[Federal Register Volume 78, Number 32 (Friday, February 15, 2013)]
[Rules and Regulations]
[Pages 11279-11427]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-01503]



[[Page 11279]]

Vol. 78

Friday,

No. 32

February 15, 2013

Part II





Bureau of Consumer Financial Protection





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12 CFR Part 1026





Loan Originator Compensation Requirements Under the Truth in Lending 
Act (Regulation Z); Final Rule

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

[[Page 11280]]


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BUREAU OF CONSUMER FINANCIAL PROTECTION

12 CFR Part 1026

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


Loan Originator Compensation Requirements Under the Truth in 
Lending Act (Regulation Z)

AGENCY: Bureau of Consumer Financial Protection.

ACTION: Final rule; official interpretations.

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SUMMARY: The Bureau of Consumer Financial Protection (Bureau) is 
amending Regulation Z to implement amendments to the Truth in Lending 
Act (TILA) made by the Dodd-Frank Wall Street Reform and Consumer 
Protection Act (Dodd-Frank Act). The final rule implements requirements 
and restrictions imposed by the Dodd-Frank Act concerning loan 
originator compensation; qualifications of, and registration or 
licensing of loan originators; compliance procedures for depository 
institutions; mandatory arbitration; and the financing of single-
premium credit insurance. The final rule revises or provides additional 
commentary on Regulation Z's restrictions on loan originator 
compensation, including application of these restrictions to 
prohibitions on dual compensation and compensation based on a term of a 
transaction or a proxy for a term of a transaction, and to 
recordkeeping requirements. The final rule also establishes tests for 
when loan originators can be compensated through certain profits-based 
compensation arrangements. At this time, the Bureau is not prohibiting 
payments to and receipt of payments by loan originators when a consumer 
pays upfront points or fees in the mortgage transaction. Instead the 
Bureau will first study how points and fees function in the market and 
the impact of this and other mortgage-related rulemakings on consumers' 
understanding of and choices with respect to points and fees. This 
final rule is designed primarily to protect consumers by reducing 
incentives for loan originators to steer consumers into loans with 
particular terms and by ensuring that loan originators are adequately 
qualified.

DATES: The amendments to Sec.  1026.36(h) and (i) are effective on June 
1, 2013. All other provisions of the rule are effective on January 10, 
2014.

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

SUPPLEMENTARY INFORMATION:

I. Summary of the Final Rule

    The mortgage market crisis focused attention on the critical role 
that loan officers and mortgage brokers play in the loan origination 
process. Because consumers generally take out only a few home loans 
over the course of their lives, they often rely heavily on loan 
officers and brokers to guide them. But prior to the crisis, training 
and qualification standards for loan originators varied widely, and 
compensation was frequently structured to give loan originators strong 
incentives to steer consumers into more expensive loans. Often, 
consumers paid loan originators an upfront fee without realizing that 
the creditors in the transactions also were paying the loan originators 
commissions that increased with the interest rate or other terms.
    The Dodd-Frank Wall Street Reform and Consumer Protection Act 
(Dodd-Frank Act) expanded on previous efforts by lawmakers and 
regulators to strengthen loan originator qualification requirements and 
regulate industry compensation practices. The Bureau of Consumer 
Financial Protection (Bureau) is issuing new rules to implement the 
Dodd-Frank Act requirements, as well as to revise and clarify existing 
regulations and commentary on loan originator compensation. The rules 
also implement Dodd-Frank Act provisions that prohibit certain 
arbitration agreements and the financing of certain credit insurance in 
connection with a mortgage loan.
    The final rule revises Regulation Z to implement amendments to the 
Truth in Lending Act (TILA). It contains the following key elements:
    Prohibition Against Compensation Based on a Term of a Transaction 
or Proxy for a Term of a Transaction. Regulation Z already prohibits 
basing a loan originator's compensation on ``any of the transaction's 
terms or conditions.'' The Dodd-Frank Act codifies this prohibition. 
The final rule implements the Dodd-Frank Act and clarifies the scope of 
the rule as follows:
     The final rule defines ``a term of a transaction'' as 
``any right or obligation of the parties to a credit transaction.'' 
This means, for example, that a mortgage broker cannot receive 
compensation based on the interest rate of a loan or on the fact that 
the loan officer steered a consumer to purchase required title 
insurance from an affiliate of the broker, since the consumer is 
obligated to pay interest and the required title insurance in 
connection with the loan.
     To prevent evasion, the final rule prohibits compensation 
based on a ``proxy'' for a term of a transaction. The rule also further 
clarifies the definition of a proxy to focus on whether: (1) The factor 
consistently varies with a transaction term over a significant number 
of transactions; and (2) the loan originator has the ability, directly 
or indirectly, to add, drop, or change the factor in originating the 
transaction.
     To prevent evasion, the final rule generally prohibits 
loan originator compensation from being reduced to offset the cost of a 
change in transaction terms (often called a ``pricing concession''). 
However, the final rule allows loan originators to reduce their 
compensation to defray certain unexpected increases in estimated 
settlement costs.
     To prevent incentives to ``up-charge'' consumers on their 
loans, the final rule generally prohibits loan originator compensation 
based upon the profitability of a transaction or a pool of 
transactions. However, subject to certain restrictions, the final rule 
permits certain bonuses and retirement and profit-sharing plans to be 
based on the terms of multiple loan originators' transactions. 
Specifically, the funds can be used for: (1) Contributions to or 
benefits under certain designated tax-advantaged retirement plans, such 
as 401(k) plans and certain pension plans; (2) bonuses and other types 
of non-deferred profits-based compensation if the individual loan 
originator originated ten or fewer mortgage transactions during the 
preceding 12 months; and (3) bonuses and other types of non-deferred 
profits-based compensation that does not exceed 10 percent of the 
individual loan originator's total compensation.
    Prohibition Against Dual Compensation. Regulation Z already 
provides that where a loan originator receives compensation directly 
from a consumer in connection with a mortgage loan, no loan originator 
may receive compensation from another person in connection with the 
same transaction. The Dodd-Frank Act codifies this prohibition, which 
was designed to address consumer confusion over mortgage broker 
loyalties where the brokers were receiving payments both from the 
consumer and the creditor. The final rule implements this restriction 
but provides an exception to allow mortgage brokers to pay their 
employees or contractors commissions, although the commissions cannot 
be based on the terms of the loans that they originate.

