinguish 

methods of compensation where there is 

a substantial risk of consumers being 

steered to different loan terms from 

compensation methods where steering 

potential is sufficiently attenuated. The 

proposed bright-line rule recognizes the 

intertwined relationship among the 

person’s revenues, profitability, and 

payment of compensation to its 

individual loan originators. The 

aggregate loan terms of multiple 

transactions at a creditor or loan 

originator organization within a given 

time period generally affect the 

revenues of that creditor or loan 

originator organization during that 

period. The creditor or loan originator 

organization’s revenues during that 

period, in turn, generally affect the 

profitability of the person during that 

period. And the profitability of the 

creditor or loan originator organization 

presumably relates to—if not 

determines—the amount of 

compensation available for the profitsharing plan, bonus pool, or profit pool 

and distributed to individual loan 

originators in the form of bonuses or 

contributions to defined benefit or 

contribution plans. In other words, the 

Bureau is treating revenue as a proxy for 

profitability, and profitability as a proxy 

for transaction terms in the aggregate. 

Furthermore, the Bureau is proposing 

a threshold of 50 percent because if 

more than 50 percent of the person’s 

total revenues are derived from the 

person’s mortgage business, the 

mortgage business revenues are 

predominant, at which point the 

attendant steering incentives seem most 


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Federal Register / Vol. 77, No. 174 / Friday, September 7, 2012 / Proposed Rules 55301 

60 In its materials prepared for the Small Business 

Review Panel process in May 2012, the Bureau 

indicated that it was considering a revenue test 

threshold of between 20 and 50 percent. As noted 

above, the Bureau is proposing two alternative 

threshold amounts—50 percent and 25 percent— 

and is soliciting comment on whether the threshold 

should be different. 

likely to exist.60 For example, loans 

with higher interest rate spreads over 

the creditor’s minimum acceptable rate, 

all else being equal, will yield greater 

amounts of interest payments if the 

loans are kept in portfolio by the 

creditor and a greater gain on sale if sold 

on the secondary market. As discussed 

above, in general revenues drive 

profitability and profitability relates to, 

if not drives, decisions about 

compensation for individual loan 

originators. Thus, if the mortgagerelated revenues predominate, there is 

more risk that the individual loan 

originators, whose transactions generate 

mortgage business revenue, will be 

incentivized to upcharge or otherwise 

steer consumers to different loan terms. 

On the other hand, where the person’s 

revenues do not predominantly consist 

of revenue from its mortgage business, 

the connection between revenue 

received from multiple individual loan 

originators’ transactions and the 

payment from the profit-sharing plan or 

contribution to the defined benefit or 

contribution plan in which the 

individual loan originator participates 

may be sufficiently attenuated to 

mitigate steering concerns given the 

number of other employees, products or 

services, and other actions that 

contribute to the overall profitability of 

the company. 

The Bureau recognizes, however, that 

a bright-line rule with a threshold set at 

50 percent of total revenue may not be 

commensurate in all cases with steering 

incentives in light of the differing sizes, 

organizational structures, and 

compensation structures of the persons 

affected by the proposed rule. Even if 

the mortgage business does not 

predominate the overall generation of 

revenues, the revenues may be 

sufficiently high that, in view of other 

facts and circumstances, the connection 

between the mortgage-business revenue 

generated and the compensation paid to 

individual loan originators may not be 

sufficiently attenuated, and thus still 

present a steering risk. Therefore, the 

Bureau is proposing an alternative 

approach that includes the same 

regulatory text and commentary 

language but contains a stricter 

threshold amount of 25 percent for 

purposes of the revenue test under 

§ 1026.36(d)(1)(iii)(B)(1). The Bureau 

solicits comment on whether 50 

percent, 25 percent, or a different 

threshold amount would better 

effectuate the purposes of the rule. 

The Bureau is also aware of the 

potential differential effects the 

provisions of § 1026.36(d)(1)(iii)(B)(1) 

may have on small creditors and loan 

originator organizations that employ 

individual loan originators when 

compared to the effects on larger 

institutions. In particular, the Bureau 

recognizes that loan originator 

organizations that originate loans as 

their exclusive, or primary, line of 

business will, barring diversification of 

their business lines, not be able to pay 

the types of compensation that are 

permitted in limited circumstances 

under § 1026.36(d)(1)(iii)(B)(1). During 

the Small Business Review Panel 

process, a SER stated that there should 

be no threshold limit because any limit 

would disadvantage small businesses 

that originate only mortgages. In 

response to this and other SERs’ 

feedback, the Small Business Review 

Panel recommended that the Bureau 

seek public comment on the 

ramifications for small businesses and 

other businesses of setting the revenue 

limit at 50 percent of company revenue 

or at other levels. The Small Business 

Review Panel also recommended that 

the Bureau solicit public comment on 

the treatment of qualified and nonqualified plans and whether treating 

qualified plans differently than nonqualified plans would adversely affect 

small creditors and loan originator 

organizations relative to large creditors 

and loan originator organizations. The 

Bureau accordingly seeks comment on 

these issues. The Bureau is also 

proposing, as discussed in the sectionby-section analysis to proposed 

§ 1026.36(d)(1)(iii)(B)(2), below, to 

permit compensation in the form of 

bonuses and other payments under 

profit-sharing plans and contributions to 

non-qualified defined benefit or 

contribution plans where an individual 

loan originator is the loan originator for 

five or fewer transactions within the 12- 

month period preceding the payment of 

the compensation. The Bureau expects 

that for some small entities, this de 

minimis exception should address some 

of the concerns expressed by the small 

entity representatives. 

Revenue Test Formula 

Proposed comment 36(d)(1)–2.iii.G 

clarifies various aspects of the revenue 

test. Proposed comment 36(d)(1)– 

2.iii.G.1 addresses the measurement of 

total revenue under the revenue test 

formula, which pursuant to 

§ 1026.36(d)(1)(iii)(B)(1) is the person’s 

total revenues or the total revenues of 

the business unit to which the profitsharing plan applies, as applicable, 

during the tax year immediately 

preceding the tax year in which the 

compensation is paid. The comment 

clarifies that under this provision, 

whether the revenues of the person or 

business unit are used depends on the 

level within the person’s organizational 

structure at which the profit-sharing 

plan is established and whose 

profitability is referenced for purposes 

of payment of the compensation. The 

comment provides that if the 

profitability of the person is referenced 

for purposes of establishing the profitsharing plan, then the total revenues of 

the person are used, and gives an 

example of how total revenues are 

calculated for a creditor that has two 

separate business units. The Bureau 

believes that the total revenues for 

purposes of the revenue test under 

§ 1026.36(d)(1)(iii)(B)(1) must reflect the 

revenues of the business unit within the 

company whose profitability is 

referenced for purposes of paying 

compensation to the individual loan 

originators, because including the 

revenues of business units to which the 

profit-sharing plan does not apply 

would lead to an artificially overinclusive measurement of total 

revenues, thus undermining the purpose 

of the revenue test in 

§ 1026.36(d)(1)(iii)(B)(1). For example, if 

the overall revenues of a creditor with 

diverse revenue sources across business 

units were included in the total 

revenues regardless of the level in the 

ownership structure at which the profitsharing plan was established, the 

creditor could establish a profit-sharing 

plan at the level of the mortgage 

business unit to pay bonuses to 

individual loan originators only, and yet 

still pass the revenue test. This type of 

arrangement is one where incentives to 

steer consumers to different loan terms 

are present, and therefore the Bureau 

believes that it should be captured by 

the revenue test. 

Proposed comment 36(d)(1)–2.iii.G.1 

also clarifies that a tax year is the 

person’s annual accounting period for 

keeping records and reporting income 

and expenses (i.e., it may be a calendar 

year or a fiscal year depending on the 

person’s annual accounting period) and 

gives an example showing how the 

revenue test is applied in the context of 

a creditor that uses a calendar year 

accounting period. The Bureau 

acknowledges that taking only one tax 

year’s revenues into account 

necessitates an annual reevaluation of 

whether the revenue test is met. This 

also could result in a person with 


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55302 Federal Register / Vol. 77, No. 174 / Friday, September 7, 2012 / Proposed Rules 

61 Defining Larger Participants of the Consumer 

Reporting Market, 77 FR 42873 (July 20, 2012) (to 

be codified at 12 CFR part 1090). In the final rule, 

the Bureau noted that the proposed definition of 

‘‘annual receipts’’ is adapted in part from the 

existing measure used by the U.S. Small Business 

Administration (SBA) for its small business loan 

programs. 

relatively consistent revenue flow over 

a number of years falling above or below 

the threshold based on an anomalous 

tax year where revenues fluctuate 

greatly for reasons that are not related to 

incentive structures. Moreover, the 

proposed rule requires evaluation of the 

previous tax year’s revenues. This 

means that, for example, whether a 

company can pay a bonus under a 

profit-sharing plan in December of a 

particular year might, under the 

proposed revenue test, depend in part 

on the level of mortgage business and 

total revenues generated beginning in 

January of the previous calendar year 

(i.e., 23 months prior), which in the 

context may be a stale data point. The 

Bureau, therefore, solicits comment on 

whether the total revenues should 

instead be based on a rolling average of 

revenues over two tax years, a rolling 

average of revenues during the 12 

months preceding the decision to make 

the compensation payment, or another 

time period. 

Section 1026.36(d)(1)(iii)(B)(1) also 

provides that total revenues are 

determined through a methodology that 

is consistent with generally accepted 

accounting principles and, as 

applicable, the reporting of the person’s 

income for purposes of Federal tax 

filings or, if none, any industry call 

reports filed regularly by the person. As 

applicable, the methodology also shall 

reflect an accurate allocation of 

revenues among the person’s business 

units. The proposed commentary notes 

that industry call reports filed regularly 

by the person could, depending on the 

person, include the NMLSR Mortgage 

Call Report or the National Credit Union 

Administration (NCUA) Call Report. 

The proposed commentary also notes 

that a Federal credit union that is 

exempt from paying Federal income tax 

would, under the proposed rule, use a 

methodology to determine total annual 

revenues that reflects the income 

reported in any NCUA Call Reports filed 

by the credit union; if none, the 

methodology otherwise must be 

consistent with GAAP and, as 

applicable, reflects an accurate 

allocation of revenues among the credit 

union’s business units. The Bureau is 

proposing that a person determine total 

revenues in this manner to ensure that 

the measurement of total revenues is 

methodologically sound and consistent 

with the company’s own reporting of 

income for Federal tax purposes or, if 

none, any industry call reports filed 

regularly by the person, and to ensure 

that it is not subject to manipulation to 

produce an outcome favorable to the 

company (presumably, a total revenue 

measurement of over 50 percent or 25 

percent, depending on the alternative 

threshold chosen for the revenue test). 

The Bureau solicits comment on 

whether this standard for measuring 

total revenues is appropriate in light of 

the diversity in size of the financial 

institutions that would be subject to the 

requirement and, more generally, on 

what types of income should be 

included in the definition of total 

revenues. The Bureau also solicits 

comment on whether the definition of 

total revenues should be tied to a more 

objective standard such as the Bureau’s 

definition of ‘‘receipts’’ in the Bureau’s 

final ‘‘larger participants’’ rule regarding 

the supervision of consumer reporting 

agencies.61

The Bureau recognizes that some of 

the creditors and loan originator 

organizations subject to this proposed 

rule may have numerous business 

organizations set up under common 

ownership, and the determination of 

profitability (which, in turn, relates to 

compensation decisions) may be made 

at a different level than by the 

management of the individual loan 

originators’ business unit. Moreover, the 

nature of the ownership hierarchy, both 

horizontal and vertical, and the level of 

proximity within the organization 

among the individual loan originators, 

the employees of the other business 

units, and the compensation decisionmakers all may serve to reduce or 

enhance the prevalence of steering 

incentives depending on the 

circumstances. In general, the Bureau 

believes that the revenues of the 

business organization or unit whose 

profits are used as reference for 

compensation decisions—whether the 

person, a business unit within the 

person, or an affiliate of the person— 

should be the business organization or 

unit whose revenues are evaluated for 

purposes of proposed 

§ 1026.36(d)(1)(iii)(B)(1). Therefore, 

proposed § 1026.36(d)(1)(iii)(B)(1) states 

that the revenues of the person’s 

affiliates generally are not taken into 

account for purposes of the revenue test 

unless the profit-sharing plan applies to 

the affiliate, in which case the person’s 

total revenues also include the total 

revenues of the affiliate. Proposed 

comment 36(d)(1)–2.iii.G.1 notes that 

the profit-sharing plan applies to the 

affiliate when, for example, the funds 

used to pay a bonus to an individual 

loan originator are the same funds used 

to pay a bonus to employees of the 

affiliate. The Bureau solicits comment 

on whether the revenues of affiliates 

should be treated in a different manner 

for purposes of the revenue test under 

§ 1026.36(d)(1)(iii)(B)(1). 

Section 1026.36(d)(1)(iii)(B)(1) 

provides that the revenues derived from 

mortgage business are the portion of 

those total revenues that are generated 

through a person’s transactions subject 

to § 1026.36(d). Proposed comment 

36(d)(1)–2.iii.G.2 clarifies that, pursuant 

to § 1026.36(j) and comment 36–1, 

§ 1026.36(d) applies to closed-end 

consumer credit transactions secured by 

dwellings and reverse mortgages that are 

not home-equity lines of credit under 

§ 1026.40. The proposed comment also 

gives guidance that a person’s revenues 

from its mortgage business include, for 

example: origination fees and interest 

associated with loans for purchase 

money or refinance purposes originated 

by individual loan originators employed 

by the person, income from servicing of 

loans for purchase money or refinance 

purposes originated by individual loan 

originators employed by the person, and 

proceeds of secondary market sales of 

loans for purchase money or refinance 

purposes originated by individual loan 

originators employed by the person. The 

proposed comment further notes that 

revenues derived from mortgage 

business do not include, for example, 

servicing income where the loans being 

serviced were purchased by the person 

after their origination by another person. 

This distinction is drawn because the 

individual loan originators employed by 

a particular creditor or loan originator 

organization do not have steering 

incentives when the loans being 

serviced were originated by another 

person. In addition, origination fees, 

interest, and secondary market sale 

proceeds associated with home-equity 

lines of credit, loans secured by 

consumers’ interests in timeshare plans, 

or loans made primarily for business, 

commercial, or agricultural purposes are 

not counted as mortgage business 

revenues because such transactions are 

outside the coverage of § 1026.36(d). In 

light of the distinctions drawn to 

include and exclude categories of 

mortgage-related revenues for purposes 

of the revenue test, the Bureau requests 

comment on the scope of revenues 

included in the definition of mortgage 

revenues. The Bureau also recognizes 

that the definition of mortgage business 

revenues, as clarified by proposed 

comment 36(d)(1)–2.iii.G.2, includes 

revenues, such as origination fees, 


srobinson on DSK4SPTVN1PROD with PROPOSALS2
Federal Register / Vol. 77, No. 174 / Friday, September 7, 2012 / Proposed Rules 55303 

interest, and servicing income, of 

transactions subject to § 1026.36(d) that 

were originated before the current 

regulation on mortgage loan origination 

went into effect. During the Small 

Business Review Panel process, the 

SERs asserted that using mortgage 

revenue as a standard would be overinclusive because the standard would 

capture income from all mortgage loans, 

including existing portfolio loans, rather 

than only newly originated loans. The 

Bureau thus solicits comment on 

whether revenues associated with 

transactions originated prior to the 

effect of the Board’s 2010 Loan 

Originator Final Rule or this proposed 

rule (if adopted) should be excluded. 

Alternative Approaches to Revenue Test 

The Bureau recognizes that, for 

purposes of proposed 

§ 1026.36(d)(1)(iii)(B)(1), a formula that 

utilizes profitability as a measuring 

point may be more appropriate than 

revenues. Compensation decisions are 

more likely to relate to profits than 

revenues because the funds available for 

bonuses will be driven by the amount 

remaining following payment of 

expenses, rather than the gross revenues 

generated by the company. Focusing on 

revenues may be an imperfect test to 

measure the relationship between the 

mortgage business and the profitability 

of the person or business unit, as 

applicable (which, in turn, relates to the 

compensation decisions). For example, 

a company could derive 40 percent of 

its total revenues from its mortgage 

business, but that same line of business 

may generate 80 percent of the 

company’s profits. In such an instance, 

the steering incentives could be 

significant given the impact the 

mortgage business has on the company’s 

overall profitability. Yet, under the 

revenue test this organization would be 

permitted to pay certain compensation 

based on terms of multiple individual 

loan originators’ transactions taken in 

the aggregate. The Bureau believes a test 

based on profitability would create 

significant challenges, such as the need 

to define profitability and the question 

of how affiliate relationships are 

addressed. Such an approach could 

require detailed, complex rules to 

clarify how the test works. Moreover, 

the Bureau is concerned that using 

profitability as the metric could lead to 

evasion of the rule if a person were to 

allocate costs in a manner across 

business lines that would lead to 

understatement of the mortgage 

business profits (making it more likely 

that the revenue test would be passed 

even though steering incentives are still 

present). In light of these 

considerations, the Bureau solicits 

comment on whether the formula under 

§ 1026.36(d)(1)(iii)(B)(1) should be 

changed to the total profits of the 

mortgage business divided by the total 

profits of the person or business unit, as 

applicable, and, if so, how profits 

should be calculated. 

The Bureau recognizes that concerns 

about individual loan originators 

steering consumers to different loan 

terms may vary depending on the 

proportion of an individual loan 

originator’s total compensation that is 

attributable to payments permitted 

under § 1026.36(d)(1)(iii)(B)(1). Thus, 

the Bureau additionally solicits 

comment on whether to establish a cap 

on the percentage of an individual loan 

originator’s total compensation that can 

be attributable to payments permitted 

under § 1026.36(d)(1)(iii)(B)(1), either in 

addition to or in lieu of the proposed 

revenue test. The Bureau also solicits 

comment on the appropriate threshold 

amount if the Bureau were to adopt a 

total compensation test. 

The Bureau recognizes that the brightline standard in proposed 

§ 1026.36(d)(1)(iii)(B)(1) creates an 

‘‘exempt or non-exempt’’ approach that 

prohibits the payment of bonuses and 

other compensation and the making of 

contributions to non-qualified defined 

benefit and contribution plans if the 

creditor or loan origination organization 

has mortgage business revenues of 

greater than 50 percent of its total 

revenues (under Alternative 1 proposed 

by the Bureau), 25 percent of its total 

revenues (under Alternative 2 proposed 

by the Bureau), or some lesser 

percentage that the Bureau may 

determine to be more appropriate. The 

Bureau acknowledges that terms of 

multiple individual loan originators’ 

transactions taken in the aggregate will 

not, in every instance, have a substantial 

effect on profitability, and likewise 

there are occasions where the 

profitability will relate only 

insubstantially to the compensation. 

However, the Bureau believes that it is 

critical to create a workable test that 

does not have significant complexity. 

Otherwise, it may be difficult for 

creditors and loan originator 

organizations to employ the test. The 

Bureau also recognizes that any test is 

likely to be both under- and overinclusive. 

Consequently, the Bureau solicits 

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 defined 

benefit or contribution plans where the 

compensation bears an insubstantial 

relationship to the terms of transactions 

subject to § 1026.36(d) of multiple 

individual loan originators. This test 

would look to whether the aggregate 

loan terms of multiple individual loan 

originators is only one factor or variable 

among multiple significant factors or 

variables taken into account in the 

compensation decision and does not 

affect the outcome of the compensation 

decision to a substantial degree. For 

example, if a creditor pays a year-end 

bonus based on formula that includes 

ten different factors, all of which are 

permissible under § 1026.36(d)(1) (e.g., 

performance of loans, amount of credit 

extended, amount of transactions closed 

relative to application), and the 

profitability of the creditor will make 

only a marginal difference of two 

percent as to the amount of bonus paid 

(e.g., an individual loan originator who 

receives a $2,000 bonus would receive 

a $1,960 bonus but for the fact that the 

person’s profitability was taken into 

account in determining the bonus), the 

creditor might, depending on the facts 

and circumstances, demonstrate that the 

compensation is substantially 

independent of the terms of transactions 

subject to § 1026.36(d) of multiple 

individual loan originators. It is unclear, 

however, how such a test would work 

in practice and what standards would 

apply to determine if compensation is 

substantially independent. Nonetheless, 

the Bureau solicits comment on whether 

such an additional provision should be 

included under § 1026.36(d)(1)(iii). 

36(d)(1)(iii)(B)(2) 

Proposed § 1026.36(d)(1)(iii)(B)(2) 

permits a person to pay, and an 

individual loan originator to receive, 

compensation in the form of a bonus or 

other payment under a profit-sharing 

plan sponsored by the person or a 

contribution to a non-qualified defined 

contribution or benefit plan if the 

individual is a loan originator (as 

defined in proposed § 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 is 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. 

The intent of proposed 

§ 1026.36(d)(1)(iii)(B)(2) is 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 defined 

benefit and defined contribution plans 

that are not qualified plans. The Bureau 


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55304 Federal Register / Vol. 77, No. 174 / Friday, September 7, 2012 / Proposed Rules 

is proposing to exempt individual loan 

originators who are loan originators for 

five or fewer transactions within a 12- 

month period preceding the date of the 

decision to pay the compensation. 

Under TILA, a person is not considered 

a creditor unless the person regularly 

extends credit, which with respect to 

consumer credit transactions secured by 

a dwelling is at least five transactions 

per calendar year. See § 1026.2(a)(17)(v). 

The Bureau believes, by analogy, that an 

individual loan originator who is a loan 

originator for five or fewer transactions 

is not truly active as an individual loan 

originator and thus is insufficiently 

incentivized to steer consumers to 

different loan terms. Proposed comment 

36(d)(1)–2.iii.H also provides an 

example of the de minimis transaction 

exception as applied to a loan originator 

organization employing six individual 

loan originators. 

The Bureau solicits comment on the 

number of individual loan originators 

who will be affected by the exception 

and whether, in light of such number, 

the de minimis test is necessary. The 

Bureau also solicits comment on the 

appropriate number of originations that 

should constitute the de minimis 

standard, over what time period the 

transactions should be measured, and 

whether this standard should be 

intertwined with the potential total 

compensation test on which the Bureau 

is soliciting comment, discussed in the 

section-by-section analysis to proposed 

§ 1026.36(d)(1)(iii)(B)(1). The Bureau, 

finally, solicits comment on whether the 

12-month period used to measure 

whether the individual loan originator 

has a de minimis number of transactions 

should end on the date on which the 

compensation is paid, rather than the 

date on which the compensation 

decision is made. The Bureau believes 

that having the 12-month period end on 

the date on which the decision is made 

will be simpler for compliance purposes 

because it would require the person to 

verify whether the individual loan 

originator is eligible for the 

compensation payment when making 

the decision, but not thereafter. If the 

12-month period were to end on the 

date of the payment, the employer 

presumably would have to verify the 

number of transactions twice—at the 

time the person decides to award the 

compensation to the individual loan 

originator, and again before the 

compensation is paid (assuming there is 

a time lag between the decision and the 

payment). The Bureau recognizes, 

however, that the date on which the 

compensation is paid may be more 

easily documentable (e.g., through a 

payroll stub) for purposes of the 

recordkeeping requirements proposed 

under § 1026.25(c)(2). 

Proposed comment 36(d)(1)–2.iii.I.1 

and –2.iii.I.2 illustrates 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). 

36(d)(2) Payments by Persons Other 

Than Consumer 

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

Background 

Section 1026.36(d)(2) currently 

provides that if any loan originator 

receives compensation directly from a 

consumer in a consumer credit 

transaction secured by a dwelling: (1) 

No loan originator may receive 

compensation from another person in 

connection with the transaction; and (2) 

no person who knows or has reason to 

know of the consumer-paid 

compensation to the loan originator 

(other than the consumer) may pay any 

compensation to a loan originator in 

connection with the transaction. 

Comment 36(d)(2)–1 currently 

provides that the restrictions imposed 

under § 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 include salary or hourly wages 

that are not tied to a specific 

transaction. 

Thus, under current § 1026.36(d)(2), a 

loan originator that receives 

compensation directly from the 

consumer may not receive 

compensation in connection with the 

transaction (e.g., a commission) from 

any other person (e.g., a creditor). In 

addition, if any loan originator is paid 

compensation directly by the consumer 

in a transaction, no other loan originator 

may receive compensation in 

connection with the transaction from a 

person other than the consumer. 

Moreover, if any loan originator receives 

compensation directly from a consumer, 

no person who knows or has reason to 

know of the consumer-paid 

compensation to the loan originator 

(other than the consumer) may pay any 

compensation to a loan originator in 

connection with the transaction. For 

example, assume that a loan originator 

that is not a natural person (loan 

originator organization) receives 

compensation directly from the 

consumer in a mortgage transaction 

subject to § 1026.36(d)(2). The loan 

originator organization may not receive 

compensation in connection with that 

particular transaction (e.g., a 

commission) from a person other than 

the consumer (e.g., the creditor). In 

addition, because the loan originator 

organization is a person other than the 

consumer, the loan originator 

organization may not pay individual 

loan originators any compensation, such 

as a transaction-specific commission, in 

connection with that particular 

transaction. Consequently, under 

current rules, in the example above, the 

loan originator organization must pay 

individual loan originators only in the 

form of a salary or hourly wage or other 

compensation that is not tied to the 

particular transaction. 

The Dodd-Frank Act 

Section 1403 of the Dodd-Frank Act 

added TILA section 129B. 12 U.S.C. 

1639b. TILA section 129B(c)(2)(A) states 

that, for any mortgage loan, a mortgage 

originator generally may not receive 

from any person other than the 

consumer any origination fee or charge 

except bona fide third-party charges not 

retained by the creditor, mortgage 

originator, or an affiliate of either. 

Likewise, no person, other than the 

consumer, who knows or has reason to 

know that a consumer has directly 

compensated or will directly 

compensate a mortgage originator, may 

pay a mortgage originator any 

origination fee or charge except bona 

fide third-party charges as described 

above. Notwithstanding this general 

prohibition on payments of any 

origination fee or charge to a mortgage 

originator by a person other than the 

consumer, TILA section 129B(c)(2)(B) 

provides that a mortgage originator may 

receive from a person other than the 

consumer an origination fee or charge, 

and a person other than the consumer 

may pay a mortgage originator an 

origination fee or charge, if: (1) The 

mortgage originator does not receive any 

compensation directly from the 

consumer; and (2) ‘‘the consumer does 

not make an upfront payment of 

discount points, origination points, or 

fees, however denominated (other than 

bona fide third party charges not 

retained by the mortgage originator, 

creditor, or an affiliate of the creditor or 

originator).’’ TILA section 129B(c)(2)(B) 

also provides the Bureau authority to 

waive or create exemptions from this 

prohibition on consumers paying 

upfront discount points, origination 

points or fees where doing so is in the 

interest of consumers and the public. 


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The Bureau’s Proposal 

As explained in more detail below, 

while the statute is structured 

differently and uses different 

terminology than existing 

§ 1026.36(d)(2), the restrictions on dual 

compensation set forth in existing 

§ 1026.36(d)(2) generally are consistent 

with the restrictions on dual 

compensation set forth in TILA section 

129B(c)(2). Nonetheless, the Bureau 

proposes several changes to existing 

§ 1026.36(d)(2) (re-designated as 

§ 1026.36(d)(2)(i)) to provide additional 

guidance and flexibility to loan 

originators. For example, as explained 

in more detail below, in response to 

questions, the Bureau proposes to 

provide additional guidance on whether 

compensation to a loan originator paid 

on the borrower’s behalf by a person 

other than a creditor or its affiliates, 

such as a non-creditor seller, home 

builder, home improvement contractor 

or real estate broker or agent, is 

considered compensation received 

directly from a consumer for purposes 

of § 1026.36(d)(2)(i). Specifically, the 

Bureau proposes to add 

§ 1026.36(d)(2)(i)(B) and comment 

36(d)(2)–2.iii to clarify that such 

payments to a loan originator are 

considered compensation received 

directly from the consumer for purposes 

of § 1026.36(d)(2) if they are made 

pursuant to an agreement between the 

borrower and the person other than the 

creditor or its affiliates. 

In addition, currently, § 1026.36(d)(2) 

prohibits a loan originator organization 

that receives compensation directly 

from a consumer in connection with a 

transaction from paying compensation 

in connection with that transaction to 

individual loan originators (such as its 

employee brokers), although the 

organization could pay compensation 

that is not tied to the transaction (such 

as salary or hourly wages) to individual 

loan originators. As explained in more 

detail below, the Bureau proposes to 

revise § 1026.36(d)(2) (re-designated 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 believes that allowing loan 

originator organizations to pay 

compensation in connection with a 

transaction to individual loan 

originators, even if the loan originator 

organization has received compensation 

directly from the consumer in that 

transaction, is consistent with the 

statutory purpose of ensuring that a loan 

originator organization is not 

compensated by both the consumer and 

the creditor for the same transaction 

because whether and how the loan 

originator organization splits its 

compensation with its individual loan 

originators does not affect the total 

amount of compensation paid by the 

consumer (directly or indirectly). 

As discussed in more detail below, 

the Bureau also believes that the 

original purpose of the restriction in 

current § 1026.36(d)(2) is addressed 

separately by other revisions pursuant 

to the Dodd-Frank Act. Under current 

§ 1026.36(d)(1)(iii), compensation paid 

directly by a consumer to a loan 

originator could be based on loan terms 

and conditions. Consequently, 

individual loan originators could have 

incentives to steer a consumer into a 

transaction where the consumer 

compensates the loan originator 

organization directly, resulting in 

greater compensation to the loan 

originator organization than it could 

receive if compensated by the creditor 

subject to the restrictions of 

§ 1026.36(d)(1). The Dodd-Frank Act 

prohibits compensation based on loan 

terms, even when a consumer is paying 

compensation directly to a mortgage 

originator. Thus, if an individual loan 

originator receives compensation in 

connection with the transaction from 

the loan originator organization (where 

the loan originator organization receives 

compensation directly from the 

consumer), the amount of the 

compensation paid by the consumer to 

the loan originator organization, and the 

amount of the compensation paid by the 

loan originator organization to the 

individual loan originator, cannot be 

based on loan terms. 

In addition, with this proposed 

revision, more loan originator 

organizations may be willing to 

structure transactions where consumers 

pay loan originator compensation 

directly. The Bureau believes that this 

result may enhance the interests of 

consumers and the public by giving 

consumers greater flexibility in 

structuring the payment of loan 

originator compensation. 

The Bureau’s proposal on restrictions 

related to dual compensation as set forth 

in proposed § 1026.36(d)(2)(i) are 

discussed in more detail below. 

Compensation received directly from 

the consumer. As discussed above, 

under § 1026.36(d)(2), a loan originator 

that receives compensation directly 

from the consumer may not receive 

compensation in connection with the 

transaction (e.g., a commission) from 

any other person (e.g., a creditor). In 

addition, if any loan originator is paid 

compensation directly by the consumer 

in a transaction, no other loan originator 

(such as an employee of a loan 

originator organization) may receive 

compensation in connection with the 

transaction from another person. 

Moreover, if any loan originator receives 

compensation directly from a consumer, 

no person who knows or has reason to 

know of the consumer-paid 

compensation to the loan originator 

(other than the consumer) may pay any 

compensation to a loan originator, 

directly or indirectly, in connection 

with the transaction. Existing comment 

36(d)(1)–7 provides guidance on when 

payments to a loan originator are 

considered compensation received 

directly from the consumer. The Bureau 

proposes to delete the first sentence of 

this comment because it is no longer 

relevant given that the Bureau proposes 

to remove § 1026.36(d)(1)(iii), as 

discussed above under the section-bysection analysis to proposed 

§ 1026.36(d)(1). The Bureau also 

proposes to move the other content of 

this comment to proposed comment 

36(d)(2)–2.i; no substantive change is 

intended. 

Existing comment 36(d)(2)–2 

references Regulation X, which 

implements the Real Estate Settlement 

Procedures Act (RESPA), and provides 

that a yield spread premium paid by a 

creditor to the loan originator may be 

characterized on the RESPA disclosures 

as a ‘‘credit’’ that will be applied to 

reduce the consumer’s settlement 

charges, including origination fees. 

Existing comment 36(d)(2)–2 clarifies 

that a yield spread premium disclosed 

in this manner is not considered to be 

received by the loan originator directly 

from the consumer for purposes of 

§ 1026.36(d)(2). The Bureau proposes to 

move this guidance to proposed 

comment 36(d)(2)(i)–2.ii and revise it. 

The Bureau proposes to revise the 

guidance in proposed comment 

36(d)(2)(i)–2.ii recognizing that 

§ 1026.36 prohibits yield spread 

premiums and overages. Yield spread 

premiums and overages were additional 

sums (premiums or bonuses) paid to 

mortgage brokers and loan officers, 

respectively, for selling consumers an 

interest rate that is higher than the 

minimum rate the creditor would be 

willing to offer a particular consumer 

based on the creditor’s specific 

underwriting criteria (i.e., the difference 

in interest rate yield, the yield spread, 

or overage) without the borrower paying 


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55306 Federal Register / Vol. 77, No. 174 / Friday, September 7, 2012 / Proposed Rules 

points to reduce this minimum rate 

further. Yield spread premiums or 

overages also differed significantly from 

lender credits or rebates because the 

loan originator had the discretion to 

retain all of the proceeds obtained from 

the yield spread premium or overage 

and not use any proceeds to reduce the 

borrower’s settlement costs. 

‘‘Rebates,’’ ‘‘credits,’’ or ‘‘lender 

credits’’ on the other hand are paid by 

the creditor for the interest rate chosen 

by the consumer or on behalf of the 

consumer to reduce the consumer’s 

settlement costs. Comment 36(d)(2)–2 

(re-designated as proposed comment 

36(d)(2)(i)–2.ii) would be revised to use 

the term ‘‘rebates’’ and ‘‘credits,’’ 

instead of yield spread premiums. 

Rebates are disclosed as ‘‘credits’’ under 

the current Regulation X disclosure 

regime. 

The Bureau also proposes to add 

§ 1026.36(d)(2)(i)(B) and comment 

36(d)(2)(i)–2.iii to provide additional 

guidance on the phrase ‘‘compensation 

directly from the consumer’’ as used in 

new TILA section 129B(c)(2)(B), as 

added by section 1403 of the DoddFrank 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 borrower by 

a person other than the creditor are 

considered compensation received 

directly from a consumer for purposes 

of § 1026.36(d)(2). For example, noncreditor sellers, home builders, home 

improvement contractors, or real estate 

brokers or agents may agree to pay some 

or all of the consumer’s closing costs. 

Some of this payment may be used to 

compensate a loan originator. In 

proposed § 1026.36(d)(2)(i)(B), the 

Bureau proposes to interpret the phrase 

‘‘compensation directly from the 

consumer’’ as used in new TILA section 

129B(c)(2)(B) and proposed 

§ 1026.36(d)(2)(i) to include payments to 

a loan originator made pursuant to an 

agreement between the consumer and a 

person other than the creditor or its 

affiliates. Proposed comment 

36(d)(2)(i)–2.iii clarifies that whether 

there is an agreement between the 

parties will depend on State law. See 

§ 1026.2(b)(3). Also, proposed comment 

36(d)(2)(i)–2.iii makes clear that the 

parties do not have to agree specifically 

that the payments will be used to pay 

for the loan originator’s compensation, 

but just that the person will make a 

payment toward the borrower’s closing 

costs. For example, assume that a noncreditor seller has an agreement with 

the borrower to pay $1,000 of the 

borrower’s closing costs on a 

transaction. Any of the $1,000 that is 

used to pay compensation to a loan 

originator is deemed to be compensation 

received directly from the consumer, 

even if the agreement does not specify 

that some or all of $1,000 must be used 

to compensate the loan originator. In 

such cases, the loan originator would be 

permitted to receive compensation from 

both the consumer and the other person 

who has the agreement with the 

consumer (but not from any other 

person). 

The Bureau believes that 

arrangements where a person other than 

a creditor or its affiliate pays 

compensation to a loan originator on 

behalf of the borrower do not raise the 

same concerns as when that 

compensation is being paid by the 

creditor or its affiliates. The Bureau 

believes that one of the primary goals of 

section 1403 of the Dodd-Frank Act is 

to restrict a loan originator from 

receiving compensation both directly 

from a consumer and from the creditor 

or its affiliates, which more easily may 

occur without the consumer’s 

knowledge. Allowing loan originators to 

receive compensation from both the 

consumer and the creditor can create 

inherent conflicts of interest of which 

consumers may not be aware. When a 

loan originator organization charges the 

consumer a direct fee for arranging the 

consumer’s mortgage loan, this charge 

may lead the consumer to infer that the 

broker accepts the consumer-paid fee to 

represent the consumer’s financial 

interests. Consumers also may 

reasonably believe that the fee they pay 

is the originator’s sole compensation. 

This may lead reasonable consumers 

erroneously to believe that loan 

originators are working on their behalf, 

and are under a legal or ethical 

obligation to help them obtain the most 

favorable loan terms and conditions. 

Consumers may regard loan originators 

as ‘‘trusted advisors’’ or ‘‘hired experts,’’ 

and consequently rely on originators’ 

advice. Consumers who regard loan 

originators in this manner may be less 

likely to shop or negotiate to assure 

themselves that they are being offered 

competitive mortgage terms. 

The Bureau believes, however, that 

the statutory goals discussed above are 

facilitated by proposed 

§ 1026.36(d)(2)(i)(B) and comment 

36(d)(2)(i)–2.iii. Under the proposal, a 

payment by a person other than a 

creditor or its affiliates is considered 

received directly from the consumer for 

purposes of § 1026.36(d)(2) only if the 

payment is made pursuant to an 

agreement between the consumer and 

that person. Thus, if there is an 

agreement, presumably the consumer 

will be aware of the payment. In 

addition, because this payment would 

be considered compensation directly 

received from the consumer, the 

consumer is the only other person in the 

transaction that could pay 

compensation in connection with the 

transaction to the loan originator. For 

example, the creditor or its affiliates 

could not pay compensation in 

connection with the transaction to the 

loan originator. 

In addition, the Bureau believes that 

proposed § 1026.36(d)(2)(i)(B) and 

comment 36(d)(2)(i)–2.iii help prevent 

circumvention of the dual compensation 

provisions. If payments by persons other 

than the creditor or its affiliates were 

not deemed to be compensation directly 

from the consumer, a loan originator 

could arrange for the consumer to pay 

compensation to such a person and for 

that person to pay the compensation to 

the loan originator. Because this 

payment would not be deemed to be 

coming directly from the consumer, the 

loan originator could receive 

compensation from a creditor and this 

other person, circumventing the dual 

compensation rules. 

Under proposed § 1026.36(d)(2)(i)(B) 

and comment 36(d)(2)(i)–2.iii, payment 

of loan originator compensation by an 

affiliate of the creditor, including a 

seller, home builder, home 

improvement contractor, etc., to a loan 

originator is not deemed to be made 

directly by the consumer for purposes of 

§ 1026.36(d)(2) (re-designated as 

proposed § 1026.36(d)(2)(i)), even if the 

payment is made pursuant to an 

agreement between the borrower and 

the affiliate. That is, for example, if a 

home builder is an affiliate of a creditor, 

proposed § 1026.36(d)(2)(i) prohibits 

this person from paying compensation 

in connection with a transaction if a 

consumer pays compensation to the 

loan originator in connection with the 

transaction. This proposal is consistent 

with current § 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 directly made by the 

consumer may allow creditors to 

circumvent the restrictions in proposed 

§ 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 


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consumer. As discussed above, under 

§ 1026.36(d)(2), a loan originator that 

receives compensation directly from the 

consumer in a closed-end consumer 

credit transaction secured by a dwelling 

may not receive compensation from any 

other person in connection with the 

transaction. In addition, in such cases, 

no person who knows or has reason to 

know of the consumer-paid 

compensation to the loan originator 

(other than the consumer) may pay any 

compensation to the loan originator in 

connection with the transaction. Current 

comment 36(d)(2)–1 provides that, for 

purposes of § 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 restricted 

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. 

Except as provided below, the Bureau 

proposes to retain the prohibition 

described above in current 

§ 1026.36(d)(2) (re-designated as 

§ 1026.36(d)(2)(i)), as consistent with 

the restriction on dual compensation set 

forth in TILA section 129B(c)(2). 

Specifically, TILA section 129B(c)(2)(A) 

provides that for any mortgage loan, a 

mortgage originator generally may not 

receive from any person other than the 

consumer any origination fee or charge 

except bona fide third-party charges not 

retained by the creditor, the mortgage 

originator, or an affiliate of either. 

Likewise, no person, other than the 

consumer, who knows or has reason to 

know that a consumer has directly 

compensated or will directly 

compensate a mortgage originator, may 

pay a mortgage originator any 

origination fee or charge except bona 

fide third party charges as described 

above. In addition, section 129B(c)(2)(B) 

provides that a mortgage originator may 

receive an origination fee or charge from 

a person other than the consumer if, 

among other things, the mortgage 

originator does not receive any 

compensation directly from the 

consumer. 

Pursuant to its authority under TILA 

section 105(a) to effectuate the purposes 

of TILA and facilitate compliance with 

TILA, the Bureau interprets ‘‘origination 

fee or charge’’ to mean compensation 

that is paid ‘‘in connection with the 

transaction,’’ such as commissions, that 

are specific to, and paid solely in 

connection with, the transaction. The 

Bureau believes that, if Congress 

intended the prohibitions on dual 

compensation to apply to salary or 

hourly wages that are not tied to a 

specific transaction, Congress would 

have used the term ‘‘compensation’’ in 

TILA section 129B(c)(2), as it did in 

TILA section 129B(c)(1) that prohibits 

compensation based on loan terms. 

Thus, like current § 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. 

Nonetheless, TILA section 129B(c)(2) 

does not restrict a mortgage originator 

from receiving payments from a person 

other than the consumer for bona fide 

third-party charges not retained by the 

creditor, mortgage originator, or an 

affiliate of the creditor or mortgage 

originator, even if the mortgage 

originator receives compensation 

directly from the consumer. For 

example, assume that a loan originator 

receives compensation directly from a 

consumer in a transaction. TILA section 

129B(c)(2) does not restrict the loan 

originator from receiving payment from 

a person other than the consumer (e.g., 

a creditor) for bona fide and reasonable 

charges, such as credit reports, where 

those amounts are not retained by the 

loan originator but are paid to a third 

party that is not the creditor, its affiliate, 

or the affiliate of the loan originator. 

Because the loan originator does not 

retain such charges, they are not 

considered part of the loan originator’s 

compensation for purposes of 

§ 1026.36(d). 

Consistent with TILA section 

129B(c)(2) and pursuant to the Bureau’s 

authority under TILA section 105(a) to 

effectuate the purposes of TILA and 

facilitate compliance with TILA, as 

discussed in more detail in the sectionby-section analysis to proposed 

§ 1026.36(a), the Bureau proposes to 

amend 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 could receive 

a payment from a person other than the 

consumer for bona fide and reasonable 

charges where those amounts are not 

retained by the loan originator but are 

paid to a third party that is not the 

creditor, its affiliate, or the affiliate of 

the loan originator. For example, 

assume a loan originator receives 

compensation directly from a consumer 

in a transaction. Further assume the 

loan originator charges the consumer 

$25 for a credit report provided by a 

third party that is not the creditor, its 

affiliates or the affiliate of the loan 

originator, and this fee is bona fide and 

reasonable. Assume also that the $25 for 

the credit report is paid by the creditor 

with proceeds from a rebate. The loan 

originator in that transaction is not 

prohibited by proposed 

§ 1026.36(d)(2)(i) from receiving the $25 

from the creditor, even though the 

consumer paid compensation to the 

loan originator in the transaction. 

In addition, a loan originator that 

receives compensation in connection 

with a transaction from a person other 

than the consumer could receive a 

payment from the consumer for a bona 

fide and reasonable charge where the 

amount of that charge is not retained by 

the loan originator but is paid to a third 

party that is not the creditor, its affiliate, 

or the affiliate of the loan originator. For 

example, assume a loan originator 

receives compensation in connection 

with a transaction from a creditor. 

Further assume the loan originator 

charges the consumer $25 for a credit 

report provided by a third party that is 

not the creditor, its affiliates or the 

affiliate of the loan originator, and this 

fee is bona fide and reasonable. Assume 

the $25 for the credit report is paid by 

the consumer. The loan originator in 

that transaction is not prohibited by 

proposed § 1026.36(d)(2)(i) from 

receiving the $25 from the consumer, 

even though the creditor paid 

compensation to the loan originator in 

connection with the transaction. 

As discussed in more detail in the 

section-by-section analysis to proposed 

§ 1026.36(a), proposed comment 36(a)– 

5.iii also recognizes that, in some cases, 

amounts received for payment for such 

third-party charges may exceed the 


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55308 Federal Register / Vol. 77, No. 174 / Friday, September 7, 2012 / Proposed Rules 

actual charge because, for example, the 

originator cannot determine precisely 

what the actual charge will be before 

consummation. In such a case, under 

proposed comment 36(a)–5.iii, the 

difference retained by the originator 

would not be deemed compensation if 

the third-party charge collected from the 

consumer or a person other than the 

consumer was bona fide and reasonable, 

and also complies with State and other 

applicable law. On the other hand, if the 

originator marks up a third-party charge 

(a practice known as ‘‘upcharging’’), and 

the originator retains the difference 

between the actual charge and the 

marked-up charge, the amount retained 

is compensation for purposes of 

§ 1026.36(d) and (e). Proposed comment 

36(a)–5.iii contains two illustrations, 

which are discussed in more detail in 

the section-by-section analysis to 

proposed § 1026.36(a). 

If any loan originator receives 

compensation directly from the 

consumer, no other loan originator may 

receive compensation in connection 

with the transaction. Under current 

§ 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 could pay 

individual loan originators a salary or 

hourly wage or other compensation that 

is not tied to the particular transaction. 

See current comment 36(d)(2)–1. In 

addition, a person other than the 

consumer (e.g., the creditor) may not 

pay compensation in connection with 

the transaction to any loan originator, 

such as a loan originator that is 

employed by the creditor or by the loan 

originator organization. 

TILA section 129B(c)(2), which was 

added by section 1403 of the DoddFrank Act, generally is consistent with 

the above prohibition in current 

§ 1026.36(d)(2) (re-designated as 

proposed § 1026.36(d)(2)(i)). 12 U.S.C. 

1639b(c)(2). TILA section 129B(c)(2)(B) 

prohibits a loan originator organization 

that receives compensation directly 

from a consumer in a transaction from 

paying compensation tied to the 

transaction (such as a commission) to 

individual loan originators. Specifically, 

TILA section 129B(c)(2)(B) provides that 

a mortgage originator may receive from 

a person other than the consumer an 

origination fee or charge, and a person 

other than the consumer may pay a 

mortgage originator an origination fee or 

charge, if: (1) The mortgage originator 

does not receive any compensation 

directly from the consumer; and (2) ‘‘the 

consumer does not make an upfront 

payment of discount points, origination 

points, or fees, however denominated 

(other than bona fide third party charges 

not retained by the mortgage originator, 

creditor, or an affiliate of the creditor or 

originator).’’ The individual loan 

originator is the one that is receiving 

compensation from a person other than 

the consumer, namely the loan 

originator organization. Thus, TILA 

section 129B(c)(2)(B) permits the 

individual loan originator to receive 

compensation tied to the transaction 

from the loan originator organization if 

(1) the individual loan originator does 

not receive any compensation directly 

from the consumer and (2) the consumer 

does not make an upfront payment of 

discount points, origination points, or 

fees, however denominated (other than 

bona fide third party charges not 

retained by the individual loan 

originator, creditor, or an affiliate of the 

creditor or originator). The individual 

loan originator is not deemed to be 

receiving compensation in connection 

with the transaction from a consumer 

simply because the loan originator 

organization is receiving compensation 

from the consumer in connection with 

the transaction. The loan originator 

organization and the individual loan 

originator are separate persons. 

Nonetheless, the consumer is making 

‘‘an upfront payment of discount points, 

origination points, or fees’’ in the 

transaction when it pays the loan 

originator organization compensation. 

The payment of the origination point or 

fee by the consumer to the loan 

originator organization is not a bona fide 

third-party charge under TILA section 

129B(c)(2)(B)(ii). Thus, because the loan 

originator organization has received an 

upfront payment of origination points or 

fees from the consumer in the 

transaction, unless the Bureau exercises 

its exemption authority as discussed in 

more detail below, no loan originator 

(including an individual loan originator) 

may receive compensation tied to the 

transaction from a person other than the 

consumer. 

Nonetheless, TILA section 

129B(c)(2)(B) also provides the Bureau 

authority to waive or create exemptions 

from this prohibition on consumers 

paying upfront discount points, 

origination points or fees, where doing 

so is in the interest of consumers and 

the public. Pursuant to this waiver/ 

exemption authority, the Bureau 

proposes to add § 1026.36(d)(2)(i)(C) to 

provide that, if a loan originator 

organization receives compensation 

directly from a consumer in connection 

with a transaction, the loan originator 

entity may pay compensation to 

individual loan originators, and the 

individual loan originators may receive 

compensation from the loan originator 

organization. The Bureau also proposes 

to amend comment 36(d)(2)–1 (redesignated as proposed comment 

36(d)(2)(i)–1) to be consistent with 

proposed § 1026.36(d)(2)(i)(C). For the 

reasons discussed below, the Bureau 

believes that it is in the interest of 

consumers and the public to allow a 

loan originator organization to pay 

individual loan originators 

compensation in connection with the 

transaction, even when the loan 

originator organization has received 

compensation in connection with the 

transaction directly from the consumer. 

The Bureau believes that the risk of 

harm to consumers that the current 

restriction was intended to address is 

likely no longer present, in light of new 

TILA provision 129B(c)(1). Under 

current § 1026.36(d)(1)(iii), 

compensation paid directly by a 

consumer to a loan originator could be 

based on loan terms and conditions. 

Thus, if a loan originator organization 

were allowed to pay an individual loan 

originator that works for the 

organization a commission in 

connection with a transaction, the 

individual loan originator could 

possibly steer the consumer into a loan 

with terms and conditions that would 

produce greater compensation to the 

loan originator organization, and the 

individual loan originator, because of 

this steering, could receive greater 

compensation if he or she were allowed 

to receive compensation in connection 

with the transaction. However, the risk 

is now expressly addressed by the 

Dodd-Frank Act. Specifically, TILA 

section 129B(c)(1), as added by section 

1403 of the Dodd-Frank Act, prohibits 

compensation based on loan terms, even 

when a consumer is paying 

compensation directly to a mortgage 

originator. 12 U.S.C. 1639b(c)(1). Thus, 

pursuant to TILA section 129B(c)(1), 

and under proposed § 1026.36(d)(1), 

even if an individual loan originator is 


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Federal Register / Vol. 77, No. 174 / Friday, September 7, 2012 / Proposed Rules 55309 

permitted to receive compensation in 

connection with the transaction from 

the loan originator organization where 

the loan originator organization receives 

compensation directly from the 

consumer, the amount of the 

compensation paid by the consumer to 

the loan originator organization, and the 

amount of the compensation paid by the 

loan originator organization to the 

individual loan originator, cannot be 

based on loan terms. In outreach with 

consumer groups, these groups agreed 

that loan origination organizations that 

receive compensation directly from a 

consumer in a transaction should be 

permitted to pay individual loan 

originators that work for the 

organization compensation in 

connection with the transaction. 

The Bureau believes that it is in the 

interest of consumers and the public to 

allow loan originator organizations to 

pay compensation in connection with 

the transaction to individual loan 

originators, even when the loan 

originator organization is receiving 

compensation directly from the 

consumer. As discussed above, the 

Bureau believes the risk of the harm to 

the consumer that the restriction was 

intended to address has been remedied 

by the statutory amendment prohibiting 

even compensation that is paid by the 

consumer from being based on the 

transaction’s terms. With that protection 

in place, allowing this type of 

compensation to the individual loan 

originator no longer presents the same 

risk to the consumer of being steered 

into a transaction involving direct 

compensation from the consumer 

because both the loan originator 

organization and the individual loan 

originator can realize greater 

compensation. In addition, with this 

proposed revision, more loan originator 

organizations may be willing to 

structure transactions where consumers 

pay loan originator compensation 

directly. The Bureau believes that this 

result will enhance the interests of 

consumers and the public by giving 

consumers greater flexibility in 

structuring the payment of loan 

originator compensation. In a 

transaction where the consumer pays 

compensation directly to the loan 

originator, the amount of the 

compensation may be more transparent 

to the consumer. In addition, in these 

transactions, the consumer may have 

more flexibility to choose the pricing of 

the loan. Subject to proposed 

§ 1026.36(d)(2)(ii), as discussed in more 

detail below, in transactions where the 

consumer pays compensation directly to 

the loan originator, the consumer would 

know the amount of the loan originator 

compensation and could pay all of that 

compensation upfront, rather than the 

creditor determining the compensation 

and recovering the cost of that 

compensation from the consumer 

through the rate, or a combination of the 

rate and upfront origination points or 

fees. 

36(d)(2)(ii) Restrictions on Discount 

Points and Origination Points or Fees 

Background 

As discussed above, under current 

§ 1026.36(d)(2), a person other than the 

consumer (e.g., a creditor) is not 

prohibited from paying compensation to 

any loan originator in connection with 

a transaction, so long as no loan 

originator has received compensation 

directly from the consumer in that 

transaction. Loan originator 

organizations typically are the only loan 

originators that receive compensation 

directly from the consumer in a 

transaction. Individual loan originators 

that work for a loan originator 

organization typically are prohibited by 

applicable law and by the loan 

originator organization from receiving 

compensation directly from the 

consumer. Thus, in the typical 

transaction that involves a loan 

originator organization, under 

§ 1026.36(d)(2), a creditor is not 

prohibited from paying compensation in 

connection with a transaction (e.g., 

commission) to a loan originator 

organization and the loan originator 

organization is not prohibited from 

paying compensation in connection 

with the transaction to individual loan 

originators, so long as the loan 

originator organization has not received 

compensation directly from the 

consumer in that transaction. In 

addition, in a transaction that does not 

involve a loan originator organization, a 

creditor is not prohibited under 

§ 1026.36(d)(2) from paying 

compensation in connection with a 

transaction to individual loan 

originators that work for the creditor, so 

long as the individual loan originators 

have not received compensation directly 

from the consumer in that transaction, 

which they are generally prohibited 

from doing by the creditor pursuant to 

safety and soundness regulation. 

Also, if a creditor is paying 

compensation in connection with a 

transaction to a loan originator 

organization or to individual loan 

originators that work for the creditor, as 

described above, current § 1026.36(d)(2) 

does not prohibit the creditor from 

collecting discount points or origination 

points or fees from the consumer in the 

transaction. For example, current 

§ 1026.36(d)(2) does not limit a 

creditor’s ability to charge the consumer 

origination points or fees which the 

consumer would pay in cash or out of 

the loan proceeds at or before closing as 

a means for the creditor to collect the 

loan originator’s compensation or other 

costs. In addition, current 

§ 1026.36(d)(2) does not limit a 

creditor’s ability to offer a lower interest 

rate in a transaction in exchange for the 

consumer paying discount points. 

The Dodd-Frank Act 

New TILA section 129B(c)(2), which 

was added by section 1403 of the DoddFrank Act, restricts the ability of a 

creditor, the mortgage originator, or the 

affiliates of either to collect from the 

consumer upfront discount points, 

origination points, or fees in a 

transaction. 12 U.S.C. 1639b(c)(2). 

Specifically, TILA section 129B(c)(2)(B) 

provides that a mortgage originator may 

receive from a person other than the 

consumer an origination fee or charge, 

and a person other than the consumer 

may pay a mortgage originator an 

origination fee or charge, if: (1) the 

mortgage originator does not receive any 

compensation directly from the 

consumer; and (2) ‘‘the consumer does 

not make an upfront payment of 

discount points, origination points, or 

fees, however denominated (other than 

bona fide third party charges not 

retained by the mortgage originator, 

creditor, or an affiliate of the creditor or 

originator).’’ TILA section 

129B(c)(2)(B)(ii) also provides the 

Bureau authority to waive or create 

exemptions from this prohibition on 

consumers paying upfront discount 

points, origination points, or fees, where 

doing so is in the interest of consumers 

and the public interest. 

