Federal Register / Vol. 75, No. 185 / Friday, September 24, 2010 / Rules and Regulations 58509 

1Public Law 111–203, 124 Stat. 1376. 

FEDERAL RESERVE SYSTEM 

12 CFR Part 226 

Regulation Z; Docket No. R–1366 

Truth in Lending 

AGENCY: Board of Governors of the 

Federal Reserve System. 

ACTION: Final rule; official staff 

commentary. 

SUMMARY: The Board is publishing final 

rules amending Regulation Z, which 

implements the Truth in Lending Act 

and Home Ownership and Equity 

Protection Act. The purpose of the final 

rule is to protect consumers in the 

mortgage market from unfair or abusive 

lending practices that can arise from 

certain loan originator compensation 

practices, while preserving responsible 

lending and sustainable 

homeownership. The final rule 

prohibits payments to loan originators, 

which includes mortgage brokers and 

loan officers, based on the terms or 

conditions of the transaction other than 

the amount of credit extended. The final 

rule further prohibits any person other 

than the consumer from paying 

compensation to a loan originator in a 

transaction where the consumer pays 

the loan originator directly. The Board 

is also finalizing the rule that prohibits 

loan originators from steering 

consumers to consummate a loan not in 

their interest based on the fact that the 

loan originator will receive greater 

compensation for such loan. The final 

rules apply to closed-end transactions 

secured by a dwelling where the 

creditor receives a loan application on 

or after April 1, 2011. 

DATES: The final rule is effective on 

April 1, 2011. 

FOR FURTHER INFORMATION CONTACT: 

Catherine Henderson or Nikita M. 

Pastor, Attorneys; Brent Lattin or Paul 

Mondor, Senior Attorneys; Division of 

Consumer and Community Affairs, 

Board of Governors of the Federal 

Reserve System, Washington, DC 20551, 

at (202) 452–3667 or (202) 452–2412; for 

users of Telecommunications Device for 

the Deaf (TDD) only, contact (202) 263– 

4869. 

SUPPLEMENTARY INFORMATION: 

I. Background and Implementation of 

the Reform Act 

A. Background: TILA and Regulation Z 

Congress enacted the Truth in 

Lending Act (TILA), 15 U.S.C. 1601 et 

seq., based on findings that economic 

stability would be enhanced and 

competition among consumer credit 

providers would be strengthened by the 

informed use of credit resulting from 

consumers’ awareness of the cost of 

credit. TILA directs the Board to 

prescribe regulations to carry out its 

purposes and specifically authorizes the 

Board, among other things, to issue 

regulations that contain such 

classifications, differentiations, or other 

provisions, or that provide for such 

adjustments and exceptions for any 

class of transactions, that in the Board’s 

judgment are necessary or proper to 

effectuate the purposes of TILA, 

facilitate compliance with TILA, or 

prevent circumvention or evasion of 

TILA. 15 U.S.C. 1604(a). 

In 1995, the Board revised Regulation 

Z to implement changes to TILA made 

by the Home Ownership and Equity Act 

(HOEPA). 60 FR 15463; Mar. 24, 1995. 

HOEPA requires special disclosures and 

substantive protections for home-equity 

loans and refinancings with annual 

percentage rates (APRs) or points and 

fees above certain statutory thresholds. 

HOEPA also directs the Board to 

prohibit unfair and deceptive acts and 

practices in connection with mortgages. 

15 U.S.C. 1639(l)(2). 

On August 26, 2009, the Board 

published a proposed rule in the 

Federal Register pertaining to closedend credit (August 2009 Closed-End 

Proposal). As part of that proposal, the 

Board proposed to prohibit certain 

compensation payments to loan 

originators, and to prohibit steering 

consumers to loans not in their interest 

because the loans would result in 

greater compensation for the loan 

originator. As stated in the Federal 

Register, this proposal was intended to 

protect consumers against the 

unfairness, deception, and abuse that 

can arise with certain loan origination 

compensation practices while 

preserving responsible lending and 

sustainable homeownership. See 74 FR 

43232; Aug. 26, 2009. The comment 

period on the August 2009 Closed-End 

Proposal ended December 24, 2009. The 

Board received approximately 6000 

comments in response to the proposed 

rule, including comments from 

creditors, mortgage brokers, trade 

associations, consumer groups, Federal 

agencies, state regulators, state attorneys 

general, individual consumers, and 

members of Congress. As discussed in 

more detail elsewhere in this 

SUPPLEMENTARY INFORMATION, the Board 

has considered comments received on 

the August 2009 Closed-End Proposal in 

adopting this final rule. 

B. The Reform Act 

On July 21, 2010, the Dodd-Frank 

Wall Street Reform and Consumer 

Protection Act (Reform Act) was enacted 

into law.1 Among other provisions, Title 

XIV of the Reform Act amends TILA to 

establish certain mortgage loan 

origination standards. In particular, 

Section 1403 of the Reform Act creates 

new TILA Section 129B(c), which 

imposes restrictions on loan originator 

compensation and on steering by loan 

originators. The Board intends to 

implement Section 129B(c) in a future 

rulemaking after notice and opportunity 

for further public comment. 

Many of the provisions in TILA 

Section 129B(c) are similar to the 

Board’s proposed rules concerning loan 

originator compensation. However, 

Section 129B(c) also has some 

provisions not addressed by the Board’s 

August 2009 Closed-End Proposal. 

Implementation of those provisions of 

the Reform Act will be addressed in a 

future rulemaking with opportunity for 

public comment. 

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 Reform 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. 

In issuing this final rule, the Board is 

relying on its authority in TILA Sections 

129(l)(2)(A) and (B) to prohibit acts or 

practices relating to mortgage loans that 

are unfair and to refinancings of 

mortgage loans that are abusive and not 

in the interest of the borrower. However, 

this final rule is also consistent with the 

Reform Act for the following reasons: 

Section 226.36(d)(1) of the final rule is 

consistent with TILA Section 

129B(c)(1), which prohibits payments to 

a mortgage loan originator that vary 

based on the terms of the loan, other 

than the amount of the credit extended. 

Likewise, the Board finds that 

§ 226.36(d)(2) of the final rule is 

consistent with TILA Section 

129B(c)(2), which allows mortgage loan 

originators to receive payment from a 

person other than the consumer (such as 


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2The statutory exception applies to persons or 

entities that are licensed or registered to engage in 

real estate brokerage activities in accordance with 

applicable State law, and who do not receive 

compensation from a creditor, mortgage broker, or 

other mortgage originator, or their agents. 

3See Home Equity Lending Market; Notice of 

Hearings, 72 FR 30380; May 31, 2007; Home Equity 

Lending Market; Notice of Public Hearings, 71 FR 

26513; May 5, 2006. 

a yield spread premium paid by the 

creditor) only if the originator does not 

receive any compensation directly from 

the consumer. TILA Section 129B(c)(2) 

also imposes a second restriction when 

an originator receives compensation 

from someone other than the consumer: 

The consumer also must not make any 

upfront payment to the lender for points 

or fees on the loan other than certain 

bona fide third-party charges. This 

restriction was not contained in the 

proposed rule, and therefore is not 

included in this final rule and will be 

addressed in a subsequent rulemaking. 

TILA Section 129B(c)(3) directs the 

Board to prescribe regulations that 

prohibit loan originators from steering 

consumers to certain types of loans, and 

prohibits other specified practices. 

These provisions will be also be 

implemented in a subsequent 

rulemaking. TILA Section 129B(c)(3) 

does not expressly include an antisteering provision similar to proposed 

§ 226.36(e). Nevertheless, the Board 

continues to believe that the prohibition 

in § 226.36(e) is necessary and proper to 

effectuate and prevent circumvention of 

the prohibition contained in 

§ 226.36(d)(1), and, as explained further 

below, § 226.33(e) prohibits acts and 

practices that are unfair, abusive, and 

not in the interest of the borrower. Thus, 

the Board is adopting proposed 

§ 226.36(e) in the final rule with some 

modifications in response to the public 

comments. 

The Board’s proposed prohibitions 

related to mortgage originator 

compensation and steering applied to 

closed-end consumer loans secured by 

real property or a dwelling, but 

comment was solicited on whether the 

prohibitions also should be applied to 

home-equity lines of credit (HELOCs). 

However, the provisions of the Reform 

Act relating to originator compensation 

and steering apply to ‘‘residential 

mortgage loans,’’ which include closedend loans secured by a dwelling or real 

property that includes a dwelling, but 

exclude HELOCs extended under openend credit plans and timeshare plans (as 

described in the bankruptcy code, 11 

U.S.C. 101(53D)). See TILA Section 

103(cc)(5), as enacted in Section 1401 of 

the Reform Act. 

The Board is adopting this final rule 

consistent with the definition of 

‘‘residential mortgage loan’’ in the 

Reform Act. Accordingly, the final rule 

does not apply to HELOCs or time-share 

transactions. It also does not apply to 

loans secured by real property if such 

property does not include a dwelling. 

The Board intends to evaluate these 

issues in connection with future 

rulemakings and assess whether broader 

coverage is appropriate or necessary. 

The definition of ‘‘loan originator’’ 

used in the proposal and the final rule 

is consistent with the Reform Act’s 

definition of ‘‘mortgage originators’’ in 

TILA Section 103(cc)(2). Specifically, 

TILA Section 103(cc)(2)(E) excludes 

certain persons and entities that 

originate loans but are also creditors 

that provide seller financing for 

properties that the originator owns. 

Because such persons would be 

‘‘creditors’’ and are not loan originators 

using table funding, they are not 

covered by final rules that are 

applicable to loan originators. 

The definition of ‘‘loan originator’’ in 

the Board’s final rule is consistent with 

the exception in Section 1401 of the 

Reform Act that applies to persons and 

entities that perform only real estate 

brokerage activities. See TILA Section 

103(cc)(2)(D).2 This final rule only 

applies to parties who arrange, 

negotiate, or obtain an extension of 

mortgage credit for a consumer in return 

for compensation or other monetary 

gain. Thus, persons covered by the final 

rule would not be engaged only in real 

estate brokerage activities, and would 

not be covered by the statutory 

exception. 

TILA Section 103(cc)(2)(G) contains 

an exception for loan servicers. The 

final rule only applies to extensions of 

consumer credit. The Board’s final rule 

does not apply to a loan servicer when 

the servicer modifies an existing loan on 

behalf of the current owner of the loan. 

This final rule does not apply if a 

modification of an existing obligation’s 

terms does not constitute a refinancing 

under § 226.20(a). The Board believes 

that TILA Section 103(cc)(2)(G) was 

intended to ensure that servicers could 

continue to modify existing loans on 

behalf of current loan holders. The 

Board will consider whether additional 

provisions are needed to implement 

TILA Section 103(cc)(2)(G) in a future 

rulemaking. 

II. Consumer Protection Concerns With 

Loan Origination Compensation 

A. HOEPA Hearings 

In the summer of 2006, the Board held 

public hearings on consumer protection 

issues in the mortgage market in four 

cities. During the hearings, consumer 

advocates urged the Board to ban ‘‘yield 

spread premiums,’’ payments that 

mortgage brokers receive from the 

creditor at closing for delivering a loan 

with an interest rate that is higher than 

the creditor’s ‘‘buy rate.’’ Consumer 

advocates asserted that yield spread 

premiums provide brokers an incentive 

to increase consumers’ interest rates 

unnecessarily. They argued that a 

prohibition would align reality with 

consumers’ perception that brokers 

serve consumers’ best interests. 

In light of the information received at 

the 2006 hearings and the rise in 

defaults that began soon after, the Board 

held an additional hearing in June of 

2007 to explore how it could use its 

authority under HOEPA to prevent 

abusive lending practices in the 

subprime mortgage market while still 

preserving responsible lending. 

Although the Board did not expressly 

solicit comment on mortgage broker 

compensation in its notice of the June 

2007 hearing, a number of commenters 

and hearing panelists raised the topic. 

Consumer and creditor representatives 

alike raised concerns about the fairness 

and transparency of creditors’ payment 

of yield spread premiums to brokers. 

Several commenters and panelists stated 

that consumers are not aware of the 

payments creditors make to brokers, or 

that such payments increase consumers’ 

interest rates. They also stated that 

consumers may mistakenly believe that 

a broker seeks to obtain the best interest 

rate available for consumers. Consumer 

groups have expressed particular 

concern about increased payments to 

brokers for delivering loans both with 

higher interest rates and prepayment 

penalties.3 Several creditors and 

creditor trade associations advocated 

requiring brokers to disclose whether 

the broker represents the consumer’s 

interests, and how and by whom the 

broker is compensated. Some of these 

commenters recommended that brokers 

be required to disclose their total 

compensation to the consumer and that 

creditors be prohibited from paying 

brokers more than the disclosed 

amount. 

B. The Board’s 2008 HOEPA Proposal 

To address concerns raised through 

the series of HOEPA hearings, the 

Board’s 2008 HOEPA Proposed Rule 

would have prohibited a creditor from 

paying a mortgage broker any 

compensation greater than the amount 

the consumer had previously agreed in 

writing that the broker would receive. 

73 FR 1672, 1698–1700; Jan. 9, 2008. In 


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4See Kellie K. Kim-Sung & Sharon Hermanson, 

Experiences of Older Refinance Mortgage Loan 

Borrowers: Broker- and Lender-Originated Loans, 

Data Digest No. 83, 3 (AARP Public Policy Inst., Jan. 

2003), available at http://assets.aarp.org/rgcenter/ 

post-import/dd83_loans.pdf. 

5For more details on the consumer testing, see 

the report of the Board’s contractor, Macro 

International, Inc., Consumer Testing of Mortgage 

Broker Disclosures (July 10, 2008), available at 

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

bcreg/20080714regzconstest.pdf. 

support of the rule, the Board explained 

its concerns about yield spread 

premiums, which are summarized 

below. 

A yield spread premium is the present 

dollar value of the difference between 

the lowest interest rate the wholesale 

lender would have accepted on a 

particular transaction and the interest 

rate the broker actually obtained for the 

lender. This dollar amount is usually 

paid to the mortgage broker, though it 

may also be applied to reduce the 

consumer’s upfront closing costs. The 

creditor’s payment to the broker based 

on the interest rate is an alternative to 

the consumer paying the broker directly 

from the consumer’s preexisting 

resources or out of loan proceeds. Thus, 

consumers potentially benefit from 

having an option to pay brokers for their 

services indirectly by accepting a higher 

interest rate. 

The Board shares concerns, however, 

that creditors’ payments to mortgage 

brokers are not transparent to 

consumers and are potentially unfair to 

them. 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. Many 

consumers do not know that creditors 

pay brokers based on the interest rate, 

and the current legally required 

disclosures seem to have only a limited 

effect. Some consumers may not even 

know that creditors pay brokers: a 

common broker practice of charging a 

small part of its compensation directly 

to the consumer, to be paid out of the 

consumer’s existing resources or loan 

proceeds, may lead consumers 

incorrectly to believe that this amount is 

all the consumer will pay or the broker 

will receive. Consumers who do 

understand that the creditor pays the 

broker based on the interest rate may 

not fully understand the implications of 

the practice. They may not appreciate 

the full extent of the incentive the 

practice gives the broker to increase the 

rate because they do not know the dollar 

amount of the creditor’s payment. 

Moreover, consumers often wrongly 

believe that brokers have agreed or are 

required to obtain the best interest rate 

available. Several commenters in 

connection with the 2006 hearings 

suggested that mortgage broker 

marketing cultivates an image of the 

broker as a ‘‘trusted advisor’’ to the 

consumer. Consumers who have this 

perception may rely heavily on a 

broker’s advice, and there is some 

evidence that such reliance is common. 

In a 2003 survey of older borrowers who 

had obtained prime or subprime 

refinancings, majorities of respondents 

with refinance loans obtained through 

both brokers and creditors’ employees 

reported that they had relied ‘‘a lot’’ on 

their loan originators to find the best 

mortgage for them.4 The Board’s recent 

consumer testing also suggests that 

many consumers shop little for 

mortgages and often rely on one broker 

or lender because of their trust in the 

relationship. In addition, a common 

perception among consumer testing 

participants was that brokers and 

lenders have no discretion over their 

loan terms, and, therefore, shopping 

actively would likely have no effect on 

the terms consumers receive. 

If consumers believe that brokers 

protect consumers’ interests by 

shopping for the lowest rates available, 

consumers may be less likely to take 

steps to protect their interests when 

dealing with brokers. For example, they 

may be less likely to shop rates across 

retail and wholesale channels 

simultaneously to assure themselves 

that the broker is providing a 

competitive rate. They may also be less 

likely to shop and negotiate brokers’ 

services, obligations, or compensation 

upfront, or at all. They may, for 

instance, be less likely to seek out 

brokers who will promise in writing to 

obtain the lowest rate available. 

In response to these concerns, the 

2008 HOEPA Proposed Rule would have 

prohibited a creditor from paying a 

broker more than the consumer agreed 

in writing to pay. Under the proposal, 

the consumer and mortgage broker 

would have had to enter into a written 

agreement before the broker accepted 

the consumer’s loan application and 

before the consumer paid any fee in 

connection with the transaction (other 

than a fee for obtaining a credit report). 

The agreement also would have 

disclosed (i) that the consumer 

ultimately would bear the cost of the 

entire compensation even if the creditor 

paid part of it directly; and (ii) that a 

creditor’s payment to a broker could 

influence the broker to offer the 

consumer loan terms or products that 

would not be in the consumer’s interest 

or the most favorable the consumer 

could obtain. 

Based on the Board’s analysis of 

comments received on the 2008 HOEPA 

Proposed Rule, the results of consumer 

testing, and other information, the 

Board withdrew the proposed 

provisions relating to broker 

compensation. 73 FR 44522, 44563–65; 

July 30, 2008. The Board’s withdrawal 

of those provisions was based on its 

concern that the proposed agreement 

and disclosures could confuse 

consumers and undermine their 

decision making rather than improve it. 

The risks of consumer confusion arose 

from two sources. First, an institution 

can act as a creditor or broker 

depending on the transaction. At the 

time the agreement and disclosures 

would have been required, an 

institution could be uncertain as to 

which role it ultimately would play. 

This could render the proposed 

disclosures inaccurate and misleading 

in some and possibly many cases. 

Second, the Board was concerned by the 

reactions of consumers who participated 

in one-on-one interviews about the 

proposed agreement and disclosures as 

part of the Board’s consumer testing. 

These consumers often concluded, not 

necessarily correctly, that brokers are 

more expensive than creditors. Many 

also believed that brokers would serve 

their best interests notwithstanding the 

conflict resulting from the relationship 

between interest rates and brokers’ 

compensation.5 The proposed 

disclosures presented a significant risk 

of misleading consumers regarding both 

the relative costs of brokers and lenders, 

and the role of brokers in their 

transactions. 

In withdrawing the broker 

compensation provisions of the 2008 

HOEPA Proposed Rule, the Board stated 

that it would continue to explore 

options to address potential unfairness 

associated with loan originator 

compensation arrangements, such as 

yield spread premiums. The Board 

indicated that it would consider 

whether disclosures or other approaches 

could effectively remedy this potential 

unfairness without imposing 

unintended consequences. 

In the August 2009 Closed-End 

proposal discussed below, the Board 

proposed a more substantive approach 

to loan originator compensation. That 

proposal is the basis for this final rule. 

III. The Board’s August 2009 ClosedEnd Proposal 

A. Summary of August 2009 Closed-End 

Proposal on Loan Originator 

Compensation 

On August 26, 2009, the Board 

proposed regulations under TILA 


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58512 Federal Register / Vol. 75, No. 185 / Friday, September 24, 2010 / Rules and Regulations 

Section 129(l)(2), 15 U.S.C. 1639(l)(2), to 

prohibit certain compensation payments 

to loan originators and steering to 

protect consumers against the 

unfairness, deception, and abuse that 

can arise with certain loan origination 

compensation practices while 

preserving responsible lending and 

sustainable homeownership. See 74 FR 

43232; Aug. 26, 2009. 

Specifically, the Board proposed to 

prohibit a creditor or any other person 

from paying compensation to a loan 

originator based on the terms or 

conditions of the transaction, or from 

paying a loan originator any 

compensation if the consumer paid the 

loan originator directly. The Board 

solicited comment, however, on an 

alternative that would permit 

compensation based on the loan 

amount. Under the proposal, ‘‘loan 

originator’’ would include both mortgage 

brokers and employees of creditors who 

perform loan origination functions. In 

addition, the Board proposed to apply 

the prohibition to all mortgage loans 

secured by real property or a dwelling, 

and solicited comment on whether the 

prohibition should apply to HELOCs. 

The Board also proposed to prohibit 

a loan originator from steering a 

consumer to a transaction that would 

yield the most compensation for the 

loan originator, unless the transaction 

was in the consumer’s interest. To 

facilitate compliance with this proposed 

prohibition, the Board proposed a safe 

harbor. A loan originator would be 

deemed in compliance with the antisteering prohibition if the consumer 

chose a transaction from a choice of 

loans with (1) the lowest interest rate, 

(2) the second lowest interest rate, and 

(3) the lowest settlement costs. The 

Board solicited comment on whether 

the steering prohibition would be 

effective in achieving its stated purpose, 

as well as on the feasibility and 

practicality of such a rule, its 

enforceability, and any unintended 

adverse effects it might have. 

B. Overview of Comments Received 

The Board received approximately 

6,000 comment letters on the proposal 

from various interested parties, 

including approximately 1,500 form 

letters. Individual mortgage brokers 

submitted the vast majority of 

comments. The remaining commenters 

included mortgage lenders, banks, 

community banks, credit unions, 

secondary market participants, industry 

trade groups, consumer advocates, 

Federal banking agencies, members of 

Congress, state regulators, state 

attorneys general, academics, and 

individual consumers. 

Many commenters supported the 

Board’s proposal to protect consumers 

from certain loan origination 

compensation practices. Consumer 

advocates supported the expanded 

definition of ‘‘loan originators’’ to 

include loan officers, because 

employees of creditors face the same 

incentives as mortgage brokers. They 

also supported covering all closed-end 

transactions regardless of loan price. 

Many of these commenters supported 

the Board’s proposed anti-steering rule, 

but expressed some reservations on the 

breadth of the proposed safe harbor. 

In contrast, industry commenters 

generally opposed the proposed 

prohibition on loan originator 

compensation based on the terms or 

conditions of the transaction, as well as 

the proposed anti-steering rule. Many of 

these commenters expressed concerns 

regarding the breadth of the definition 

of ‘‘loan originator,’’ and urged the Board 

to limit the scope of its definition to 

individuals. Further, these commenters 

urged the Board to limit the scope of the 

proposal to higher-priced loans because 

the abuses targeted by the prohibition 

have historically been limited to the 

subprime market. In addition, many 

community banks, credit unions, and 

mortgage brokers maintained that 

prohibiting these types of origination 

compensation practices would hurt 

small businesses and reduce 

competition in the mortgage market. 

They argued that the proposal would 

increase the cost of credit for 

consumers. 

These comments are discussed in 

further detail below in part VI. 

IV. Summary of Final Rule 

The Board is issuing final rules 

amending Regulation Z to prohibit 

certain practices relating to payments 

made to compensate mortgage brokers 

and other loan originators. The goal of 

the amendments is to protect consumers 

in the mortgage market from unfair 

practices involving compensation paid 

to loan originators. The final rule 

prohibits a creditor or any other person 

from paying, directly or indirectly, 

compensation to a mortgage broker or 

any other loan originator that is based 

on a mortgage transaction’s terms or 

conditions, except the amount of credit 

extended. The rule also prohibits any 

person from paying compensation to a 

loan originator for a particular 

transaction if the consumer pays the 

loan originator’s compensation directly. 