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    No Prohibition on Consumer Payment of Upfront Points and Fees. 
Section 1403 of the Dodd-Frank Act contains a section that would 
generally have prohibited consumers from paying upfront points or fees 
on transactions in which the loan originator compensation is paid by a 
person other than the consumer (either to the creditor's own employee 
or to a mortgage broker). However, the Dodd-Frank Act also authorizes 
the Bureau to waive or create exemptions from the prohibition on 
upfront points and fees if the Bureau determines that doing so would be 
in the interest of consumers and in the public interest.
    The Bureau had proposed to waive the ban so that creditors could 
charge upfront points and fees in connection with a mortgage loan, so 
long as they made available to consumers an alternative loan that did 
not include upfront points and fees. The proposal was designed to 
facilitate consumer shopping, enhance consumer decision-making, and 
preserve consumer choice and access to credit. The Bureau has decided 
not to finalize this part of the proposal at this time, however, 
because of concerns that it would have created consumer confusion and 
other negative outcomes. The Bureau has decided instead to issue a 
complete exemption to the prohibition on upfront points and fees 
pursuant to its exemption authority under section 1403 and other 
authority while it scrutinizes several crucial issues relating to the 
proposal's design, operation, and possible effects in a mortgage market 
undergoing regulatory overhaul. The Bureau is planning consumer testing 
and other research to understand how new Dodd-Frank Act requirements 
affect consumers' understanding of and choices with respect to points 
and fees, so that the Bureau can determine whether further regulation 
is appropriate to facilitate consumer shopping and enhanced decision-
making while protecting access to credit.
    Loan Originator Qualifications and Identifier Requirements. The 
Dodd-Frank Act imposes a duty on individual loan officers, mortgage 
brokers, and creditors to be ``qualified'' and, when applicable, 
registered or licensed to the extent required under State and Federal 
law. The final rule imposes duties on loan originator organizations to 
make sure that their individual loan originators are licensed or 
registered as applicable under the Secure and Fair Enforcement for 
Mortgage Licensing Act of 2008 (SAFE Act) and other applicable law. For 
loan originator employers whose employees are not required to be 
licensed, including depository institutions and bona fide nonprofits, 
the rule requires them to: (1) Ensure that their loan originator 
employees meet character, fitness, and criminal background standards 
similar to existing SAFE Act licensing standards; and (2) provide 
training to their loan originator employees that is appropriate and 
consistent with those loan originators' origination activities. The 
final rule contains special provisions with respect to criminal 
background checks and the circumstances in which a criminal conviction 
is disqualifying, and with respect to situations in which a credit 
check on a loan originator is required.
    The final rule also implements a Dodd-Frank Act requirement that 
loan originators provided their unique identifiers under the Nationwide 
Mortgage Licensing System and Registry (NMLSR) on loan documents. 
Accordingly, mortgage brokers, creditors, and individual loan 
originators that are primarily responsible for a particular origination 
will be required to list on enumerated loan documents their NMLSR 
unique identifiers (NMLSR IDs), if any, along with their names.
    Prohibition on Mandatory Arbitration Clauses and Single Premium 
Credit Insurance. The final rule also contains language implementing 
two other Dodd-Frank Act provisions concerning mortgage loan 
originations. The first prohibits the inclusion of clauses requiring 
the consumer to submit disputes concerning a residential mortgage loan 
or home equity line of credit to binding arbitration. It also prohibits 
the application or interpretation of provisions of such loans or 
related agreements so as to bar a consumer from bringing a claim in 
court in connection with any alleged violation of Federal law. The 
second provision prohibits the financing of any premiums or fees for 
credit insurance (such as credit life insurance) in connection with a 
consumer credit transaction secured by a dwelling, but allows credit 
insurance to be paid for on a monthly basis.
    Other Provisions. The final rule also extends existing 
recordkeeping requirements concerning loan originator compensation so 
that they apply to both creditors and mortgage brokers for three years. 
The rule also clarifies the definition of ``loan originator'' for 
purposes of the compensation and qualification rules, including 
exclusions for certain employees of manufactured home retailers, 
servicers, seller financers, and real estate brokers; management, 
clerical, and administrative staff; and loan processors, underwriters, 
and closers.

II. Background

A. The Mortgage Market

Overview of the Market and the Mortgage Crisis
    The mortgage market is the single largest market for consumer 
financial products and services in the United States, with 
approximately $9.9 trillion in mortgage loans outstanding.\1\ During 
the last decade, the market went through an unprecedented cycle of 
expansion and contraction that was fueled in part by the securitization 
of mortgages and creation of increasingly sophisticated derivative 
products. So many other parts of the American financial system were 
drawn into mortgage-related activities that, when the housing market 
collapsed in 2008, it sparked the most severe recession in the United 
States since the Great Depression.\2\
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    \1\ Fed. Reserve Sys., Flow of Funds Accounts of the United 
States, at 67 tbl.L.10 (2012), available at http://www.federalreserve.gov/releases/z1/Current/z1.pdf (as of the end of 
the third quarter of 2012).
    \2\ See Thomas F. Siems, Branding the Great Recession, Fin. 
Insights (Fed. Reserve Bank of Dall.) May 13, 2012, at 3, available 
at http://www.dallasfed.org/assets/documents/banking/firm/fi/fi1201.pdf (stating that the great recession ``was the longest and 
deepest economic contraction, as measured by the drop in real GDP, 
since the Great Depression.'').
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    The expansion in this market is commonly attributed to both 
particular economic conditions (including an era of low interest rates 
and rising housing prices) and to changes within the industry. Interest 
rates dropped significantly--by more than 20 percent--from 2000 through 
2003.\3\ Housing prices increased dramatically--about 152 percent--
between 1997 and 2006.\4\ Driven by the decrease in interest rates and 
the increase in housing prices, the volume of refinancings increased 
rapidly, from about 2.5 million loans in 2000 to more than 15 million 
in 2003.\5\
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    \3\ See U.S. Dep't of Hous. & Urban Dev., An Analysis of 
Mortgage Refinancing, 2001-2003, at 2 (2004) (``An Analysis of 
Mortgage Refinancing, 2001-2003''), available at www.huduser.org/Publications/pdf/MortgageRefinance03.pdf; Souphala Chomsisengphet & 
Anthony Pennington-Cross, The Evolution of the Subprime Mortgage 
Market, 88 Fed. Res. Bank of St. Louis Rev. 31, 48 (2006), available 
at http://research.stlouisfed.org/publications/review/article/5019.
    \4\ U.S. Fin. Crisis Inquiry Comm'n, The Financial Crisis 
Inquiry Report: Final Report of the National Commission on the 
Causes of the Financial and Economic Crisis in the United States 156 
(Official Gov't ed. 2011) (``FCIC Report''), available at http://www.gpo.gov/fdsys/pkg/GPO-FCIC/pdf/GPO-FCIC.pdf.
    \5\ An Analysis of Mortgage Refinancing, 2001-2003, at 1.
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    Growth in the mortgage loan market was particularly pronounced in 
what are known as ``subprime'' and ``Alt-A'' products. Subprime 
products were sold