As discussed in more detail in the 

section-by-section analysis to proposed 

§ 1026.36(d)(2)(i), the Bureau interprets 

the phrase ‘‘origination fee or charge’’ as 

used in new TILA section 129B(c)(2) 

more narrowly than compensation as 

used in TILA section 129B(c)(1) and to 

mean compensation that is paid ‘‘in 

connection with the transaction,’’ such 

as commissions, that are specific to, and 

paid solely in connection with, the 

transaction. Thus, under TILA section 

129B(c)(2), for a transaction involving a 

loan originator organization, a creditor 

may pay compensation in connection 

with a transaction (e.g., a commission) 

to the loan originator organization, and 

the loan originator organization may pay 

compensation in connection with a 

transaction to individual loan 

originators only if: (1) The loan 

originator organization does not receive 

compensation directly from the 


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55310 Federal Register / Vol. 77, No. 174 / Friday, September 7, 2012 / Proposed Rules 

62The Bureau notes that the restrictions in TILA 

section 129B(c)(2) do not apply in transactions 

where a loan originator organization receives 

compensation directly from the consumer and the 

loan originator organization does not pay individual 

loan originators compensation (such as a 

commission) in connection with the transaction. In 

these cases, TILA section 129(B)(c)(2) is not 

violated because no loan originator is receiving 

compensation in connection with a transaction 

from a person other than the consumer. 

consumer; and (2) the consumer does 

not make an upfront payment of 

discount points, origination points, or 

fees as discussed above. 

In addition, the Bureau proposes to 

use its exemption authority in TILA 

section 129B(c)(2)(B)(ii) to permit a loan 

originator organization to pay 

compensation in connection with a 

transaction to individual loan 

originators, even if the loan originator 

organization received compensation 

directly from the consumer. Assume a 

transaction where a loan originator 

organization receives compensation 

directly from the consumer. As 

discussed in more detail in the sectionby-section analysis to proposed 

§ 1026.36(d)(2)(i), TILA section 

129B(c)(2) prohibits the loan originator 

organization from paying compensation 

tied to a transaction (such as 

commission) to an individual loan 

originator unless: (1) The individual 

loan originator does not receive 

compensation directly from the 

consumer; and (2) the consumer does 

not make an upfront payment of 

discount points, origination points, or 

fees, however denominated (other than 

bona fide third party charges not 

retained by the individual loan 

originator, creditor, or an affiliate of the 

creditor or originator). An individual 

loan originator is not deemed to be 

receiving compensation in connection 

with a transaction from a consumer 

simply because the loan originator 

organization is receiving compensation 

from the consumer in connection with 

the transaction. The loan originator 

organization and the individual loan 

originator are separate persons. 

Nonetheless, the consumer makes ‘‘an 

upfront payment of discount points, 

origination points, or fees’’ in the 

transaction when the loan originator 

organization is paid compensation by 

the consumer. The payment of the 

origination points or fees by the 

consumer to the loan originator 

organization is not considered a bona 

fide third-party charge under TILA 

section 129B(c)(2)(B)(ii). Thus, because 

the loan originator organization has 

received an upfront payment of 

origination points or fees from the 

consumer in the transaction, unless the 

Bureau exercises its exemption 

authority, no loan originator (including 

an individual loan originator) could 

receive compensation tied to the 

transaction from a person other than the 

consumer.62

Likewise, under TILA section 

129B(c)(2), for a transaction not 

involving a loan originator organization, 

unless the Bureau exercises its 

exemption authority, a creditor may pay 

compensation in connection with a 

transaction to individual loan 

originators, such as the creditor’s 

employees, only if: (1) These individual 

loan originators do not receive 

compensation directly from the 

consumer, which they are generally 

prohibited from doing by the creditor 

pursuant to safety and soundness 

regulation; and (2) the consumer does 

not make an upfront payment of 

discount points, origination points, or 

fees as discussed above. As a result, 

under TILA section 129B(c)(2), if a 

consumer pays discount points, 

origination points, or fees to a creditor, 

the creditor cannot pay compensation in 

connection with the transaction (e.g., a 

commission) to individual loan 

originators that work for the creditor. 

However, the restrictions in TILA 

section 129B(c)(2) do not apply if a 

creditor does not pay compensation to 

individual loan originators that is not 

tied to a particular transaction. For 

example, if a creditor pays to individual 

loan originators only a salary or hourly 

wage, the restriction on the consumer 

paying discount points, origination 

points, or fees in the transaction as set 

forth in TILA section 129B(c)(2)(B)(ii) 

would not apply. In this case, the 

creditor and its affiliates could collect 

discount points, origination points, or 

fees, as described in TILA section 

129B(c)(2)(B)(ii), from the consumer. 

To summarize, the prohibition in 

TILA section 129B(c)(2)(B)(ii) on the 

consumer paying upfront discount 

points, origination points, or fees in a 

transaction generally applies in three 

scenarios: (1) The creditor pays 

compensation in connection with the 

transaction (e.g., a commission) to 

individual loan originators, such as the 

creditor’s employees; (2) the creditor 

pays a loan originator organization 

compensation in connection with a 

transaction, regardless of how the loan 

originator organization pays 

compensation to individual loan 

originators; and (3) the loan originator 

organization receives compensation 

directly from the consumer in a 

transaction and pays individual loan 

originators compensation in connection 

with the transaction. The prohibition in 

TILA section 129B(c)(2)(B)(ii) on the 

consumer paying upfront discount 

points, origination points, or fees in a 

transaction generally does not apply in 

the following two scenarios: (1) The 

creditor pays individual loan 

originators, such as the creditor’s 

employees, only in the form of a salary, 

hourly wage or other compensation that 

is not tied to the particular transaction; 

and (2) the loan originator organization 

receives compensation directly from the 

consumer in a transaction and pays 

individual loan originators that work for 

the organization only in the form of a 

salary, hourly wage, or other 

compensation that is not tied to the 

particular transaction. The Bureau 

understands, however, that in most 

transactions, creditors and loan 

originator organizations pay individual 

loan originators compensation tied to a 

particular transaction (such as a 

commission). Thus, the Bureau expects 

that the restrictions in new TILA section 

129B(c)(2)(B)(ii) will apply to most 

mortgage transactions except to the 

extent that the Bureau exercises its 

exemption authority as discussed 

below. 

The Bureau’s Proposal 

The Bureau is proposing to 

implement the statutory provisions 

addressing the prohibition on the 

upfront payment by the consumer of 

discount points, origination points, or 

fees as set forth in TILA section 

129B(c)(2)(B)(ii) by using its exemption 

authority provided in that same section. 

Specifically, the Bureau proposes to use 

its exemption authority set forth in 

TILA section 129B(c)(2)(B)(ii), which 

provides the Bureau authority to waive 

or create exemptions from the 

prohibition on consumers’ paying 

upfront discount points, origination 

points, or fees, where doing so is in the 

interest of consumers and the public. 

As discussed in more detail below, 

the Bureau proposes in new 

§ 1026.36(d)(2)(ii)(A) restrictions on 

discount points and origination points 

or fees in a closed-end consumer credit 

transaction secured by a dwelling, if any 

loan originator will receive from any 

person other than the consumer 

compensation in connection with the 

transaction. Specifically, in these 

transactions, a creditor or loan 

originator organization may not impose 

on the consumer any discount points 

and origination points or fees in 

connection with the transaction unless 

the creditor makes available to the 

consumer a comparable, alternative loan 

that does not include discount points 

and origination points or fees; the 

creditor need not make available the 


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alternative, comparable loan, however, 

if the consumer is unlikely to qualify for 

such a loan. The term ‘‘comparable’’ 

means equal or equivalent. Thus, the 

term ‘‘comparable, alternative loan’’ 

would mean that the two loans must 

have the same terms and conditions, 

other than the interest rate, any terms 

that change solely as a result of the 

change in the interest rate (such as the 

amount of the regular periodic 

payments), and the amount of any 

discount points and origination points 

or fees. 

Under the proposal, a creditor would 

not be required to provide all consumers 

the option of a comparable, alternative 

loan that does not include discount 

points and origination points or fees. If 

the creditor determines that a consumer 

is unlikely to qualify for a comparable, 

alternative loan that does not include 

discount points and origination points 

or fees, the creditor is not required to 

make such a loan available to the 

consumer. 

The Bureau notes that under 

§ 1026.36(d)(3), affiliates are treated as a 

single ‘‘person.’’ Thus, affiliates of the 

creditor and the loan originator 

organization also could not impose on 

the consumer any discount points and 

origination points or fees in connection 

with the transaction unless the creditor 

makes available to the consumer a 

comparable, alternative loan that does 

not include discount points and 

origination points or fees, except that 

the creditor need not make available the 

alternative, comparable loan if the 

consumer is unlikely to qualify for such 

a loan. See proposed comment 

36(d)(2)(ii)–3. The proposal also makes 

clear that proposed § 1026.36(d)(2)(ii) 

does not override any of the 

prohibitions on dual compensation set 

forth in proposed § 1026.36(d)(2)(i), as 

discussed above. For example, 

§ 1026.36(d)(2)(ii) does not permit a 

loan originator organization to receive 

compensation in connection with a 

transaction both from a consumer and 

from a person other than the consumer. 

See proposed comment 36(d)(2)(ii)–1.iii. 

The proposal also provides that no 

discount points and origination points 

or fees may be imposed on the 

consumer in connection with a 

transaction subject to proposed 

§ 1026.36(d)(2)(ii)(A) unless there is a 

bona fide reduction in the interest rate 

compared to the interest rate for the 

comparable, alternative loan that does 

not include discount points and 

origination points or fees required to be 

made available to the consumer under 

§ 1026.36(d)(2)(ii)(A). In addition, for 

any rebate paid by the creditor that will 

be applied to reduce the consumer’s 

settlement charges, the creditor must 

provide a bona fide rebate in return for 

an increase in the interest rate compared 

to the interest rate for the loan that does 

not include discount points and 

origination points or fees required to be 

made available to the consumer under 

§ 1026.36(d)(2)(ii)(A). As discussed in 

more detail below, the Bureau has 

evaluated three primary types of 

approaches to implement a requirement 

that the trade-off be ‘‘bona fide.’’ 

As described in more detail below, 

the Bureau proposes in new 

§ 1026.36(d)(2)(ii)(B) to define the term 

‘‘discount points and origination points 

or fees’’ for purposes of § 1026.36(d) and 

(e) to include all items that would be 

included in the finance charge under 

§ 1026.4(a) and (b), and any fees 

described in § 1026.4(a)(2) 

notwithstanding that those fees may not 

be included in the finance charge under 

§ 1026.4(a)(2), that are payable at or 

before consummation by the consumer 

to a creditor or a loan originator 

organization, except for: (1) Interest, 

including per-diem interest; (2) any 

bona fide and reasonable third-party 

charges not retained by the creditor or 

loan originator organization; and (3) 

seller’s points and premiums for 

property insurance that are excluded 

from the finance charge under 

§ 1026.4(c)(5), and (d)(2), respectively. 

Under the proposal, the phrase ‘‘payable 

at or before consummation by the 

consumer to a creditor or a loan 

originator organization’’ would include 

amounts paid by the consumer in cash 

at or before closing or financed and paid 

out of the loan proceeds. 

The Bureau notes that the proposal 

does not contain two potential 

restrictions that were discussed as part 

of the Small Business Review Panel 

process. First, the proposal does not 

contain a provision that would ban 

origination points and prevent 

origination fees from varying based on 

loan size. By and large, SERs were 

strongly opposed to the requirement 

that origination fees do not vary with 

the size of loan. SERs’ opposition to the 

flat fee requirement was based on the 

view that the costs of origination varied 

for loans with different characteristics, 

such as geography and loan type, and 

GSE-imposed loan level pricing 

adjustments vary by loan size. In 

addition, SERs stated that the 

imposition of the flat fee requirement 

would disproportionately harm small 

lenders and would be regressive because 

borrowers with smaller loan amounts 

would be charged more than they are 

typically charged currently. The Bureau 

believes that the provisions set forth in 

this proposal accomplish a similar 

purpose as the flat fee requirement, 

namely to ensure that consumers are in 

the position to shop and receive value 

for origination points or fees, but does 

so in a way to minimize adverse 

consequences for industry and 

consumers that the flat fee requirement 

might entail. 

Second, the proposal does not contain 

a provision that would ‘‘sunset’’ the 

proposed exemptions from the statutory 

restrictions on consumers’ upfront 

payment of discount points, origination 

points, or fees. As detailed in the Small 

Business Review Panel Report, the 

Bureau had considered a sunset 

provision whereby, after a specified 

period (e.g., three or five years), the 

proposed rule permitting creditors and 

loan originator organizations in certain 

circumstances to impose upfront 

discount points and origination points 

or fees on consumers would 

automatically expire (and the default 

prohibition would take full effect) 

unless the Bureau takes affirmative 

action to extend it. At that time, the 

Bureau would have had time to conduct 

a more detailed assessment of the 

payment of discount points and 

origination points or fees in a more 

stable regulatory environment to 

determine the long-term regulatory 

regime that would maximize consumer 

protections and credit availability. As 

part of the Small Business Review Panel 

process, the Bureau also noted that with 

or without a sunset provision, the 

Bureau would review the regulation 

within five years of its effective date 

pursuant to section 1022(d) of the DoddFrank Act, which requires the Bureau to 

‘‘conduct an assessment of each 

significant rule or order adopted by the 

Bureau under Federal consumer 

financial law’’ and publish a report of 

its assessment. 12 U.S.C. 5512(d). The 

assessment must address, among other 

relevant factors, the effectiveness of the 

rule or order in meeting the Dodd-Frank 

Act’s purposes and objectives and the 

specific goals stated by the Bureau, and 

it must reflect any available evidence 

and data collected by the Bureau. Before 

publishing a report of its assessment, 

the Bureau is required to invite public 

comment on recommendations for 

modifying, expanding, or eliminating 

the newly adopted significant rule or 

order. 

SERs generally preferred the Bureau 

to follow its Dodd-Frank-Act 

requirement to review the impact of 

whatever regulation is adopted after five 

years instead of adopting an automatic 

sunset. The SERs believed an automatic 

sunset could be disruptive to the 

market. 


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To minimize potential disruption to 

the market, the Bureau is not proposing 

the ‘‘sunset’’ provision. The Bureau 

believes that the review it must conduct 

within five years of the rule’s effective 

date pursuant to section 1022(d) of the 

Dodd-Frank Act is the appropriate 

method to continue to assess the impact 

of the rule. If the Bureau finds through 

this review that changes in the rule may 

be needed, the Bureau could make 

changes to the rule with notice and 

comment as appropriate. Nonetheless, 

the Bureau solicits comment on whether 

such as ‘‘sunset’’ provision would be 

beneficial. 

Use of the Bureau’s exemption 

authority. Unlike TILA section 

129B(c)(2)(B)(ii), the Bureau’s proposal 

would permit consumers in certain 

circumstances to pay upfront discount 

points and origination points or fees in 

transactions where any loan originator 

receives compensation in connection 

with the transaction from a person other 

than the consumer. Pursuant to the 

exemption authority set forth in TILA 

section 129B(c)(2)(B)(ii), the Bureau 

believes that it is ‘‘in the interest of 

consumers and the public interest’’ to 

permit discount points and origination 

points or fees to be charged on loans in 

certain instances. 

The Bureau believes that the proposal 

may benefit consumers and the public 

by providing consumers the flexibility 

to decide whether to pay discount 

points and origination points or fees. 

The Bureau believes that permitting 

creditors to offer consumers the option 

to choose to pay discount points and 

origination points or fees may benefit 

consumers by giving them additional 

options in choosing a loan product that 

fits their needs. 

Some mortgage consumers may want 

the lowest rate possible on their loans. 

In addition, some mortgage customers 

may prefer to lower the future monthly 

payment on the loan below some 

threshold amount, and paying discount 

points and origination points or fees 

would allow consumers to achieve this 

lower monthly payment by reducing the 

interest rate. In addition, some 

consumers may need to pay discount 

points and origination points or fees to 

reduce the monthly payment on the 

loan so that they can qualify for the 

loan. Without the ability to pay discount 

points and origination points or fees to 

reduce the monthly payment, the 

interest rate and the monthly payments 

on the loan that does not include 

discount points and origination points 

or fees may be too high for the consumer 

to qualify for the loan. 

A consumer could achieve a lower 

monthly payment by making a bigger 

down payment and thus reducing the 

loan amount. Nonetheless, it may be 

difficult for consumers to use this 

option to reduce significantly the 

monthly payment because it might take 

a significant increase in the down 

payment to achieve the desired 

reduction in the monthly payment. In 

other words, if the consumer took the 

same money that he or she would pay 

in discount points and origination 

points or fees and made a bigger down 

payment to reduce the loan amount, the 

consumer may not gain as large of a 

reduction in the monthly payment as if 

the consumer used that money to pay 

discount points and origination points 

or fees to reduce the interest rate. Some 

consumers may also obtain a tax benefit 

by paying discount points that applying 

such funds to a down payment would 

not achieve. 

Having the option to pay discount 

points and origination points or fees 

also allows consumers to determine 

whether they can best lower the overall 

costs of the mortgage loan by paying 

discount points and origination points 

or fees upfront in exchange for a lower 

interest rate. There will be a specific 

point in the timeline of the loan where 

the money spent to buy down the 

interest rate will be equal to the money 

saved by making reduced loan payments 

resulting from the lower interest rate on 

the loan. Selling the property or 

refinancing prior to this break-even 

point will result in a net financial loss 

for the consumer, while keeping the 

loan for longer than this break-even 

point will result in a net financial 

savings for the consumer. The longer a 

consumer keeps the same credit 

extension in place, the more the money 

spent on the discount points and 

origination points or fees will pay off. 

The Bureau believes consumers will be 

benefited by retaining the option to 

make these evaluations based upon their 

assessment of the costs and benefits, as 

well as their future plans. 

On the other hand, some consumers 

may prefer not to pay discount points 

and origination points or fees. For 

example, some consumers may not have 

the cash to pay discount points and 

origination points or fees before or at 

closing, and may wish not to finance 

such fees or have insufficient equity 

available to do so. In addition, some 

consumers may contemplate selling the 

home or refinancing the mortgage 

within a short period of time and may 

believe that it is not in their best 

interests to pay discount points and 

origination points or fees upfront in 

exchange for a lower interest rate. 

The Bureau is proposing to structure 

the use of its exemption authority to 

leverage the benefits that would arise if 

creditors were limited to making loans 

that do not include discount points and 

origination points or fees while 

preserving consumers’ ability to choose 

another loan when appropriate. 

Through the proposal, the Bureau hopes 

to advance two objectives to address the 

problems in the current mortgage 

market that the Bureau believes the 

prohibition on discount points and 

origination points or fees was designed 

to address: (1) To facilitate consumer 

shopping by enhancing the ability of 

consumers to make comparisons using 

loans that do not include discount 

points and origination points or fees 

available from different creditors as a 

basis for comparison; and (2) to enhance 

consumer decisionmaking by facilitating 

a consumer’s ability to understand and 

make meaningful trade-offs on loans 

available from a particular creditor of 

paying discount points and origination 

points or fees in exchange for a higher 

interest rate. In addition, the Bureau is 

considering whether to adopt additional 

safeguards to ensure consumers who 

make upfront payments of discount 

points and origination points or fees 

receive value in return. 

Making available a loan that does not 

include discount points and origination 

points or fees. Under the proposal, a 

creditor would be required to make 

available to a consumer a comparable, 

alternative loan that does not include 

discount points and origination points 

or fees, unless the consumer is unlikely 

to qualify for such a loan. To ensure that 

consumers are informed of the option to 

choose such a loan from the creditor 

that does not include discount points 

and origination points or fees, the 

proposal would provide guidance on 

what it means for the creditor to make 

such a loan available. Specifically, the 

proposal would provide that, in a retail 

transaction, a creditor would be deemed 

to have made that loan available if any 

time the creditor gives an oral or written 

quote specific to the consumer of the 

interest rate, regular periodic payments, 

the total discount points and origination 

points or fees, or the total closing costs 

for a loan that includes discount points 

and origination points or fees, the 

creditor also provides a quote for those 

same types of information for the 

comparable, alternative loan that does 

not include discount points and 

origination points or fees. The term 

‘‘comparable, alternative loan’’ would 

mean that the two loans for which 

quotes are provided must have the same 

terms and conditions, other than the 

interest rate, any terms that change 

solely as a result of the change in the 


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interest rate (such as the amount of 

regular periodic payments), and the 

amount of any discount points and 

origination points or fees. 

The quote for the loan that does not 

include discount points and origination 

points or fees would need to be given 

only if the quote for the loan that 

includes discount points and 

origination points or fees is given prior 

to when the consumer receives the Good 

Faith Estimate (required under RESPA). 

The requirement to provide a quote for 

a loan that does not include discount 

points or origination points or fees 

would also not apply to any disclosures 

required by TILA or RESPA on loans 

that include discount points or 

origination points or fees. The Bureau 

believes that consumers generally ask 

for, and are provided, quotes from 

creditors prior to application. However, 

as discussed below, the Bureau is 

inviting comments as to whether the 

requirement to provide an alternative 

quote should apply in conjunction with 

the Loan Estimate, as proposed in the 

TILA–RESPA Integration Proposal. 

Under the proposal, a creditor using 

this safe harbor is required to provide 

information about the loan that does not 

include discount points and origination 

points or fees only when the 

information about the loan that includes 

discount points or origination points or 

fees is specific to the consumer. 

Advertisements would not be subject to 

this requirement. See comment 2(a)(2)– 

1.ii.A. If the information about the loan 

that includes discount points or 

origination points or fees is an 

advertisement under § 1026.24, the 

creditor is not required to provide the 

quote for the loan that does not include 

discount points and origination points 

or fees. For example, if prior to the 

consumer submitting an application, the 

creditor provides a consumer an 

estimated interest rate and monthly 

payment for a loan that includes 

discount points and origination points 

or fees, and the estimates were based on 

the estimated loan amount and the 

consumer’s estimated credit score, then 

the creditor must also disclose the 

estimated interest rate and estimated 

monthly payment for the loan that does 

not include discount points and 

origination points or fees. In contrast, if 

the creditor provides the consumer with 

a preprinted list of available rates for 

different loan products that include 

discount points and origination points 

or fees, the creditor is not required to 

provide the information about the loans 

that do not include discount points and 

origination points or fees under this safe 

harbor. Nonetheless, as discussed in 

more detail below, the Bureau solicits 

comment on whether the advertising 

rules in § 1026.24(d) should be revised 

as well. 

In addition, in a transaction that 

involves a loan originator organization, 

the creditor generally would be deemed 

to have made available the loan that 

does not include discount points and 

origination points or fees if the creditor 

communicates to the loan originator 

organization the pricing for all loans 

that do not include discount points and 

origination points or fees. Separately, 

mortgage brokers are prohibited under 

§ 1026.36(e) from steering consumers 

into a loan solely to maximize the 

broker’s commission. The rule sets forth 

a safe harbor for complying with 

provisions prohibiting steering if the 

broker presents to the consumer three 

loan options that are specified in the 

rule. One of these loan options is the 

loan with the lowest total dollar amount 

for discount points and origination 

points or fees. Thus, mortgage brokers 

that are using the safe harbor must 

present to the consumer the loan with 

the lowest interest rate that does not 

include discount points and origination 

points or fees. The Bureau believes that 

most mortgage brokers are using the safe 

harbor to comply with the provision 

prohibiting steering, so most consumers 

in transactions that involve mortgage 

brokers would be informed of the loan 

with the lowest interest rate that does 

not include discount points and 

origination points or fees. 

As discussed above, under the 

proposal, a creditor is not required to 

make available a comparable, alternative 

loan if the consumer is unlikely to 

qualify for that loan. The Bureau solicits 

comment on whether consumers should 

be informed that they were not given 

information about a comparable, 

alternative loan because they were 

unlikely to qualify for that loan. For 

example, in transactions that do not 

involve a loan originator organization, 

should creditors be required either to 

make the comparable, alternative loan 

available to the consumer if the 

consumer likely qualifies for that loan 

or to inform consumers that the creditor 

is not making the comparable, 

alternative loan available because the 

consumer is unlikely to qualify for that 

loan? In transactions that involve a loan 

originator organization, should a loan 

originator organization using the safe 

harbor under § 1026.36(e) be required to 

disclose to a consumer that the loan 

originator organization did not present a 

loan that does not include discount 

points and origination points or fees 

because the consumer was unlikely to 

qualify for that loan from the creditors 

with whom the loan originator 

organization regularly does business? 

The Bureau specifically requests 

comment on whether it is useful to 

consumers to be informed that they 

were unlikely to qualify for the 

comparable, alternative loan. 

The Bureau recognizes that creditors 

who do not wish to make loans that do 

not include discount points and 

origination points or fees available to 

particular consumers could possibly 

manipulate their underwriting 

standards so that those consumers do 

not qualify for such a loan. To prevent 

this practice, the Bureau is considering 

safeguards designed to prohibit 

creditors from changing their 

qualification standards, such as loan-tovalue ratios and credit score 

requirements, solely for the purpose of 

disqualifying consumers from receiving 

loans that does not include discount 

points and origination points or fees. 

This alternative would make clear that 

creditors must make available the loan 

that does not include discount points 

and origination points or fees unless, as 

a result of the increased monthly 

payment resulting from the higher 

interest rate on the loan that does not 

include discount points and origination 

points or fees, the consumer cannot 

satisfy the creditor’s underwriting rules. 

The Bureau invites comments on 

whether there is a risk that, absent such 

a requirement, some creditors might 

manipulate their underwriting 

standards and whether the Bureau 

should adopt a rule against doing so. 

The Bureau recognizes, however, that 

even if underwriting standards could 

not be manipulated, creditors who do 

not want to make loans that do not 

include discount points and origination 

points or fees could set the interest rates 

high for certain consumers, which could 

increase the monthly payment on those 

loans to be high so that those consumers 

cannot satisfy the creditor’s 

underwriting rules. Thus, the Bureau is 

considering another alternative, 

whereby a creditor would be able to 

make available a loan that includes 

discount points and origination points 

or fees only when the consumer also 

qualifies for a comparable, alternative 

loan that does not include discount 

points and origination points or fees. A 

potential advantage of this alternative is 

that it would effectively limit creditors’ 

opportunity to manipulate their 

underwriting standards or charge abovemarket interest rates to prevent 

particular consumers from qualifying for 

a loan that does not include discount 

points and origination points or fees. 

On the other hand, the Bureau is 

concerned that adoption of such an 

alternative may impact access to credit. 


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55314 Federal Register / Vol. 77, No. 174 / Friday, September 7, 2012 / Proposed Rules 

The Bureau recognizes that there are 

some creditors who will not make a loan 

where the debt-to-income ratio exceeds 

a certain level and that there may be 

some consumers for whom the 

difference between the interest rate on 

a loan that includes and does not 

include discount points and origination 

points or fees will determine whether 

the consumer can satisfy the creditor’s 

debt-to-income standard. In that case, 

consumers who do not qualify for 

specific loans that do not include 

discount points and origination points 

or fees would not be able to receive from 

the creditor the same type of loans that 

include discount points and origination 

points or fees. This could harm those 

consumers who might prefer to obtain 

from a creditor a specific type of loan 

that includes discount points and 

origination points or fees, rather than 

not be able to obtain that type of loan 

at all from the creditor. 

The Bureau specifically requests 

comment on credit availability issues of 

adopting such an alternative. For 

example, in some cases, a consumer 

may not qualify for the loan that does 

not include discount points and 

origination points or fees because the 

loan has a higher interest rate and the 

monthly payments on that loan will be 

too high for the consumer to qualify 

based on the debt-to-income ratio and 

other underwriting standards used by 

the creditor. The Bureau recognizes that 

this may be true even if the interest rate 

the creditor charges on the loan that 

does not include discount points and 

origination points or fees is a 

competitive market rate, and the 

creditor does not change its 

underwriting standards purposefully to 

prevent consumers from qualifying for 

the loan. The Bureau requests comment 

on how common it would be for this to 

occur, in which scenarios it would be 

more likely to occur, and what types of 

consumers would likely be affected. 

In addition, in industry outreach 

meetings, some creditors expressed 

concern that the interest rate (and 

corresponding APR) that a creditor may 

need to charge a less-creditworthy 

consumer for a loan that does not 

include discount points and origination 

points or fees to make the loan 

profitable to the creditor could exceed 

the APR threshold set forth in the rules 

under § 1026.32 for high-cost mortgages 

(‘‘high-cost mortgage rules’’) and could 

make that loan a high-cost mortgage. 

These creditors also pointed out that 

there are State laws that have 

restrictions similar to the high-cost 

mortgage rules. Many creditors 

generally do not want to make loans that 

would be subject to the high-cost 

mortgage rules or similar State laws. If 

the alternative were adopted where a 

consumer must qualify for the 

comparable, alternative loan that does 

not include discount points and 

origination points or fees, the consumer 

could not obtain this specific type of 

loan from the creditor even though the 

creditor would be willing to make the 

consumer a comparable, alternative loan 

that includes discount points and 

origination points or fees because this 

loan would not trigger the high-cost 

mortgage rules or similar State laws. 

The Bureau does not currently have 

sufficient data to model the impact of 

the requirement for a creditor to make 

available a comparable, alternative loan 

that does not include discount points 

and origination points or fees on 

triggering the high-cost mortgage rules 

or similar State laws or to model the 

impact on credit availability to the 

extent that such rules or laws are 

triggered. The Bureau seeks data and 

comment on the potential triggering of 

the high-cost mortgage rule or similar 

State laws, the potential impact on 

credit availability, and potential 

modifications to the requirement to 

mitigate these effects. 

Moreover, the Bureau is aware that 

certain State loan programs that permit 

creditors to charge origination points on 

the loans do not permit the option of 

charging a higher interest rate in lieu of 

charging the origination points. The 

Bureau requests additional comment on 

these types of State loan programs, how 

they work, how prevalent they are, the 

types of consumers these programs 

typically serve; and how common it is 

for creditors under these programs not 

to have the option of charging a higher 

interest rate. 

Also, in outreach meetings, some 

creditors mentioned that, while 

creditors that sell loans in the secondary 

market typically can recover their 

origination costs through the premium 

paid through the sale of the loan for the 

higher interest rate, creditors that hold 

loans in portfolio do not have that 

option and would be required to recover 

the origination costs through a higher 

interest rate if the creditor cannot charge 

an upfront origination fee. Consumers 

with loan products with higher rates are 

more likely to refinance those loan 

products and thus a creditor that holds 

those loans in portfolio would have to 

use another approach to recover the 

costs to originate those loans. Thus, 

creditors that plan to hold a loan in 

portfolio may be more reluctant to make 

available to a consumer a loan that does 

not include discount points and 

origination points or fees. This may 

particularly affect small or specialty 

creditors that may be more likely to 

hold a sizable number of loans in 

portfolio. The Bureau requests comment 

on whether creditors currently make 

portfolio loans that do not include 

discount points and origination points 

or fees, and if so, how creditors 

typically manage the risk that such 

consumers will refinance the loans or 

sell the homes and repay the loans prior 

to the origination costs being recovered. 

In addition, in outreach with 

industry, some creditors raised concerns 

that, even for creditors that sell loans 

into the secondary market, it may not 

possible for creditors in all cases to 

make available to all consumers a loan 

that does not include discount points 

and origination points or fees. These 

creditors indicated that in some cases it 

is possible that the premium paid in the 

secondary market for a loan will not be 

sufficient for the creditor to cover 

origination and other costs and to 

realize a profit. These creditors 

indicated that this may occur more often 

for smaller loans, or riskier loans (such 

as where the consumer’s credit score is 

low and the loan-to-value ratio on the 

loan is high). These creditors indicated 

that the interest rates on these types of 

loans would likely be high, and the 

secondary market may not pay sufficient 

premiums for those loans even though 

they have a higher interest rate because 

secondary market investors would be 

concerned about prepayment risk. These 

creditors indicated that in these 

situations, creditors may not make loans 

that include discount points and 

origination points or fees available to 

consumers because they would be 

unwilling to make available, as 

required, a comparable, alternative loan 

that does not include discount points 

and origination points or fees. 

The Bureau requests comment, 

however, on: (1) The circumstances, 

either currently or in the past, where 

creditors are unable to make available to 

consumers loans that do not include 

discount points and origination points 

or fees because the premiums received 

by the creditor on those loans are not 

sufficient to sell the loan into the 

secondary market, and (2) the 

characteristics of the types of loans and 

consumers affected in these 

circumstances. In addition, the Bureau 

requests comment on whether the 

secondary market is likely to adjust to 

create new securities to disperse risk, 

including prepayment risk, if the 

volume of loans with higher interest 

rates increases because more consumers 

are offered the option, and actually 

choose, not to pay discount points and 

origination points or fees. 


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Federal Register / Vol. 77, No. 174 / Friday, September 7, 2012 / Proposed Rules 55315 

63The Bureau notes that in these circumstances, 

a creditor would not be required to provide an 

adverse action notice to the consumer under the 

Bureau’s Regulation B, 12 CFR part 1002, which 

implements the Equal Credit Opportunity Act, 

because the creditor’s denial of the loan that 

includes discount points and origination points or 

fees would be required by law. See 12 CFR. 

1002.2(c). 

64Section 1026.24(g) provides an alternative 

disclosure method for television and radio 

advertisements. 

The Bureau also solicits comment on 

whether, if the alternative were adopted 

where a consumer must qualify for the 

comparable, alternative loan that does 

not include discount points and 

origination points or fees, creditors 

should be required to inform a 

consumer that he or she is not being 

offered a loan that includes discount 

points and origination points or fees 

because the consumer does not qualify 

for the comparable, alternative loan that 

does not include discount points and 

origination points or fees.63 The Bureau 

solicits comment on whether it would 

be useful or beneficial to consumers to 

be informed that they did not qualify in 

these circumstances. The Bureau also 

solicits comment on, if such notification 

would be useful or beneficial, what form 

such a notice should take. 

Facilitating consumer shopping. 

Through the proposal, the Bureau 

intends to facilitate consumer shopping 

by enhancing the ability of consumers to 

make comparisons using loans that do 

not include discount points and 

origination points or fees made available 

by different creditors as a basis for 

comparison. As discussed above, for 

retail transactions, a creditor will be 

deemed to be making the loan available 

if, any time the creditor provides a 

quote specific to the consumer for a loan 

that includes discount points and 

origination points or fees, the creditor 

also provides a quote for a comparable, 

alternative loan that does not include 

discount points and origination points 

or fees (unless the consumer is unlikely 

to qualify for the loan). Nonetheless, the 

Bureau is concerned that by the time a 

consumer receives a quote from a 

particular creditor for a loan that does 

not include discount points and 

origination points or fees, the consumer 

may have already completed his or her 

shopping in comparing loans from 

different creditors. 

Thus, the Bureau solicits comment on 

whether the advertising rules in 

§ 1026.24(d) should be revised to enable 

consumers to make comparisons using 

loans that does not include discount 

points and origination points or fees 

made available by different creditors as 

a basis for comparison. Currently, under 

§ 1026.24(d), if an advertisement 

includes a ‘‘trigger term,’’ the 

advertisement must contain certain 

other information described in 

§ 1026.24(d). The ‘‘trigger terms’’ set 

forth in § 1026.24(d)(1) are: (1) The 

amount or percentage of any 

downpayment; (2) the number of 

payments or period of repayment; (3) 

the amount of any payment; and (4) the 

amount of any finance charge (which 

includes the interest rate). Currently, 

under § 1024(d)(2), if one or more of 

these trigger terms are set forth in such 

an advertisement, the following 

information (‘‘triggered terms’’) must 

also be contained in the advertisement: 

(1) The amount or percentage of the 

downpayment; (2) the terms of 

repayment, which reflect the repayment 

obligations over the full terms of the 

loan, including any balloon payment; 

and (3) the ‘‘annual percentage rate,’’ 

using that term and, if the rate may be 

increased after consummation, that 

fact.64 Thus, currently under 

§ 1026.24(d)(2), if a creditor includes in 

an advertisement the interest rate that 

applies to a loan that includes discount 

points and origination points or fees, the 

creditor must include in that 

advertisement the following terms 

related to that loan: (1) The amount or 

percentage of the downpayment; (2) the 

terms of repayment, which reflect the 

repayment obligations over the full 

terms of the loan, including any balloon 

payment; and (3) the ‘‘annual 

percentage rate,’’ using that term and, if 

the rate may be increased after 

consummation, that fact. Currently, 

under § 1024(d)(2), a creditor may use 

an example of one or more typical 

extensions of credit with a statement of 

all the terms described above applicable 

to each example. 

The Bureau solicits comment on 

whether the creditor in such an 

advertisement that contains the interest 

rate for a loan that includes discount 

points and origination points or fees 

also must contain the following 

information for the comparable, 

alternative loan that does not include 

discount points and origination points 

or fees: (1) The interest rate; and (2) the 

amount or percentage of the 

downpayment; (3) the terms of 

repayment, which reflect the repayment 

obligations over the full terms of the 

loan, including any balloon payment; 

and (4) the ‘‘annual percentage rate,’’ 

using that term and, if the rate may be 

increased after consummation, that fact. 

The Bureau solicits comment on 

whether this information about the loan 

that does not include discount points 

and origination points or fees must be 

equally prominent in the advertisement 

as the information about the loan that 

includes discount points and 

origination points or fees. The Bureau 

expects that the other rules set forth in 

§ 1026.24 (such as the special rules 

applicable to catalog advertisements, 

and radio and television 

advertisements) would apply to this 

additional information about the loan 

that does not include discount points 

and origination points or fees, as 

applicable, in the same way that it 

applies to the information that is 

provided for the loan that includes 

discount points and origination points 

or fees. For example, in radio and 

television advertisements where the 

creditor discloses an interest rate for a 

loan that includes discount points and 

origination points or fees, a creditor is 

given the option (1) to comply with the 

rules in § 1026.24(d), as described 

above; or (2) to state the ‘‘annual 

percentage rate,’’ using that term and, if 

the rate may be increased after 

consummation, that fact and to list a 

toll-free telephone number that may be 

used by consumers to obtain additional 

cost information. See § 1026.24(g). The 

Bureau expects that a similar alternative 

method of disclosure would apply to the 

information that must be provided for 

the comparable, alternative loan that 

does not include discount points and 

origination points or fees. 

The Bureau solicits comment on 

whether § 1026.24 should be revised, as 

discussed above, to require that a 

creditor that provides in an 

advertisement the interest rate for a loan 

that includes discount points and 

origination points or fees to include in 

such advertisement certain information 

for a comparable, alternative loan that 

does not include discount points and 

origination points or fees. The Bureau 

specifically solicits comment on 

whether this information would be 

useful to consumers that are interested 

in loans that do not include discount 

points and origination points or fees to 

compare such loans available from 

different creditors. 

Consumers may find it easier to 

compare the loan pricing on loans that 

do not include discount points and 

origination points or fees available from 

different creditors because most of the 

cost of the loans would be incorporated 

into the interest rate. A consumer could 

compare the interest rates on such loans 

available from different creditors, 

without having to consider a variety of 

different discount points and 

origination points or fees that might be 

charged on each loan. 

The Bureau recognizes that new TILA 

section 129B(c)(2)(B)(ii), and this 


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55316 Federal Register / Vol. 77, No. 174 / Friday, September 7, 2012 / Proposed Rules 

proposal in its definition of discount 

points and origination points or fees, 

treats charges differently based on 

whether they are paid to the creditor, 

loan originator organization, or the 

affiliates of either, or paid to an 

unaffiliated third party. Concerns have 

been raised that these advertising rules 

(and the quotes discussed above) may 

not effectively enable consumers to 

shop among multiple different creditors. 

If a consumer is comparing two loan 

products with no discount points and 

origination points or fees from different 

creditors, it may be difficult for the 

consumer to compare the two interest 

rates because the interest rate that is 

available from each creditor may 

depend at least in part on whether 

certain services, such as appraisal or 

lender’s title insurance, are performed 

by the creditor, the loan originator 

organization, or affiliates of either, or 

whether they are performed by an 

unaffiliated third party. For example, if 

for one creditor the creditor’s title 

insurance services will be performed by 

the creditor’s affiliate while for another 

creditor these services will be 

performed by a third party, the interest 

rate available on the loan that does not 

include discount points and origination 

points or fees is likely to be higher for 

the first creditor than the interest rate 

available from the second creditor 

because the first creditor may not collect 

the cost of the title insurance from the 

consumer in cash at or before closing or 

through the loan proceeds but instead 

may collect those costs from the 

consumer through a higher rate. 

The Bureau potentially could address 

this inconsistent treatment of thirdparty charges by providing that certain 

third-party charges are always excluded 

from discount points and origination 

points or fees, even when they are 

payable to an affiliate of the creditor or 

a loan originator organization. 

Nonetheless, even if payments for 

certain services were consistently 

excluded from the definition of discount 

points and origination points or fees, the 

consumer still may need to consider the 

amount of such closing costs in 

comparing alternative transactions. 

Consistently excluding certain services 

from the definition of discount points 

and origination points or fees may make 

it easier for a consumer to compare the 

interest rates on loan products available 

from different creditors if (1) the total 

amount of the closing costs that are not 

incorporated into the interest rate 

generally remains similar among 

different creditors; or (2) consumers 

have the ability to hold these costs 

constant by shopping for these services. 

The Bureau requests comment on the 

scope of the definition of discount 

points and origination points or fees. 

The Bureau also requests comment on 

ways to revise the definition of discount 

points and origination points or fees to 

facilitate consumers’ ability to compare 

alternative loans that do not include 

discount points and origination points 

or fees from different creditors. In 

particular, the Bureau solicits comment 

on whether it should exempt from the 

definition of discount points and 

origination points or fees any fees 

imposed for lender’s title insurance, 

regardless of whether this service is 

provided by the creditor, the loan 

originator organization, or the affiliates 

of either or is provided by an 

unaffiliated third party, so long as the 

fees are bona fide and reasonable. The 

Bureau understands that the cost of 

lender’s title insurance can be a 

significant portion of a mortgage loan’s 

total closing costs. Thus, excluding this 

cost from being incorporated into the 

rate for the loan that does not include 

discount points and origination points 

or fees, regardless of what party 

provides the service, may help produce 

interest rates that are more comparable 

across different creditors. In addition, 

the Bureau believes that, because the 

cost of lender’s title insurance often is 

regulated by the States, the cost may 

remain constant from creditor to 

creditor. Accordingly, excluding 

lender’s title coverage from the 

definition of discount points and 

origination points or fees in all cases 

may increase the ease with which 

consumers can shop among multiple 

creditors using the interest rate that 

does not include discount points and 

origination points or fees as a means of 

comparison. The Bureau also solicits 

comment on whether this same 

reasoning may be applicable for other 

types of insurance, assuming those costs 

also generally are regulated by the 

States. 

The Bureau also recognizes that there 

may be other services that might be 

performed either by the creditor, the 

loan originator organization, or affiliates 

of either, or by an unaffiliated third 

party. For example, such services may 

include appraisal, credit reporting, 

property inspections, and others. The 

Bureau requests comment on whether 

continuing to treat these services 

differently for purposes of the definition 

of discount points and origination 

points or fees depending on what party 

provides those services would hinder 

consumers’ ability to shop among 

multiple creditors using the interest rate 

on loans that do not include discount 

points and origination points or fees. 

Alternatively, the Bureau solicits 

comment on whether fees for all 

services provided by an affiliate of a 

creditor or loan originator organization 

should be excluded from the definition 

of discount points and origination 

points or fees. The Bureau solicits 

comment on whether excluding affiliate 

fees consistent with the exclusion for 

third-party fees would facilitate 

consumers’ ability to shop using the 

interest rates on loans that do not 

include discount points and origination 

points or fees. The Bureau remains 

concerned, however, that such an 

exclusion for affiliates fees could be 

used by creditors to circumvent the 

prohibition in proposed 

§ 1026.36(d)(2)(ii). For example, 

creditors could have affiliates perform 

certain services that are typically 

performed by the creditor (subject to 

RESPA restrictions), and exclude fees 

for those services under this exception. 

This would permit such a creditor to 

make available to consumers an interest 

rate for a loan that does not include 

discount points or origination points or 

fees, as defined, but still impose up 

front through its affiliate some or all of 

the costs that, in light of the purpose of 

proposed § 1026.36(d)(2)(ii), more 

properly should be included in the 

interest rate. 

As a third alternative, the Bureau 

solicits comment on whether it should 

exclude certain services that 

unambiguously relate to ancillary 

services, such as credit reports, 

appraisals, and property inspections, 

rather than core loan origination 

services, even if the creditor, loan 

originator organization, or an affiliate of 

either performs those services, so long 

as the amount paid for those services is 

bona fide and reasonable. The core loan 

origination services that could not be 

excluded would be ones that 

specifically relate to the origination of a 

mortgage loan and typically are 

provided by the creditor or the loan 

originator organization, possibly 

clarified further by reference to the 

meaning of ‘‘loan originator’’ in 

proposed § 1026.36(a)(3). The Bureau 

requests comment on whether such an 

approach is likely to improve the ease 

with which consumers can compare 

loans that does not include discount 

points and origination points or fees 

from different creditors, by ensuring 

that the types of fees incorporated into 

the interest rate for the loans that does 

not include discount points and 

origination points or fees generally 

remain constant across different 

creditors. The Bureau further solicits 

comment on how such ancillary 


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Federal Register / Vol. 77, No. 174 / Friday, September 7, 2012 / Proposed Rules 55317 

services that would be excluded from 

the definition, and core origination 

services that would not be excluded 

from the definition, might be described 

clearly enough to distinguish the two. 

For example, would elaborating on core 

origination services by reference to the 

kinds of activities described in the 

definition of ‘‘loan originator’’ in 

proposed § 1026.36(a)(3) be a workable 

and sufficient approach? 

Understanding trade-offs. As 

previously discussed, the Bureau is 

proposing to mandate that creditors 

make available a comparable, alternative 

loan that does not include discount 

points and origination points or fees to 

help assure that consumers understand 

that points and fees can vary with the 

interest rate and that there are trade-offs 

for the consumer to consider. 

Consumer groups have raised 

concerns that consumers’ ability to 

choose to pay discount points and 

origination points or fees may not 

actually be beneficial to consumers 

because they do not understand tradeoffs between upfront discount points 

and origination points or fees and 

paying a higher interest rate. 

Furthermore, even if consumers 

understand such trade-offs, they may 

not be able to determine whether 

discount points and origination points 

or fees paid up front result in a 

reasonably proportionate interest rate 

reduction. There is also concern that 

creditors may present multiple 

permutations and, because of their 

complexity and opaqueness, consumers 

may not be easily able to make such 

evaluations. 

Consumer testing conducted by the 

Bureau on closed-end mortgage 

disclosures suggests that some 

consumers do understand that there is 

a trade-off between paying upfront 

discount points and origination points 

or fees and paying a higher interest rate. 

Specifically, as discussed in part II.E 

above, the Bureau is proposing to 

combine certain disclosures that 

consumers receive in connection with 

applying for and closing on a mortgage 

loan under TILA and RESPA. As 

discussed in the supplementary 

information to that proposed rule, the 

Bureau conducted extensive consumer 

testing on these proposed disclosure 

forms. Through this consumer testing, 

the Bureau specifically examined how 

the required disclosures should work 

together on the integrated disclosure to 

maximize consumer understanding. As 

part of the consumer testing, the Bureau 

looked at how consumers would make 

trade-offs between the interest rate and 

closing costs. For example, in one round 

of testing, participants compared two 

adjustable rate loans with different 

closing costs. One loan had a 2.75 

percent initial interest rate that adjusted 

every year after Year 5 with $11,448 in 

closing costs; the other loan had an 3.5 

percent initial interest rate that adjusted 

every year after Year 5 with $3,254 in 

closing costs. In subsequent rounds of 

testing, the Bureau tested forms that 

presented interest only loans; various 

adjustable rate loans; balloon payments; 

bi-weekly payment loans; loans with 

escrow accounts, partial escrow 

accounts, and no escrow accounts; 

different closing costs; and different 

amounts of cash to close. 

Significantly, in this testing, 

participants were able to make multifactored trade-offs between the interest 

rate and monthly payments and the cash 

needed to close based on their personal 

situations. Many participants were 

aware of the trade-off between the cash 

to close and the interest rate and 

corresponding monthly loan payment. 

When they chose the higher interest 

rate, they understood it would result in 

a higher monthly payment. They made 

this choice however, because they knew 

they did not have access to the needed 

cash to close. Conversely, other 

participants were willing to pay the 

higher closing costs to lower the 

monthly payment. Even with 

increasingly complicated decisions, 

participants continued to be able to use 

the disclosures to make certain multifactored trade-offs and gave rational and 

personal explanations of their choices. 

Thus, the Bureau believes that 

providing information to consumers 

about the comparable, alternative loan 

that does not include discount points 

and origination points or fees so that 

consumers can compare these loans to 

loans that include such points or fees 

and have lower interest rates facilitates 

consumers’ ability to choose the tradeoff that best fits their needs. As 

discussed above, for retail transactions, 

a creditor will be deemed to be making 

the loan available if, any time the 

creditor provides a quote specific to the 

consumer for a loan that includes 

discount points and origination points 

or fees, the creditor also provides a 

quote for a comparable, alternative loan 

that does not include those discount 

points and origination points or fees 

(unless the consumer is unlikely to 

qualify for the loan). The interest rate on 

the loan that does not include discount 

points and origination points or fees 

provides a baseline interest rate for the 

consumer. By having the interest rate on 

this loan as the baseline, consumers 

may better understand the trade-off that 

the creditor is providing to the 

consumer for paying discount points 

and origination points or fees in 

exchange for a lower interest rate. 

In addition, to further achieve the goal 

of enhancing consumer understanding 

of the trade-offs of making upfront 

payments in return for a reduced 

interest rate, the Bureau is also 

considering and solicits comment on 

whether there should be a requirement 

after application that a creditor disclose 

to a consumer a loan that does not 

include discount points and origination 

points or fees. As discussed in part II.E 

above, the Bureau issued a proposal to 

combine certain disclosures that 

consumers receive in connection with 

applying for and closing on a mortgage 

loan under TILA and RESPA. Under 

that proposal, the Bureau proposed to 

require creditors to provide a ‘‘Loan 

Estimate’’ not later than the third 

business day after the creditor receives 

the consumer’s application. See 

proposed § 1026.19(e) under the TILA– 

RESPA Integration Proposal. This Loan 

Estimate would contain information 

about the loan to which the Loan 

Estimate relates. The first page of the 

Loan Estimate would contain, among 

other things, information about the 

interest rate, the regular periodic 

payments, and the amount of money the 

consumer would need at closing 

including the total amount of closing 

costs. The second page of the Loan 

Estimate would contain, among other 

things, a detailed list of the closing 

costs. See proposed § 1026.37(f) under 

the TILA–RESPA Integration Proposal. 

The Bureau solicits comment on 

whether it would be useful for the 

consumer if, at the time a creditor first 

provides a Loan Estimate for a loan that 

includes discount points and 

origination points or fees, the creditor 

also were required to provide either a 

complete Loan Estimate, or just the first 

page of the Loan Estimate, for a 

comparable, alternative loan that does 

not include discount points and 

origination points or fees. Thus, if the 

Loan Estimate the creditor initially 

provides to the consumer not later than 

the third business day after the creditor 

receives the consumer’s application 

describes a loan that includes discount 

points and origination points or fee, the 

creditor also would be required to 

disclose a second Loan Estimate (or at 

least the first page of the Loan Estimate) 

at that time to the consumer that 

describes the comparable, alternative 

loan that does not include discount 

points and origination points or fees. 

The Bureau specifically solicits 

comment on whether receiving this 

second Loan Estimate from the same 

creditor would be helpful to the 

consumer in understanding the trade-off 


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55318 Federal Register / Vol. 77, No. 174 / Friday, September 7, 2012 / Proposed Rules 

in the reduction in the interest rate that 

the consumer is receiving in exchange 

for paying discount points and 

origination points or fees, and helpful to 

the consumer in deciding which loan to 

choose. 

The Bureau expects that, if this 

alternative were adopted, it would not 

become effective until the rules 

mandating the Loan Estimate are 

finalized. Until the Loan Estimate is 

finalized, creditors are required to 

provide two different disclosure forms 

to consumers applying for a mortgage, 

namely the mortgage loan disclosures 

required under TILA and the GFE 

required under RESPA. The Bureau 

believes that it would create information 

overload for consumers to receive two 

disclosure forms for the loan that 

includes discount points and 

origination points or fees, and two 

disclosure forms for the comparable, 

alternative loan that does not include 

discount points and origination points 

or fees. 

Competitive Trade-Off 

Proposed § 1026.36(d)(2)(ii)(C) 

provides that no discount points and 

origination points or fees may be 

imposed on the consumer in connection 

with a transaction subject to proposed 

§ 1026.36(d)(2)(ii)(A) unless there is a 

bona fide reduction in the interest rate 

compared to the interest rate for the 

comparable, alternative loan that does 

not include discount points and 

origination points or fees required to be 

made available to the consumer under 

§ 1026.36(d)(2)(ii)(A). In addition, for 

any rebate paid by the creditor that will 

be applied to reduce the consumer’s 

settlement charges, the creditor must 

provide a bona fide rebate in return for 

an increase in the interest rate compared 

to the interest rate for the loan that does 

not include discount points and 

origination points or fees required to be 

made available to the consumer under 

§ 1026.36(d)(2)(ii)(A). As discussed in 

more detail below, the Bureau has 

evaluated three primary types of 

approaches to implement a requirement 

that the trade-off be ‘‘bona fide.’’ 

The Bureau solicits comment on 

whether the Bureau should adopt a 

‘‘bona fide’’ requirement to help ensure 

that all consumers receive a competitive 

market trade-off between the interest 

rate and the payment of discount points 

and origination points or fees or 

whether, alternatively, market forces are 

sufficient to ensure that consumers 

generally receive such competitive 

trade-offs. As discussed above, the 

requirement to make available a loan 

that does not include discount points 

and origination points or fees informs 

consumers of the baseline interest rates 

on the loans that do not include 

discount points and origination points 

or fees so that consumers can make 

informed decisions on the trade-offs 

presented by creditors. In addition, as 

discussed above, consumer testing 

conducted by the Bureau on closed-end 

mortgage disclosures suggests that some 

consumers do understand aspects of the 

trade-off between paying upfront 

discount points and origination points 

or fees and paying a higher interest rate. 

The Bureau believes that, in general, 

creditors will need to incorporate 

competitive pricing into their pricing 

policies to attract consumers that do 

understand this trade-off and shop for 

the best pricing. Nonetheless, the 

Bureau recognizes that there will be 

some consumers who are less 

sophisticated in terms of understanding 

the trade-off, and creditors may be able 

to present those consumers less 

competitive pricing than what is in the 

creditor’s pricing policy. Thus, the 

Bureau solicits comment on whether a 

‘‘bona fide’’ requirement is necessary to 

ensure that all consumers receive a 

competitive market trade-off between 

the interest rate and the payment of 

discount points and origination points 

or fees. 

In addition, the Bureau seeks 

comment on how it might structure 

such a ‘‘bona fide’’ requirement, if one 

is appropriate. In considering this issue, 

the Bureau has evaluated the following 

three primary types of approaches to 

structuring the bona fide trade-off 

requirements: (1) A pricing-policy 

approach; (2) a minimum rate reduction 

approach; and (3) a market-based 

benchmark approach. 

Pricing-policy approach. A pricingpolicy approach would require that, in 

transactions where the requirement to 

make available a loan that does not 

include discount points and origination 

points or fees would apply, a creditor 

also must meet the following four 

requirements: 

• First, the creditor would be 

required to establish a pricing policy 

that sets forth the amount of discount 

points and origination points or fees 

that each consumer would pay or the 

amount of the ‘‘rebate’’ that each 

consumer would receive, as applicable, 

for each interest rate on each loan 

product available to the consumer. The 

term ‘‘rebate’’ refers to an amount 

contributed by the creditor to pay some 

or all of the consumer’s transaction 

costs, generally resulting from the 

consumer’s agreeing to accept a 

‘‘premium’’ (above par) interest rate. 