The final rule adopts the proposal that 

prohibits a loan originator from steering 

a consumer to consummate a loan that 

provides the loan originator with greater 

compensation, as compared to other 

transactions the loan originator offered 

or could have offered to the consumer, 

unless the loan is in the consumer’s 

interest. The rule provides a safe harbor 

to facilitate compliance with the 

prohibition on steering. A loan 

originator is deemed to comply with the 

anti-steering prohibition if the consumer 

is presented with loan options that 

provide (1) the lowest interest rate; (2) 

no risky features, such as a prepayment 

penalty, negative amortization, or a 

balloon payment in the first seven years; 

and (3) the lowest total dollar amount 

for origination points or fees and 

discount points. 

The final rule applies to loan 

originators, which are defined to 

include mortgage brokers, including 

mortgage broker companies that close 

loans in their own names in tablefunded transactions, and employees of 

creditors that originate loans (e.g., loan 

officers). Thus, creditors are excluded 

from the definition of a loan originator 

when they do not use table funding, 

whether they are a depository 

institution or a non-depository mortgage 

company, but employees of such 

entities are loan originators. The final 

rule covers all transactions secured by a 

dwelling, but excludes HELOCs 

extended under open-end credit plans 

and timeshare transactions. The rule 

requires creditors and other persons 

who compensate loan originators to 

retain records for at least two years after 

a mortgage transaction is consummated. 

As discussed further in part VII, the 

Board has determined that compliance 

with this final rule shall become 

mandatory on April 1, 2011. 

Accordingly, the final rule applies to 

transactions for which the creditor 

receives an application on or after April 

1, 2011. The Board believes that this 

date gives parties sufficient time to 

develop new business models, train 

employees, and makes system changes 

to implement the rule’s requirements. 

The Board has considered whether it 

would be appropriate to delay the 

effective date of this final rule so that 

the rules related to mortgage loan 

origination standards in the Reform Act 

could be implemented at the same time. 

Although such a delay might facilitate 

compliance and result in some cost 

savings, the Board finds that the benefits 

to consumers of an earlier effective date 

for rules pertaining to loan origination 

compensation and steering greatly 

outweigh any potential savings. 

V. Legal Authority 

A. General Rulemaking Authority 

TILA Section 105 mandates that the 

Board prescribe regulations to carry out 


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Federal Register / Vol. 75, No. 185 / Friday, September 24, 2010 / Rules and Regulations 58513 

6H.R. Rep. 103–652, 162 (Aug. 1994) (Conf. Rep.). 

7See 15 U.S.C. 45(n); Letter from Commissioners 

of the FTC to the Hon. Wendell H. Ford, Chairman, 

and the Hon. John C. Danforth, Ranking Minority 

Member, Consumer Subcomm. of the H. Comm. on 

Commerce, Science, and Transp. (Dec. 17, 1980). 

8 15 U.S.C. 45(n). 

9Statement of Basis and Purpose and Regulatory 

Analysis, Credit Practices Rule, 42 FR 7740, 7743; 

Mar. 1, 1984 (Credit Practices Rule). 

10Letter from Commissioners of the FTC to the 

Hon. Wendell H. Ford, Chairman, and the Hon. 

John C. Danforth, Ranking Minority Member, 

Consumer Subcomm. of the H. Comm. on 

Commerce, Science, and Transp., n.12 (Dec. 17, 

1980). 

11Credit Practices Rule, 42 FR at 7744. 

12 Id. 

13 Id. 

14Letter from James C. Miller III, Chairman, FTC 

to the Hon. John D. Dingell, Chairman, H. Comm. 

on Energy and Commerce (Oct. 14, 1983) (Dingell 

Letter). 

15 Dingell Letter at 1–2. 

16See, e.g., Kenai Chrysler Ctr., Inc. v. Denison, 

167 P.3d 1240, 1255 (Alaska 2007) (quoting FTC v. 

Sperry & Hutchinson Co., 405 U.S. 233, 244–45 n.5 

(1972)); State v. Moran, 151 N.H. 450, 452, 861 A.2d 

763, 755–56 (N.H. 2004) (concurrently applying the 

FTC’s former test and a test under which an act or 

practice is unfair or deceptive if ‘‘the objectionable 

conduct * * * attain[s] a level of rascality that 

would raise an eyebrow of someone inured to the 

rough and tumble of the world of commerce’’) 

(citation omitted); Robinson v. Toyota Motor Credit 

Corp., 201 Ill. 2d 403, 417–418, 775 N.E.2d 951, 

961–62 (2002) (quoting FTC v. Sperry & Hutchinson 

Co., 405 U.S. 233, 244–45 n.5 (1972)). 

the purposes of the Act. TILA also 

specifically authorizes the Board, among 

other things, to: 

• Issue regulations that contain such 

classifications, differentiations, or other 

provisions, or that provide for such 

adjustments and exceptions for any 

class of transactions, that in the Board’s 

judgment are necessary or proper to 

effectuate the purposes of TILA, 

facilitate compliance with the Act, or 

prevent circumvention or evasion. 15 

U.S.C. 1604(a). 

• Exempt from all or part of TILA any 

class of transactions if the Board 

determines that TILA coverage does not 

provide a meaningful benefit to 

consumers in the form of useful 

information or protection. The Board 

must consider factors identified in the 

Act and publish its rationale at the time 

it proposes an exemption for comment. 

15 U.S.C. 1604(f). 

In the course of developing this final 

rule, the Board has considered the views 

of interested parties, its experience in 

implementing and enforcing Regulation 

Z, and the results obtained from testing 

various disclosure options in controlled 

consumer tests. For the reasons 

discussed in this notice, the Board 

believes this final rule is appropriate 

pursuant to the authority under TILA 

Section 105(a). 

B. The Board’s Authority Under TILA 

Section 129(l)(2) 

TILA Section 129(l)(2) authorizes the 

Board to prohibit acts or practices in 

connection with: 

• Mortgage loans that the Board finds 

to be unfair, deceptive, or designed to 

evade the provisions of HOEPA; and 

• Refinancing of mortgage loans that 

the Board finds to be associated with 

abusive lending practices or that are 

otherwise not in the interest of the 

borrower. 

15 U.S.C. 1639(l)(2). The authority 

granted to the Board under TILA 

Section 129(l)(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(aa), 15 U.S.C. 

1602(aa), as well as mortgage loans not 

covered under that Section, such as 

home purchase loans. Moreover, while 

HOEPA’s statutory restrictions apply 

only to creditors and only to loan terms 

or lending practices, TILA Section 

129(l)(2) is not limited to acts or 

practices by creditors, nor is it limited 

to loan terms or lending practices. See 

15 U.S.C. 1639(l)(2). It authorizes 

protections against unfair or deceptive 

practices ‘‘in connection with mortgage 

loans,’’ and it authorizes protections 

against abusive practices ‘‘in connection 

with refinancing of mortgage loans.’’ 

Thus, the Board’s authority is not 

limited to regulating specific contractual 

terms of mortgage loan agreements; it 

extends to regulating loan-related 

practices generally, within the standards 

set forth in the statute. 

HOEPA does not set forth a standard 

for what is unfair or deceptive, but the 

Congressional Conference Report for 

HOEPA indicates that, in determining 

whether a practice in connection with 

mortgage loans is unfair or deceptive, 

the Board should look to the standards 

employed for interpreting state unfair 

and deceptive trade practices statutes 

and the Federal Trade Commission Act 

(FTC Act), Section 5(a), 15 U.S.C. 45(a).6

Congress has codified standards 

developed by the Federal Trade 

Commission (FTC) for determining 

whether acts or practices are unfair 

under Section 5(a), 15 U.S.C. 45(a).7

Under the FTC Act, an act or practice 

is unfair when it causes or is likely to 

cause substantial injury to consumers, 

which is not reasonably avoidable by 

consumers themselves and not 

outweighed by countervailing benefits 

to consumers or to competition. In 

addition, in determining whether an act 

or practice is unfair, the FTC is 

permitted to consider established public 

policies, but public policy 

considerations may not serve as the 

primary basis for an unfairness 

determination.8

The FTC has interpreted these 

standards to mean that consumer injury 

is the central focus of any inquiry 

regarding unfairness.9 Consumer injury 

may be substantial if it imposes a small 

harm on a large number of consumers, 

or if it raises a significant risk of 

concrete harm.10 The FTC looks to 

whether an act or practice is injurious 

in its net effects.11 The FTC has also 

observed that an unfair act or practice 

will almost always reflect a market 

failure or market imperfection that 

prevents the forces of supply and 

demand from maximizing benefits and 

minimizing costs.12 In evaluating 

unfairness, the FTC looks to whether 

consumers’ free market decisions are 

unjustifiably hindered.13

The FTC has also adopted standards 

for determining whether an act or 

practice is deceptive (though these 

standards, unlike unfairness standards, 

have not been incorporated into the FTC 

Act).14 First, there must be a 

representation, omission, or practice 

that is likely to mislead the consumer. 

Second, the act or practice is examined 

from the perspective of a consumer 

acting reasonably in the circumstances. 

Third, the representation, omission, or 

practice must be material, that is, it 

must be likely to affect the consumer’s 

conduct or decision with regard to a 

product or service.15

Many states also have adopted 

statutes prohibiting unfair or deceptive 

acts or practices, and these statutes 

employ a variety of standards, many of 

them different from the standards 

currently applied under the FTC Act. A 

number of states follow an unfairness 

standard formerly used by the FTC. 

Under this standard, an act or practice 

is unfair where it offends public policy 

or is immoral, unethical, oppressive, or 

unscrupulous, and causes substantial 

injury to consumers.16

In adopting this final rule under TILA 

Section 129(l)(2)(A), 15 U.S.C. 

1639(l)(2)(A), the Board has considered 

the standards currently applied to the 

FTC Act’s prohibition against unfair or 

deceptive acts or practices, as well as 

the standards applied in similar state 

statutes. 

VI. Section-by-Section Analysis of Final 

Rules for Loan Origination 

Compensation 

A. Overview 

This part VI discusses the 

prohibitions on certain compensation 

payments to loan originators and 

steering. To address the unfairness that 

arises with certain loan originator 

compensation practices, the final rule 

prohibits creditors or any other person 


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58514 Federal Register / Vol. 75, No. 185 / Friday, September 24, 2010 / Rules and Regulations 

17See 73 FR 68204; Nov. 17, 2008. 

from paying compensation to a loan 

originator based on the terms or 

conditions of the credit transaction, 

other than the amount of credit 

extended. This prohibition does not 

apply to payments that consumers make 

directly to a loan originator. However, if 

the loan originator receives payments 

directly from the consumer, the loan 

originator is prohibited from also 

receiving compensation from any other 

party in connection with that 

transaction. In addition, the final rule 

prohibits a loan originator from steering 

consumers to loans not in their interest 

because the loans would result in 

greater compensation for the loan 

originator. Similar to the proposed rule, 

the final rule provides a safe harbor to 

facilitate compliance with the steering 

prohibition, with some modifications. 

As discussed in further detail below, 

the Board finds that these prohibitions 

on payments to loan originators and 

steering are necessary and appropriate 

to prevent practices that the Board 

deems unfair in connection with 

mortgage loans and that are associated 

with abusive lending practices or are 

otherwise not in the interest of the 

consumer in connection with 

refinancings. See TILA Section 129(l)(2), 

15 U.S.C. 1639(l)(2), and the discussion 

of this statutory authority in part IV 

above. 

B. Public Comment 

Industry commenters and their trade 

groups generally, although not 

uniformly, opposed the proposal to 

prohibit loan originator compensation 

based on the terms or conditions of the 

transaction. These commenters stated 

that such a prohibition would hurt 

small businesses, especially mortgage 

brokers, as well as community banks 

and credit unions. They maintained that 

adopting the proposed prohibition 

would increase the cost of credit for all 

creditors and consumers. Some industry 

commenters also suggested alternatives 

such as imposing a cap on originator 

compensation and requiring improved 

disclosures. They noted that the U.S. 

Department of Housing and Urban 

Development’s (HUD) recently revised 

the disclosures required under the Real 

Estate Settlement Procedures Act 

(RESPA), including disclosures about 

yield spread premiums. They stated that 

the RESPA rules had only recently take 

effect,17 and urged the Board to wait 

until a determination could be made as 

to whether the disclosures could resolve 

concerns about originator 

compensation. 

However, industry commenters 

generally suggested that if the Board 

chooses to finalize the proposed 

prohibitions, the Board should permit 

payments to loan originators based on 

the principal loan amount. They 

asserted that prohibiting payments 

based on the loan amount would disrupt 

the secondary market. Industry 

commenters uniformly opposed 

expanding the proposed prohibitions to 

HELOCs, citing a lack of abuse in the 

HELOC market as the principal reason. 

In contrast, consumer groups, state 

and Federal regulators, state attorneys 

general, and several members of 

Congress strongly supported the 

proposed prohibition on loan originator 

compensation based on the terms or 

conditions of the transaction. They 

stated that by removing reliance on loan 

terms or conditions to set compensation 

for loan originators, the rule seeks to 

correct the misaligned incentives that 

currently exist in the mortgage 

marketplace between loan originators 

and consumers. However, some of these 

commenters did not support allowing 

compensation based on the principal 

loan amount. They argued that 

permitting payments to loan originators 

based on the loan amount may 

encourage loan originators to ‘‘upsell’’ 

the loan amount and discourage others 

from originating small balance loans. 

Some commenters, especially consumer 

advocates, sought additional 

protections, such as disclosures and 

prohibitions on creditors paying any 

compensation to a loan originator unless 

the creditor’s payment covered all fees 

and charges associated with the loan, 

not just the compensation paid to the 

loan originator. 

Many of these commenters supported 

expanding the definition of ‘‘loan 

originator’’ to include both mortgage 

brokers and employees of creditors. 

They stated that overages paid to retail 

originators are equally harmful to 

consumers as compensation paid to 

mortgage brokers; both provide 

incentives for the loan originator to steer 

the consumer to a loan that will yield 

the originator the greatest amount of 

compensation. In addition, they urged 

the Board to extend the scope of the 

proposed prohibition to the entire 

mortgage market, including HELOCs, to 

prevent unfair compensation practices 

from migrating from one market 

segment to another. 

In response to the proposed 

prohibition on steering, consumer 

advocates, other Federal banking 

agencies, members of Congress, state 

regulators, and state attorneys general 

expressed support overall. Certain 

consumer advocates and state officials 

argued, however, that the proposed safe 

harbor for steering substantially 

weakened the proposed prohibitions on 

compensation practices. These 

commenters urged the Board to replace 

the safe harbor with a rebuttable 

presumption if the transaction’s terms 

or conditions met certain criteria, such 

as a competitive interest rate and no 

prepayment penalty. 

In contrast, the vast majority of 

industry commenters opposed the 

steering prohibition. They argued that 

the steering prohibition and proposed 

safe harbor were too vague and would 

increase litigation risk. They suggested 

that, at a minimum, the Board provide 

a broader safe harbor for the steering 

prohibition to facilitate compliance and 

lessen litigation risk. 

These comments are discussed in 

further detail throughout this part as 

applicable. 

C. Unfair and Deceptive Acts and 

Practices Analysis 

The Board proposed to use its HOEPA 

authority to prohibit unfair 

compensation practices in connection 

with transactions secured by real 

property or a dwelling. TILA Section 

129(l)(2)(A), 15 U.S.C. 1639(l)(2)(A). 

TILA Section 129(l)(2) authorizes the 

Board to prohibit acts or practices in 

connection with mortgage loans that the 

Board finds to be unfair or deceptive. As 

discussed above in part V, in 

considering whether a practice is unfair 

or deceptive under TILA Section 

129(l)(2), the Board has generally relied 

on the standards that have been adopted 

for purposes of Section 5(a) of the FTC 

Act, 15 U.S.C. 45(a), which also 

prohibits unfair and deceptive acts and 

practices. For purposes of the FTC Act, 

an act or practice is considered unfair 

when it causes or is likely to cause 

substantial injury to consumers that is 

not reasonably avoidable by consumers 

themselves and not outweighed by 

countervailing benefits to consumers or 

to competition. 

As explained in further detail below, 

the Board finds that paying loan 

originators based on the terms or 

conditions of the loan, other than the 

amount of credit extended, or steering 

consumers to loans that are not in their 

interest to maximize loan originator 

compensation, are unfair practices. 

Furthermore, based on its experience 

with consumer testing, particularly in 

connection with the 2008 HOEPA 

Proposed Rule, the Board believes that 

disclosure alone is insufficient for most 

consumers to avoid the harm caused by 

this practice. Thus, the Board is 

adopting substantive regulations to 

prohibit these unfair practices 


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Federal Register / Vol. 75, No. 185 / Friday, September 24, 2010 / Rules and Regulations 58515 

18For example, some creditors may be willing to 

offer a loan with a lower interest rate in return for 

including a prepayment penalty. A loan originator 

that offers a loan with a prepayment penalty may 

not offer the lower rate, however, resulting in a 

premium interest rate and the payment of a yield 

spread premium. 

substantially as proposed. This section 

discusses (1) the substantial injuries 

caused to consumers by these unfair 

compensation practices; (2) the reasons 

consumers cannot reasonably avoid 

these injuries; and (3) the basis for the 

Board concluding that the injuries are 

not outweighed by the countervailing 

benefits to consumers or competition 

when creditors engage in these unfair 

compensation practices. 

Substantial Injury 

When loan originators receive 

compensation based on a transaction’s 

terms and conditions, they have an 

incentive to provide consumers loans 

with higher interest rates or other less 

favorable terms. Yield spread premiums, 

therefore, present a significant risk of 

economic injury to consumers. 

Currently, this injury is common 

because consumers typically are not 

aware of the practice or do not 

understand its implications, and thus 

cannot effectively limit the practice. 

Creditors’ payments to mortgage 

brokers or their own employees that 

originate loans (loan officers) generally 

are not transparent to consumers. 

Brokers may impose a direct fee on the 

consumer, which may lead consumers 

to believe that the direct fee is the sole 

source of the broker’s compensation. 

While consumers expect the creditor to 

compensate its own loan officers, they 

do not necessarily understand that the 

loan originator may have the ability to 

increase the creditor’s interest rate or 

include certain loan terms for the 

originator’s own gain. 

Because consumers generally do not 

understand the yield spread premium 

mechanism, they are unable to engage in 

effective negotiation. Instead they are 

more likely to rely on the loan 

originator’s advice, and, as a result, may 

receive a higher rate or other 

unfavorable terms solely because of 

greater originator compensation. These 

consumers suffer substantial injury by 

incurring greater costs for mortgage 

credit than they would otherwise be 

required to pay. 

Injury Not Reasonably Avoidable 

Yield spread premiums create a 

conflict of interest between the loan 

originator and consumer. As noted 

above, many consumers are not aware of 

creditor payments to loan originators, 

especially in the case of mortgage 

brokers, because these arrangements 

lack transparency. Although consumers 

may reasonably expect creditors to 

compensate their own employees, 

consumers do not know how the loan 

officer’s compensation is structured or 

that loan officers can increase the 

creditor’s interest rate or offer certain 

loan terms to increase their own 

compensation. Without this 

understanding, consumers cannot 

reasonably be expected to appreciate or 

avoid the risk of financial harm these 

arrangements represent. 

To guard against this practice, a 

consumer would have to know the 

lowest interest rate the creditor would 

have accepted, and ascertain that the 

offered interest rate includes a rate 

increase by the loan originator. Most 

consumers will not know the lowest rate 

the creditor would be willing to accept. 

The consumer also would need to 

understand the dollar amount of the 

yield spread premium that is generated 

by the rate increase to determine what 

portion, if any, is being applied to 

reduce the consumer’s upfront loan 

charges. HUD recently adopted 

disclosures in Regulation X (24 CFR Part 

3500), which implement RESPA and 

that could enhance some consumers’ 

understanding of mortgage broker 

compensation. But the details of the 

compensation arrangements are 

complex and the disclosures are limited. 

Pursuant to Regulation X, a mortgage 

broker or lender shows the yield spread 

premium as a credit to the borrower that 

is applied to cover upfront costs, but 

also adds the amount of the yield spread 

premium to the total origination charges 

being disclosed. This disclosure would 

not necessarily inform the consumer 

that the rate has been increased by the 

originator and that a lower rate with a 

smaller origination charge may be 

available. In addition, the Regulation X 

disclosure concerning yield spread 

premiums would not apply to 

compensation paid to a loan originator 

that is employed by the creditor. Thus, 

the Regulation X disclosure, while 

perhaps an improvement over previous 

rules, is not likely by itself to prevent 

consumers from incurring substantial 

injury from the practice. 

Yield spread premiums are complex 

and may be counter-intuitive even to 

well-informed consumers. Based on the 

Board’s experience with consumer 

testing, the Board believes that 

disclosures are insufficient to overcome 

the gap in consumer comprehension 

regarding this critical aspect of the 

transaction. Currently, the required 

disclosures of originator compensation 

under Federal and state laws seem to 

have little, if any, effect on originators’ 

incentive to provide consumers with 

increased interest rates or other 

unfavorable loan terms to increase the 

originators’ compensation.18 The 

Board’s consumer testing indicated that 

disclosures about yield spread 

premiums are ineffective. Consumers in 

these tests did not understand yield 

spread premiums and how they create 

an incentive for loan originators to 

increase consumers’ costs. 

Consumers’ lack of comprehension of 

yield spread premiums is compounded 

where the originator imposes a direct 

charge on the consumer. A mortgage 

broker may charge 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 are far less 

likely to shop or negotiate to assure 

themselves that they are being offered 

competitive mortgage terms. Even for 

consumers who shop, the lack of 

transparency in originator compensation 

arrangements makes it unlikely that 

consumers will avoid yield spread 

premiums that unnecessarily increase 

the cost of their loan. 

Consumers generally lack expertise in 

complex mortgage transactions because 

they engage in such mortgage 

transactions infrequently. Their reliance 

on loan originators is reasonable in light 

of originators’ greater experience and 

professional training in the area, the 

belief that originators are working on 

their behalf, and the apparent 

ineffectiveness of disclosures to dispel 

that belief. 

Injury Not Outweighed by Benefits to 

Consumers or to Competition 

Yield spread premiums may benefit 

consumers in cases where the amount is 

applied to reduce consumers’ upfront 

closing costs, including originator 

compensation. A creditor’s increase in 

the interest rate (or the addition of other 

loan terms) may be used to generate 

additional income that the creditor uses 

to compensate the originator, in lieu of 

adding origination points or fees that 


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58516 Federal Register / Vol. 75, No. 185 / Friday, September 24, 2010 / Rules and Regulations 

the consumer would be required to pay 

directly from the consumer’s preexisting 

funds or the loan proceeds. This can 

benefit a consumer who lacks the 

resources to pay closing costs in cash, 

or who may have insufficient equity in 

the property to increase the loan amount 

to cover these costs. 

Without a clear understanding of 

yield spread premiums, the majority of 

consumers are not equipped to police 

the market to ensure that yield spread 

premiums are in fact applied to reduce 

their closing costs, especially in the case 

of loan originator compensation. Such 

policing would be particularly difficult 

because consumers are not likely to 

have any basis for determining a 

‘‘typical’’ or ‘‘reasonable’’ amount for 

originator compensation. Accordingly, 

the Board is amending Regulation Z to 

prohibit any person from basing a loan 

originator’s compensation on the loan’s 

terms or conditions, other than the 

amount of credit extended. However, 

the final rule still afford creditors the 

flexibility to structure loan pricing to 

preserve the potential consumer benefit 

of compensating an originator, or 

funding third-party closing costs, 

through the interest rate. 

D. Final Rules Prohibiting Certain 

Payments to Loan Originators and 

Steering 

The Board proposed in § 226.36(d)(1) 

to prohibit any person from 

compensating a loan originator, directly 

or indirectly, based on the terms or 

conditions of a loan transaction secured 

by real property or a dwelling. The 

prohibition extends to all persons, not 

just the creditor, to prevent evasion by 

structuring payments to loan originators 

through non-creditors, such as 

secondary market investors. Under the 

proposal, compensation based on the 

loan amount would be prohibited as a 

payment that is based on a term or 

condition of the loan, but comment was 

sought on an alternative proposal that 

would permit such compensation. 