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primarily to borrowers with poor or no credit history, although some 
borrowers who would have qualified for ``prime'' loans were steered 
into subprime loans instead.\6\ The Alt-A category of loans permitted 
borrowers to take out mortgage loans while providing little or no 
documentation of income or other evidence of repayment ability. Because 
these loans involved additional risk, they were typically more 
expensive to borrowers than ``prime'' mortgages, although many of them 
had very low introductory interest rates. In 2003, subprime and Alt-A 
origination volume was almost $400 billion; in 2006, it had reached $1 
trillion.\7\
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    \6\ For example, the Federal Reserve Board on July 20, 2011, 
issued a consent cease and desist order and assessed an $85 million 
civil money penalty against Wells Fargo & Company of San Francisco, 
a registered bank holding company, and Wells Fargo Financial, Inc., 
of Des Moines. The order addresses allegations that Wells Fargo 
Financial employees steered potential prime borrowers into more 
costly subprime loans and separately falsified income information in 
mortgage applications. In addition to the civil money penalty, the 
order requires that Wells Fargo compensate affected borrowers. See 
http://www.federalreserve.gov/newsevents/press/enforcement/20110720a.htm.
    \7\ Inside Mortg. Fin., Mortgage Originations by Product, in 1 
The 2011 Mortgage Market Statistical Annual 20 (2011).
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    So long as housing prices were continuing to increase, it was 
relatively easy for borrowers to refinance their existing loans into 
more affordable products to avoid interest rate resets and other 
adjustments. When housing prices began to decline in 2005, refinancing 
became more difficult and delinquency rates on these subprime and Alt-A 
products increased dramatically.\8\ More and more consumers, especially 
those with subprime and Alt-A loans, were unable or unwilling to make 
their mortgage payments. An early sign of the mortgage crisis was an 
upswing in early payment defaults--generally defined as borrowers being 
60 or more days delinquent within the first year. Prior to 2006, 1.1 
percent of mortgages would end up 60 or more days delinquent within the 
first year.\9\ Taking a more expansive definition of early payment 
default to include 60 days delinquent within the first two years, this 
figure was double the historic average during 2006, 2007, and 2008.\10\ 
In 2006, 2007, and 2008, 2.3 percent, 2.1 percent, and 2.3 percent of 
mortgages ended up 60 or more days delinquent within the first two 
years, respectively. In addition, as the economy worsened, the rates of 
serious delinquency (90 or more days past due or in foreclosure) for 
the subprime and Alt-A products began a steep increase from 
approximately 10 percent in 2006, to 20 percent in 2007, to more than 
40 percent in 2010.\11\
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    \8\ FCIC Report at 215-217.
    \9\ CoreLogic's TrueStandings Servicing (reflects first-lien 
mortgage loans) (data service accessible only through paid 
subscription).
    \10\ Id.
    \11\ Id. at 217.
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    The impact of this level of delinquencies was severe on creditors 
who held loans on their books and on private investors who purchased 
loans directly or through securitized vehicles. Prior to and during the 
housing bubble, the evolution of the securitization of mortgages 
attracted increasing involvement from financial institutions that were 
not directly involved in the extension of credit to consumers and from 
investors worldwide. Securitization of mortgages allows originating 
creditors to sell off their loans (and reinvest the funds earned in 
making new ones) to investors who want an income stream over time. 
Securitization had been pioneered by what are now called government-
sponsored enterprises (GSEs), including the Federal National Mortgage 
Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation 
(Freddie Mac). But by the early 2000s, large numbers of private 
financial institutions were deeply involved in creating increasingly 
complex mortgage-related investment vehicles through securities and 
derivative products. The private securitization-backed subprime and 
Alt-A mortgage market ground to a halt in 2007 in the face of the 
rising delinquencies on subprime and Alt-A products.\12\
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    \12\ Id. at 124.
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    Six years later, the United States continues to grapple with the 
fallout. The fall in housing prices is estimated to have resulted in 
about $7 trillion in household wealth losses.\13\ In addition, 
distressed homeownership and foreclosure rates remain at unprecedented 
levels.\14\
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    \13\ The U.S. Housing Market: Current Conditions and Policy 
Considerations, 3 (Fed. Reserve Bd., White Paper, 2012), available 
at http://www.federalreserve.gov/publications/other-reports/files/housing-white-paper-20120104.pdf.
    \14\ Lender Processing Servs., PowerPoint Presentation, LPS 
Mortgage Monitor: December 2012 Mortgage Performance Observations, 
Data as of November 2012 Month End, 3, 11 (December 2012), available 
at http://www.lpsvcs.com/LPSCorporateInformation/CommunicationCenter/DataReports/Pages/Mortgage-Monitor.aspx.
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Response and Government Programs
    In light of these conditions, the Federal Government began 
providing support to the mortgage markets in 2008 and continues to do 
so at extraordinary levels today. The Housing and Economic Recovery Act 
of 2008 (HERA), which became effective on October 1, 2008, provided 
both new safeguards and increased regulation for Fannie Mae and Freddie 
Mac, as well as provisions to assist troubled borrowers and the hardest 
hit communities. Fannie Mae and Freddie Mac, which supported the 
mainstream mortgage market, experienced heavy losses and were placed in 
conservatorship by the Federal government in 2008 to support the 
collapsing mortgage market.\15\ Because private investors have 
withdrawn from the mortgage securitization market and there are no 
other effective secondary market mechanisms in place, the GSEs' 
continued operations help ensure that the secondary mortgage market 
continues to function and to assist consumers in obtaining new 
mortgages or refinancing existing mortgages. The Troubled Asset Relief 
Program (TARP), created to implement programs to stabilize the 
financial system during the financial crisis, was authorized through 
the Emergency Economic Stabilization Act of 2008 (EESA), as amended by 
the American Recovery and Reinvestment Act of 2009, and includes 
programs to help struggling homeowners avoid foreclosure.\16\ Since 
2008, several other