• Second, the creditor would be 

allowed to change its pricing policy 

periodically, but may not do so to 

provide less favorable pricing for the 

purpose of a consumer’s particular 

transaction. The term ‘‘pricing’’ would 

mean the interest rate applicable to a 

loan and the corresponding discount 

points and origination points or fees a 

consumer would pay or the amount of 

the rebate that the consumer would 

receive, as applicable, for the interest 

rate applicable to the loan. 

• Third, at the time the interest rate 

on the transaction is set (or ‘‘locked’’), 

the pricing offered to the consumer 

must be no less favorable than the 

pricing established by the creditor’s 

current pricing policy. 

• Fourth, at the time the interest rate 

on the transaction is set, the interest rate 

offered to the consumer in return for 

paying discount points and origination 

points or fees must be lower than the 

interest rate for the loan that does not 

include discount points and origination 

points or fees. 

Under such an approach, a creditor 

would not be required to charge all 

consumers the same amount of discount 

points and origination points or fees or 

provide all consumers the same amount 

of rebate, as applicable, at each interest 

rate for each loan product. A creditor’s 

pricing policy could still set forth 

specific pricing adjustments for 

determining the amount of discount 

points and origination points or fees or 

the amount of the rebate, as applicable, 

for consumers at each rate for each loan, 

based on factors such as the consumer’s 

risk profile (such as the consumer’s 

credit score) and the characteristics of 

the loan or the property securing the 

loan (such as the loan-to-value ratio, or 

whether the property will be owneroccupied). The pricing adjustments, 

however, would need to be set forth 

with specificity in the pricing policy. 

These pricing adjustments could be 

changed periodically, for example, for 

market or other reasons, but may not be 

changed to provide less favorable 

pricing for the purpose of a consumer’s 

particular transaction. 

Also, under such an approach, 

creditors would still be allowed to 

provide more favorable pricing to a 

particular consumer than the pricing set 

forth in the creditor’s current pricing 

policy. This would preserve consumers’ 

ability to negotiate better pricing with 

creditors. For example, upon receiving a 

rate quote from a creditor, a consumer 

could inform the creditor that a 

competitor is offering a lower rate for 

the consumer paying the same amount 

of discount points and origination 

points or fees. The creditor could agree 

to match the lower rate under this 

approach. 


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Federal Register / Vol. 77, No. 174 / Friday, September 7, 2012 / Proposed Rules 55319 

65 76 FR 27390 (May 11, 2011); see also section 

1412 of the Dodd-Frank Act (adding new TILA 

section 129C(b), which sets forth the statutory 

standards for a ‘‘qualified mortgage’’). 

66 76 FR 27390, 27396 (May 11, 2011); see also 

section 1412 of the Dodd-Frank Act (adding new 

TILA section 129C(b)(2)(A)(vii), which sets the 

three percent cap for a ‘‘qualified mortgage’’). 

67The ATR proposal was implementing new 

TILA section 129C(b)(2)(C)(iv), as added by DoddFrank Act section 1412, which mandates that, to be 

bona fide discount points, ‘‘the amount of the 

interest rate reduction purchased is reasonably 

consistent with established industry norms and 

practices for secondary mortgage market 

transactions.’’ 

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

69 Id. 

70The 2011 ATR Proposal would not prohibit a 

creditor from charging discount points that are not 

bona fide, but such points would count towards the 

points-and-fees limit. 

The Bureau recognizes that, with this 

flexibility, a creditor could potentially 

circumvent the purpose of this approach 

by setting forth less competitive pricing 

in its pricing policy but then regularly 

departing from the policy to provide 

more favorable pricing to particular 

consumers, especially more 

sophisticated consumers. On the other 

hand, the Bureau believes that several 

factors could militate against a creditor 

doing this. Processing frequent 

exceptions to the pricing policy may be 

inefficient for a creditor; expose 

creditors to risks, such as potential 

violations of fair lending laws; and 

would call into question whether the 

creditor has complied with the 

requirement under this approach to set 

forth its pricing policy. In addition, 

competition may discipline creditors to 

offer competitive rates. The Bureau 

specifically requests comment on 

whether such an approach should be 

adopted, as well as on its advantages 

and disadvantages. The Bureau also 

requests comment specifically on the 

burdens this approach would create for 

creditors to retain records necessary to 

document the pricing policy applicable 

to each consumer’s transaction. 

Minimum rate reduction. The Bureau 

also requests comment on an alternative 

approach under which the consumer 

must receive a minimum reduction in 

the interest rate for each point paid 

(compared to the interest rate that is 

applicable to the loan that does not 

include discount points and origination 

points or fees where fees would be 

converted to points). The Bureau is 

aware that Fannie Mae will purchase or 

securitize loans only if the total points 

and fees (converted into points) do not 

exceed five points. Fannie Mae excludes 

‘‘bona fide’’ discount points for this 

calculation and specifies that, to be 

bona fide, each discount point must 

result in at least a .25 percent reduction 

in the interest rate. Similarly, the rule 

could specify that for each point paid by 

the consumer in discount points and 

origination points or fees (where fees 

would be converted to points), the 

consumer must receive a reduction in 

the interest rate of at least a certain 

portion of a percentage point, e.g., .125 

of a percentage point, compared to the 

interest rate that is applicable to the 

loan that does not include discount 

points and origination points or fees. 

However, the Bureau is concerned 

that mandating such a minimum 

reduction in the interest rate for each 

point paid could unduly constrict 

pricing of mortgage products. The 

Bureau understands that creditors often 

use the dollar amount of the premium 

that the creditor expects to receive from 

the secondary market for a loan at a 

particular rate as a factor in its 

determination of the reduction in the 

interest rate given for each point paid. 

The Bureau understands that these 

premiums do not move in a linear 

manner. Thus, depending on the 

premiums that are paid by the 

secondary market for each interest rate, 

the amount of reduction in the interest 

rate may be .125 of a percentage point 

for the first point paid, but may be .25 

of a percentage point for the second 

point paid. In addition, the amount of 

reduction in the interest rate for each 

point paid by the consumer in discount 

points and origination points or fees 

also could vary for a number of other 

reasons, such as by product type (e.g., 

30-year fixed-rate loans versus 

adjustable rate loans). 

Market-based benchmarks. The 

Bureau has also considered whether an 

objective measure for determining 

whether a creditor is providing a 

competitive market trade-off in the 

interest rate on a loan that includes 

discount points and origination points 

or fees, as compared to established 

industry standards, could be achieved 

by reference to current, or at least 

recent, trade-offs actually provided to 

consumers. 

In the Board’s 2011 Ability to Repay 

(ATR) Proposal, the Board proposed a 

definition of ‘‘bona fide discount 

points’’ for use in determining whether 

a loan is a ‘‘qualified mortgage.’’ Under 

the 2011 ATR Proposal, a creditor can 

make a ‘‘qualified mortgage,’’ which 

provides the creditor with protections 

against potential liability under the 

general ability-to-repay standard set 

forth in that proposal.65 Also, under the 

2011 ATR Proposal, a qualified 

mortgage generally may not have 

‘‘points and fees,’’ as that term is 

defined in the Board’s proposal, that 

exceed three percent of the total loan 

amount.66

The 2011 ATR Proposal provided 

exceptions to the calculation of points 

and fees for certain bona fide discount 

points, which were defined as ‘‘any 

percent of the loan amount’’ paid by the 

consumer that reduces the interest rate 

or time-price differential applicable to 

the mortgage loan by an amount based 

on a calculation that: (1) Is consistent 

with established industry practices for 

determining the amount of reduction in 

the interest rate or time-price 

differential appropriate for the amount 

of discount points paid by the 

consumer; and (2) accounts for the 

amount of compensation that the 

creditor can reasonably expect to 

receive from secondary market investors 

in return for the mortgage loan.67

As discussed by the Board in its 2011 

ATR Proposal, the value of a rate 

reduction in a particular mortgage 

transaction on the secondary market is 

based on many complex factors, which 

interact in a variety of complex ways.68

These factors may include, among 

others: 

• The product type, such as whether 

the loan is a fixed-rate or adjustable-rate 

mortgage, or has a 30-year term or a 15- 

year term. 

• How much the mortgage-backed 

securities (MBS) market is willing to 

pay for a loan at that interest rate and 

the liquidity of an MBS with loans at 

that rate. 

• How much the secondary market is 

willing to pay for excess interest on the 

loan that is available for capitalization 

outside of the MBS market. 

• The amount of the guaranty fee 

required to be paid by the creditor to the 

investor.69

The Bureau recognizes, however, that it 

may not be appropriate to mandate the 

same market-based approach (or any 

other approach to bona fide reductions 

in the interest rate) in both the ATR 

context and this context given the 

differences between the purposes and 

scope of the requirements. For ATR 

purposes, a discount point must be 

‘‘bona fide’’ to be excluded from the 

three-percent points and fees limit on 

qualified mortgages.70 For this 

rulemaking, the Bureau is considering 

adopting a mandatory trade-off for any 

transaction that is subject to the 

requirement that a creditor make 

available a loan without discount points 

and origination points or fees. In 

addition, the bona fide trade-off in this 

context includes discount points and 

origination points or fees, which is 

broader than the inclusion in the 2011 

ATR Proposal of just discount points. 

The same approach may not be 


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55320 Federal Register / Vol. 77, No. 174 / Friday, September 7, 2012 / Proposed Rules 

appropriate for both contexts for a 

number of reasons, including the fact 

that the inclusion of origination points 

or fees may introduce different 

complexities. 

Another variation of the market-based 

approach would be to measure whether 

a trade-off is bona fide through reference 

to regularly obtained, robust, and 

reliable data on the trade-offs currently 

being afforded, possibly by conducting 

a survey of actual market terms. 

According to this variation, the trade-off 

available from a particular creditor 

would be measured against this 

benchmark to determine whether it is 

deemed competitive for purposes of this 

rule. At present, the Bureau knows of no 

existing survey or other source of such 

data and, therefore, assumes that 

pursuing such an approach would 

require that the Bureau establish such a 

survey or other source of data for these 

purposes. 

The Bureau is concerned that it may 

be difficult to effectively implement this 

variation of the market-based approach 

in a manner that adequately accounts 

for the impacts of all the factors that 

affect the value that the secondary 

market places on a rate reduction for a 

particular transaction. In addition, the 

Bureau recognizes that a determination 

whether a creditor is providing a 

competitive market trade-off in the 

interest rate on a loan that is based on 

actual market trade-offs in the recent 

past might not be reflective of future 

trade-offs, given that the MBS market 

varies frequently. 

The Bureau requests comment on the 

feasibility of using this variation of a 

market-based benchmark to determine 

whether a creditor is providing a 

competitive market trade-off in the 

interest rate on a loan that includes 

discount points and origination points 

or fees compared to industry standards. 

More generally, the Bureau solicits 

comment on whether any market-based 

benchmark should be pursued in this 

rulemaking and, if so, how it should be 

structured. 

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

The Bureau’s Proposal 

As discussed in more detail above, the 

Bureau proposes in new 

§ 1026.36(d)(2)(ii)(A) restrictions on 

discount points and origination points 

or fees in a closed-end consumer credit 

transaction secured by a dwelling, if any 

loan originator will receive from any 

person other than the consumer 

compensation in connection with the 

transaction. Specifically, in these 

transactions, a creditor or loan 

originator organization may not impose 

on the consumer any discount points 

and origination points or fees in 

connection with the transaction unless 

the creditor makes available to the 

consumer a comparable, alternative loan 

that does not include discount points 

and origination points or fees; the 

creditor need not make available the 

alternative, comparable loan, however, 

if the consumer is unlikely to qualify for 

such a loan. 

Scope. To provide guidance on the 

scope of the transactions to which 

proposed § 1026.36(d)(2)(ii) applies, the 

Bureau is proposing comment 

36(d)(2)(ii)–1 to provide examples of 

transactions to which § 1026.36(d)(2)(ii) 

applies, and examples of transactions to 

which § 1026.36(d)(2)(ii) does not apply. 

Specifically, proposed comment 

36(d)(2)(ii)–1.i provides the following 

three examples of transactions in which 

the prohibition in proposed 

§ 1026.36(d)(2)(ii) applies: (1) For 

transactions that do not involve a loan 

originator organization, the creditor 

pays compensation in connection with 

the transaction (e.g., a commission) to 

individual loan originators that work for 

the creditor; (2) the creditor pays a loan 

originator organization compensation in 

connection with a transaction, 

regardless of how the loan originator 

organization pays compensation to 

individual loan originators that work for 

the organization; and (3) the loan 

originator organization receives 

compensation directly from the 

consumer in a transaction and the loan 

originator organization pays individual 

loan originators that work for the 

organization compensation in 

connection with the transaction. 

Proposed comment 36(d)(2)(ii)–1.ii 

provides the following two examples of 

transactions where the prohibition in 

proposed § 1026.36(d)(2)(ii) does not 

apply: (1) For transactions that do not 

involve a loan originator organization, 

the creditor pays individual loan 

originators that work for the creditor 

only in the form of a salary, hourly 

wage, or other compensation that is not 

tied to the particular transaction; and (2) 

the loan originator organization receives 

compensation directly from the 

consumer in a transaction and the loan 

originator organization pays individual 

loan originators that work for the 

organization only in the form of a salary, 

hourly wage, or other compensation that 

is not tied to the particular transaction. 

Proposed comment 36(d)(2)(ii)–1.iii 

clarifies the relationship of proposed 

§ 1026.36(d)(2)(ii) to the provisions 

prohibiting dual compensation in 

proposed § 1026.36(d)(2)(i). This 

proposed comment clarifies that 

§ 1026.36(d)(2)(ii) does not override any 

of the prohibitions on dual 

compensation set forth in 

§ 1026.36(d)(2)(i). For example, 

§ 1026.36(d)(2)(ii) does not permit a 

loan originator organization to receive 

compensation in connection with a 

transaction both from a consumer and 

from a person other than the consumer. 

Loan product where consumer will 

not pay discount points and origination 

points or fees. Proposed comment 

36(d)(2)(ii)(A)–3 would provide 

guidance on identifying the comparable, 

alternative loan product that does not 

include discount points and origination 

points or fees. As explained in proposed 

comment 36(d)(2)(ii)(A)–3, in some 

cases, the creditor’s pricing policy may 

not contain an interest rate for which 

the consumer will neither pay discount 

points and origination points or fees nor 

receive a rebate. For example, assume 

that a creditor’s pricing policy only 

provides interest rates in 1⁄8 percent 

increments. Assume also that under the 

creditor’s current pricing policy, the 

pricing available to a consumer for a 

particular loan product would be for the 

consumer to pay a 5.0 percent interest 

rate with .25 discount point, pay a 5.125 

percent interest rate and receive .25 

point in rebate, or pay a 5.250 percent 

interest rate and receive a 1.0 point in 

rebate. This creditor’s pricing policy 

does not contain a rate for this 

particular loan product where the 

consumer would neither pay discount 

points and origination points or fees nor 

receive a rebate from the creditor. In 

such cases, proposed comment 

36(d)(2)(ii)(A)–3 clarifies that the 

interest rate for a loan that does not 

include discount points and origination 

points or fees would be the interest rate 

for which the consumer does not pay 

discount points and origination points 

or fees and the consumer would receive 

the smallest possible amount of rebate 

from the creditor. Thus, in the example 

above, the interest rate for that 

particular loan product that does not 

include discount points and origination 

points or fees is the 5.125 percent rate 

with .25 point in rebate. 

Make available. Proposed comment 

36(d)(2)(ii)(A)–1 would provide 

guidance on how creditors may meet the 

requirement in § 1026.36(d)(2)(ii)(A) to 

make available the required comparable, 

alternative loan that does not include 

discount points and origination points 

or fees. Specifically, proposed comment 

36(d)(2)(ii)(A)–1.i provides guidance for 

transactions that do not involve a loan 

originator organization. In this case, a 

creditor will be deemed to have made 

available to the consumer a comparable, 

alternative loan that does not include 

discount points and origination points 


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or fees if, any time the creditor provides 

any oral or written estimate of the 

interest rate, the regular periodic 

payments, the total amount of the 

discount points and origination points 

or fees, or the total amount of the 

closing costs specific to a consumer for 

a transaction that would include 

discount points and origination points 

or fees, the creditor also provides an 

estimate of those same types of 

information for a comparable, 

alternative loan that does not include 

discount points and origination points 

or fees, unless a creditor determines that 

a consumer is unlikely to qualify for 

such a loan. A creditor using this safe 

harbor is required to provide the 

estimate for the loan that does not 

include discount points and origination 

points or fees only if the estimate for the 

loan that includes discount points and 

origination points or fees is received by 

the consumer prior to the estimated 

disclosures required within three 

business days after application pursuant 

to the Bureau’s regulations 

implementing the Real Estate Settlement 

Procedures Act (RESPA). See proposed 

comment 36(d)(1)(A)–1.i.A. 

Proposed comment 36(d)(2)(ii)(A)– 

1.i.B clarifies that a creditor using this 

safe harbor is required to provide 

information about the loan that does not 

include discount points and origination 

points or fees only when the 

information about the loan that includes 

discount points or origination points or 

fees is specific to the consumer. 

Advertisements would be excluded 

from this requirement. See comment 

2(a)(2)–1.ii.A. If the information about 

the loan that includes discount points or 

origination points or fees is an 

advertisement under § 1026.24, the 

creditor is not required to provide the 

quote for the loan that does not include 

discount points and origination points 

or fees. For example, if prior to the 

consumer submitting an application, the 

creditor provides a consumer an 

estimated interest rate and monthly 

payment for a loan that includes 

discount points and origination points 

or fees, and the estimates were based on 

the estimated loan amount and the 

consumer’s estimated credit score, then 

the creditor must also disclose the 

estimated interest rate and estimated 

monthly payment for the loan that does 

not include discount points and 

origination points or fees. In contrast, if 

the creditor provides the consumer with 

a preprinted list of available rates for 

different loan products that include 

discount points and origination points 

or fees, the creditor is not required to 

provide the information about the loans 

that do not include discount points and 

origination points or fees under this safe 

harbor. Nonetheless, as discussed in 

more detail below, the Bureau solicits 

comment on whether the advertising 

rules in § 1026.24(d) should be revised 

as well. 

Under this safe harbor, proposed 

comment 36(d)(2)(ii)(A)–1.i.C clarifies 

that ‘‘comparable, alternative loan’’ 

means that the two loans for which 

estimates are provided as discussed 

above have the same terms and 

conditions, other than the interest rate, 

any terms that change solely as a result 

of the change in the interest rate (such 

the amount of regular periodic 

payments), and the amount of any 

discount points and origination points 

or fees. The Bureau believes that, for a 

consumer to compare loans 

meaningfully and usefully, it is 

important that the only terms and 

conditions that are different between the 

loan that includes discount points and 

origination points or fees and the loan 

that does not include discount points 

and origination points or fees are: (1) 

The interest rates applicable to the 

loans; (2) any terms that change solely 

as a result of the change in the interest 

rate (such the amount of regular 

periodic payments); and (3) the fact that 

one loan includes discount points and 

origination points or fees and the other 

loan does not. Proposed comment 

36(d)(2)(ii)(A)–4 provides guidance on 

the meaning of ‘‘regular periodic 

payment’’ and indicates that this term 

means payments of principal and 

interest (or interest only, depending on 

the loan features) specified under the 

terms of the loan contract that are due 

from the consumer for two or more unit 

periods in succession. The Bureau 

believes that limiting the differences 

between the two loans will allow 

consumers to focus consumer choice on 

core loan terms and help consumers 

understand better the trade-off between 

the two loans in terms of paying 

discount points and origination points 

or fees in exchange for a lower interest 

rate. In addition, proposed comment 

36(d)(2)(ii)(A)–1.i.C clarifies that a 

creditor using this safe harbor must 

provide the estimate for the loan that 

does not include discount points and 

origination points or fees in the same 

manner (i.e., orally or in writing) as 

provided for the loan that does include 

discount points and origination points 

or fees. For both written and oral 

estimates, both of the written (or both of 

the oral) estimates must be given at the 

same time. 

Also, as clarified by proposed 

comment 36(d)(2)(ii)(A)–1.i.E, a creditor 

using this safe harbor must disclose 

estimates of the interest rate, the regular 

periodic payments, the total amount of 

the discount points and origination 

points or fees, and the total amount of 

the closing costs for the loan that does 

not include discount points and 

origination points or fees only if the 

creditor disclosed estimates for those 

types of information for the loan that 

includes discount points and 

origination points or fees. For example, 

if a creditor provides estimates of the 

interest rate and monthly payments for 

a loan that includes discount points and 

origination points or fees, the creditor 

using the safe harbor must provide 

estimates of the interest rate and 

monthly payments for the loan that does 

not includes discount points and 

origination points or fees, such as saying 

‘‘your estimated interest rate and 

monthly payments on this loan product 

where you will not pay discount points 

and origination points or fees to the 

creditor or its affiliates is [x] percent, 

and $[xx] per month.’’ On the other 

hand, if the creditor provides an 

estimate of only the interest rate for the 

loan that includes discount points and 

origination points or fees and does not 

provide an estimate of the regular 

periodic payments for that loan, the 

creditor using the safe harbor is required 

only to provide an estimate of the 

interest rate for the loan that does not 

include discount points and origination 

points or fees and is not required to 

provide an estimate of the regular 

periodic payments for the loan without 

discount points and origination points 

or fees. 

Proposed comment 36(d)(2)(ii)(A)–1.ii 

would specify guidance for transactions 

that involve a loan originator 

organization. In this case, a creditor will 

be deemed to have made available to the 

consumer a comparable, alternative loan 

that does not include discount points 

and origination points or fees if the 

creditor communicates to the loan 

originator organization the pricing for 

all loans that do not include discount 

points and origination points or fees. 

Separately, mortgage brokers are 

prohibited under § 1026.36(e) from 

steering consumers into a loan just to 

maximize the broker’s commission. The 

rule sets forth a safe harbor for 

complying with provisions prohibiting 

steering if the broker presents to the 

consumer three loan options that are 

specified in the rule. One of these loan 

options is the loan with the lowest total 

dollar amount for discount points and 

origination points or fees. Thus, 

mortgage brokers that are using the safe 

harbor must present to the consumer the 

loan with the lowest interest rate that 


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55322 Federal Register / Vol. 77, No. 174 / Friday, September 7, 2012 / Proposed Rules 

does not include discount points and 

origination points or fees. The Bureau 

believes that most mortgage brokers are 

using the safe harbor to comply with the 

provision prohibiting steering, so most 

consumers in transactions that involve 

mortgage brokers would be informed of 

the loan with the lowest interest rate 

that do not include discount points and 

origination points or fees. 

The Bureau solicits comments 

generally on the safe harbor approaches 

set forth in proposed comment 

36(d)(2)(ii)(A)–1, and specifically on the 

effectiveness of these approaches to 

ensure that consumers are informed of 

the options to obtain loans that do not 

include discount points and origination 

points or fees. As discussed in more 

detail above, the Bureau specifically 

requests comment on whether there 

should be a requirement after 

application that a creditor disclose to a 

consumer a loan that does not include 

discount points and origination points 

or fees. The Bureau specifically solicits 

comment on whether it would be useful 

for the consumer if, at the time a 

creditor first provides a Loan Estimate 

for a loan that includes discount points 

and origination points or fees, the 

creditor also were required to provide 

either a complete Loan Estimate, or just 

the first page of the Loan Estimate, for 

a comparable, alternative loan that does 

not include discount points and 

origination points or fees. 

In addition, as discussed in more 

detail above, through the proposal, the 

Bureau intends to facilitate consumer 

shopping by enhancing the ability of 

consumers to make comparisons using 

loans that do not include discount 

points and origination points or fees 

available from different creditors as a 

basis for comparison. Nonetheless, the 

Bureau is concerned that by the time a 

consumer receives a quote from a 

particular creditor for a loan that does 

not include discount points and 

origination points or fees, the consumer 

may have already completed his or her 

shopping in comparing loans from 

different creditors. Thus, as discussed in 

more detail above, the Bureau 

specifically solicits comment on 

whether the advertising rules in 

§ 1026.24 should be revised to enable 

consumers to make comparisons using 

loans that do not include discount 

points and origination points or fees 

available from different creditors as a 

basis for comparison. 

Transactions for which a consumer is 

unlikely to qualify. Proposed comment 

36(d)(2)(ii)(A)–2 provides guidance on 

how a creditor may determine whether 

a consumer is likely not to qualify for 

a comparable, alternative loan that does 

not include discount points and 

origination points or fees. Specifically, 

this proposed comment provides that 

the creditor must have a good-faith 

belief that a consumer will not qualify 

for a loan that has the same terms and 

conditions as the loan that includes 

discount points and origination points 

or fees, other than the interest rate, any 

terms that change solely as a result of 

the change in the interest rate (such the 

amount of regular periodic payments) 

and the fact that the consumer will not 

pay discount points and origination 

points or fees. Under this proposed 

comment, the creditor’s belief that the 

consumer is likely not to qualify for 

such a loan must be based on the 

creditor’s current pricing and 

underwriting policy. In making this 

determination, the creditor may rely on 

information provided by the consumer, 

even if it subsequently is determined to 

be inaccurate. 

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

Definition of Discount Points and 

Origination Points or Fees 

Under proposed § 1026.36(d)(2)(ii)(B), 

the term ‘‘discount points and 

origination points or fees’’ for purposes 

of § 1026.36(d) and (e) means all items 

that would be included in the finance 

charge under § 1026.4(a) and (b) and any 

fees described in § 1026.4(a)(2) 

notwithstanding that those fees may not 

be included in the finance charge under 

§ 1026.4(a)(2) that are payable at or 

before consummation by the consumer 

to a creditor or a loan originator 

organization, except for (1) interest, 

including any per-diem interest, or the 

time-price differential; (2) any bona fide 

and reasonable third-party charges not 

retained by the creditor or loan 

originator organization; and (3) seller’s 

points and premiums for property 

insurance that are excluded from the 

finance charge under § 1026.4(c)(5), 

(c)(7)(v) and (d)(2). Proposed comment 

36(d)(2)(ii)(B)–4 provides that, for 

purposes of § 1026.36(d)(2)(ii)(B), the 

phrase ‘‘payable at or before 

consummation by the consumer to a 

creditor or a loan originator 

organization’’ includes amounts paid by 

the consumer in cash at or before 

closing or financed as part of the 

transaction and paid out of the loan 

proceeds. The Bureau notes that 

§ 1026.36(d)(3) provides that for 

purposes of § 1026.36(d), affiliates must 

be treated as a single person. Thus, for 

purposes of the definition of discount 

points and origination points or fees, 

charges that are payable by a consumer 

to a creditor’s affiliate or the affiliate of 

a loan originator organization are 

deemed to be payable to the creditor or 

loan originator organization, 

respectively. See proposed comment 

36(d)(2)(ii)–3. 

The Bureau believes the definition of 

discount points and origination points 

or fees is consistent with the description 

of the discount points, origination 

points, or fees referenced in the 

statutory ban in TILA section 

129B(c)(2)(B)(ii), which was added by 

section 1403 of the Dodd-Frank Act. 12 

U.S.C. 1639b(c)(2)(B)(ii). Specifically, 

TILA section 129B(c)(2)(B)(ii) uses the 

phrase ‘‘upfront payment of discount 

points, origination points, or fees, 

however denominated (other than bona 

fide third party charges not retained by 

the mortgage originator, creditor, or an 

affiliate of the creditor or originator).’’ 

The Bureau interprets the phrase 

‘‘upfront payment of discount points, 

origination points, or fees, however 

denominated’’ generally to mean 

finance charges (except for interest) that 

are imposed in connection with the 

mortgage transaction that are payable at 

or before consummation by the 

consumer. The Bureau believes that 

Congress did not intend to cover charges 

that are payable by the consumer in 

comparable cash real estate transactions, 

such as real estate broker fees, where 

these charges are imposed regardless of 

whether the consumer engages in a 

credit transaction. The provision 

prohibiting consumers from paying 

upfront discount points and origination 

points or fees amends TILA, which 

generally regulates credit transactions, 

and not the underlying real estate 

transactions that are in connection with 

the extensions of credit. 

The proposed definition of discount 

points and origination points or fees 

also includes an exception for any bona 

fide and reasonable third-party charges 

not retained by the creditor, loan 

originator organization, or any affiliate 

of either, consistent with TILA section 

129B(c)(2)(B)(ii). The Bureau believes 

that this exception for bona fide and 

reasonable third-party charges means 

that Congress presumptively intended to 

include such third-party charges in the 

definition of ‘‘discount points, 

origination points, or fees’’ where they 

are retained by the creditor, mortgage 

originator, or affiliates of either. In 

addition, the exception for fees that are 

not ‘‘retained’’ by the creditor is 

consistent with the current comment 

36(d)(1)–7 (re-designated as proposed 

comment 36(d)(2)(i)–2.i) and the 

Bureau’s position that the definition of 

‘‘discount points, origination points, or 

fees’’ includes upfront payments when 

the consumer either pays in cash or 

finances these payments from loan 


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proceeds because in either instance, the 

creditor, mortgage originator, or 

affiliates retain such payments. The 

proposed definition of discount points 

and origination points or fees reflects 

proposed changes that the Bureau set 

forth in the TILA–RESPA Integration 

Proposal to the definition of finance 

charge for purposes of mortgage 

transactions. Specifically, in the TILA– 

RESPA Integration Proposal, the Bureau 

proposes to add new § 1026.4(g) to 

specify that § 1026.4(a)(2) and (c) 

through (e), other than § 1026.4(c)(2), 

(c)(5), (c)(7)(v), and (d)(2), do not apply 

to closed-end transactions secured by 

real property or a dwelling. Thus, under 

the TILA–RESPA Integration Proposal, 

the term finance charge for purposes of 

closed-end transactions secured by real 

property or a dwelling would mean all 

items that would be included in the 

finance charge under § 1026.4(a) and (b) 

and fees described in § 1026.4(a)(2) 

notwithstanding that those fees may not 

be included in the finance charge under 

§ 1026.4(a)(2) except for charges for late 

payments or for delinquency, default or 

other similar occurrences, seller’s 

points, and premiums for property 

insurance that are excluded from the 

finance charge under § 1026.4(c)(2), 

(c)(5), (c)(7)(v) and (d)(2). In the 

supplementary information to the 

TILA–RESPA Integration Proposal, the 

Bureau solicits comment on the 

definition of finance charge generally in 

§ 1026.4 as it relates to closed-end 

mortgage transactions, and specifically 

proposed § 1026.4(g). To the extent that 

the Bureau revises the definition of 

finance charge as it relates to closed-end 

mortgage transaction in response to the 

TILA–RESPA Integration Proposal, the 

Bureau expects to make corresponding 

changes to the definition of discount 

points and origination points or fees. 

Proposed comment 36(d)(2)(ii)(B)–1 

provides guidance generally on the 

definition of discount points and 

origination points or fees as set forth in 

proposed § 1026.36(d)(2)(ii)(B). This 

proposed comment clarifies that, for 

purposes of proposed 

§ 1026.36(d)(2)(ii)(B), ‘‘items included 

in the finance charge under § 1026.4(a) 

and (b)’’ means those items included 

under § 1026.4(a) and (b), without 

reference to any other provisions of 

§ 1026.4. Nonetheless, proposed 

§ 1026.36(d)(2)(ii)(B)(3) specifies that 

items that are excluded from the finance 

charge under § 1026.4(c)(5), (c)(7)(v) and 

(d)(2) are also excluded from the 

definition of discount points and 

origination points or fees. For example, 

property insurance premiums may be 

excluded from the finance charge if the 

conditions set forth in § 1026.4(d)(2) are 

met, and these premiums also may be 

excluded if they are escrowed. See 

§ 1026.4(c)(7)(v), (d)(2). Under proposed 

§ 1026.36(d)(2)(ii)(B)(3), these premiums 

are also excluded from the definition of 

discount points and origination points 

or fees. In addition, charges in 

connection with transactions that are 

payable in a comparable cash 

transaction are not included in the 

finance charge. See comment 4(a)–1. For 

example, property taxes imposed to 

record the deed evidencing transfer 

from the seller to the buyer of title to the 

property are not included in the finance 

charge because they would be paid even 

if no credit were extended to finance the 

purchase. Thus, these charges would 

not be included in the definition of 

discount points and origination points 

or fees. 

The proposed definition of discount 

points and origination points or fees 

also excludes any bona fide and 

reasonable third-party charges not 

retained by the creditor or loan 

originator organization. Proposed 

comment 36(d)(2)(B)–2 provides 

guidance on this exception. Specifically, 

proposed comment 36(d)(2)(B)–2 notes 

that § 1026.36(d)(2)(ii)(B) generally 

includes any fees described in 

§ 1026.4(a)(2) notwithstanding that 

those fees may not be included in the 

finance charge under § 1026.4(a)(2). 

Section 1026.4(a)(2) discusses fees 

charged by a ‘‘third party’’ that conducts 

the loan closing. For purposes of 

§ 1026.4(a)(2), the term ‘‘third party’’ 

includes affiliates of the creditor or the 

loan originator organization. 

Nonetheless, for purposes of the 

definition of discount points and 

origination points or fees, the term 

‘‘third party’’ does not include affiliates 

of the creditor or the loan originator. 

Thus, fees described in § 1026.4(a)(2) 

would be included in the definition of 

discount points and origination points 

or fees if they are charged by affiliates 

of the creditor or the loan originator. 

Nonetheless, fees described in 

§ 1026.4(a)(2) would not be included in 

such definition if they are charged by a 

third party that is not an affiliate of the 

creditor or any loan originator 

organization, pursuant to the exception 

in § 1026.36(d)(2)(ii)(B)(2). 

The proposed comment also 

recognizes that, in some cases, amounts 

received for payment for third-party 

charges may exceed the actual charge 

because, for example, the creditor 

cannot determine with accuracy what 

the actual charge will be before 

consummation. In such a case, the 

difference retained by the creditor or 

loan originator organization is not 

deemed to fall within the definition of 

discount points and origination points 

or fees if the third-party charge imposed 

on the consumer was bona fide and 

reasonable, and also complies with State 

and other applicable law. On the other 

hand, if the creditor or loan originator 

organization marks up a third-party 

charge (a practice known as 

‘‘upcharging’’), and the creditor or loan 

originator organization retains the 

difference between the actual charge 

and the marked-up charge, the amount 

retained falls within the definition of 

discount points and origination points 

or fees. 

Proposed comment 36(d)(2)(ii)(B)–2 

provides two illustrations for this 

guidance. The first illustration assumes 

that the creditor charges the consumer 

a $400 application fee that includes $50 

for a credit report and $350 for an 

appraisal that will be conducted by a 

third party that is not the affiliate of the 

creditor or the loan originator 

organization. Assume that $50 is the 

amount the creditor pays for the credit 

report to a third party that is not 

affiliated with the creditor or with the 

loan originator organization. At the time 

the creditor imposes the application fee 

on the consumer, the creditor is 

uncertain of the cost of the appraisal 

because the appraiser charges between 

$300 and $350 for appraisals. Later, the 

cost for the appraisal is determined to 

be $300 for this consumer’s transaction. 

Assume, however, that the creditor uses 

average charge pricing in accordance 

with Regulation X. In this case, the $50 

difference between the $400 application 

fee imposed on the consumer and the 

actual $350 cost for the credit report and 

appraisal is not deemed to fall within 

the definition of discount points and 

origination points or fees, even though 

the $50 is retained by the creditor. The 

second illustration specifies that, using 

the same example as described above, 

the $50 difference would fall within the 

definition of discount points and 

origination points or fees if the 

appraisers from whom the creditor 

chooses charge fees between $250 and 

$300. 

Proposed comment 36(d)(2)(ii)(B)–3 

provides that, if at the time a creditor 

must comply with the requirements in 

proposed § 1026.36(d)(2)(ii) the creditor 

does not know whether a particular 

charge will be paid to its affiliate or an 

affiliate of the loan originator 

organization or will be paid to a thirdparty that is not the creditor’s affiliate 

or an affiliate of the loan originator 

organization, the creditor must assume 

that the charge will be paid to its 

affiliates or an affiliate of the loan 

originator organization, as applicable, 


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for purposes of complying with the 

requirements in § 1026.36(d)(2)(ii). For 

example, assume that a creditor 

typically uses three title insurance 

companies, one of which is an affiliate 

of the creditor and two are not affiliated 

with the creditor or the loan originator 

organization. If the creditor does not 

know at the time it must establish 

available credit terms for a particular 

consumer pursuant to proposed 

§ 1026.36(d)(2)(ii) whether the title 

insurance services will be performed by 

the affiliate of the creditor, the creditor 

must assume that the title insurance 

services will be conducted by the 

affiliate for purposes of complying with 

the requirements in § 1026.36(d)(2)(ii). 

The Bureau solicits comment 

generally on the proposed definition of 

discount points and origination points 

or fees. As discussed in more detail 

above, the Bureau requests comment on 

the scope of the definition of discount 

points and origination points or fees and 

its impact on the ease with which 

consumers can compare loans that do 

not include discount points and 

origination points or fees from different 

creditors. 

36(d)(2)(ii)(C) 

Proposed § 1026.36(d)(2)(ii)(C) 

provides that no discount points and 

origination points or fees may be 

imposed on the consumer in connection 

with a transaction subject to proposed 

§ 1026.36(d)(2)(ii)(A) unless there is a 

bona fide reduction in the interest rate 

compared to the interest rate for the 

comparable, alternative loan that does 

not include discount points and 

origination points or fees required to be 

made available to the consumer under 

§ 1026.36(d)(2)(ii)(A). In addition, for 

any rebate paid by the creditor that will 

be applied to reduce the consumer’s 

settlement charges, the creditor must 

provide a bona fide rebate in return for 

an increase in the interest rate compared 

to the interest rate for the loan that does 

not include discount points and 

origination points or fees required to be 

made available to the consumer under 

§ 1026.36(d)(2)(ii)(A). As discussed in 

detail above, the Bureau is seeking 

comment on whether such a bona fide 

requirement is necessary and, if so, 

what form the requirement should take. 

36(e) Prohibition on Steering 

36(e)(3) Loan Options Presented 

Section 1026.36(e)(1) provides that a 

loan originator may not direct or ‘‘steer’’ 

a consumer to consummate a 

transaction based on the fact that the 

originator will receive greater 

compensation from the creditor in that 

transaction than in other transactions 

the originator offered or could have 

offered to the consumer, unless the 

consummated transaction is in the 

consumer’s interest. Section 

1026.36(e)(2) provides a safe harbor that 

loan originators may use to comply with 

the prohibition set forth in 

§ 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), in 

order for a loan originator to qualify for 

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

loan originator must obtain loan options 

from a significant number of the 

creditors with which the originator 

regularly does business and must 

present the consumer with the following 

loan options for each type of transaction 

in which the consumer expressed an 

interest: (1) The loan with the lowest 

interest rate; (2) the loan with the lowest 

total dollar amount for origination 

points or fees and discount points; and 

(3) a loan with the lowest interest rate 

without negative amortization, a 

prepayment penalty, a balloon payment 

in the first seven years of the loan term, 

shared equity, or shared appreciation, 

or, in the case of a reverse mortgage, a 

loan without a prepayment penalty, 

shared equity, or shared appreciation. In 

accordance with current 

§ 1026.36(e)(3)(ii), the loan originator 

must have a good faith belief that the 

options presented to the consumer as 

discussed above are loans for which the 

consumer likely qualifies. 

The Bureau’s Proposal 

Discount points and origination 

points or fees. As discussed above, to 

qualify for the safe harbor in 

§ 1026.36(e)(2), a loan originator must 

present to a consumer particular loan 

options, one of which is the loan with 

the lowest total dollar amount for 

‘‘origination points or fees and discount 

points’’ for which the consumer likely 

qualifies. See § 1026.36(e)(3)(C). For 

consistency, the Bureau proposes to 

revise § 1026.36(e)(3)(C) to use the 

terminology ‘‘discount points and 

origination points or fees,’’ which is a 

defined term in proposed 

§ 1026.36(d)(2)(ii)(B). 

In addition, the Bureau proposes to 

amend 1026.36(e)(3)(C) to address the 

situation where two or more loans have 

the same total dollar amount of discount 

points and origination points or fees. 

This situation is likely to occur in 

transactions that are subject to proposed 

§ 1026.36(d)(2)(ii). As discussed above, 

proposed § 1026.36(d)(2)(ii)(A) requires, 

as a prerequisite to a creditor, loan 

originator organization, or affiliate of 

either imposing any discount points and 

origination points or fees on a consumer 

in a transaction, that the creditor also 

make available to the consumer a 

comparable, alternative loan that does 

not include discount points and 

origination points or fees, unless the 

consumer is unlikely to qualify for such 

a loan. For transactions that involve a 

loan originator organization, a creditor 

will be deemed to have made available 

to the consumer a comparable, 

alternative loan that does not include 

discount points and origination points 

or fees if the creditor communicates to 

the loan originator organization the 

pricing for all loans that do not include 

discount points and origination points 

or fees, unless the consumer is unlikely 

to qualify for such a loan. See proposed 

comment 36(d)(2)(ii)(A)–1. Thus, each 

creditor with whom a loan originator 

regularly does business generally will be 

communicating pricing to the loan 

originator for all loans that do not 

include discount points and origination 

points or fees. 

Proposed § 1026.36(e)(3)(C) provides 

that with respect to the loan with the 

lowest total dollar amount of discount 

points and origination points or fees, if 

two or more loans have the same total 

dollar amount of discount points and 

origination points or fees, the creditor 

must disclose the loan with the lowest 

interest rate that has the lowest total 

dollar amount of discount points and 

origination points or fees for which the 

consumer likely qualifies. For example, 

for transactions that are subject to 

proposed § 1026.36(d)(2)(ii), the loan 

originator must disclose the loan with 

the lowest rate that does not include 

discount points and origination points 

or fees for which the consumer likely 

qualifies. This proposed guidance will 

help ensure that loan originators are not 

steering consumers into loans to 

maximize the originator’s 

compensation. 

The loan with the lowest interest rate. 

As discussed above, to qualify for the 

safe harbor in § 1026.36(e)(2), a loan 

originator must present to a consumer 

particular loan options, one of which is 

the loan with the lowest interest rate for 

which the consumer likely qualifies. See 

§ 1026.36(e)(3)(A). Mortgage creditors 


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Federal Register / Vol. 77, No. 174 / Friday, September 7, 2012 / Proposed Rules 55325 

and other industry representatives have 

asked for additional guidance on how to 

identify the loan with the lowest 

interest rate for which a consumer likely 

qualifies as set forth in 

§ 1026.36(e)(3)(A), given that a 

consumer generally can obtain a lower 

rate by paying discount points. To 

provide additional guidance, the Bureau 

proposes to amend comment 36(e)(3)–3 

to clarify that the loan with the lowest 

interest rate for which the consumer 

likely qualifies is the loan with the 

lowest rate the consumer can likely 

obtain, regardless of how many discount 

points the consumer must pay to obtain 

it. 

36(f) Loan Originator Qualification 

Requirements 

Section 1402(a)(2) of the Dodd-Frank 

Act added TILA section 129B, which 

imposes new requirements for mortgage 

originators, including requirements for 

them to be licensed, registered, and 

qualified, and to include their 

identification numbers on loan 

documents. 15 U.S.C. 1639b. 

TILA section 129B(b)(1)(A) authorizes 

the Bureau to issue regulations requiring 

mortgage originators to be registered and 

licensed in compliance with State and 

Federal law, including the SAFE Act, 12 

U.S.C. 5101. TILA section 129B(b)(1)(A) 

also authorizes the Bureau’s regulations 

to require mortgage originators to be 

‘‘qualified.’’ As discussed in the sectionsection 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 in TILA section 103(cc)(2) 

excludes creditors for certain other 

purposes. 

The SAFE Act imposes licensing and 

registration requirements on 

individuals. Under the SAFE Act, loan 

originators who are employees of a 

depository institution or a Federally 

regulated subsidiary of a depository 

institution are subject to registration, 

and other loan originators are generally 

required to obtain a State license. 

Regulation H, 12 CFR part 1008, which 

implements SAFE Act standards 

applicable to State licensing, provides 

that a State is not required to impose 

licensing requirements on loan 

originators who are employees of a bona 

fide non-profit organization. 12 CFR 

1008.103(e)(7). Individuals who are 

subject to SAFE Act registration or State 

licensing are required to obtain a unique 

identification number from the NMLSR, 

which is a system and database for 

registering, licensing, and tracking loan 

originators. 

SAFE Act licensing is implemented 

by States. To grant an individual a SAFE 

Act-compliant loan originator license, 

the State must determine that the 

individual has never had a loan 

originator license revoked; has not been 

convicted of enumerated felonies within 

specified timeframes; has demonstrated 

financial responsibility, character, and 

fitness; has completed eight hours of 

pre-licensing classes that have been 

approved by the NMLSR; has passed a 

written test approved by the NMLSR; 

and has met net worth or surety bond 

requirements. Licensed loan originators 

must take eight hours of continuing 

education classes approved by the 

NMLSR and must renew their licenses 

annually. Some States impose 

additional or higher minimum 

standards for licensing of individual 

mortgage loan originators under their 

SAFE Act-compliant licensing regimes. 

Separately from their SAFE Actcompliant licensing regimes, most 

States also require licensing or 

registration of loan originator 

organizations. 

SAFE Act registration generally 

requires depository institution 

employee loan originators to submit to 

the NMLSR identifying information and 

information about their employment 

history and certain criminal 

convictions, civil judicial actions and 

findings, and adverse regulatory actions. 

The employee must also submit 

fingerprints to the NMLSR and 

authorize the NMLSR and the 

employing depository institution to 

obtain a criminal background check and 

information related to certain findings 

and sanctions against the employee by 

a court or government agency. 

Regulation G, 12 CFR part 1007, which 

implements SAFE Act registration 

requirements, imposes an obligation on 

the employing depository institution to 

have and follow policies to ensure 

compliance with the SAFE Act. The 

policies must also provide for the 

depository institution to review 

employee criminal background reports 

and to take appropriate action 

consistent with Federal law. 12 CFR 

1007.104(h). 

Proposed § 1026.36(f) implements, as 

applicable, TILA section 129B(b)(1)(A)’s 

mortgage originator licensing, 

registration, and qualification 

requirements by requiring a loan 

originator for a consumer credit 

transaction to meet the requirements 

described above. Proposed § 1026.36(f) 

tracks the TILA requirement that 

mortgage originators comply with State 

and Federal licensing and registration 

requirements, including those of the 

SAFE Act. Proposed comment 36(f)–1 

notes that the definition of loan 

originator includes individuals and 

organizations and, for purposes of 

§ 1026.36(f), includes creditors. 

Comment 36(f)–2 clarifies 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 § 1026.36(f) sets forth 

standards that loan originator 

organizations must meet to comply with 

the TILA requirement that they be 

qualified, as discussed below. Section 

1026.36(f) clarifies that the requirements 

do not apply to government agencies 

and State housing finance agencies, 

employees of which are not required to 

be licensed under the SAFE Act. This 

differentiation is made pursuant to the 

Bureau’s authority under TILA section 

105(a) to effectuate the purposes of 

TILA, which as provided in TILA 

section 129B(a)(2) include assuring that 

consumers are offered and receive 

residential mortgage loans on terms that 

reasonably reflect their ability to repay 

the loans and that are understandable 

and not unfair, deceptive, or abusive. 

The Bureau does not believe that it is 

proper to apply the proposed 

qualification requirements to these 

individuals, because such agencies 

directly regulate and control the manner 

of all of their loan origination activities, 

thereby providing consumers adequate 

protection from these types of harm. 

36(f)(1) 

Proposed § 1026.36(f)(1) requires loan 

originator organizations to comply with 

applicable State law requirements for 

legal existence and foreign qualification, 

meaning the requirements that govern 

the legal creation of the organization 

and the authority of the organization to 

transact business in another State. 

Proposed comment 36(f)(1)–1 states, by 

way of example, that the provision 

encompasses requirements for 

incorporation or other type of formation 

and for maintaining an agent for service 

of process. This requirement would help 

ensure that consumers are able to seek 

remedies against loan originator 

organizations that fail to comply with 

requirements for legal formation and, 

when applicable, for operating as 

foreign businesses. 

36(f)(2) 

Proposed § 1026.36(f)(2) requires loan 

originator organizations to ensure that 

their individual loan originators are in 

compliance with SAFE Act licensing 

and registration requirements. Proposed 

comment 36(f)(2)–1 notes that the loan 


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55326 Federal Register / Vol. 77, No. 174 / Friday, September 7, 2012 / Proposed Rules 

originator organization can comply with 

the requirement by verifying 

information that is available on the 

NMLSR consumer access Web site. 

36(f)(3) 

Proposed § 1026.36(f)(3) provides 

actions that a loan originator 

organization must take for its individual 

loan originators who are not required to 

be licensed, and are not licensed, 

pursuant to the SAFE Act and State 

SAFE Act implementing laws. 

Individual loan originators who are not 

required to be licensed generally 

include employees of depository 

institutions and organizations that a 

State has determined to be bona fide 

non-profit organizations, in accordance 

with criteria in Regulation H. 12 CFR 

1008.103(e)(7). 

The proposed requirements in 

§ 1026.36(f)(3)(ii) apply to unlicensed 

individual loan originators two of the 

core standards that apply to individuals 

who are subject to SAFE Act State 

licensing requirements: the criminal 

background standards and the financial 

responsibility, character, and general 

fitness standards. Proposed 

§ 1026.36(f)(3)(iii) also requires loan 

originator organizations to provide 

periodic training to these individual 

loan originators, a requirement that is 

analogous to but, as discussed below, 

more flexible than the continuing 

education requirement that applies to 

individuals who have SAFE Actcompliant State licenses. 

The SAFE Act’s application of the less 

stringent registration standards to 

employees of depository institutions, as 

well as Regulation H’s provision for 

States to exempt from State licensing 

employees of bona fide non-profit 

organizations, are based in part on an 

assumption that these institutions carry 

out basic screening of and provide basic 

training to their employee loan 

originators to comply with prudential 

regulatory requirements or to ensure a 

minimum level of protection of and 

service to their borrowers. The proposed 

requirements in § 1026.36(f)(3) would 

help ensure that all individual loan 

originators meet core standards of 

integrity and competence, regardless of 

the type of loan originator organization 

for which they work. 

The proposal does not require 

employers of unlicensed loan originator 

individuals to obtain the covered 

information and make the required 

determinations on a periodic basis. 

Instead, such employers would be 

required to obtain the information and 

make the determinations under the 

criminal, financial responsibility, 

character, and general fitness standards 

before an individual acts as a loan 

originator in a covered consumer credit 

transaction. However, the Bureau 

invites public comment on whether 

such determinations should be required 

on a periodic basis or whether the 

employer of an unlicensed loan 

originator should be required to make 

subsequent determinations only when it 

obtains information that indicates the 

individual may no longer meet the 

applicable standards. 

The Bureau is not proposing to apply 

to employees of depository institutions 

and bona fide non-profit organizations 

the more detailed requirements to pass 

a standardized test and to be covered by 

a surety bond that apply to individuals 

seeking a SAFE Act-compliant State 

license. The Bureau has not found 

evidence that consumers who obtain 

mortgage loans from depository 

institutions and bona fide non-profit 

organizations face risks that are not 

adequately addressed through existing 

safeguards and proposed safeguards in 

this proposed rule. However, the Bureau 

will continue to monitor the market to 

consider whether additional measures 

are warranted. 

36(f)(3)(i) 

Proposed § 1026.36(f)(3)(i) provides 

that the loan originator organization 

must obtain, for each individual loan 

originator who is not licensed under the 

SAFE Act, a State and national criminal 

background check, a credit report from 

a nationwide consumer reporting 

agency in compliance, where 

applicable, with the requirements of 

section 604(b) of the Fair Credit 

Reporting Act (15 U.S.C. 1681b), and 

information about any administrative, 

civil, or criminal findings by any court 

or government agency. Proposed 

comment 36(f)(3)(i)–1 clarifies that loan 

originator organizations that do not have 

access to this information in the NMLSR 

(generally, bona fide non-profit 

organizations) could satisfy the 

requirement by obtaining a criminal 

background check from a law 

enforcement agency or commercial 

service. Such a loan originator 

organization could satisfy the 

requirement to obtain information about 

administrative, civil, or criminal 

determinations by requiring the 

individual to provide it with this 

information. The Bureau notes that the 

information in the NMLSR about 

administrative, civil, or criminal 

determinations about an individual is 

generally supplied to the NMLSR by the 

individual, rather than by a third party. 

The Bureau invites public comment on 

whether loan originator organizations 

that do not have access to this 

information in the NMLSR should be 

permitted to satisfy the requirement by 

requiring the individual loan originator 

to provide it directly to the loan 

originator organization or if, instead, 

there are other means of obtaining the 

information that are more reliable or 

efficient. 

36(f)(3)(ii) 

Proposed § 1026.36(f)(3)(ii) specifies 

the standards that a loan originator 

organization must apply in reviewing 

the information it is required to obtain. 

The standards are the same as those that 

State agencies must apply in 

determining whether to grant an 

individual a SAFE Act-compliant loan 

originator license. Proposed comment 

36(f)(3)(ii)–1 clarifies that the scope of 

the required review includes the 

information required to be obtained 

under § 1026.36(f)(3)(i) as well 

information the loan originator 

organization has obtained or would 

obtain as part of its customary hiring 

and personnel management practices, 

including information from application 

forms, candidate interviews, and 

reference checks. 

First, under proposed 

§ 1026.36(f)(3)(ii)(A), a loan originator 

organization must determine that the 

individual loan originator has not been 

convicted (or pleaded guilty or nolo 

contendere) to a felony involving fraud, 

dishonesty, a breach of trust, or money 

laundering at any time, or any other 

felony within the preceding seven-year 

period. Depository institutions already 

apply similar standards in complying 

with the SAFE Act registration 

requirements under 12 CFR 1007.104(h) 

and other applicable Federal 

requirements, which generally prohibit 

employment of individuals convicted of 

offenses involving dishonesty, money 

laundering, or breach of trust. For 

depository institutions, the incremental 

effect of the proposed standard 

generally would be to expand the scope 

of disqualifying crimes to include 

felonies other than those involving 

dishonesty, money laundering, or 

breach of trust if the conviction was in 

the previous seven years. The Bureau 

does not believe that depository 

institutions or bona fide non-profit 

organizations currently employ many 

individual loan originators who would 

be disqualified by the proposed 

provision, but the proposed provision 

would give consumers confidence that 

individual loan originators meet 

common minimum criminal background 

standards, regardless of the type of 

institution or organization for which 

they work. The proposed description of 

potentially disqualifying convictions is 


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the same as that in the SAFE Act 

provision that applies to applicants for 

State licenses and includes felony 

convictions in foreign courts. The 

Bureau recognizes that records of 

convictions in foreign courts may not be 

easily obtained and that many foreign 

jurisdictions do not classify crimes as 

felonies. The Bureau invites public 

comment on what, if any, further 

clarifications the Bureau should provide 

for this provision. 