The proposed prohibition did not 

apply to consumers’ direct payments to 

loan originators. However, where the 

consumer compensated the loan 

originator directly, proposed 

§ 226.36(d)(2) prohibited the loan 

originator from also receiving 

compensation from the creditor or any 

other person. The proposal applied to 

all ‘‘loan originators,’’ which included 

employees of the creditor in addition to 

mortgage brokers, and to all closed-end 

transactions secured by real property or 

a dwelling. 

The Board also proposed in 

§ 226.36(e)(1) to prohibit a loan 

originator from steering a consumer to 

consummate a loan that may not be in 

the consumer’s interest to maximize the 

loan originator’s compensation. 

Proposed §§ 226.36(e)(2) and (3) 

provided a safe harbor: No violation of 

the steering prohibition would occur if, 

under certain conditions, the consumer 

was presented with at least three loan 

options for each type of transaction 

(fixed-rate or adjustable-rate loan) in 

which the consumer expressed an 

interest. Proposed commentary 

provided additional guidance regarding 

the prohibition on steering and the safe 

harbor. 

The Board is adopting the prohibition 

on originator compensation that is based 

on the terms or conditions of the loan, 

substantially as proposed. The Board is 

also adopting the alternative proposal 

that permits compensation that is based 

on the amount of credit extended. The 

Board is revising the proposed 

commentary to provide further 

clarification regarding compensation 

payments that do and do not violate the 

prohibition, including clarifications 

concerning the use of credit scores and 

similar indicators of credit risk. The 

Board is also adopting the final rule 

prohibiting steering as proposed, with 

modifications to the safe harbor and 

corresponding commentary. These 

provisions are discussed in further 

detail below. 

Section 226.36 Prohibited Acts or 

Practices in Connection With Credit 

Secured by a Dwelling 

Definition of ‘‘Loan Originator’’ 

As discussed below in more detail, 

the Board proposed to prohibit certain 

payments to loan originators based on 

transaction terms or conditions, and 

also proposed to prohibit a loan 

originator from ‘‘steering’’ consumers to 

transactions that are not in their 

interest, to increase the loan originator’s 

compensation. Accordingly, the Board 

proposed in § 226.36(a)(1) to define the 

term ‘‘loan originator’’ to include 

persons who are covered by the current 

definition of ‘‘mortgage broker’’ in 

§ 226.36(a) and employees of the 

creditor who are not otherwise already 

considered ‘‘mortgage brokers.’’ (Section 

226.36(a) currently defines the term 

‘‘mortgage broker’’ because a mortgage 

broker is subject to the prohibition on 

coercion of appraisers in existing 

§ 226.36(b).) The Board further proposed 

to clarify under the proposed definition 

of ‘‘loan originator’’ that a creditor in a 

‘‘table-funded transaction’’ that is not 

funding the transaction at 

consummation out of its own resources, 

including drawing on a bona fide 

warehouse line of credit or out of its 

deposits, is considered a ‘‘mortgage 

broker.’’ No substantive change was 

intended other than to adopt the 

definition of ‘‘loan originator.’’ The 

Board proposed to revise and 

redesignate the existing definition of 

‘‘mortgage broker’’ under § 226.36(a) as 

new § 226.36(a)(2). 

Public Comment. Industry 

commenters and their trade groups 

strongly opposed the proposed 

definition of ‘‘loan originator’’ in 

§ 226.36(a) because they opposed the 

scope of coverage for the proposed 

prohibitions on compensation in 

§ 226.36(d). They argued that the rule 

should not apply to compensation paid 

by creditors to their employees because 

creditors have greater capital 

requirements, face significant oversight 

and regulation, and are motivated by 

concern for their reputation, and, 

therefore, do not engage in unfair 

compensation practices. Independent 

mortgage companies and their trade 

groups further argued that, unlike 

mortgage brokers, they do not present 

themselves to consumers as being able 

to shop loans offered by different 

creditors, but originate loans exclusively 

for themselves using their own 

resources. These commenters argued 

that this distinction prevents employees 

of independent mortgage banking 

companies from engaging in the abuses 

targeted by the rule, and, therefore, it is 

unnecessary to extend the rule’s 

prohibitions on compensation to them. 

Community banks and their trade 

groups contended that they should be 

excluded from the definition of loan 

originator because such banks and 

employees have a vested interest in 

their communities and consumers, and 

therefore take more time to educate and 

inform consumers. They noted that they 

hold most of their loans in portfolio 

rather than selling them to the 

secondary market, and have not engaged 

in the abusive practices targeted by the 

rule. Similarly, a credit union trade 

association argued that its members 

should be excluded from the definition 

of ‘‘loan originator.’’ This commenter 

stated that loan originator compensation 

encourages credit union employees to 

ensure that consumers obtain the loan 

best suited for them in order to 

maximize customer satisfaction, because 

credit union employees share in the 

profit generated by high loan volumes. 

Other industry commenters urged the 

Board to exempt managers, supervisors, 

and technical or administrative 

employees from the definition of ‘‘loan 

originator.’’ These commenters said that 

such employees have little, if any, 

impact on terms or conditions of 

individual loans and their 


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Federal Register / Vol. 75, No. 185 / Friday, September 24, 2010 / Rules and Regulations 58517 

19For example, the FTC’s settlement with 

Gateway Funding, Inc. in December 2008 illustrates 

a case where a creditor’s loan officers created 

‘‘overages,’’ although the primary legal theory 

concerned disparate treatment by race in the 

imposition of overages. The FTC’s complaint and 

the court’s final judgment and order can be found 

on the FTC’s Web site at http://www.ftc.gov/os/ 

caselist/0623063/index.shtm. The FTC has since 

filed a complaint alleging similar patterns of 

overages in violation of fair lending laws against 

Golden Empire Mortgage, Inc. The May 2009 

complaint can be found at http://www.ftc.gov/os/ 

caselist/0623061/090511gemcmpt.pdf. A similar 

pattern of overages was alleged in legal actions 

brought by the Department of Justice, which 

resulted in settlement agreements with Huntington 

Mortgage Company (1995), available at http:// 

www.justice.gov/crt/housing/documents/ 

huntingtonsettle.php, and Fleet Mortgage Corp 

(1996), available at http://www.justice.gov/crt/ 

housing/documents/fleetsettle.php. 

20Amany El Anshasy, Gregory Elliehausen, & 

Yoshiaki Shimazaki, The Pricing of Subprime 

Mortgages by Mortgage Brokers and Lenders (July 

2005). 

21Morris Kleiner & Richard Todd, Mortgage 

Broker Regulations that Matter: Analyzing Earnings, 

Employment, and Outcomes for Consumers, 

National Bureau of Economic Research Working 

Paper 13684 (Dec. 2007). 

22Michael LaCour-Little, The Pricing of 

Mortgages by Brokers: An Agency Problem?, 31 

Journal of Real Estate Research 235 (2009); Howell 

E. Jackson & Jeremy Berry, Kickbacks or 

Compensation: The Case of YSPs, 12 Stan. J. L. Bus. 

& Fin. 298, 353 (2007); Patricia A. McCoy, 

Rethinking Disclosure in a World of Risk-Based 

Pricing, 44 Harvard J. on Leg. 123 (2006). 

23Center for Responsible Lending, Steered 

Wrong: Brokers, Borrowers, and Subprime Loans 

(Apr. 2008). 

compensation does not rely on 

originated loans. 

Some industry commenters urged the 

Board to exclude companies and other 

entities from the proposed definition of 

‘‘loan originator’’ and instead adopt the 

definition of ‘‘loan originator’’ provided 

for by Congress in the Safe Mortgage 

Licensing Act (SAFE Act), which covers 

only natural persons and not entities. 

Mortgage brokers, together with some 

other commenters including the Small 

Business Administration (the SBA), 

argued that the proposed definition of 

‘‘loan originator’’ in Regulation Z would 

be broader than the SAFE Act 

definition, without justification. 

Specifically, the mortgage brokers and 

the SBA argued the proposal would 

disproportionately affect small 

brokerage firms and create an unlevel 

playing field. They stated that large 

brokerage firms would be ‘‘creditors’’ 

who are not subject to the compensation 

restrictions, because they can and 

would fund loans out of their own 

resources, such as by drawing on bona 

fide warehouse lines of credit. They 

claimed that the proposal would force 

small brokerage firms who are unable to 

fund loans out of their own resources 

out of the marketplace. 

Consumer advocates and state 

attorneys general supported the 

proposed definition of loan originator. 

They noted that, like third-party 

originators, employees of creditors 

receive compensation based on loan 

terms and conditions, a practice that 

provides incentives to direct consumers 

to costlier loans. 

Discussion. The Board is adopting the 

definition of loan originator in 

§ 226.36(a)(1) as proposed, with some 

clarifications. As discussed above, the 

final rule is aimed at abuses associated 

with creditors’ compensation payments 

to loan originators for originating loans 

with interest rates above the creditor’s 

minimum or ‘‘par’’ interest rate or other 

less favorable terms, such as a 

prepayment penalty. The final rule 

applies whether the creditor’s payment 

is made to a natural person, including 

an employee of the creditor, or a 

business entity. The rule does not apply 

to payments received by a creditor when 

selling the loan to a secondary market 

investor. When a mortgage brokerage 

firm originates a loan, it is not exempt 

under the final rule unless it is also a 

creditor that funds the loan from its own 

resources, such as its own line of credit. 

Similar to mortgage brokers, creditors’ 

employees have significant discretion 

over loan pricing, and therefore are able 

to modify the loan’s terms or conditions 

to increase their own compensation. 

Ample anecdotal evidence indicates 

that creditors’ loan officers engage in 

such pricing discretion that directly 

harms consumers.19 The Board believes 

that where loan originators have the 

capacity to control their own 

compensation based on the terms or 

conditions offered to consumers, the 

incentive to provide consumers with a 

higher interest rate or other less 

favorable terms exists. When this unfair 

practice occurs, it results in direct 

economic harm to consumers whether 

the loan originator is a mortgage broker 

or employed as a loan officer for a bank, 

credit union, or community bank. 

The final rule also defines loan 

originator under § 226.36(a)(1) as 

covering both natural persons and 

mortgage broker companies, including 

those companies that close loans in 

their own names but use table funding 

from a third party. The final rule 

clarifies that a creditor that funds a 

transaction is excluded from the rule’s 

definition of a loan originator. 

As noted above, a mortgage broker 

trade group asserted that by treating 

mortgage broker companies that use 

table funding as ‘‘loan originators,’’ 

small brokerage firms that do not fund 

their own loans would be forced out of 

the marketplace. This commenter 

argued that mortgage brokers benefit 

consumers by increasing competition in 

the mortgage market and lowering 

mortgage costs, and cited studies for 

support. One of the studies found that 

loans obtained through mortgage 

brokers were less costly to borrowers as 

compared to loans obtained through 

lenders.20 Another study noted that 

mortgage brokers can simplify the loan 

shopping experience for consumers and 

enhance competition.21 On the other 

hand, a consumer group cited studies 

showing that borrowers using mortgage 

brokers incurred greater costs in 

connection with their loans, such as 

fees, interest, and other closing costs.22

This commenter also cited a study that 

found that broker-originated loans, as 

compared to loans originated by 

creditors’ employees (loan officers), cost 

subprime borrowers more in interest 

over the life of the loan.23 Although 

using a broker can help consumers shop 

among different lenders and so enhance 

competition, consumers do not benefit if 

they are steered by a broker to a higher 

cost loan to increase the broker’s 

compensation. 

The Board has considered these 

comments and believes the studies are 

not dispositive of the issues the rule 

seeks to address. Brokerage entities that 

do not fund loans out of their own 

resources operate as retail networks for 

creditors, particularly in markets where 

creditors might not have a direct retail 

presence. The brokers serve to expand 

the lenders’ customer base by bringing 

loans to creditors that would not be 

originated by the creditors’ own 

employees. In these cases, mortgage 

brokers that do not fund loans do not 

compete directly with creditor entities, 

but rather with the loan officers of such 

creditor entities. The final rule, as 

proposed, applies to mortgage brokers, 

as well as employees of creditors, that 

meet the definition of ‘‘loan originator.’’ 

Moreover, as noted above, the rule is 

intended to address uniformly unfair 

compensation practices that result in 

consumers being given loans with less 

favorable terms, whether the practices 

involve individual brokers and loan 

officers or companies that operate as 

loan originators. The Board believes that 

providing exemptions for any set of loan 

originators would facilitate 

circumvention of the rule and 

undermine its objective. A rule that 

covered only natural persons and not 

brokerage entities would permit 

evasion, for example, by individual loan 

originators incorporating as sole 

proprietorships. 

In addition, the Board does not 

believe the final rule will require small 

brokerage firms to go out of business. 


srobinson on DSKHWCL6B1PROD with RULES3
58518 Federal Register / Vol. 75, No. 185 / Friday, September 24, 2010 / Rules and Regulations 

Creditors rely upon mortgage brokers as 

their retail origination network so that 

they can operate in a greater number of 

markets with less overhead expense 

than if they operated direct retail 

branches and employed loan officers. To 

the extent that mortgage brokers provide 

cost savings or other value to creditors 

as an origination network, the final rule 

does not prevent creditors from 

compensating these entities in a manner 

that reflects such value, so long as the 

compensation is not based on a 

transaction’s terms or conditions. The 

Board has provided illustrative 

examples of permissible compensation 

for loan originators in the final rule. The 

final rule prohibits a particular 

compensation practice that the Board 

finds to be unfair but does not set a cap 

on the amount of compensation that a 

loan originator may receive. This may 

result in new business models, but the 

Board does not believe mortgage 

brokerage firms will no longer be able to 

compete in the marketplace unless they 

can continue to engage in compensation 

practices the Board has found to be 

unfair. 

The Board recognizes, however, that 

including mortgage brokerage firms in 

the definition of ‘‘loan originator’’ will 

capture a significant number of small 

firms; such firms, on average, tend to be 

small (e.g., 7 to 10 employees). In 

addition, extending the definition of 

‘‘loan originator’’ to entities that function 

as mortgage brokers in particular 

transactions may also cover community 

banks and credit unions, many of which 

are small entities. The Board notes that 

these smaller entities may experience 

relatively higher costs to implement the 

final rule because the costs of 

compliance are fixed and these entities 

may not achieve similar economies of 

scale with a smaller loan volume. The 

Board recognizes the concerns of small 

entities, but believes for the reasons 

stated above that the benefits of the 

prohibition to consumers outweigh the 

associated compliance costs. 

Furthermore, the definition of ‘‘loan 

originator’’ in § 226.36(a)(1) is consistent 

with new TILA Section 103(cc)(2), as 

enacted in Section 1401 of the Reform 

Act, which defines ‘‘mortgage 

originator’’ to include employees of a 

creditor, individual brokers and 

mortgage brokerage firms, including 

entities that close loans in their own 

names that are table funded by a third 

party. Consistent with Section 1401 of 

the Reform Act, the Board does not 

purport to address transactions that 

occur between creditors and secondary 

market purchasers, to which consumers 

are not a direct party, and appropriately 

does not extend the rule to 

compensation earned by entities on 

those transactions. 

Existing § 226.36(a) defining mortgage 

broker is revised and redesignated as 

new § 226.36(a)(2). Comments 36(a)–1 

and –2 regarding the meaning of loan 

originator and mortgage broker, 

respectively, are adopted substantially 

as proposed. However, comment 36(a)– 

1 regarding the meaning of loan 

originator is amended to clarify when 

table funding occurs. For example, a 

table-funded transaction does not occur 

if a creditor provides the funds for the 

transaction at consummation out of its 

own resources, such as by drawing on 

a bona fide warehouse line of credit, or 

out of its deposits. In addition, comment 

36(a)-1 is also amended to clarify 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. 

This final 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 

§ 226.20(a). 

Under existing § 226.2(a)(17)(i)(B), a 

person to whom the obligation is 

initially payable on its face generally is 

a ‘‘creditor.’’ However, as noted, the 

definition of ‘‘loan originator’’ in 

§ 226.36(a)(1) provides that if a creditor 

closes a loan transaction in its own 

name using table funding by a third 

party, that creditor is also deemed a 

‘‘loan originator’’ for purposes of 

§ 226.36. Thus, new comment 36(a)–3 

clarifies that for purposes of § 226.36(d) 

and (e), the provisions that refer to a 

‘‘creditor’’ excludes those creditors that 

are also deemed ‘‘loan originators’’ 

under § 226.36(a)(1) because they table 

fund the credit transaction (i.e., do not 

provide the funds for the transaction at 

consummation out of their own 

resources). New comment 36(a)–4 

clarifies that for purposes of § 226.36, 

managers, administrative staff, and 

similar individuals whose 

compensation is not based on whether 

a particular loan is originated are not 

loan originators. 

Covered Transactions 

The Board proposed to apply the 

prohibitions in §§ 226.36(d) and 

226.36(e) to closed-end transactions 

secured by real property or a dwelling 

regardless of whether they were higherpriced loans under existing § 226.35(a). 

The Board requested comment on the 

relative costs and benefits of applying 

the rule to all segments of the market, 

whether the costs would outweigh the 

benefits for loans below the higherpriced threshold, and whether the 

prohibitions should be extended to 

HELOCs. 

Public Comment. Many creditors and 

their trade associations urged the Board 

to limit the prohibitions in §§ 226.36(d) 

and (e) to higher-priced loans. They 

argued that unfair and abusive practices 

relating to loan originator compensation 

were historically concentrated in the 

higher-priced loan market. A trade 

association for independent mortgage 

banking companies also suggested that 

the rule protect only vulnerable 

consumers that have loans with risky 

features. In addition, most, if not all, 

industry commenters and their trade 

groups urged the Board to exclude 

HELOCs from the proposal’s coverage. 

They cited a lack of evidence that 

unfairness is associated with loan 

originator compensation for open-end 

products. 

In contrast, consumers, consumer 

advocacy groups, and state attorneys 

general supported extending the 

prohibitions to the entire market, 

including HELOCs. They stated that the 

conflict of interest inherent in 

rewarding loan originators for offering 

less favorable loan terms exists 

regardless of the loan price. They argued 

that excluding HELOCS or loans below 

the higher-priced threshold from the 

rules would simply result in migration 

of unfair compensation practices to 

those market segments. Consumer 

advocates and state attorneys general 

also noted that failure to cover HELOCs 

would encourage loan originators to 

originate ‘‘piggyback’’ HELOCs 

simultaneously with first-lien loans. 

These commenters claimed that 

creditors currently offer financial 

incentives to loan originators to 

originate split loan transactions to yield 

greater return for the creditor, and stated 

that excluding HELOCs from the 

prohibitions would allow this unfair 

practice to continue. 

Discussion. The final rule applies to 

all closed-end consumer credit 

transactions secured by a dwelling, 

regardless of price or lien position. See 

§§ 226.1(c) and 226.3(a), and 

corresponding commentary, regarding 

extensions of consumer credit subject to 

TILA. The Board believes covering only 

transactions above the higher-priced 

threshold in § 226.35(a) would fail to 

protect consumers adequately. A 

consumer can be harmed from a loan 

originator delivering less favorable loan 

terms or conditions to maximize 

compensation whether the loan has an 

APR that falls above or below the 

threshold in § 226.35. The Board 

recognizes that the risk of harm may be 

lower in the prime segment of the 

market where consumers historically 


srobinson on DSKHWCL6B1PROD with RULES3
Federal Register / Vol. 75, No. 185 / Friday, September 24, 2010 / Rules and Regulations 58519 

24 In the August 2009 Closed-End Proposal, the 

Board solicited comment on whether §§ 226.36(b) 

and (c) should apply to HELOCs. The Board will 

consider whether to extend §§ 226.36(b) and (c) to 

HELOCs when it finalizes the August 2009 ClosedEnd Proposal. 

have more choices and ability to shop. 

However, as noted above, the Board’s 

consumer testing showed, and anecdotal 

evidence demonstrates, that consumers 

in all segments of the market fail to 

appreciate the conflict of interest that 

can arise from originators receiving 

compensation based on the loan terms 

or conditions offered. As a result, the 

Board believes that consumers in all 

segments of the market are equally 

susceptible to these unfair 

compensation practices, and, therefore, 

equally benefit from the prohibition. 

Moreover, the Reform Act provisions on 

originator compensation are not limited 

to higher-priced mortgage loans. 

As discussed above, the Board is 

adopting this final rule consistent with 

the proposal, and with the definition of 

‘‘residential mortgage loan’’ in the 

Reform Act. Accordingly, consistent 

with TILA Section 103(cc)(5), as enacted 

in section 1401 of the Reform Act, the 

final rule excludes HELOCs that are 

subject to § 226.5b and timeshare plans, 

as described in the Bankruptcy Code, 11 

U.S.C. 101(53D). It also does not apply 

to loans secured by real property that 

does not include a dwelling. The Board 

will reconsider these issues in 

connection with future rulemakings to 

implement the Reform Act and assess 

whether broader coverage is necessary, 

pursuant to its authority in TILA 

Sections 129(l)(2)(A) and 129B(e). 

Section 226.36(d) currently provides 

that § 226.36 does not apply to HELOCs. 

Section 226.36(d) is redesignated as 

§ 226.36(f) and revised to clarify that all 

of § 226.36 does not extend to HELOCs, 

and § 226.36(d) and (e) do not extend to 

a loan that is secured by a consumer’s 

interest in a timeshare plan, as 

described in the Bankruptcy Code, 11 

U.S.C. 101(53D).24 The Board adds new 

comment 36–1 to clarify that the final 

rule on loan origination compensation 

practices covers closed-end consumer 

credit transactions secured by a 

dwelling or real property that includes 

a dwelling, including reverse mortgages 

that are not HELOCs, and provides a 

cross reference to additional restrictions 

set forth in § 226.36(f). In technical 

revisions, the heading to § 226.36 and 

corresponding commentary is revised to 

reflect the expanded scope of that 

section, and current comment 36–1 is 

redesignated as comment 36–3. Also in 

technical revisions, §§ 226.36(d)(1) and 

(e), which are discussed in detail below, 

are revised to apply to consumer credit 

transactions secured by a dwelling. In 

addition, § 226.1(b) is revised to reflect 

that the final rule broadens the scope of 

§ 226.36 from transactions secured by 

the consumer’s principal dwelling to all 

transactions secured by real property or 

a dwelling. Section 226.1(d)(5) is also 

revised to reflect the scope of § 226.36. 

Payments Based on Transaction Terms 

and Conditions 

As proposed, § 226.36(d)(1) would 

prohibit any person from compensating 

a loan originator, directly or indirectly, 

based on the terms or conditions of the 

mortgage. Under the proposal, 

compensation based on the loan amount 

would have been prohibited as a 

payment that is based on a term of the 

loan. However, the Board sought 

comment on an alternative that would 

permit compensation to be based on the 

amount of credit extended, which is a 

common practice today. 

The prohibition on origination 

compensation in proposed 

§ 226.36(d)(1) did not apply to 

consumers’ direct payments to loan 

originators. However, under proposed 

§ 226.36(d)(2), if the consumer 

compensated the loan originator 

directly, the originator would be 

prohibited from also receiving 

compensation from the creditor or any 

other person. Proposed § 226.36(d)(3) 

provided that for purposes of the 

prohibition on certain compensation 

practices set forth in §§ 226.36(d)(1) and 

(d)(2), affiliated entities would be 

treated as a single ‘‘person.’’ See 

§ 226.2(a)(22) defining the term 

‘‘person.’’ 

The proposed commentary clarified 

the types of arrangements considered to 

be ‘‘compensation,’’ and provided 

examples of compensation based on the 

transaction’s terms or conditions such 

as payments based on the interest rate, 

and examples of permissible methods of 

compensation to loan originators such 

as payments based on loan volume. The 

proposed commentary also provided 

guidance regarding pricing flexibility 

that creditors would retain and the 

ability to adjust loan originator 

compensation periodically to respond to 

market changes. See comments 

36(d)(1)–1 through –6. 