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Federal government efforts have endeavored to keep the country's 
housing finance system functioning, including the Treasury Department's 
and the Federal Reserve System's mortgage-backed securities (MBS) 
purchase programs to help keep interest rates low and the Federal 
Housing Administration's (FHA's) increased market presence. As a 
result, mortgage credit has remained available, albeit with more 
restrictive underwriting terms that limit or preclude some consumers' 
access to credit. These same government agencies together with the GSEs 
and other market participants have also undertaken a series of efforts 
to help families avoid foreclosure through loan-modification programs, 
loan-refinance programs and foreclosure alternatives.\17\
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    \15\ HERA, which created the Federal Housing Finance Agency 
(FHFA), granted the Director of FHFA discretionary authority to 
appoint FHFA conservator or receiver of the Enterprises ``for the 
purpose of reorganizing, rehabilitating, or winding up the affairs 
of a regulated entity.'' Housing and Economic Recovery Act of 2008, 
section 1367(a)(2), amending the Federal Housing Enterprises 
Financial Safety and Soundness Act of 1992, 12 U.S.C. 4617(a)(2). On 
September 6, 2008, FHFA exercised that authority, placing Fannie Mae 
and Freddie Mac into conservatorships. The two GSEs have since 
received more than $180 billion in support from the Department of 
the Treasury. Through the second quarter of 2012, Fannie Mae has 
drawn $116.1 billion and Freddie Mac has drawn $71.3 billion, for an 
aggregate draw of $187.5 billion from the Department of the 
Treasury. Fed. Hous. Fin. Agency, Conservator's Report on the 
Enterprises' Financial Performance, at 17 (Second Quarter 2012), 
available at http://www.fhfa.gov/webfiles/24549/ConservatorsReport2Q2012.pdf.
    \16\ The Making Home Affordable Program (MHA) is the umbrella 
program for Treasury's homeowner assistance and foreclosure 
mitigation efforts. The main MHA components are the Home Affordable 
Modification Program (HAMP), a Treasury program that uses TARP funds 
to provide incentives for mortgage servicers to modify eligible 
first-lien mortgages, and two initiatives at the GSEs that use non-
TARP funds. Incentive payments for modifications to loans owned or 
guaranteed by the GSEs are paid by the GSEs, not TARP. Treasury over 
time expanded MHA to include sub-programs designed to overcome 
obstacles to sustainable HAMP modifications. Treasury also allocated 
TARP funds to support two additional housing support efforts: an FHA 
refinancing program and TARP funding for 19 state housing finance 
agencies, called the Housing Finance Agency Hardest Hit Fund. In the 
first half of 2012, Treasury extended the application period for 
HAMP by a year to December 31, 2013, and opened HAMP to non-owner-
occupied rental properties and to consumers with a wider range of 
debt-to-income ratios under ``HAMP Tier 2.''
    \17\ The Home Affordable Refinance Program (HARP) is designed to 
help eligible homeowners refinance their mortgage. HARP is designed 
for those homeowners who are current on their mortgage payments but 
have been unable to get traditional refinancing because the value of 
their homes has declined. For a mortgage to be considered for a HARP 
refinance, it must be owned or guaranteed by the GSEs. HARP ends on 
December 31, 2013.
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Size and Volume of the Current Mortgage Origination Market
    Even with the economic downturn and tightening of credit standards, 
approximately $1.28 trillion in mortgage loans were originated in 
2011.\18\ In exchange for an extension of mortgage credit, consumers 
promise to make regular mortgage payments and provide their home or 
real property as collateral. The overwhelming majority of homebuyers 
continue to use mortgage loans to finance at least some of the purchase 
price of their property. In 2011, 93 percent of all home purchases were 
financed with a mortgage credit transaction.\19\
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    \18\ Moody's Analytics, Credit Forecast 2012 (2012) (``Credit 
Forecast 2012''), available at http://www.economy.com/default.asp 
(reflects first-lien mortgage loans) (data service accessible only 
through paid subscription).
    \19\ Inside Mortg. Fin., New Homes Sold by Financing, in 1 The 
2012 Mortgage Market Statistical Annual 12 (2012).
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    Consumers may obtain mortgage credit to purchase a home, to 
refinance an existing mortgage, to access home equity, or to finance 
home improvement. Purchase loans and refinancings together produced 6.3 
million new first-lien mortgage loan originations in 2011.\20\ The 
proportion of loans that are for purchases as opposed to refinances 
varies with the interest rate environment and other market factors. In 
2011, 65 percent of the market was refinance transactions and 35 
percent was purchase loans, by volume.\21\ Historically the 
distribution has been more even. In 2000, refinances accounted for 44 
percent of the market while purchase loans comprised 56 percent; in 
2005, the two products were split evenly.\22\
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    \20\ Credit Forecast 2012.
    \21\ Inside Mortg. Fin., Mortgage Originations by Product, in 1 
The 2012 Mortgage Market Statistical Annual 17 (2012).
    \22\ Id. These percentages are based on the dollar amount of the 
loans.
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    With a home equity transaction, a homeowner uses his or her equity 
as collateral to secure consumer credit. The credit proceeds can be 
used, for example, to pay for home improvements. Home equity credit 
transactions and home equity lines of credit resulted in an additional 
1.3 million mortgage loan originations in 2011.\23\
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    \23\ Credit Forecast 2012 (reflects open-end and closed-end home 
equity loans).
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    GSE-eligible loans, together with the other federally insured or 
guaranteed loans, cover the majority of the current mortgage market. 
Since entering conservatorship in September 2008, the GSEs have bought 
or guaranteed roughly three of every four mortgages originated in the 
country. Mortgages guaranteed by FHA make up most of the rest.\24\ 
Outside of the securitization available through the Government National 
Mortgage Association (Ginnie Mae) for loans primarily backed by FHA, 
there are very few alternatives in place today to assume the secondary 
market functions served by the GSEs.\25\
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    \24\ Fed. Hous. Fin. Agency, A Strategic Plan for Enterprise 
Conservatorships: The Next Chapter in a Story that Needs an Ending, 
at 14 (2012) (``FHFA Report''), available at http://www.fhfa.gov/webfiles/23344/StrategicPlanConservatorshipsFINAL.pdf.
    \25\ FHFA Report at 8-9. Secondary market issuance remains 
heavily reliant upon the explicitly government guaranteed securities 
of Fannie Mae, Freddie Mac, and Ginnie Mae. Through the first three 
quarters of 2012, approximately $1.2 trillion of the $1.33 trillion 
in mortgage originations have been securitized, less than $10 
billion of the $1.2 trillion were non-agency mortgage backed 
securities. Inside Mortg. Fin. (Nov. 2, 2012) at 4.
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Continued Fragility of the Mortgage Market
    The current mortgage market is especially fragile as a result of 
the recent mortgage crisis. Tight credit remains an important factor in 
the contraction in mortgage lending seen over the past few years. 
Mortgage loan terms and credit standards have tightened most for 
consumers with lower credit scores and with less money available for a 
down payment. According to CoreLogic's TrueStandings Servicing, a 
proprietary data service that covers about two-thirds of the mortgage 
market, average underwriting standards have tightened considerably 
since 2007. Through the first nine months of 2012, for consumers that 
have received closed-end first-lien mortgages, the weighted average 
FICO \26\ score was 750, the loan-to-value (LTV) ratio was 78 percent, 
and the debt-to-income (DTI) ratio was 34.5 percent.\27\ In comparison, 
in the peak of the housing bubble in 2007, the weighted average FICO 
score was 706, the LTV was 80 percent, and the DTI was 39.8 
percent.\28\
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    \26\ FICO is a type of credit score that makes up a substantial 
portion of the credit report that lenders use to assess an 
applicant's credit risk and whether to extend a loan.
    \27\ CoreLogic, TrueStandings Servicing Database, available at 
http://www.truestandings.com (data reflects first-lien mortgage 
loans) (data service accessible only through paid subscription). 
According to CoreLogic's TrueStandings Servicing, FICO reports that 
in 2011, approximately 38 percent of consumers receiving first-lien 
mortgage credit had a FICO score of 750 or greater.
    \28\ Id.
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    In this tight credit environment, the data suggest that creditors 
are not willing to take significant risks. In terms of the distribution 
of origination characteristics, for 90 percent of all the Fannie Mae 
and Freddie Mac mortgage loans originated in 2011, consumers had a FICO 
score over 700 and a DTI less than 44 percent.\29\ According to the 
Federal Reserve's Senior Loan Officer Opinion Survey on Bank Lending 
Practices, in April, 2012 nearly 60 percent of creditors reported that 
they would be much less likely, relative to 2006, to originate a 
conforming home-purchase mortgage \30\ to a consumer with a 10 percent 
down payment and a credit score of 620--a traditional marker for those 
consumers with weaker credit histories.\31\ The Federal Reserve Board 
calculates that the share of mortgage borrowers with credit scores 
below 620 has fallen from about 17 percent of consumers at the end of 
2006 to about 5 percent more recently.\32\ Creditors also appear to 
have pulled back on offering these consumers loans insured by the FHA, 
which provides mortgage insurance on loans made by FHA-approved 
creditors throughout the United States and its territories and is

[[Page 11284]]