Second, under proposed 

§ 1026.36(f)(3)(ii)(B), a loan originator 

organization must determine that the 

individual loan originator has 

demonstrated financial responsibility, 

character, and general fitness to warrant 

a determination that the individual loan 

originator will operate honestly, fairly, 

and efficiently. This standard is 

identical to the standard that State 

agencies apply to applicants for SAFE 

Act-compliant loan originator licenses, 

except that it does not include the 

requirement to determine that the 

individual’s financial responsibility, 

character, and general fitness ‘‘such as 

to command the confidence of the 

community.’’ The Bureau believes that 

responsible depository institutions and 

bona fide non-profit organizations 

already apply similar standards when 

hiring or transferring any individual 

into a loan originator position. The 

proposed requirement formalizes this 

practice and ensures that the 

determination considers reasonably 

available, relevant information so that, 

as with the case of the proposed 

criminal background standards, 

consumers can be confident that all 

individual loan originators meet 

common minimum qualification 

standards for financial responsibility, 

character, and general fitness. Proposed 

comment 36(f)(3)(ii)(B)–1 clarifies that 

the review and assessment need not 

include consideration of an individual’s 

credit score but must include 

consideration of whether any of the 

information indicates dishonesty or a 

pattern of irresponsible use of credit or 

of disregard of financial obligations. As 

an example, the comment states that 

conduct revealed in a criminal 

background report may show dishonest 

conduct, even if the conduct did not 

result in a disqualifying felony 

conviction. It also distinguishes 

delinquent debts that arise from 

extravagant spending from those that 

arise, for example, from medical 

expenses. The Bureau’s view is that an 

individual with a history of dishonesty 

or a pattern of irresponsible use of credit 

or of disregard of financial obligations 

should not be in a position to interact 

with or influence consumers in the loan 

origination process, during which 

consumers must decide whether to 

assume a significant financial obligation 

and determine which of any presented 

mortgage options is appropriate for 

them. 

The Bureau recognizes that, even with 

guidance in the proposed comment, any 

standard for financial responsibility, 

character, and general fitness inherently 

includes a subjective component. 

During the Small Business Review Panel 

process, some SERs expressed concern 

that the proposed standard could lead to 

uncertainty whether a loan originator 

organization was meeting the standard. 

The proposed standard excludes the 

phrase ‘‘such as to command the 

confidence of the community’’ to reduce 

the potential for this uncertainty. 

Nonetheless, in light of the civil liability 

imposed under TILA, the Bureau invites 

public comment on how to address this 

concern while also ensuring that the 

loan originator organization’s review of 

information is sufficient to protect 

consumers. For example, if a loan 

originator organization reviews the 

required information and documents a 

rational explanation for why relevant 

negative information does not show that 

the standard is violated, should the 

provision provide a presumption that 

the loan originator organization has 

complied with the requirement? 

36(f)(3)(iii) 

In addition to the screening 

requirements discussed above, proposed 

§ 1026.36(f)(3)(iii) requires loan 

originator organizations to provide 

periodic training to its individual loan 

originators who are not licensed under 

the SAFE Act. The training must cover 

the Federal and State law requirements 

that apply to the individual loan 

originator’s loan origination activities. 

The proposed requirement is analogous 

to, but more flexible than, the 

continuing education requirement that 

applies to loan originators who are 

subject to SAFE Act licensing. Whereas 

the SAFE Act requires licensed 

individuals to take eight hours of 

preapproved classes every year, the 

proposed requirement is intended to be 

flexible to accommodate the wide range 

of loan origination activities in which 

covered loan originator organizations 

engage and for which covered 

individuals are responsible. For 

example, the training provision applies 

to a large depository institution 

providing complex mortgage loan 

products as well as a non-profit 

organization providing only basic home 

purchase assistance loans secured by a 

second lien on a dwelling. The 

proposed provision also recognizes that 

covered individuals already possess a 

wide range of knowledge and skill 

levels. Accordingly, it would require 

loan originator organizations to provide 

training to close any gap in the 

individual loan originator’s knowledge 

of Federal and State law requirements 

that apply to the individual’s loan 

origination activities. 

The proposed requirement also differs 

from the analogous SAFE Act 

requirement in that it does not include 

a requirement to provide training on 

‘‘ethical standards,’’ beyond those that 

amount to State or Federal legal 

requirements. In light of the civil 

liability imposed under TILA, the 

Bureau invites public comment on 

whether there exist loan originator 

ethical standards that are sufficiently 

concrete and widely applicable such 

that loan originator organizations would 

be able to determine what subject matter 

must be included in the required 

training, if the Bureau were to include 

ethical standards in the training 

requirement. 

Proposed comment 36(f)(3)(iii)–1 

includes explanations of the training 

requirement and also describes the 

flexibility available under 

§ 1026.36(f)(3)(iii) regarding how the 

required training is delivered. It clarifies 

that training may be delivered by the 

loan originator organization or any other 

party through online or other 

technologies. In addition, it states that 

training that a Federal, State, or other 

government agency or housing finance 

agency has approved or deemed 

sufficient for an individual to originate 

loans under a program sponsored or 

regulated by that agency is 

presumptively sufficient to meet the 

proposed requirement. It further states 

that training approved by the NMLSR to 

meet the continuing education 

requirement applicable to licensed loan 

originators is sufficient to meet the 

proposed requirement to the extent that 

the training covers the types of loans the 

individual loan originator originates and 

applicable Federal and State laws and 

regulations. The proposed comment 

recognizes that many loan originator 

organizations already provide training 

to their individual loan originators to 

comply with requirements of prudential 

regulators, funding agencies, or their 

own operating procedures. Thus, the 

proposed comment clarifies that 

§ 1026.36(f)(3)(iii) does not require 

training that is duplicative of training 

that loan originator organizations are 

already providing if that training meets 

the standard in § 1026.36(f)(3)(iii). 

These clarifications are intended to 

respond to questions that SERs raised 


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55328 Federal Register / Vol. 77, No. 174 / Friday, September 7, 2012 / Proposed Rules 

during the Small Business Review Panel 

process discussed above. 

36(g) NMLSR Identification Number 

on Loan Documents 

TILA section 129B(b)(1)(A), which 

was added by Dodd-Frank Act section 

1402(b), authorizes the Bureau to issue 

regulations requiring mortgage 

originators to include on all loan 

documents any unique identifier issued 

by the NMLSR (also referred to as an 

NMLSR ID). Individuals who are subject 

to SAFE Act registration or State 

licensing are required to obtain an 

NMLSR ID, and many organizations also 

obtain NMLSR IDs pursuant to State or 

other requirements. Proposed 

§ 1026.36(g) incorporates the 

requirement that mortgage originators 

must include their NMLSR ID on loan 

documents while providing several 

clarifications. The Bureau believes that 

the purpose of the statutory requirement 

is not only to permit consumers to look 

up the loan originator’s record on the 

consumer access Web site of the NMLSR 

(www.nmlsconsumeraccess.org) before 

proceeding further with a mortgage 

transaction, but also to help ensure 

accountability of loan originators both 

before and after a transaction has been 

originated. 

36(g)(1) 

Proposed § 1026.36(g)(1)(i) and (ii) 

provides that loan originators must 

include both their NMLSR IDs and their 

names on loan documents, because 

without the associated names, a 

consumer may not understand whom or 

what the NMLSR ID number serves to 

identify. Having the loan originator’s 

name may help consumers understand 

that they have the opportunity to assess 

the risks associated with a particular 

loan originator in connection with the 

transaction, which in turn promotes the 

informed use of credit (consistent with 

TILA section 105(a)’s provision for 

additional requirements that are 

necessary or proper to effectuate the 

purposes of TILA or to facilitate 

compliance with TILA). These 

provisions also clarify, consistent with 

the statutory requirement that mortgage 

originators include ‘‘any’’ NMLSR ID, 

that the requirement applies if the 

organization or individual loan 

originator has ever been issued an 

NMLSR ID. Proposed § 1026.36(g)(1) 

also provides that the NMLSR IDs must 

be included each time any of these 

documents are provided to a consumer 

or presented to a consumer for 

signature. Proposed comment 36(g)(1)–1 

notes that for purposes of § 1026.36(g), 

creditors are not excluded from the 

definition of ‘‘loan originator.’’ 

Proposed comment 36(g)(1)–2 clarifies 

that the requirement applies regardless 

of whether the organization or 

individual loan originator is required to 

obtain an NMLSR ID under the SAFE 

Act or otherwise. Proposed 

§ 1026.36(g)(1)(ii) recognizes that there 

may be transactions in which more than 

one individual meets the definition of a 

loan originator and clarifies that the 

individual loan originator whose 

NMLSR ID must be included is the 

individual with primary responsibility 

for the transaction at the time the loan 

document is issued. 

In its 2012 TILA–RESPA Integration 

Proposal, the Bureau is proposing to 

integrate TILA and RESPA mortgage 

disclosure documents, in accordance 

with section 1032(f) of the Dodd-Frank 

Act, 12 U.S.C. 5532(f). That separate 

rulemaking also addresses inclusion of 

NMLSR IDs on the integrated 

disclosures it proposes, as well as the 

possibility that in some circumstances 

more than one individual may meet the 

criteria for whose NMLSR ID must be 

included. To ensure harmonization 

between the two rules, proposed 

comment 36(g)(1)(ii)–1 states that under 

these circumstances, an individual loan 

originator may comply with the 

requirement in § 1026.36(g)(1)(ii) by 

complying with the applicable 

provision governing disclosure of 

NMLSR IDs in rules issued by the 

Bureau pursuant to Dodd-Frank Act 

section 1032(f). 

36(g)(2) 

Proposed § 1026.36(g)(2) identifies the 

documents that must include loan 

originators’ NMLSR IDs as the 

application, the disclosure provided 

under section 5(c) of the Real Estate 

Settlement Procedures Act of 1974 

(RESPA), the disclosure provided under 

TILA section 128, the note or loan 

contract, the security instrument, and 

the disclosure provided to comply with 

section 4 of RESPA. Proposed comment 

36(g)(2)–1 clarifies that the NMLSR ID 

must be included on any amendment, 

rider, or addendum to the note or loan 

contract or security instrument. These 

clarifications are provided in response 

to concerns that SERs expressed in the 

Small Business Review Panel process 

that the statutory reference to ‘‘all loan 

documents’’ would lead to uncertainty 

as to what is or is not considered a 

‘‘loan document.’’ The proposed scope 

of the requirement’s coverage is 

intended to ensure that loan originators’ 

NMLSR IDs are included on documents 

that include the terms or prospective 

terms of the transaction or borrower 

information that the loan originator may 

use to identify loan terms that are 

potentially available or appropriate for 

the consumer. To the extent that any 

document not listed in § 1026.36(g)(2) is 

arguably a ‘‘loan document,’’ 

differentiation as to which documents 

must include loan originators’ NMLSR 

IDs is consistent with TILA section 

105(a), which allows the Bureau to 

make exceptions that are necessary or 

proper to effectuate the purposes of 

TILA or to facilitate compliance with 

TILA. 

A final rule implementing the 

proposed requirements to include 

NMLSR IDs on loan documents may be 

issued, and may generally become 

effective, prior to the effective date of a 

final rule implementing the Bureau’s 

2012 TILA–RESPA Integration Proposal. 

If so, then the requirement to include 

the NMLSR ID would apply to the 

current Good Faith Estimate, Settlement 

Statement, and TILA disclosure until 

the issuance of the integrated 

disclosures. The Bureau recognizes that 

such a sequence of events might cause 

loan originator organizations to have to 

incur the cost of adjusting their systems 

and procedures to accommodate the 

NMLSR IDs on the current disclosures, 

even though those disclosures will be 

replaced in the future by the integrated 

disclosures. Accordingly, the Bureau 

invites public comment on whether the 

effective date of the provisions 

regarding inclusion of the NMLSR IDs 

on the RESPA and TILA disclosures 

should be delayed until the date that the 

integrated disclosures are issued. 

36(g)(3) 

Proposed § 1026.36(g)(3) defines 

‘‘NMLSR identification number’’ as a 

number assigned by the NMLSR to 

facilitate electronic tracking of loan 

originators and uniform identification 

of, and public access to, the 

employment history of, and the publicly 

adjudicated disciplinary and 

enforcement actions against, loan 

originators. The definition is consistent 

with the definition of ‘‘unique 

identifier’’ in section 1503(12) of the 

SAFE Act, 12 U.S.C. 5102(12). 

36(h) Prohibition on Mandatory 

Arbitration Clauses and Waivers of 

Certain Consumer Rights 

Section 1414 of the Dodd-Frank Act 

added TILA section 129C(e), which 

prohibits certain transactions secured by 

a dwelling from requiring arbitration or 

any other non-judicial procedure as the 

method for resolving disputes arising 

from the transaction. The same 

provision provides that a consumer and 

creditor or their assignees may 

nonetheless agree, after a dispute arises, 

to use arbitration or other non-judicial 


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71As noted above in the section-by-section 

analysis, this proposal would implement TILA 

sections 129B(b)(1), (c)(1), and (c)(2), and 129C(d) 

and (e). The only provisions of TILA section 129B 

that are required to be implemented by regulations 

are those in section 129B(b)(2) and (c)(3). Section 

129B(b)(2), for which the Bureau has not set forth 

proposed rule text but which the Bureau may 

Continued 

procedure to resolve the dispute. It 

further provides, however, that no 

covered transaction secured by a 

dwelling, and no related agreement 

between the consumer and creditor, 

may limit a consumer’s ability to bring 

a claim in connection with any alleged 

violation of Federal law. As a result, 

even a post-dispute agreement to use 

arbitration or other non-judicial 

procedure must not limit a consumer’s 

right to bring a claim in connection with 

any alleged violation of Federal law, 

thus the consumer must be able to bring 

any such claim through the agreed-upon 

non-judicial procedure. The provision 

does not address State law causes of 

action. Proposed § 1026.36(h) codifies 

these statutory provisions. 

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 certain transactions 

secured by a dwelling. The same 

provision provides that the prohibition 

does not apply to credit insurance for 

which premiums or fees are calculated 

and paid in full on a monthly basis. The 

prohibition applies to credit life, credit 

disability, credit unemployment, credit 

property insurance, and other similar 

products. It does not apply, however, to 

credit unemployment insurance for 

which the premiums are reasonable, the 

creditor receives no compensation, and 

the premiums are paid pursuant to 

another insurance contract and not to 

the creditor’s affiliate. Proposed 

§ 1026.36(i) codifies these statutory 

provisions. Rather than repeating DoddFrank Act section 1414’s list of covered 

credit insurance products, it crossreferences the existing description of 

insurance products in § 1026.4(d)(1) and 

(3). The Bureau does not intend any 

substantive change to the statutory 

provision’s scope of coverage. The 

Bureau believes that these provisions 

are straightforward enough that they 

require no further clarification. The 

Bureau requests comment, however, on 

whether any issues raised by the 

provision require clarification and, if so, 

how they should be clarified. The 

Bureau also solicits comment on when 

the provision should become effective, 

for example, 30 days following 

publication of the final rule, or at a later 

time. 

36(j) 

Scope of § 1026.36 

The Bureau proposes to transfer 

§ 1026.36(f) to new § 1026.36(j). Moving 

the section accommodates new 

§ 1026.36(f), (g), (h) and (i). The Bureau 

also proposes to amend § 1026.36(j) to 

reflect the scope of coverage for the 

proposals implementing TILA sections 

129B (except for (c)(3)) and 129C(d) and 

(e), as added by sections 1402, 1403, 

1414(d) and (e) of the Dodd-Frank Act 

as discussed further below. 

The Bureau proposes to implement 

the scope of products covered in TILA 

section 129C(d) and (e) (the new 

arbitration and single-premium credit 

insurance provisions proposed in 

§ 1026.36(h) and (i)) by amending 

§ 1026.36(j) to state that § 1026.36(h) 

and (i) applies both to HELOCs subject 

to § 1026.40 and closed–end consumer 

credit transactions, secured by the 

consumer’s principal dwelling. The 

Bureau further proposes to implement 

the scope of coverage in TILA section 

129B(b) (the new qualification, 

document identification and 

compliance procedure requirements 

proposed in new § 1026.36(f) and (g)) by 

amending § 1026.36(j) to include 

§ 1026.36(f) and (g) with the coverage 

applicable to § 1026.36(d) and (e). That 

is, § 1026.36(d), (e), (f) and (g) applies to 

closed-end consumer credit transactions 

secured by a dwelling (as opposed to the 

consumer’s principal dwelling). The 

Bureau does not propose amending the 

scope of transactions covered by 

§ 1026.36(d) and (e). 

The Bureau also proposes to make 

technical revisions to comment 36–1 

reflecting these scope-of-coverage 

amendments proposed in § 1026.36(j). 

The Bureau relies on its interpretive 

authority under TILA section 105(a) to 

the extent there is ambiguity in TILA 

sections 129B (except for (c)(3)) and 

129C(d) and (e), as added by sections 

1402, 1403, 1414(d) and (e) of the DoddFrank Act, regarding which provisions 

apply to different types of transactions. 

Consumer Credit Transaction Secured 

by a Dwelling 

The definition of ‘‘mortgage 

originator’’ in TILA section 103(cc)(2) 

applies to activities related to a 

‘‘residential mortgage loan’’ only. TILA 

section 103(cc)(5) defines ‘‘residential 

mortgage loan’’ as: 

any consumer credit transaction that is 

secured by a mortgage, deed of trust, or other 

equivalent consensual security interest on a 

dwelling or on residential real property that 

includes a dwelling, other than a consumer 

credit transaction under an open end credit 

plan or, for purposes of sections 129B and 

129C and section 128(a) (16), (17), (18), and 

(19), and sections 128(f) and 130(k), and any 

regulations promulgated thereunder, an 

extension of credit relating to a plan 

described in section 101(53D) of title 11, 

United States Code. 

The Bureau does not propose to use the 

statutory term ‘‘residential mortgage 

loan’’ in § 1026.36. Section 1026.36 uses 

the term ‘‘consumer credit transaction’’ 

throughout and proposed § 1026.36(j) 

qualifies the scope of § 1026.36’s 

provisions. The Bureau believes that 

changing the terminology of ‘‘consumer 

credit transaction’’ to ‘‘residential 

mortgage loan’’ is unnecessary because 

the same meaning will be preserved. 

Dwelling 

The Bureau believes the definition of 

‘‘dwelling’’ in § 1026.2(a)(19) is 

consistent with TILA section 

103(cc)(5)’s use of the term in the 

definition of ‘‘residential mortgage 

loan.’’ Section 1026.2(a)(19) defines 

‘‘dwelling’’ to mean ‘‘a residential 

structure that contains one to four units, 

whether or not that structure is attached 

to real property. The term includes an 

individual condominium unit, 

cooperative unit, mobile home, and 

trailer, if it is used as a residence.’’ The 

Bureau interprets the term ‘‘dwelling’’ 

to also include dwellings in various 

stages of construction. Construction 

loans are often secured by dwellings in 

this fashion. Indeed, draws to fund 

construction are usually released in 

phases as the dwelling comes into 

existence and secures the draws. Thus, 

a construction loan secured by an 

improvement through various stages of 

construction that will be used as a 

residence is secured by a ‘‘dwelling.’’ 

The Bureau proposes to maintain this 

definition of dwelling. 

VI. Implementation 

A. This Proposal 

Section 1400(c)(1) of the Dodd-Frank 

Act mandates that the Bureau prescribe 

implementing regulations in final form 

by January, 21, 2013 (i.e., the date that 

is 18 months after the ‘‘designated 

transfer date’’) for regulations that are 

required under title XIV of the DoddFrank Act, and the Bureau must set 

effective dates of these regulations no 

later than one year from their date of 

issuance. The regulations proposed in 

this notice for which proposed rule text 

is set forth, while implementing 

amendments under title XIV of the 

Dodd-Frank Act, are not regulations 

required under title XIV.71 Pursuant to 


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55330 Federal Register / Vol. 77, No. 174 / Friday, September 7, 2012 / Proposed Rules 

implement in the final rule, is discussed in more 

detail in part VI.B, below. 

72 If the Bureau does not issue implementing 

regulations by January 21, 2013, however, the 

Dodd-Frank Act amendments of title XIV generally 

will go into effect on January 21, 2013. See DoddFrank Act section 1400(c)(3). 

73TILA section 129B(b)(2) mandates that the 

Bureau issue regulations to require procedures to 

assure and monitor compliance with ‘‘this section,’’ 

which is a reference to section 129B, not the 

regulations implementing section 129B. But DoddFrank Act section 1400(c)(2) provides that the 

statutory provisions in title XIV take effect when 

the final regulations implementing them take effect, 

provided such regulations are issued by January 21, 

2013. 

section 1400(c)(2) of the Dodd-Frank 

Act, the final rule issued under this 

proposal will establish its effective date, 

which need not be within one year of 

issuance.72

The Bureau recognizes the importance 

of the changes to be made by the 

Bureau’s final rule for consumer 

protection and the need to put these 

changes into place for consumers. For 

example, mandating that creditors make 

available a loan without discount points 

and origination points or fees may help 

ensure that consumers can shop 

effectively among different creditors and 

get a reasonable value for discount 

points and origination points or fees. In 

addition, an individual loan originator 

who has been properly screened and 

trained to present the type of loan that 

the individual loan originator sells is a 

clear benefit to consumers. The Bureau 

believes consumers should have the 

benefit of the Dodd-Frank Act’s 

additional protections and requirements 

as soon as practical. 

The Bureau also recognizes, however, 

that loan originators and creditors will 

need time to make systems changes and 

to retrain their staff to address the DoddFrank Act provisions implemented 

through the Bureau’s final rule, 

including the requirement to make 

available in certain circumstances a loan 

without discount points and origination 

points or fees. Moreover, certain 

creditors and loan originator 

organizations will need to conduct 

training and screening for individual 

loan originators. The Bureau further 

recognizes that mortgage creditors and 

loan originators will need to make 

changes to address a number of other 

requirements relating to other DoddFrank Act provisions, some of which, 

unlike the requirements set out in the 

proposed rule text for this rulemaking, 

are required by the Dodd-Frank Act to 

take effect within one year after 

issuance of final implementing rules. 

The Bureau believes that ensuring that 

industry has sufficient time to make the 

necessary changes ultimately will 

benefit consumers through better 

industry compliance. 

The Bureau expects to issue a final 

rule under this proposal by January 21, 

2013 because the statutory provisions it 

implements otherwise will take effect 

automatically on that date. The Bureau 

also expects to issue several other final 

rules by January 21, 2013 to implement 

other provisions of title XIV of the 

Dodd-Frank Act. The Bureau solicits 

comment on an appropriate 

implementation period for the final rule, 

in light of the competing considerations 

discussed above. The Bureau is 

especially mindful, however, of the 

importance of affording consumers the 

benefits of the additional protections in 

this proposal as soon as practical and 

therefore seeks detailed comment, and 

supporting information, on the nature 

and length of implementation processes 

that this rulemaking will necessitate. 

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

As noted above, this proposal does 

not contain specific proposed rule text 

to implement TILA section 129B(b)(2). 

That section provides that the Bureau 

‘‘shall prescribe regulations requiring 

depository institutions to establish and 

maintain procedures reasonably 

designed to assure and monitor the 

compliance of such depository 

institutions, and subsidiaries of such 

institutions, and the employees of such 

institutions or subsidiaries with the 

requirements of this section and the 

registration procedures established 

under section 1507 of the [SAFE Act].’’ 

15 U.S.C. 1639b(b)(2). Nonetheless, the 

Bureau may adopt such rule text at the 

same time as the final rule under this 

proposal. Accordingly, it is describing 

the rule text it is considering in detail 

and invites interested parties to provide 

comment. 

Regulations to implement TILA 

section 129B(b)(2) are required by title 

XIV. Accordingly, under Dodd-Frank 

Act section 1400(c)(1), the Bureau must 

prescribe those regulations no later than 

January 21, 2013, and those regulations 

must take effect no later than one year 

after they are issued. The Bureau notes, 

however, that TILA section 129B(b)(2) 

has no practical effect on depository 

institutions in the absence of 

implementing regulations because the 

statute imposes no requirement directly 

on any person other than the Bureau 

itself (to make regulations requiring 

depository institutions to adopt the 

referenced procedures). 

If the Bureau were to make the 

substantive requirements of this 

rulemaking implementing TILA section 

129B effective more than one year after 

issuance of the final rule and also were 

to adopt regulations requiring 

depository institutions to establish the 

referenced procedures (which must take 

effect within one year of their issuance), 

depository institutions might appear to 

be required to establish and maintain 

procedures to ensure compliance with 

substantive regulatory requirements that 

have not yet taken effect.73 This 

incongruous result would not impose 

any practical requirements on 

depository institutions until the 

substantive regulatory requirements take 

effect. Nevertheless, the Bureau is 

concerned that depository institutions 

may experience considerable 

uncertainty and compliance burden in 

attempting to reconcile a currently 

effective requirement for procedures 

with its corresponding, but not yet 

effective, substantive requirements. 

Therefore, the Bureau sees no practical 

reason to put into effect a requirement 

for procedures, with no practical 

consequences and possible negative 

consequences for depository 

institutions, until the substantive 

requirements to which it relates take 

effect. 

On the other hand, if the Bureau were 

to make the substantive requirements of 

this rulemaking implementing TILA 

section 129B effective one year or less 

after issuance, the Bureau could require 

depository institutions simultaneously 

to establish and maintain procedures to 

ensure compliance with those 

substantive requirements without 

creating the incongruity discussed 

above. The Bureau is aware that 

depository institutions generally 

establish and maintain procedures to 

ensure compliance with all regulatory 

requirements to which they are subject, 

as a matter of standard compliance 

practice. Thus, the Bureau believes that 

regulations implementing TILA section 

129B(b)(2), when adopted by the 

Bureau, will impose a relatively routine 

and familiar obligation on depository 

institutions and therefore could consist 

of a straightforward rule paralleling the 

statutory language. 

Specifically, the Bureau expects that 

such a rule would require depository 

institutions to establish and maintain 

procedures reasonably designed to 

assure and monitor the compliance of 

themselves, their subsidiaries, and the 

employees of both with the 

requirements of § 1026.36(d), (e), (f), and 

(g). The rule would provide further that 

the required procedures must be 

appropriate to the nature, size, 

complexity, and scope of the mortgage 

credit activities of the depository 

institution and its subsidiaries. Finally, 

consistent with the definitions in 


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section 2(18) of the Dodd-Frank Act, 12 

U.S.C. 5301(18), the rule would define 

‘‘depository institution’’ and 

‘‘subsidiary’’ for this purpose to have 

the same meanings as in section 3 of the 

Federal Deposit Insurance Act (FDIA), 

12 U.S.C. 1813. 

The Bureau notes that the definitions 

in section 2(18) of the Dodd-Frank Act 

should not necessarily determine the 

meanings of the ambiguous terms in 

TILA section 129B(b)(2). The DoddFrank Act definitions apply, ‘‘[a]s used 

in this Act,’’ not necessarily as used in 

another statute, TILA, being amended 

by the Dodd-Frank Act. In addition, the 

Dodd-Frank Act definitions do not 

apply if ‘‘the context otherwise 

requires.’’ One of the substantive 

requirements to which TILA section 

129B(b)(2) applies concerns the 

registration procedures under section 

1507 of the SAFE Act. The SAFE Act 

provides that, for purposes of the SAFE 

Act: ‘‘The term ‘depository institution’ 

has the same meaning as in [12 U.S.C. 

1813], and includes any credit union.’’ 

12 U.S.C. 5102(2). It may therefore be 

appropriate in this context to apply the 

SAFE Act definition of ‘‘depository 

institution’’ either as an interpretation 

of TILA section 129B(b)(2) or as an 

exercise of the Bureau’s authority under 

TILA section 105(a). Applying the SAFE 

Act definition in this way could 

facilitate compliance by aligning the 

definition of ‘‘depository institution’’ 

applicable to the procedures 

requirement under TILA section 

129B(b)(2) with the definition of 

‘‘depository institution’’ applicable 

under the SAFE Act. Applying the 

SAFE Act definition in this way also 

could be necessary or proper to 

effectuate the purpose stated in TILA 

section 129B(a)(2) of assuring that 

consumers are offered and receive 

residential mortgage loans that are not 

unfair, deceptive, or abusive. 

The Bureau also notes that Regulation 

G, which implements the SAFE Act, 

contains a requirement that all covered 

financial institutions (including banks, 

savings associations, Farm Credit 

System institutions, and certain 

subsidiaries) adopt and follow certain 

policies and procedures related to SAFE 

Act requirements. 12 CFR 1007.104. 

Accordingly, a regulation implementing 

TILA section 129B(b)(2) to require 

procedures could also apply to credit 

unions, as well as Farm Credit System 

institutions, as an exercise of the 

Bureau’s authority under TILA section 

105(a). Extending the TILA section 

129B(b)(2) procedures requirement in 

this way may facilitate compliance by 

aligning the scope of the entities subject 

to the TILA and SAFE Act procedures 

requirements. Further, such an 

extension may be necessary or proper to 

effectuate the purpose stated in TILA 

section 129B(a)(2) of assuring that 

consumers are offered and receive 

residential mortgage loans that are not 

unfair, deceptive, or abusive. 

The Bureau further notes that under 

Regulation G only certain subsidiaries 

(those that are ‘‘covered financial 

institutions’’) are required by 12 CFR 

1007.104 to adopt and follow written 

policies and procedures designed to 

assure compliance with Regulation G. 

Accordingly, it may be appropriate to 

apply the duty to assure and monitor 

compliance of subsidiaries and their 

employees under TILA section 

129B(b)(2) only to subsidiaries that are 

covered financial institutions under 

Regulation G. Exercising TILA 105(a) 

authority to make an adjustment or 

exception in this way may facilitate 

compliance by aligning the scope of the 

subsidiaries covered by the TILA and 

SAFE Act procedures requirements. 

Finally, extending the scope of a 

regulation requiring procedures even 

further, to apply to other loan 

originators that are not covered financial 

institutions under Regulation G (such as 

independent mortgage companies), 

would help ensure consistent consumer 

protections and a level playing field. 

Exercising TILA section 105(a) authority 

in this way may be necessary or proper 

to effectuate the purpose stated in TILA 

section 129B(a)(2) of assuring that 

consumers are offered and receive 

residential mortgage loans that are not 

unfair, deceptive, or abusive. 

The Bureau therefore solicits 

comment on whether a regulation 

requiring procedures to comply with 

TILA section 129B also should apply 

only to depository institutions as 

defined in section 3 of the FDIA, or also 

to credit unions, other covered financial 

institutions subject to Regulation G, or 

any other loan originators such as 

independent mortgage companies. 

Additionally, the Bureau solicits 

comment on whether it should apply 

the duty to assure and monitor 

compliance of subsidiaries and their 

employees only with respect to 

subsidiaries that are covered financial 

institutions under Regulation G. With 

respect to all of the foregoing, the 

Bureau also solicits comment on 

whether any of the potential exercises of 

TILA section 105(a) authority should 

apply with respect to procedures 

concerning only SAFE Act registration, 

or with respect to procedures for all the 

duty of care requirements in TILA 

section 129B(b)(1), or with respect to 

procedures for all the requirements of 

TILA section 129B, including those 

added by section 1402 of the DoddFrank Act. 

The Bureau also recognizes that a 

depository institution’s failure to 

establish and maintain the required 

procedures under the implementing 

regulation would constitute a violation 

of TILA, thus potentially resulting in 

significant civil liability risk to 

depository institutions under TILA 

section 130. 15 U.S.C. 1640. The Bureau 

anticipates concerns on the part of 

depository institutions regarding their 

ability to avoid such liability risk and 

therefore seeks comment on the 

appropriateness of establishing a safe 

harbor that would demonstrate 

compliance with the rule requiring 

procedures. For example, such a safe 

harbor might provide that a depository 

institution is presumed to have met the 

requirement for procedures if it, its 

subsidiaries, and the employees of it 

and its subsidiaries do not engage in a 

pattern or practice of violating 

§ 1026.36(d), (e), (f), or (g). 

The Bureau may adopt such a rule 

requiring procedures at the same time as 

the final rule under this proposal. If the 

effective date of the substantive 

requirements in that final rule is more 

than one year after issuance, the Bureau 

could adopt the requirement for 

procedures but clarify that having no 

procedures satisfies the procedures 

requirement until such time as the rule’s 

substantive requirements to which the 

procedures must relate take effect. 

Alternatively, the Bureau could refrain 

from issuing the rule requiring 

procedures until such time as it can take 

effect at the same time as the 

substantive requirements without the 

need for such a clarification. The 

Bureau solicits comment, however, on 

whether the requirement for procedures 

is straightforward enough to allow 

implementation by a regulation such as 

that described above. Alternatively, the 

Bureau seeks comment on whether the 

regulation prescribed under TILA 

section 129B(b)(2) should contain any 

specific guidance on the necessary 

procedures beyond that described 

above. 

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

In developing the proposed rule, the 

Bureau has considered potential 

benefits, costs, and impacts, and has 

consulted or offered to consult with the 

prudential regulators, the Department of 

Housing and Urban Development 

(HUD), and the Federal Trade 

Commission (FTC) regarding 

consistency with any prudential, 


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74Specifically, section 1022(b)(2)(A) of the DoddFrank 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. 

75This rulemaking also solicits comment on 

implementing, possibly in the final rule, new TILA 

section 129B(b)(2), which was added by DoddFrank Act section 1402 and requires the Bureau to 

prescribe regulations requiring certain loan 

originators to establish and maintain various 

procedures. This rulemaking does not implement 

new TILA section 129B(c)(3) which was added by 

Dodd-Frank Act section 1403. 

76Sections 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. 

market, or systemic objectives 

administered by such agencies.74

In this rulemaking, the Bureau 

proposes to amend Regulation Z to 

implement amendments to TILA made 

by the Dodd-Frank Act. The proposed 

amendments to Regulation Z implement 

Dodd-Frank Act sections 1402 (new 

duties of mortgage originators 

concerning proper qualification, 

registration, and related requirements), 

1403 (limitations on loan originator 

compensation to reduce steering 

incentives for residential mortgage 

loans), and 1414(d) and (e) (restrictions 

on the financing of single-premium 

credit insurance products and 

mandatory arbitration agreements in 

residential mortgage loan 

transactions).75 The proposed rule and 

commentary would also provide 

clarification of certain provisions in the 

existing Loan Originator Final Rule, 

including guidance on the application 

of those provisions to certain profitsharing plans and the appropriate 

analysis of other payments made to loan 

originators. 

As discussed in part II above, in 2010, 

the Board and Congress acted to address 

concerns that certain loan originator 

compensation arrangements could be 

difficult for consumers to understand 

and had the potential to create 

incentives to steer consumers to 

transactions with different terms, such 

as higher interest rates. The proposed 

rule would continue the protections 

provided in the Loan Originator Final 

Rule and implement the additional 

provisions Congress included in the 

Dodd-Frank Act that, as described 

above, to further improve the 

transparency of mortgage loan 

originations, enhance consumers’ ability 

to understand loan terms, and afford 

additional protections to consumers. 

A. Provisions To Be Analyzed 

The analysis below considers the 

benefits, costs, and impacts of the 

following major proposed provisions: 

1. New restrictions on discount points 

and origination points or fees in closedend consumer credit transactions 

secured by a dwelling where any person 

other than the consumer will 

compensate a loan originator in 

connection with the transaction. 

Specifically, in these transactions, a 

creditor or loan originator organization 

may not impose on the consumer any 

upfront discount points and origination 

points or fees in connection with the 

transaction unless the creditor makes 

available to the consumer a comparable, 

alternative loan that does not include 

discount points and origination points 

and fees, unless the consumer is 

unlikely to qualify for such a loan. The 

term ‘‘comparable, alternative loan’’ 

would mean that the two loans have the 

same terms and conditions, other than 

the interest rate, any terms that change 

solely as a result of the change in the 

interest rate (such as the amount of the 

regular periodic payments), and the 

amount of any discount points and 

origination points or fees. 

2. Clarification of the applicability of 

the prohibition on payment and receipt 

of loan originator compensation based 

on the transaction’s terms to employer 

contributions to qualified profit-sharing 

and other defined contribution or 

benefit plans in which individual loan 

originators participate, and to payment 

of bonuses under a profit-sharing plan 

or a contribution to a non-qualified 

plan. 

3. New requirements for loan 

originators, including requirements 

related to their licensing, registration, 

and qualifications, and a requirement to 

include their identification numbers 

and names on loan documents. 

With respect to each major proposed 

provision, the analysis considers the 

benefits and costs to consumers and 

covered persons. The analysis also 

addresses certain alternative provisions 

that were considered by the Bureau in 

the development of the proposed rule. 

The data with which to quantify the 

potential benefits, costs, and impacts of 

the proposed rule are generally limited. 

For example, a lack of data regarding the 

specific distribution of loan products 

offered to consumers limits the precise 

estimation of the benefits of increased 

consumer choice. In light of these data 

limitations, the analysis below provides 

a mainly qualitative discussion of the 

benefits, costs, and impacts of the 

proposed rule. General economic 

principles, together with the limited 

data that are available, provide insight 

into these benefits, costs, and impacts. 

Wherever possible, the Bureau has made 

quantitative estimates based on these 

principles and the data available. 

The Bureau requests comments on the 

analysis of the potential benefits, costs, 

and impacts of the proposed rule. 

B. Baseline for Analysis 

The amendments to TILA in sections 

1402, 1403, and 1414(d) and (e) of the 

Dodd-Frank Act take effect 

automatically on January 21, 2013, 

unless final rules implementing those 

requirements are issued on or before 

that date and provide for a different 

effective date.76 Specifically, new TILA 

section 129B(c)(2), which was added by 

section 1403 of the Dodd-Frank Act and 

restricts the ability of a creditor, the 

mortgage originator, or the affiliates of 

either to collect from the consumer 

upfront discount points, origination 

points, or fees in a transaction in which 

the mortgage originator receives from a 

person other than the consumer an 

origination fee or charge, will take effect 

automatically unless the Bureau 

exercises its authority to waive or create 

exemptions from this prohibition. New 

TILA section 129B(b)(1) requires each 

mortgage originator to be qualified and 

include unique identification numbers 

on loan documents. TILA section 

129B(c)(1) prohibits mortgage 

originators in residential mortgage loans 

from receiving compensation that varies 

based on loan terms. TILA section 

129C(d) creates prohibitions on singlepremium credit insurance, and TILA 

section 129C(e) provides restrictions on 

mandatory arbitration agreements. 

These statutory amendments to TILA 

also take effect automatically in the 

absence of the Bureau’s regulation. 

In some instances, the provisions of 

the proposed rule would provide 

substantial benefits compared to 

allowing the TILA amendments to take 

effect automatically, by providing 

exemptions to certain statutory 

provisions. In particular, the DoddFrank Act prohibits consumer payment 

of upfront points and fees in all loan 

transactions where someone other than 

the consumer pays a loan originator 

compensation tied to the transaction 

(e.g., a commission). Pursuant to its 

authority under the Dodd-Frank Act to 

create exemptions from this prohibition 

when doing so would be in the interest 

of consumers and in the public interest, 

the Bureau’s proposed rule would 

permit consumers to pay upfront points 

and fees when the creditor also makes 

available a loan that does not include 

discount points and origination points 

or fees (or when the consumer is 


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77Entities would likely incur some costs, 

however, in reviewing the new rule and 

commentary. 

78The proposed rule also solicits comment on: (1) 

Whether the rule should instead prohibit a creditor 

from making available a loan that includes discount 

points and origination points or fees if the 

consumer does not also qualify for the comparable, 

alternative loan that does not include points and 

fees; (2) whether to revise the Regulation Z 

advertising rules to require that advertisements that 

disclose information about loans that include 

discount points and origination points or fees also 

include information about the comparable, 

alternative loans to further facilitate shopping by 

consumers for loans from different creditors; and (3) 

whether the creditor should be required to provide 

a Loan Estimate (i.e., the combined TILA–RESPA 

disclosure proposed by the Bureau in its TILA– 

RESPA Integration Proposal), or the first page of the 

Loan Estimate, for the loan that does not include 

discount points and origination points or fees to the 

consumer after application. 

unlikely to qualify for such loan). In 

proposing to use its exemption 

authority, the Bureau is attempting to 

capture the benefits to consumers from 

a loan that does not include discount 

points and origination points or fees 

(which would be the only loan available 

if the statute went into effect without 

use of exception authority), while 

preserving consumers’ ability to choose, 

and creditors’ and loan originator 

organizations’ ability to offer, other loan 

options. 

In other instances, the provisions of 

the proposed rule would implement the 

statute more directly. Thus, many costs 

and benefits of the provisions of the 

proposed rule would arise largely or 

entirely from the Dodd-Frank Act and 

not from the Bureau’s proposed 

provisions. In these cases, the benefits 

of the proposed rule derive from 

providing additional clarification of 

certain elements of the statute. The 

proposed rule would reduce the 

compliance burdens on covered persons 

by, for example, reducing costs for 

attorneys and compliance officers as 

well as potential costs of overcompliance and unnecessary litigation. 

Moreover, the costs that these 

provisions would impose beyond those 

imposed by the Dodd-Frank Act itself 

are likely to be minimal. 

Section 1022 of the Dodd-Frank Act 

permits the Bureau to consider the 

benefits, costs, and impacts of the 

proposed rule relative to the most 

appropriate baseline. This consideration 

can encompass an assessment of the 

benefits, costs, and impacts of the 

proposed rule solely compared to the 

state of the world in which the statute 

takes effect without implementing 

regulations. For the provisions of the 

proposed rule where the Bureau is using 

its exemption authority with respect to 

an otherwise self-effectuating statute, 

the Bureau believes that the benefits, 

costs, and impacts are best measured 

against such a post-statutory baseline. 

For the provisions that largely 

implement the statute or clarify 

ambiguity in the statute or existing 

regulations, a pre-statute baseline is 

used to discuss the benefits, costs and 

impacts of the proposed rule. 

Additionally, the provisions of the 

proposed rule and commentary that 

clarify or provide additional guidance 

on provisions of the Loan Originator 

Final Rule should not impose additional 

costs or require changes to the business 

practices, systems, and operations of 

covered persons, and in particular those 

of small entities, beyond those that 

would already have occurred in order to 

comply with the current rule.77 The 

additional clarity offered by the 

proposed rule and commentary should 

in fact lower compliance burden by 

reducing confusion, expenditures made 

to interpret the current rule (such as 

hiring counsel or contacting the 

regulating or supervising agencies with 

questions), and diminishing the risk of 

inadvertent non-compliance. 

C. Coverage of the Proposed Rule 

The proposed rule applies to loan 

originators and table-funded creditors 

(i.e., those who take an application, 

arrange, offer, negotiate, or otherwise 

obtain an extension of consumer credit 

for compensation or other monetary 

gain). The new qualification, document 

identification, and compliance 

procedure requirements also apply to 

creditors that finance transactions from 

their own resources. Like current 

§ 1026.36(d) and (e), the proposed new 

qualification, document identification, 

and compliance procedure requirements 

apply to closed-end consumer credit 

transactions secured by a dwelling (as 

opposed to the consumer’s principal 

dwelling). The proposed new arbitration 

and single-premium credit insurance 

provisions apply to both HELOCs 

subject to § 1026.40 and closed-end 

consumer credit transactions secured by 

the consumer’s principal dwelling. 

D. Potential Benefits and Costs of the 

Proposed Rule to Consumers and 

Covered Persons 

1. Restrictions on Discount Points and 

Origination Points or Fees With the 

Requirement of Making Available a 

Comparable, Alternative Loan 

The Dodd-Frank Act prohibits 

consumer payment of upfront points 

and fees in all residential mortgage loan 

transactions (as defined in the DoddFrank Act) except those where no one 

other than the consumer pays a loan 

originator compensation tied to the 

transaction (e.g., a commission). 

Pursuant to its authority under the 

Dodd-Frank Act to create exemptions 

from this prohibition when doing so 

would be in the interest of consumers 

and in the public interest, the Bureau is 

proposing to require that before a 

creditor or loan originator organization 

may impose discount points and 

origination points or fees on a consumer 

where someone other than the consumer 

pays a loan originator transactionspecific compensation, the creditor 

must make available to the consumer a 

comparable, alternative loan that does 

not include discount points and 

origination points or fees. (Making 

available the comparable, alternative 

loan is not necessary if the consumer is 

unlikely to qualify for such a loan.) 

In retail transactions, a creditor will 

be deemed to be making available the 

comparable, alternative loan that does 

not include discount points and 

origination points or fees if, any time 

prior to a loan application, a creditor 

that gives a quote specific to the 

consumer for a loan that includes 

discount points and origination points 

or fees also provides a quote for a 

comparable, alternative loan that does 

not include those points and fees. 

(Making available the comparable, 

alternative loan is not necessary if the 

consumer is unlikely to qualify for such 

a loan.) 78

In transactions that involve mortgage 

brokers, a creditor will be deemed to be 

making available the comparable, 

alternative loan that does not include 

discount points and origination points 

or fees if the creditor provides mortgage 

brokers with the pricing for all of the 

creditor’s comparable, alternative loans 

that do not include those points and 

fees. Mortgage brokers then would 

provide quotes to consumers for the 

loans that do not include discount 

points and origination points or fees 

when presenting different loan options 

to consumers. 

Because the Bureau is using its 

exemption authority with respect to the 

otherwise self-effectuating provisions 

regarding points and fees, the analysis 

measures the benefits, costs, and 

impacts of this provision of the 

proposed rule relative to the enactment 

of the statute alone, i.e., it uses a poststatute baseline. The two portions of the 

provision are discussed separately: the 

elimination of restrictions on charging 

of points and fees in certain transactions 

is discussed first, followed by the 

requirement to make available the 

comparable, alternative loan. 


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79Should they expect to pay the balance of their 

loan prior to maturity, consumers can purchase 

from creditors the sole right to choose the date of 

this payoff. This right is valuable and its price is 

the market value such a sale creates for creditors 

in regard to the date of this potential payoff. Bond 

markets often exhibit an exactly opposite trade, in 

which the borrower cedes to the creditor the choice 

of time at which the creditor can require, if it 

chooses, the borrower to remit the remaining value 

of the bond. Bonds including such trades are 

termed ‘‘callable.’’ 

80The two options are not mutually exclusive. In 

some transactions, consumers may pay for the 

embedded option through more than one of the 

methods outlined. Donald Keenan & James J Kau, 

An Overview of the Option-Theoretic Pricing of 

Mortgages, 6 Journal of Housing Research 217 

(1995) (providing an overview of options embedded 

in residential mortgages); James J Kau, Donald 

Keenan, Walter Muller & James Epperson, A 

Generalized Valuation Model for Fixed-Rate 

Mortgages with Default and Prepayment, 11 Journal 

of Real Estate Finance & Economics 5 (1995) 

(providing a traditional method to value these 

options numerically); Robert R. Jones and David 

Nickerson, Mortgage Contracts, Strategic Options 

and Stochastic Collateral, 24 Journal of Real Estate 

Finance & Economics 35 (2002) (generating 

numerical values, in current dollars, for optionembedded mortgages in a continuous-time 

environment). 

81Similarly, consumers who expect to pay their 

loans over a period sufficiently short as to make the 

purchase of discount loans unattractive may find it 

better at the end of this expected period to continue 

to pay their mortgage and, consequently, suffer an 

unanticipated loss from refraining from the 

purchase of points. Yan Chang & Abdullah Yavas, 

Do Borrowers Make Rational Choices on Points and 

Refinancing?, 37 Real Estate Economics 635 (2009) 

(offering empirical evidence that consumers in their 

sample data remain in their current fixed-rate 

mortgages for too short a time to recover their initial 

investment in discount points). Other empirical 

evidence, however, conflicts with these results in 

regard to both the frequency and magnitude of 

losses. Simple numerical calculations that take into 

account taxes, local volatility in property values, 

and returns on alternative assets highlight the 

difficulty in drawing conclusions from much of the 

empirical data. 

82 In situations where consumers are unaware of 

their own circumstance or their own relative 

financial acuity, some creditors may be able to 

benefit. For example, an unethical creditor may 

persuade those consumers unaware of their lower 

relative financial ability to make incorrect decisions 

regarding purchasing points. The outcome of this 

type of adverse selection will, of course, be reversed 

when consumers have a more accurate knowledge 

of their financial abilities than does the creditor. 

83Conversely, the elimination of the option to pay 

upfront points and fees could, depending on the 

extant risk in creditors’ portfolios and their 

perceptions of differential risk between 

neighborhoods, seriously reduce the access to 

mortgage credit for some portion of consumers. 

84 In certain economic models, increased choice 

may not lead to improvements in consumer welfare. 

a. Restrictions on Discount Points and 

Origination Points or Fees 

Potential Benefits and Costs to 

Consumers 

In any mortgage transaction, the 

consumer has the option to prepay the 

loan and exit the existing contract. This 

option to repay has some inherent value 

to the consumer and imposes a cost on 

the creditor.79 In particular, consumers 

usually pay for part of this option 

through one of three alternative means: 

(1) ‘‘discount points,’’ which are the 

current payment of the value of future 

interest; (2) a ‘‘prepayment penalty,’’ 

which is a payment of the same market 

value deferred until the time at which 

the loan balance is actually repaid; or 

(3) a higher coupon rate on the loan. 

In many instances, creditors or loan 

originators will charge consumers an 

origination point or fee. This upfront 

payment is meant to cover the labor and 

material costs the originator incurs from 

processing the loan. Here too, the loan 

originator could offer the consumer a 

loan with a higher interest rate in order 

to recover the creditor’s costs. In this 

sense, discount points and origination 

points or fees are similar; from the 

consumer’s perspective, they are various 

upfront charges the consumer may pay 

where the possibility may exist to trade 

some or all of this payment in exchange 

for a higher interest rate. 

By permitting discount points under 

certain circumstances, the Bureau’s 

proposed rule offers all consumers 

greater choice over the terms of the 

coupon payments on their loan and a 

choice between paying discount points 

or a higher rate for the purchase of the 

prepayment option embedded in the 

loan.80 The purchase of discount points, 

however, is essentially a calculated best 

guess by a consumer given an uncertain 

outcome. In this context, the purchase 

of discount points will not necessarily 

result in a benefit to the consumer after 

the consummation of the transaction. 

Rational consumers presumably 

purchase discount points because they 

expect to make loan payments for a long 

enough period to make a positive return. 

The occurrence of unanticipated events, 

however, could induce these consumers 

to pay off their loan after a shorter 

period, resulting in a realized loss.81

Greater choice over loan terms and 

greater choice over how to pay for the 

prepayment option should, under 

normal circumstances, increase the ex 

ante welfare of consumers. However, 

the degree to which individual 

consumers benefit will depend on their 

individual circumstances and their 

relative degree of financial acuity.82

Any ex post changes in aggregate 

benefits and changes in the overall 

volume of available credit also depend 

on consumers’ circumstances and 

abilities. 

The choice over the means by which 

consumers compensate creditors for the 

prepayment option is of particular 

potential benefit to consumers who 

currently enjoy high liquidity but who 

either face prospects of diminished 

liquidity in the future or are more 

sensitive to the risk posed by a high 

variance in their future income or 

wealth. Examples of such consumers 

include retiring or older individuals 

wishing to secure their future housing, 

individuals who are otherwise 

predisposed to use their wealth for a 

one-time payment, consumers with 

relocation funds available, and 

consumers offered certain rebates by 

developers or other sellers. 

Relative to permitting the statutory 

provision to go into effect unaltered, the 

Bureau’s proposed rule regarding 

upfront points and fees also provides 

the potential for an additional benefit to 

consumers when adverse selection in 

the mortgage market compounds the 

costs of uncertainty over early 

repayment. Consumers who buy 

discount points credibly signal to 

creditors that the expected maturity of 

their loans is longer than those loans 

taken out by consumers not purchasing 

points. Credible signaling by an 

individual consumer in this 

circumstance would result in the 

consumer being offered a rate below that 

obtained by purchasing discount points 

in a more efficient market. When 

creditors confirm the relationship 

between individual purchases of 

discount points and the rapidity of 

individual prepayment, they respond by 

offering a lower average rate on each 

class of mortgages over which creditors 

have discretion in pricing.83

If having to understand and decide 

among loans with different points and 

fees combinations imposes a burden on 

some consumers, the existence of the 

increased choice made available by this 

provision may itself be a cost.84 In these 

circumstances, the Bureau’s proposed 

exercise of its exemption authority 

would have the cost of not reducing this 

confusion, relative to the statute. 

However, the proposed rule also 

includes, and solicits comment on, a 

‘‘bona fide’’ requirement to ensure that 

consumers receive value in return for 

paying discount points and origination 

points or fees and different options for 

structuring such a requirements. 

Implementing a requirement that the 

payment of discount points and 

origination points or fees be bona fide 

may benefit these consumers who, in 

the absence of such a provision, would 

incur these costs from the increased 

choice. In essence, by guaranteeing that 

any points and fees be bona fide, the 

proposed rule would offer some 

additional protection for these 

consumers. 


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85Since the Bureau’s proposed provisions on 

both loan originator compensation and the 

conditional ability to charge upfront points and fees 

should, if adopted, effectively eliminate a loan 

originator’s ability to engage in steering or similar 

practices possible under moral hazard, the analysis 

here will focus on only those benefits and costs 

which are unrelated to moral hazard. 

86 In contrast, the prohibition on payment of 

upfront points and fees in the Dodd-Frank Act 

under most circumstances would ensure that the 

value of the option to share risk through discount 

points is lost to both the creditor and the consumer 

in those circumstances. 

87Credible signaling in such a situation, from the 

creditor’s perspective, distinguishes two groups of 

consumers— one with low prepayment risk who 

purchase discount points, and the second a group 

not purchasing discount points and, consequently, 

expect to prepay their loan more rapidly than 

average—in what would otherwise be a pool of 

consumers who are perceived by the creditor to 

exhibit an equivalent measure of prepayment risk. 

88 In this situation where the efficiency of the 

market is only impaired by adverse selection, this 

increase in creditor returns is independent of 

whether the creditor sells loans in the secondary 

market or chooses to engage in hedging to hold 

these mortgages in portfolio. 

89Conversely, the elimination of the payment of 

upfront points and fees to the extent provided in 

the Dodd-Frank Act could, depending on the extant 

risk in creditors’ portfolios and various 

characteristics of property by neighborhood, 

seriously reduce the access to mortgage credit for 

some portion of consumers. 

Potential Benefits and Costs to Covered 

Persons 

The ability to charge discount points 

and origination points or fees is a 

substantial benefit to loan originators 

and remains so even under the Bureau’s 

requirement that, as a prerequisite for 

any such charge, creditors make 

available a comparable, alternative loan 

that does not include discount points 

and origination points or fees (except 

where the consumer is unlikely to 

qualify for the loan).85 Based on the 

assumption that the costs of originating 

a comparable, alternative loan that does 

not include discount points and 

origination points or fees are sufficiently 

small (relative to the revenue from all 

mortgage funding), the proposed rule 

would create three significant benefits 

for creditors. 

First, the conditional permission to 

charge discount points and origination 

points or fees allows creditors to 

increase their returns on mortgage 

funding by offering different loan terms 

to consumers having different 

preferences and posing different risks. 

Second, creditors have the option to 

share risk with consumers. As noted 

above, discount points are one way for 

creditors to recoup some portion of the 

implicit value of the prepayment option 

from consumers and the primary means 

by which a creditor can hedge losses 

from potential consumer prepayment. 

The proposed rule’s allowance of the 

payment of points in circumstances 

other than the limited circumstances 

permitted under the Dodd-Frank Act 

preserves the ability of creditors to share 

a loan’s prepayment risk, created by the 

prepayment option embedded in the 

loan, with consumers. Regardless of 

whether discount points are actually 

exchanged in any particular mortgage 

transaction, the ability to offer such 

points to consumers is a valuable option 

to the creditor.86

A third benefit for creditors arises 

since adverse selection exists in the 

mortgage market, which compounds the 

risks borne from early repayment. 

Allowing consumers to purchase 

discount points, at least in part, allows 

them to signal to the creditor that they 

expect to make payments on their loan 

for a longer period than other 

consumers who choose not to purchase 

such points. Creditors gain from that 

information and will respond to such 

differences in behavior.87 Increasing a 

creditor’s ability to measure more finely 

the prepayment risk posed by an 

individual consumer allows him or her 

to more finely ‘‘risk-price’’ loans across 

consumers posing different risk. By 

charging different loan rates to 

consumers who pose different degrees 

of risk, the creditor will earn a greater 

overall return from funding mortgage 

loans.88

Both creditors, and by the preceding 

analysis, consumers benefit from the 

role of discount points as a credible 

signal and, consequently, the economic 

efficiency of the mortgage markets is 

enhanced.89 The Bureau believes that 

this private means for reducing the risk 

that the mortgage loan (a liability for the 

consumer) can pose to the assets of the 

creditor is a significant source of 

efficiency in the mortgage market. In 

addition, mindful of the state of the 

United States housing and mortgage 

markets, the proposed rule also lowers 

the chances of any potential disruptions 

to those markets that might arise from 

implementing the Dodd-Frank Act 

provisions without change, which 

would be significantly different than 

current regulations. This should help 

promote the recovery and stability of 

those markets. 

b. Requirement That All Creditors Make 

Available a Comparable, Alternative 

Loan 

The Bureau is proposing to require 

that before a creditor or loan originator 

organization may impose discount 

points and origination points or fees on 

a consumer where someone other than 

the consumer pays a loan originator 

transaction-specific compensation, the 

creditor must make available to the 

consumer a comparable, alternative loan 

that does not include discount points 

and origination points or fees. (Making 

available the comparable, alternative 

loan is not necessary if the consumer is 

unlikely to qualify for such a loan.) 