Public Comment. Consumer 

advocates, associations of state 

regulators, state attorneys general, other 

Federal banking agencies, and members 

of Congress strongly supported the 

Board’s proposed ban on loan originator 

compensation that is based on the terms 

or conditions of a transaction. They 

stated that these compensation 

arrangements lack transparency and are 

unfair and deceptive. They cited various 

examples of the harm caused to 

consumers and the economy at large by 

the practice of compensating loan 

originators based on a transaction’s 

terms or conditions. These commenters 

asserted that these compensation 

arrangements led to significant growth 

of risky loans for non-prime consumers, 

increased mortgage costs, and the 

foreclosure crisis. 

In contrast, industry commenters and 

their trade associations almost 

uniformly opposed prohibiting loan 

originator compensation based on the 

terms or conditions of a transaction. 

They argued that loan originator 

compensation provides consumers with 

the option to cover upfront costs 

through the interest rate, and generally 

makes credit more widely available. 

They further argued that research on the 

impact of loan originator compensation 

on consumers is inconclusive, and that 

existing regulations under RESPA, the 

SAFE Act, and the MDIA together with 

market competition are sufficient to 

protect consumers. Independent 

mortgage companies and their trade 

groups also asserted that the Board 

should consider adopting less restrictive 

rules as an alternative to the proposal. 

They also argued that information and 

views received by the Board during the 

public comment period should be set 

forth in a second proposal to permit 

further public comment. 

A mortgage broker trade association 

argued that TILA does not authorize the 

Board to regulate private compensation 

arrangements between employers and 

employees under TILA. It further 

asserted that the Board did not 

adequately demonstrate that the 

proposed rule satisfied the FTC 

standards for unfair or deceptive acts or 

practices, or the rulemaking standards 

set forth in the Administrative 

Procedures Act (APA). 

The SBA commented that the 

proposal did not provide sufficient 

information regarding the rule’s 

economic impact on small entities. In 

addition to listing the number and type 

of affected entities, the SBA asserted 

that the Board should have provided 

more information about the costs of the 

rule for small entities. The SBA 

expressed concern that small entities 

that originate loans for creditors would 

be disadvantaged compared to larger 

entities that are able to fund their own 

loans, because larger entities would be 

treated as creditors when selling loans 

to secondary market investors. The SBA 

argued that the proposal would require 

smaller entities to alter their business 

practices and that some small entities 

might ultimately leave the marketplace, 

making it more difficult for consumers 


srobinson on DSKHWCL6B1PROD with RULES3
58520 Federal Register / Vol. 75, No. 185 / Friday, September 24, 2010 / Rules and Regulations 

25See, e.g., affidavits on loan originator 

compensation filed in Mayor and City Council of 

Baltimore v. Wells Fargo Bank, N.A., Civil No. JFM 

1:08 CV–00062, Second Amended Complaint 

(2010); Iowa v. Ameriquest Mortgage Co., et al., Civ. 

No. CE 53090, Consent Order (2006), available at 

http://www.state.ia.us/government/ag/images/pdfs/

Ameriquest_CJ.pdf; Memorandum from Senator 

Carl Levin and Senator Tom Coburn to Members of 

the Permanent Subcommittee on Investigations re: 

Wall Street and the Financial Crisis: The Role of 

High Risk Home Loans, Exhibit 1a of the Senate 

Permanent Subcommittee on Investigations Hearing 

on Wall Street and the Financial Crisis: The Role 

of High Risk Home Loans, 4–5 (Apr. 13, 2010), 

available at http://hsgac.senate.gov/public/_files/

Financial_Crisis/041310Exhibits.pdf; Testimony of 

Michael C. Calhoun, Center for Responsible 

Lending, Before the U.S. House of Representatives 

Committee on Financial Services, Perspectives on 

the Consumer Financial Protection Agency, 21 

(Sept. 30, 2009), available at http:// 

www.responsiblelending.org/mortgage-lending/

policy-legislation/congress/cfpa-calhountestimony.pdf ; Testimony of Patricia McCoy, 

Professor of Law, University of Connecticut Law 

School, Before the U.S. Senate Banking Committee, 

Consumer Protections in Financial Services: Past 

Problems, Future Solutions, 8, 10 (Mar. 3, 2009), 

available at http://banking.senate.gov/public/ 

index.cfm?FuseAction=Files.View&File

Store_id=40666635-bc76-4d59-9c25-76daf0784239; 

Susan E. Woodward & Robert E. Hall, Consumer 

Confusion in the Mortgage Market: Evidence of Less 

than a Perfectly Transparent and Competitive 

Market, American Econ. Rev.: Papers and 

Proceedings (May 2010), available at http:// 

pubs.aeaweb.org/doi/pdfplus/10.1257/

aer.100.2.511; Susan Woodward, A Study of Closing 

Costs for FHA Mortgages, HUD Office of Policy 

Development and Research (May 2008); Howell E. 

Jackson & Jeremy Berry, Kickbacks or 

Compensation: The Case of Yield-Spread 

Premiums, 12 Stan. J. L, Bus & Fin. 289 (2007), 

available at http://www.law.harvard.edu/faculty/ 

hjackson/pdfs/january_draft.pdf. Most recently, in 

March 2010 the Department of Justice and two 

subsidiaries of American International Group 

entered into a settlement agreement under which 

wholesale residential mortgages lenders were 

responsible for broker fee disparities. The 

complaint is available at http://www.justice.gov/crt/ 

housing/documents/aigcomp.pdf, and the consent 

order can be found at http://www.justice.gov/crt/ 

housing/documents/aigsettle.pdf. 

to obtain mortgages. The SBA also said 

the Board should more fully consider 

alternatives that would be less 

burdensome to small entities and reduce 

or eliminate the economic impact on 

small entities. 

Discussion. The Board is adopting the 

prohibition on certain compensation 

practices under § 226.36(d) substantially 

as proposed, except that the final rule 

permits compensation based on the 

amount of credit extended. In addition, 

for clarity § 226.36(d)(1) is divided into 

subparts § 226.36(d)(1)(i) through (iii); 

no other substantive change is intended. 

For the reasons explained in the 

proposal, the Board finds 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. The Board is taking 

this action pursuant to its authority 

under TILA Section 129(l)(2) to prohibit 

acts or practices in connection with 

mortgage loans that it finds to be unfair 

or deceptive. 

As discussed in greater detail above 

under part VI.C, 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. There is 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.25 This evidence 

demonstrates that market forces, such as 

competition or liquidity, have not been 

adequate to prevent the harm to 

consumers caused by compensation 

payments that are based on the loan’s 

terms or conditions. Creditors’ 

payments to mortgage brokers or their 

own employees are neither transparent 

nor understood by consumers. 

Accordingly, consumers do not 

effectively shop or engage in 

negotiation, and instead often rely on 

the advice of loan originators. This 

reliance further compounds the harmful 

effect of these unfair compensation 

practices because consumers do not 

understand that loan originators may 

have the ability to increase the creditor’s 

interest rate or include costly terms or 

features to increase their own 

compensation. The Board’s consumer 

testing conducted in connection with 

the 2008 HOEPA Proposed Rule further 

demonstrated consumers’ reliance on 

loan originators and misunderstanding 

of loan originator compensation. 

Consequently, these unfair 

compensation practices cause 

consumers injuries they often cannot 

reasonably avoid. 

The Board has previously considered 

other less restrictive alternatives to 

address concerns about mortgage 

originator compensation. Under the 

2008 HOEPA Proposed Rule, the Board 

published a disclosure-based approach 

to the problems presented by yield 

spread premiums. For the reasons stated 

in the August 2009 Closed-End 

Proposal, the Board determined such an 

approach to be ineffective in redressing 

the harm caused by these unfair 

compensation practices. 

The Board recognizes that the 

prohibition on certain compensation 

practices will require entities, both 

small and large, to alter their business 

practices, develop new business models, 

re-train staff, and reprogram operational 

systems to ensure compliance with the 

final rule. For the reasons discussed 

above, the Board believes that the 

benefits to consumers provided by the 

prohibition on certain unfair 

compensation practices outweigh these 

associated costs. 

Compensation based on the amount 

of credit extended. As noted above, the 

Board sought comment on an alternative 

proposal that would permit loan 

originator compensation to be based on 

the amount of credit extended, which is 

a common practice today. The Board 

specifically requested comment on 

whether prohibiting originator 

compensation based on the amount of 

credit extended to the consumer was 

unduly restrictive and necessary to 

achieve the purpose of the rule. 

Consumer advocates and certain 

Federal banking and state regulators and 

elected officials opposed the alternative 

proposal. They argued that it would 

create an incentive for loan originators 

to steer consumers to larger loans, 

thereby increasing consumer risk. They 

stated that creditors could find another 

means to compensate brokers and loan 

officers for additional time spent 

originating larger loans, and suggested 

that lenders be permitted to set a 

minimum loan origination fee to 

encourage the origination of small loans. 

Industry commenters and their trade 

groups strongly supported the 

alternative and stated that payments 

based on loan amount do not provide 

harmful incentives or result in 

consumer injury. They asserted that a 

loan originator typically requires 

compensation in an amount equal to 1 

percent of the loan amount in order to 

cover the costs of origination. Some 

mortgage industry commenters also 

recommended permitting originators to 

receive a higher percentage 

compensation for smaller loans to 

ensure that loan originators receive 

adequate compensation for originating 

such loans. 

The Board is adopting the alternative 

as proposed with additional 

clarifications. Under the final rule, the 

amount of credit extended is deemed 

not to be a transaction term or condition 

for purposes of § 226.36(d)(1) provided 

the compensation payments to loan 

originators are 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 Board 

believes that compensation based on the 

amount of credit extended is less subject 

to manipulation by the originator than 

compensation based on terms such as 

the interest rate or prepayment 

penalties. For example, a consumer 

purchasing a home would be unlikely to 


srobinson on DSKHWCL6B1PROD with RULES3
Federal Register / Vol. 75, No. 185 / Friday, September 24, 2010 / Rules and Regulations 58521 

26See TILA Section 129B(c)(1), as enacted in 

section 1403 of the Reform Act. 

accept an offer for a larger loan amount. 

Furthermore, a loan originator’s ability 

to steer consumers to larger loans is 

limited by underwriting criteria such as 

maximum loan-to-value (LTV) and debtto-income (DTI) ratios. The Board notes 

that transaction amount is commonly 

used throughout the mortgage market to 

determine the amounts paid to other 

parties, such as real-estate brokers, 

mortgage insurers, and various thirdparty service providers. The Reform Act 

also specifically permits compensation 

to loan originators based on the amount 

of credit extended.26 For all of the 

reasons discussed, the Board believes 

prohibiting originator compensation 

based on the amount of credit extended 

would be unduly restrictive and is 

unnecessary to achieve the purposes of 

the final rule. 

In response to commenters’ concerns 

that the proposal would provide 

originators with no incentive to 

originate small loans, the final rule 

explicitly permits creditors to establish 

minimum or maximum dollar amounts 

for loan originator compensation. To 

prevent circumvention, the commentary 

clarifies that the minimum or maximum 

amount may not vary with each credit 

transaction. Thus, a creditor could 

choose to pay a loan originator 1 percent 

of the amount of credit extended for 

each loan, but no less than $1,000 and 

no more than $5,000. In this case, the 

originator is guaranteed payment of a 

minimum amount for each loan, 

regardless of the amount of credit 

extended to the consumer. Using this 

example, the creditor would pay a loan 

originator $3,000 on a $300,000 loan 

(i.e., 1 percent of the amount of credit 

extended), $1,000 on a $50,000 loan, 

and $5,000 on a $900,000 loan. 

However, a creditor may not pay a loan 

originator 1 percent of the amount of 

credit extended for amounts greater than 

$300,000, and 2 percent of the amount 

of credit extended for amounts that fall 

between $200,000 and $300,000. In 

addition, the Board notes that creditors 

are able to use other compensation 

methods to provide adequate 

compensation for smaller loans, such as 

basing compensation on an hourly rate, 

or on the number of loans originated in 

a given time period. 

The Board proposed comment 

36(d)(1)–10 to clarify that a loan 

originator may be paid the same fixed 

percentage of the amount of credit 

extended for all transactions, subject to 

a minimum or maximum dollar amount. 

The Board is adopting the comment, 

redesignated as comment 36(d)(1)–9, 

substantially as proposed with 

additional clarifications. The revisions 

clarify that a loan originator may be 

paid compensation based on a fixed 

percentage that does not vary with the 

amount of credit extended. Thus, a 

creditor may pay a loan originator, for 

example, 1 percent of the amount of 

credit extended for all loans the 

originator arranges for the creditor. 

However, under the final rule a creditor 

may not pay a loan originator a fixed 

percentage that varies with different 

levels or tiers of amounts. The Board 

believes that permitting compensation 

to vary in this manner could enable 

evasion of the rule. For example, some 

creditors might create tiers and vary the 

compensation for each tier so that the 

tiers serve as proxies for other terms or 

conditions of the transaction. Such a 

rule might also permit creditors to 

create tiers with minimal increments, 

for instance every $10,000, and increase 

or decrease the percentage of the loan 

amount paid to the loan originator with 

each tier. The creditor could pair loan 

terms, such as prepayment penalties, 

with some tiers and not others. In this 

way, a creditor might evade the rule or 

make enforcement of the prohibition 

more difficult. 

Unlike compensation based on a fixed 

percentage of the loan amount, 

underwriting criteria do not serve as a 

meaningful constraint to the loan 

originator’s ability to steer a consumer 

from one tier to another where there are 

minimal increments between loan tiers. 

It is also unlikely that a consumer 

would question relatively small 

differences in loan amounts that might 

move them from one tier to another tier. 

Moreover, if compensation could vary 

in relation to tiers of loan amounts, to 

prevent potential evasion of the rule, the 

Board would need to determine 

reasonable increments between tiers and 

whether the percentage paid in relation 

to tiers could increase, decrease, or 

both. Such an approach would result in 

an unnecessarily complex rule that 

would make compliance difficult. 

Furthermore, to the extent that paying 

compensation based on tiered loan 

amounts is meant to ensure fair 

compensation for some loans and 

prevent unreasonable compensation for 

others, the Board believes that 

permitting loan originators to be paid a 

minimum and/or maximum 

compensation amount serves the same 

purpose. 

The meaning of the term 

‘‘compensation.’’ Some commenters 

were concerned that the proposed rule 

would prevent consumers from 

choosing a higher rate loan to fund 

amounts that are paid to the originator 

to cover upfront closing costs. The final 

rule clarifies that this is not the case. 

Under the final rule, a consumer may 

finance upfront costs, such as thirdparty settlement costs, by increasing or 

‘‘buying up’’ the interest rate regardless 

of whether the consumer pays the loan 

originator directly or the creditor pays 

the loan originator’s compensation. 

Thus, the final rule does not prohibit 

creditors or loan originators from using 

the interest rate to cover upfront closing 

costs, as long as any creditor-paid 

compensation retained by the originator 

does not vary based on the transaction’s 

terms or conditions. 

To address commenters’ concerns 

regarding third-party charges, comment 

36(d)(1)–1 is revised to clarify that for 

purposes of §§ 226.36(d) and (e), the 

term ‘‘compensation’’ includes amounts 

retained by the loan originator, but does 

not include amounts that the loan 

originator receives as payment for bona 

fide and reasonable third-party charges, 

such as title insurance or appraisals. 

Comment 36(d)(1)–1 provides further 

clarification for certain circumstances 

where amounts received by the loan 

originator may exceed the third-party’s 

actual charge imposed in connection 

with the transaction but would not be 

deemed compensation for purposes of 

§§ 226.36(d) and (e). The Board 

recognizes that, in some cases, loan 

originators receive payment for thirdparty charges that may exceed the actual 

charge because, for example, the loan 

originator cannot determine with 

accuracy what the actual charge for the 

third-party service will be, and, 

therefore, the originator retains the 

difference. The difference in amount 

retained by the originator is not deemed 

compensation if the third-party charge 

imposed on the consumer is bona fide 

and reasonable. On the other hand, if 

the originator marks up the third-party 

charge (a practice known as 

‘‘upcharging’’) and retains the difference 

between the actual charge and the 

marked-up charge, the amount retained 

is compensation for purposes of 

§§ 226.36(d) and (e). 

Comment 36(d)(1)–1 provides the 

following example: 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 originator imposes the 

application fee on the consumer, the 

originator does not know what the 

actual cost for the appraisal will be, 

because the originator may choose from 

appraisers that charge between $300 to 

$350 for an appraisal. Later, the cost for 

the appraisal is determined to be $300 


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58522 Federal Register / Vol. 75, No. 185 / Friday, September 24, 2010 / Rules and Regulations 

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 

§§ 226.36(d) and (e), even though the 

$50 is retained by the loan originator. 

The $50 difference would be 

compensation, however, if the 

appraisers from whom the originator 

chooses charge fees between $250 and 

$300. 

The commentary also states that any 

third-party charge the loan originator 

imposes on the consumer must comply 

with state and other applicable law to be 

deemed bona fide and reasonable. For 

example, if a loan originator uses an 

‘‘average charge,’’ to be deemed bona 

fide and reasonable under § 226.36, it 

must also comply with the provisions of 

HUD’s Regulation X, which implements 

RESPA and addresses the use of 

‘‘average charges.’’ See 12 CFR 3500.8(b). 

Comment 36(d)(1)–1 also provides 

further clarification regarding ‘‘amounts 

retained’’ by the loan originator that are 

deemed compensation for purposes of 

§§ 226.36(d) and (e). For example, if a 

loan originator imposes a ‘‘processing 

fee’’ on the consumer in connection with 

the transaction and retains such fee, it 

is deemed compensation for purposes of 

§§ 226.36(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. The remainder of comment 

36(d)(1)–1 is adopted as proposed, and 

clarifies that the term ‘‘compensation’’ 

includes salaries, commissions, and any 

financial or similar incentive that is tied 

to the transaction’s terms or conditions, 

including annual or periodic bonuses, 

or awards of merchandise or other 

prizes. 

The Board notes that TILA Section 

129B(c)(2), as enacted by Section 1403 

of the Reform Act, further restricts a 

loan originator’s ability to receive 

originator compensation from a creditor 

or other person where a consumer 

makes any upfront payment to the 

creditor for points or fees on the loan, 

other than certain bona fide third-party 

charges. This restriction was not part of 

the Board’s August 2009 Closed-End 

Proposal. The Board intends to evaluate 

this issue and implement this provision 

as part of a subsequent rulemaking after 

giving the public notice and opportunity 

to comment. See also § 226.36(d)(2) 

prohibiting loan originator 

compensation from dual sources, which 

is discussed below. 

Examples of prohibited 

compensation. The Board is adopting 

comment 36(d)(1)–2 substantially as 

proposed to provide examples of loan 

originator compensation that are 

deemed to be based on transaction terms 

or conditions, such as compensation 

that is based on the interest rate, annual 

percentage rate, or the existence of a 

prepayment penalty. The comment is 

further revised to provide additional 

clarification, however, regarding credit 

scores and similar representations of 

risk. 

As proposed, comment 36(d)(1)–2 

stated that a consumer’s credit score or 

similar representation of credit risk is 

not one of the transaction’s terms and 

conditions. However, proposed 

commentary also provided that ‘‘a 

creditor does not necessarily avoid 

having based a loan originator’s 

compensation on the interest rate or the 

annual percentage rate solely because 

the originator compensation happens to 

vary with the consumer’s credit score as 

well.’’ A few commenters sought 

clarification and some urged the Board 

explicitly to state that compensation 

could be based on credit scores. In 

contrast, some other commenters urged 

the Board expressly to prohibit basing 

compensation on the credit score or 

other similar factors of credit risk, such 

as DTI, to prevent possible 

circumvention of the rule. 

The comment has been revised for 

clarification. The Board believes credit 

scores or similar indications of credit 

risk, such as DTI, are not terms or 

conditions of the transaction. At the 

same time, the Board recognizes that 

they can serve as proxies for a 

transaction’s terms or conditions. For 

example, credit scores are often used by 

creditors to assess a consumer’s 

likelihood of default on a loan. If a 

creditor engages in risk-based pricing, 

then a lower credit score would yield a 

higher interest rate loan to reflect the 

greater risk associated with extending 

credit to that consumer, while a higher 

credit score would yield a lower interest 

rate loan. The Board is concerned that 

permitting compensation to be based on 

credit score or other similar factors that 

serve as proxies for a transaction’s terms 

or conditions would lead to 

circumvention of the rule. As discussed 

above, the Board believes that the 

practice of basing compensation on a 

transaction’s term or condition leads to 

consumers being given loans with less 

favorable terms, such as a higher 

interest rate, which results in harm to 

consumers that they cannot reasonably 

avoid, and, therefore, constitutes an 

unfair practice. Accordingly, the Board 

believes that permitting compensation 

based on factors that serve as proxies for 

a transaction’s terms or conditions 

would provide incentives to originators 

to place consumers in loans with less 

favorable terms, which constitutes an 

unfair practice. Thus, the Board is 

revising comment 36(d)(1)–2 to address 

these concerns. 

Comment 36(d)(1)–2 clarifies that 

credit scores or similar indications of 

credit risk, such as DTI, are not terms 

or conditions of the loan. The comment 

further provides, however, that the rule 

prohibits compensation based on a 

factor that serves as a proxy for a 

transaction’s terms or conditions and 

provides the following example: 

Assume 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 is given a loan with a 7 percent 

interest rate, and consumer B has a 

credit score of 800 and is given a loan 

with a 61⁄2 percent interest rate because 

of his or her different credit score. If the 

loan originator compensation varies for 

these transactions in whole or in part 

based on the credit score so that, for 

instance, the loan originator receives 

$1,500 for the loan given to consumer A 

and $1,000 for the loan given to 

consumer B, compensation would be 

based on a transaction’s terms or 

conditions. 

The clarification in comment 

36(d)(1)–2 acknowledges that credit 

scores or similar indications of credit 

risk may, in some instances, serve as 

proxies for a transaction’s terms or 

conditions, such as the interest rate. The 

Board believes that this clarification is 

necessary to prevent evasion of the rule. 

The Board emphasizes, however, that 

the final rule does not prohibit riskbased pricing. Risk-based pricing is 

permissible as long as the loan 

originator’s compensation does not vary 

based on the transaction’s terms or 

conditions or factors that serve as 

proxies for the transaction’s terms or 

conditions. 

Some industry commenters argued 

that originators should receive more 

compensation for loans to borrowers 

with lower credit scores or blemished 

credit histories, asserting that these 

borrowers require more time and effort 

of the originator. As discussed, under 

the final rule originators may not 

receive increased compensation based 

on credit score or credit history, where 

credit score and credit history serve as 

proxies for loan terms and conditions. 

The Board notes, however, that loan 

originators may be compensated based 

on the time actually spent on a 

transaction, as discussed under 

comment 36(d)–3 below. 

Examples of permissible 

compensation. Comment 36(d)(1)–3 

proposed several examples of 


srobinson on DSKHWCL6B1PROD with RULES3
Federal Register / Vol. 75, No. 185 / Friday, September 24, 2010 / Rules and Regulations 58523 

27See Interagency Guidance on Sound Incentive 

Compensation Policies, 75 FR 36395; June 25, 2010. 

compensation arrangements that would 

not be based on the transaction’s terms 

or conditions, such as loan volume, 

long-term performance of an originator’s 

loans, and time spent. Several 

commenters suggested, however, that 

the Board provide additional guidance 

and urged the Board to clarify that 

compensation could be based, for 

instance, on the percentage of 

transactions successfully originated on 

behalf of the creditor, file quality, and 

customer satisfaction. 

The Board is adopting comment 

36(d)(1)–3 largely as proposed, with 

additional examples of permissible 

compensation. The comment provides 

that a payment that is fixed in advance 

for each originated loan and 

compensation that accounts for a loan 

originator’s fixed overhead costs are 

permissible compensation methods. In 

addition, the comment states that a 

creditor may pay an originator based on 

the percentage of loan applications that 

result in consummated loans and the 

quality of the loan originator’s loan files. 