especially structured to help promote affordability.\33\
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    \29\ Id.
    \30\ A conforming mortgage is one that is eligible for purchase 
or credit guarantee by Fannie Mae or Freddie Mac.
    \31\ Fed. Reserve Bd., Senior Loan Officer Opinion Survey on 
Bank Lending Practices, available at http://www.federalreserve.gov/boarddocs/SnLoanSurvey/default.htm.
    \32\ Federal Reserve Board staff calculations based on the 
Federal Reserve Bank of New York Consumer Credit Panel. The 10th 
percentile of credit scores on mortgage originations rose from 585 
in 2006 to 635 at the end of 2011.
    \33\ FHA insures mortgages on single family and multifamily 
homes including manufactured homes and hospitals. It is the largest 
insurer of mortgages in the world, insuring over 34 million 
properties since its inception in 1934.
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    The Bureau is acutely aware of the high levels of anxiety in the 
mortgage market today. These concerns include the continued slow pace 
of recovery, the confluence of multiple major regulatory and capital 
initiatives, and the compliance burdens of the various Dodd-Frank Act 
rulemakings (including uncertainty on what constitutes a qualified 
residential mortgage (QRM), which relates to the Dodd-Frank Act's 
credit risk retention requirements and mortgage securitizations). The 
Bureau acknowledges that it will likely take some time for the mortgage 
market to stabilize and that creditors will need to adjust their 
operations to account for several major regulatory and capital regime 
changes.
The Mortgage Origination Process and Origination Channels
    As discussed above, the mortgage market crisis focused attention on 
the critical role that loan officers and mortgage brokers play in 
guiding consumers through the loan origination process. Consumers must 
go through a mortgage origination process to obtain a mortgage loan. 
There are many actors involved in a mortgage origination. In addition 
to the creditor and the consumer, a transaction may involve a loan 
officer employed by a creditor, a mortgage broker, settlement agent, 
appraiser, multiple insurance providers, local government clerks and 
tax offices, and others. Purchase money loans involve additional 
parties such as sellers and real estate agents. These third parties 
typically charge fees or commissions for the services they provide 
which may be paid directly by the consumer or from loan proceeds, or 
indirectly through a creditor or broker.
    Application. To obtain a mortgage loan, consumers must first apply 
through a loan originator. There are three different ``channels'' for 
mortgage loan origination in the current market:
     Retail: The consumer deals with a loan officer that works 
directly for the mortgage creditor, such as a bank, credit union, or 
specialized mortgage finance company. The creditor typically operates a 
network of branches, but may also communicate with consumers through 
mail and the internet. The entire origination transaction is conducted 
within the corporate structure of the creditor, and the loan is closed 
using funds supplied by the creditor. Depending on the type of 
creditor, the creditor may hold the loan in its portfolio or sell the 
loan to investors on the secondary market, as discussed further below.
     Wholesale: The consumer deals with an independent mortgage 
broker, which may be an individual or a mortgage brokerage firm. The 
broker may seek offers from many different creditors, and then acts as 
a liaison between the consumer and whichever creditor ultimately closes 
the loan. At closing, the loan is consummated by using the creditor's 
funds, and the mortgage note is written in the creditor's name.\34\ 
Again, the creditor may hold the loan in its portfolio or sell the loan 
on the secondary market.
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    \34\ In some cases, mortgage brokers use a process called 
``table funding,'' in which the transaction is closed using the 
wholesale creditor's funds at the settlement table, but the loan is 
closed in the broker's name. The broker simultaneously assigns the 
closed loan to the creditor. These types of transactions generally 
require the use of approved title companies or title attorneys of 
the creditor to assure strict adherence to the creditor's closing 
instructions. Such transactions are only valid in those states that 
allow ``wet closings.'' These types of closings are not as common 
today.
---------------------------------------------------------------------------

     Correspondent: The consumer deals with a loan officer that 
works directly for a ``correspondent lender'' that does not deal 
directly with the secondary market. At closing, the correspondent 
lender closes the loans using its own funds, but then immediately sells 
the loan to an ``acquiring creditor,'' which in turn either holds the 
loan in portfolio or sells it on the secondary market.
    Both loan officers and mortgage brokers generally provide 
information to consumers about different types of loans and advise 
consumers on choosing a loan. Consumers rely on loan officers and 
mortgage brokers to determine what kind of loan best suits the 
consumers' needs. Loan officers and mortgage brokers also take a 
consumers' completed loan application for submission to the creditor's 
loan underwriter. The applications include consumers' credit and income 
information, along with information about the home to be purchased. 
Consumers can work with multiple loan originators to compare the loan 
offers that loan originators may obtain on their behalf from creditors. 
Once the consumers have decided to move forward with a loan, the loan 
originator may request additional information or documents from the 
consumers to support the information in the application and obtain an 
appraisal of the property.
    Underwriting. Historically, the creditor's loan underwriter used 
the application and additional information to confirm initial 
information provided by the consumer. The underwriter assessed whether 
the creditor should take on the risk of making the mortgage loan. To 
make this decision, the underwriter considered whether the consumer 
could repay the loan and whether the home was worth enough to serve as 
collateral for the loan. If the underwriter found that the consumer and 
the home qualified, the underwriter would approve the consumer's 
mortgage application.
    During the years preceding the mortgage crisis, much of this 
process broke down as previously discussed. Underwriting today appears 
to have largely returned to these historical norms. The Bureau's 2013 
Ability To Repay (ATR) Final Rule is designed, in substantial part, to 
assure that as credit continues improve, creditors do not return to the 
problematic practices of the last decade.
    Closing. After being approved for a mortgage loan, completing any 
closing requirements, and receiving necessary disclosures, the consumer 
can close on the loan. Multiple parties participate at closing, 
including the consumer, the creditor, and the settlement agent. In some 
instances, the loan originator also functions as the settlement agent. 
More commonly, a separate individual handles the settlement, although 
that individual may be an employee of the creditor or brokerage firm or 
of an affiliate of one of those.
Loan Pricing and Disposition of Closed Loans
    From the consumer's perspective, loan pricing depends on several 
elements:
     Loan terms. The loan terms affect consumer costs and how 
the loan is to be repaid, including the type of loan ``product,'' the 
method of calculating monthly payments and repayment (for example, 
whether the payments are fully amortizing) and the length of the loan 
term.\35\ The most important single term in determining the price is, 
of course, the interest rate (and for adjustable rate mortgages the 
index and margin).
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    \35\ The meaning of loan ``product'' is not firmly established 
and varies with the person using the term, but it generally refers 
to various combinations of features such as the type of interest 
rate and the form of amortization. Feature distinctions often 
thought of as distinct ``loan products'' include, for example, fixed 
rate versus adjustable rate loans and fully amortizing versus 
interest-only or negatively amortizing loans.
---------------------------------------------------------------------------

     Discount points and cash rebates. Discount points are paid 
by consumers to the creditor to purchase a lower interest rate. 
Conversely, creditors may

[[Page 11285]]