In transactions that do not involve a 

mortgage broker, the proposed rule 

would provide a safe harbor if, any time 

prior to application that the creditor 

provides a consumer an individualized 

quote for a loan that includes discount 

points and origination points or fees, the 

creditor also provides a quote for a 

comparable, alternative loan that does 

not include such points or fees. In 

transactions that involve mortgage 

brokers, the proposed rule would 

provide a safe harbor under which 

creditors provide mortgage brokers with 

the pricing for all of their comparable, 

alternative loans that do not include 

discount points and origination points 

or fees. Mortgage brokers then would 

provide quotes to consumers for the 

loans that do not include discount 

points and origination points or fees 

when presenting different loan options 

to consumers. 

Relative to the post-statute baseline, 

this provision on its own has no or very 

limited effect on the market. As 

described, in the absence of the 

proposed rule, virtually the only 

mortgage transactions allowed would be 

loans without any upfront discount 

points, or origination points and fees; 

under the proposed rule, creditors are 

required in most instances to make 

these loans available. Any differences 

that arise in prices, quantities or 

product mix available in the market that 

are attributable to changes in the legal 

environment, therefore arise from the 

exemption allowing discount points, 

and origination points and fees, rather 

than from this requirement. 

Nevertheless, the Bureau has chosen 

to discuss the benefits, costs and 

impacts from mandating that creditors 

make available the comparable, 

alternative loan (except where a 

consumer is unlikely to qualify for such 

a loan). With the Bureau’s exemption 

authority, one alternative could be to 

completely eliminate the Dodd-Frank 

Act’s prohibitions and allow the 

payment of upfront points and fees with 

no restrictions. (The Bureau has chosen 

not to present that alternative.) The 

following analysis discusses the 

benefits, costs and impacts of the 

current proposed rule relative to the 

alternative (which would mirror the 

status quo) where no such requirement 

for a comparable, alternative loan would 

be in place. 


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90Susan Woodward and Robert Hall (2012), 

Diagnosing Consumer Confusion and Sub-Optimal 

Shopping Effort: Theory and Mortgage-Market 

Evidence, forthcoming American Economic Review: 

Papers and Proceedings (documenting the existence 

of such consumers in domestic mortgage markets). 

91The Bureau recognizes that rates on loans that 

do not include discount points and or origination 

points or fees may still not be perfectly comparable 

given that different creditors may have different 

additional charges. However, the rates on 

comparable, alternative loans should be correlated 

among creditors and informative. 

92Higher transactions volumes in any product 

increase the accuracy and value of the information 

provided by its market price. 

93When a distribution of financial acuity and 

abilities exists among consumers market 

transparency may exacerbate any existing crosssubsidization between consumers. As a result, it is 

possible that some consumers gain more relative to 

others. 

94Under certain plausible circumstances, such 

additional shopping would also encourage entry by 

creditors into previously localized mortgage 

markets. 95The potential for these additional financerelated costs would likely be greater under the 

alternative discussed in part V. Under that 

alternative, some creditors will lose additional 

profits derived from loans they can no longer make 

because the consumer does not qualify for the 

comparable, alternative loan. Creditors in general 

will need to take the time to ensure that they make 

the comparable, alternative loan available, that they 

provide quotes for it where applicable, and that 

they assess the consumer’s qualification for it. 

Potential Benefits and Costs to 

Consumers 

Eliminating the prohibition on 

upfront points and fees creates greater 

choice for consumers over the means by 

which the consumer may compensate 

the creditor in exchange for the 

prepayment option in the mortgage. The 

preceding analysis discussed that 

greater choice should, under normal 

circumstances, create an ex ante welfare 

gain for consumers. The ex post (or 

realized) gains to consumers, however, 

may or may not exceed the 

corresponding frequency of realized 

losses. 

Consumer choice is further expanded 

by the requirement that a creditor or 

loan originator organization generally 

make available the comparable, 

alternative loan to a consumer as a 

prerequisite to the creditor or loan 

originator organization imposing 

discount points and origination points 

or fees on the consumer in a transaction. 

In particular, the ability to choose this 

loan may be of particular benefit to 

those consumers having a relatively 

lower ability to accurately interpret loan 

terms. The simpler loan terms may help 

these consumers understand the total 

cost of the loan and select the mortgage 

most suited to them.90

Consumers may also benefit from the 

proposed rule if the greater prevalence 

of comparable, alternative loans and 

their rates makes terms of mortgage 

loans clearer and more observable for all 

mortgage products. A creditor’s 

communication regarding its rate on a 

particular comparable, alternative loan 

may act as a benchmark or ‘‘focal point’’ 

for the purpose of comparing rates on all 

additional mortgage products available 

from this creditor. Such a focal point 

may anchor the consumer’s assessment 

of the relative costs of each type of 

mortgage product available from that 

creditor. The comparable, alternative 

loan, as a result, conveys to consumers 

information about the value of discount 

points and origination points or fees on 

all other products offered by a given 

creditor and, under certain 

circumstances, across all creditors.91

The availability of this benchmark, 

consequently, enhances the ability of all 

consumers, and particularly those 

having a relatively low degree of 

financial sophistication, to more 

accurately compare the terms of 

alternative mortgage products offered by 

a creditor and select that product that 

best suits the consumer’s needs. 

The magnitude of the benefits to 

consumers from having the rate on 

comparable, alternative loans available 

as a benchmark would depend, in part, 

on the volume of transactions in such 

mortgages.92 A higher volume of 

transactions reduces the likelihood that 

the rate posted by any individual 

creditor reflects idiosyncrasies specific 

to that creditor. By reducing the 

expected deviation of the rate posted by 

a given creditor from the average rate 

posted by all creditors, a higher 

transaction volume results in an 

improvement in the accuracy with 

which a consumer can compare the 

rates on all loans offered by a given 

creditor. A lower volume, conversely, 

decreases such accuracy. 

The Bureau believes that transactions 

without discount points and origination 

points or fees will be at a sufficiently 

high level to make the information 

conveyed by its average rate of 

significant value to consumers. This 

belief is founded on two factors. First, 

loans that do not include discount 

points and origination points or fees are 

currently offered and transacted in 

volumes comparable to several other 

types of mortgage loans. Second, the 

Bureau’s proposed rule would give 

consumers certainty that this mortgage 

is generally available from virtually any 

creditor. Since current transactions 

volumes in this mortgage are 

comparable to those of many other 

mortgage products, this certainty about 

its universal availability, combined with 

its simplicity, should cause a level of 

consumer demand for the comparable, 

alternative mortgage sufficiently high to 

ensure sufficient transaction volumes. 

Providing a useful means by which to 

compare rates also provides a 

potentially significant additional benefit 

to consumers.93 Widespread availability 

of the current rate on the comparable, 

alternative loan should also lower the 

costs of comparing the rate on any 

mortgage product across creditors, 

owing to the correlation of costs and 

hence of rates among creditors. If so, 

this would encourage additional 

shopping by consumers. Additional 

shopping by consumers over alternative 

creditors would, in turn, enhance the 

degree of competition among creditors, 

further driving down prices and 

increasing consumer welfare.94

Potential Benefits and Costs to Covered 

Persons 

Under the proposal, a creditor 

generally must make available a 

comparable, alternative loan to a 

consumer as a prerequisite to the 

creditor or loan originator organization 

imposing any discount points and 

origination points or fees on the 

consumer in a transaction (unless the 

consumer is unlikely to qualify for the 

comparable, alternative loan.) The 

proposed requirement would, in theory, 

have the potential to impose financerelated costs on creditors, particularly 

those whose size may preclude them 

from accessing either the secondary 

mortgage market or hedging 

(derivatives) markets.95 Selling loans 

into the secondary market or investing 

in certain derivatives allows firms to 

lower the risk of their portfolios. Large 

and mid-sized creditors are able 

profitably to engage in these activities. 

In particular, the large number of fixedincome securities and hedging 

instruments available to these creditors 

should allow them to mitigate their 

financial risks. 

The Bureau has considered whether 

future economic conditions could 

conceivably occur in which secondary 

market investors have no or low 

demand for comparable, alternative 

loans, rendering these products illiquid. 

In these circumstances, the volume of 

originations of such mortgages would 

drastically decrease with a concurrent 

rise in rates on the comparable, 

alternative loans, and a potential for 

increased exposure to credit and 

prepayment risk borne by creditors with 

limited asset diversification. Illiquidity 

in financial markets as a whole could 

inflict severe effects on creditors with 

portfolios consisting primarily of 

comparable, alternative loans. However, 

several factors mitigate the likelihood of 


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96Some of the earliest securitizations were so 

called Collateralized Mortgage Obligations created 

by Freddie Mac in the late 1980s. See Brochure, 

Freddie Mac, Direct Access Retail Remic Tranches 

(2008), available at: http://www.freddiemac.com/ 

mbs/docs/freddiedarts_brochure.pdf; Frank 

Fabozzi, Chuck Ramsey, and Frank Ramirez, 

Collateralized Mortgage Obligations: Structures and 

Analysis (Frank J Fabozzi Assocs., 1994). 

97

98Moral hazard, in the current context of 

mortgage origination, depends fundamentally on 

the advantage the loan originator has in knowing 

the least expensive loan terms acceptable to 

creditors and greater overall knowledge of the 

functioning of mortgage markets. Holden Lewis, 

‘‘Moral Hazard’’ Helps Shape Mortgage Mess, 

Bankrate (Apr. 18, 2007), available at: 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). 

99As noted in the section-by-section analysis, the 

Bureau issued CFPB Bulletin 2012–2 in response to 

the questions it received regarding the applicability 

of the current regulation to qualified plans and nonqualified plans, and this regulation is intended in 

part to provide further clarity on such issues. 

this event. Most historical experience, 

along with the size, liquidity, and pace 

of innovation in the United States 

mortgage markets, make such an event 

unlikely. For example, some of the 

earliest secondary market innovations 

involved structuring mortgage securities 

with different tranches of prepayment 

risk.96 These securities would offer 

investors the opportunity to voluntarily 

purchase alternative exposures to the 

prepayment risk arising from any 

underlying pool of mortgages. 

Another potential concern of 

creditors, closely related to the issues of 

liquidity discussed above, is the 

possibility that the rates on comparable, 

alternative loans could reach certain 

discrete thresholds such as the cutoff for 

higher-rate mortgages or the threshold 

rate that triggers HOEPA coverage. In 

such cases, creditors may face a limited 

ability to sell these loans. To the extent 

that creditors hold these new loans in 

portfolio, they will face some additional 

risk.97 Here too, considerations of 

several important features of the credit 

markets mitigate concerns for those 

creditors who could be adversely 

affected in these cases. First, creditors 

should be able to price comparable, 

alternative loans at values that maintain 

their compliance with regulations but 

allow them to attain a desired degree of 

aggregate risk in their portfolios of 

assets. Second, the volume of 

originations at such high rates would 

inevitably decline under all situations 

except that of a completely inelastic 

demand by consumers. Since each loan 

with discount points or origination 

points or fees is a substitute for the 

comparable, alternative loan, a 

sufficiently high relative price on the 

comparable, alternative loan will make 

them unattractive to most consumers. 

In considering the benefits, costs, and 

impacts, the Bureau notes that neither 

the alternative of allowing points and 

fees without restriction nor the 

elimination of all points and fees would 

on balance provide benefits to all 

consumers as a group. As a 

consequence, any conclusion about the 

comparative benefits and costs to 

consumers must be based on a 

comparison of two mutually exclusive 

classes of consumers: (1) Those who 

benefit more from the adoption of an 

unrestricted points and fees proposal, 

relative to the prohibition of all points 

and fees; and (2) those who benefit more 

from the elimination of all points and 

fees offers. Both groups should benefit 

from the current proposed rule where a 

creditor who wishes to make available 

to a consumer a menu of loans with 

terms including points and/or fees 

generally must also make available to 

this consumer the comparable, 

alternative loan that does not include 

discount points and origination points 

or fees. The costs of the proposed rule 

should be minimal assuming the likely 

scenario that a sufficiently efficient 

market for comparable, alternative loans 

(in the presence of other types of 

mortgage products) would exist and that 

the potential costs of making available 

the comparable, alternative loan is not 

be too high for a significant proportion 

of creditors. 

2. Compensation Based on Transaction 

Terms 

Compensation rules, which restrict 

the means by which a loan originator 

receives compensation, are a practical 

way to mitigate potential harm to 

consumers arising from the 

opportunities for moral hazard on the 

part of loan originators.98 Similar to the 

current regulation regarding loan 

originator compensation (i.e., the Loan 

Originator Final Rule or, more simply, 

the ‘‘current rule’’), the Dodd-Frank Act 

mitigates consumer harm by targeting 

the means by which loan originators can 

unfairly increase remuneration for their 

services. 

The Dodd-Frank Act generally mirrors 

the current rule’s general prohibition on 

compensating an individual loan 

originator based on the terms of a 

‘‘transaction.’’ Although the statute and 

the current rule are clear that an 

individual loan originator cannot be 

compensated differently based on the 

terms of his or her transactions, they do 

not expressly address whether the 

individual loan originator may be 

compensated based on the terms of 

multiple transactions, taken in the 

aggregate, of multiple loan originators 

employed by the same creditor or loan 

originator organization. 

Through its outreach and the 

inquiries the Board and the Bureau have 

received about the application of the 

current regulation to qualified and nonqualified plans,99 the Bureau believes 

that confusion exists about the 

application of the current regulation to 

compensation in the form of bonuses 

paid under profit-sharing plans (which 

under the proposed commentary is 

deemed to include so called ‘‘bonus 

pools’’ and ‘‘profit pools’’) and 

employer contributions to qualified and 

non-qualified defined benefit and 

contribution plans. As discussed in the 

section-by-section analysis, these types 

of compensation are often indirectly 

based on the aggregate transaction terms 

of multiple individual loan originators 

employed by the same creditor or loan 

originator organization, because 

aggregate transaction terms (e.g., the 

average interest rate spread of the 

individual loan originators’ transactions 

in a particular calendar year over the 

creditor’s minimum acceptable rate) 

affects revenues, which in turn affects 

profits, and which, in turn, influences 

compensation decisions where profits 

are taken into account. 

The proposed rule and commentary 

would address this confusion by 

clarifying the scope of the compensation 

restrictions in current § 1026.36(d)(1)(i). 

In so clarifying the compensation 

restrictions, the proposed rule treats 

different types of compensation 

structures differently based on an 

analysis of the potential steering 

incentives created by the particular 

structure. The proposed rule would 

permit employers to make contributions 

to qualified plans (which, as explained 

in the proposed commentary, include 

defined benefit and contribution plans 

that satisfy the qualification 

requirements of IRC section 401(a) or 

certain other IRC sections), even if the 

contributions were made out of 

mortgage business profits. The proposed 

rule also would permit bonuses under 

non-qualified profit-sharing plans, profit 

pools, and bonus pools and employer 

contributions to non-qualified defined 

benefit and contribution plans if: (1) 

The mortgage business revenue 

component of the total revenues of the 

company or business unit to which the 

profit-sharing plan applies, as 

applicable, is below a certain threshold, 

even if the payments or contributions 

were made out of mortgage business 

profits (the Bureau is proposing 


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100Payments to qualified retirement plans 

include, for example, employer contributions to 

employee 401(k) plans. 

101Bengt Holmstrom, Moral Hazard and 

Observability, 10 Bell Journal of Economics 74 

(1979) (providing the first careful analysis of the 

effects such compensation methods have on 

employee incentives). 

102For example, when the compensation to each 

loan originator depends upon on the aggregate 

efforts of multiple originators (rather than directly 

on the individual loan originator’s own 

performance) then that individual’s efforts have 

increasingly little influence on the compensation 

the individual receives through a profit-sharing 

plan. As a result, each individual reduces his or her 

effort. This ‘‘free-riding’’ behavior has been 

extensively analyzed: Surveys of these analyses 

appear in Martin L. Weitzman, Incentive Effects of 

Profit Sharing, in Trends in Business Organization: 

Do Participation and Cooperation Increase 

Competitiveness? (Kiel Inst. of World Econs.1995), 

available at: http://ws1.ad.economics.harvard.edu/ 

faculty/weitzman/files/ 

IncentiveEffectsProfitSharing.pdf. 

103As noted earlier, the Bureau issued CFPB 

Bulletin 2012–2, which stated that the practice is 

permitted under the current rule, but the bulletin 

was issued as guidance pending the adoption of 

final rules on loan originator compensation. 

104Some firms may choose not to offer such 

compensation. In certain circumstances an 

originating institution (perhaps unable to invest in 

sufficient management expertise) will see reduced 

profitability from adopting incentive -based 

compensation. 

105Analysis of Call Report data from depository 

institutions and credit unions indicates that among 

depository institutions, roughly 6 percent are likely 

to exceed the 50 percent threshold and 30 percent 

are likely to exceed the 25 percent threshold. The 

largest impact would be on thrifts, whose business 

model historically has centered on residential 

mortgage lending. 

alternative threshold amounts of 50 and 

25 percent); or (2) the individual loan 

originator has been the loan originator 

for five or fewer transactions during the 

preceding 12-month period, i.e., a ‘‘de 

minimis’’ test for individuals who 

originate a very small number of 

transactions per year. The proposed 

rule, however, would reaffirm the 

current rule and not permit individual 

loan originators to be compensated 

based on the terms of their individual 

transactions. 

Compensation in the form of bonuses 

paid under profit-sharing plans and 

employer contributions to qualified and 

non-qualified defined benefit and 

contribution plans is normally based on 

the profitability of the firm.100 As with 

compensation paid to the individual 

loan originator concurrently with loan 

origination, compensation paid 

pursuant to a profit-sharing plan is 

designed to provide individual loan 

originators and other employees with 

greater performance incentives and to 

align their interests with those of the 

owners of the institution employing 

them.101 When moral hazard exists, 

however, such profit-sharing could lead 

to misaligned incentives on the part of 

individual loan originators with respect 

to consumers. The magnitude of adverse 

incentives arising from profit-sharing in 

creating gains to the owners of the loan 

originator organization or creditor, 

however, depends on several 

circumstances.102 These include the 

number of individual loan originators 

employed by the creditor or loan 

originator organization that contributes 

to the funds available for profit-sharing, 

the means by which shares of the profits 

are distributed to the individual loan 

originators in the same firm, and the 

ability of owners to monitor loan quality 

on an ongoing basis. 

Potential Benefits and Costs to Covered 

Persons 

As described above, considering the 

benefits, costs and impacts of this 

provision requires the understanding of 

current industry practice against which 

to measure any changes. As discussed, 

the Bureau believes, based on outreach 

to and inquiries received from industry, 

that confusion exists about the 

application of the current regulation to 

compensation in the form of bonuses 

paid under profit-sharing plans, bonus 

pools, and employer contributions to 

qualified and non-qualified plans. In 

light of this confusion, the Bureau 

believes that industry practice likely 

varies and therefore any determination 

of the costs and benefit of the proposed 

rule depend critically on assumptions 

about current firm practices. 

Firms that currently offer incentivebased compensation arrangements for 

individual loan originators that would 

continue to be allowed under the 

proposed rule should incur neither costs 

nor benefits from the proposed rule. 

Notably, the proposed rule would 

clarify that employer contributions to 

qualified plans in which individual loan 

originators participate are permitted 

under the current rule.103 Such firms 

can continue to benefit from these 

arrangements, which have the potential 

to motivate individual productivity; to 

reduce potential intra-firm moral hazard 

by aligning the interests of individual 

originators with those of their employer; 

and to reduce the potential for increased 

costs arising from adverse selection in 

the retention of more productive 

employees. Firms that do not offer such 

plans would benefit, with the increased 

clarity of the proposed rule, from the 

opportunity to do so should they so 

choose.104

Firms that did not change their 

compensation practices in response to 

the current rule and that currently offer 

compensation arrangements that would 

be prohibited under the proposed rule 

would incur costs. These include costs 

from changing internal accounting 

practices, re-negotiating the 

remuneration terms in the contracts of 

existing employees and any other 

industry practice related to these 

methods of compensation. For these 

firms, the prohibition on compensation 

based on transaction terms may 

contribute to adverse selection among 

individual loan originators, a possible 

lower average quality of individual loan 

originators in such a firm, higher 

retention costs, and possibly lower 

profits.105 The specific numerical 

threshold also implies that some loan 

originators may now suffer the 

disadvantage of facing competitors with 

fewer restrictions on compensation. 

These potential differential effects may 

be greater for small creditors and loan 

originator organizations, and loan 

originator organizations that originate 

loans as their exclusive, or primary, line 

of business. The Bureau seeks 

comments and data on the current 

compensation practices of those firms at 

or above the thresholds. 

Potential Benefits and Costs to 

Consumers 

The proposed rule would benefit most 

consumers by clarifying the current 

regulation to address, and mitigate, the 

steering incentives inherent in the 

nature of profit-sharing plans and other 

types of compensation that are directly 

or indirectly based on the terms of 

multiple transactions of multiple 

individual loan originators. Limiting 

such incentive-based compensation for 

many firms limits the potential for 

steering consumers into more expensive 

loans. The Bureau’s approach permits 

bonuses under profit-sharing plans, 

contributions to qualified plans, and 

contributions to non-qualified plans 

only where the steering incentives are 

sufficiently attenuated (i.e., the nexus 

between the transaction terms and the 

compensation is too indirect). 

3. Qualification Requirements for Loan 

Originators 

Section 1402 of Dodd-Frank amends 

TILA to impose a duty on loan 

originators to be ‘‘qualified’’ and, where 

applicable, registered or licensed as a 

loan originator under State law and the 

Federal SAFE Act. Employees of 

depositories, certain of their 

subsidiaries, and nonprofit 

organizations currently do not have to 

meet the SAFE Act standards that apply 

to licensing, such as taking prelicensure classes, passing a test, meeting 


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106Use of the post-statute baseline used earlier in 

this analysis would be uninformative since even 

post statute but in the absence of the proposal, the 

definition of ‘‘qualified’’ would still be unclear. 

107Under 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. 

character and fitness standards, having 

no felony convictions within the 

previous seven years, or taking annual 

continuing education classes. To 

implement the Dodd-Frank-Act’s 

requirement that entities employing or 

retaining the services of individual loan 

originators be ‘‘qualified,’’ the proposed 

rule would require entities whose 

individual loan originators are not 

subject to SAFE Act licensing, including 

depositories and bona fide nonprofit 

loan originator entities, to: (1) Ensure 

that their individual loan originators 

meet character and fitness and criminal 

background standards equivalent to the 

licensing standards that the SAFE Act 

applies to employees of non-bank loan 

originators; and (2) provide appropriate 

training to their individual loan 

originators commensurate with the 

mortgage origination activities of the 

individual. The proposed rule would 

mandate training appropriate for the 

actual lending activities of the 

individual loan originator and would 

not impose a minimum number of 

training hours. In developing this 

provision, the Bureau used its 

discretion. As such, the benefits and 

costs of this provision are discussed 

relative to a pre-statute baseline.106

Potential Benefits and Costs to 

Consumers 

Consumers will inevitably make 

subjective evaluations of the expertise of 

any loan originators with whom they 

consult. A consumer’s knowledge that 

all originators possess a minimal level 

of such expertise would be of significant 

assistance to the accuracy of that 

evaluation and to the consumer’s 

confidence in the originator with whom 

they initially begin negotiations. 

Consumers, who are generally 

considered to prefer certainty, will 

benefit to the extent that the current 

provisions increase such consumer 

confidence. Consumers incur no new 

direct costs created by the current 

proposal; any increases that originators 

may pass on to consumers will be de 

minimis. 

Potential Benefits and Costs to Covered 

Persons 

The increased requirements for 

institutions that employ individuals not 

licensed under the SAFE Act would 

further assure that the individual loan 

originators in their employ satisfy those 

levels of expertise and standards of 

probity as specified in the current 

proposed rule.107 This would have a 

positive effect by tending to reduce any 

potential liability they incur in future 

mortgage transactions and to enhance 

their reputation among consumers. An 

increase in consumer confidence in the 

expertise and experience of loan 

originators may possibly increase the 

number of consumers willing to engage 

in these transactions. 

In addition, relative to current market 

conditions, the proposed rule would 

create a more level ‘‘playing field’’ 

between non-banking institutions and 

depository and non-profit institutions 

with regard to the enhanced training 

requirements and background checks 

that would be required of the latter 

institutions. This may help mitigate any 

possible adverse selection in the market 

for individual originators, in which nonbanking institutions employ and retain 

only the most qualified individuals 

while those of more modest expertise 

seek employment by depository and 

non-profit institutions. 

For depository institutions, the 

enhanced requirements related to 

findings from a criminal background 

check may cause certain loan originators 

to no longer be able to work at these 

institutions. It also slightly limits the 

pool of employees from which to hire, 

relative to the pool from which they can 

hire under existing requirements. 

Following an initial transition period 

where firms will have to perform the 

background check on current 

employees, these costs should be 

minimal. Similarly, the additional credit 

check for current loan originators at 

depository institutions, and the ongoing 

requirement will result in some minimal 

increased costs. Non-banking 

institutions not currently subject to the 

SAFE Act will have to incur the costs 

of both the criminal background check 

and the credit check. 

4. Potential Benefits and Costs From 

Other Provisions 

Mandatory Arbitration: Section 1414 

of the Dodd-Frank Act added section 

129C(e) to TILA. Section 129C(e) 

prohibits terms in any residential 

mortgage loan (as defined in the DoddFrank Act) or related agreement from 

requiring arbitration or any other nonjudicial procedure as the method for 

resolving any controversy or settling any 

claims arising out of the transaction. 

The proposed rule implements this 

statutory provision of the Dodd-Frank 

Act. Relative to a pre-statute baseline, 

mortgage-related agreements can no 

longer reflect such terms. Consumers 

who desire access to the judicial system 

over disputes will not be prohibited 

from having such access. Some creditors 

and other parties will have to incur any 

additional costs of such legal actions 

above the costs associated with 

arbitration. Based on its outreach, the 

Bureau believes that to the extent terms 

that would be prohibited are currently 

included in any transactions covered by 

the statute, they are most likely to be 

included in contracts for open-ended 

mortgage credit. The Bureau requests 

comment on the prevalence of contracts 

with such terms for the purposes of the 

analysis under Section 1022 of the 

Dodd-Frank Act. 

Creditor Financing of ‘‘Single 

Premium’’ Credit Insurance: DoddFrank Act section 1414 added section 

129C(f) to TILA. Section 129(C)(f) 

pertains to a creditor financing credit 

insurance fees for the consumer. 

Although the provision permits 

insurance premiums to be calculated 

and paid in full per month, this 

provision prohibits a creditor from 

financing any fees, including premiums, 

for credit insurance in closed- and 

certain open-end loan transactions 

secured by a dwelling. The proposed 

rule implements the relevant statutory 

provision of the Dodd-Frank Act. The 

structure of these transactions is often 

harmful to consumers, and as such the 

proposed rule should benefit 

consumers. 

5. Additional Potential Benefits and 

Costs 

Covered persons would have to incur 

some costs in reviewing the proposed 

rule and adapting their business 

practices to any new requirements. The 

Bureau notes that many of the 

provisions of the current rule do not 

require significant changes to current 

practice and therefore these costs 

should be minimal for most covered 

persons. 

The Bureau has considered whether 

the proposed rule would lead to a 

potential reduction in access to 

consumer financial products and 

services. The Bureau notes that many of 

the provisions of the current rule do not 

require significant changes to current 

consumer financial products or 

providers’ practices. Firms will not have 

to incur substantial operational costs. 

As result, the Bureau does not anticipate 

any material impact on consumer access 

to mortgage credit. 


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108Approximately 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. 

109More information about Mortgage Call Report 

can be found at: http:// 

mortgage.nationwidelicensingsystem.org/slr/ 

common/mcr/Pages/default.aspx. 

E. Potential Specific Impacts of the 

Proposed Rule 

1. Depository Institutions and Credit 

Unions With $10 Billion or Less in Total 

Assets, As Described in Section 1026 108

Overall, the impact on smaller 

creditors of the Bureau’s proposed rule 

would depend on several factors, the 

most important of which involve: (1) 

The ability of such creditors to manage 

any additional risk or loss of return the 

requirement generally to make available 

a comparable, alternative loan 

potentially imposes on the overall risk 

and return of their current portfolios; (2) 

the effects of the requirements on their 

return to equity and capital costs 

relative to larger competitors; and (3) 

their ability to recover, in a timely 

matter, any costs of processing loans. As 

previously discussed, the additional risk 

to the portfolios of any but the smallest 

creditors, from the requirement to make 

available the comparable, alternative 

loan (unless the consumer is unlikely to 

qualify), is likely to be small for the 

same reasons that apply to the portfolio 

risk of larger institutions and other 

investors. 

Certain circumstances could, 

however, create a greater potential for 

adverse effects on small creditors, 

relative to their larger rivals, from 

originating large volumes of 

comparable, alternative loans. These 

circumstances occur if the financial 

capacity of the small creditor affects 

both its cost of raising capital and its 

ability to hedge risk. Should such an 

institution be unable effectively to 

hedge prepayment and credit risk with 

larger rivals or through the markets (e.g., 

the firm has substantial fixed costs of 

accessing the secondary market), then 

the general requirement to make 

available a comparable, alternative loan 

in specified circumstances could cause 

it greater costs, relative to its size, than 

those that larger institutions would 

incur. 

Under the proposed rule, smaller 

creditors may originate and hold more 

loans that do not include discount 

points and origination points or fees. 

These creditors may have fewer funds 

available from origination revenues to 

fund loan origination operations and, if 

they are unable to easily borrow, the 

general requirement to make available 

the comparable, alternative loan may 

result in greater costs. In all the cases 

described, however, these costs would 

necessarily be considerably smaller than 

those that they would suffer, for similar 

reasons, under the Dodd-Frank Act 

prohibition against the origination of 

mortgages with upfront discount points 

and origination points or fees under 

most circumstances. 

2. Impact on Consumers in Rural Areas 

Consumers in rural areas are unlikely 

to experience benefits or costs from the 

proposed rule that are different from 

those benefits and costs experienced by 

consumers in general. Consumers in 

rural areas who obtain mortgage loans 

from mid-size to large creditors would 

experience virtually the same costs and 

benefits as do any others who use such 

creditors. Those consumers in rural 

areas who obtain mortgages from small 

local banks and credit unions may face 

slightly different benefit and costs. As 

noted above, the provisions of the 

proposed rule conditionally allowing 

upfront points and fees may expose 

some consumers to the risk that a more 

informed creditor will use these terms 

to its advantage. This may be less likely 

to occur in cases of smaller, more local 

creditors. 

To the extent that the requirement 

that a creditor generally must make 

available a make available comparable, 

alternative loans as a prerequisite to the 

creditor or loan originator organization 

imposing discount points and 

origination points or fees on consumers 

would raise the cost of credit, these 

impacts are most likely at smaller 

creditors. Rural consumers using such 

creditors may face these marginally 

increased costs. However, these effects 

would derive from the provisions of the 

Dodd-Frank Act if they were permitted 

to go into effect; if anything, the 

proposed rule would alleviate burden 

from small creditors by permitting them 

to make available loans with discount 

points and origination points or fees, 

subject to certain conditions. 

F. Additional Analysis Being 

Considered and Request for Information 

The Bureau will further consider the 

benefits, costs and impacts of the 

proposed provisions and additional 

alternatives before finalizing the 

proposed rule. As noted above, there are 

a number of areas where additional 

information would allow the Bureau to 

better estimate the benefits, costs, and 

impacts of this proposed rule and more 

fully inform the rulemaking. The Bureau 

asks interested parties to provide 

comment or data on various aspects of 

the proposed rule, as detailed in the 

section-by-section analysis. The most 

significant of these include information 

or data addressing: 

• The potential impact on all types of 

loan originators of the proposed 

restrictions on the methods by which a 

loan originator is remunerated in a 

transaction; 

• The potential impact on mortgage 

lenders, including depository and nondepository institutions, of the 

requirement that all creditors must 

make available a comparable, alternative 

mortgage loan to a consumer that does 

not include discount points and 

origination points and fees, unless the 

consumer is unlikely to qualify for such 

a loan. 

Information provided by interested 

parties regarding these and other aspects 

of the proposed rule may be considered 

in the analysis of the costs and benefits 

of the final rule. 

To supplement the information 

discussed in in this preamble and any 

information that the Bureau may receive 

from commenters, the Bureau is 

currently working to gather additional 

data that may be relevant to this and 

other mortgage related rulemakings. 

These data may include additional data 

from the NMLSR and the NMLSR 

Mortgage Call Report, loan file extracts 

from various creditors, and data from 

the pilot phases of the National 

Mortgage Database. The Bureau expects 

that each of these datasets will be 

confidential. This section now describes 

each dataset in turn. 

First, as the sole system supporting 

licensure/registration of mortgage 

companies for 53 agencies for States and 

territories and mortgage loan originators 

under the SAFE Act, NMLSR contains 

basic identifying information for nondepository mortgage loan origination 

companies. Firms that hold a State 

license or registration through NMLSR 

are required to complete either a 

standard or expanded Mortgage Call 

Report (MCR). The Standard MCR 

includes data on each firm’s residential 

mortgage loan activity including 

applications, closed loans, individual 

mortgage loan originator activity, line of 

credit, and other data repurchase 

information by state. It also includes 

financial information at the company 

level. The expanded report collects 

more detailed information in each of 

these areas for those firms that sell to 

Fannie Mae or Freddie Mac.109 To date, 

the Bureau has received basic data on 

the firms in the NMLSR and deidentified data and tabulations of data 

from the NMLSR Mortgage Call Report. 

These data were used, along with data 


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from HMDA, to help estimate the 

number and characteristics of nondepository institutions active in various 

mortgage activities. In the near future, 

the Bureau may receive additional data 

on loan activity and financial 

information from the NMLSR including 

loan activity and financial information 

for identified creditors. The Bureau 

anticipates that these data will provide 

additional information about the 

number, size, type, and level of activity 

for non-depository creditors engaging in 

various mortgage origination activities. 

As such, it supplements the Bureau’s 

current data for non-depository 

institutions reported in HMDA and the 

data already received from NMLSR. For 

example, these new data will include 

information about the number and size 

of closed-end first and second loans 

originated, fees earned from origination 

activity, levels of servicing, revenue 

estimates for each firm and other 

information. The Bureau may compile 

some simple counts and tabulations and 

conduct some basic statistical modeling 

to better model the levels of various 

activities at various types of firms. In 

particular, the information from the 

NMLSR and the MCR may help the 

Bureau refine its estimates of benefits, 

costs, and impacts for updates to loan 

originator compensation rules, revisions 

to the GFE and HUD–1 disclosure forms, 

changes to the HOEPA thresholds, 

changes to requirements for appraisals, 

and proposed new servicing 

requirements and the new ability to pay 

standards. 

Second, the Bureau is working to 

obtain a random selection of loan-level 

data from a handful of creditors. The 

Bureau intends to request loan file data 

from creditors of various sizes and 

geographic locations to construct a 

representative dataset. In particular, the 

Bureau will request a random sample of 

‘‘GFEs’’ and ‘‘HUD–1’’ forms from loan 

files for closed-end mortgage loans. 

These forms include data on some or all 

loan characteristics including settlement 

charges, origination charges, appraisal 

fees, flood certifications, mortgage 

insurance premiums, homeowner’s 

insurance, title charges, balloon 

payment, prepayment penalties, 

origination charges, and credit charges 

or points. Through conversations with 

industry, the Bureau believes that such 

loan files exist in standard electronic 

formats allowing for the creation of a 

representative sample for analysis. 

Third, the Bureau may also use data 

from the pilot phases of the National 

Mortgage Database (NMDB) to refine its 

proposals and/or its assessments of the 

benefits costs and impacts of these 

proposals. The NMDB is a 

comprehensive database, currently 

under development, of loan-level 

information on first lien single-family 

mortgages. It is designed to be a 

nationally representative sample (one 

percent) and contains data derived from 

credit reporting agency data and other 

administrative sources along with data 

from surveys of mortgage borrowers. 

The first two pilot phases, conducted 

over the past two years, vetted the datadevelopment process, successfully 

pretested the survey component and 

produced a prototype dataset. The 

initial pilot phases validated that credit 

repository data are both accurate and 

comprehensive and that the survey 

component yields a representative 

sample and a sufficient response rate. A 

third pilot is currently being conducted 

with the survey being mailed to holders 

of five thousand newly originated 

mortgages sampled from the prototype 

NMDB. Based on the 2011 pilot, a 

response rate of 50 percent or higher is 

expected. These survey data will be 

combined with the credit repository 

information of non-respondents and 

then de-identified. Credit repository 

data will be used to minimize nonresponse bias, and attempts will be 

made to impute missing values. The 

data from the third pilot will not be 

made public. However, to the extent 

possible, the data may be analyzed to 

assist the Bureau in its regulatory 

activities and these analyses will be 

made publicly available. 

The survey data from the pilots may 

be used by the Bureau to analyze 

borrowers’ shopping behavior regarding 

mortgages. For instance, the Bureau may 

calculate the number of borrowers who 

use brokers, the number of lenders 

contacted by borrowers, how often and 

with what patterns potential borrowers 

switch lenders, and other behaviors. 

Questions may also assess borrowers’ 

understanding of their loan terms and 

the various charges involved with 

origination. Tabulations of the survey 

data for various populations and simple 

regression techniques may be used to 

help the Bureau with its analysis. 

In addition to the comment solicited 

elsewhere in this proposed rule, the 

Bureau requests commenters to submit 

data and to provide suggestions for 

additional data to assess the issues 

discussed above and other potential 

benefits, costs, and impacts of the 

proposed rule. The Bureau also requests 

comment on the use of the data 

described above. Further, the Bureau 

seeks information or data on the 

proposed rule’s potential impact on 

consumers in rural areas as compared to 

consumers in urban areas. The Bureau 

also seeks information or data on the 

potential impact of the proposed rule on 

depository institutions and credit 

unions with total assets of $10 billion or 

less as described in Dodd-Frank Act 

section 1026 as compared to depository 

institutions and credit unions with 

assets that exceed this threshold and 

their affiliates. 

VIII. Regulatory Flexibility Act 

The Regulatory Flexibility Act (RFA), 

as amended by SBREFA, requires each 

agency to consider the potential impact 

of its regulations on small entities, 

including small businesses, small notfor-profit organizations, and small 

governmental units. 5 U.S.C. 601 et seq. 

The RFA generally requires an agency to 

conduct an initial regulatory flexibility 

analysis (IRFA) and a final regulatory 

flexibility analysis (FRFA) of any rule 

subject to notice-and-comment 

rulemaking requirements, unless the 

agency certifies that the rule will not 

have a significant economic impact on 

a substantial number of small entities. 5 

U.S.C. 603, 604. The Bureau is also 

subject to certain additional procedures 

under the RFA involving the convening 

of a panel to consult with small entity 

representatives (SERs) prior to 

proposing a rule for which an IRFA is 

required. 5 U.S.C. 609. 

The Bureau has not certified that the 

proposed rule would not have a 

significant economic impact on a 

substantial number of small entities 

within the meaning of the RFA. 

Accordingly, the Bureau convened and 

chaired a Small Business Review Panel 

to consider the impact of the proposed 

rule on small entities that would be 

subject to that rule and to obtain 

feedback from representatives of such 

small entities. The Small Business 

Review Panel for this rulemaking is 

discussed below in part VIII.A. 

The Bureau is publishing an IRFA. 

Among other things, the IRFA estimates 

the number of small entities that will be 

subject to the proposed rule and 

describes the impact of that rule on 

those entities. The IRFA for this 

rulemaking is set forth below in part 

VIII.B. 

A. Small Business Review Panel 

Under section 609(b) of the RFA, as 

amended by SBREFA and the DoddFrank Act, the Bureau seeks, prior to 

conducting the IRFA, information from 

representatives of small entities that 

may potentially be affected by its 

proposed rules to assess the potential 

impacts of that rule on such small 

entities. 5 U.S.C. 609(b). Section 609(b) 

sets forth a series of procedural steps 

with regard to obtaining this 

information. The Bureau first notifies 


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55342 Federal Register / Vol. 77, No. 174 / Friday, September 7, 2012 / Proposed Rules 

110As described in the IRFA in part VIII.B, below, 

sections 603(b)(3) through (b)(5) and section 603(c) 

of the RFA, respectively require a description of 

and, where feasible, provision of an estimate of the 

number of small entities to which the proposed rule 

will apply; a description of the projected reporting, 

record keeping, and other compliance requirements 

of the proposed rule, including an estimate of the 

classes of small entities which will be subject to the 

requirement and the type of professional skills 

necessary for preparation of the report or record; an 

identification, to the extent practicable, of all 

relevant Federal rules which may duplicate, 

overlap, or conflict with the proposed rule; and a 

description of any significant alternatives to the 

proposed rule which accomplish the stated 

objectives of applicable statutes and which 

minimize any significant economic impact of the 

proposed rule on small entities. 5 U.S.C. 603(b)(3), 

603(b)(4), 603(b)(5), 603(c). 

111The Bureau posted these materials on its Web 

site and invited the public to email remarks on the 

materials. See U.S. Consumer Fin. Prot. Bureau, 

Small Business Review Panel for Residential 

Mortgage Loan Origination Standards Rulemaking: 

Outline of Proposals Under Consideration and 

Alternative Considered (May 9, 2012) (Outline of 

Proposals), available at: http://files.consumer

finance.gov/f/201205_cfpb_MLO_SBREFA_Outline_

of_Proposals.pdf. 

112This written feedback is attached as Appendix 

A to the Small Business Review Panel Final Report 

discussed below. 

113The Panel extended its deliberations in order 

to allow full consideration and incorporation of the 

written comments of the SERs that were submitted 

pursuant to the extended deadline. 

114Small Business Review Panel Final Report, 

supra note 36. 

the Chief Counsel for Advocacy (Chief 

Counsel) of the SBA and provides the 

Chief Counsel with information on the 

potential impacts of the proposed rule 

on small entities and the types of small 

entities that might be affected. 5 U.S.C. 

609(b)(1). Not later than 15 days after 

receipt of the formal notification and 

other information described in section 

609(b)(1) of the RFA, the Chief Counsel 

then identifies the SERs, the individuals 

representative of affected small entities 

for the purpose of obtaining advice and 

recommendations from those 

individuals about the potential impacts 

of the proposed rule. 5 U.S.C. 609(b)(2). 

The Bureau convenes a review panel for 

such rule consisting wholly of full-time 

Federal employees of the office within 

the Bureau responsible for carrying out 

the proposed rule, the Office of 

Information and Regulatory Affairs 

(OIRA) within the OMB, and the Chief 

Counsel. 5 U.S.C. 609(b)(3). The Small 

Business Review Panel reviews any 

material the Bureau has prepared in 

connection with the Small Business 

Review Panel process and collects the 

advice and recommendations of each 

individual SER identified by the Bureau 

after consultation with the Chief 

Counsel on issues related to sections 

603(b)(3) through (b)(5) and 603(c) of 

the RFA.110 5 U.S.C. 609(b)(4). Not later 

than 60 days after the date the Bureau 

convenes the Small Business Review 

Panel, the panel reports on the 

comments of the SERs and its findings 

as to the issues on which the Small 

Business Review Panel consulted with 

the SERs, and the report is made public 

as part of the rulemaking record. 5 

U.S.C. 609(b)(5). Where appropriate, the 

Bureau modifies the rule or the IRFA in 

light of the foregoing process. 5 U.S.C. 

609(b)(6). 

In May 2012, the Bureau provided the 

Chief Counsel with the formal 

notification and other information 

required under section 609(b)(1) of the 

RFA. To obtain feedback from SERs to 

inform the Small Business Review Panel 

pursuant to sections 609(b)(2) and 

609(b)(4) of the RFA, the Bureau, in 

consultation with the Chief Counsel, 

identified 6 categories of small entities 

that may be subject to the proposed rule 

for purposes of the IRFA: Commercial 

banks, savings institutions, credit 

unions, mortgage brokers, real estate 

credit entities (non-depository lenders), 

and certain non-profit organizations. 

Section 3 of the IRFA, in part VIII.B.3, 

below, describes in greater detail the 

Bureau’s analysis of the number and 

types of entities that may be affected by 

the proposed rule. Having identified the 

categories of small entities that may be 

subject to the proposed rule for 

purposes of an IRFA, the Bureau then, 

in consultation with the Chief Counsel, 

selected 17 SERs to participate in the 

Small Business Review Panel process. 

As described in chapter 7 of the Small 

Business Review Panel Report, 

described below, the SERs selected by 

the Bureau in consultation with the 

Chief Counsel included representatives 

from each of the categories identified by 

the Bureau and comprised a diverse 

group of individuals with regard to 

geography and type of locality (i.e., 

rural, urban, suburban, or metropolitan 

areas). 

On May 9, 2012, the Bureau convened 

the Small Business Review Panel 

pursuant to section 609(b)(3) of the 

RFA. Afterwards, to collect the advice 

and recommendations of the SERs 

under section 609(b)(4) of the RFA, the 

Small Business Review Panel held an 

outreach meeting/teleconference with 

the SERs on May 23, 2012. To help the 

SERs prepare for the outreach meeting 

beforehand, the Small Business Review 

Panel circulated briefing materials 

prepared in connection with section 

609(b)(4) of the RFA that summarized 

the proposals under consideration at 

that time, posed discussion issues, and 

provided information about the SBREFA 

process generally.111 All 17 SERs 

participated in the outreach meeting 

either in person or by telephone. The 

Bureau then held two teleconference 

calls with the SERs on June 7 and June 

8, 2012, in which a potential provision 

under consideration requiring that 

origination fees in certain transactions 

not vary with the size of the loan was 

further discussed. At the request of 

several SERs and in light of the 

additional calls, the Small Business 

Review Panel extended the SERs 

deadline to submit written feedback, 

which was originally June 4, 2012, to 

June 11, 2012. The Small Business 

Review Panel received written feedback 

from 11 of the representatives.112

On July 11, 2012,113 the Small 

Business Review Panel submitted to the 

Director of the Bureau, Richard Cordray, 

the Small Business Review Panel Report 

that includes the following: Background 

information on the proposals under 

consideration at the time: Information 

on the types of small entities that would 

be subject to those proposals and on the 

SERs who were selected to advise the 

Small Business Review Panel; a 

summary of the Small Business Review 

Panel’s outreach to obtain the advice 

and recommendations of those SERs; a 

discussion of the comments and 

recommendations of the SERs; and a 

discussion of the Small Business 

Review Panel findings, focusing on the 

statutory elements required under 

section 603 of the RFA. 5 U.S.C. 

609(b)(5).114

In preparing this proposed rule and 

the IRFA, the Bureau has carefully 

considered the feedback from the SERs 

participating in the Small Business 

Review Panel process and the findings 

and recommendations in the Small 

Business Review Panel Report. The 

section-by-section analysis of the 

proposed rule in part V, above, and the 

IRFA discuss this feedback and the 

specific findings and recommendations 

of the Small Business Review Panel, as 

applicable. The Small Business Review 

Panel process provided the Small 

Business Review Panel and the Bureau 

with an opportunity to identify and 

explore opportunities to minimize the 

burden of the rule on small entities 

while achieving the rule’s purposes. It is 

important to note, however, that the 

Small Business Review Panel prepared 

the Small Business Review Panel Report 

at a preliminary stage of the proposal’s 

development and that the Small 

Business Review Panel Report—in 

particular, the Small Business Review 

Panel’s findings and 

recommendations—should be 

considered in that light. Also, any 

options identified in the Small Business 

Review Panel Report for reducing the 


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115See Small Business Review Panel Report for 

a detailed discussion of the issues related to the 

effective dates of the rules in this rulemaking. 

proposed rule’s regulatory impact on 

small entities were expressly subject to 

further consideration, analysis, and data 

collection by the Bureau to ensure that 

the options identified were practicable, 

enforceable, and consistent with TILA, 

the Dodd-Frank Act, and their statutory 

purposes. The proposed rule and the 

IRFA reflect further consideration, 

analysis, and data collection by the 

Bureau. 

B. Initial Regulatory Flexibility Analysis 

Under RFA section 603(a), an IRFA 

‘‘shall describe the impact of the 

proposed rule on small entities.’’ 5 

U.S.C. 603(a). Section 603(b) of the RFA 

sets forth the required elements of the 

IRFA. Section 603(b)(1) requires the 

IRFA to contain a description of the 

reasons why action by the agency is 

being considered. 5 U.S.C. 603(b)(1). 

Section 603(b)(2) requires a succinct 

statement of the objectives of, and the 

legal basis for, the proposed rule. 5 

U.S.C. 603(b)(2). The IRFA further must 

contain a description of and, where 

feasible, an estimate of the number of 

small entities to which the proposed 

rule will apply. 5 U.S.C. 603(b)(3). 

Section 603(b)(4) requires a description 

of the projected reporting, 

recordkeeping, and other compliance 

requirements of the proposed rule, 

including an estimate of the classes of 

small entities that will be subject to the 

requirement and the types of 

professional skills necessary for the 

preparation of the report or record. 5 

U.S.C. 603(b)(4). In addition, the Bureau 

must identify, to the extent practicable, 

all relevant Federal rules which may 

duplicate, overlap, or conflict with the 

proposed rule. 5 U.S.C. 603(b)(5). The 

Bureau, further, must describe any 

significant alternatives to the proposed 

rule that accomplish the stated 

objectives of applicable statutes and that 

minimize any significant economic 

impact of the proposed rule on small 

entities. 5 U.S.C. 603(b)(6). Finally, as 

amended by the Dodd-Frank Act, RFA 

section 603(d) requires that the IRFA 

include a description of any projected 

increase in the cost of credit for small 

entities, a description of any significant 

alternatives to the proposed rule which 

accomplish the stated objectives of 

applicable statutes and that minimize 

any increase in the cost of credit for 

small entities (if such an increase in the 

cost of credit is projected), and a 

description of the advice and 

recommendations of representatives of 

small entities relating to the cost of 

credit issues. 5 U.S.C. 603(d)(1); DoddFrank Act section 1100G(d)(1). 

1. Description of the Reasons Why 

Agency Action Is Being Considered 

As discussed in the Background, part 

II above, in the wake of the financial 

crisis, the Board in 2010 issued the Loan 

Originator Final Rule, which has been 

transferred to the Bureau. The Loan 

Originator Final Rule addressed many 

concerns regarding the lack of 

transparency, consumer confusion, and 

steering incentives created by certain 

residential loan originator compensation 

structures. The Dodd-Frank Act 

included a number of provisions that 

substantially paralleled, but also added 

further provisions to, the Loan 

Originator Final Rule. The Board noted 

in adopting the Loan Originator Final 

Rule that the Dodd-Frank Act would 

necessitate further rulemaking to 

implement the additional provisions of 

the legislation not reflected by the 

regulation. These provisions are new 

TILA sections 129B(b)(1) (requiring each 

mortgage originator to be qualified and 

include unique identification numbers 

on loan documents), (c)(1) and (c)(2) 

(prohibiting steering incentives 

including prohibiting mortgage 

originators from receiving compensation 

that varies based on loan terms and from 

receiving origination charges or fees 

from persons other than the consumer 

except in certain circumstances), and 

129C(d) and (e) (prohibiting financing of 

single-premium credit insurance and 

providing restrictions on mandatory 

arbitration agreements), as added by 

sections 1402, 1403, 1414(d) and (e) of 

the Dodd-Frank Act. The Bureau is also 

proposing to clarify certain provisions 

of the existing Loan Originator Final 

Rule to provide additional guidance and 

reduce uncertainty. The Bureau is also 

soliciting comment on implementing 

the requirement in TILA section 

129B(b)(2), as added by section 1402 of 

the Dodd-Frank Act, that it prescribe 

regulations requiring certain entities to 

establish and maintain certain 

procedures, a requirement that may be 

included in the final rule. 

The Dodd-Frank Act and TILA 

authorize the Bureau to adopt 

implementing regulations for the 

statutory provisions provided by 

sections 1402, 1403, and 1414(d) and (e) 

of the Dodd-Frank Act. The Bureau is 

using this authority to propose 

regulations in order to provide creditors 

and loan originators with clarity about 

their statutory obligations under these 

provisions. The Bureau is also 

proposing to adjust or provide 

exemptions to the statutory 

requirements, including the obligations 

of small entities, in certain 

circumstances. The Bureau is taking this 

action in order to ease burden when 

doing so would not sacrifice adequate 

protection of consumers. 

The new statutory requirements 

relating to qualification and 

compensation take effect automatically 

on January 21, 2013, as written in the 

statute, unless final rules are issued on 

or prior to that date that provide for a 

later effective date.115

2. Statement of the Objectives of, and 

Legal Basis for, the Proposed Rule 

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(d) and (e) of the DoddFrank Act; (2) to clarify ambiguities 

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, 

guidance, and flexibility on several 

issues. 

To address consumer confusion over 

the relationship between certain upfront 

loan charges and loan interest rates, the 

proposal would require that, in certain 

circumstances, before the creditor or 

loan originator organization may impose 

upfront discount points, origination 

points, or originations fees on a 

consumer, the creditor must make 

available to the consumer a comparable, 

alternative loan that does not include 

discount points and origination points 

or fees that are retained by the creditor, 

loan originator organization, or an 

affiliate of either. (Making available the 

comparable, alternative loan is not 

necessary if the consumer is unlikely to 

qualify for such a loan.) The proposed 

use of the Bureau’s exception authority 

under TILA section 129B(c)(2)(B)(ii) to 

allow creditors and loan originator 

organization to impose discount points 

and origination points or fees provided 

that the creditor makes available a 

comparable, alternative loan, as 

described above, will implement TILA 

section 129B(c)(2)(B) and make it easier 

for consumers to understand terms and 

evaluate pricing options while 

preserving their ability to make and 

receive the benefit of some upfront 

payments of points and fees. In addition 

to reducing consumer confusion, the 

proposal would also avoid a radical 

restructuring of existing mortgage 

market pricing structures that may 


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116The current SBA size standards are available 

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

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

117Savings institutions include thrifts, savings 

banks, mutual banks, and similar institutions. 

result from strict implementation of the 

Dodd-Frank Act and thus would 

promote stability in the mortgage 

market. 

The proposal would also implement 

certain other Dodd-Frank Act 

requirements applicable to both closedend and open-end mortgage credit. 

Specifically, the proposed provisions 

would codify TILA section 129C(d), 

which creates prohibitions on financing 

of premiums for single-premium credit 

insurance. The proposed provisions 

would also implement TILA section 

129C(e), which restricts agreements 

requiring consumers to submit any 

disputes that may arise to mandatory 

arbitration, thereby preserving 

consumers’ ability to seek redress 

through the court system after a dispute 

arises. The proposal also solicits 

comment on implementing TILA section 

129B(b)(2), which requires the Bureau to 

prescribe regulations requiring 

depository institutions to establish and 

monitor compliance of such depository 

institutions, the subsidiaries of such 

institutions, and the employees of both 

with the requirements of TILA section 

129B and the registration procedures 

established under section 1507 of the 

SAFE Act. 