The comment also states that 

compensation based on the amount of 

credit extended is permissible under the 

rule, and provides a cross-reference to 

comment 36(d)(1)–9 for further 

discussion. The Board believes 

compensation based on the new 

examples would not provide originators 

with incentives that are harmful and 

unfair to consumers. The comment 

clarifies, however, that the examples 

provided in it are illustrative and not 

exhaustive, and thus a creditor may 

identify and use other permissible 

compensation methods. 

Compensation that varies from one 

originator to another. The Board further 

notes creditors may compensate their 

own loan officers differently than 

mortgage brokers. For instance, to 

account for the fact that mortgage 

brokers relieve creditors of certain fixed 

overhead costs associated with loan 

originations, a creditor may pay 

mortgage brokers more than its own 

retail loan officers. For example, a 

creditor may pay a mortgage broker 

$2,000 for each loan and pay its loan 

officers $1,500 for each loan. 

Alternatively, a creditor may pay its 

mortgage brokers an amount equal to 2 

percent of the amount of credit 

extended on each loan, and pay its loan 

officers an amount equal to 1 percent of 

the amount of credit extended on each 

loan. Likewise, a creditor may pay one 

loan officer more than it pays another 

loan officer. For example, a creditor may 

pay loan officer A an amount equal to 

1 percent of the amount of credit 

extended for each loan, and loan officer 

B an amount equal to 1.25 percent of the 

amount of credit extended for each loan. 

This is permissible, as long as each loan 

originator receives compensation that is 

not based on the terms or conditions of 

the transactions he or she delivers to the 

creditor. 

Compensation based on loan volume. 

The final rule does not prohibit a 

creditor from basing compensation on 

an originator’s loan volume, whether by 

the total dollar amount of credit 

extended or the total number of loans 

originated over a given time period. 

These arrangements, however, might 

raise supervisory concerns about 

whether the creditor has created 

incentives for originators to deliver 

loans without proper regard for the 

credit risks involved. For example, 

depository institutions and depository 

institution holding companies (banking 

organizations) are subject to supervisory 

guidance that provides for incentive 

compensation arrangements to take into 

account credit and other risks in a 

manner that is consistent with safety 

and soundness practices.27 Consistent 

with this guidance, banking 

organizations should ensure that 

incentive compensation arrangements 

not only comply with the requirements 

of TILA, but also do not encourage 

employees to take imprudent risks that 

are inconsistent with the safety and 

soundness of the organization. 

Compensation based on loan type or 

program. Some commenters also urged 

the Board to permit higher 

compensation for certain loan types, for 

example, small loans, loans under 

special programs that assist first-time 

home-buyers and low- or moderateincome consumers, and loans that 

satisfy the creditor’s obligations under 

the Community Reinvestment Act 

(CRA). As discussed above, creditors 

can encourage originators to make small 

loans as well as large loans by setting a 

minimum and maximum payment for 

each loan if they compensate loan 

originators a fixed percentage of the 

amount of credit extended. See 

comment 36(d)(1)–9. The Board 

believes, however, that allowing 

compensation to vary with loan type, 

such as loans eligible for consideration 

under the CRA, would permit unfair 

compensation practices to persist in 

loan programs offered to consumers 

who may be more vulnerable to such 

practices. 

Compensation that differs based on 

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

4 clarified that payment of 

compensation to a loan originator that 

differed by geographical area was not 

prohibited under the proposal, provided 

that such compensation arrangements 

complied with other applicable laws 

such as the Equal Credit Opportunity 

Act (15 U.S.C. 1691–1691f) and Fair 

Housing Act (42 U.S.C. 3601–3619). One 

commenter noted that significant 

differences exist in geographic areas that 

can impact loan terms and conditions, 

such as property value or ranges of 

income. This commenter urged the 

Board expressly to provide that 

creditors can structure originator 

compensation to account for 

geographical differences. Other industry 

commenters also generally suggested 

that the Board permit compensation to 

vary based on identified market and 

geographical factors, in addition to other 

factors such as charter type and 

institution size. 

The Board is not adopting comment 

36(d)(1)–4, and is redesignating 

36(d)(1)–5 through 36(d)(1)–10 

accordingly. Comment 36(d)(1)–4 was 

intended to clarify that compensation 

may take account of differences in the 

costs of loan origination, such as rent 

and other overhead expenses. As 

discussed above, however, the Board 

has clarified under comment 36(d)(1)–2 

that compensation paid to loan 

originators may account for differences 

in the costs of origination such as fixed 

overhead costs, and believes this 

example is sufficient to address the 

matter. The Board notes that any 

compensation arrangement must also 

comply with all other applicable laws, 

such as the Equal Credit Opportunity 

Act and the Fair Housing Act. 

Creditors’ pricing flexibility. 

Consumer advocates argued that the 

Board should only permit loan 

originators to receive yield spread 

premiums on ‘‘no-cost’’ loans, meaning 

loans for which the interest rate is high 

enough to eliminate all of the 

consumer’s upfront costs including 

points and third party closing costs. 

Consumer advocates asserted that when 

an originator receives a yield spread 

premium and the consumer pays some 

or all of the other closing costs upfront, 

the consumer is more susceptible to 

being over-charged because he or she 

does not understand the trade-off 

between upfront closing costs and 

higher interest rates. Therefore, these 

commenters argued that the rule should 

prohibit a yield spread premium and 

upfront charges on the same transaction. 

The Board is not adopting the 

recommendation to limit compensation 

paid to loan originators through the rate 

to no-cost loans. Accordingly, the Board 

is adopting comment 36(d)(1)–5, 

redesignated as comment 36(d)(1)–4, as 

proposed to clarify that the rule does 


srobinson on DSKHWCL6B1PROD with RULES3
58524 Federal Register / Vol. 75, No. 185 / Friday, September 24, 2010 / Rules and Regulations 

28See, e.g., Susan E. Woodward & Robert E. Hall, 

Consumer Confusion in the Mortgage Market: 

Evidence of Less than a Perfectly Transparent and 

Competitive Market, 513–15, American Econ. Rev.: 

Papers and Proceedings (May 2010), available at 

http://pubs.aeaweb.org/doi/pdfplus/10.1257/ 

aer.100.2.511; Susan Woodward, A Study of Closing 

Costs for FHA Mortgages, HUD Office of Policy 

Development and Research (May 2008). 

not affect creditors’ flexibility in setting 

rates or other loan terms. The Board 

recognizes that some research has 

suggested that consumers who received 

no-cost loans paid less for their loans 

than consumers who received loans 

where they paid some upfront charges 

and a yield spread premium.28 The 

Board’s proposal did not restrict yield 

spread premiums to no-cost loans, 

however, and therefore the 

recommendation is outside the scope of 

the proposed rule. Provisions of the 

Reform Act address this issue, which 

will be the subject of a future 

rulemaking. 

In addition, under the rule, creditors 

may adjust the loan terms it offers to 

consumers to finance transaction costs 

the consumer would otherwise be 

obligated to pay directly in cash or out 

of the loan proceeds. For example, a 

creditor could recoup some costs related 

to the loan transaction by adding an 

origination point to the loan terms 

(calculated as one percentage point of 

the loan amount). However, any 

adjustment of loan terms must not affect 

the amount a loan originator receives as 

compensation for the transaction. Thus, 

the final rule does not impact creditors’ 

ability to offer a full range of interest 

rate and fee combinations, so long as the 

exchange between the loan price and 

transaction costs has no bearing on loan 

originator compensation. For example, a 

creditor could add a constant premium 

of 1⁄4 of one percent to the interest rates 

on all transactions to recoup loan 

originator compensation. See comment 

36(d)(1)–5. 

Effect of modification of loan terms. 

Under the proposed rule, a loan 

originator’s compensation could neither 

be increased nor decreased based on the 

loan terms and conditions. Accordingly, 

proposed comment 36(d)(1)–6 clarified 

that if a consumer’s request for a lower 

rate was accepted by the creditor, the 

creditor would not be permitted to 

reduce the amount it pays to the loan 

originator based on the change in loan 

terms. Similarly, any reduction in 

origination points paid by the consumer 

would be a cost borne by the creditor. 

Industry commenters opposed 

prohibiting creditors from reducing loan 

originator compensation when the loan 

originator offers a favorable loan term 

change to a consumer. They argued that 

unusual circumstances require 

flexibility, and that loan term 

concessions help consumers receive 

better loans. They further stated that fair 

lending laws adequately provide 

protection from unlawful discrimination 

in offering more favorable terms on a 

prohibited basis. 

For the reasons explained in the 

proposal, the Board is adopting 

comment 36(d)(1)–6, redesignated as 

comment 36(d)(1)–5, as proposed. The 

Board believes that permitting creditors 

to decrease loan originator 

compensation because of a change in 

terms favorable to the consumer would 

result in loopholes and permit evasions 

of the final rule. For example, a creditor 

could agree to set originators’ 

compensation at a high level generally, 

and then subsequently lower the 

compensation in selective cases based 

on the actual loan terms, such as when 

the consumer obtains another offer with 

a lower interest rate. This would have 

the same effect as increasing the 

originator’s compensation for higher 

rate loans. As noted above, the Board 

believes such compensation practices 

are harmful and unfair to consumers. 

Thus, under the final rule, when the 

creditor offers to extend a loan with 

specified terms and conditions (such as 

rate and points), the amount of the 

originator’s compensation for that 

transaction is not subject to change, 

based on either an increase or a decrease 

in the consumer’s loan cost or any other 

change in the loan terms. The Board 

recognizes that in some cases a creditor 

may be unable to offer the consumer a 

lower cost and more competitivelypriced loan without also reducing the 

creditor’s own origination costs. 

Creditors finding themselves in this 

situation frequently, however, will be 

able to adjust their pricing and 

compensation arrangements to be more 

competitive with other creditors in the 

market. 

Periodic changes in loan originator 

compensation. The Board proposed 

comment 36(d)(1)–7 to provide 

guidance on how creditors may 

periodically revise the compensation 

they pay a loan originator without 

violating the rule. The Board is adopting 

the comment, redesignated as comment 

36(d)(1)–6, as proposed. The revised 

compensation arrangement must result 

in payments to the loan originator that 

are not based on the terms or conditions 

of a transaction. Thus, a creditor may 

periodically review factors such as loan 

performance, loan volume, and current 

market conditions for originator 

compensation, and prospectively revise 

the compensation it will pay the loan 

originator for future transactions. 

Compensation received directly from 

the consumer. The Board proposed 

comment 36(d)(1)–8 to indicate that the 

prohibition in § 226.36(d)(1) did not 

apply to transactions in which the loan 

originator received compensation 

directly from the consumer, and to 

clarify that in such cases no other 

person could pay the loan originator in 

connection with the particular 

transaction pursuant to § 226.36(d)(2). 

See § 226.36(d)(2) and corresponding 

commentary below discussing the 

prohibition on compensation from both 

the consumer and another source. 

Proposed comment 36(d)(1)–8 also 

provided guidance regarding what 

constitutes compensation received 

directly from the consumer. 

The Board is adopting the comment, 

redesignated as comment 36(d)(1)–7, 

substantially as proposed with 

clarifications. Comment 36(d)(1)–7 

provides that loan originator 

compensation may be paid directly by 

the consumer whether it is paid in cash 

or out of the loan proceeds. However, 

payments by the creditor to the loan 

originator that are derived from an 

increased interest rate are not 

considered compensation received 

directly from the consumer. Comment 

36(d)(1)–7 further clarifies that 

origination points charged by a creditor 

are not compensation paid directly by a 

consumer to a loan originator whether 

they are paid in cash or out of loan 

proceeds. If a creditor pays 

compensation to the loan originator out 

of points, the loan originator may not 

also collect compensation directly from 

the consumer. To facilitate compliance, 

comment 36(d)(1)–7 provides a cross 

reference to 36(d)(1)–1, which discusses 

compensation. 

Prohibition of Compensation From Both 

the Consumer and Another Source 

The Board proposed § 226.36(d)(2) to 

provide that, if a loan originator is 

compensated directly by the consumer 

on a transaction, no other person may 

pay any compensation to the originator 

for that transaction. Direct 

compensation paid by a consumer to a 

loan originator is not limited to 

‘‘origination fees,’’ ‘‘broker fees,’’ or 

similarly labeled charges. Rather, 

compensation for this purpose includes 

any payment by the consumer that is 

retained by the loan originator. Thus, a 

creditor that is a loan originator by 

virtue of making a table-funded 

transaction is subject to this prohibition 

if it imposes and retains any direct 

charge on the consumer for the 

transaction. See comment 36(d)(1)–1 for 

further discussion of amounts retained 

by a loan originator for bona fide thirdVerDate Mar<15>2010 16:33 Sep 23, 2010 Jkt 220001 PO 00000 Frm 00016 Fmt 4701 Sfmt 4700 E:\FR\FM\24SER3.SGM 24SER3

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Federal Register / Vol. 75, No. 185 / Friday, September 24, 2010 / Rules and Regulations 58525 

29See, e.g., Susan E. Woodward, A Study of 

Closing Costs for FHA Mortgages 70–73, Urban 

Institute and U.S. Department of Housing and 

Urban Development (2008), available at http://

www.urban.org/UploadedPDF/411682_fha_

mortgages.pdf. 

party charges that are and are not 

deemed compensation. 

Industry commenters and their trade 

associations opposed the proposed 

restriction on loan originator 

compensation from more than one 

source. These commenters argued that 

the proposed rule would give 

consumers fewer options for paying 

closing costs, including broker 

compensation. Some commenters 

recommended permitting loan 

originators to receive payments from 

both a creditor and a consumer if the 

total compensation does not exceed an 

agreed-upon amount and is reasonable. 

For example, a trade association 

suggested that reasonable compensation 

would not exceed 2 percent of the loan 

amount, subject to minimum of $500. 

On the other hand, consumer 

advocates and a Federal banking agency 

urged the Board to adopt § 226.36(d)(2) 

as proposed. Consumer advocates 

asserted that allowing loan originators 

to receive compensation from different 

sources would enable loan originators to 

evade the prohibition on loan originator 

compensation based on the terms and 

conditions of a transaction. Consumer 

advocates concurred with the rationale 

stated in the Board’s proposal, that 

consumers may reasonably believe that 

their direct payments are the only 

compensation the loan originator 

receives. They stated that consumers 

generally are less able to keep track of 

points paid on a loan and of the total 

amount of originator compensation 

paid, when loan originators receive 

compensation from multiple sources. 

The Board is adopting § 226.36(d)(2) 

as proposed with some clarifications. 

The Board believes this provision is 

necessary to ensure that the protections 

in § 226.36(d)(1) are effective and that 

loan originators do not increase a 

consumer’s interest rate or points to 

increase the originator’s own 

compensation. Allowing the originator 

to receive compensation directly from 

the consumer while also accepting 

payment from the creditor in the form 

of a yield spread premium would enable 

the originator to evade the prohibition 

in § 226.36(d)(1). An originator that 

increases the consumer’s interest rate to 

generate a larger yield spread premium 

can apply the excess creditor payment 

to third-party closing costs and thereby 

reduce the amount of consumer funds 

needed to cover upfront fees. Without 

§ 226.36(d)(2), the originator could then 

impose a direct fee on the consumer in 

the same amount, to retain the benefit 

of the larger yield spread premium. 

For example, suppose that for a loan 

with a 5 percent interest rate, the 

originator will receive a payment of 

$1,000 from the creditor as 

compensation, and for a loan with a 6 

percent interest rate, a yield spread 

premium of $3,000 will be generated. 

Under § 226.36(d)(1), the originator 

must apply the additional $2,000 to 

cover the consumer’s other closing 

costs. Without § 226.36(d)(2), instead of 

reducing the consumer’s total upfront 

payment, the originator could also 

impose a $2,000 origination fee directly 

on the consumer, essentially retaining 

the benefit of the larger yield spread 

premium. 

As discussed above, consumers 

generally are not aware of creditor 

payments to originators and reasonably 

may believe that when they pay a loan 

originator directly, that amount is the 

only compensation the loan originator 

will receive. Even if a consumer were 

aware of such creditor payments to loan 

originators, the consumer could 

reasonably expect that making a direct 

payment to an originator would reduce 

or eliminate the need for the creditor to 

fund the originator’s compensation 

through the consumer’s interest rate. 

Because yield spread premiums are not 

transparent to consumers, however, 

consumers cannot effectively negotiate 

the originator’s compensation. In fact, if 

consumers pay loan originators directly 

and creditors also pay originators 

through higher rates, consumers may be 

injured by unwittingly paying 

originators more in total compensation 

(directly and through the rate) than 

consumers believe they agreed to pay. 

The Board does not believe that 

§ 226.36(d)(2) will significantly limit 

consumer choice, as consumers may 

still use a rate increase to cover upfront 

closing costs that are charged by third 

parties, as long as loan originators 

receive their compensation from only 

one party. Section 226.36(d)(2) will, 

however, increase transparency for 

consumers by reducing the total number 

of loan pricing variables with which 

consumers must contend. The increased 

transparency is consistent with TILA’s 

purpose of promoting the informed use 

of consumer credit.29 See TILA Section 

102(a), 15 U.S.C. 1601(a). Consistent 

with TILA Section 129B(c)(2), as 

enacted in section 1403 of the Reform 

Act, the final rule permits loan 

originators to receive payment from a 

person other than the consumer only if 

the originator does not also receive any 

compensation directly from the 

consumer. As noted above, TILA 

Section 129B(c)(2) further restricts a 

loan originator’s ability to receive 

compensation from a person other than 

a consumer where a consumer pays 

upfront points or fees on the 

transaction, other than certain bona fide 

third-party charges. See comment 

36(d)(1)–1 discussing the term 

‘‘compensation.’’ The Board intends to 

address this issue as part of a 

subsequent rulemaking after giving the 

public notice and opportunity to 

comment. 

The Board is also adopting comment 

36(d)(2)–1 substantially as proposed 

with some clarifications. Comment 

36(d)(2)–1 clarifies circumstances when 

a person is or is not deemed to provide 

compensation to a loan originator in 

connection with a particular credit 

transaction. Comment 36(d)(2)–1 

explains that payment of a salary or 

hourly wage to a loan originator does 

not violate the prohibition in 

§ 226.36(d)(2) even if the loan originator 

also receives direct compensation from 

a consumer in connection with that 

consumer’s transaction. However, the 

final rule also clarifies that, in this 

instance, if any loan originator receives 

compensation directly from the 

consumer in connection with a specific 

credit transaction, no other loan 

originator, such as the mortgage broker 

company or another employee of the 

mortgage broker company, can receive 

compensation from the creditor in 

connection with that particular credit 

transaction. 

The Board proposed in comment 

36(d)(2)–2 to clarify that yield spread 

premiums, even if disclosed as ‘‘credits’’ 

in accordance with HUD’s Regulation X, 

which implements RESPA, are not 

considered compensation received by 

the loan originator directly from the 

consumer for purposes of this rule. 

Under Regulation X, 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 

total settlement charges, including 

origination fees. A mortgage broker 

trade association opposed the 

clarification in proposed comment 

36(d)(2)–2 and urged the Board to treat 

yield spread premiums as payments 

made directly from the consumer to the 

loan originator under Regulation Z. By 

contrast, as discussed above, consumer 

advocates and a Federal banking agency 

urged the Board to adopt § 226.36(d)(2) 

as proposed. 

The Board is adopting comment 

36(d)(2)–2, as proposed. If the rule were 

to treat yield spread premiums as 

payments made directly by the 

consumer, loan originators could accept 


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58526 Federal Register / Vol. 75, No. 185 / Friday, September 24, 2010 / Rules and Regulations 

30See TILA Section 129B(d), as enacted in 

Section 1404 of the Reform Act. 

both a yield spread premium from the 

creditor as well as a payment from the 

consumer, which would undermine the 

purpose of the rule. For the reasons 

stated above, the Board believes that 

permitting compensation from different 

sources would enable originators to 

evade the prohibition on receiving 

compensation based on the loan terms 

and conditions. Comment 36(d)(2)–2 

clarifies that for purposes of this final 

rule, payments made by creditors to 

loan originators are not payments made 

directly by the consumer, regardless of 

how they might be disclosed under 

HUD’s Regulation X. 

Affiliated Entities 

The Board is adopting the definition 

of ‘‘affiliates’’ under § 226.36(d)(3), as 

proposed with some clarifications. 

Section 226.36(d)(3) clarifies that 

affiliates must be treated as a single 

‘‘person’’ for purposes of § 226.36(d), 

and comment 36(d)(3)–1 provides a 

cross-reference to the definition of 

‘‘affiliates’’ in § 226.32(b)(2). 

Commenters did not address this aspect 

of the proposed rule. The Board believes 

that defining the term ‘‘affiliates’’ as a 

single person for purposes of § 226.36(d) 

is necessary to prevent circumvention of 

the final rule. For example, 

circumvention would occur if a parent 

company with multiple subsidiaries 

could structure its business to evade the 

prohibition on certain compensation 

practices. To illustrate, the rule would 

be circumvented if a parent company 

that has two mortgage lending 

subsidiaries could arrange to pay a loan 

originator greater compensation on 

higher rate loans offered by subsidiary 

‘‘A’’ than the compensation it would pay 

the same originator for a lower rate loan 

made by subsidiary ‘‘B.’’ To address this 

issue, the Board treats such subsidiaries 

of the parent company as a single 

person, so that if a loan originator is 

able to deliver loans to both 

subsidiaries, they must compensate the 

loan originator in the same manner. 

Accordingly, if a loan originator delivers 

a loan to subsidiary ‘‘B’’ and the interest 

rate is 8 percent, the originator must 

receive the same compensation that 

would have been paid by subsidiary ‘‘A’’ 

for a loan with a rate of either 7 or 8 

percent. The Board is also adopting 

comment 36(d)(3)–1, as proposed. 

Record Retention Requirements 

Currently, creditors are required by 

§ 226.25(a) to retain evidence of 

compliance with Regulation Z for two 

years. Under the proposal, comment 

25(a)–5 clarified that a creditor must 

retain at least two types of records to 

demonstrate compliance with 

§ 226.36(d)(1): A record of the 

compensation agreement with the loan 

originator that was in effect on the date 

the transaction’s rate was set, and a 

record of the actual amount of 

compensation it paid to a loan 

originator in connection with each 

covered transaction. The proposed 

comment explained that for loans 

involving mortgage brokers, the creditor 

may retain the HUD–1 settlement 

statement required under RESPA as a 

record of the actual amount of loan 

originator compensation paid. The 

Board sought comment on whether 

other records should be subject to the 

retention requirements; whether some 

time other than the date the transaction 

rate is set would be more appropriate; 

whether the two-year retention 

requirement was adequate; and the 

relative costs and benefits of requiring 

persons, other than creditors, to retain 

records concerning originator 

compensation. 

Industry commenters and their trade 

associations opposed expanding the 

record retention requirements to 

persons other than creditors, citing cost 

and burden as reasons. A credit union 

trade association affirmed that systems 

currently used by credit unions to track 

loan originator compensation should be 

deemed sufficient. This commenter also 

stated that credit union compensation 

records indicating that loan originator 

compensation was provided in the form 

of salary without being directly 

attributable to a particular transaction 

should satisfy the record retention 

requirements. 

Associations of state regulators urged 

the Board to require the retention of 

records for longer than two years. 

Consumer advocates recommended that 

the Board require retention of records by 

all parties making payments to loan 

originators for five years. They asserted 

that detection of violations of the rule 

would be unlikely within the two-year 

period. These commenters also noted 

that that the HUD–1 settlement 

statement is often inaccurate, and so 

should not be considered a record of the 

actual amount of loan originator 

compensation paid, but did not offer 

other alternatives. 

The Board is adopting comment 

25(a)–5 substantially as proposed. 

Accordingly, the final rule does not 

extend the record retention requirement 

to persons other than the creditor that 

pays loan originator compensation. At 

the time the Board issued this proposal 

and comments were submitted, TILA 

did not subject non-creditors to civil 

liability. As a result, the comments did 

not take into account such liability in 

their analysis of the costs and benefits 

of recordkeeping by non-creditors. On 

July 21, 2010, Congress enacted the 

Reform Act, which amended TILA to 

provide civil liability for loan 

originators.30 The Board will request 

additional comment on this matter in 

connection with subsequent 

rulemakings to implement provisions of 

the Reform Act. 