offer consumers a cash rebate at closing which can help cover upfront 
closing costs in exchange for paying a higher rate over the life of the 
loan. Both discount points and creditor rebates involve an exchange of 
cash now (in the form of a payment or credit at closing) for cash over 
time (in the form of a reduced or increased interest rate). Consumers 
will also incur some third-party fees in connection with a mortgage 
application such as the fee for an appraisal or for a credit report. 
These may be paid at origination or, in some cases, at closing.
     Origination points or fees. Creditors and loan originators 
also sometimes charge origination points or fees, which are typically 
presented as charges to apply for the loan. Origination fees can take a 
number of forms: A flat dollar amount, a percentage of the loan amount 
(i.e., an ``origination point''), or a combination of the two. 
Origination points or fees may also be framed as a single lump sum or 
as several different fees (e.g., application fee, underwriting fee, 
document preparation fee).
     Closing costs. Closing costs are the additional upfront 
costs of completing a mortgage transaction, including appraisal fees, 
title insurance, recording fees, taxes, and homeowner's insurance, for 
example. These closing costs, as distinct from upfront discount points 
and origination charges, often are paid to third parties other than the 
creditor or loan originator.
    In practice, both discount points and origination points or fees 
are revenue to the lender or loan originator, and that revenue is 
fungible. The existence of two types of fees and the many names lenders 
use for origination fees--some of which may appear to be more 
negotiable than others--has the potential to confuse consumers.
    Determining the appropriate trade-off between payments now and 
payments later requires a consumer to have a clear sense of how long he 
or she expects to stay in the home and in the particular loan. If the 
consumer plans to stay in the home for a number of years without 
refinancing, paying points to obtain a lower rate may make sense 
because the consumer will save more in monthly payments than he or she 
pays up front in discount points. If the consumer expects to move or 
refinance within a few years, however, then agreeing to pay a higher 
rate on the loan to reduce out of pocket expenses at closing may make 
sense because the consumer will save more up front than he or she will 
pay in increased monthly payments before moving or refinancing. There 
is a break-even moment in time where the present value of a reduction/
increase to the rate just equals the corresponding upfront points/
credits. If the consumer moves or refinances earlier (in the case of 
discount points) or later (in the case of creditor rebates) than the 
break-even moment, then the consumer will lose money compared to a 
consumer that neither paid discount points nor received creditor 
rebates.
    The creditor's assessment of pricing--and in particular what 
different combinations of points, fees, and interest rates it is 
willing to offer particular consumers--is also driven by the trade-off 
between upfront and long-term payments. Creditors in general would 
prefer to receive as much money as possible up front, because having to 
wait for payments to come in over the life of the loan increases the 
level of risk. If consumers ultimately pay off a loan earlier than 
expected or cannot pay off a loan due to financial distress, the 
creditors will not earn the overall expected return on the loan. 
However, for creditors, as for consumers, there is a break-even point 
where the present value of a reduction/increase to the rate just equals 
the corresponding upfront points/credits. If the creditor reduces the 
upfront costs in return for a higher interest rate and the consumer 
continues to make payments on the loan beyond the break-even points, 
the creditor will come out ahead.
    The creditor's calculation of these tradeoffs is generally heavily 
influenced by the secondary market, which allows creditors to sell off 
their loans to investors, recoup the capital they have invested in the 
loans, and recycle that capital into new loans. The investors then 
benefit from the payment streams over time, as well as bearing the risk 
of early payment or default. As described above, the creditor can 
benefit from going on to make additional money from additional loans. 
Thus, although some banks \36\ and credit unions hold some loans in 
portfolio over time, many creditors prefer not to hold loans until 
maturity.\37\
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    \36\ As used throughout this document, the term ``banks'' also 
includes ``savings associations.''
    \37\ For companies that are affiliated with securitizers, the 
processing fees involved in creating investment vehicles on the 
secondary market can itself become a distinct revenue stream. 
Although the secondary market was originally created by government-
sponsored enterprises Fannie Mae and Freddie Mac to provide 
liquidity for the mortgage market, over time, Wall Street companies 
began packaging mortgage loans into private-label mortgage-backed 
securities. Subprime and Alt-A loans, in particular, were often sold 
into private-label securities. During the boom, a number of large 
creditors started securitizing the loans themselves in-house, 
thereby capturing the final piece of the loan's value.
---------------------------------------------------------------------------

    When a creditor sells a loan into the secondary market, the 
creditor is exchanging an asset (the loan) that produces regular cash 
flows (principal and interest) for an upfront cash payment from the 
buyer.\38\ That upfront cash payment represents the buyer's present 
valuation of the loan's future cash flows, using assumptions about the 
rate of prepayments due to moves and refinancings, the rate of expected 
defaults, the rate of return relative to other investments, and other 
factors. Secondary market buyers assume considerable risk in 
determining the price they are willing to pay for a loan. If, for 
example, loans prepay faster than expected or default at higher rates 
than expected, the investor will receive a lower return than expected. 
Conversely, if loans prepay more slowly than expected, or default at 
lower rates than expected, the investor will earn a higher return over 
time than expected.\39\
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    \38\ For simplicity, this discussion assumes that the secondary 
market buyer is a person other than the creditor, such as Fannie 
Mae, Freddie Mac, or a Wall Street investment bank. In practice, 
during the mortgage boom, some creditors securitized their own 
loans. In this case, the secondary market price for the loans was 
effectively determined by the price investors were willing to pay 
for the subsequent securities.
    \39\ For simplicity, these examples do not take into account the 
use of various risk mitigation techniques, such as risk-sharing 
counterparties and loan level mortgage or other security credit 
enhancements.
---------------------------------------------------------------------------

    Secondary market mortgage prices are typically quoted in relation 
to the principal loan amount and are specific to a given interest rate 
and other factors that are correlated with default risk. For 
illustrative purposes, at some point in time, a loan with an interest 
rate of 3.5 percent might earn 102.5 in the secondary market. This 
means that for every $100 in initial loan principal amount, the 
secondary market buyer will pay $102.50. Of that amount, $100 is to 
cover the principal amount and $2.50 is revenue to the creditor in 
exchange for the rights to the future interest payments on the 
loan.\40\ The secondary market price of a loan increases or decreases 
along with the loan's interest rate, but the relationship is not 
typically linear. In other words, using the above example at the same 
point in time, loans with interest rates higher than 3.5 percent will 
typically earn more than 102.5, and loans with interest rates less than 
3.5 percent will typically earn less than 102.5. However, each 
subsequent 0.125 percent increment in interest rate above or below 3.5 
percent may not be associated with the same size increment in

[[Page 11286]]

secondary market price.\41\ The same style of pricing is used when 
correspondent lenders sell loans to acquiring creditors.
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    \40\ The creditor's profit is equal to secondary market revenue 
plus origination fees collected by the creditor (if any) plus value 
of the mortgage servicing rights (MSRs) less origination expenses.
    \41\ Susan E. Woodward, Urban Inst., A Study of Closing Costs 
for FHA Mortgages 10-11 (U.S. Dep't of Hous. & Urban Dev. 2008), 
available at: http://www.huduser.org/publications/pdf/FHA_closing_cost.pdf.
---------------------------------------------------------------------------

    In some cases, secondary market prices can actually be less than 
the principal amount of the loan. A price of 98.75, for example, means 
that for every $100 in principal, the selling creditor receives only 
$98.75. This represents a loss of $1.25 per $100 of principal just on 
the sale of the loan, before the creditor takes its expenses into 
account. This usually happens when the interest rate on the loan is 
below prevailing interest rates. But so long as discount points or 
other origination charges can cover the shortfall, the creditor will 
still make its expected return on the loan.
    Discount points are also valuable to creditors (and secondary 
market investors) for another reason: because payment of discount 
points signals the consumer's expectations about how long he or she 
expects to stay in the loan, they make prepayment risk easier to 
predict. The more discount points a consumer pays, the longer the 
consumer likely expects to keep the loan in place. This fact mitigates 
a creditor's or investor's uncertainty about how long interest payments 
can be expected to continue, which facilitates assigning a present 
value to the loan's yield and, therefore, setting the loan's price.
Loan Originator Compensation
    Brokerage firms and loan officers are typically paid a commission 
that is a percentage of the loan amount. Prior to 2010, it was common 
for the percentage to vary based upon the interest rate of the loan: 
commissions on loans with higher interest rates were higher than 
commission on loans with lower interest rates (just as the premiums 
paid by the secondary market for loans vary with the interest rate). 
This was typically called a ``yield spread premium.'' \42\ In the 
wholesale context, the loan originator might keep the entire yield 
spread premium as a commission, or he or she might provide some of the 
yield spread premium to the borrower as a credit against closing 
costs.\43\
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    \42\ Some commenters use the term ``yield spread premium'' to 
refer to any payment from a creditor to a mortgage broker that is 
funded by increasing the interest rate that would otherwise be 
charged to the consumer in the absence of that payment. These 
commenters generally assume that any payment to the brokerage firm 
by the creditor is funded out of the interest rate, reasoning that 
had the consumer paid the brokerage firm directly, the creditor 
would have had lower expenses and would have been able to charge a 
lower rate. Other commenters use the term ``yield spread premium'' 
more narrowly to refer only to a payment from a creditor to a 
mortgage broker that is based on the interest rate, i.e., the 
mortgage broker receives a larger payment if the consumer agrees to 
a higher interest rate. To avoid confusion, the Bureau is limiting 
its use of the term and is instead more specifically describing the 
payment at issue.
    \43\ Mortgage brokers, and some retail loan officers, were 
compensated in this fashion. Some retail loan officers may have been 
paid a salary with a bonus for loan volume, rather than yield spread 
premium-based commissions.
---------------------------------------------------------------------------