In addition to creating new 

substantive requirements, the DoddFrank Act extended previous efforts by 

lawmakers and regulators to strengthen 

loan originator qualification 

requirements and regulate industry 

compensation practices. New TILA 

section 129B(b) imposes a duty on loan 

originators to be ‘‘qualified’’ and, where 

applicable, registered or licensed as a 

loan originator under State law and the 

Federal SAFE Act and to include unique 

identification numbers on loan 

documents. The proposal would 

implement this section and expand 

consumer protections by requiring 

entities whose individual loan 

originators are not subject to SAFE Act 

licensing requirements, including 

depositories and bona fide nonprofit 

loan originator entities, to: (1) Ensure 

that their individual loan originators 

meet character and fitness and criminal 

background standards equivalent to the 

licensing standards that the SAFE Act 

applies to employees of non-bank loan 

originators; and (2) provide appropriate 

training to their individual loan 

originators commensurate with the 

mortgage origination activities of the 

individual. 

Furthermore, the proposal would 

adjust existing rules governing 

compensation to individual loan 

originations in connection with closedend mortgage transactions to account for 

Dodd-Frank Act amendments to TILA 

and provide greater clarity and 

flexibility. Specifically, the proposed 

provisions would preserve, with some 

refinements, the prohibition on the 

payment or receipt of commissions or 

other loan originator compensation 

based on the terms of the transaction 

(other than loan amount) and on loan 

originators being compensated 

simultaneously by both consumers and 

other parties in the same transaction. To 

further reduce potential steering 

incentives for loan originators created 

by certain compensation arrangements, 

the proposed rule would also clarify and 

revise restrictions on pooled 

compensation, profit-sharing, and bonus 

plans for loan originators, depending on 

the potential for incentives to steer 

consumers to different transaction 

terms. 

Finally, the proposal would make two 

changes to the current record retention 

provisions of § 1026.25 of TILA. The 

proposed provisions would: (1) Require 

a creditor to maintain records of the 

compensation paid to a loan originator 

organization or the creditor’s individual 

loan originators, and the governing 

compensation agreement, for three years 

after the date of payment; and (2) 

require a loan originator organization to 

maintain records of the compensation it 

receives from a creditor, a consumer, or 

another person and that it pays to its 

individual loan originators, as well as 

the compensation agreement that 

governs those receipts or payments, for 

three years after the date of the receipts 

or payments. In addition, creditors 

would be required to make and 

maintain, for three years, records to 

show that they made available to a 

consumer a comparable, alternative loan 

when required by the proposed rule and 

complied with the requirement that 

where discount points and origination 

points or fees are charged, there be a 

bona fide reduction in the interest rate 

compared to the interest rate for the 

comparable, alternative loan. By 

ensuring that records associated with 

loan originator compensation are 

retained for a time period 

commensurate with the statute of 

limitations for causes of action under 

TILA section 130 and are readily 

available for examination, these 

proposed modifications to the existing 

recordkeeping provisions will prevent 

circumvention or evasion of TILA and 

facilitate compliance. 

The legal basis for the proposed rule 

is discussed in detail in the legal 

authority analysis in part IV and in the 

section-by-section analysis in part V, 

above. 

3. Description and, Where Feasible, 

Provision of an Estimate of the Number 

of Small Entities To Which the 

Proposed Rule Will Apply 

For purposes of assessing the impacts 

of the proposals under consideration on 

small entities, ‘‘small entities’’ are 

defined in the RFA to include small 

businesses, small non-profit 

organizations, and small government 

jurisdictions. 5 U.S.C. 601(6). A ‘‘small 

business’’ is determined by application 

of SBA regulations and reference to the 

North American Industry Classification 

System (‘‘NAICS’’) classifications and 

size standards.116 5 U.S.C. 601(3). A 

‘‘small organization’’ is any ‘‘not-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); 117

• Credit unions (NAICS 522130); 

• Firms providing real estate credit 

(NAICS 522292); 

• Mortgage brokers (NAICS 522310); 

and 

• Small non-profit organizations. 

Commercial banks, savings 

institutions, and credit unions are small 

businesses if they have $175 million or 

less in assets. Firms providing real 

estate credit and mortgage brokers are 

small businesses if their average annual 

receipts do not exceed $7 million. 

A small non-profit organization is any 

not-for-profit enterprise that is 

independently owned and operated and 

is not dominant in its field. Small 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 non-profit 

organizations originate mortgage loans 

for low and moderate-income 

individuals while others purchase loans 

originated by local community 

development lenders. 

The following table provides the 

Bureau’s estimated number of affected 

and small entities by NAICS Code and 

engagement in loan origination: 


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Federal Register / Vol. 77, No. 174 / Friday, September 7, 2012 / Proposed Rules 55345 

Category NAICS Code Total entities Small entities 

Entities that originate any mortgage loans bSmall entities 

that originate any 

mortgage loans 

Commercial Banking ........................................ 522110 6,596 3,764 a 6,362 a 3,597 

Savings Institutions .......................................... 522120 1,145 491 a 1,138 a 487 

Credit Unions ................................................... 522130 7,491 6,569 a 4,359 a 3,441 

Real Estate Credit c e ....................................... 522292 2,515 2,282 2,515 a 2,282 

Mortgage Brokers e .......................................... 522310 8,051 8,049 d N/A d N/A 

Total .......................................................... ............................ 25,798 21,155 14,374 9,807 

Source: HMDA, Bank and Thrift Call Reports, NCUA Call Reports, NMLSR Mortgage Call Reports. 

aFor HMDA reporters, loan counts from HMDA 2010. For institutions that are not HMDA reporters, loan counts projected based on Call Report 

data fields and counts for HMDA reporters. bEntities are characterized as originating loans if they make one or more loans. If loan counts are estimated, entities are counted as originating loans if the estimated loan count is greater than one. c NMLSR Mortgage Call Report (‘‘MCR’’) for Q1 and Q2 of 2011. All MCR reporters that originate at least one loan or that have positive loan 

amounts are considered to be engaged in real estate credit (instead of purely mortgage brokers). For institutions with missing revenue values 

revenues were imputed using nearest neighbor matching of the count of originations and the count of brokered loans. d Mortgage Brokers do not originate (back as a creditor) loans. 

e Data do not distinguish nonprofit from for-profit organizations, but Real Estate Credit and Mortgage Brokers categories presumptively include 

nonprofit organizations. 

4. Projected Reporting, Recordkeeping, 

and Other Compliance Requirements of 

the Proposed Rule, Including an 

Estimate of the Classes of Small Entities 

Which Will Be Subject to the 

Requirement and the Type of 

Professional Skills Necessary for the 

Preparation of the Report 

(1) Reporting Requirements 

The proposed rule does not impose 

new reporting requirements. 

(2) Recordkeeping Requirements 

Regulation Z currently requires 

creditors to create and maintain records 

to demonstrate their compliance with 

provisions that apply to the 

compensation paid to or received by a 

loan originator. As discussed above in 

part V, the proposed rule would require 

creditors to retain these records for a 

three-year period, rather than for a twoyear period as currently required. The 

Bureau is soliciting comment on 

extending the record retention period to 

five years. The proposed rule would 

apply the same requirement to 

organizations when they act as a loan 

originator in a transaction, even if they 

do not act as a creditor in the 

transaction. The proposed 

recordkeeping requirements, however, 

would not apply to individual loan 

originators. In addition, creditors would 

be required to make and maintain 

records for three years to show that they 

made available to a consumer a 

comparable, alternative loan when 

required by this proposed rule and 

complied with the requirement that 

where discount points and origination 

points or fees are charged, there be bona 

fide reduction in the interest rate 

compared to the interest rate for the 

comparable, alternative loan. The 

Bureau is also soliciting comment on 

extending this record retention period to 

five years. 

As discussed in the section-by-section 

analysis, the Bureau recognizes that 

extending the record retention 

requirement for creditors from two years 

for specific information related to loan 

originator compensation and discount 

points and origination points and fees, 

as currently provided in Regulation Z, 

to three years may result in some 

increase in costs for creditors. The 

Bureau believes, however, that creditors 

should be able to use existing 

recordkeeping systems to maintain the 

records for an additional year at 

minimal cost. Similarly, although loan 

originator organizations may incur some 

costs to establish and maintain 

recordkeeping systems, loan originator 

organizations may be able to use 

existing recordkeeping systems that they 

maintain for other purposes at minimal 

cost. During the Small Business Review 

Panel process, the SERs were asked 

about their current record retention 

practices and the potential impact of the 

proposed enhanced record retention 

requirements. Of the few SERs who 

provided feedback on the issue, one 

creditor stated that it maintained 

detailed records of compensation paid 

to all of its employees and that a 

regulator already reviews its 

compensation plans regularly, and 

another creditor reported that it did not 

believe the proposed record retention 

requirement would require it to change 

its current practices. Therefore, the 

Bureau does not believe that the record 

retention requirements will create 

undue burden for small entity creditors 

and loan originator organizations. 

(3) Compliance Requirements 

The proposal contains both specific 

proposed provisions with regulatory or 

commentary language (proposed 

provisions) as well as requests for 

comment on modifications where 

regulatory or commentary language was 

not specifically included (additional 

proposed modifications). The possible 

compliance costs for small entities from 

each major component of the proposed 

rule are presented below. In most cases, 

the Bureau presents these costs against 

a pre-statute baseline. As noted above in 

the section 1022(b)(2) analysis in part 

VII above, provisions where the Bureau 

has used its exemption authority are 

discussed relative to the statutory 

provisions (a post-statute baseline). The 

analysis below considers the benefits, 

costs, and impacts of the following 

major proposed provisions on small 

entities: 

1. Upfront points and fees 

2. Compensation based on transaction’s 

terms 

3. Qualification for mortgage originators 

(a) Upfront Points and Fees 

The Dodd-Frank Act prohibits 

consumer payment of upfront points 

and fees in all residential mortgage loan 

transactions (as defined in the 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 

is proposing to require that before a 

creditor or loan originator may impose 

discount points and origination points 

or fees on a consumer, the creditor must 

make available to the consumer a 

comparable, alternative loan that does 

not include such points or fees. (Making 

available the comparable, alternative 

loan is not necessary if the consumer is 

unlikely to qualify for such a loan.) 


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55346 Federal Register / Vol. 77, No. 174 / Friday, September 7, 2012 / Proposed Rules 

The Bureau is proposing two safe 

harbors for how a creditor may comply 

with the requirement to make available 

a comparable, alternative loan (unless 

the consumer is unlikely to qualify for 

the loan). In transactions that do not 

involve a mortgage broker, a creditor 

will be deemed to have made available 

a comparable, alternative loan to a 

consumer if, any time prior to 

application that the creditor provides to 

the consumer an individualized quote 

for a loan that includes discount points 

and origination points or fees, the 

creditor also provides a quote for the 

comparable, alternative loan. In 

transactions that involve mortgage 

brokers, a creditor will be deemed to 

have made a comparable, alternative 

loan available to consumers if it 

provides to mortgage brokers the pricing 

for all of its comparable, alternative 

loans that do not include discount 

points and origination points or fees. 

Mortgage brokers then will provide 

quotes to consumers for loans that do 

not include discount points and 

origination points or fees when 

presenting different loan options to 

consumers. The requirement would not 

apply where the consumer is unlikely to 

qualify for the comparable, alternative 

loan. 

The Bureau is also seeking comment 

on a number of related issues, including 

whether the Bureau should adopt a 

‘‘bona fide’’ requirement to ensure that 

consumers receive value in return for 

paying discount points and origination 

points or fees, and different options for 

structuring such a requirement; whether 

additional adjustments to the proposal 

concerning the treatment of affiliate fees 

would make it easier for consumers to 

compare offers between two or more 

creditors; whether to take a different 

approach concerning situations in 

which a consumer does not qualify for 

a comparable, alternative loan that does 

not include discount points and 

origination points or fees; and whether 

to require information about a 

comparable, alternative loan be 

provided not just in connection with 

informal quotes, but also in advertising 

and at the time that consumers are 

provided disclosures three days after 

application. These issues are described 

in more detail in the section-by-section 

analysis, above. 

Benefits for Small Entities: The 

Bureau’s proposal with regard to points 

and fees has a number of potential 

benefits for small entities. First, relative 

to the Dodd-Frank Act ban on points 

and fees, allowing consumers to pay 

upfront discount points and origination 

points or fees in transactions in certain 

circumstances would increase the range 

of mortgage transactions available to 

consumers. Thus, the increased range of 

payment options would allow small 

creditors and loan originator 

organizations to be more flexible in 

marketing different mortgage loan 

products to consumers. The availability 

of different payment options also would 

enhance the ability of small creditors 

and loan originator organizations to 

enter into certain mortgage loan 

transactions with consumers. 

Furthermore, a consumer’s ability to 

refinance is costly to the creditor. 

Preserving consumers’ ability to choose 

to pay interest upfront in the form of 

discount points would reduce the 

ultimate cost to creditors from both loan 

default and prepayment. 

Moreover, the ability of small 

creditors to charge discount points in 

exchange for lower interest rates would 

accommodate those consumers who 

prefer to pay more at settlement in 

exchange for lower monthly interest 

charges and could produce a greater 

volume of available credit in residential 

mortgage markets. Preserving this ability 

would potentially allow a wider access 

to homeownership, which would 

benefit consumers, creditors, loan 

originator organizations, and individual 

loan originators. The ability to charge 

origination fees up front also would 

allow small creditors to recover fixed 

costs at the time they are incurred rather 

than over time through increased 

interest payments or through the 

secondary market prices. And, similarly, 

preserving the flexibility for affiliates of 

creditors and loan originator 

organizations to charge fees upfront 

should allow for these firms to charge 

directly for their services. This means 

that creditors and loan originator 

organizations may be less likely to 

divest such entities than if the DoddFrank Act mandate takes effect as 

written. 

Costs for Small Entities: As described, 

in the absence of the proposed rule in 

which the Bureau exercises its 

exemption authority, generally the only 

mortgage transactions permitted 

pursuant to the Dodd-Frank Act would 

be loans that do not include any 

discount points and origination points 

or fees. Under the proposed rule, 

creditors would be required in most 

instances to make available these loans. 

(Making available the comparable, 

alternative loan is not necessary if the 

consumer is unlikely to qualify for such 

a loan.) To ease compliance burdens, 

the Bureau is proposing two safe 

harbors for how a creditor may comply 

with the requirement to make available 

a comparable, alternative loan available. 

The requirement that creditors must 

generally make available loans that do 

not include discount points and 

origination points or fees (unless the 

consumer is unlikely to qualify for such 

a loan) would impose some restrictions 

on small creditors and loan originator 

organizations. As discussed in part VII, 

this requirement may impose costs on 

smaller entities with more limited 

access to the secondary market or to 

affordable hedging opportunities. There 

may be instances where a consumer’s 

choice of the comparable, alternative 

loan from a small creditor increases that 

firm’s financial risk; however for the 

reasons discussed, the Bureau believes 

such instances would be rare. The 

Bureau seeks comment on the costs to 

small entities from this requirement. 

The proposed rule also solicits 

comment on whether the Bureau should 

adopt a ‘‘bona fide’’ requirement to 

ensure that consumers receive value in 

return for paying discount points and 

origination points or fees, and different 

options for structuring such a 

requirements. To the extent the final 

rule imposes a bona fide requirement 

that departs from current market pricing 

practices, this condition may restrict 

small entities’ flexibility in pricing. 

Implementing a requirement that the 

payment of discount points and 

origination points or fees be bona fide 

may also impose additional compliance 

and monitoring costs. Small creditors 

may already need to determine and 

monitor when discount points are bona 

fide for the purposes of the Bureau’s 

forthcoming ATR rulemaking; and to the 

extent that the definitions of bona fide 

discount points in the ATR context and 

bona fide discount points and 

origination points or fees are similar, the 

additional costs would be reduced. 

Regarding compliance, the proposal 

seeks comments on market based 

approaches or approaches based on 

firms’ own pricing policies; in either 

case, compliance would likely entail 

increased records retention. 

Moreover, the Bureau is soliciting 

comment on whether to require 

information about the comparable, 

alternative loan to be provided not just 

in connection with informal quotes, but 

also in advertising and after application 

by providing a Loan Estimate, or the 

first page of the Loan Estimate, which is 

the integrated disclosures under TILA 

and RESPA proposed by the Bureau in 

the TILA–RESPA Integration Proposal. 

Changes to the advertising rules under 

Regulation Z are unlikely to raise 

specific costs of compliance for small 

entities, apart from those costs 

associated with learning about and 

adjusting to any new regulations. The 


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118Estimates are based on 2010 Call Report data. 

Revenue from loan originations is assumed to equal 

fee and interest income from 1–4 family residences 

as reported. To the extent that other revenue on the 

Call Reports is tied to loan originations, these 

numbers may be underestimated. Revenue 

estimates for credit unions are not available; 

instead, the percentage of assets held in 1–4 family 

residential real estate is used instead. 

requirement to provide the Loan 

Estimate for the comparable, alternative 

loan would marginally increase cost for 

some small entity originators. The 

Bureau seeks comments on the specific 

impacts these alternatives may have for 

small entities. 

(b) Compensation Based on Transaction 

Terms 

The proposed rule clarifies and 

revises restrictions on pooled 

compensation, profit-sharing, and bonus 

plans for loan originators, depending on 

the potential incentives to steer 

consumers to different transaction 

terms. As discussed in the section-bysection analysis to proposed 

1026.36(d)(1)(iii), the proposal regarding 

bonus plans would permit employers to 

make contributions from general profits 

derived from mortgage activity to 401(k) 

plans, employee stock option plans, and 

other ‘‘qualified plans’’ under section 

401(a) of the IRC and ERISA, as 

applicable, and also would permit 

employers to pay bonuses or make 

contributions to non-qualified profitsharing or retirement plans from general 

profits derived from mortgage activity if: 

(1) The loan originator affected has 

originated five or fewer mortgage 

transactions during the last 12 months; 

or (2) the company’s mortgage business 

revenues are limited (the Bureau is 

seeking comment on whether 50 percent 

or 25 percent of total revenues would be 

an appropriate test for such limitation, 

and on other related issues). The Bureau 

is also proposing, to permit 

compensation funded by general profits 

derived from mortgage activity in the 

form of bonuses and other payments 

under profit-sharing plans and 

contributions to non-qualified defined 

benefit or contribution plans where an 

individual loan originator is the loan 

originator for five or fewer transactions 

within the 12-month period preceding 

the payment of the compensation. Even 

though contributions and bonuses could 

be funded from general mortgage profits, 

the amounts paid to individual loan 

originators could not be based on the 

terms of the transactions that the 

individual had originated. 

With respect to the proposal to permit 

bonuses under profit-sharing plans and 

contributions to non-qualified 

retirement plans where the revenues of 

the mortgage business do not exceed a 

certain percentage of the total revenues 

of the organization (or, as applicable, 

the business until to which the profitsharing plan applies), for small 

depository institutions and credit 

unions (defined as those institutions 

with assets under $175 million), 

regulatory data from 2010 indicate that 

at the higher threshold of 50 percent of 

total revenue, roughly 2 percent of small 

commercial banks (about 75 banks) and 

3 percent of small credit unions (about 

200 credit unions) would remain subject 

to the proposed restrictions. Using a 

lower threshold of 25 percent of 

revenue, roughly 28 percent of small 

commercial banks and 22 percent of 

small credit unions would be subject to 

the proposed restrictions. The numbers 

are larger and more significant for small 

savings institutions whose primary 

business focus is on residential 

mortgages. At the higher threshold, 59 

percent of these firms would be 

restricted from paying bonuses based on 

mortgage-related profits to their 

individual loan originators.118 The 

Bureau lacks comprehensive data on 

nonbank lenders and, in particular, does 

not have information regarding the 

precise range of business activities that 

such companies engage in. As a result, 

it is unclear at this time the extent to 

which such nonbank lenders will face 

restrictions on their compensation 

practices. 

Firms that did not change their 

compensation practices in response to 

the current rule and the Dodd-Frank Act 

and, thus, currently offer compensation 

arrangements that would be prohibited 

under the proposed rule, will incur 

costs. These include costs from 

changing internal accounting practices, 

renegotiating the remuneration terms in 

the contracts of existing employees, and 

any other industry practice related to 

these methods of compensation. For 

these firms, the prohibition on 

compensation based on transaction 

terms may contribute to adverse 

selection among individual loan 

originators, a possible lower average 

quality of individual loan originators in 

such a firm, and higher retention costs. 

The discrete nature of the threshold also 

implies that some loan originators may 

now suffer the disadvantage of facing 

competitors with fewer restrictions on 

compensation. These potential 

differential effects may be greater for 

small entities. The Bureau seeks 

comments and data on the current 

compensation practices of those firms at 

or above the thresholds. 

During the Small Business Review 

Panel process, a SER stated that there 

should be no threshold limit because 

any limit would disadvantage small 

businesses that originate only 

mortgages. In response to this and other 

SERs feedback, the Small Business 

Review Panel recommended that the 

Bureau seek public comment on the 

ramifications for small businesses and 

other businesses of setting the revenue 

limit at 50 percent of company revenue 

or at other levels. The Small Business 

Review Panel also recommended that 

the Bureau solicit comment on the 

treatment of qualified and non-qualified 

plans and whether treating qualified 

plans differently than non-qualified 

plans would adversely affect small 

lenders and brokerages relative to large 

lenders and brokerage. While the 

Bureau expects that for some small 

entities, the de minimis exception 

should address some of the concerns 

expressed by the SERs through the 

Small Business Review Panel process, 

the Bureau is seeking comment on these 

issues. 

(c) Loan Originator Qualification 

Requirements 

The proposal would implement a 

Dodd-Frank Act provision requiring 

both individual loan originators and 

their employers to be ‘‘qualified’’ and to 

include their license or registration 

numbers on loan documents. Where an 

individual loan originator is not already 

required to be licensed under the SAFE 

Act, the proposal would require his or 

her employer to ensure that the 

individual loan originator meets 

character, fitness, and criminal 

background check standards that are 

equivalent to SAFE Act requirements 

and receives training commensurate 

with the individual loan originator’s 

duties. Employers would be required to 

ensure that their individual loan 

originator employees are licensed or 

registered under the SAFE Act where 

applicable. Employers and the 

individual loan originators that are 

primarily responsible for a particular 

transaction would be required to list 

their license or registration numbers on 

key loan documents along with their 

names. 

Costs to Small Entities: Employees of 

depositories and bona fide non-profit 

organizations do not have to meet the 

SAFE Act standards that apply only to 

licensing, such as taking pre-licensure 

classes, passing a test, meeting character 

and fitness standards, having no felony 

convictions within the previous seven 

years, or taking annual continuing 

education classes. The proposed rule 

would require these institutions to 

adopt character and criminal record 

screening and ongoing training 

requirements. However, the Bureau 


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believes that many of these entities 

already have adopted screening and 

training requirements, either to satisfy 

safety-and-soundness requirements or as 

a matter of good business practice. 

For any entity that adopted screening 

and training requirements in the first 

instance, the Bureau estimates the costs 

to include the cost of a criminal 

background check and the time 

involved in checking employment and 

character references of an applicant. The 

time and cost required to provide 

occasional, appropriate training to 

individual loan originators will vary 

greatly depending on the lending 

activities of the entity and the skill and 

experience level of the individual loan 

originators; however, the Bureau 

anticipates that the training that many 

non-profit and depository individual 

loan originator employees already 

receive will be adequate to meet the 

proposed requirement. The Bureau 

expects that in no case would the 

training needed to satisfy the proposed 

requirement be more comprehensive, 

time-consuming, or costly than the 

online training approved by the NMLSR 

to satisfy the continuing education 

requirement imposed under the SAFE 

Act on those individuals who are 

subject to state licensing. 

The requirement to include the 

NMLSR unique identifiers and names of 

loan originators on loan documents may 

impose some additional costs relative to 

current practice. However, this may be 

mitigated by the fact that the Federal 

Housing Finance Agency already 

requires the NMLSR numerical 

identifier of individual loan originators 

and loan originator organizations to be 

included on all loan applications for 

Fannie Mae and Freddie Mac loans. 

(d) Other Provisions 

(i) Mandatory Arbitration and Credit 

Insurance: The proposal would 

implement the Dodd-Frank Act 

requirements that prohibit agreements 

requiring consumers to submit any 

disputes that may arise to mandatory 

arbitration rather than filing suit in 

court and that ban the financing of 

premiums for credit insurance. Firms 

may incur some compliance cost such 

as amending standard contract form to 

reflect these changes. 

(ii) Dual Compensation, Pricing 

Concessions, and Proxies: The proposed 

rule contains provisions that would 

adjust existing rules governing 

compensation to individual loan 

originations in connection with closedend mortgage transactions to account for 

Dodd-Frank Act amendments to TILA 

and provide greater clarity and 

flexibility. 

These proposed provisions would 

preserve the current prohibition on the 

payment or receipt of commissions or 

other loan originator compensation 

based on the terms of the transaction 

(other than loan amount) and on loan 

originators being compensated 

simultaneously by both consumers and 

other parties in the same transaction. 

The proposal would, however, revise 

the Loan Originator Final Rule to 

provide that if a loan originator 

organization receives compensation 

directly from a consumer in connection 

with a transaction, the loan originator 

organization may pay compensation in 

connection with the transaction (e.g., a 

commission) to individual loan 

originators and the individual loan 

originators may receive compensation 

from the loan originator organization. 

The proposed rule also would clarify 

that payments to a loan originator paid 

on the consumer’s behalf by a person 

other than a creditor or its affiliates, 

such as a non-creditor seller, home 

builder, home improvement contractor, 

or realtor, are considered compensation 

received directly from the consumer if 

they are made pursuant to an agreement 

between the consumer and the person 

other than the creditor or its affiliates. 

In addition, the proposed rule would 

allow reductions in loan originator 

compensation in a limited set of 

circumstances where there are 

unanticipated increases in closing costs 

from non-affiliated third parties in a 

violation of applicable law (such as a 

tolerance violation under Regulation X). 

The proposed rule would also provide 

additional guidance on determining 

whether a factor used as a basis for 

compensation is prohibited as a ‘‘proxy’’ 

for a transaction term. 

These provisions will provide greater 

flexibility, relative to the statutory 

provisions of the Dodd-Frank Act, for 

firms needing to comply with the 

regulations. This greater clarity and 

flexibility should lower any costs of 

compliance for small entities by, for 

example, reducing costs for attorneys 

and compliance officers as well as 

potential costs of over-compliance and 

unnecessary litigation. These provisions 

of the proposed rule would therefore 

reduce the compliance burdens on small 

entities. The Bureau seeks comments on 

the specific impacts these provisions 

may have for small entities. 

(4) Estimate of the Classes of Small 

Entities Which Will Be Subject to the 

Requirement and the Type of 

Professional Skills Necessary for the 

Preparation of the Report or Record 

Section 603(b)(4) of the RFA requires 

an estimate of the classes of small 

entities that will be subject to the 

requirements. The classes of small 

entities that will be subject to the 

reporting, recordkeeping, and 

compliance requirements of the 

proposed rule are the same classes of 

small entities that are identified above 

in part VIII. 

Section 603(b)(4) of the RFA also 

requires an estimate of the type of 

professional skills necessary for the 

preparation of the reports or records. 

The Bureau anticipates that the 

professional skills required for 

compliance with the proposed rule are 

the same or similar to those required in 

the ordinary course of business of the 

small entities affected by the proposed 

rule. Compliance by the small entities 

that will be affected by the proposed 

rule will require continued performance 

of the basic functions that they perform 

today. 

5. Identification, to the Extent 

Practicable, of All Relevant Federal 

Rules Which May Duplicate, Overlap, or 

Conflict With the Proposed Rule 

The proposal contains restrictions on 

loan originator compensation practices, 

prerequisites to the making of a 

mortgage transaction with discount 

points and origination points or fees 

under most circumstances, requirements 

for loan originators to be qualified and 

licensed or registered, and restrictions 

on mandatory arbitration and the 

financing of certain credit insurance 

premiums. The Bureau has identified 

certain other Federal rules that relate in 

some fashion to these areas and has 

considered to what extent they may 

duplicate, overlap, or conflict with this 

proposal. Each of these is discussed 

below. 

The Bureau’s Regulation X, 12 CFR 

part 1024, implements RESPA. The 

regulation requires, among other things, 

the disclosure to consumers pursuant to 

RESPA of real estate settlement costs. 

The settlement costs required to be 

disclosed under Regulation X include 

discount points and origination charges. 

See 12 CFR part 1024, app. C. Thus, 

Regulation X governs the disclosure of 

certain charges that this proposal would 

regulate substantively. The Bureau 

believes, however, that substantive 

restrictions on the charging of discount 

points and origination points or fees, as 

well as substantive restrictions on loan 

originator compensation, are distinct 

and independent from rules governing 

how such charges must be disclosed. 

Accordingly, the Bureau does not 

believe this proposal duplicates, 

overlaps, or conflicts with Regulation X. 

The Bureau’s Regulations G, 12 CFR 

part 1007, and H, 12 CFR part 1008, 


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implement the SAFE Act. Those 

regulations include the requirements 

pursuant to the SAFE Act that 

individual loan originators be qualified 

and licensed or registered, as applicable. 

As noted, this proposal also contains 

certain qualification, registration, and 

licensing requirements. This proposal, 

however, supplements the existing 

requirements of Regulations G and H, to 

the extent they apply to persons subject 

to this proposal’s requirements. Where a 

person is already subject to the same 

kind of requirement that this proposal 

imposes pursuant to Regulation G or H, 

this proposal cross-references the 

existing requirement to avoid 

duplication. The Bureau believes this 

proposal therefore does not duplicate, 

overlap, or conflict with Regulations G 

and H. If the Bureau implements TILA 

section 129B(b)(2) in the final rule, the 

Bureau will endeavor to minimize any 

potential overlap with the procedures 

currently required by Regulation G. 

In the section-by-section analysis to 

§ 1026.36(d)(1)(i), above, the Bureau 

notes the Interagency Guidance on 

incentive compensation. 75 FR 36395 

(Jun. 17, 2010). As discussed there, the 

Interagency Guidance was issued to 

help ensure that incentive 

compensation policies at large 

depository institutions do not encourage 

imprudent risk-taking and are consistent 

with the safety and soundness of the 

institutions. As also noted above, 

however, the Bureau’s proposed rule 

does not affect the Interagency Guidance 

on loan origination compensation. 

While certain compensation practices 

may violate either the Interagency 

Guidance or this proposal but not the 

other, no practice is mandated by one 

and also prohibited by the other. 

Accordingly, the Bureau believes that 

this proposal does not conflict with the 

Interagency Guidance. The Bureau also 

believes that there is no duplication or 

overlap between the two. 

In addition to existing Federal rules, 

the Bureau is also in the process of 

several other rulemakings relating to 

mortgage credit to implement 

requirements of the Dodd-Frank Act. 

These other rulemakings are discussed 

in part II.E, above. As noted there, the 

Bureau is coordinating carefully the 

development of those proposals and 

final rules. Among those that include 

provisions potentially intersecting with 

this proposal are the TILA–RESPA 

Integration, HOEPA, and ATR 

rulemakings. 

• Under the TILA–RESPA Integration 

Proposal, the integrated disclosures 

must include an NMLSR ID, which 

parallels proposed § 1026.36(g)(1)(ii) in 

this notice. The Bureau has sought to 

avoid duplication, overlap, or conflict in 

this regard through proposed comment 

36(g)(1)(ii)–1, which states that an 

individual loan originator may comply 

with the requirement in 

§ 1026.36(g)(1)(ii) by complying with 

the applicable provision governing 

disclosure of NMLSR IDs in rules issued 

by the Bureau under the TILA–RESPA 

Integration rulemaking. 

The ATR and HOEPA rulemakings 

both involve the concept of bona fide 

discount points. As discussed in the 

section-by-section analysis to proposed 

§ 1026.36(d)(2)(ii)(C), this proposal 

includes an analogous concept in 

providing that no discount points and 

origination points or fees may be 

imposed on the consumer in certain 

transactions unless there is a bona fide 

reduction in the interest rate. The same 

discussion refers to the 2011 ATR 

Proposal and notes the parallel, while 

also recognizing that the two contexts 

may not necessarily call for an identical 

definition of ‘‘bona fide’’ given the 

differences between the purposes and 

scope of the requirements. The Bureau 

intends to coordinate carefully between 

this rulemaking and the ATR and 

HOEPA rulemakings with respect to any 

definitions of bona fide for their 

respective purposes, to ensure that they 

create no duplication, overlap, or 

conflict. 

6. Description of Any Significant 

Alternatives to the Proposed Rule 

Which Accomplish the Stated 

Objectives of Applicable Statutes and 

Minimize Any Significant Economic 

Impact of the Proposed Rule on Small 

Entities 

a. Payments of Upfront Points and Fees 

The Dodd-Frank Act prohibits 

consumers from making an ‘‘upfront 

payment of discount points, origination 

points, or fees’’ to a loan originator, 

creditor, or their affiliates in all retail 

and wholesale loan originations where 

the loan originator is compensated by 

creditors or brokerage firms. During the 

Small Business Review Panel process, 

one proposal the Bureau presented to 

the SERs for consideration concerned 

the nature of permissible origination 

fees. Specifically the Bureau asked the 

SERs to provide feedback on the 

proposal that consumers could, at the 

time of origination, remit to the loan 

originator, creditor, or their affiliates 

payment for bona fide or third-party 

charges connected with this origination, 

if these fees were independent of the 

size of the loan as well as its terms. 

This condition reflected the Bureau’s 

belief that the actual costs incurred in 

originating a loan, whether in the 

wholesale or retail market, did not vary 

materially with the size of the initial 

loan balance. Under such constant costs, 

the requirement that fees not vary with 

the balance would benefit consumers in 

two distinct ways. First, it would likely 

improve market efficiency by requiring 

fees to consumers to mirror the actual 

costs of loan origination, precisely as 

they would in a competitive market, and 

consequently lower consumer costs. 

Second, it would eliminate an potential 

source of misinterpretation by 

consumers by essentially precluding 

originators from using the term ‘‘points’’ 

when referring to both origination 

points (charges to the borrower for 

originating the loan) and discount 

points (charges to the borrower that are 

exchanged for future interest payments). 

Industry, through both the Small 

Business Review Panel process and 

outreach, and consumer groups raised 

concerns with this proposal. SERs, in 

particular, raised objections focusing on 

the potential that the requirement 

would disadvantage smaller creditors. 

SERs and others also raised objections 

to the validity of the assumption of 

constant origination costs. 

Several SERs participating in Small 

Business Review Panel and participants 

in outreach calls asserted that, contrary 

to the Bureau’s supposition, the 

economic costs of origination do vary 

with the loan balance and related loan 

characteristics. Two robust examples 

were cited in support of this assertion. 

The first involved GSE-imposed loan 

level pricing adjustments based on loan 

balance, which are incurred in the sale 

of mortgages to the secondary market. 

The second involved loans subsidized 

through the provision of an FHA or VAfunded financial guarantee against 

default by the primary borrower. More 

extensive services are required to 

originate such a loan, including efforts 

expended on consumer qualification 

and on certification of the terms of the 

guarantee per dollar of initial loan 

balance, than are required on a 

conventional loan. 

In addition, certain costs of hedging 

risk, incurred by creditors during and 

after origination vary with loan size. 

The most common example of this is the 

cost to the creditor of buying various 

forms of derivative securities to hedge 

the financial risks of newly-originated 

mortgage loans, the costs of which do 

vary with loan size and are incurred by 

creditors merely warehousing such 

loans for resale and those intending to 

hold these mortgages in portfolio. 

In response to the feedback it 

obtained from the SERs during the 

Small Business Review Panel process, 

as well as feedback obtained through 


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119See 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. 

120See 5 U.S.C. 603(d)(2)(B). 

121See Outline of Proposals at appendix A. 

122See the SBREFA Final Report, at app., 

appendix D, slide 38 (PowerPoint slides from the 

Panel Outreach Meeting, ‘‘Topic 7: Impact on the 

Cost of Business Credit’’). 

123For purposes of this PRA analysis, the 

Bureau’s respondents include 128 depository 

institutions and their depository institution 

other outreach efforts, the Bureau has 

not proposed to restrict origination fees 

from varying with the size of the loan. 

Instead, an alternative provision, 

developed with the benefit of the SERs 

that met with the Small Business 

Review Panel as well as additional 

outreach to industry and consumer 

groups, would require a creditor to 

make available to a consumer a 

comparable, alternative loan that does 

not include discount points and 

origination points or fees as a 

prerequisite to the creditor or loan 

originator organization imposing 

discount points and origination points 

or fees on the consumer in the 

transaction (unless the consumer is 

unlikely to qualify for the comparable, 

alternative loan). Further, no discount 

points and origination points or fees 

could be imposed on the consumer 

unless there was a bona fide reduction 

in the interest rate. These provisions 

within the Bureau’s current proposal are 

designed to accomplish a similar 

purpose as the flat fee requirement, 

namely to ensure that consumers are in 

the position to shop and receive value 

for origination points and fees, but do so 

in a way to minimize adverse 

consequences for industry and 

consumers that the flat fee requirement 

might entail. 

7. Discussion of Impact on Cost of 

Credit for Small Entities 

Section 603(d) of the RFA requires the 

Bureau to consult with small entities 

regarding the potential impact of the 

proposed rule on the cost of credit for 

small entities and related matters. 5 

U.S.C. 603(d). To satisfy this statutory 

requirement, the Bureau notified the 

Chief Counsel on May 9, 2012, that the 

Bureau would collect the advice and 

recommendations of the same SERs 

identified in consultation with the Chief 

Counsel during the Small Business 

Review Panel process concerning any 

projected impact of the proposed rule 

on the cost of credit for small entities.119

The Bureau sought and collected the 

advice and recommendations of the 

SERs during the Small Business Review 

Panel Outreach Meeting regarding the 

potential impact on the cost of business 

credit, since the SERs, as small 

providers of financial services, could 

also provide valuable input on any such 

impact related to the proposed rule.120

The Bureau had no evidence at the 

time of the Small Business Review 

Panel Outreach Meeting that the 

proposals then under consideration 

would result in an increase in the cost 

of business credit for small entities 

under any plausible economic 

conditions. The proposals under 

consideration at the time applied to 

consumer credit transactions secured by 

a mortgage, deed of trust, or other 

security interest on a residential 

dwelling or a residential real property 

that includes a dwelling, and the 

proposals would not apply to loans 

obtained primarily for business 

purposes.121

At the Small Business Review Panel 

Outreach Meeting, the Bureau 

specifically asked the SERs a series of 

questions regarding any potential 

increase in the cost of business credit. 

Specifically, the SERs were asked if they 

believed any of the proposals under 

consideration would impact the cost of 

credit for small entities and, if so, in 

what ways and whether there were any 

alternatives to the proposals being 

considered that could minimize such 

costs while accomplishing the statutory 

objectives addressed by the proposal.122

Although some SERs expressed the 

concern that any additional federal 

regulations, in general, had the potential 

to increase credit and other costs, all 

SERs responding to these questions 

stated that the proposals under 

consideration in this rulemaking would 

have little to no impact on the cost of 

credit to small businesses. 

Based on the feedback obtained from 

SERs at the Small Business Review 

Panel Outreach Meeting, the Bureau 

currently has no evidence that the 

proposed rule would result in an 

increase in the cost of credit for small 

business entities. In order to further 

evaluate this question, the Bureau 

solicits comment on whether the 

proposed rule would have any impact 

on the cost of credit for small entities. 

IX. Paperwork Reduction Act 

A. Overview 

The Bureau’s collection of 

information requirements contained in 

this proposal, and identified as such, 

will be submitted to the Office of 

Management and Budget (OMB) for 

review under section 3507(d) of the 

Paperwork Reduction Act of 1995 (44 

U.S.C. 3501 et seq.) (Paperwork 

Reduction Act or PRA) on or before 

publication of this proposal in the 

Federal Register. Under the Paperwork 

Reduction Act, the Bureau may not 

conduct or sponsor, and a person is not 

required to respond to, an information 

collection unless the information 

collection displays a valid OMB control 

number. 

This proposed rule would amend 12 

CFR part 1026 (Regulation Z). 

Regulation Z currently contains 

collections of information approved by 

OMB, and the Bureau’s OMB control 

number is 3170–0015 (Truth in Lending 

Act (Regulation Z) 12 CFR part 1026). 

As described below, the proposed rule 

would amend the collections of 

information currently in Regulation Z. 

The title of this information collection 

is: Loan Originator Compensation. The 

frequency of response is on-occasion. 

The information collection requirements 

in this proposed rule are required to 

provide benefits for consumers and 

would be mandatory. See 15 U.S.C. 

1601 et seq. Because the Bureau would 

not collect any information under the 

proposed rule, no issue of 

confidentiality arises. The likely 

respondents would be commercial 

banks, savings institutions, credit 

unions, mortgage companies (non-bank 

creditors), mortgage brokers, and nonprofit organizations that make or broker 

closed-end mortgage loans for 

consumers. 

Under the proposal, the Bureau would 

account for the paperwork burden 

associated with Regulation Z for the 

following respondents pursuant to its 

administrative enforcement authority: 

insured depository institutions with 

more than $10 billion in total assets, 

their depository institution affiliates, 

and certain non-depository loan 

originator organizations. The Bureau 

and the FTC generally both have 

enforcement authority over nondepository institutions for Regulation Z. 

Accordingly, the Bureau has allocated to 

itself half of its estimated burden to 

non-depository institutions. Other 

Federal agencies, including the FTC, are 

responsible for estimating and reporting 

to OMB the total paperwork burden for 

the institutions for which they have 

administrative enforcement authority. 

They may, but are not required, to use 

the Bureau’s burden estimation 

methodology. 

Using the Bureau’s burden estimation 

methodology, the total estimated burden 

for the approximately 22,400 

institutions subject to the proposal, 

including Bureau respondents,123 would 


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affiliates. The Bureau’s respondents include an 

estimated 2,515 non-depository creditors, an 

assumed 200 not-for profit originators (which may 

overlap with the other non-depository creditors), 

and 8,051 loan originator organizations. 

124This 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. 

be approximately 64,700 hours annually 

and 169,600 one-time hours. For the 

10,984 Bureau respondents subject to 

this proposal, the estimates for the 

ongoing burden hours are roughly 

32,400 annually, and the total one-time 

burden hours are roughly 84,500. 

The aggregate estimates of total 

burdens presented in this part IX are 

based on estimated costs that are 

averages across respondents. The 

Bureau expects that the amount of time 

required to implement each of the 

proposed changes for a given institution 

may vary based on the size, complexity, 

and practices of the respondent. 

B. Information Collection Requirements 

1. Record Retention Requirements 

Regulation Z currently requires 

creditors to create and maintain records 

to demonstrate their compliance with 

Regulation Z provisions regarding 

compensation paid to or received by a 

loan originator. As discussed above in 

part V, the proposed rule would require 

creditors to retain these records for a 

three-year period, rather than for a twoyear period as currently required. The 

proposed rule would apply the same 

requirement to organizations when they 

act as a loan originator in a transaction, 

even if they do not act as a creditor in 

the transaction. In addition, creditors 

would be required to make and 

maintain records for three years to show 

that they made available to a consumer 

a comparable, alternative mortgage loan 

when required by this proposed rule 

and complied with the requirement that 

where discount points and origination 

points or fees are charged, there be bona 

fide reduction in the interest rate 

compared to the interest rate for the 

comparable, alternative loan. 

For the requirement extending the 

record retention requirement for 

creditors from two years, as currently 

provided in Regulation Z, to three years, 

the Bureau assumes that there is not 

additional marginal cost. For most, if 

not all firms, the required records are in 

electronic form. The Bureau believes 

that, as a consequence, all creditors 

should be able to use their existing 

recordkeeping systems to maintain the 

required documentation for mortgage 

origination records for one additional 

year at a negligible cost of investing in 

new storage facilities. 

Loan originator organizations, but not 

creditors, will incur costs from the new 

requirement to retain records related to 

compensation. For the requirement that 

organizations retain records related to 

compensation on loan transactions, 

these firms will need to build the 

requisite reporting regimes. At some 

firms this may require the integration of 

information technology systems; for 

others simple reports can be generated 

from existing core systems. 

For the 8,051 Bureau respondents that 

are non-depository loan originator 

organizations but not creditors, the onetime burden is estimated to be roughly 

162,800 hours to review the regulation 

and establish the requisite systems to 

retain compensation information. The 

Bureau estimates the requirement for 

these Bureau respondents to retain 

documentation of compensation 

arrangements is assumed to require 

64,400 ongoing burden hours annually. 

The Bureau has allocated to itself onehalf of this burden. 

The proposal would require a creditor 

to retain records that it made available 

to a consumer, when required, a 

comparable, alternative loan that does 

not include discount points and 

origination points or fees, or that it 

made a good-faith determination that a 

consumer is unlikely to qualify for it. 

The Bureau believes that there is no 

additional cost or burden associated 

with this requirement because it 

believes that most, if not all creditors, 

already keep records of quotes of loan 

terms that they make to individual 

consumers as a matter of usual and 

customary practice. The Bureau believes 

that, as a consequence, all creditors 

should be able to use their existing 

recordkeeping systems to maintain the 

required documentation. The Bureau 

seeks public comment on how creditors 

currently keep track of quotes they have 

made to particular consumers and any 

additional costs from the requirement to 

track compliance with the requirements 

regarding the comparable, alternative 

loan. 

2. Requirement To Obtain Criminal 

Background Checks, Credit Reports, and 

Other Information for Certain Individual 

Loan Originators 

To the extent loan originator 

organizations employ or retain the 

services of individual loan originators 

who are not required to be licensed 

under the SAFE Act, and who are not 

so licensed, the loan originator 

organizations would be required to 

obtain a criminal background check and 

credit report for the individual loan 

originators. Loan originator 

organizations would also be required to 

obtain from the NMLSR or individual 

loan originator information about any 

findings against such individual loan 

originator by a government jurisdiction. 

In general, the loan originator 

organizations that would be subject to 

this requirement are depository 

institutions (including credit unions) 

and non-profit organizations whose loan 

originators are not subject to State 

licensing because the State has 

determined the organization to be a 

bona fide non-profit organization. The 

burden of obtaining this information 

may be different for a depository 

institution than it is for a non-profit 

organization because depository 

institutions already obtain criminal 

background checks for their loan 

originators to comply with Regulation G 

and have access to information about 

findings against such individual loan 

originator by a government jurisdiction 

through the NMLSR. 

a. Credit Check 

Both depository institutions and nonprofit organizations will incur one-time 

costs related to obtaining credit reports 

for all existing loan originators and 

ongoing costs for all future loan 

originators that are hired or transfer into 

this function. For the estimated 2,843 

Bureau respondents, which include 

depository institutions over $10 billion, 

their depository affiliates, and one-half 

the estimated burdens for the non-profit 

non-depository organizations, this one 

time estimated burden would be 2,950 

hours and the estimated on going 

burden would be 150 hours. 

b. Criminal Background Check 

Depository institutions already obtain 

criminal background checks for each of 

their individual loan originators through 

the NMLSR for purposes of complying 

with Regulation G. A criminal 

background check provided by the 

NMLSR to the depository institution is 

sufficient to meet the requirement to 

obtain a criminal background check in 

this proposed rule. Accordingly, the 

Bureau believes they will not incur any 

additional burden. 

Non-depository loan originator 

organizations that do not have access to 

information about criminal history in 

the NMLSR, including bona fide nonprofit organizations, could satisfy the 

latter requirements by obtaining a 

national criminal background check.124

For the assumed 200 non-profit 

originators and their 1000 loan 


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125The Bureau has not been able to determine 

how many loan originators organizations qualify as 

bona fide non-profit organizations or how many of 

their employee loan originators are not subject to 

SAFE Act licensing. Accordingly, the Bureau has 

estimated these numbers. 

126The 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. 

originators,125 the one-time burden is 

estimated to be roughly 265 hours.126

The ongoing cost to perform the check 

for new hires is estimated to be 15 hours 

annually. The Bureau has allocated to 

itself one-half of these burdens. 

c. Information About Findings Against 

the Individual by Government 

Jurisdictions 

Depository institutions already obtain 

and have access to information about 

government jurisdiction findings against 

their individual loan originators through 

the NMLSR. Such information is 

sufficient to meet the requirement to 

obtain a criminal background check in 

this proposed rule. Accordingly, the 

Bureau does not believe they will incur 

significant additional burden. 

The information for employees of 

non-profit organizations is generally not 

in the NMLSR. Accordingly, under the 

proposed rule a non-profit organization 

would have to obtain this information 

using individual statements concerning 

any prior administrative, civil, or 

criminal findings. For the assumed 

1,000 loan originators who are 

employees of bona-fide non-profit 

organizations, the Bureau estimates that 

no more than 10 percent have any such 

findings by a governmental jurisdiction 

to describe. The one-time burden is 

estimated to be 20 hours, and the annual 

burden to obtain the information from 

new hires is estimated to be one hour. 

C. Comments 

Comments are specifically requested 

concerning: (1) Whether the proposed 

collections of information are necessary 

for the proper performance of the 

functions of the Bureau, including 

whether the information will have 

practical utility; (2) the accuracy of the 

estimated burden associated with the 

proposed collections of information; (3) 

how to enhance the quality, utility, and 

clarity of the information to be 

collected; and (4) how to minimize the 

burden of complying with the proposed 

collections of information, including the 

application of automated collection 

techniques or other forms of information 

technology. All comments will become 

a matter of public record. Comments on 

the collection of information 

requirements should be sent to the 

Office of Management and Budget 

(OMB), Attention: Desk Officer for the 

Consumer Financial Protection Bureau, 

Office of Information and Regulatory 

Affairs, Washington, DC, 20503, or by 

the Internet to http://oira_submission@

omb.eop.gov, with copies to the Bureau 

at the Consumer Financial Protection 

Bureau (Attention: PRA Office), 1700 G 

Street NW., Washington, DC 20552, or 

by the Internet to CFPB_Public_PRA@

cfpb.gov. 

List of Subjects in 12 CFR Part 1026 

Advertising, Consumer protection, 

Credit, Credit unions, Mortgages, 

National banks, Reporting and 

recordkeeping requirements, Savings 

associations, Truth in lending. 

Text of Proposed Revisions 

Certain conventions have been used 

to highlight the proposed revisions. 

New language is shown inside bold 

arrows, and language that would be 

removed is shown inside bold brackets. 

Authority and Issuance 

For the reasons set forth in the 

preamble, the Bureau proposes to 

amend Regulation Z, 12 CFR part 1026, 

as set forth below: 

PART 1026—TRUTH IN LENDING 

(REGULATION Z) 

1. The authority citation for part 1026 

continues to read as follows: 

Authority: 12 U.S.C. 5512, 5581; 15 U.S.C. 

1601 et seq. 

2. Section 1026.25 is amended by 

adding paragraph (c) to read as follows: 

Subpart D—Miscellaneous 

§ 1026.25 Record Retention. 

* * * * * 

fl(c) Records related to certain 

requirements for mortgage loans. 

(1) [Reserved] 

(2) Records related to requirements for 

loan originator compensation. 

Notwithstanding the two-year record 

retention requirement in paragraph (a) 

of this section, for transactions subject 

to § 1026.36 of this part: 

(i) A creditor must maintain records 

sufficient to evidence all compensation 

it pays to a loan originator organization 

(as defined in § 1026.36(a)(1)(iii)) or the 

creditor’s individual loan originator (as 

defined in § 1026.36(a)(1)(ii)) and the 

compensation agreement that governs 

those payments for three years after the 

date of payment. 

(ii) A loan originator organization 

must maintain records sufficient to 

evidence all compensation it receives 

from a creditor, a consumer, or another 

person, all compensation it pays to the 

loan originator organization’s individual 

loan originators, and the compensation 

agreement that governs those receipts or 

payments for three years after the date 

of each receipt or payment. 

(3) Records related to requirements for 

discount points and origination points 

or fees. For each transaction subject to 

§ 1026.36(d)(2)(ii), the creditor must 

maintain for three years after the date of 

consummation records sufficient to 

evidence: 

(i) The creditor has made available to 

the consumer a comparable, alternative 

loan that does not include discount 

points and origination points or fees as 

required by § 1026.36(d)(2)(ii)(A) or, if 

such a loan was not made available to 

the consumer, a good-faith 

determination that the consumer was 

unlikely to qualify for such a loan; and 

(ii) Compliance with the ‘‘bona fide’’ 

requirements under 

§ 1026.36(d)(2)(ii)(C).fi 

Subpart E—Special Rules for Certain 

Home Mortgage Transactions 

3. Section 1026.36 is amended by: 

a. Revising the section heading; 

b. Revising paragraphs (a), (d)(1), 

(d)(2), and (e)(3)(i)(C); 

c. Re-designating paragraph (f) as 

paragraph (j); 

d. Adding new paragraph (f) and 

paragraphs (g), (h), and (i); and 

e. Revising newly re-designated 

paragraph (j), 

The revisions and additions read as 

follows: 

§ 1026.36 Prohibited acts or practices 

fland certain requirements forfiøin 

connection with] credit secured by a 

dwelling. 

(a) Loan originatorfl,fiøand¿ 

mortgage broker fl, and 

compensationfi defined— (1) Loan 

originator. fl(i) fiFor purposes of this 

section, the term ‘‘loan originator’’ 

means, with respect to a particular 

transaction, a person who øfor 

compensation or other monetary gain, or 

in expectation of compensation or other 

monetary gain,¿fltakes an 

application,fi arranges, floffers,fi 

negotiates, or otherwise obtains an 

extension of consumer credit for another 

personfl in expectation of 

compensation or other monetary gain or 

for compensation or other monetary 

gain.fi The term ‘‘loan originator’’ 

includes an employee of the creditor if 


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the employee meets this definition. The 

term ‘‘loan originator’’ includes øthe¿ 

flafi creditor flfor the transaction 

fiøonly¿ if the creditor does not 

øprovide the funds for¿flfinance fithe 

transaction at consummation out of the 

creditor’s own resources, including 

drawing on a bona fide warehouse line 

of credit, or out of deposits held by the 

creditorfl. The term ‘‘loan originator’’ 

includes all creditors for purposes of 

§ 1026.36(f) and (g). The term does not 

include an employee of a manufactured 

home retailer who assists a consumer in 

obtaining or applying to obtain 

consumer credit, provided such 

employee does not take a consumer 

credit application, offer or negotiate 

terms of a consumer credit transaction, 

or advise a consumer on credit terms 

(including rates, fees, and other costs). 

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

a natural person who meets the 

definition of ‘‘loan originator’’ in 

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

(iii) A ‘‘loan originator organization’’ 

is any loan originator, as defined in 

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

not an individual loan originatorfi. 

(2) Mortgage broker. For purposes of 

this section, a mortgage broker with 

respect to a particular transaction is any 

loan originator that is not fla creditor 

or the creditor’sfiøan¿ employee øof 

the creditor¿. 

fl(3) Compensation. The term 

‘‘compensation’’ includes salaries, 

commissions, and any financial or 

similar incentive provided to a loan 

originator for originating loans.fi 

* * * * * 

(d) Prohibited payments to loan 

originators—(1) Payments based on 

transaction terms ø or conditions¿. (i) 

flExcept as provided in paragraph 

(d)(1)(iii) of this section, infi øIn¿ 

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 øor conditions¿. flIf 

a loan originator’s compensation is 

based in whole or in part on a factor that 

is a proxy for a transaction’s terms, the 

loan originator’s compensation is based 

on the transaction’s terms. A factor (that 

is not itself a term of a transaction 

originated by the loan originator) is a 

proxy for the transaction’s terms if the 

factor substantially correlates with a 

term or terms of the transaction and the 

loan originator can, directly or 

indirectly, add, drop, or change the 

factor when originating the 

transaction.fi 

(ii) For purposes of this paragraph 

(d)(1), the amount of credit extended is 

not deemed to be a transaction term øor 

condition¿, provided compensation 

received by or paid to a loan originator, 

directly or indirectly, is based on a fixed 

percentage of the amount of credit 

extended; however, such compensation 

may be subject to a minimum or 

maximum dollar amount. 