Under the final rule, any creditor who 

pays loan originator compensation, and, 

therefore, is subject to § 226.36(d), is 

required to retain records pursuant to 

§ 226.25(a). The Board believes record 

retention requirements are necessary to 

ensure that the loan originator 

compensation rules in §§ 226.36(d) and 

(e) are enforceable. Comment 25(a)–5 is 

being revised to remove reference to the 

HUD–1 settlement statement which 

does not currently itemize loan 

originator compensation. Comment 

25(a)–5 is also revised to provide that 

where a loan originator is a mortgage 

broker, a disclosure or agreement 

required by applicable state law that 

complies with § 226.25 is presumed to 

be a record of the amount actually paid 

to the loan originator in connection with 

the transaction. 

The final rule does not extend the 

record retention requirement for 

origination compensation beyond two 

years. This is the same time period that 

applies for records of compliance with 

other provisions of Regulation Z. The 

Board weighed the potential benefits of 

a longer timeframe against the increased 

costs, and believes that the benefits of 

a longer time period do not clearly 

outweigh the costs. To facilitate 

compliance, the Board adopts proposed 

comment 36(d)(1)–9, redesignated as 

comment 36(d)(1)–8, to provide a crossreference to the record retention 

requirement. 

Alternatives and Exemptions Not 

Adopted 

Disclosures. Industry commenters and 

their trade associations urged the Board 

to implement disclosure requirements to 

address unfair compensation practices, 

instead of directly prohibiting loan 

originator compensation based on terms 

or conditions of the transaction under 

§ 226.36(d)(1). In particular, the SBA 

and a mortgage broker trade association 

recommended that the Board replace the 

proposed prohibition on certain 

compensation practices with a 

requirement that creditors disclose the 

lowest interest rate they would accept 

for a given loan. A Federal banking 

agency suggested that, in addition to 

prohibiting loan originator 


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Federal Register / Vol. 75, No. 185 / Friday, September 24, 2010 / Rules and Regulations 58527 

31A mortgage broker trade association suggested 

that the Board look to a House-passed bill that 

preceded the Reform Act for guidance on its antisteering rule. For the reasons discussed above, the 

Board’s rule is consistent with the Reform Act as 

enacted. 

compensation based on the terms or 

conditions of a transaction, the Board 

develop and require uniform mortgage 

broker disclosures that specify the 

mortgage broker’s role and fees. This 

commenter argued that such disclosures 

would help consumers understand the 

role of brokers, and would indirectly 

reform loan originator compensation 

practices. 

For the reasons discussed in the 

proposal, the Board is not adopting 

disclosure requirements as an 

alternative to the proposed prohibitions 

on certain compensation practices. In 

connection with its proposal of a 

disclosure-based approach to originator 

compensation, the Board conducted 

consumer testing of the disclosures and 

based on the results of such testing, and 

other concerns, withdrew the rule in its 

2008 HOEPA Final Rule. For the reasons 

stated therein and reiterated in its 

August 2009 Closed-End Proposal, the 

Board believed that disclosure of loan 

originator compensation would not 

address the injury to consumers. The 

Board was concerned that after reading 

the disclosures consumers often 

concluded, not necessarily correctly, 

that mortgage brokers are more 

expensive than creditors. Many 

consumers also believed that mortgage 

brokers would serve their best interests 

notwithstanding disclosure of the 

conflict of interest resulting from the 

relationship between interest rates and 

broker compensation. 

The Board’s consumer testing also 

suggests that few consumers shop for 

mortgages, and often rely on one broker 

or lender because of their trust in the 

relationship, and because they do not 

know that brokers and lenders have 

discretion over the loan terms offered. 

Moreover, even when originator 

compensation is disclosed, consumers 

typically do not understand its 

complexities or how it relates to the 

mechanics of loan pricing. Consumers 

do not understand how a creditor 

payment to a loan originator can result 

in a higher interest rate for consumers. 

Without that knowledge, consumers 

cannot take steps to protect their own 

interests, for example by negotiating for 

a smaller direct payment, a lower rate, 

or both. 

Further, HUD and some states have 

required certain disclosures of mortgage 

broker fees for years. In spite of these 

disclosures, concerns continue to be 

raised about abuses associated with 

yield spread premiums and similar 

compensation for loan officers. For 

these reasons, the Board believes that 

disclosures are ineffective at addressing 

unfair originator compensation. 

Caps. Some industry commenters and 

trade associations recommended the 

Board adopt a cap on loan originator 

compensation, for example at two 

percent of the loan amount, while 

allowing compensation to vary from 

transaction to transaction based on the 

loan’s terms. The Board is not imposing 

a cap on the amount of loan originator 

compensation that can be paid in a 

particular transaction. Although a cap 

might prohibit the most egregious 

compensation practices, it would not 

adequately address the consumer injury 

that the final rule is designed to address. 

A cap would merely create an upper 

limit on an originator’s compensation; it 

would not prevent a loan originator 

from increasing the consumer’s rate or 

points to increase the originator’s own 

compensation. In addition, a cap would 

require the Board to determine an upper 

limit that is appropriate for all loans. It 

is unclear how, or on what basis, the 

Board would determine the appropriate 

cap for all loans, and, therefore, such a 

cap might prove arbitrary. In some cases 

originators might not be fully 

compensated for their work, and in 

other cases they might receive 

compensation that exceeds the value of 

their services. Some loan originators 

would simply charge up to the cap in all 

cases. For all of these reasons, the final 

rule does not apply a cap to originator 

compensation. 

Prohibition on Steering 

The Board requested comment on a 

proposal under § 226.36(e)(1) that 

would prohibit loan originators from 

directing or ‘‘steering’’ consumers to 

loans based on the fact that the 

originator will receive additional 

compensation, when that loan may not 

be in the consumer’s interest. The 

proposed rule was intended to prevent 

circumvention of the prohibition in 

§ 226.36(d)(1), which could occur if the 

loan originator steered the consumer to 

a loan with a higher interest rate or 

higher points to increase the originator’s 

compensation. To facilitate compliance 

with this anti-steering rule, the Board 

also proposed a safe harbor in 

§§ 226.36(e)(2) and (3). Under the safe 

harbor, a loan originator would be 

deemed to comply with the anti-steering 

rule if, under certain specified 

conditions, the consumer is presented 

with a choice of loan options that 

include (1) the lowest interest rate, (2) 

the second lowest interest rate, and (3) 

the lowest total dollar amount for 

origination points or fees and discount 

points. Proposed commentary provided 

additional guidance regarding the 

prohibition on steering and the safe 

harbor. 

The Board specifically sought 

comment on whether the steering 

prohibition would be effective in 

achieving its stated purpose, as well as 

the feasibility and practicality of such a 

rule, its enforceability, and any 

unintended adverse effects the rule 

might have. As discussed in further 

detail below, the Board is adopting the 

anti-steering rule under § 226.36(e)(1) as 

proposed, with a modification to the 

safe harbor provided under 

§§ 226.36(e)(2) and (3). 

Public Comment. Industry 

commenters and their trade associations 

generally asserted that the anti-steering 

prohibition, as well as the safe harbor, 

were too vague and would increase 

compliance costs and litigation risk. 

They asserted that these costs would, in 

turn, be passed on to consumers. Some 

commenters argued that the antisteering rule would interfere with the 

loan originator’s ability to communicate 

with consumers. They claimed that the 

prohibition would cause loan 

originators not to advise their 

consumers fully about possible loan 

options. These commenters urged the 

Board to provide a safe harbor for 

various disclosures instead of the antisteering rule.31 A credit union trade 

association suggested a safe harbor for 

consumers who know what loan type 

they want, and for smaller entities that 

may offer only one or two types of 

loans. 

Consumer advocates, other Federal 

banking agencies, members of Congress, 

and state officials generally supported 

the anti-steering proposal, although 

some noted concerns with the safe 

harbor and associated record-keeping 

requirements. These commenters stated 

that the practice of steering consumers 

to loans with less favorable terms 

increases consumers’ costs and risk, 

increases the risk to the market as a 

whole, and has the potential to result in 

illegal discrimination. For example, one 

commenter stated that originator 

compensation led to many borrowers 

who qualified for prime loans being 

steered to subprime loans. This 

commenter also asserted that the 

compensation practices addressed by 

the rule caused subprime borrowers to 

have reduced access to loans with lower 

interest rates and no risky features, and 

contributed significantly to foreclosures 

in minority neighborhoods. 

With respect to the safe harbor, 

consumer advocates, state officials, and 


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58528 Federal Register / Vol. 75, No. 185 / Friday, September 24, 2010 / Rules and Regulations 

a Federal banking agency expressed 

concern that the proposed safe harbor 

would undermine the effectiveness of 

the prohibition on certain compensation 

payments under § 226.36(d). These 

commenters stated that the safe harbor 

was too broad and would permit 

circumvention of the rule under 

§ 226.36(d)(1). They argued that the safe 

harbor would create incentives for ‘‘pro 

forma’’ compliance, and weaken 

consumers’ access to effective remedies. 

These commenters urged the Board to 

eliminate the safe harbor entirely so that 

compliance with the steering 

prohibition could be determined caseby-case, based on whether the loan 

originator could have offered the 

consumer a loan transaction with lower 

costs. Alternatively, they recommended 

that the Board replace the safe harbor 

with a rebuttable presumption of 

compliance that would only be available 

in those instances where the loan 

originator offered, and the consumer 

chose, a ‘‘plain vanilla loan’’ (e.g., a loan 

with a rate that is fixed for at least 5 

years with a competitive interest rate, 

points and fees equal to 2 points or less, 

no prepayment penalty, fully amortizing 

payments, and that is underwritten with 

full documentation of the consumer’s 

ability to repay). 

Discussion. The Board is adopting the 

anti-steering rule under § 226.36(e)(1) as 

proposed, with some clarifications to 

corresponding comments 36(e)(1)–1 

through –3. The Board believes an antisteering rule is appropriate and 

necessary to prevent the harm that 

results if loan originators steer 

consumers to a particular transaction 

based on the amount of compensation 

paid to the originator when that loan is 

not in the consumer’s interest. In 

addition, the Board believes the rule is 

necessary to prevent circumvention of 

the prohibition in § 226.36(d)(1). 

Section 226.36(d)(1) does not prevent a 

loan originator from directing a 

consumer to transactions from a single 

creditor that offer greater compensation 

to the originator, while ignoring 

possible transactions having lower 

interest rates that are available from 

other creditors. Consumers generally are 

unaware of yield spread premiums and 

are unable to appreciate the incentives 

such compensation creates regarding the 

loan options a loan originator may 

choose to present to consumers. 

Unaware of these financial incentives, 

consumers are unable to engage in 

effective negotiation with loan 

originators. Rather, consumers are more 

likely to rely on a loan originator’s 

advice regarding which loan transaction 

will be in their interest. Consequently, 

these consumers may pay more for 

mortgage credit than they would 

otherwise be required to pay. As 

discussed above in part VI.C, the Board 

finds such a practice to be unfair. 

The final rule under § 226.36(e)(1) 

prohibits loan originators from directing 

or ‘‘steering’’ a consumer to consummate 

a dwelling-secured loan 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. The rule is 

intended to preserve consumer choice 

by ensuring that consumers have loan 

options that reflect considerations other 

than the maximum amount of 

compensation that will be paid to the 

originator. Thus, originators could 

violate the anti-steering prohibition if, 

for instance, they direct a consumer to 

a fixed-rate loan option from a creditor 

that maximizes the originator’s 

compensation without providing the 

consumer with an opportunity to choose 

from other available loans that have 

lower fixed interest rates with the 

equivalent amount in origination and 

discount points. 

Commenters expressed concern that a 

prohibition on steering could negatively 

impact the relationship between loan 

originators and consumers, for example 

by causing loan originators not fully to 

advise consumers on available loan 

options. The Board believes, however, 

that the anti-steering rule is sufficiently 

flexible to allow the loan originator and 

consumer to continue to discuss and 

determine which terms and conditions 

of the loan transaction, in addition to 

other factors such as length of time until 

closing, will serve the consumer’s 

interest. For example, comment 

36(e)(1)–2(ii) makes clear that the final 

rule does not require a loan originator 

to direct a consumer to consummate the 

transaction that will result in the least 

amount of compensation being paid to 

the originator by the creditor. However, 

if the loan originator reviews possible 

loan offers available from a significant 

number of the creditors with which the 

originator regularly does business, and 

the originator directs the consumer to 

the transaction that will result in the 

least amount of creditor-paid 

compensation, the requirements of 

§ 226.36(e) would be deemed to be 

satisfied. 

Comment 36(e)(1)–2 is also revised to 

provide additional clarification that 

where a loan originator directs a 

consumer to a transaction that will 

result in a greater amount of creditorpaid compensation for the loan 

originator, § 226.36(e)(1) is not violated 

if the terms and conditions on that 

transaction are the same as other 

possible loan offers available through 

the originator, and for which the 

consumer likely qualifies. Comment 

36(e)–1 is adopted as proposed to 

provide guidance on compensation that 

is subject to the anti-steering rule. 

Comments 36(e)(1)–1 and –3 are 

adopted as proposed to provide further 

guidance regarding what it means to 

‘‘direct’’ or ‘‘steer’’ a consumer, and 

examples of conduct that is prohibited 

under the anti-steering rule, 

respectively. 

As discussed above under the 

definition of a ‘‘loan originator,’’ 

employees of a creditor are prohibited 

under § 226.36(d)(1) from receiving 

compensation that is based on the terms 

or conditions of the loan. Thus, when 

originating loans for the employercreditor, the originator may not steer the 

consumer to a particular loan offered by 

the employer to increase compensation. 

Accordingly, in these cases, compliance 

with § 226.36(d)(1) is deemed to satisfy 

the requirements of § 226.36(e)(1). At 

the same time, the Board recognizes that 

a creditor’s employee may occasionally 

act as a broker by forwarding a 

consumer’s application to a creditor 

other than the loan originator’s 

employer, such as when the employer 

does not offer any loan products for 

which the consumer would qualify. If 

the loan originator is compensated for 

arranging the loan with the other 

creditor, the originator is not an 

employee of the creditor in that 

transaction and is subject to 

§ 226.36(e)(1). See comment 36(e)(1)– 

2.ii. 

Safe Harbor; Loan Options Presented 

As noted above, to facilitate 

compliance with the anti-steering rule, 

the Board proposed to create a safe 

harbor in §§ 226.36(e)(2) and (3). Under 

the proposal, a loan originator would be 

deemed to comply with the anti-steering 

rule if, under certain conditions, the 

consumer is presented with a choice of 

loan options that include (1) the lowest 

interest rate, (2) the second lowest 

interest rate, and (3) the lowest total 

dollar amount for origination points or 

fees and discount points. For the 

reasons discussed below, the Board is 

adopting the proposed safe harbor, with 

technical clarifications and a 

modification to the set of loan options 

that a loan originator must present to 

the consumer to qualify for the safe 

harbor. 

Under the final rule, a loan originator 

is deemed to have complied with the 

anti-steering rule in § 226.36(e)(1) if it 


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Federal Register / Vol. 75, No. 185 / Friday, September 24, 2010 / Rules and Regulations 58529 

satisfies each of three requirements: (1) 

For each type of transaction in which 

the consumer expressed an interest (i.e., 

a fixed-rate, adjustable-rate, or a reverse 

mortgage), the consumer is presented 

with and able to choose from loan 

options that include a loan with the 

lowest interest rate, a loan with the 

lowest total dollar amount for 

origination points or fees and discount 

points, and a loan with the lowest rate 

with no risky features, such as a 

prepayment penalty or negative 

amortization; (2) the loan options 

presented to the consumer are obtained 

by the loan originator from a significant 

number of the creditors with whom the 

loan originator regularly does business; 

and (3) the loan originator believes in 

good faith that the consumer likely 

qualifies for the loan options presented 

to the consumer. The loan originator 

need only evaluate loan offers that are 

available from creditors with whom the 

loan originator regularly does business. 

See §§ 226.36(e)(2)(i)–(iii), 

226.36(e)(3)(i)(A)–(C), and 

226.36(e)(3)(ii) and corresponding 

commentary. 

The safe harbor is intended to provide 

loan originators with clear guidance to 

ensure that they can comply with the 

anti-steering rule in § 226.36(e). At the 

same time, the Board believes the safe 

harbor must be sufficiently flexible to 

ensure consumers are not unduly 

restricted from considering various loan 

options. There is no uniform method 

available for determining which loans 

may be in the consumer’s interest. 

Consumers and loan originators 

generally consider various terms and 

conditions in relation to other external 

factors, such as how long the consumer 

expects to hold the loan or the creditor’s 

reputation for delivering loans within a 

promised timeframe. Thus, some 

consumers may reasonably determine 

that the financial risk created by a 

certain loan feature, for example shared 

equity, is acceptable in light of the 

loan’s lower interest rate, while other 

consumers may prefer to accept a higher 

rate to avoid the risk associated with a 

shared equity feature (e.g., potential loss 

of future equity). The Board believes 

that consumer advocates’ suggestion for 

narrowing the safe harbor to permit only 

one type of loan option would unduly 

restrict consumer choice and access to 

credit. 

The Board believes, however, that 

there is merit in limiting the safe harbor 

to circumstances where the loan 

originator offers a loan option without 

certain risk features. Such a requirement 

may serve to deter loan originators from 

steering consumers to loans with riskier 

features than they would otherwise 

choose simply to earn greater 

compensation. In addition, requiring 

loan originators to present a loan option 

with the lowest rate and without certain 

risky features to obtain the benefit of the 

safe harbor should place consumers in 

a better position to compare more 

traditional loans to loans with riskier 

features and might result in more 

consumers opting for ‘‘traditional’’ loans. 

To this end, such a requirement serves 

TILA’s purpose of avoiding the 

uninformed use of credit. See TILA 

Section 102(a), 15 U.S.C. 1601(a). 

For these reasons, the final rule 

modifies the safe harbor to require that, 

in addition to loan options with the 

lowest rate and the lowest total dollar 

amount for origination points or fees 

and discount points, one of the loan 

options presented to a consumer be a 

loan with the lowest interest rate that is 

without any of the following features: 

Negative amortization; a prepayment 

penalty; a balloon payment in the first 

7 years; a demand feature; shared 

equity; or shared appreciation. The final 

rule also provides that if the consumer 

expresses an interest in a reverse 

mortgage, a loan without a prepayment 

penalty, or a shared-equity or sharedappreciation feature must be presented. 

See § 226.36(e)(3)(i)(B). This loan option 

requirement replaces the requirement 

under the proposal to offer the 

consumer a loan option with the second 

lowest rate. In technical revisions, 

§§ 226.36(e)(2) and (e)(3)(i) are further 

clarified that to obtain the safe harbor, 

loan originators must present loan 

options to the consumer that include the 

loan options identified in 

§ 226.36(e)(3)(i); no substantive change 

is intended. In addition, comments 

36(e)–1 through –4 are adopted as 

proposed to provide guidance on the 

application of the rule. 

The Board believes that requiring loan 

originators to present loan offers with 

the lowest interest rate and the lowest 

total dollar amount for origination 

points or fees and discount points to 

avail themselves of the safe harbor will 

prevent the most egregious practices of 

originators steering consumers to more 

expensive loans. Such a requirement 

may also help to ensure that consumers 

are able to choose from low-cost 

alternatives. The Board is not adopting 

the recommendation by some 

commenters to provide a rebuttable 

presumption rather than a safe harbor. 

As noted above, consumers may choose 

loans for a variety of reasons, depending 

on their individual circumstances and 

preferences. The anti-steering rule is 

intended to deter the most egregious 

practices of steering consumers to more 

expensive loans simply to earn greater 

compensation, while at the same time 

preserving consumers’ credit options. 

The Board believes that a presumption 

of compliance would not serve this 

purpose as well as a safe harbor, 

because creditors could incur greater 

risk by offering more loan options to 

consumers. See comment 36(e)(2)–1, 

adopted as proposed, clarifying that 

there is no presumption regarding the 

loan originator’s compliance or 

noncompliance with § 226.36(e)(1) 

where a loan originator does not satisfy 

§ 226.36(e)(2). 

Comment 36(e)(1)–2.i, adopted 

substantially as proposed, clarifies that 

in determining whether a transaction is 

in the consumer’s interest, the loan 

originator must compare that 

transaction to other possible loan offers 

available through the originator, and for 

which the loan originator in good faith 

believes the consumer is likely to 

qualify, at the time that transaction was 

offered to the consumer. The loan 

originator need only evaluate those loan 

offers that are available from creditors 

with whom the loan originator regularly 

does business. That is, the final rule 

does not require a loan originator to 

establish a new business relationship 

with any creditor. 

The Board is also adopting 

§ 226.36(e)(3)(iii), as proposed, which 

provides that if a loan originator 

presents more than three loans to the 

consumer for each type of transaction in 

which the consumer expresses an 

interest, the loan originator must 

highlight the three loans that satisfy the 

criteria of the safe harbor, as discussed 

above. 

Some commenters expressed concern, 

however, that the safe harbor would 

unnecessarily require loan originators to 

present consumers with a minimum of 

three loan options where one or two 

loan options satisfied the criteria set 

forth in § 226.36(e)(3)(i). To address 

these commenters’ concerns, the final 

rule includes new § 226.36(e)(4) to 

provide that if a single loan fulfills the 

criteria of all loan options listed in 

§ 226.36(e)(3)(i), loan originators satisfy 

the requirements of the safe harbor by 

presenting that loan to the consumer. 

Thus, loan originators can present fewer 

than three loans and satisfy 

§§ 226.36(e)(2) and (e)(3)(i) if the loans 

presented meet the criteria of the 

options set forth in § 226.36(e)(3). 

Furthermore, comment 36(e)(2)–2, 

which is adopted substantially as 

proposed, provides additional 

clarification that presenting more than 

four loans for each transaction type in 

which the consumer expressed an 

interest and for which the consumer 

likely qualifies would not likely help 


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58530 Federal Register / Vol. 75, No. 185 / Friday, September 24, 2010 / Rules and Regulations 

consumers make a meaningful choice. 

As noted above, if a loan originator 

presents more than three loans to a 

consumer, the loan originator must 

highlight the three loans that satisfy the 

criteria set out in the final rule. 

Alternatives not adopted. A Federal 

banking agency recommended offering a 

safe harbor if the loan originator 

completed a trade-off table in the 

RESPA Good Faith Estimate (GFE). The 

Board is not adopting the 

recommendation to provide a safe 

harbor for a completed trade-off table in 

the RESPA GFE. The trade-off table is 

designed to help consumers understand 

the trade-off between interest rates and 

points. While understanding this tradeoff is beneficial, it is not sufficient, by 

itself, to protect consumers against 

steering. For example, the trade-off table 

would not highlight that a loan has a 

prepayment penalty or other risky 

feature. Moreover, for adjustable-rate 

products, the trade-off table reflects only 

the initial interest rate and not the rate 

at first adjustment or the maximum 

possible interest rate. In some cases, a 

trade-off table might lead a consumer to 

choose an adjustable rate mortgage 

because of a low initial rate, without the 

consumer realizing that the rate could 

rapidly and significantly increase. 

VII. Mandatory Compliance Dates; 

Effective Dates 

The Board requested comment on the 

length of time necessary for creditors to 

implement the proposed rule. Industry 

commenters and their trade associations 

requested an implementation period of 

at least 18 to 24 months. The SBA 

recommended that the Board delay 

implementation for at least 18 months 

for small entities. Many of these 

commenters explained that the 

proposed rule involved extensive 

revisions to current business practices 

regarding loan originator compensation. 

In contrast, consumer advocates asked 

that the proposed rule become effective 

immediately or at least very quickly in 

light of the substantial consumer injury 

resulting from loan originator 

compensation. 

Under TILA Section 105(d), certain of 

the Board’s disclosure regulations are to 

have an effective date of that October 1 

which follows by at least six months the 

date of promulgation. 15 U.S.C. 1604(d). 