    While this system was in place, it was common for loan originator 
commissions to mirror secondary market pricing closely. The ``price'' 
that the creditor offered to its brokers was somewhat lower than the 
price that the creditor expected to receive from the secondary market--
the creditor kept the difference as corporate revenue. However, the 
underlying mechanics of the secondary market flowed through to the loan 
originator's compensation. The higher the interest rate on the loan or 
the more in upfront charges the consumer pays to the creditor (or 
both), the greater the compensation available to the loan originator. 
This created a situation in which the loan originator had a financial 
incentive to steer consumers into the highest interest rate possible or 
to impose on the consumer additional upfront charges payable to the 
creditor.
    In a perfectly competitive and transparent market, competition 
would ensure that this incentive would be countered by the need to 
compete with other loan originators to offer attractive loan terms to 
consumers. However, the mortgage origination market is neither always 
perfectly competitive nor always transparent, and consumers (who take 
out a mortgage only a few times in their lives) may be uninformed about 
how prices work and what terms they can expect.\44\ Moreover, prior to 
2010, mortgage brokers were free to charge consumers directly for 
additional origination points or fees, which were generally described 
to the consumer as compensating for the time and expense of working 
with the consumer to submit the loan application. This compensation 
structure was problematic both because the loan originator had an 
incentive to steer borrowers into less favorable pricing terms while 
the consumer may have paid origination fees to the loan originator 
believing that the loan originator was working for the borrower, 
without knowing that the loan originator was receiving compensation 
from the creditor as well.
---------------------------------------------------------------------------

    \44\ James Lacko and Janis Pappalardo, Improving Consumer 
Mortgage Disclosures: An Empirical Assessment of Current and 
Prototype Disclosure Forms, Federal Trade Commission, ES-12 (June 
2007), available at http://www.ftc.gov/os/2007/06/P025505MortgageDisclosureReport.pdf, Brian K. Bucks and Karen M. 
Pence, Do Borrowers Know their Mortgage Terms?, J. of Urban Econ. 
(2008), available at http://works.bepress.com/karen_pence/5, Hall 
and Woodward, Diagnosing Consumer Confusion and Sub-Optimal Shopping 
Effort: Theory and Mortgage-Market Evidence (2012), available at 
http://www.stanford.edu/~rehall/DiagnosingConsumerConfusionJune2012.
---------------------------------------------------------------------------

B. TILA and Regulation Z

    Congress enacted the TILA based on findings that the informed use 
of credit resulting from consumers' awareness of the cost of credit 
would enhance economic stability and would strengthen competition among 
consumer credit providers. 15 U.S.C. 1601(a). One of the purposes of 
TILA is to provide meaningful disclosure of credit terms to enable 
consumers to compare credit terms available in the marketplace more 
readily and avoid the uninformed use of credit. Id. TILA's disclosures 
differ depending on whether credit is an open-end (revolving) plan or a 
closed-end (installment) loan. TILA also contains procedural and 
substantive protections for consumers. TILA is implemented by the 
Bureau's Regulation Z, 12 CFR part 1026, though historically the Board 
of Governors of the Federal Reserve System (Board) Regulation Z, 12 CFR 
part 226, had implemented TILA.\45\
---------------------------------------------------------------------------

    \45\ The Board's rule remains applicable to certain motor 
vehicle dealers. See 12 U.S.C. 5519 (Section 1029 of the Dodd-Frank 
Act).
---------------------------------------------------------------------------

    In the aftermath of the mortgage crisis, regulators and lawmakers 
began focusing on concerns about the steering of consumers into less 
favorable loan terms than those for which they otherwise qualified. 
Both the Board and the Department of Housing and Urban Development 
(HUD) had explored the use of disclosures to inform consumers about 
loan originator compensation practices. HUD adopted a new disclosure 
regime under the Real Estate Settlement Procedures Act (RESPA), in a 
2008 final rule, which addressed among other matters the disclosure of 
mortgage broker compensation. 73 FR 68204, 68222-27 (Nov. 17, 2008). 
The Board also proposed a disclosure-based approach to addressing 
concerns with mortgage broker compensation. 73 FR 1672, 1698 (Jan. 9, 
2008). The Board later determined, however, that the proposed approach 
presented a significant risk of misleading consumers regarding both the 
relative costs of brokers and creditors and the role of brokers in 
their transactions and, consequently, withdrew that aspect of the 2008 
proposal as part of its 2008 Home Ownership and Equity Protection

[[Page 11287]]

Act (HOEPA) Final Rule.\46\ 73 FR 44522, 44564 (July 30, 2008).
---------------------------------------------------------------------------

    \46\ The Board indicated that it would continue to explore 
available options to address potential unfairness associated with 
loan originator compensation practices. 73 FR 44522, 44565 (July 30, 
2008).
---------------------------------------------------------------------------

    The Board in 2009 proposed new rules addressing in a more 
substantive fashion loan originator compensation practices. The Board's 
proposal included, among other provisions, proposed rules prohibiting 
certain payments to a mortgage broker or loan officer based on the 
transaction's terms or conditions, prohibiting dual compensation as 
described above, and prohibiting a mortgage broker or loan officer from 
``steering'' consumers to transactions not in their interest, to 
increase mortgage broker or loan officer compensation. The Board based 
that proposal on its authority to prohibit acts or practices in the 
mortgage market that the Board found to be unfair, deceptive, or (in 
the case of refinancings) abusive under TILA section 129(l)(2) (now 
redesignated as TILA section 129(p)(2), 15 U.S.C. 1639(p)(2)). 74 FR 
43232, 43279-286 (Aug. 26, 2009). Although the Board issued its 
proposal prior to the enactment of the Dodd-Frank Act, Congress 
subsequently amended TILA to codify significant elements of the Board's 
proposal. See, e.g., 15 U.S.C. 1639b (Section 1403 of the Dodd-Frank 
Act). The Board therefore decided in 2010 to finalize the rules it had 
proposed under its preexisting TILA powers, while acknowledging that 
further rulemaking would be required to address certain issues and 
adjustments made by the Dodd-Frank Act.\47\ 75 FR 58509 (Sept. 24, 
2010) (2010 Loan Originator Final Rule). The Board's 2010 Loan 
Originator Final Rule took effect in April 2011.
---------------------------------------------------------------------------

    \47\ As the Board explained: ``The Board has decided to issue 
this final rule on loan originator compensation and steering, even 
though a subsequent rulemaking will be necessary to implement 
Section 129B(c). The Board believes that Congress was aware of the 
Board's proposal and that in enacting TILA Section 129B(c), Congress 
sought to codify the Board's proposed prohibitions while expanding 
them in some respects and making other adjustments. The Board 
further believes that it can best effectuate the legislative purpose 
of the [Dodd-Frank Act] by finalizing its proposal relating to loan 
origination compensation and steering at this time. Allowing 
enactment of TILA Section 129B(c) to delay final action on the 
Board's prior regulatory proposal would have the opposite effect 
intended by the legislation by allowing the continuation of the 
practices that Congress sought to prohibit.'' 75 FR 58509 (Sept. 24, 
2010).
---------------------------------------------------------------------------

    Most notably, the Board's 2010 Loan Originator Final Rule 
substantially restricted the payments to loan originators which create 
incentives for them to steer consumers to more expensive loans. Under 
this rule, creditors may not base a loan originator's compensation on 
the transaction's terms or conditions, other than the mortgage loan 
amount. In addition, the rule prohibits ``dual compensation,'' in which 
a loan originator is paid compensation by both the consumer and the 
creditor (or any other person). See generally 12 CFR 226.36(d). After 
authority for Regulation Z transferred from the Board, the Bureau 
republished the rule at 12 CFR 1026.36(d). 76 FR 79768 (Dec. 22, 2011).