ø(iii) This paragraph (d)(1) shall not 

apply to any transaction in which 

paragraph (d)(2) of this section applies.¿ 

fl(iii) Notwithstanding paragraph 

(d)(1)(i) of this section, an individual 

loan originator may receive, and a 

person may pay to an individual loan 

originator, compensation in the form of 

a contribution to a defined contribution 

plan or defined benefit plan that is a 

qualified plan and in which the 

individual loan originator participates, 

provided that the contribution is not 

directly or indirectly based on the terms 

of that individual loan originator’s 

transactions subject to paragraph (d) of 

this section. In addition, 

notwithstanding paragraph (d)(1)(i) of 

this section, an individual loan 

originator may receive, and a person 

may pay, compensation in the form of 

a bonus or other payment under a profitsharing plan sponsored by the person or 

a contribution to a defined benefit plan 

or defined contribution plan in which 

the individual loan originator 

participates that is not a qualified plan, 

even if the compensation directly or 

indirectly is based on the terms of the 

transactions subject to paragraph (d) of 

this section of multiple individual loan 

originators employed by the person 

during the time period for which the 

compensation is paid to the individual 

loan originator, provided that: 

(A) The compensation paid to an 

individual loan originator is not directly 

or indirectly based on the terms of that 

individual loan originator’s transactions 

subject to paragraph (d) of this section; 

and 

(B) At least one of the following 

conditions is satisfied: 

ALTERNATIVE 1—PARAGRAPH 

(d)(1)(iii)(B)(1): 

(1) Not more than 50 percent of the 

total revenues of the person (or, if 

applicable, the business unit to which 

the profit-sharing plans applies) are 

derived from the person’s mortgage 

business during the tax year 

immediately preceding the tax year in 

which the payment or contribution is 

made. The total revenues are 

determined through a methodology that 

is consistent with generally accepted 

accounting principles and, as 

applicable, the reporting of the person’s 

income for purposes of Federal tax 

filings or, if none, any industry call 

reports filed regularly by the person. As 

applicable, the methodology also shall 

reflect an accurate allocation of 

revenues among the person’s business 

units. Notwithstanding the provisions of 

subparagraph (d)(3) of this section, the 

revenues of the person’s affiliates are 

not taken into account for purposes of 

this paragraph, provided that, if the 

profit-sharing plan applies to the 

affiliate, then the person’s total revenues 

for purposes of this paragraph also 

include the total revenues of the 

affiliate. The total revenues that are 

derived from the mortgage business is 

that portion of the total revenues that 

are generated through a person’s 

transactions subject to paragraph (d) of 

this section; or 

ALTERNATIVE 2—PARAGRAPH 

(d)(1)(iii)(B)(1): 

(1) Not more than 25 percent of the 

revenues of the person (or, if applicable, 

the business unit to which the profitsharing plan applies) are derived from 

the person’s mortgage business during 

the tax year immediately preceding the 

tax year in which the payment or 

contribution is made. The total revenues 

are determined through a methodology 

that is consistent with generally 

accepted accounting principles and, as 

applicable, the reporting of the person’s 

income for purposes of Federal tax 

filings or, if none, any industry call 

reports filed regularly by the person. As 

applicable, the methodology also shall 

reflect an accurate allocation of 

revenues among the person’s business 

units. Notwithstanding the provisions of 

subparagraph (d)(3) of this section, the 

revenues of the person’s affiliates are 

not taken into account for purposes of 

this paragraph, provided that, if the 

profit-sharing plan applies to the 

affiliate, then the person’s total revenues 

for purposes of this paragraph also 

include the total revenues of the 

affiliate. The total revenues that are 

derived from the mortgage business is 

that portion of the total revenues that 

are generated through a person’s 

transactions subject to paragraph (d) of 

this section; or 

(2) The individual loan originator was 

the loan originator for five or fewer 

transactions subject to paragraph (d) of 

this section during the 12-month period 

preceding the date of the decision to 

make the payment or contribution.fi 

(2) Payments by persons other than 

consumer— fl(i) Dual compensation. 

(A) Except as provided in paragraph 

(d)(2)(i)(C) of this section, iffi øIf¿ any 

loan originator receives compensation 

directly from a consumer øin a 

consumer credit transaction secured by 

a dwelling¿: 


srobinson on DSK4SPTVN1PROD with PROPOSALS2
55354 Federal Register / Vol. 77, No. 174 / Friday, September 7, 2012 / Proposed Rules 

(fl1fiøi¿) No loan originator shall 

receive compensation, directly or 

indirectly, from any person other than 

the consumer in connection with the 

transaction; and 

(fl2fiøii¿) No person who knows or 

has reason to know of the consumerpaid 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. 

fl(B) Compensation directly from a 

consumer includes payments to a loan 

originator made pursuant to an 

agreement between the consumer and a 

person other than the creditor or its 

affiliates. 

(C) Exception. If a loan originator 

organization receives compensation 

directly from a consumer in connection 

with a transaction, the loan originator 

organization may pay compensation to 

an individual loan originator, and the 

individual loan originator may receive 

compensation from the loan originator 

organization. 

(ii) Restrictions on discount points 

and origination points or fees. (A) If any 

loan originator receives compensation 

from any person other than the 

consumer in connection with a 

transaction, a creditor or a loan 

originator organization may not impose 

on the consumer any discount points 

and origination points or fees, as 

defined in paragraph (d)(2)(ii)(B) of this 

section, in connection with the 

transaction unless the creditor makes 

available to the consumer a comparable, 

alternative loan that does not include 

discount points and origination points 

or fees, unless the consumer is unlikely 

to qualify for such a loan. 

(B) The term ‘‘discount points and 

origination points or fees’’ for purposes 

of this paragraph (d) and paragraph (e) 

of this section means all items that 

would be included in the finance charge 

under § 1026.4(a) and (b), and any fees 

described in § 1026.4(a)(2) 

notwithstanding that those fees may not 

be included in the finance charge under 

§ 1026.4(a)(2), that are payable at or 

before consummation by the consumer 

in connection with the transaction to a 

creditor or a loan originator 

organization, other than: 

(1) Interest, including per-diem 

interest, or the time-price differential; 

(2) Any bona fide and reasonable 

third-party charges not retained by the 

creditor or loan originator organization; 

and 

(3) Items that are excluded from the 

finance charge under § 1026.4(c)(5), 

(c)(7)(v) and (d)(2). 

(C) No discount points and 

origination points or fees may be 

imposed on the consumer in connection 

with a transaction subject to paragraph 

(d)(2)(ii)(A) of this section unless there 

is a bona fide reduction in the interest 

rate compared to the interest rate for the 

comparable, alternative loan that does 

not include discount points and 

origination points or fees required to be 

made available to the consumer under 

paragraph (d)(2)(ii)(A) of this section. 

For any rebate paid by the creditor that 

will be applied to reduce the 

consumer’s settlement charges, the 

creditor must provide a bona fide rebate 

in return for an increase in the interest 

rate compared to the interest rate for the 

comparable, alternative loan that does 

not include discount points and 

origination points or fees required to be 

made available to the consumer under 

paragraph (d)(2)(ii)(A) of this section.fi 

* * * * * 

(e). * * * 

(3) * * * 

(i) * * * 

(C) The loan with the lowest total 

dollar amount flof discount points and 

origination points or fees. If two or more 

loans have the same total dollar amount 

of discount points and origination 

points or fees, the loan originator must 

present the loan with the lowest interest 

rate that has the lowest total dollar 

amount of discount points and 

origination points or fees.fiøfor 

origination points or fees and discount 

points.¿ 

* * * * * 

fl(f) Loan originator qualification 

requirements. A loan originator for a 

consumer credit transaction secured by 

a dwelling must comply with this 

paragraph (f) and be registered and 

licensed in accordance with applicable 

State and Federal law, including the 

Secure and Fair Enforcement for 

Mortgage Licensing Act of 2008 (SAFE 

Act, 12 U.S.C. 5102 et seq.), its 

implementing regulations (12 CFR part 

1007 or part 1008), and State SAFE Act 

implementing law. To comply with this 

paragraph (f), a loan originator 

organization that is not a government 

agency or State housing finance agency 

must: 

(1) Comply with all applicable State 

law requirements for legal existence and 

foreign qualification; 

(2) Ensure that its individual loan 

originators are licensed or registered to 

the extent the individual is required to 

be licensed or registered under the 

SAFE Act, its implementing regulations, 

and State SAFE Act implementing law; 

and 

(3) For each of its individuals who is 

not required to be licensed and is not 

licensed as a loan originator pursuant to 

§ 1008.103 of this chapter or State SAFE 

Act implementing law: 

(i) Obtain: 

(A) A State and national criminal 

background check through the 

Nationwide Mortgage Licensing System 

and Registry (NMLSR) or, in the case of 

an individual loan originator who is not 

a registered loan originator under the 

NMLSR, a State and national criminal 

background check from a law 

enforcement agency or commercial 

service; 

(B) A credit report from a consumer 

reporting agency described in section 

603(p) of the Fair Credit Reporting Act 

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

applicable, in compliance with the 

requirements of section 604(b) of the 

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

1681b(b); and 

(C) Information from the NMLSR 

about any administrative, civil, or 

criminal findings by any government 

jurisdiction or, in the case of an 

individual loan originator who is not a 

registered loan originator under the 

NMLSR, such information from the 

individual loan originator; 

(ii) Determine, on the basis of the 

information obtained pursuant to 

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

any other information reasonably 

available to the loan originator 

organization, that the individual loan 

originator: 

(A) Has not been convicted of, or 

pleaded guilty or nolo contendere to, a 

felony in a domestic, foreign, or military 

court during the preceding seven-year 

period or, in the case of a felony 

involving an act of fraud, dishonesty, a 

breach of trust, or money laundering, at 

any time; and 

(B) Has demonstrated financial 

responsibility, character, and general 

fitness such as to command the 

confidence of the community and to 

warrant a determination that the 

individual loan originator will operate 

honestly, fairly, and efficiently; and 

(iii) Provide periodic training 

covering Federal and State law 

requirements that apply to the 

individual loan originator’s loan 

origination activities. 

(g) NMLSR ID on loan documents. (1) 

For a transaction secured by a dwelling, 

a loan originator organization must 

include on the loan documents 

described in paragraph (g)(2) of this 

section, whenever each such loan 

document is provided to a consumer or 

presented to a consumer for signature, 

as applicable: 

(i) Its name and NMLSR identification 

number (NMLSR ID), if the NMLSR has 

provided it an NMLSR ID; and 


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Federal Register / Vol. 77, No. 174 / Friday, September 7, 2012 / Proposed Rules 55355 

(ii) The name of the individual loan 

originator with primary responsibility 

for the origination and, if the NMLSR 

has provided such person an NMLSR 

ID, that NMLSR ID. 

(2) The loan documents that must 

include the names and NMLSR IDs 

pursuant to paragraph (g)(1) of this 

section are: 

(i) The credit application; 

(ii) The disclosure provided under 

section 5(c) of the Real Estate Settlement 

Procedures Act of 1974 (12 U.S.C. 

2604(c)); 

(iii) The disclosure provided under 

section 128 of the Truth in Lending Act 

(15 U.S.C. 1638); 

(iv) The note or loan contract; 

(v) The security instrument; and 

(vi) The disclosure provided to 

comply with section 4 of the Real Estate 

Settlement Procedures Act of 1974 (12 

U.S.C. 2603). 

(3) For purposes of this § 1026.36, 

NMLSR identification number means a 

number assigned by the Nationwide 

Mortgage Licensing System and Registry 

to facilitate electronic tracking of loan 

originators and uniform identification 

of, and public access to, the 

employment history of, and the publicly 

adjudicated disciplinary and 

enforcement actions against, loan 

originators. 

(h) Prohibition on mandatory 

arbitration clauses and waivers of 

certain consumer rights- (1) Arbitration. 

A contract or other agreement in 

connection with a consumer credit 

transaction secured by a dwelling may 

not require arbitration or any other nonjudicial procedure to resolve disputes 

arising out of the transaction. This 

prohibition does not limit a consumer 

and creditor or any assignee from 

agreeing, after a dispute arises between 

them, to use arbitration or other nonjudicial procedure to resolve a dispute. 

(2) No waivers of Federal statutory 

causes of action. A contract or other 

agreement in connection with a 

consumer credit transaction secured by 

a dwelling may not limit a consumer 

from bringing a claim in court, an 

arbitration, or other non-judicial 

procedure, pursuant to any provision of 

law, for damages or any other relief, in 

connection with any alleged violation of 

any Federal law. This prohibition 

applies to a post-dispute agreement to 

use arbitration or other non-judicial 

procedure to resolve a dispute, thus 

such an agreement may not limit the 

ability of a consumer to bring a covered 

claim through the agreed-upon nonjudicial procedure. 

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

may not finance any premiums or fees 

for credit insurance in connection with 

a consumer credit transaction secured 

by a dwelling. This prohibition does not 

apply to credit insurance for which 

premiums or fees are calculated and 

paid in full on a monthly basis. 

(2) In this paragraph (i), ‘‘credit 

insurance’’: 

(i) Includes insurance described in 

§ 1026.4(d)(1) and (3) of this part, 

whether or not such insurance is 

voluntary; but 

(ii) Excludes credit unemployment 

insurance for which the unemployment 

insurance premiums are reasonable, the 

creditor receives no direct or indirect 

compensation in connection with the 

unemployment insurance premiums, 

and the unemployment insurance 

premiums are paid pursuant to another 

insurance contract and not paid to an 

affiliate of the creditor.fi 

(fljfiøf¿) This section does not apply 

to a home-equity line of credit subject 

to § 1026.40fl, except that § 1026.36(h) 

and (i) applies to such credit when 

secured by the consumer’s principal 

dwellingfi. Section 

1026.36(d)fl,fiøand¿ (e)fl, (f), (g), (h), 

and (i)fi does not apply to a loan that 

is secured by a consumer’s interest in a 

timeshare plan described in 11 U.S.C. 

101(53D). 

4. Supplement I to part 1026 is 

amended as follows: 

a. Under Section 1026.25—Record 

Retention: 

i. 25(a) General rule, paragraph 5 is 

removed; 

ii. New heading 25(c)(2) Records 

related to requirements for loan 

originator compensation and paragraphs 

1 and 2 are added. 

b. Under Section 1026.36—Prohibited 

Acts or Practices in Connection with 

Credit Secured by a Dwelling: 

i. The heading is revised to read 

Section 1026.36—Prohibited Acts or 

Practices and Certain Requirements for 

Credit Secured by a Dwelling; 

ii. Paragraph 1 is revised; 

iii. 36(a) Loan originator and 

mortgage broker defined, the heading is 

revised to read 36(a) Loan originator, 

mortgage broker, and compensation 

defined, paragraphs 1 and 4 are revised, 

and new paragraph 5 is added; 

iv. 36(d) Prohibited payments to loan 

originators, paragraph 1 is revised; 

v. 36(d)(1) Payments based on 

transaction terms and conditions, the 

heading is revised to read 36(d)(1) 

Payments based on transaction terms, 

paragraphs 1 through 8 are revised, and 

new paragraph 10 is added; 

vi. 36(d)(2) Payments by persons other 

than consumer, new heading 36(d)(2)(i) 

Dual compensation is added and 

paragraphs 1 and 2 are revised, new 

heading 36(d)(2)(ii) Restrictions on 

discount points and origination points 

or fees and new paragraphs 1 through 3 

are added, new heading Paragraph 

36(d)(2)(ii)(A) and new paragraphs 1 

through 4 are added, new heading 

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

paragraphs 1 through 4 are added; 

vii. 36(e) Prohibition on steering, 

36(e)(3) Loan options presented, 

paragraph 3 is revised; 

viii. New heading 36(f) Loan 

originator qualification requirements 

and new paragraphs 1 and 2 are added; 

ix. New heading Paragraph 36(f)(1) 

and new paragraph 1 are added; 

x. New heading Paragraph 36(f)(2) 

and new paragraph 1 are added; 

xi. New heading Paragraph 36(f)(3), 

and new paragraph 1 are added; 

xii. New heading Paragraph 36(f)(3)(i) 

and new paragraph 1 are added; 

xiii. New heading Paragraph 

36(f)(3)(ii) and new paragraph 1 are 

added; 

xiv. New heading Paragraph 

36(f)(3)(ii)(B) and new paragraph 1 are 

added; 

xv. New heading Paragraph 

36(f)(3)(iii) and new paragraph 1 are 

added; 

xvi. New headings 36(g) NMLSR ID on 

loan documents, Paragraph 36(g)(1) and 

new paragraphs 1 and 2 are added; 

xvii. New heading Paragraph 

36(g)(1)(ii) and new paragraph 1 are 

added; 

xviii. New heading Paragraph 36(g)(2) 

and new paragraph 1 are added. 

Supplement I to Part 1026—Official 

Interpretations 

* * * * * 

Subpart D—Miscellaneous 

Section 1026.25—Record Retention 

25(a) General rule. 

* * * * * 

ø5. Prohibited payments to loan 

originators. 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. See § 1026.35(a) and 

comment 35(a)(2)(iii)–3 for additional 

guidance on when a transaction’s rate is 

set. For example, where a loan 

originator is a mortgage broker, a 

disclosure of compensation or other 

broker agreement required by applicable 

State law that complies with § 1026.25 

would be presumed to be a record of the 

amount actually paid to the loan 


srobinson on DSK4SPTVN1PROD with PROPOSALS2
55356 Federal Register / Vol. 77, No. 174 / Friday, September 7, 2012 / Proposed Rules 

originator in connection with the 

transaction.¿ 

* * * * * 

fl25(c)(2) Records related to 

requirements for loan originator 

compensation. 

1. Scope of records of loan originator 

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

requires a creditor to maintain records 

sufficient to evidence all compensation 

it pays to a loan originator organization 

or the creditor’s individual loan 

originators, as well as the compensation 

agreements that govern those payments 

for three years after the date of the 

payments. Section 1026.25(c)(2)(ii) 

requires that a loan originator 

organization maintain records sufficient 

to evidence all compensation it receives 

from a creditor, a consumer, or another 

person and all compensation it pays to 

the loan originator organization’s 

individual loan originators, as well as 

the compensation agreements that 

govern those payments or receipts for 

three years after the date of the receipts 

or payments. 

i. Records sufficient to evidence 

payment and receipt of compensation. 

Records are sufficient to evidence 

payment and receipt of compensation if 

they demonstrate the following facts: 

The nature and amount of the 

compensation; that the compensation 

was paid, and by whom; that the 

compensation was received, and by 

whom; and when the payment and 

receipt of compensation occurred. The 

records that are sufficient necessarily 

will vary on a case-by-case basis 

depending on the facts and 

circumstances, particularly with regard 

to the nature of the compensation. In 

addition to the compensation 

agreements themselves, which are to be 

retained in all circumstances, records of 

the payment and receipt of 

compensation to be maintained under 

§ 1026.25(c)(2) might include, for 

example, and depending on the facts 

and circumstances, copies of required 

filings under applicable provisions of 

the Employee Retirement Income 

Security Act of 1974 (ERISA), 29 U.S.C. 

1001, et seq., and the Internal Revenue 

Code (IRC) relating to qualified defined 

benefit and defined contribution plans; 

copies of qualified or non-qualified 

bonus and profit-sharing plans in which 

individual loan originator employees 

participate; the names of any loan 

originators covered by such plans; a 

settlement agent ‘‘flow of funds’’ 

worksheet or other written record; a 

creditor closing instructions letter 

directing disbursement of fees at 

consummation; records of any 

payments, distributions, awards, or 

other compensation made under any 

such agreements or plans. Where a loan 

originator is a mortgage broker, a 

disclosure of compensation or broker 

agreement required by applicable State 

law that recites the broker’s total 

compensation for a transaction would 

be presumed to be a record of the 

amount actually paid to the loan 

originator in connection with the 

transaction. 

ii. Compensation agreement. For 

purposes of § 1026.25(c)(2), a 

compensation agreement includes any 

agreement, whether oral, written, or 

based on a course of conduct that 

establishes a compensation arrangement 

between the parties (e.g., a brokerage 

agreement between a creditor and a loan 

originator organization, provisions of 

employment contracts addressing 

payment of compensation between a 

creditor and an individual loan 

originator employee). Creditors and loan 

originators are free to specify what 

transactions are governed by a particular 

compensation agreement as they see fit. 

For example, they may provide, by the 

terms of the agreement, that the 

agreement governs compensation 

payable on transactions consummated 

on or after some future effective date (in 

which case, a prior agreement governs 

transactions consummated in the 

meantime). For purposes of applying the 

record retention requirement, the 

relevant compensation agreement for a 

given transaction is the agreement 

pursuant to which compensation for 

that transaction is determined, pursuant 

to the agreement’s terms. 

iii. Three-year retention period. The 

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

(ii) that the records be retained for three 

years after the date of receipt or 

payment, as applicable, means that the 

records are retained for three years after 

each receipt or payment, as applicable, 

even if multiple compensation 

payments relate to a single transaction. 

For example, if a loan originator 

organization pays an individual loan 

originator a commission consisting of 

two separate payments of $1,000 each 

on June 5 and July 7, 2012, then the 

organization loan originator is required 

to retain records sufficient to evidence 

the two payments through June 4, 2015, 

and July 6, 2015, respectively. 

2. An example of § 1026.25(c)(2) as 

applied to a loan originator organization 

is as follows: Assume a loan originator 

organization originates only loans where 

the loan originator organization derives 

revenues exclusively from fees paid by 

creditors that fund its originations (i.e., 

‘‘creditor-paid’’ compensation) and pays 

its individual loan originators 

commissions and annual bonuses. The 

loan originator organization must retain 

a copy of the agreement with any 

creditor that pays the loan originator 

organization compensation for 

originating loans and documentation 

evidencing the specific payment it 

receives from the creditor for each loan 

originated. In addition, the loan 

originator organization must retain 

copies of the agreements with its 

individual loan originators governing 

their commissions and their annual 

bonuses and records of any specific 

commissions and bonuses.fi 

* * * * * 

Subpart E—Special Rules for Certain 

Home Mortgage Transactions 

* * * * * 

Section 1026.36—Prohibited Acts or 

Practices fland Certain Requirements 

forfiøin Connection with¿ Credit 

Secured by a Dwelling 

1. Scope of coverage. Section 

1026.36(b) fl,fiøand¿ (c) fl, (h), and 

(i)fi applies to closed-end consumer 

credit transactions secured by a 

consumer’s principal dwelling.fl 

Section 1026.36(h) and (i) also applies 

to home-equity lines of credit under 

§ 1026.40 secured by a consumer’s 

principal dwelling.fi Section 

1026.36(d)fl,fiøand¿ (e)fl, (f), and 

(g)fi applies to closed-end consumer 

credit transactions secured by a 

dwelling. øSection 1026.36(d) and (e) 

applies to closed¿flClosedfi-end 

øloans¿flconsumer credit transactions 

include transactions fisecured by first 

or subordinate liens, and reverse 

mortgages that are not home-equity lines 

of credit under § 1026.40. See 

§ 1026.36(øf¿fljfi) for additional 

restrictions on the scope of this section, 

and §§ 1026.1(c) and 1026.3(a) and 

corresponding commentary for further 

discussion of extensions of credit 

subject to Regulation Z. 

* * * * * 

36(a) Loan originatorfl,fiøand¿ 

mortgage broker fl, and compensation 

fidefined. 

1. Meaning of loan originator. i. 

General. flA. fiSection 1026.36(a) 

provides that a loan originator is any 

person who for compensation or other 

monetary gain fltakes an application, 

fiarranges, floffers, finegotiates, or 

otherwise obtains an extension of 

consumer credit for another person. 

øThus,¿flThe term includes a person 

who assists a consumer in obtaining or 

applying for consumer credit by 

advising on credit terms (including 

rates, fees, and other costs), preparing 

application packages (such as a credit or 

pre-approval application or supporting 


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Federal Register / Vol. 77, No. 174 / Friday, September 7, 2012 / Proposed Rules 55357 

documentation), or collecting 

application and supporting information 

on behalf of the consumer to submit to 

a loan originator or creditor. A loan 

originator includes a person who in 

expectation of compensation or other 

monetary gain advertises or 

communicates to the public that such 

person can or will provide any of these 

services or activities. 

B. Thefiøthe¿ term ‘‘loan originator’’ 

flalsofi includes employees of a 

creditor as well as employees of a 

mortgage broker that satisfy this 

definition. In addition, the definition of 

loan originator expressly includes any 

creditor that satisfies the definition of 

loan originator but makes use of ‘‘table 

funding’’ by a third party. See comment 

36(a)–1.ii øbelow¿ discussing table 

funding. Although consumers may 

sometimes arrange, negotiate, or 

otherwise obtain extensions of 

consumer credit on their own behalf, in 

such cases they do not do so for another 

person or for compensation or other 

monetary gain, and therefore are not 

loan originators øunder this section¿. 

flA ‘‘loan originator organization’’ is a 

loan originator that is an organization 

such as a trust, sole proprietorship, 

partnership, limited liability 

partnership, limited partnership, 

limited liability company, corporation, 

bank, thrift, finance company, or a 

credit union. An ‘‘individual loan 

originator’’ is limited to a natural 

person.fi (Under § 1026.2(a)(22), the 

term ‘‘person’’ means a natural person 

or an organization.) 

ii. Table funding. Table funding 

occurs when the creditor does not 

provide the funds for the transaction at 

consummation out of the creditor’s own 

resources, including fl, for example, fi 

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. øThe creditor generally is not 

considered a loan originator unless table 

funding occurs.¿ For example, if a 

person closes a loan in its own name but 

does not fund the loan from its own 

resources or deposits held by it because 

it flimmediately fi assigns the loan 

øat¿flafterfi consummation, 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 a loan in its own name 

and flfinances a consumer credit 

transaction from the person’s own 

resources, including drawing on a bona 

fide warehouse line of credit or out of 

deposits held by the person, but does 

not immediately assign the loan at 

closing the person is not a table-funded 

creditor but is included in the definition 

of loan originator for the purposes of 

§ 1026.36(f) and (g). Such a personfi 

ødraws on a bona fide warehouse line 

of credit to make the loan at 

consummation, it is considered¿flisfi 

a creditor, not a loan originator, for 

purposes of Regulation Z, including 

flthe other provisions offi § 1026.36. 

iii. Servicing. øThe definition 

of¿flAfi ‘‘loan originator’’ does not 

øapply to¿flincludefi a loan servicer 

when the servicer modifies an existing 

loan on behalf of the current owner of 

the loan. flOther than § 1026.36(b) and 

(c), § 1026.36fi øThe rule¿ applies to 

extensions of consumer credit flthat 

constitute a refinancing under 

§ 1026.20(a). Thus, other than 

§ 1026.36(b) and (c), § 1026.36fiøand¿ 

does not apply if a flperson 

renegotiates,fi modifiesfl, replaces, or 

subordinatesfiøof¿ an existing 

obligation’s terms ødoes not 

constitute¿fl, unless the transaction 

isfi a refinancing under § 1026.20(a). 

fliv. Real estate brokerage. A ‘‘loan 

originator’’ does not include a person 

that performs only real estate brokerage 

activities (e.g., does not perform 

mortgage broker activities or extend 

consumer credit) if the person is 

licensed or registered under applicable 

State law governing real estate 

brokerage, unless such person is paid by 

a creditor or a loan originator for a 

particular consumer credit transaction 

subject to § 1026.36. A person is not 

paid by a creditor or a loan originator 

if the person is paid by a creditor or a 

loan originator on behalf of a consumer 

solely for performing real estate 

brokerage activities. 

v. Seller financing by natural persons. 

The definition of ‘‘loan originator’’ does 

not include a natural person, estate, or 

trust that finances the sale of three or 

fewer properties in any 12-month period 

owned by such natural person, estate, or 

trust where each property serves as a 

security for the credit transaction. The 

natural person, estate, or trust also must 

not have constructed or acted as a 

contractor for the construction of the 

dwelling in its ordinary course of 

business. The natural person, estate, or 

trust must additionally determine in 

good faith and document that the buyer 

has a reasonable ability to repay the 

credit transaction. The natural person, 

estate, or trust makes such a good faith 

determination by complying with the 

requirements of § 1026.43. The credit 

transaction also must be fully 

amortizing, have a fixed rate or an 

adjustable rate that adjusts only after 

five or more years, and be subject to 

reasonable annual and lifetime 

limitations on interest rate increases.fi 

* * * * * 

4. Managers and administrative staff. 

For purposes of § 1026.36, managers, 

administrative fland clericalfi 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. flA ‘‘producing 

manager’’ who also arranges, negotiates, 

or otherwise obtains an extension of 

consumer credit for another person, is a 

loan originator. Thus, a producing 

manager’s compensation is subject to 

the restrictions of § 1026.36. 

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 provided to a person 

for engaging in loan originator activities. 

See comment 36(d)(1)–2 for examples of 

types of compensation that are covered 

by § 1026.36(d) and (e), and comment 

36(d)(1)–3 for examples of types of 

compensation that are not covered by 

§ 1026.36(d) and (e). For example, the 

term ‘‘compensation’’ includes: 

A. An annual or other periodic bonus; 

or 

B. Awards of merchandise, services, 

trips, or similar prizes. 

ii. Name of fee. Compensation 

includes amounts the loan originator 

retains and is not dependent on the 

label or name of any fee imposed in 

connection with the transaction. For 

example, if a loan originator imposes a 

‘‘processing fee’’ in connection with the 

transaction and retains such fee, it is 

deemed compensation for purposes of 

§ 1026.36(d) and (e), whether the 

originator expends the time to process 

the consumer’s application or uses the 

fee for other expenses, such as 

overhead. 

iii. Amounts for third-party charges. 

Compensation includes amounts the 

loan originator retains, but does not 

include amounts the originator receives 

as payment for bona fide and reasonable 

charges, such as credit reports, where 

those amounts are passed on to a third 


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55358 Federal Register / Vol. 77, No. 174 / Friday, September 7, 2012 / Proposed Rules 

party that is not the creditor, its affiliate, 

or the affiliate of the loan originator. In 

some cases, amounts received for 

payment for such third-party charges 

may exceed the actual charge because, 

for example, the originator cannot 

determine with accuracy what the 

actual charge will be before 

consummation. In such a case, the 

difference retained by the originator is 

not deemed compensation if the thirdparty charge imposed on the consumer 

or collected from a person other than 

the consumer was bona fide and 

reasonable, and also complies with State 

and other applicable law. On the other 

hand, if the originator marks up a thirdparty 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(d) and (e). For 

example: 

A. Assume a loan originator receives 

compensation directly from either a 

consumer or a creditor. Further assume 

the loan originator uses average charge 

pricing under Regulation X to charge the 

consumer $25 for a credit report 

provided by a third party that is not the 

creditor, its affiliate or the affiliate of the 

loan originator. At the time the loan 

originator imposes the credit report fee 

on the consumer, the loan originator is 

uncertain of the cost of the credit report 

because the cost of a credit report from 

the consumer reporting agency is paid 

in a monthly bill and varies from 

between $15 and $35 depending on how 

many credit reports the originator 

obtains that month. Assume the $25 for 

the credit report is paid by the 

consumer or is paid by the creditor with 

proceeds from a rebate. Later, at the end 

of the month, the cost for the credit 

report is determined to be $15 for this 

consumer’s transaction. In this case, the 

$10 difference between the $25 credit 

report fee imposed on the consumer and 

the actual $15 cost for the credit report 

is not deemed compensation for 

purposes of § 1026.36(d) and (e), even 

though the $10 is retained by the loan 

originator. 

B. Using the same example in 

comment 36(a)–5.iii.A above, the $10 

difference would be compensation for 

purposes of § 1026.36(d) and (e) if the 

price for a credit report varies between 

$10 and $15. 

iv. Returns on equity interests and 

dividends on equity holdings. The term 

‘‘compensation’’ for purposes of 

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

example, stocks and stock options, and 

equity interests that are awarded to 

individual loan originators. Thus, the 

awarding of stocks or stock options, or 

equity interests to individual loan 

originators is subject to the restrictions 

in § 1026.36(d) and (e). For example, a 

person may not award additional stock 

or a preferable type of equity interest to 

an individual loan originator based on 

the terms of a consumer credit 

transaction subject to § 1026.36(d) and 

(e) originated by that individual loan 

originator. However, bona fide returns 

or dividends paid on stocks or other 

equity holdings, including those paid to 

owners or shareholders of an loan 

originator organization who own such 

stock or equity interests, are not 

considered compensation for purposes 

of § 1026.36(d) and (e). Bona fide 

returns or dividends are those returns 

and dividends that are paid pursuant to 

documented ownership or equity 

interests and are not functionally 

equivalent to compensation. Ownership 

and equity interests must be bona fide. 

Bona fide ownership and equity 

interests are allocated according to a 

loan originator’s respective capital 

contribution and the allocation is not a 

mere subterfuge for the payment of 

compensation based on terms of a 

transaction. For example, assume that 

three individual loan originators form a 

loan originator organization that is a 

limited liability company (LLC). The 

three individual loan originators are 

members of the LLC, and the LLC 

agreement governing the loan originator 

organization’s structure calls for regular 

distributions based on the members’ 

respective equity interests. If the 

members’ respective equity interests are 

allocated based on the members’ 

transaction terms, rather than according 

to their respective capital contributions, 

then distributions based on such equity 

interests are not bona fide and, thus, are 

considered compensation for purposes 

of § 1026.36(d) and (e).fi 

* * * * * 

36(d) Prohibited payments to loan 

originators. 

1. Persons covered. Section 1026.36(d) 

prohibits any person (including the 

creditor) from paying compensation to a 

loan originator in connection with a 

covered credit transaction, if the amount 

of the payment is based on any of the 

transaction’s termsøor conditions¿. For 

example, a person that purchases a loan 

from the creditor may not compensate 

the loan originator in a manner that 

violates § 1026.36(d). 

* * * * * 

36(d)(1) Payments based on 

transaction termsøand conditions¿. 

1. flCompensation that is ‘‘based on’’ 

transaction terms. i. Whether 

compensation is ‘‘based on’’ transaction 

terms does not require a determination 

that any person subjectively intended 

that there be a relationship between the 

amount of the compensation paid and a 

transaction term. Instead, the 

determination is based on the objective 

facts and circumstances indicating that 

compensation would have been 

different if a transaction term had been 

different. In general, this determination 

is based on a comparison of transactions 

originated, but a violation does not 

require a comparison of multiple 

transactions. 

ii. The prohibition on payment and 

receipt of compensation based on 

transaction ‘‘terms’’ under 

§ 1026.36(d)(1)(i) encompasses 

compensation that directly or indirectly 

is based on the terms of a single 

transaction of a single individual loan 

originator or the terms of multiple 

transactions of the individual loan 

originator within the time period for 

which the compensation is paid, where 

such transactions are subject to 

§ 1026.36(d). The prohibition also 

covers compensation in the form of a 

bonus or other payment under a profitsharing plan sponsored by the person or 

a contribution to a qualified or nonqualified defined contribution or benefit 

plan in which the individual loan 

originator participates, if the 

compensation directly or indirectly is 

based on the terms of the transactions of 

multiple individual loan originators 

employed by the person within the time 

period for which the compensation is 

paid, although such compensation may 

be permissible under 

§ 1026.36(d)(1)(iii). For further clarity 

on the definitions of qualified plans, 

profit-sharing plans, the time period in 

which compensation is paid, and the 

other terms used in this comment 

36(d)(1)–1.ii, see comment 36(d)(1)– 

2.iii. 

A. For example, assume that a 

creditor employs six individual loan 

originators and offers loans at a 

minimum interest rate of 6.0 percent 

and a maximum rate of 8.0 percent 

(unrelated to risk-based pricing). 

Assuming relatively constant loan 

volume and amounts of credit extended 

and relatively static market rates, if the 

individual loan originators’ aggregate 

transactions in a given calendar year 

average 7.5 percent rather than 7.0 

percent, creating a higher interest rate 

spread over the creditor’s minimum 

acceptable rate of 6.0 percent, the 

creditor will generate higher amounts of 

interest revenue if the loans are held in 

portfolio and increased proceeds from 

secondary market purchasers if the 

loans are sold. Assume that the 

increased revenues lead to higher profits 

for the creditor (i.e., expenses do not 


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increase so as to negate the effect of the 

higher revenues). If the creditor pays a 

bonus to an individual loan originator 

out of a bonus pool established with 

reference to the creditor’s profitability 

that, all other factors being equal, is 

higher than the bonus would have been 

if the average rate of the six individual 

loan originators’ transactions was 7.0 

percent, then the bonus is indirectly 

related to the terms of multiple 

transactions of multiple loan 

originators. Therefore, the bonus is 

compensation based on the transactions’ 

terms and is prohibited under 

§ 1026.36(d)(1)(i), unless the conditions 

under § 1026.36(d)(1)(iii) are satisfied 

such that the compensation is permitted 

under that provision. 

B. Assume that an individual loan 

originator’s employment contract with a 

creditor guarantees a quarterly bonus in 

a specified amount conditioned upon 

the individual loan originator meeting 

certain performance benchmarks (e.g., 

volume of loans monthly). A bonus paid 

following the satisfaction of those 

contractual conditions is not directly or 

indirectly based on the terms of 

multiple individual loan originators’ 

transactions, because the creditor is 

obligated to pay the bonus, in the 

specified amount, regardless of the 

terms of multiple loan originators’ 

transactions and the effect of those 

multiple transaction terms on the 

creditor’s revenues and profits.fi 

øCompensation. i. General. For 

purposes of § 1026.36(d) and (e), the 

term ‘‘compensation’’ includes salaries, 

commissions, and any financial or 

similar incentive provided to a loan 

originator that is based on any of the 

terms or conditions of the loan 

originator’s transactions. See comment 

36(d)(1)–3 for examples of types of 

compensation that are not covered by 

§ 1026.36(d) and (e). For example, the 

term ‘‘compensation’’ includes: 

A. An annual or other periodic bonus; 

or 

B. Awards of merchandise, services, 

trips, or similar prizes. 

ii. Name of fee. Compensation 

includes amounts the loan originator 

retains and is not dependent on the 

label or name of any fee imposed in 

connection with the transaction. For 

example, if a loan originator imposes a 

‘‘processing fee’’ in connection with the 

transaction and retains such fee, it is 

deemed compensation for purposes of 

§ 1026.36(d) and (e), whether the 

originator expends the time to process 

the consumer’s application or uses the 

fee for other expenses, such as 

overhead. 

iii. Amounts for third-party charges. 

Compensation includes amounts the 

loan originator retains, but does not 

include amounts the originator receives 

as payment for bona fide and reasonable 

third-party charges, such as title 

insurance or appraisals. In some cases, 

amounts received for payment for thirdparty charges may exceed the actual 

charge because, for example, the 

originator cannot determine with 

accuracy what the actual charge will be 

before consummation. In such a case, 

the difference retained by the originator 

is not deemed compensation if the 

third-party charge imposed on the 

consumer was bona fide and reasonable, 

and also complies with State and other 

applicable law. On the other hand, if the 

originator marks up a third-party charge 

(a practice known as ‘‘upcharging’’), and 

the originator retains the difference 

between the actual charge and the 

marked-up charge, the amount retained 

is compensation for purposes of 

§ 1026.36(d) and (e). For example: 

A. Assume a loan originator charges 

the consumer a $400 application fee that 

includes $50 for a credit report and 

$350 for an appraisal. Assume that $50 

is the amount the creditor pays for the 

credit report. At the time the loan 

originator imposes the application fee 

on the consumer, the loan originator is 

uncertain of the cost of the appraisal 

because the originator may choose from 

appraisers that charge between $300 and 

$350 for appraisals. Later, the cost for 

the appraisal is determined to be $300 

for this consumer’s transaction. In this 

case, the $50 difference between the 

$400 application fee imposed on the 

consumer and the actual $350 cost for 

the credit report and appraisal is not 

deemed compensation for purposes of 

§ 1026.36(d) and (e), even though the 

$50 is retained by the loan originator. 

B. Using the same example in 

comment 36(d)(1)–1.iii.A above, the $50 

difference would be compensation for 

purposes of § 1026.36(d) and (e) if the 

appraisers from whom the originator 

chooses charge fees between $250 and 

$300.¿ 

2. Examples of compensation that is 

based on transaction termsøor 

conditions¿. Section 1026.36(d)(1) 

fldoes not prohibit compensating a 

loan originator differently on different 

transactions, provided the difference is 

not based on a transaction’s terms or a 

proxy for the transaction’s terms. The 

sectionfi prohibits loan originator 

compensation that is based on the terms 

øor conditions¿ of the loan originator’s 

transactions. 

fli.fi For example, the rule prohibits 

compensation to a loan originator for a 

transaction based on that transaction’s 

interest rate, annual percentage rate, 

øloan-to-value ratio,¿ or the existence of 

a prepayment penalty. The rule also 

prohibits compensation flto a loan 

originator that isfi based on a factor 

that is a proxy for a transaction’s terms 

øor conditions¿. flIf the loan 

originator’s compensation is based in 

whole or in part on a factor that is a 

proxy for a transaction’s terms, then the 

loan originator’s compensation is based 

on a transaction’s terms. A factor (that 

is not itself a term of a transaction 

originated by the loan originator) is a 

proxy for the transaction’s terms if the 

factor substantially correlates with a 

term or terms of the transaction and the 

loan originator can, directly or 

indirectly, add, drop, or change the 

factor when originating the transaction. 

fiFor exampleø,¿fl: 

A. No proxy exists if compensation is 

not substantially correlated with a 

difference in a transaction’s terms. 

Assume a creditor pays loan originator 

employees with less than three years of 

employment with the creditor a 

commission of 0.75 percent of the total 

loan amount, loan originator employees 

with three through five years of 

employment 1.25 percent of the loan 

amount, and loan originator employees 

with more than five years of 

employment 1.5 percent of the total loan 

amount. For this creditor, there is no 

substantial correlation between whether 

loans are originated by a loan originator 

with less than three years of 

employment, three through five years of 

employment, or more than five years of 

employment with any term of the 

creditor’s transactions. Thus, payment 

of compensation in this circumstance 

based on tenure is not a proxy for a 

transaction’s terms. 

B. fiøA consumer’s credit score or 

similar representation of credit risk, 

such as the consumer’s debt-to-income 

ratio, is not one of the transaction’s 

terms conditions. To illustrate, assume 

that consumer A and consumer B 

receive loans from the same loan 

originator and the same creditor. 

Consumer A has a credit score of 650, 

and consumer B has a credit score of 

800. Consumer A’s loan has a 7 percent 

interest rate, and consumer B’s loan has 

a 61⁄2 percent interest rate, because of 

the consumers’ different credit scores. If 

the creditor pays the loan originator 

$1,500 in compensation for consumer 

A’s loan and $1,000 in compensation for 

consumer B’s loan, because the creditor 

varies compensation payments in whole 

or in part with the consumer’s credit 

score, the originator’s compensation 

would be based on the transactions’ 

terms.¿ 

flAssume a creditor pays a loan 

originator differently based on whether 

a loan the person originates will be held 


srobinson on DSK4SPTVN1PROD with PROPOSALS2
55360 Federal Register / Vol. 77, No. 174 / Friday, September 7, 2012 / Proposed Rules 

by the creditor in portfolio or sold by 

the creditor into the secondary market. 

The creditor holds in portfolio only 

loans that have a fixed interest rate and 

a five-year term with a final balloon 

payment. The creditor sells into the 

secondary market all other loans, which 

typically have a higher fixed interest 

rate and a thirty-year term. The creditor 

pays a loan originator a 1.5 percent 

commission for originating loans to be 

held in portfolio, and pays the same 

loan originator a 1 percent commission 

for originating loans that will be sold 

into the secondary market. Thus, 

whether a loan is held in portfolio or 

sold into the secondary market for this 

creditor correlates highly with whether 

the loan has a five-year term or a thirtyyear term, which are terms of the 

transaction. Also, the loan originator 

can indirectly change the factor by 

steering the consumer to choose a loan 

destined for portfolio or for sale into the 

secondary market. Whether or not the 

loan will be held in portfolio is a factor 

that is a proxy for the transaction’s 

terms. 

C. Assume a loan originator 

organization pays its individual loan 

originators different commissions for 

loans based on the location of the home. 

The loan originator organization pays its 

individual loan originators 1 percent of 

the loan amount for originating 

refinancings in State A and 2 percent of 

the loan amount for originating 

refinancings in State B. For this 

organization loan originator, on average, 

loans for refinancings in State A have 

substantially lower interest rates than 

loans for refinancings in State B even if 

a loan originator, however, cannot 

influence whether the refinancing of a 

particular loan is for a home located in 

State A or State B. In this instance, 

whether a refinancing is originated in 

State A or State B is not a proxy for the 

transaction’s terms. 

ii. Pooled compensation. Where loan 

originators are compensated differently 

and they each originate loans with 

different terms, § 1026.36(d)(1) does not 

permit the pooling of compensation so 

that the loan originators share in that 

pooled compensation. For example, 

assume that Loan Originator A receives 

a commission of two percent of the 

amount of credit extended on each loan 

he or she originates and originates loans 

that generally have higher interest rates 

than the loans that Loan Originator B 

originates. In addition, assume Loan 

Originator B receives a commission of 

one percent of the amount of credit 

extended on each loan he or she 

originates and originates loans that 

generally have lower interest rates than 

the loans originated by Loan Originator 

A. The compensation to these loan 

originators may not be pooled so that 

the loan originators each share in that 

pooled compensation. This type of 

pooling is prohibited by § 1026.36(d)(1) 

because each loan originator is being 

paid based on loan terms, with each 

loan originator receiving compensation 

based on the terms of the transactions 

the loan originators collectively make. 

iii. Payment and distribution of 

compensation to loan originators. 

Section 1026.36(d)(1)(i) prohibits a 

person from paying and a loan 

originator from receiving compensation 

that is based on any transaction terms, 

except as provided in 

§ 1026.36(d)(1)(iii). Comment 36(d)(1)– 

1.ii clarifies that this prohibition covers 

the payment of compensation that 

directly or indirectly is based on the 

terms of a single transaction of that 

individual loan originator, the terms of 

multiple transactions of that individual 

loan originator, or the terms of multiple 

transactions of multiple individual loan 

originators employed by the person. 

Comment 36(d)(1)–1.ii also provides 

examples of when a bonus paid to an 

individual loan originator is and is not 

based on the terms of transactions of 

multiple individual loan originators. 

Section 1026.36(d)(1)(iii) provides that, 

notwithstanding § 1026.36(d)(1)(i), a 

person may make a contribution to a 

qualified defined contribution or benefit 

plan in which the individual loan 

originator participates, provided that the 

contribution is not directly or indirectly 

based on the terms of that individual 

loan originator’s transactions subject to 

§ 1026.36(d). The section also provides 

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 a non-qualified 

defined benefit or contribution plan 

even if the compensation directly or 

indirectly is based on the terms of the 

transactions subject to § 1026.36(d) of 

multiple individual loan originators, but 

only if the conditions set forth in 

§ 1026.36(d)(1)(iii)(A) and (B) are 

satisfied, as applicable. Pursuant to 

§ 1026.36(j) and comment 36–1, 

§ 1026.36(d) applies to closed-end 

consumer credit transactions secured by 

dwellings and reverse mortgages that are 

not home-equity lines of credit under 

§ 1026.40. 

A. Profit-sharing plan. Under 

§ 1026.36(d)(1)(iii), a profit-sharing plan 

is a plan sponsored and funded by a 

person under which the person pays an 

individual loan originator directly in 

cash, stock, or other non-deferred 

compensation or through deferred 

compensation to be distributed at 

retirement or another future date. The 

person’s funding of the profit-sharing 

plan, and the distributions to the 

individual loan originators, may be 

determined by a fixed formula or may 

be at the discretion of the person (e.g., 

the person may elect not to contribute 

to the profit-sharing plan in a given 

year). For purposes of 

§ 1026.36(d)(1)(iii), profit-sharing plans 

include ‘‘bonus plans,’’ ‘‘bonus pools,’’ 

or ‘‘profit pools’’ from which a person 

pays individual loan originators 

employed by the person (as well as 

other employees, if it so elects) 

additional compensation based in whole 

or in part on the profitability of the 

person or the business unit within the 

person’s organizational structure whose 

profitability is referenced for the 

compensation payment, as applicable 

(i.e., depending on the level within the 

company at which the profit-sharing 

plan is established). For example, a 

creditor that pays its individual loan 

originators bonuses at the end of a 

calendar year based on the creditor’s 

average net return on assets for the 

calendar year is considered a profitsharing plan under § 1026.36(d)(1)(iii). 

A bonus that is paid to an individual 

loan originator without reference to the 

profitability of the person or business 

unit, as applicable, such as a retention 

payment budgeted for in advance, does 

not violate the prohibition on payment 

of compensation based on transaction 

terms under § 1026.36(d)(1)(i), as 

clarified by comment 36(d)(1)–1.ii; 

therefore, the provisions of 

§ 1026.36(d)(1)(iii) do not apply (see 

comment 36(d)(1)–1.ii for further 

guidance) 

B. Contributions to defined benefit 

and contribution plans. A defined 

benefit plan is a retirement plan in 

which the sponsoring person agrees to 

provide a certain benefit to participants 

based on a pre-determined formula. A 

defined contribution plan is an 

employer-sponsored retirement plan in 

which contributions are made to 

individual accounts of employees 

participating in the plan, and the final 

distribution consists solely of assets 

(including investment returns) that have 

accumulated in these individual 

accounts. Depending on the type of 

defined contribution plan, contributions 

may be made either by the sponsoring 

employer, the participating employee, 

or both. Defined contribution plans and 

defined benefit plans are either 

qualified or non-qualified. For guidance 

on the distinction between qualified and 

non-qualified plans and the relevance of 


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such distinction to the provisions of 

§ 1026.36(d)(1)(iii), see comments 

36(d)(1)–2.iii.E and –2.iii.G. 

C. Directly or indirectly based on the 

terms of multiple individual loan 

originators. The compensation 

arrangements addressed in 

§ 1026.36(d)(1)(iii) are directly or 

indirectly based on the terms of 

transactions of multiple individual loan 

originators when the compensation, or 

its amount, results from or is otherwise 

related to the terms of those multiple 

individual loan originators’ transactions 

subject to § 1026.36(d). See comment 

36(d)(1)–1.i for further guidance on 

when compensation is ‘‘based on’’ loan 

terms. See comment 36(d)(1)–1.ii for 

examples of when an individual loan 

originator’s compensation is and is not 

based on multiple transactions of 

multiple individual loan originators. If a 

creditor does not permit its individual 

loan originator employees to deviate 

from the transaction terms established 

by the creditor for each consumer, such 

as the interest rate offered or existence 

of a prepayment penalty, then the 

creditor’s payment of a bonus at the end 

of a calendar year to an individual loan 

originator under a profit-sharing plan is 

not directly or indirectly based on the 

transaction terms during that calendar 

year. If a loan originator organization’s 

revenues are derived exclusively from 

fees paid by the creditors that fund its 

originations pays a bonus under a profitsharing plan, the bonus is not directly 

or indirectly based on multiple 

individual loan originators’ transaction 

terms because § 1026.36(d)(1)(i) 

precludes any person (including the 

creditor) from paying to a loan 

originator (in this case, the loan 

originator organization) compensation 

based on the terms of the loans it is 

purchasing. 

D. Time period for which the 

compensation is paid. Under 

§ 1026.36(d)(1)(iii), the time period for 

which the compensation is paid is the 

time period for which the individual 

loan originator’s performance was 

evaluated for purposes of the 

compensation decision (e.g., calendar 

year, quarter, month), whether or not 

the compensation is actually paid 

during or after the time period. For 

example, assume a creditor assesses the 

financial performance of its mortgage 

business on a quarterly and calendar 

year basis (which annual review is the 

basis for the creditor’s income tax 

filings). Among the factors taken into 

account in assessing the financial 

performance of the creditor’s mortgage 

business are the interest rate spreads 

over the creditor’s minimum acceptable 

rates of the loans subject to § 1026.36(d) 

originated for the creditor by individual 

loan originators employed by the 

creditor during the calendar year (i.e., 

because the rate spreads will affect the 

amount of interest income and 

secondary market sale proceeds of the 

mortgage business line). Following its 

third quarter review, the creditor 

decides to pay a ‘‘pre-holiday bonus’’ in 

early November to every individual loan 

originator employee in an amount equal 

to two percent of each employee’s 

salary. For purposes of 

§ 1026.36(d)(1)(iii), the compensation 

decision is directly or indirectly based 

on the terms of multiple transactions of 

multiple individual loan originators 

during the full calendar year because it 

took into account the terms of 

transactions during the first three 

quarters as well as projected similar 

transaction terms for the remainder of 

the calendar year. 

E. Employer contributions to qualified 

plans. Section 1026.36(d)(1)(iii) permits 

a person to compensate an individual 

loan originator through making a 

contribution to a qualified defined 

contribution or defined benefit plan in 

which an individual loan originator 

employee participates, even if the 

compensation is directly or indirectly 

based on the terms of transactions 

subject to § 1026.36(d) of multiple 

individual loan originators. For 

purposes of § 1026.36(d)(1)(iii), 

qualified defined contribution and 

defined benefit plans (collectively, 

qualified plans) include 401(k) plans, 

employee stock ownership plans 

(ESOPs), profit-sharing plans, savings 

incentive match plans for employees 

(SIMPLE plans), simplified employee 

pensions (SEPs), and any other plans 

that satisfy the qualification 

requirements under section 401(a) of the 

Internal Revenue Code (IRC) and 

applicable terms of the Employee 

Retirement Income Security Act of 1974 

(ERISA), 29 U.S.C. 1001, et seq. For 

purposes of § 1026.36(d)(1)(iii), 

qualified plans also include taxsheltered annuity plans under IRC 

section 403(b) and eligible governmental 

deferred compensation plans under IRC 

section 457(b). For example, a loan 

originator organization may make 

discretionary contributions to a 

qualified profit-sharing plan (i.e., the 

loan originator organization’s annual 

contribution is not fixed and may even 

be zero in a given year) in accordance 

with a definite formula for allocating 

and distributing the contribution among 

the plan participants, even if the 

discretionary contribution is directly or 

indirectly based on the terms of 

multiple individual loan originators’ 

transactions. 

F. Compensation based on terms of an 

individual loan originator’s 

transactions. Under both 

§ 1026.36(d)(1)(iii), with regard to 

contributions made to qualified plans, 

and § 1026.36(d)(1)(iii)(A), with regard 

to compensation in the form of a bonus 

or other payment under a profit-sharing 

plan or a contribution to a non-qualified 

defined contribution or benefit plan, the 

payment of compensation to an 

individual loan originator may not be 

directly or indirectly based on the terms 

of that individual loan originator’s 

transaction or transactions. 

Consequently, the compensation 

payment may not take into account, for 

example, that the individual loan 

originator’s transactions subject to 

§ 1026.36(d) during the preceding 

calendar year had higher interest rate 

spreads over the creditor’s minimum 

acceptable rate on average than similar 

transactions for other individual loan 

originators employed by the creditor. 

See comment 36(d)(1)–1 for further 

guidance on determining whether 

compensation is ‘‘based on’’ transaction 

terms. 

ALTERNATIVE 1—PARAGRAPH 

2.iii.G 

G. Bonuses under profit-sharing 

plans; employer contributions to 

defined contribution and defined benefit 

plans other than qualified plans. 

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

compensation to an individual loan 

originator in the form of a bonus or 

other payment under a profit-sharing 

plan or a contribution to a defined 

contribution or benefit plan other than 

a qualified plan even if the payment or 

contribution is directly or indirectly 

based on the terms of multiple 

individual loan originators’ transactions 

subject to § 1026.36(d), if certain 

conditions are met. Specifically, the 

compensation is permitted if no more 

than 50 percent of the total revenues of 

the person (or, if applicable, the 

business unit within the person at 

which level the payment or contribution 

is made) are derived from the person’s 

mortgage business during the tax year 

immediately preceding the tax year in 

which the compensation is paid. 

1. Total revenues. The total revenues 

for purposes of the revenue test under 

§ 1026.36(d)(1)(iii)(B)(1) are the 

revenues of the person or the business 

unit to which the profit-sharing plan 

applies, as applicable, during the tax 

year immediately preceding the tax year 

in which the compensation is paid. 

Under this provision, whether the 

revenues of the person or the business 


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55362 Federal Register / Vol. 77, No. 174 / Friday, September 7, 2012 / Proposed Rules 

unit are used depends on the level 

within the person’s organizational 

structure at which the profit-sharing 

plan is established and whose 

profitability is referenced for purposes 

of payment of the compensation under 

the profit-sharing plan. If the 

profitability of a business unit is 

referenced for purposes of establishing 

the profit-sharing plan rather than the 

overall profits of the person, then the 

revenues of the business unit are used. 