However, the Board may at its 

discretion lengthen the implementation 

period for creditors to adjust their forms 

to accommodate new requirements, or 

shorten the period where the Board 

finds that such action is necessary to 

prevent unfair or deceptive disclosure 

practices. No similar effective date 

requirement exists for non-disclosure 

regulations. The Riegle Community 

Development and Regulatory 

Improvement Act of 1994, however, 

requires that agency regulations which 

impose additional reporting, disclosure 

and other requirements on insured 

depository institutions take effect on the 

first day of a calendar quarter following 

publication in final form. 12 U.S.C. 

4802(b). 

Compliance with the final rule will be 

mandatory on April 1, 2011. See 

comment 36–2. Thus, the final rule 

applies to loan originator compensation 

for transactions subject to § 226.36(d) 

and (e), for which creditors receive 

applications on or after April 1, 2011. 

The Board believes that this will 

provide sufficient time for creditors and 

loan originators to make the necessary 

adjustments to their compensation 

agreements and practices to conform to 

the final rule. A longer compliance time 

such as the 18 to 24 months suggested 

by creditors is not necessary, given that 

the rule does not require changes to the 

timing, content and format of mortgage 

disclosure forms. 

Compliance with the provisions of the 

final rule is not required before the 

effective date. Thus, the final rule and 

the Board’s accompanying analysis 

should have no bearing on whether the 

acts and practices that are restricted or 

prohibited under this final rule are 

deemed to be unfair or deceptive if they 

occur before the effective date of this 

rule. Unfair acts or practices can be 

addressed through case-by-case 

enforcement actions against specific 

institutions or individuals, through 

regulations applying to all institutions 

and individuals, or both. An 

enforcement action concerns a specific 

institution’s or individual’s conduct and 

is based on all of the facts and 

circumstances surrounding that 

conduct. By contrast, a regulation is 

prospective and applies to the market as 

a whole, drawing bright lines that 

distinguish broad categories of conduct. 

Because broad regulations, such as 

those in the final rule, can require large 

numbers of institutions and individuals 

to make major adjustments to their 

practices, there could be more harm to 

consumers than benefit if the 

regulations were effective earlier than 

the effective date. If institutions and 

individuals were not provided a 

reasonable time to make changes to their 

operations and systems to comply with 

the final rule, they would either incur 

excessively large expenses, which 

would be passed on to consumers, or 

cease engaging in the regulated activity 

altogether, to the detriment of 

consumers. And because an act or 

practice is unfair only when the harm 

outweighs the benefits to consumers or 

to competition, the implementation 

period preceding the effective date set 

forth in the final rule is integral to the 

Board’s decision to restrict or prohibit 

certain acts or practices by regulation. 

For these reasons, acts or practices 

occurring before the effective date of 

this final rule will be judged on the 

totality of the circumstances under 

applicable laws or regulations. 

Similarly, acts or practices occurring 

after this final rule’s effective date that 

are not governed by these rules will 

continue to be judged on the totality of 

the circumstances under applicable 

laws or regulations. 

VIII. Paperwork Reduction Act 

In accordance with the Paperwork 

Reduction Act of 1995, 44 U.S.C. 3506; 

5 CFR 1320 Appendix A.1, the Board 

has reviewed the final rule under 

authority delegated to the Board by the 

Office of Management and Budget. The 

final rule contains no new collections of 

information and proposes no 

substantive changes to existing 

collections of information pursuant to 

the Paperwork Reduction Act. 

As discussed above, on August 26, 

2009 the Board published in the Federal 

Register a notice of proposed 

rulemaking to amend Regulation Z. 74 

FR 43232. The comment period for this 

notice expired on December 24, 2009. 

The Board is continuing to review all of 

the comments and is in the process of 

developing several final rules. 

The Board has a continuing interest in 

the public’s opinions of its collections 

of information. At any time, comments 

regarding the burden estimate or any 

other information, including suggestions 

for reducing the burden may be sent to: 

Secretary, Board of Governors of the 

Federal Reserve System, 20th and C 

Streets, NW., Washington, DC 20551; 

and to the Office of Management and 

Budget, Paperwork Reduction Project 

(7100–0199), Washington, DC 20503. 

IX. Final Regulatory Flexibility 

Analysis 

In accordance with section 4(a) of the 

Regulatory Flexibility Act (RFA), 5 

U.S.C. §§ 601–612, the Board is 

publishing a final regulatory flexibility 

analysis for the amendments to 

Regulation Z. The RFA requires an 

agency either to provide a final 

regulatory flexibility analysis with a 

final rule or to certify that the final rule 

will not have a significant economic 

impact on a substantial number of small 

entities. Under regulations issued by the 

SBA, an entity is considered ‘‘small’’ if 

it has $175 million or less in assets for 

banks and other depository institutions; 


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Federal Register / Vol. 75, No. 185 / Friday, September 24, 2010 / Rules and Regulations 58531 

32 13 CFR 121.201. 

33Advocacy commented on all of the provisions 

in the Board’s August 2009 Closed-End Proposal. 

The Board is responding in this final rule only to 

Advocacy’s comments that relate to this final rule 

regarding loan originator compensation. The Board 

will respond to Advocacy’s comments on other 

proposed provisions when any final rules on those 

provisions are issued. 

34 74 FR 43232, 43320; Aug. 26, 2009. 

35 Id. at 43319–43320. 

and $7 million or less in revenues for 

non-bank mortgage lenders and 

mortgage brokers.32

The Board received a large number of 

comments contending that the proposed 

rule would have a significant impact on 

various businesses. Based on public 

comment, the Board’s own analysis, and 

for the reasons stated below, the Board 

believes that this final rule will have a 

significant economic impact on a 

substantial number of small entities. 

A. Statement of Need for, and 

Objectives of, the Final Rule 

Congress enacted TILA based on 

findings that economic stability would 

be enhanced and competition among 

consumer credit providers would be 

strengthened by the informed use of 

credit resulting from consumers’ 

awareness of the cost of credit. One of 

the stated purposes of TILA is to 

provide a 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. TILA also 

contains procedural and substantive 

protections for consumers. TILA directs 

the Board to prescribe regulations to 

carry out the purposes of the statute. 

The Board’s Regulation Z implements 

TILA. 

Congress enacted HOEPA in 1994 as 

an amendment to TILA. HOEPA 

imposed additional substantive 

protections on certain high-cost 

mortgage transactions. HOEPA also 

charged the Board with prohibiting acts 

or practices in connection with 

mortgage loans that are unfair, 

deceptive, or designed to evade the 

purposes of HOEPA, and acts or 

practices in connection with refinancing 

of mortgage loans that are associated 

with abusive lending practices or are 

otherwise not in the interest of 

borrowers. 

The final rule restricts certain loan 

originator compensation practices to 

address problems that have been 

observed in the mortgage market. These 

restrictions are proposed pursuant to the 

Board’s statutory responsibility to 

prohibit unfair and deceptive acts and 

practices in connection with mortgage 

loans. 

B. Summary of Issues Raised by 

Comments in Response to the Initial 

Regulatory Flexibility Analysis 

In accordance with section 3(a) of the 

RFA, 5 U.S.C 603(a), the Board prepared 

an initial regulatory flexibility analysis 

(IRFA) in connection with the proposed 

rule, and acknowledged that the 

projected reporting, recordkeeping, and 

other compliance requirements of the 

proposed rule would have a significant 

economic impact on a substantial 

number of small entities. In addition, 

the Board recognized that the precise 

compliance costs would be difficult to 

ascertain because they would depend on 

a number of unknown factors, 

including, among other things, the 

specifications of the current systems 

used by small entities to administer and 

maintain accounts, the complexity of 

the terms of credit products that they 

offer, and the range of such product 

offerings. The Board sought information 

and comment on any costs, compliance 

requirements, or changes in operating 

procedures arising from the application 

of the proposed rule to small entities. 

The Board reviewed comments 

submitted by various entities in order to 

ascertain the economic impact of the 

proposed rule on small entities. A 

number of financial institutions and 

mortgage brokers expressed concern that 

the Board had underestimated the costs 

of compliance. In addition, the SBA 

submitted a comment on the Board’s 

IRFA. Executive Order 13272 directs 

Federal agencies to respond in a final 

rule to written comments submitted by 

the SBA on a proposed rule, unless the 

agency certifies that the public interest 

is not served by doing so. The Board’s 

response to the SBA’s comment letter is 

below.33

Response to the SBA. The SBA 

expressed concern that the Board’s IRFA 

did not adequately assess the impact of 

the proposed rule on small entities as 

required by the RFA. The SBA urged the 

Board to issue a new proposal 

containing a revised IRFA. For the 

reasons stated below, the Board believes 

that its IRFA complied with the 

requirements of the RFA and the Board 

is proceeding with a final rule. 

The SBA suggested that the Board 

failed to provide sufficient information 

about the economic impact of the 

proposed rule and that the Board’s 

request for public comment on the costs 

to small entities of the proposed rule 

was not appropriate. Section 3(a) of the 

RFA requires agencies to publish for 

comment an IRFA which shall describe 

the impact of the proposed rule on small 

entities. 5 U.S.C. 603(a). In addition, 

section 3(b) requires the IRFA to contain 

certain information including a 

description of the 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 

preparation of the report or record. 5 

U.S.C. 603(b). 

The Board’s IRFA complied with the 

requirements of the RFA. The IRFA 

procedure is ‘‘intended to evoke 

commentary from small businesses 

about the effect of the rule on their 

activities, and to require agencies to 

consider the effect of a regulation on 

those entities.’’ Cement Kiln Recycling 

Coalition v. EPA, 255 F.3d 855, 868 

(D.C. Cir. 2001). The RFA does not 

require that the Board be able to project 

the specific dollar amount that a rule 

will cost small entities in order to 

implement the rule; rather it requires a 

description of the projected impact of 

the rule on small entities and of 

reporting, recordkeeping, or compliance 

requirements. 5 U.S.C. 603(a), 603(b)(4). 

Accordingly, the Board described the 

projected impact of the proposed rule 

and sought comments from small 

entities themselves on the effect the 

proposed rule would have on their 

activities. First, the Board described the 

impact of the proposed rule on small 

entities by describing the rule’s 

proposed requirements in detail 

throughout the supplementary 

information for the proposed rule. 

Second, the Board described the 

projected compliance requirements of 

the rule in its IRFA, noting the need for 

small entities to comply with 

recordkeeping requirements, and update 

systems and loan origination 

practices.34

The SBA also commented that the 

Board failed to provide sufficient 

information about the number of small 

mortgage brokers that may be impacted 

by the rule. Section 3(b)(3) of the RFA 

requires the IRFA to 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) (emphasis added). 

The Board provided a description of the 

small entities to which the proposed 

rule would apply and provided an 

estimate of the number of small 

depository institutions to which the 

proposed rule would apply.35 The 

Board also provided an estimate of the 

total number of mortgage broker entities 

and estimated that most of these were 


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58532 Federal Register / Vol. 75, No. 185 / Friday, September 24, 2010 / Rules and Regulations 

36 Id. 

37 Id. at 43319. 

38 73 FR 1672, 1720; Jan. 9, 2008. 

39Section 5(a) of the RFA permits an agency to 

perform the IRFA analysis (among others) in 

conjunction with or as part of any other analysis 

required by any other law if such other analysis 

satisfies the provisions of the RFA. 5 U.S.C. 605(a). 

Other alternatives were discussed throughout the 

supplementary information to the Board’s proposal. 

40 74 FR 43232, 43320; Aug. 26, 2009. 

41 73 FR 1672; Jan. 9, 2008. 42 73 FR 44522; July 30, 2008. 

43Regulation Z generally applies to ‘‘each 

individual or business that offers or extends credit 

when four conditions are met: (i) The credit is 

offered or extended to consumers; (ii) the offering 

or extension of credit is done regularly; (iii) the 

credit is subject to a finance charge or is payable 

by a written agreement in more than four 

installments, and (iv) the credit is primarily for 

personal, family, or household purposes.’’ 

§ 226.1(c)(1). 

small entities.36 The Board stated that it 

was not aware of a reliable source for 

the total number of small entities likely 

to be affected by the proposal.37 Thus, 

the Board did not find it feasible to 

estimate their number. The Board has 

previously requested information on the 

number of small entities, including 

small mortgage broker entities, in its 

2008 proposed rule under HOEPA.38

Comment letters received by the Board 

on both the current and the 2008 

proposals, including the SBA’s 

comment letters, have not provided 

additional sources of information about 

the number of small entities affected. 

The SBA also suggested that the 

Board’s IRFA did not sufficiently 

address alternatives to the proposed 

rule, especially as they relate to small 

entities. Section 3(c) of the RFA requires 

that an IRFA contain 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(c) 

(emphasis added). However, the Board’s 

IRFA discusses the alternative of 

improved disclosures and requests 

comment on other alternatives.39

The SBA’s comment letter 

recommended that the Board replace the 

proposed substantive rule restricting 

originator practices with a requirement 

that creditors disclose the lowest 

interest rate they would accept for a 

given loan. However, the Board’s IRFA 

discussion of the disclosure alternative 

indicates why the Board does not 

believe that such a disclosure 

alternative would accomplish the stated 

objectives of applicable statutes.40 The 

Board has extensively considered 

whether additional disclosures, 

including disclosing the loan 

originator’s compensation, would 

achieve the statutory objectives of 

HOEPA, and even proposed such a 

disclosure requirement in the 2008 

HOEPA Proposed Rule.41 However, 

public comment on that proposal, and 

consumer testing conducted for the 

Board, provided strong evidence that 

additional disclosures would not 

accomplish the goal of HOEPA and the 

Board’s proposal to prevent unfair or 

deceptive origination practices, which 

led the Board to withdraw the 

proposal.42 The SBA’s comment letter 

asserts that the disclosure alternative 

should be sufficient to accomplish the 

Board’s regulatory goals, yet it fails to 

mention the public comment or 

consumer testing findings relating to the 

Board’s withdrawn 2008 proposal. 

The SBA also suggested that, 

according to a mortgage broker industry 

trade group, the proposed definition of 

‘‘loan originator’’ would limit the 

flexibility and loan pricing and product 

options that small business entities can 

offer. The SBA urged the Board to give 

full consideration to the trade group’s 

comments. As discussed in the 

SUPPLEMENTARY INFORMATION above, the 

Board has carefully considered these 

comments. The final rule is intended to 

uniformly address the harm that can 

result from unfair compensation 

practices, and the Board believes that 

providing exemptions for any set of loan 

originators would facilitate 

circumvention of the rule and 

undermine its objective. Furthermore, as 

discussed in the SUPPLEMENTARY

INFORMATION above, the final rule still 

affords creditors the flexibility to 

structure loan pricing to preserve the 

potential consumer benefit of 

compensating an originator, or funding 

third-party closing costs, through the 

interest rate. 

As the SBA notes, the Board 

requested comment in the 

supplementary information to the 

proposal on an alternative that would 

permit compensation based on loan 

amount. The Board is adopting this 

alternative in the final rule. 

Other comments. In addition to the 

SBA’s comment letter, a number of 

industry commenters expressed 

concerns that the rule, as proposed, 

would be costly to implement, would 

not provide enough flexibility, and 

would not adequately respond to the 

needs or nature of their business. 

Mortgage brokers argued that the Board 

should consider alternatives that would 

exempt small entities from the proposed 

rule or mitigate the application of the 

proposed rule on small entities. As 

discussed above, the Board concluded 

that these suggestions do not represent 

significant alternatives to the proposed 

rule because they would not meet the 

objectives of the rule. Many of the issues 

raised by commenters do not apply 

uniquely to small entities and are 

addressed above in other parts of the 

SUPPLEMENTARY INFORMATION. 

C. Description of Small Entities to 

Which the Final Rule Will Apply 

The final rule will apply to all 

institutions and entities that engage in 

originating or extending closed-end, 

home-secured credit. The Board is not 

aware of a reliable source for the total 

number of small entities likely to be 

affected by the final rule, and the credit 

provisions of TILA and Regulation Z 

have broad applicability to individuals 

and businesses that originate, extend 

and service even small numbers of 

home-secured credit. See § 226.1(c)(1).43

All small entities that originate or 

extend closed-end loans secured by real 

property or a dwelling potentially could 

be subject to at least some aspects of the 

final rule. 

The Board can, however, identify 

through data from Reports of Condition 

and Income (call reports) approximate 

numbers of small depository institutions 

that will be subject to the final rule. 

According to March 2010 Call Report 

data, approximately 8,848 small 

depository institutions will be subject to 

the rule. Approximately 15,899 

depository institutions in the United 

States filed Call Report data, 

approximately 11,218 of which had total 

domestic assets of $175 million or less 

and thus were considered small entities 

for purposes of the RFA. Of the 3,898 

banks, 523 thrifts, 6,727 credit unions, 

and 70 branches of foreign banks that 

filed Call Report data and were 

considered small entities, 3,776 banks, 

496 thrifts, 4,573 credit unions, and 3 

branches of foreign banks, totaling 8,848 

institutions, extended mortgage credit. 

For purposes of this Call Report 

analysis, thrifts include savings banks, 

savings and loan entities, co-operative 

banks and industrial banks. 

The Board cannot identify with 

certainty the number of small nondepository institutions that will be 

subject to the final rule. Home Mortgage 

Disclosure Act (HMDA) data indicate 

that 1,507 non-depository institutions 

(independent mortgage companies, 

subsidiaries of a depository institution, 

or affiliates of a bank holding company) 

filed HMDA reports in 2009 for 2008 

lending activities. Based on the small 

volume of lending activity reported by 

these institutions, most are likely to be 

small. 


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Federal Register / Vol. 75, No. 185 / Friday, September 24, 2010 / Rules and Regulations 58533 

44http://www.namb.org/namb/ 

Industry_Facts.asp?SnID=719224934. This page of 

the NAMB Web site, however, no longer provides 

an estimate of the number of mortgage brokerage 

companies. 

45http://www.census.gov/prod/ec02/ 

ec0252a1us.pdf (NAICS code 522310). 

The final rule will apply to mortgage 

brokers. Loan originators other than 

mortgage brokers that will be affected by 

the final rule are employees of creditors 

(or of brokers) and, as such, are not 

business entities in their own right. In 

its 2008 proposed rule under HOEPA, 

73 FR 1672, 1720; Jan. 9, 2008, the 

Board noted that, according to the 

National Association of Mortgage 

Brokers (NAMB), there were 53,000 

mortgage brokerage companies in 2004 

that employed an estimated 418,700 

people.44 The Board estimated that most 

of these companies are small entities. 

On the other hand, the U.S. Census 

Bureau’s 2002 Economic Census 

indicates that there were only 17,041 

‘‘mortgage and nonmortgage loan 

brokers’’ in the United States at that 

time.45

D. Reporting, Recordkeeping, and Other 

Compliance Requirements 

The compliance requirements of the 

final rule are described in the 

SUPPLEMENTARY INFORMATION. Some 

small entities will be required, among 

other things, to alter certain business 

practices, develop new business models, 

re-train staff, and reprogram operational 

systems to ensure compliance with the 

final rule. In addition, Regulation Z 

currently requires creditors to retain 

evidence of compliance with Regulation 

Z for two years. As described in the 

SUPPLEMENTARY INFORMATION, the final 

rule clarifies the types of records that 

creditors must retain to demonstrate 

compliance with the rule. The effect of 

the final rule on small entities is 

unknown. The final rule could affect 

how loan originators are compensated 

and will impose certain related 

recordkeeping requirements on 

creditors. The precise costs that the final 

rule will impose on mortgage creditors 

and loan originators are difficult to 

ascertain. As discussed above, the Board 

has requested information about the 

impact of the rule on small entities but 

has not received additional sources of 

information about the number of small 

entities affected or the costs to small 

entities. Nevertheless, the Board 

believes that these costs will have a 

significant economic effect on small 

entities, including small mortgage 

creditors and brokers. 

E. Steps Taken To Minimize the 

Economic Impact on Small Entities 

The steps the Board has taken to 

minimize the economic impact and 

compliance burden on small entities, 

including the factual, policy, and legal 

reasons for selecting the alternatives 

adopted and why each one of the other 

significant alternatives was not 

accepted, are described above in the 

SUPPLEMENTARY INFORMATION and in the 

summary of issues raised by the public 

comments in response to the proposal’s 

IRFA. For example, the Board has 

adopted an alternative that permits loan 

originator compensation to be based on 

loan amount. The SBA and small entity 

commenters stated that this alternative 

would be less burdensome and would 

provide more flexibility to small entity 

loan originators. In addition, the final 

rule does not apply to open-end credit 

or timeshare plans, and the final rule 

does not extend the record retention 

requirement to persons other than the 

creditor who pays loan originator 

compensation. The Board believes that 

these provisions minimize the 

significant economic impact on small 

entities while still meeting the stated 

objectives of HOEPA and TILA. 

List of Subjects in 12 CFR Part 226 

Advertising, Consumer protection, 

Federal Reserve System, Mortgages, 

Reporting and recordkeeping 

requirements, Truth in lending. 

Authority and Issuance 

■ For the reasons set forth in the 

preamble, the Board amends Regulation 

Z, 12 CFR part 226, as set forth below: 

PART 226—TRUTH IN LENDING 

(REGULATION Z) 

■ 1. The authority citation for part 226 

continues to read as follows: 

Authority: 12 U.S.C. 3806; 15 U.S.C. 1604, 

1637(c)(5), and 1639(l); Pub L. 111–24 § 2, 

123 Stat. 1734. 

Subpart A—General 

■ 2. Section 226.1 is amended by 

revising paragraphs (b) and (d)(5) to 

read as follows: 

§ 226.1 Authority, purpose, coverage, 

organization, enforcement, and liability. 

* * * * * 

(b) Purpose. The purpose of this 

regulation is to promote the informed 

use of consumer credit by requiring 

disclosures about its terms and cost. The 

regulation also includes substantive 

protections. It gives consumers the right 

to cancel certain credit transactions that 

involve a lien on a consumer’s principal 

dwelling, regulates certain credit card 

practices, and provides a means for fair 

and timely resolution of credit billing 

disputes. The regulation does not 

generally govern charges for consumer 

credit, except that several provisions in 

Subpart G set forth special rules 

addressing certain charges applicable to 

credit card accounts under an open-end 

(not home-secured) consumer credit 

plan. The regulation requires a 

maximum interest rate to be stated in 

variable-rate contracts secured by the 

consumer’s dwelling. It also imposes 

limitations on home-equity plans that 

are subject to the requirements of 

§ 226.5b and mortgages that are subject 

to the requirements of § 226.32. The 

regulation prohibits certain acts or 

practices in connection with credit 

secured by a dwelling in § 226.36, and 

credit secured by a consumer’s principal 

dwelling in § 226.35. The regulation 

also regulates certain practices of 

creditors who extend private education 

loans as defined in § 226.46(b)(5). 

* * * * * 

(d) * * * 

(5) Subpart E contains special rules 

for mortgage transactions. Section 

226.32 requires certain disclosures and 

provides limitations for closed-end 

loans that have rates or fees above 

specified amounts. Section 226.33 

requires special disclosures, including 

the total annual loan cost rate, for 

reverse mortgage transactions. Section 

226.34 prohibits specific acts and 

practices in connection with closed-end 

mortgage transactions that are subject to 

§ 226.32. Section 226.35 prohibits 

specific acts and practices in connection 

with closed-end higher-priced mortgage 

loans, as defined in § 226.35(a). Section 

226.36 prohibits specific acts and 

practices in connection with an 

extension of credit secured by a 

dwelling. 

* * * * * 

Subpart E—Special Rules for Certain 

Home Mortgage Transactions 

■ 3. Section 226.36 is amended by: 

■ A. Revising the section heading; 

■ B. Revising paragraph (a); 

■ C. Redesignating paragraph (d) as 

paragraph (f) and revising it; and 

■ D. Adding new paragraphs (d) and (e). 

The additions and revisions read as 

follows: 

§ 226.36 Prohibited acts or practices in 

connection with credit secured by a 

dwelling. 