If the profitability of the person is 

referenced for purposes of establishing 

the profit-sharing plan, however, then 

the total revenues of the person are 

used. For example, if a creditor has two 

separate business units, one for 

commercial credit transactions and one 

for consumer credit transactions, and 

the profits of the consumer credit 

business unit are referenced for 

purposes of establishing a bonus pool to 

pay bonuses to individual loan 

originators then the profit-sharing plan 

applies to the consumer credit business 

unit, and thus the total revenues of the 

consumer credit business unit are the 

total revenues used for purposes of 

§ 1026.36(d)(1)(i)(B)(1). If the creditor 

has a single profit-sharing plan for all of 

its employees, however, the creditor’s 

total revenues across all business lines 

are used. The total revenues for the 

person or the applicable business unit 

or division, as applicable, are those 

revenues during the tax year 

immediately preceding the tax year in 

which the compensation is paid. A tax 

year is the person’s annual accounting 

period for keeping records and reporting 

income and expenses (i.e., it may be a 

calendar year or a fiscal year depending 

on the person’s annual accounting 

period). Thus, for example, if a loan 

originator organization at the level of 

the organization (rather than a lower-tier 

business unit) pays multiple individual 

loan originator employees a bonus 

under a profit-sharing plan in February 

2013, and the loan originator 

organization uses a calendar year 

accounting period, then the total 

revenues used for purposes of 

§ 1026.36(d)(1)(i)(B)(1) are the 

organization’s revenues generated 

during 2012. Pursuant to 

§ 1026.36(d)(1)(i)(B)(1), the total 

revenues are determined through a 

methodology that is consistent with 

generally accepted accounting 

principles (GAAP) and, as applicable, 

the reporting of the person’s income for 

purposes of Federal tax filings or, if 

none, any industry call reports filed 

regularly by the person. Depending on 

the person, the industry call report to be 

used may be, for example, the NMLSR 

Mortgage Call Report or the NCUA Call 

Report. For example, to determine its 

total revenues on a calendar year basis, 

a Federal credit union that is exempt 

from paying Federal income tax uses a 

methodology to determine total annual 

revenues that reflects the income 

reported in the NCUA Call Reports. If 

the credit union does not file NCUA 

Call Reports, however, the credit union 

uses a methodology that, pursuant to 

§ 1026.36(d)(1)(i)(B)(1), otherwise is 

consistent with GAAP and, as 

applicable, reflects an accurate 

allocation of revenues among the credit 

union’s business units. Pursuant to 

§ 1026.36(d)(1)(i)(B)(1), the revenues of 

the person’s affiliates generally are not 

taken into account for purposes of the 

revenue test unless the profit-sharing 

plan applies to the affiliate, in which 

case the person’s total revenues also 

include the total revenues of the 

affiliate. The profit-sharing plan applies 

to the affiliate when, for example, the 

funds used to pay a bonus to an 

individual loan originator are the same 

funds used to pay a bonus to employees 

of the affiliate. 

2. Revenues derived from mortgage 

business. Section 1026.36(d)(1)(iii)(B)(1) 

provides that revenues derived from 

mortgage business are the portion of the 

total revenues (see comment 36(d)(1)– 

2.iii.G.1) that are generated through a 

person’s transactions subject to 

§ 1026.36(d). Pursuant to § 1026.36(j) 

and comment 36–1, § 1026.36(d) applies 

to closed-end consumer credit 

transactions secured by dwellings and 

reverse mortgages that are not homeequity lines of credit under § 1026.40. 

Thus, a person’s revenues from its 

mortgage business include, for example: 

origination fees and interest associated 

with loans for purchase money or 

refinance purposes originated by 

individual loan originators employed by 

the person, income from servicing of 

loans for purchase money or refinance 

purposes originated by individual loan 

originators employed by the person, and 

proceeds of secondary market sales of 

loans for purchase money or refinance 

purposes originated by individual loan 

originators employed by the person. 

Revenues derived from mortgage 

business do not include, for example, 

servicing income where the loans being 

serviced were purchased by the person 

after the loans’ origination by another 

person, or origination fees, interest, and 

secondary market sale proceeds 

associated with home-equity lines of 

credit, loans secured by consumers’ 

interests in timeshare plans, or loans 

made primarily for business, 

commercial or agricultural purposes. 

ALTERNATIVE 2—PARAGRAPH 

2.iii.G 

G. Bonuses under profit-sharing 

plans; employer contributions to 

defined contribution and defined benefit 

plans other than qualified plans. 

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

compensation to an individual loan 

originator in the form of a bonus or 

other payment under a profit-sharing 

plan or a contribution to a defined 

contribution or benefit plan other than 

a qualified plan even if the payment or 

contribution is directly or indirectly 

based on the terms of multiple 

individual loan originators’ transactions 

subject to § 1026.36(d), if certain 

conditions are met. Specifically, the 

compensation is permitted if no more 

than 25 percent of the total revenues of 

the person (or, if applicable, the 

business unit within the person at 

which level the payment or contribution 

is made) are derived from the person’s 

mortgage business during the tax year 

immediately preceding the tax year in 

which the compensation is paid. 

1. Total revenues. The total revenues 

for purposes of the revenue test under 

§ 1026.36(d)(1)(iii)(B)(1) are the 

revenues of the person or the business 

unit to which the profit-sharing plan 

applies, as applicable, during the tax 

year immediately preceding the tax year 

in which the compensation is paid. 

Under this provision, whether the 

revenues of the person or the business 

unit are used depends on the level 

within the person’s organizational 

structure at which the profit-sharing 

plan is established and whose 

profitability is referenced for purposes 

of payment of the compensation under 

the profit-sharing plan. If the 

profitability of a business unit is 

referenced for purposes of establishing 

the profit-sharing plan rather than the 

overall profits of the person, then the 

revenues of the business unit are used. 

If the profitability of the person is 

referenced for purposes of establishing 

the profit-sharing plan, however, then 

the total revenues of the person are 

used. For example, if a creditor has two 

separate business units, one for 

commercial credit transactions and one 

for consumer credit transactions, and 

the profits of the consumer credit 

business unit are referenced for 

purposes of establishing a bonus pool to 

pay bonuses to individual loan 

originators then the profit-sharing plan 

applies to the consumer credit business 

unit, and thus the total revenues of the 

consumer credit business unit are the 

total revenues used for purposes of 

§ 1026.36(d)(1)(i)(B)(1). If the creditor 

has a single profit-sharing plan for all of 


srobinson on DSK4SPTVN1PROD with PROPOSALS2
Federal Register / Vol. 77, No. 174 / Friday, September 7, 2012 / Proposed Rules 55363 

its employees, however, the creditor’s 

total revenues across all business lines 

are used. The total revenues for the 

person or the applicable business unit 

or division, as applicable, are those 

revenues during the tax year 

immediately preceding the tax year in 

which the compensation is paid. A tax 

year is the person’s annual accounting 

period for keeping records and reporting 

income and expenses (i.e., it may be a 

calendar year or a fiscal year depending 

on the person’s annual accounting 

period). Thus, for example, if a loan 

originator organization at the level of 

the organization (rather than a lower-tier 

business unit) pays multiple individual 

loan originator employees a bonus 

under a profit-sharing plan in February 

2013, and the loan originator 

organization uses a calendar year 

accounting period, then the total 

revenues used for purposes of 

§ 1026.36(d)(1)(i)(B)(1) are the 

organization’s revenues generated 

during 2012. Pursuant to 

§ 1026.36(d)(1)(i)(B)(1), the total 

revenues are determined through a 

methodology that is consistent with 

generally accepted accounting 

principles (GAAP) and, as applicable, 

the reporting of the person’s income for 

purposes of Federal tax filings or, if 

none, any industry call reports filed 

regularly by the person. Depending on 

the person, the industry call report to be 

used may be, for example, the NMLSR 

Mortgage Call Report or the NCUA Call 

Report. For example, to determine its 

total revenues on a calendar year basis, 

a Federal credit union that is exempt 

from paying Federal income tax uses a 

methodology to determine total annual 

revenues that reflects the income 

reported in the NCUA Call Reports. If 

the credit union does not file NCUA 

Call Reports, however, the credit union 

uses a methodology that, pursuant to 

§ 1026.36(d)(1)(i)(B)(1), otherwise is 

consistent with GAAP and, as 

applicable, reflects an accurate 

allocation of revenues among the credit 

union’s business units. Pursuant to 

§ 1026.36(d)(1)(i)(B)(1), the revenues of 

the person’s affiliates generally are not 

taken into account for purposes of the 

revenue test unless the profit-sharing 

plan applies to the affiliate, in which 

case the person’s total revenues for 

purposes also include the total revenues 

of the affiliate. The profit-sharing plan 

applies to the affiliate when, for 

example, the funds used to pay a bonus 

to an individual loan originator are the 

same funds used to pay a bonus to 

employees of the affiliate. 

2. Revenues derived from mortgage 

business. Section 1026.36(d)(1)(iii)(B)(1) 

provides that revenues derived from 

mortgage business are the portion of the 

total revenues (see comment 36(d)(1)– 

2.iii.G.1) that are generated through a 

person’s transactions subject to 

§ 1026.36(d). Pursuant to § 1026.36(j) 

and comment 36–1, § 1026.36(d) applies 

to closed-end consumer credit 

transactions secured by dwellings and 

reverse mortgages that are not homeequity lines of credit under § 1026.40. 

Thus, a person’s revenues from its 

mortgage business include, for example: 

origination fees and interest associated 

with loans for purchase money or 

refinance purposes originated by 

individual loan originators employed by 

the person, income from servicing of 

loans for purchase money or refinance 

purposes originated by individual loan 

originators employed by the person, and 

proceeds of secondary market sales of 

loans for purchase money or refinance 

purposes originated by individual loan 

originators employed by the person. 

Revenues derived from mortgage 

business do not include, for example, 

servicing income where the loans being 

serviced were purchased by the person 

after the loans’ origination by another 

person, or origination fees, interest, and 

secondary market sale proceeds 

associated with home-equity lines of 

credit, loans secured by consumers’ 

interests in timeshare plans, or loans 

made primarily for business, 

commercial or agricultural purposes. 

H. Individual loan originators who 

originate five or fewer mortgage loans. 

Section 1026.36(d)(1)(iii)(B)(2) permits 

compensation to an individual loan 

originator in the form of a bonus or 

other payment under a profit-sharing 

plan or a contribution to a defined 

contribution or benefit plan other than 

a qualified plan even if the payment or 

contribution is directly or indirectly 

based on the terms of multiple 

individual loan originators’ transactions 

subject to § 1026.36(d), if certain 

conditions are met. Specifically, the 

compensation is permitted if the 

individual is a loan originator (as 

defined in § 1026.36(a)(1)(i)) for five or 

fewer transactions subject to 

§ 1026.36(d) during the 12-month period 

preceding the date of the decision to 

make the payment or contribution. 

ALTERNATIVE 1—PARAGRAPHS 

2.iii.H.1 and 2.iii.I 

1. For example, assume a loan 

originator organization employs six 

individual loan originators during a 

given calendar year. In January of the 

following calendar year, the loan 

originator organization formally 

determines the financial performance of 

its mortgage business for the prior 

calendar year, which takes into account 

the terms of all transactions subject to 

§ 1026.36(d) of the individual loan 

originators employed by the person 

during that calendar year. Based on that 

determination, the loan originator 

organization on February 1 decides to 

pay bonuses to the individual loan 

originators out of a ‘‘bonus pool.’’ 

Assume that between February 1 of the 

prior calendar year and January 31 of 

the current calendar year, individual 

loan originators A, B, and C each were 

the loan originators for between three 

and five transactions subject to 

§ 1026.36(d), and individual loan 

originators D, E, and F each were the 

loan originators for between 10 and 15 

transactions subject to § 1026.36(d). 

Therefore, the loan originator 

organization may award the bonuses to 

individual loan originators A, B, and C, 

but the loan originator organization may 

not award the bonuses to individual 

loan originators D, E, and F unless the 

loan originator organization can 

demonstrate that its mortgage business 

revenues are 50 percent or less of the 

total revenues of the loan originator 

organization or the business unit to 

which the profit-sharing plan applies, as 

applicable (thereby satisfying the 

conditions of § 1026.36(d)(1)(iii)(B)(1)). 

I. Additional examples. 1. Assume 

that Company A is solely engaged in the 

mortgage and credit card businesses. 

Company A generates $1 million in 

revenue in a given calendar year and 

files its income taxes on a calendar-year 

basis. Company A’s mortgage business 

accounts for $150,000 in revenue (or 15 

percent of the company’s total 

revenues), while its credit card business 

accounts for $850,000 in revenue (or 85 

percent). A bonus pool is set aside at the 

level of the company, rather than the 

individual business units. Because 

Company A’s mortgage business 

accounts for less than 50 percent of its 

total revenues, Company A may take 

into account the terms of multiple 

transactions subject to § 1026.36(d) of 

multiple individual loan originators 

when paying a bonus or other 

compensation to an individual loan 

originator under a profit-sharing plan or 

making a contribution to a defined 

benefit or contribution plan (whether or 

not a qualified plan). However, the 

compensation cannot reflect the terms 

of that individual loan originator’s 

transaction or transactions. 

2. Assume that Company B is solely 

engaged in the mortgage and credit card 

businesses. Company B earns $1 million 

in revenue in a given calendar year, and 

it files its income taxes on a calendaryear basis. Company B’s mortgage 

business accounts for $510,000 in 


srobinson on DSK4SPTVN1PROD with PROPOSALS2
55364 Federal Register / Vol. 77, No. 174 / Friday, September 7, 2012 / Proposed Rules 

revenue (51 percent), and its credit card 

business accounts for $490,000 in 

revenue (49 percent). A bonus pool is 

set aside at the level of the company, 

rather than the individual business 

units. Because Company B’s mortgage 

business accounts for more than the 50 

percent of its total revenues, Company 

B may not take into account the terms 

of multiple transactions subject to 

§ 1026.36(d) of multiple individual loan 

originators when paying a bonus or 

other compensation under a profitsharing plan or making a contribution to 

a non-qualified defined benefit or 

contribution plan. The compensation 

may be based on the financial 

performance of the credit card business 

alone. In addition, the compensation 

may be based on the terms of multiple 

individual loan originators’ transactions 

with regard to a contribution to a 

qualified plan. Further, where an 

individual loan originator has been the 

loan originator for five or fewer 

transactions subject to § 1026.36(d) 

during the 12 month period 

immediately preceding the decision to 

make the compensation payment, 

Company B make take into account the 

terms of multiple transactions subject to 

§ 1026.36(d) of multiple individual loan 

originators when paying a bonus or 

other compensation under a profitsharing plan or making a contribution to 

a defined benefit or contribution plan 

(whether or not a qualified plan). In all 

instances, however, the compensation 

cannot reflect the terms of that 

individual loan originator’s transaction 

or transactions.fi 

ALTERNATIVE 2—PARAGRAPHS 

2.iii.H.1 and 2.iii.I 

1. For example, assume a loan 

originator organization employs six 

individual loan originators during a 

given calendar year. In January of the 

following calendar year, the loan 

originator organization formally 

determines the financial performance of 

its mortgage business for the prior 

calendar year, which takes into account 

the terms of all transactions subject to 

§ 1026.36(d) of the individual loan 

originators employed by the person 

during that calendar year. Based on that 

determination, the loan originator 

organization on February 1 decides to 

pay bonuses to the individual loan 

originators out of a ‘‘bonus pool.’’ 

Assume that between February 1 of the 

prior calendar year and January 31 of 

the current calendar year, individual 

loan originators A, B, and C each were 

the loan originators for between three 

and five transactions subject to 

§ 1026.36(d), and individual loan 

originators D, E, and F each were the 

loan originators for between 10 and 15 

transactions subject to § 1026.36(d). 

Therefore, the loan originator 

organization may award the bonuses to 

individual loan originators A, B, and C, 

but the loan originator organization may 

not award the bonuses to individual 

loan originators D, E, and F unless the 

loan originator organization can 

demonstrate that its mortgage business 

revenues are 25 percent or less of the 

total revenues of the loan originator 

organization or the business unit to 

which the profit-sharing plan applies, as 

applicable (thereby satisfying the 

conditions of § 1026.36(d)(1)(iii)(B)(1)). 

I. Additional examples. 1. Assume 

that Company A is solely engaged in the 

mortgage and credit card businesses. 

Company A generates $1 million in 

revenue in a given calendar year and 

files its income taxes on a calendar-year 

basis. Company A’s mortgage business 

accounts for $150,000 in revenue (or 15 

percent of the company’s total 

revenues), while its credit card business 

accounts for $850,000 in revenue (or 85 

percent). A bonus pool is set aside at the 

level of the company, rather than the 

individual business units. Because 

Company A’s mortgage business 

accounts for less than 25 percent of its 

total revenues, Company A may take 

into account the terms of multiple 

transactions subject to § 1026.36(d) of 

multiple individual loan originators 

when paying a bonus or other 

compensation to an individual loan 

originator under a profit-sharing plan or 

making a contribution to a defined 

benefit or contribution plan (whether or 

not a qualified plan). However, the 

compensation cannot reflect the terms 

of that individual loan originator’s 

transaction or transactions. 

2. Assume that Company B is solely 

engaged in the mortgage and credit card 

businesses. Company B earns $1 million 

in revenue in a given calendar year, and 

it files its income taxes on a calendaryear basis. Company B’s mortgage 

business accounts for $300,000 in 

revenue (30 percent), and its credit card 

business accounts for $700,000 in 

revenue (70 percent). A bonus pool is 

set aside at the level of the company, 

rather than the individual business 

units. Because Company B’s mortgage 

business accounts for more than the 25 

percent of its total revenues, Company 

B may not take into account the terms 

of multiple transactions subject to 

§ 1026.36(d) of multiple individual loan 

originators when paying a bonus or 

other compensation under a profitsharing plan or making a contribution to 

a non-qualified defined benefit or 

contribution plan. The compensation 

may be based on the financial 

performance of the credit card business 

alone. In addition, the compensation 

may be based on the terms of multiple 

individual loan originators’ transactions 

with regard to a contribution to a 

qualified plan. Further, where an 

individual loan originator has been the 

loan originator for five or fewer 

transactions subject to § 1026.36(d) 

during the 12 month period 

immediately preceding the decision to 

make the compensation payment, 

Company B make take into account the 

terms of multiple transactions subject to 

§ 1026.36(d) of multiple individual loan 

originators when paying a bonus or 

other compensation under a profitsharing plan or making a contribution to 

a defined benefit or contribution plan 

(whether or not a qualified plan). In all 

instances, however, the compensation 

cannot reflect the terms of that 

individual loan originator’s transaction 

or transactions.fi 

3. Examples of compensation not 

based on transaction terms [or 

conditions]. The following are only 

illustrative examples of compensation 

methods that are permissible (unless 

otherwise prohibited by applicable law), 

and not an exhaustive list. 

Compensation is not based on the 

transaction’s terms [or conditions] if it 

is based on, for example: 

i. The loan originator’s overall loan 

volume (i.e., total dollar amount of 

credit extended or total number of loans 

originated), delivered to the creditor. 

ii. The long-term performance of the 

originator’s loans. 

iii. An hourly rate of pay to 

compensate the originator for the actual 

number of hours worked. 

iv. Whether the consumer is an 

existing customer of the creditor or a 

new customer. 

v. A payment that is fixed in advance 

for every loan the originator arranges for 

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

arranged for the creditor, or $1,000 for 

the first 1,000 loans arranged and $500 

for each additional loan arranged). 

vi. The percentage of applications 

submitted by the loan originator to the 

creditor that results in consummated 

transactions. 

vii. The quality of the loan 

originator’s loan files (e.g., accuracy and 

completeness of the loan 

documentation) submitted to the 

creditor. 

viii. A legitimate business expense, 

such as fixed overhead costs. 

ix. Compensation that is based on the 

amount of credit extended, as permitted 

by § 1026.36(d)(1)(ii). See comment 

36(d)(1)–9 discussing compensation 

based on the amount of credit extended. 


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Federal Register / Vol. 77, No. 174 / Friday, September 7, 2012 / Proposed Rules 55365 

4. Creditor’s flexibility in setting loan 

terms. Section 1026.36(d)(1) does not 

limit a creditor’s ability to offer a higher 

interest rate in a transaction as a means 

for the consumer to finance the payment 

of the loan originator’s compensation or 

other costs that the consumer would 

otherwise be required to pay directly 

(either in cash or out of the loan 

proceeds). Thus, flsubject to 

§ 1026.36(d)(2)(ii),fi a creditor may 

charge a higher interest rate to a 

consumer who will pay fewer of the 

costs of the transaction directly, or it 

may offer the consumer a lower rate if 

the consumer pays more of the costs 

directly. For example, if the consumer 

pays half of the transaction costs 

directly, a creditor may charge an 

interest rate of 6 percent but, if the 

consumer pays none of the transaction 

costs directly, the creditor may charge 

an interest rate of 6.5 percent. Section 

1026.36(d)(1) also does not limit a 

creditor from offering or providing 

different loan terms to the consumer 

based on the creditor’s assessment of the 

credit and other transactional risks 

involved. flBut see 

§ 1026.36(d)(2)(ii).fi A creditor could 

also offer different consumers varying 

interest rates that include a constant 

interest rate premium to recoup the loan 

originator’s compensation through 

increased interest paid by the consumer 

(such as by adding a constant 0.25 

percent to the interest rate on each 

loan). 

5. Effect of modification of loan terms. 

Under § 1026.36(d)(1), a loan 

originator’s compensation may not 

flbefi øvary¿ based on any of a credit 

transaction’s terms. Thus, a creditor and 

loan originator may not agree to set the 

originator’s compensation at a certain 

level and then subsequently lower it in 

selective cases (such as where the 

consumer is able to obtain a lower rate 

from another creditor). When the 

creditor offers to extend a loan with 

specified terms and conditions (such as 

the rate and points), the amount of the 

originator’s compensation for that 

transaction is not subject to change 

(increase or decrease) based on whether 

different loan terms are negotiated. For 

example, if the creditor agrees to lower 

the rate that was initially offered, the 

new offer may not be accompanied by 

a reduction in the loan originator’s 

compensation. flThus, while the 

creditor may change loan terms or 

pricing to match a competitor, to avoid 

triggering high-cost loan provisions, or 

for other reasons, the loan originator’s 

compensation on that transaction may 

not be changed. A loan originator 

therefore may not agree to reduce its 

compensation or provide a credit to the 

consumer to pay a portion of the 

consumer’s closing costs, for example, 

to avoid high-cost loan provisions. See 

comment 36(d)(1)–7 for further 

guidance.fi 

6. Periodic changes in loan originator 

compensation and transactions’ terms 

[and conditions]. This section does not 

limit a creditor or other person from 

periodically revising the compensation 

it agrees to pay a loan originator. 

However, the revised compensation 

arrangement must result in payments to 

the loan originator that flare notfi [do 

not vary] based on the terms [or 

conditions] of a credit transaction. A 

creditor or other person might 

periodically review factors such as loan 

performance, transaction volume, as 

well as current market conditions for 

originator compensation, and 

prospectively revise the compensation it 

agrees to pay to a loan originator. For 

example, assume that during the first six 

months of the year, a creditor pays 

$3,000 to a particular loan originator for 

each loan delivered, regardless of the 

loan terms [or conditions]. After 

considering the volume of business 

produced by that originator, the creditor 

could decide that as of July 1, it will pay 

$3,250 for each loan delivered by that 

particular originator, regardless of the 

loan terms [or conditions]. No violation 

occurs even if the loans made by the 

creditor after July 1 generally carry a 

higher interest rate than loans made 

before that date, to reflect the higher 

compensation. 

fl7. Unanticipated increases in nonaffiliated third-party closing costs. 

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 result in the actual 

amounts of such closing costs exceeding 

limits imposed by applicable law, 

provided that the creditor or the loan 

originator does not know or should not 

reasonably be expected to know the 

amount of any third-party closing costs 

in advance. An example of where the 

loan originator is reasonably expected to 

know the amount of closing costs in 

advance is if the loan originator allows 

the consumer to choose from among 

only three pre-approved third-party 

service providers.fi 

[7. Compensation received directly 

from the consumer. The prohibition in 

§ 1026.36(d)(1) does not apply to 

transactions in which any loan 

originator receives compensation 

directly from the consumer, in which 

case no other person may provide any 

compensation to a loan originator, 

directly or indirectly, in connection 

with that particular transaction 

pursuant to § 1026.36(d)(2). Payments to 

a loan originator made out of loan 

proceeds are considered compensation 

received directly from the consumer, 

while payments derived from an 

increased interest rate are not 

considered compensation received 

directly from the consumer. However, 

points paid on the loan by the consumer 

to the creditor are not considered 

payments received directly from the 

consumer whether they are paid in cash 

or out of the loan proceeds. That is, if 

the consumer pays origination points to 

the creditor and the creditor 

compensates the loan originator, the 

loan originator may not also receive 

compensation directly from the 

consumer. Compensation includes 

amounts retained by the loan originator, 

but does not include amounts the loan 

originator receives as payment for bona 

fide and reasonable third-party charges, 

such as title insurance or appraisals. See 

comment 36(d)(1)–1.] 

8. Record retention. fl Creditors and 

loan originator organizations are subject 

to certain record retention requirements 

under § 1026.25(a), (b), and (c)(2), as 

applicable, in order to comply with 

§ 1026.36(d)(1).fi See commentflsfi 

[25(a)–5] fl 25(c)(2)–1 and –2fi for 

guidance on complying with the record 

retention requirements of § 1026.25[(a)] 

as they apply to § 1026.36(d)(1). 

* * * * * 

fl10. Amount of credit extended 

under a reverse mortgage. For closedend 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.fi 

36(d)(2) Payments by persons other 

than consumer. 

fl36(d)(2)(i) Dual compensation.fi 

1. Compensation in connection with a 

particular transaction. Under 

§ 1026.36(d)(2)fl(i)(A)fi, if any loan 

originator receives compensation 

directly from a consumer in a 

transaction, no other person may 

provide any compensation to 

flanyfiøa¿ loan originator, directly or 

indirectly, in connection with that 

particular credit transaction. See 

comment fl36(d)(2)(i)–2fiø36(d)(1)–7¿ 

discussing compensation received 

directly from the consumer. 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. flSection 1026.36(d)(2)(i)(C) 


srobinson on DSK4SPTVN1PROD with PROPOSALS2
55366 Federal Register / Vol. 77, No. 174 / Friday, September 7, 2012 / Proposed Rules 

provides that, if a loan originator 

organization receives compensation 

directly from a consumer, the loan 

originator organization may provide 

compensation to individual loan 

originators and the individual loan 

originator may receive compensation 

from the loan originator organization. 

(See comment 36(a)(1)–1.i for an 

explanation of the use of the term ‘‘loan 

originator organization’’ and 

‘‘individual loan originator’’ for 

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

example, payments by a mortgage 

broker florganizationfiøcompany¿ to 

an employee flas compensation for a 

specific credit transactionfiøin the form 

of a salary or hourly wage, which is not 

tied to a specific transaction,¿ do not 

violate § 1026.36(d)(2)fl(i)(A)fi even if 

the consumer directly pays flthe 

mortgage broker organizationfi øa loan 

originator¿ a fee in connection with 

flthat transactionfi øa specific credit 

transaction¿. However,øif any loan 

originator receives compensation 

directly from the consumer in 

connection with a specific credit 

transaction,¿ neither the mortgage 

broker florganizationfiøcompany¿ nor 

flthefiøan¿ employee øof the mortgage 

broker company¿ can receive 

compensation from the creditor in 

connection with that particular credit 

transaction. 

2. Compensation received directly 

from a consumer. fli. Payments to a 

loan originator from loan proceeds are 

considered compensation received 

directly from the consumer, while 

payments derived from an increased 

interest rate are not considered 

compensation received directly from the 

consumer. However, points paid on the 

loan by the consumer to the creditor are 

not considered payments to the loan 

originator that are received directly from 

the consumer whether they are paid 

directly by the consumer (for example, 

in cash or by check) or out of the loan 

proceeds. That is, if the consumer pays 

points to the creditor and the creditor 

compensates the loan originator, the 

loan originator may not also receive 

compensation directly from the 

consumer. Compensation includes 

amounts retained by the loan originator, 

but does not include amounts the loan 

originator receives as payment for bona 

fide and reasonable third-party charges, 

such as credit reports. See comment 

36(a)–5.iii. 

ii. fiøUnder Regulation X, which 

implements the Real Estate Settlement 

Procedures Act (RESPA), ¿flA rebate 

that will be applied to reduce the 

consumer’s settlement charges, 

including origination feesfiøa yield 

spread premium¿ paid by a creditor to 

the loan originator may be characterized 

on the øRESPA¿ disclosures flmade 

pursuant to the Real Estate Settlement 

Procedures Actfi as a ‘‘credit.’’ øthat 

will be applied to reduce the 

consumer’s settlement charges, 

including origination fees.¿ A øyield 

spread premium¿flrebatefi 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). 

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

provides that compensation directly 

from a consumer includes payments to 

a loan originator made pursuant to an 

agreement between the consumer and a 

person other than the creditor or its 

affiliates. Compensation to a loan 

originator is sometimes paid on the 

borrower’s behalf by a person other than 

a creditor or its affiliates, such as a noncreditor 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 will 

determine if 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 toward the 

borrower’s closing costs. For example, 

assume that a non-creditor seller has an 

agreement with the borrower to pay 

$1,000 of the borrower’s closing costs on 

a transaction. Any of the $1,000 that is 

used to pay compensation to a loan 

originator is deemed to be compensation 

received directly from the consumer, 

even if the agreement does not specify 

that some or all of $1,000 must be used 

to compensate the loan originator. 

36(d)(2)(ii) Restrictions on Discount 

Points and Origination Points or Fees. 

1. Scope. i. Examples of transactions 

to which the restrictions on discount 

points and origination points or fees 

applies. The prohibition in 

§ 1026.36(d)(2)(ii) applies when: 

A. For transactions that do not 

involve a loan originator organization, 

the creditor pays compensation in 

connection with the transaction (e.g., a 

commission) to individual loan 

originators that work for the creditor; 

B. The creditor pays a loan originator 

organization compensation in 

connection with a transaction, 

regardless of how the loan originator 

organization pays compensation to 

individual loan originators that work for 

the organization; and 

C. The loan originator organization 

receives compensation directly from the 

consumer in a transaction and the loan 

originator organization pays individual 

loan originators that work for the 

organization compensation in 

connection with the transaction. 

ii. Examples of transactions to which 

the restrictions on discount points and 

origination points or fees does not 

apply. The prohibition in 

§ 1026.36(d)(2)(ii) does not apply when: 

A. For transactions that do not 

involve a loan originator organization, 

the creditor pays individual loan 

originators that work for the creditor 

only in the form of a salary, hourly 

wage, or other compensation that is not 

tied to the particular transaction; and 

B. For transactions that involve a loan 

origination organization, the loan 

originator organization receives 

compensation directly from the 

consumer and pays individual loan 

originators that work for the 

organization only in the form of a salary, 

hourly wage, or other compensation that 

is not tied to the particular transaction. 

iii. Relationship to provisions 

prohibiting dual compensation. Section 

1026.36(d)(2)(ii) does not override any 

of the prohibitions on dual 

compensation set forth in 

§ 1026.36(d)(2)(i). For example, 

§ 1026.36(d)(2)(ii) does not permit a 

loan originator organization to receive 

compensation in connection with a 

transaction both from a consumer and 

from a person other than the consumer. 

2. Record retention. See 

§ 1026.25(c)(3) for record retention 

requirements as they apply to 

§ 1026.36(d)(2)(ii). 

3. Affiliates. Section 1026.36(d)(3) 

provides that for purposes of 

§ 1026.36(d), affiliates must be treated as 

a single person. Thus, under 

§ 1026.36(d)(2)(ii)(A), neither a 

creditor’s affiliate nor an affiliate of the 

loan originator organization may impose 

on the consumer any discount points 

and origination points or fees in 

connection with the transaction unless 

the creditor makes available to the 

consumer a comparable, alternative loan 

that does not include discount points 

and origination points or fees, unless 

the consumer is unlikely to qualify for 

such a loan. In addition, for purposes of 

the definition of discount points and 

origination points or fees set forth in 

§ 1026.36(d)(2)(ii)(B), charges that are 

payable by a consumer to a creditor’s 

affiliate or the affiliate of a loan 

originator organization are deemed to be 

payable to the creditor or loan originator 

organization, respectively. 


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Federal Register / Vol. 77, No. 174 / Friday, September 7, 2012 / Proposed Rules 55367 

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

1. Make available. i. Unless a creditor 

determines that a consumer is unlikely 

to qualify for a comparable, alternative 

loan that does not include discount 

points and origination points or fees, the 

creditor must make such a loan 

available to the consumer. For 

transactions that do not involve a loan 

originator organization, a creditor will 

be deemed to have made available to the 

consumer such a loan if: 

A. Any time the creditor provides any 

oral or written estimate of the interest 

rate, the regular periodic payments, the 

total amount of discount points and 

origination points or fees, or the total 

amount of closing costs specific to a 

consumer for a transaction that includes 

discount points and origination points 

or fees, the creditor also provides an 

estimate of those same types of 

information for a comparable, 

alternative loan that does not include 

discount points and origination points 

or fees, unless a creditor determines that 

a consumer is unlikely to qualify for 

such a loan. A creditor using this safe 

harbor is required to provide the 

estimate for the loan that does not 

include discount points and origination 

points or fees only if the estimate for the 

loan that includes discount points and 

origination points or fees is received by 

the consumer prior to the estimated 

disclosures required within three 

business days after application pursuant 

to the Bureau’s regulations 

implementing the Real Estate Settlement 

Procedures Act (RESPA); 

B. A creditor using the safe harbor 

described in comment 36(d)(1)(ii)–1.i.A 

is required to provide information about 

the loan that does not include discount 

points and origination points or fees 

only when the information about the 

loan that includes discount points or 

origination points or fees is specific to 

the consumer. Advertisements are not 

subject to this requirement. See 

comment 2(a)(2)–1.ii.A. If the 

information about the loan that includes 

discount points and origination points 

or fees is an advertisement under 

§ 1026.24, the creditor using this safe 

harbor is not required to provide the 

quote for the loan that does not include 

discount points and origination points 

or fees. For example, if prior to the 

consumer submitting an application, the 

creditor provides a consumer an 

estimated interest rate and monthly 

payment for a loan that includes 

discount points and origination points 

or fees, and the estimates were based on 

the estimated loan amount and the 

consumer’s estimated credit score, then 

the creditor must also disclose the 

estimated interest rate and estimated 

monthly payment for the loan that does 

not include discount points and 

origination points or fees. In contrast, if 

the creditor provides the consumer with 

a preprinted list of available rates for 

different loan products that include 

discount points and origination points 

or fees, the creditor is not required to 

provide the information about the loans 

that do not include discount points and 

origination points or fees under this safe 

harbor. 

C. For purposes of 

§ 1026.36(d)(2)(ii)(A) and this comment, 

‘‘comparable, alternative loan’’ means 

that the two loans for which estimates 

are provided as discussed in comment 

36(d)(2)(ii)(A)–1.i.A have the same 

terms and conditions, other than the 

interest rate, any terms that change 

solely as a result of the change in the 

interest rate (such the amount of regular 

periodic payments), and the amount of 

any discount points and origination 

points or fees. If a creditor determines 

that the consumer is unlikely to qualify 

for such a loan that does not include 

discount points and origination points 

or fees, the creditor is not required to 

make the loan available to the 

consumer. 

D. A creditor using this safe harbor 

must provide the estimate for the loan 

that does not include discount points 

and origination points or fees in the 

same manner (i.e., either orally or in 

writing) as provided for the loan that 

does include discount points and 

origination points or fees. For both 

written and oral estimates, both of the 

written (or both of the oral) estimates 

must be given at the same time. 

E. A creditor using this safe harbor 

must disclose estimates of the interest 

rate, regular periodic payments, the total 

amount of the discount points and 

origination points or fees, and the total 

amount of the closing costs for the loan 

that does not include discount points 

and origination points or fees only if the 

creditor disclosed estimates for those 

types of information for the loan that 

includes discount points and 

origination points or fees. For example, 

if a creditor provides estimates of the 

interest rate and monthly payments for 

a loan that includes discount points and 

origination points or fees, the creditor 

using the safe harbor must provide 

estimates of the interest rate and 

monthly payments for the loan that does 

not include discount points and 

origination points or fees, such as saying 

‘‘your estimated interest rate and 

monthly payments on this loan product 

where you will not pay discount points 

and origination points or fees to the 

creditor or its affiliates is [x] percent, 

and $[x] per month.’’ On the other hand, 

if the creditor provides an estimate of 

only the interest rate for the loan that 

includes discount points and 

origination points or fees and does not 

provide an estimate of the regular 

periodic payments for that loan, the 

creditor using the safe harbor is required 

only to provide an estimate of the 

interest rate for the loan that does not 

include discount points and origination 

points or fees and is not required to 

provide an estimate of the regular 

periodic payments for the loan that does 

not include discount points and 

origination points or fees. 

ii. For transactions that include a loan 

originator organization, a creditor will 

be deemed to have made available to the 

consumer a comparable, alternative loan 

that does not include discount points 

and origination points or fees if the 

creditor communicates to the loan 

originator organization the pricing for 

all loans that do not include discount 

points and origination points or fees, 

unless the consumer is unlikely to 

qualify for such a loan. 

2. Transactions for which the 

consumer is unlikely to qualify. Under 

§ 1026.36(d)(2)(ii)(A), a creditor or loan 

originator organization may not impose 

any discount points and origination 

points or fees on a consumer in a 

transaction unless the creditor makes 

available a comparable, alternative loan 

that does not include discount points 

and origination points or fees, unless 

the consumer is unlikely to qualify for 

such a loan. The creditor must have a 

good-faith belief that a consumer is 

unlikely to qualify for a loan that has 

the same terms and conditions as the 

loan that includes discount points and 

origination points or fees, other than the 

interest rate, any terms that change 

solely as a result of the change in the 

interest rate (such the amount of regular 

periodic payments), and the fact that the 

consumer will not pay discount points 

and origination points or fees. The 

creditor’s belief that the consumer is 

unlikely to qualify for such a loan must 

be based on the creditor’s current 

pricing and underwriting policy. In 

making this determination, the creditor 

may rely on information provided by 

the consumer, even if it subsequently is 

determined to be inaccurate. 

3. Loan with no discount points and 

origination points or fees. In some cases, 

the creditor’s pricing policy may not 

contain an interest rate for which the 

consumer will neither pay discount 

points and origination points or fees nor 

receive a rebate. For example, assume 

that a creditor’s pricing policy provides 

interest rates only in 1⁄8 percent 

increments. Assume also that, under the 


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55368 Federal Register / Vol. 77, No. 174 / Friday, September 7, 2012 / Proposed Rules 

creditor’s current pricing policy, the 

pricing available to a consumer for a 

particular loan product would be for the 

consumer to pay a 5.0 percent interest 

rate with .25 discount point, pay a 5.125 

percent interest rate and receive .25 

point in rebate, or pay a 5.250 percent 

interest rate and receive a 1.0 point in 

rebate. This creditor’s pricing policy 

does not contain a rate for this 

particular loan product where the 

consumer would neither pay discount 

points and origination points or fees nor 

receive a rebate from the creditor. In 

such cases, the interest rate for a loan 

that does not include discount points 

and origination points or fees would be 

the interest rate for which the consumer 

does not pay discount points and 

origination points or fees and would 

receive the smallest possible amount of 

rebate from the creditor. Thus, in the 

example above, the interest rate for that 

particular loan product that does not 

include discount points and origination 

points or fees is the 5.125 percent rate 

with .25 point in rebate. 

4. Regular periodic payments. For 

purposes of comments 36(d)(2)(ii)(A)–1 

and –2, the regular periodic payments 

are the payments of principal and 

interest (or interest only, depending on 

the loan features) specified under the 

terms of the loan contract that are due 

from the consumer for two or more unit 

periods in succession. 

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

1. Finance charge. Under 

§ 1026.36(d)(2)(ii)(B), the term discount 

points and origination points or fees 

generally includes all items that would 

be included in the finance charge under 

§ 1026.4(a) and (b) as well as fees 

described in § 1026.4(a)(2) 

notwithstanding that those fees may not 

be included in the finance charge under 

§ 1026.4(a)(2). For purposes of 

§ 1026.36(d)(2)(ii)(B), ‘‘items included 

in the finance charge under § 1026.4(a) 

and (b)’’ means those items included 

under § 1026.4(a) and (b), without 

reference to any other provisions of 

§ 1026.4. Nonetheless, 

§ 1026.36(d)(2)(ii)(B)(3) specifies that 

items that are excluded from the finance 

charge under § 1026.4(c)(5), (c)(7)(v), 

and (d)(2) are also excluded from the 

definition of discount points and 

origination points or fees. For example, 

property insurance premiums may be 

excluded from the finance charge if the 

conditions set forth in § 1026.4(d)(2) are 

met, and these premiums also may be 

excluded even though they are 

escrowed. See § 1026.4(c)(7)(v), (d)(2). 

Under § 1026.36(d)(2)(ii)(B)(3), these 

premiums also are excluded from the 

definition of discount points and 

origination points or fees. In addition, 

charges in connection with transactions 

that are payable in a comparable cash 

transaction are not included in the 

finance charge. See comment 4(a)–1. For 

example, property taxes imposed to 

record the deed evidencing transfer 

from the seller to the buyer of title to the 

property are not included in the finance 

charge because they would be paid even 

if no credit were extended to finance the 

purchase. Thus, these charges are not 

included in the definition of discount 

points and origination points or fees. 

2. Amounts for third-party charges. 

Section 1026.36(d)(2)(ii)(B) generally 

includes any fees described in 

§ 1026.4(a)(2) notwithstanding that 

those fees may not be included in the 

finance charge under § 1026.4(a)(2). 

Section 1026.36(d)(2)(ii)(B)(2) excludes 

from the definition of discount points 

and origination points or fees any bona 

fide and reasonable third-party charges 

not retained by the creditor or loan 

originator organization. Section 

1026.4(a)(2) discusses fees charged by a 

‘‘third party’’ that conducts the loan 

closing. For purposes of § 1026.4(a)(2), 

the term ‘‘third party’’ includes affiliates 

of the creditor or the loan originator 

organization. Nonetheless, for purposes 

of the definition of discount points and 

origination points or fees, the term 

‘‘third party’’ does not include affiliates 

of the creditor or the loan originator. 

Specifically, § 1026.36(d)(3) provides 

that for purposes of § 1026.36(d), 

affiliates must be treated as a single 

person. Thus, under § 1026.36(d), 

affiliates of the creditor or the loan 

originator are not considered third 

parties. As a result, fees described in 

§ 1026.4(a)(2) would be included in the 

definition of discount points and 

origination points or fees if they are 

charged by affiliates of the creditor or 

the loan originator. Nonetheless, fees 

described in § 1026.4(a)(2) would not be 

included in such definition if they are 

charged by a third party that is not an 

affiliate of the creditor or any loan 

originator organization, pursuant to the 

exception in § 1026.36(d)(2)(ii)(B)(2). In 

some cases, amounts received by the 

creditor or loan originator organization 

for payment of independent third-party 

charges may exceed the actual charge 

because, for example, the creditor or 

loan originator organization cannot 

determine with accuracy what the 

actual charge will be before 

consummation. In such a case, the 

difference retained by the creditor or 

loan originator organization is not 

deemed to fall within the definition of 

discount points and origination points 

or fees if the third-party charge imposed 

on the consumer was bona fide and 

reasonable, and also complies with State 

and other applicable law. On the other 

hand, if the creditor or loan originator 

organization marks up a third-party 

charge (a practice known as 

‘‘upcharging’’), and the creditor or loan 

originator organization retains the 

difference between the actual charge 

and the marked-up charge, the amount 

retained falls within the definition of 

discount points and origination points 

or fees. For example: 

i. Assume a creditor charges the 

consumer a $400 application fee that 

includes $50 for a credit report and 

$350 for an appraisal that will be 

conducted by a third party that is not 

the affiliate of the creditor or the loan 

originator organization. Assume that 

$50 is the amount the creditor pays for 

the credit report to a third party that is 

not affiliated with the creditor or with 

the loan originator organization. At the 

time the creditor imposes the 

application fee on the consumer, the 

creditor is uncertain of the cost of the 

appraisal because the appraiser charges 

between $300 and $350 for appraisals. 

Later, the cost for the appraisal is 

determined to be $300 for this 

consumer’s transaction. Assume, 

however, that the creditor uses average 

charge pricing in accordance with 

Regulation X. In this case, the $50 

difference between the $400 application 

fee imposed on the consumer and the 

actual $350 cost for the credit report and 

appraisal is not deemed to fall within 

the definition of discount points and 

origination points or fees, even though 

the $50 is retained by the creditor. 

ii. Using the same example as in 

comment 36(d)(2)(ii)(B)–2.i above, the 

$50 difference would fall within the 

definition of discount points and 

origination points or fees if the 

appraiser charge fees between $250 and 

$300. 

3. Information about whether point or 

fee will be paid to a creditor’s affiliate 

or affiliate of the loan originator 

organization. If at the time a creditor 

must comply with the requirements in 

§ 1026.36(d)(2)(ii) the creditor does not 

know whether a particular origination 

point or fee will be paid to its affiliate 

or an affiliate of the loan originator 

organization or will be paid to a thirdparty that is not the creditor’s affiliate 

or an affiliate of the loan originator 

organization, the creditor must assume 

that those origination points or fees will 

be paid to its affiliates or an affiliate of 

the loan originator organization, as 

applicable, for purposes of complying 

with the requirements in 

§ 1026.36(d)(2)(ii). For example, assume 

that a creditor typically uses three title 


srobinson on DSK4SPTVN1PROD with PROPOSALS2
Federal Register / Vol. 77, No. 174 / Friday, September 7, 2012 / Proposed Rules 55369 

insurance companies, one of which is 

an affiliate of the creditor and two are 

not affiliated with the creditor or the 

loan originator organization. If the 

creditor does not know at the time it 

must establish available credit terms for 

a particular consumer pursuant to 

§ 1026.36(d)(2)(ii) whether the title 

insurance services will be performed by 

the affiliate of the creditor, the creditor 

must assume that the title insurance 

services will be conducted by the 

affiliate for purposes of complying with 

the requirements in § 1026.36(d)(2)(ii). 

4. Payable to a creditor or loan 

originator organization. For purposes of 

§ 1026.36(d)(2)(ii)(B), the phrase 

‘‘payable at or before consummation by 

the consumer to a creditor or a loan 

originator organization’’ includes 

amounts paid by the consumer in cash 

at or before closing or financed as part 

of the transaction and paid out of the 

loan proceeds.fi 

* * * * * 

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). The 

criteria are: The loan with the lowest 

interest rate; the loan with the lowest 

total dollar amount floffiøfor¿ 

discount points and origination points 

or fees; and a loan with the lowest 

interest rate without negative 

amortization, a prepayment penalty, a 

balloon payment in the first seven years 

of the loan term, shared equity, or 

shared appreciation, or, in the case of a 

reverse mortgage, a loan without a 

prepayment penalty, shared equity, or 

shared appreciation. flThe 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.fi To identify the loan with 

the lowest interest rate, for any loan that 

has an initial rate that is fixed for at 

least five years, the loan originator shall 

use the initial rate that would be in 

effect at consummation. For a loan with 

an initial rate that is not fixed for at least 

five years: 

i. If the interest rate varies based on 

changes to an index, the originator shall 

use the fully-indexed rate that would be 

in effect at consummation without 

regard to any initial discount or 

premium. 

ii. For a step-rate loan, the originator 

shall use the highest rate that would 

apply during the first five years. 

* * * * * 

fl36(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 creditors for purposes of the 

qualification requirements in 

§ 1026.36(f). 

2. Licensing and registration 

requirements. Section 1026.36(f) 

requires loan originators to comply with 

State and Federal licensing and 

registration requirements, including any 

such requirements imposed by the 

SAFE Act and its implementing 

regulations and State laws. SAFE Act 

licensing and registration applies to 

individual loan originators, but many 

State licensing and registration 

requirements apply to organizations as 

well. Section 1026.36(f) does not affect 

who must comply with these licensing 

and registration requirements. For 

example, the fact that the definition of 

loan originator in § 1026.36(a)(1) differs 

somewhat from that in the SAFE Act 

does not affect who must comply with 

the SAFE Act. 

Paragraph 36(f)(1). 

1. Legal existence and foreign 

qualification. Section 1026.36(f)(1) 

requires a loan originator organization 

to comply with State law requirements 

governing the legal existence and 

foreign qualification of the loan 

originator organization. Covered State 

law requirements include those that 

must be complied with to bring the loan 

originator organization into legal 

existence, to maintain its legal 

existence, to be permitted to transact 

business in another State, or facilitate 

service of process. For example, covered 

State law requirements include those for 

incorporation or other type of legal 

formation and for designating and 

maintaining a registered agent for 

service of process. State law 

requirements to pay taxes and other 

requirements that do not relate to legal 

accountability of the loan originator 

organization to consumers are outside 

the scope of § 1026.36(f)(1). 

Paragraph 36(f)(2). 

1. License or registration. Section 

1026.36(f)(2) requires the loan originator 

organization to ensure that its 

individual loan originators are licensed 

or registered in compliance with the 

SAFE Act. A loan originator 

organization can meet this duty by 

confirming the registration or license 

status of an individual at 

www.nmlsconsumeraccess.org. 

Paragraph 36(f)(3). 

1. Unlicensed individual loan 

originators. Section 1026.36(f)(3) sets 

forth actions that a loan originator 

organization must take for any of its 

individual loan originators who are not 

required to be licensed, and are not 

licensed, pursuant to the SAFE Act. 

Individual loan originators who are not 

subject to SAFE Act licensing generally 

include employees of depository 

institutions and their Federally 

regulated subsidiaries and employees of 

bona fide non-profit organizations that a 

State has exempted from licensing 

under the criteria in 12 CFR 

1008.103(e)(7). 

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

1. Criminal and credit histories. 

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

originator organization to obtain, for 

each of its individual loan originators 

who is not licensed pursuant to the 

SAFE Act, a criminal background check, 

a credit report, and information related 

to any administrative, civil, or criminal 

determinations by any government 

jurisdiction. Loan originator 

organizations that do not have access to 

these items through the NMLSR may 

obtain them by other means. For 

example, a criminal background check 

may be obtained from a law 

enforcement agency or commercial 

service. A credit report may be obtained 

directly from a consumer reporting 

agency or through a commercial service. 

Information on any past administrative, 

civil, or criminal findings may be 

obtained from the individual loan 

originator. 

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

1. Scope of review. Section 

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

originator organization to review the 

information that it obtains under 

§ 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 its customary hiring 

and personnel management practices, 

including information obtained from 

application forms, candidate interviews, 

and reference checks. 


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55370 Federal Register / Vol. 77, No. 174 / Friday, September 7, 2012 / Proposed Rules 

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

1. Financial responsibility, character, 

and fitness. The determination of 

financial responsibility, character, and 

general fitness required under 

§ 1026.36(f)(3)(ii)(B) requires an 

assessment of reasonably available. A 

determination that an individual loan 

originator meets the standard complies 

with the requirement if it results from 

a reasonable assessment of information 

that is known to the loan originator 

organization or would become known to 

the loan originator organization as part 

of a reasonably prudent hiring process. 

Review and assessment of the 

individual loan originator’s credit report 

does not require consideration of a 

credit score. A review and assessment of 

financial responsibility, character, and 

general fitness must consider whether 

the information indicates dishonesty or 

a pattern of irresponsible use of credit 

or of disregard of financial obligations. 

For example, conduct shown in a 

criminal background check may 

indicate dishonesty even if it did not 

result in a disqualifying felony 

conviction under § 1026.36(f)(3)(ii)(A). 

Irresponsible use of credit may be 

indicated by delinquent debts incurred 

as a result of extravagant spending on 

consumer goods but may not be shown 

by debts resulting from medical 

expenses. 

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

1. Training. The periodic training 

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

adequate in frequency, timing, duration, 

and content to ensure the individual 

loan originator has the knowledge of 

State and Federal legal requirements 

that apply to the individual loan 

originator’s loan origination activities. It 

must take into consideration the 

particular responsibilities of the 

individual loan originator and the 

nature and complexity of the mortgage 

loans with which the individual loan 

originator works. An individual loan 

originator is not required to receive 

training on requirements and standards 

that apply to types of mortgage loans the 

individual loan originator does not 

originate, or on subjects in which the 

individual loan originator already has 

the necessary knowledge and skill. 

Training may be delivered by the loan 

originator organization or any other 

party and may utilize workstation, 

Internet, teleconferencing, or other 

interactive technologies and delivery 

methods. Training that a government 

agency or housing finance agency has 

established for an individual to 

originate mortgage loans under a 

program sponsored or regulated by that 

a Federal, State, or other government 

agency or housing finance agency 

satisfies the requirement in 

§ 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. 

36(g) NMLSR ID on Loan Documents 

Paragraph 36(g)(1) 

1. NMLSR ID. Section 1026.36(g)(1) 

requires a loan originator organization 

to include its name and NMLSR ID and 

the name and NMLSR ID of the 

individual loan originator on certain 

loan documents. As provided in 

§ 1026.36(a)(1), the term loan originator 

does not exclude creditors for purposes 

this requirement. Thus, for example, if 

an individual loan originator employed 

by a bank originates a loan, the name 

and NMLSR ID of the individual and the 

bank must be included on covered loan 

documents. The NMLSR ID is a number 

generally assigned by the NMLSR to 

individuals registered or licensed 

through NMLSR to provide loan 

origination services. For more 

information, see the Secure and Fair 

Enforcement for Mortgage Licensing Act 

of 2008 (SAFE Act) sections 1503(3) and 

(12) and 1504 (12 U.S.C. 5102(3) and 

(12) and 5103), and its implementing 

regulations (12 CFR 1007.103(a) and 

1008.103(a)(2)). An organization may 

also have an NMLSR unique identifier. 

2. Loan originators without NMLSR 

IDs. An NMLSR ID is not required by 

§ 1026.36(g)(1) to be included on loan 

documents if the loan originator is not 

required to obtain and has not been 

issued an NMLSR ID. For example, 

certain loan originator organizations, 

and individual loan originators who are 

employees of bona fide non-profit 

organizations, may not be required to 

obtain a unique identifier under State 

law. However, some loan originators 

may have obtained NMLSR IDs, even if 

they are not required to have one for 

their current jobs. If a loan originator 

organization or an individual loan 

originator has been provided a unique 

identifier by the NMLSR, it must be 

included on the loan documents, 

regardless of whether the loan originator 

organization or individual loan 

originator is required to obtain an 

NMLSR unique identifier. 

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

1. Multiple individual loan 

originators. If more than one individual 

meets the definition of a loan originator 

for a transaction, the NMLSR ID of the 

individual loan originator with primary 

responsibility for the transaction at the 

time the loan document is issued must 

be included. An individual loan 

originator may comply with the 

requirement in § 1026.36(g)(1)(ii), with 

respect to the TILA and RESPA 

disclosure documents, by complying 

with the applicable provision governing 

disclosure of NMLSR IDs in rules issued 

by the Bureau pursuant to section 

1032(f) of the Dodd-Frank Act, 15 U.S.C. 

5532(f). 

Paragraph 36(g)(2). 

1. Amendments. The requirements 

under § 1026.36(g)(2)(iv) and (v) to 

include the NMLSR ID on the note or 

other loan contract and the security 

instrument also apply to any 

amendment, rider, or addendum to the 

note or security instrument made at 

consummation.fi 

Dated: August 17, 2012. 

Richard Cordray, 

Director, Bureau of Consumer Financial 

Protection. 

[FR Doc. 2012–20808 Filed 8–29–12; 11:15 am] 

BILLING CODE 4810–AM–P 


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