(a) Loan originator and mortgage 

broker defined. (1) Loan originator. For 

purposes of this section, the term ‘‘loan 

originator’’ means with respect to a 


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58534 Federal Register / Vol. 75, No. 185 / Friday, September 24, 2010 / Rules and Regulations 

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 

term ‘‘loan originator’’ includes an 

employee of the creditor if the employee 

meets this definition. The term ‘‘loan 

originator’’ includes the creditor only if 

the creditor does not provide the funds 

for 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. 

(2) Mortgage broker. For purposes of 

this section, a mortgage broker with 

respect to a particular transaction is any 

loan originator that is not an employee 

of the creditor. 

* * * * * 

(d) Prohibited payments to loan 

originators. (1) Payments based on 

transaction terms or conditions. (i) 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. 

(ii) For purposes of this paragraph 

(d)(1), 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; however, such compensation 

may be subject to a minimum or 

maximum dollar amount. 

(iii) This paragraph (d)(1) shall not 

apply to any transaction in which 

paragraph (d)(2) of this section applies. 

(2) Payments by persons other than 

consumer. If any loan originator 

receives compensation directly from a 

consumer in a consumer credit 

transaction secured by a dwelling: 

(i) No loan originator shall receive 

compensation, directly or indirectly, 

from any person other than the 

consumer in connection with the 

transaction; and 

(ii) No person who knows or has 

reason to know of the consumer-paid 

compensation to the loan originator 

(other than the consumer) shall pay any 

compensation to a loan originator, 

directly or indirectly, in connection 

with the transaction. 

(3) Affiliates. For purposes of this 

paragraph (d), affiliates shall be treated 

as a single ‘‘person.’’ 

(e) Prohibition on steering. (1) 

General. In connection with a consumer 

credit transaction secured by a dwelling, 

a loan originator shall 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. 

(2) Permissible transactions. A 

transaction does not violate paragraph 

(e)(1) of this section if the consumer is 

presented with loan options that meet 

the conditions in paragraph (e)(3) of this 

section for each type of transaction in 

which the consumer expressed an 

interest. For purposes of paragraph (e) of 

this section, the term ‘‘type of 

transaction’’ refers to whether: 

(i) A loan has an annual percentage 

rate that cannot increase after 

consummation; 

(ii) A loan has an annual percentage 

rate that may increase after 

consummation; or 

(iii) A loan is a reverse mortgage. 

(3) Loan options presented. A 

transaction satisfies paragraph (e)(2) of 

this section only if the loan originator 

presents the loan options required by 

that paragraph and all of the following 

conditions are met: 

(i) The loan originator must obtain 

loan options from a significant number 

of the creditors with which the 

originator regularly does business and, 

for each type of transaction in which the 

consumer expressed an interest, must 

present the consumer with loan options 

that include: 

(A) The loan with the lowest interest 

rate; 

(B) The loan with the lowest interest 

rate without negative amortization, a 

prepayment penalty, interest-only 

payments, a balloon payment in the first 

7 years of the life of the loan, a demand 

feature, shared equity, or shared 

appreciation; or, in the case of a reverse 

mortgage, a loan without a prepayment 

penalty, or shared equity or shared 

appreciation; and 

(C) The loan with the lowest total 

dollar amount for origination points or 

fees and discount points. 

(ii) The loan originator must have a 

good faith belief that the options 

presented to the consumer pursuant to 

paragraph (e)(3)(i) of this section are 

loans for which the consumer likely 

qualifies. 

(iii) For each type of transaction, if the 

originator presents to the consumer 

more than three loans, the originator 

must highlight the loans that satisfy the 

criteria specified in paragraph (e)(3)(i) of 

this section. 

(4) Number of loan options presented. 

The loan originator can present fewer 

than three loans and satisfy paragraphs 

(e)(2) and (e)(3)(i) of this section if the 

loan(s) presented to the consumer 

satisfy the criteria of the options in 

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

the provisions of paragraph (e)(3) of this 

section are otherwise met. 

(f) This section does not apply to a 

home-equity line of credit subject to 

§ 226.5b. Section 226.36(d) and (e) do 

not apply to a loan that is secured by a 

consumer’s interest in a timeshare plan 

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

■ 4. In Supplement I to Part 226: 

■ A. Under Section 226.25—Record 

Retention, 25(a) General rule, new 

paragraph 5 is added. 

■ B. Under Section 226.36—Prohibited 

Acts or Practices in Connection With 

Credit Secured by a Dwelling , 

■ 1. Revise the heading; 

■ 2. Redesignate paragraph 1 as 

paragraph 3; 

■ 3. Add paragraphs 1 and 2; 

■ 4. Under 36(a) Mortgage broker 

defined, revise the heading, revise 

paragraph 1, and add paragraphs 2, 3, 

and 4; and 

■ 5. Add entries for 36(d) Prohibited 

payments to loan originators and 36(e) 

Prohibition on steering. 

The additions and revisions read as 

follows: 

Supplement I To Part 226—Official 

Staff Interpretations 

* * * * * 

Subpart D—Miscellaneous 

* * * * * 

Section 226.25—Record Retention 

25(a) General rule. 

* * * * * 

5. Prohibited payments to loan originators. 

For each transaction subject to the loan 

originator compensation provisions in 

§ 226.36(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 § 226.35(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 § 226.25 would be 

presumed to be a record of the amount 

actually paid to the loan originator in 

connection with the transaction. 

* * * * * 

Subpart E—Special Rules for Certain 

Home Mortgage Transactions 

* * * * * 


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Federal Register / Vol. 75, No. 185 / Friday, September 24, 2010 / Rules and Regulations 58535 

Section 226.36—Prohibited Acts or 

Practices in Connection with Credit 

Secured by a Dwelling 

1. Scope of coverage. Sections 226.36(b) 

and (c) apply to closed-end consumer credit 

transactions secured by a consumer’s 

principal dwelling. Sections 226.36(d) and 

(e) apply to closed-end consumer credit 

transactions secured by a dwelling. Sections 

226.36(d) and (e) apply to closed-end loans 

secured by first or subordinate liens, and 

reverse mortgages that are not home-equity 

lines of credit under § 226.5b. See § 226.36(f) 

for additional restrictions on the scope of this 

section, and §§ 226.1(c) and 226.3(a) and 

corresponding commentary for further 

discussion of extensions of credit subject to 

Regulation Z. 

2. Mandatory compliance date for 

§§ 226.36(d) and (e). The final rules on loan 

originator compensation in § 226.36 apply to 

transactions for which the creditor receives 

an application on or after April 1, 2011. For 

example, assume a mortgage broker takes an 

application on March 10, 2011, which the 

creditor receives on March 25, 2011. This 

transaction is not covered. If, however, the 

creditor does not receive the application 

until April 5, 2011, the transaction is 

covered. 

* * * * * 

36(a) Loan originator and mortgage broker 

defined. 

1. Meaning of loan originator. i. General. 

Section 226.36(a) provides that a loan 

originator is any person who for 

compensation or other monetary gain 

arranges, negotiates, or otherwise obtains an 

extension of consumer credit for another 

person. Thus, the term ‘‘loan originator’’ 

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 

below 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 under this 

section. (Under § 226.2(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 

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 § 226.2(a)(17)(i)(B) 

provides that a person to whom a debt 

obligation is initially payable on its face 

generally is a creditor, § 226.36(a)(1) provides 

that, solely for the purposes of § 226.36, such 

a person is also considered a loan originator. 

The creditor 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 

assigns the loan at consummation, it is 

considered a creditor for purposes of 

Regulation Z and also a loan originator for 

purposes of § 226.36. However, if a person 

closes a loan in its own name and draws on 

a bona fide warehouse line of credit to make 

the loan at consummation, it is considered a 

creditor, not a loan originator, for purposes 

of Regulation Z, including § 226.36. 

iii. Servicing. 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 

§ 226.20(a). 

2. Meaning of mortgage broker. For 

purposes of § 226.36, with respect to a 

particular transaction, the term ‘‘mortgage 

broker’’ refers to a loan originator who is not 

an employee of the creditor. Accordingly, the 

term ‘‘mortgage broker’’ includes companies 

that engage in the activities described in 

§ 226.36(a) and also includes employees of 

such companies that engage in these 

activities. Section 226.36(d) prohibits certain 

payments to a loan originator. These 

prohibitions apply to payments made to all 

loan originators, including payments made to 

mortgage brokers, and payments made by a 

company acting as a mortgage broker to its 

employees who are loan originators. 

3. Meaning of creditor. For purposes of 

§ 226.36(d) and (e), a creditor means a 

creditor that is not deemed to be a loan 

originator on the transaction under this 

section. Thus, a person that closes a loan in 

its own name (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) is 

deemed a loan originator, not a creditor, for 

purposes of § 226.36. However, that person is 

still a creditor for all other purposes of 

Regulation Z. 

4. Managers and administrative staff. For 

purposes of § 226.36, 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, and whose compensation is not 

based on whether any particular loan is 

originated, are not loan originators. 

* * * * * 

36(d) Prohibited payments to loan 

originators. 

1. Persons covered. Section 226.36(d) 

prohibits any person (including the creditor) 

from paying compensation to a loan 

originator in connection with a covered 

credit transaction, if the amount of the 

payment is based on any of the transaction’s 

terms or conditions. For example, a person 

that purchases a loan from the creditor may 

not compensate the loan originator in a 

manner that violates § 226.36(d). 

2. Mortgage brokers. The payments made 

by a company acting as a mortgage broker to 

its employees who are loan originators are 

subject to the section’s prohibitions. For 

example, a mortgage broker may not pay its 

employee more for a transaction with a 7 

percent interest rate than for a transaction 

with a 6 percent interest rate. 

36(d)(1) Payments based on transaction 

terms and conditions. 

1. Compensation. i. General. For purposes 

of § 226.36(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 

§ 226.36(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 § 226.36(d) and 

(e), whether the originator expends the time 

to process the consumer’s application or uses 

the fee for other expenses, such as overhead. 

iii. Amounts for third-party charges. 

Compensation includes amounts the loan 

originator retains, but does not include 

amounts the originator receives as payment 

for bona fide and reasonable third-party 

charges, such as title insurance or appraisals. 

In some cases, amounts received for payment 

for third-party charges may exceed the actual 

charge because, for example, the originator 

cannot determine with accuracy what the 

actual charge will be before consummation. 

In such a case, the difference retained by the 

originator is not deemed compensation if the 

third-party charge imposed on the consumer 

was bona fide and reasonable, and also 

complies with state and other applicable law. 

On the other hand, if the originator marks up 

a third-party charge (a practice known as 

‘‘upcharging’’), and the originator retains the 

difference between the actual charge and the 

marked-up charge, the amount retained is 

compensation for purposes of § 226.36(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 to 

$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 

§ 226.36(d) and (e), even though the $50 is 

retained by the loan originator. 


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58536 Federal Register / Vol. 75, No. 185 / Friday, September 24, 2010 / Rules and Regulations 

B. Using the same example in comment 

36(d)(1)–1.iii.A above, the $50 difference 

would be compensation for purposes of 

§ 226.36(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 terms or conditions. Section 

226.36(d)(1) prohibits loan originator 

compensation that is based on the terms or 

conditions of the loan originator’s 

transactions. For example, the rule prohibits 

compensation to a loan originator for a 

transaction based on that transaction’s 

interest rate, annual percentage rate, loan-tovalue ratio, or the existence of a prepayment 

penalty. 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. 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 a consumer’s credit score, the 

originator’s compensation would be based on 

the transactions’ terms or conditions. 

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 result 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 

§ 226.36(d)(1)(ii). See comment 36(d)(1)–9 

discussing compensation based on the 

amount of credit extended. 

4. Creditor’s flexibility in setting loan 

terms. Section 226.36(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, 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 

226.36(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. 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 § 226.36(d)(1), a loan originator’s 

compensation may not vary based on any of 

a credit transaction’s terms or conditions. 

Thus, a creditor and 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. 

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 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 6 months of the year, a 

creditor pays $3,000 to a particular loan 

originator for each loan delivered, regardless 

of the loan terms or conditions. After 

considering the volume of business produced 

by that originator, the creditor could decide 

that as of July 1, it will pay $3,250 for each 

loan delivered by that particular originator, 

regardless of the loan terms or conditions. No 

violation occurs even if the loans made by 

the creditor after July 1 generally carry a 

higher interest rate than loans made before 

that date, to reflect the higher compensation. 

7. Compensation received directly from the 

consumer. The prohibition in § 226.36(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 § 226.36(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. See comment 25(a)–5 

for guidance on complying with the record 

retention requirements of § 226.25(a) as they 

apply to § 226.36(d)(1). 

9. Amount of credit extended. A loan 

originator’s compensation may be based on 

the amount of credit extended, subject to 

certain conditions. Section 226.36(d)(1) does 

not prohibit an arrangement under which a 

loan originator is paid compensation 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: 

i. A creditor may offer a loan originator 1 

percent of the amount of credit extended for 

all loans the originator arranges for the 

creditor, but not less than $1,000 or greater 

than $5,000 for each loan. 

ii. A creditor may not offer a loan 

originator 1 percent of the amount of credit 

extended for loans of $300,000 or more, 2 

percent of the amount of credit extended for 

loans between $200,000 and $300,000, and 3 

percent of the amount of credit extended for 

loans of $200,000 or less. 

36(d)(2) Payments by persons other than 

consumer. 


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Federal Register / Vol. 75, No. 185 / Friday, September 24, 2010 / Rules and Regulations 58537 

1. Compensation in connection with a 

particular transaction. Under § 226.36(d)(2), 

if any loan originator receives compensation 

directly from a consumer in a transaction, no 

other person may provide any compensation 

to a loan originator, directly or indirectly, in 

connection with that particular credit 

transaction. See comment 36(d)(1)–7 

discussing compensation received directly 

from the consumer. The restrictions imposed 

under § 226.36(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, payments by a mortgage broker 

company to an employee in the form of a 

salary or hourly wage, which is not tied to 

a specific transaction, do not violate 

§ 226.36(d)(2) even if the consumer directly 

pays a loan originator a fee in connection 

with a specific credit transaction. However, 

if any loan originator receives compensation 

directly from the consumer in connection 

with a specific credit transaction, neither the 

mortgage broker company nor an employee of 

the mortgage broker company can receive 

compensation from the creditor in 

connection with that particular credit 

transaction. 

2. Compensation received directly from a 

consumer. Under Regulation X, which 

implements the Real Estate Settlement 

Procedures Act (RESPA), 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. 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 § 226.36(d)(2). 

36(d)(3) Affiliates. 

1. For purposes of § 226.36(d), affiliates are 

treated as a single ‘‘person.’’ The term 

‘‘affiliate’’ is defined in § 226.32(b)(2). For 

example, assume a parent company has two 

mortgage lending subsidiaries. Under 

§ 226.36(d)(1), subsidiary ‘‘A’’ could not pay 

a loan originator greater compensation for a 

loan with an interest rate of 8 percent than 

it would pay for a loan with an interest rate 

of 7 percent. If the loan originator may 

deliver loans to both subsidiaries, they must 

compensate the loan originator in the same 

manner. Accordingly, if the loan originator 

delivers the loan to subsidiary ‘‘B’’ and the 

interest rate is 8 percent, the originator must 

receive the same compensation that would 

have been paid by subsidiary A for a loan 

with a rate of either 7 or 8 percent. 

36(e) Prohibition on steering. 

1. Compensation. See comment 36(d)(1)–1 

for guidance on compensation that is subject 

to § 226.36(e). 

Paragraph 36(e)(1). 

1. Steering. For purposes of § 226.36(e), 

directing or ‘‘steering’’ a consumer to 

consummate a particular credit transaction 

means advising, counseling, or otherwise 

influencing a consumer to accept that 

transaction. For such actions to constitute 

steering, the consumer must actually 

consummate the transaction in question. 

Thus, § 226.36(e)(1) does not address the 

actions of a loan originator if the consumer 

does not actually obtain a loan through that 

loan originator. 

2. Prohibited conduct. Under 

§ 226.36(e)(1), a loan originator may not 

direct or steer a consumer to consummate a 

transaction based on the fact that the loan 

originator would increase the amount of 

compensation that the loan originator would 

receive for that transaction compared to other 

transactions, unless the consummated 

transaction is in the consumer’s interest. 

i. In determining whether a consummated 

transaction is in the consumer’s interest, that 

transaction must be compared to other 

possible loan offers available through the 

originator, if any, and for which the 

consumer was likely to qualify, at the time 

that transaction was offered to the consumer. 

Possible loan offers are available through the 

loan originator if they could be obtained from 

a creditor with which the loan originator 

regularly does business. Section 226.36(e)(1) 

does not require a loan originator to establish 

a business relationship with any creditor 

with which the loan originator does not 

already do business. To be considered a 

possible loan offer available through the loan 

originator, an offer need not be extended by 

the creditor; it need only be an offer that the 

creditor likely would extend upon receiving 

an application from the applicant, based on 

the creditor’s current credit standards and its 

current rate sheets or other similar means of 

communicating its current credit terms to the 

loan originator. An originator need not 

inform the consumer about a potential 

transaction if the originator makes a good 

faith determination that the consumer is not 

likely to qualify for it. 

ii. Section 226.36(e)(1) does not require a 

loan originator to direct a consumer to the 

transaction that will result in a creditor 

paying the least amount of compensation to 

the originator. However, if the loan originator 

reviews possible loan offers available from a 

significant number of the creditors with 

which the originator regularly does business, 

and the originator directs the consumer to the 

transaction that will result in the least 

amount of creditor-paid compensation for the 

loan originator, the requirements of 

§ 226.36(e)(1) are deemed to be satisfied. In 

the case where a loan originator directs the 

consumer to the transaction that will result 

in a greater amount of creditor-paid 

compensation for the loan originator, 

§ 226.36(e)(1) is not violated if the terms and 

conditions on that transaction compared to 

the other possible loan offers available 

through the originator, and for which the 

consumer likely qualifies, are the same. A 

loan originator who is an employee of the 

creditor on a transaction may not obtain 

compensation that is based on the 

transaction’s terms or conditions pursuant to 

§ 226.36(d)(1), and compliance with that 

provision by such a loan originator also 

satisfies the requirements of § 226.36(e)(1) for 

that transaction with the creditor. However, 

if a creditor’s employee acts as a broker by 

forwarding a consumer’s application to a 

creditor other than the loan originator’s 

employer, such as when the employer does 

not offer any loan products for which the 

consumer would qualify, the loan originator 

is not an employee of the creditor in that 

transaction and is subject to § 226.36(e)(1) if 

the originator is compensated for arranging 

the loan with the other creditor. 

iii. See the commentary under 

§ 226.36(e)(3) for additional guidance on 

what constitutes a ‘‘significant number of 

creditors with which a loan originator 

regularly does business’’ and guidance on the 

determination about transactions for which 

‘‘the consumer likely qualifies.’’ 

3. Examples. Assume a loan originator 

determines that a consumer likely qualifies 

for a loan from Creditor A that has a fixed 

interest rate of 7 percent, but the loan 

originator directs the consumer to a loan 

from Creditor B having a rate of 7.5 percent. 

If the loan originator receives more in 

compensation from Creditor B than the 

amount that would have been paid by 

Creditor A, the prohibition in § 226.36(e) is 

violated unless the higher-rate loan is in the 

consumer’s interest. For example, a higherrate loan might be in the consumer’s interest 

if the lower-rate loan has a prepayment 

penalty, or if the lower-rate loan requires the 

consumer to pay more in up-front charges 

that the consumer is unable or unwilling to 

pay or finance as part of the loan amount. 

36(e)(2) Permissible transactions. 

1. Safe harbors. A loan originator that 

satisfies § 226.36(e)(2) is deemed to comply 

with § 226.36(e)(1). A loan originator that 

does not satisfy § 226.36(e)(2) is not subject 

to any presumption regarding the originator’s 

compliance or noncompliance with 

§ 226.36(e)(1). 

2. Minimum number of loan options. To 

obtain the safe harbor, § 226.36(e)(2) requires 

that the loan originator present loan options 

that meet the criteria in § 226.36(e)(3)(i) for 

each type of transaction in which the 

consumer expressed an interest. As required 

by § 226.36(e)(3)(ii), the loan originator must 

have a good faith belief that the options 

presented are loans for which the consumer 

likely qualifies. If the loan originator is not 

able to form such a good faith belief for loan 

options that meet the criteria in 

§ 226.36(e)(3)(i) for a given type of 

transaction, the loan originator may satisfy 

§ 226.36(e)(2) by presenting all loans for 

which the consumer likely qualifies and that 

meet the other requirements in § 226.36(e)(3) 

for that given type of transaction. A loan 

originator may present to the consumer any 

number of loan options, but presenting a 

consumer more than four loan options for 

each type of transaction in which the 

consumer expressed an interest and for 

which the consumer likely qualifies would 

not likely help the consumer make a 

meaningful choice. 

36(e)(3) Loan options presented. 

1. Significant number of creditors. A 

significant number of the creditors with 

which a loan originator regularly does 

business is three or more of those creditors. 

If the loan originator regularly does business 

with fewer than three creditors, the originator 

is deemed to comply by obtaining loan 

options from all the creditors with which it 

regularly does business. Under 

§ 226.36(e)(3)(i), the loan originator must 

obtain loan options from a significant 

number of creditors with which the loan 


srobinson on DSKHWCL6B1PROD with RULES3
58538 Federal Register / Vol. 75, No. 185 / Friday, September 24, 2010 / Rules and Regulations 

originator regularly does business, but the 

loan originator need not present loan options 

from all such creditors to the consumer. For 

example, if three loans available from one of 

the creditors with which the loan originator 

regularly does business satisfy the criteria in 

§ 226.36(e)(3)(i), presenting those and no 

options from any other creditor satisfies that 

section. 

2. Creditors with which loan originator 

regularly does business. To qualify for the 

safe harbor in § 226.36(e)(2), the loan 

originator must obtain and review loan 

options from a significant number of the 

creditors with which the loan originator 

regularly does business. For this purpose, a 

loan originator regularly does business with 

a creditor if: 

i. There is a written agreement between the 

originator and the creditor governing the 

originator’s submission of mortgage loan 

applications to the creditor; 

ii. The creditor has extended credit secured 

by a dwelling to one or more consumers 

during the current or previous calendar 

month based on an application submitted by 

the loan originator; or 

iii. The creditor has extended credit 

secured by a dwelling twenty-five or more 

times during the previous twelve calendar 

months based on applications submitted by 

the loan originator. For this purpose, the 

previous twelve calendar months begin with 

the calendar month that precedes the month 

in which the loan originator accepted the 

consumer’s application. 

3. Lowest interest rate. To qualify under the 

safe harbor in § 226.36(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 § 226.36(e)(3)(i). The 

criteria are: The loan with the lowest interest 

rate; the loan with the lowest total dollar 

amount for 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. 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. 

4. Transactions for which the consumer 

likely qualifies. To qualify under the safe 

harbor in § 226.36(e)(2), the loan originator 

must have a good faith belief that the loan 

options presented to the consumer pursuant 

to § 226.36(e)(3) are transactions for which 

the consumer likely qualifies. The loan 

originator’s belief that the consumer likely 

qualifies should be based on information 

reasonably available to the loan originator at 

the time the loan options are presented. In 

making this determination, the loan 

originator may rely on information provided 

by the consumer, even if it subsequently is 

determined to be inaccurate. For purposes of 

§ 226.36(e)(3), a loan originator is not 

expected to know all aspects of each 

creditor’s underwriting criteria. But pricing 

or other information that is routinely 

communicated by creditors to loan 

originators is considered to be reasonably 

available to the loan originator, for example, 

rate sheets showing creditors’ current pricing 

and the required minimum credit score or 

other eligibility criteria. 

* * * * * 

By order of the Board of Governors of the 

Federal Reserve System, September 1, 2010. 

Jennifer J. Johnson, 

Secretary of the Board. 

[FR Doc. 2010–22161 Filed 9–23–10; 8:45 am] 

BILLING CODE 6210–01–P 


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