C. The SAFE Act

    The Secure and Fair Enforcement for Mortgage Licensing Act of 2008 
(SAFE Act), 12 U.S.C. 5106-5116, generally prohibits an individual from 
engaging in the business of a loan originator without first obtaining, 
and maintaining annually, a unique identifier from the NMLSR and either 
a registration as a registered loan originator or a license and 
registration as a State-licensed loan originator. 12 U.S.C. 5103. Loan 
originators who are employees of depository institutions are generally 
subject to the registration requirement, which is implemented by the 
Bureau's Regulation G, 12 CFR part 1007. Other loan originators are 
generally subject to the State licensing requirement, which is 
implemented by the Bureau's Regulation H, 12 CFR part 1008, and by 
State law.

D. The Dodd-Frank Act

    The Dodd-Frank Act expanded on previous efforts by lawmakers and 
regulators to strengthen loan originator qualification requirements and 
regulate industry compensation practices. Public Law 111-203, 124 Stat. 
1376 (approved July 21, 2010). The Dodd-Frank Act adopted several new 
provisions concerning the compensation and qualifications of mortgage 
originators, defined related terms, and prohibited certain arbitration 
and credit insurance financing practices. See Dodd-Frank Act sections 
1401, 1402, 1403, and 1414. Section 1401 of the Dodd-Frank Act amended 
TILA section 103 to add definitions of the term ``mortgage originator'' 
and of other terms relating to mortgage loan origination. 15 U.S.C. 
1602. Section 1402 of the Dodd-Frank Act amended TILA section 129 by 
redesignating existing text and adding section 129B to require mortgage 
originators to meet qualification standards and depository institutions 
to establish and maintain procedures reasonably designed to assure 
compliance with these qualification standards, the loan originator 
registration procedures established pursuant to the SAFE Act, and the 
other requirements of TILA section 129B. TILA section 129B also 
requires mortgage originators to provide their license or registration 
number on loan documents. 15 U.S.C. 1639b. Section 1403 of the Dodd-
Frank Act amended new TILA section 129B to prohibit loan originator 
compensation that varies based on the terms of the loan, other than the 
amount of the principal, and generally to prohibit loan originators 
from being compensated simultaneously by both the consumer and a person 
other than the consumer. Section 1403 of the Dodd-Frank Act also added 
new TILA section 129B(c)(2), which would generally have prohibited 
consumers from paying upfront points or fees on transactions in which 
the loan originator compensation is paid by the creditor (either to the 
creditor's own employee or to a mortgage broker). However, TILA section 
129B(c)(2) also authorized the Bureau to waive or create exemptions 
from the prohibition on upfront points and fees if the Bureau 
determines that doing so would be in the interest of consumers and in 
the public interest. Section 1414 of the Dodd-Frank Act amended new 
TILA section 129C, in part to prohibit certain financing practices for 
single-premium credit insurance and debt cancellation or suspension 
agreements and to restrict mandatory arbitration agreements.

III. Summary of Rulemaking Process

A. Pre-Proposal Outreach

    In developing a proposal to implement sections 1401, 1402, 1403, 
and 1414 of the Dodd-Frank Act, the Bureau conducted extensive 
outreach. Bureau staff met with and held in-depth conference calls with 
large and small bank and non-bank mortgage creditors, mortgage brokers, 
trade associations, secondary market participants, consumer groups, 
nonprofit organizations, and State regulators. Discussions covered 
existing business models and compensation practices and the impact of 
the existing 2010 Loan Originator Compensation Final Rule. They also 
covered the Dodd-Frank Act provisions and the impact on consumers, loan 
originators, lenders, and secondary market participants of various 
options for implementing the statutory provisions. The Bureau developed 
several of the proposed clarifications of existing regulatory 
requirements in response to compliance inquiries and with input from 
industry participants.
    In addition, the Bureau held roundtable meetings with other Federal 
banking and housing regulators, consumer groups, and industry

[[Page 11288]]

representatives regarding the Small Business Review Panel Outline. At 
the Bureau's request, many of the participants provided feedback, which 
the Bureau considered in preparing the proposed rule as well as this 
final rule.

B. Small Business Review Panel

    In May 2012, the Bureau convened a Small Business Review Panel with 
the Chief Counsel for Advocacy of the Small Business Administration 
(SBA Advocacy) and the Administrator of the Office of Information and 
Regulatory Affairs within the Office of Management and Budget 
(OMB).\48\ As part of this process, the Bureau prepared an outline of 
the proposals then under consideration and the alternatives considered 
(Small Business Review Panel Outline), which the Bureau posted on its 
Web site for review by the general public as well as the small entities 
participating in the panel process.\49\ The Small Business Review Panel 
gathered information from representatives of small creditors, mortgage 
brokers, and not-for-profit organizations and made findings and 
recommendations regarding the potential compliance costs and other 
impacts of the proposed rule on those entities. These findings and 
recommendations were set forth in the Small Business Review Panel 
Report, which was made part of the administrative record in this 
rulemaking.\50\ The Bureau carefully considered these findings and 
recommendations in preparing the proposed rule.
---------------------------------------------------------------------------

    \48\ The Small Business Regulatory Enforcement Fairness Act of 
1996 (SBREFA) requires the Bureau to convene a Small Business Review 
Panel before proposing a rule that may have a substantial economic 
impact on a significant number of small entities. See Public Law 
104-121, tit. II, 110 Stat. 847, 857 (1996) (as amended by Pub. L. 
110-28, section 8302 (2007)).
    \49\ U.S. Consumer Fin. Prot. Bureau, Outline of Proposals under 
Consideration and Alternatives Considered (May 9, 2012), available 
at: http://files.consumerfinance.gov/f/201205_cfpb_MLO_SBREFA_Outline_of_Proposals.pdf.
    \50\ U.S. Consumer Fin. Prot. Bureau, U.S. Small Bus. Admin., 
and U.S. Office of Mgmt. and Budget, Final Report of the Small 
Business Review Panel on CFPB's Proposals Under Consideration for 
Residential Mortgage Loan Origination Standards Rulemaking (July 11, 
2012) (Small Business Review Panel Final Report), available at 
http://files.consumerfinance.gov/f/201208_cfpb_LO_comp_SBREFA.pdf.
---------------------------------------------------------------------------

C. Proposed Rule

    On September 7, 2012, the Bureau published a proposed rule in the 
Federal Register to implement the Dodd-Frank Act requirements, as well 
as to revise and clarify existing regulations and commentary on loan 
originator compensation. 77 FR 55272 (Sept. 7, 2012) (the ``2012 Loan 
Originator Compensation Proposal''). The proposal included the 
following main provisions:
1. Restrictions on Loan Originator Compensation
    The proposal would have adjusted existing rules governing 
compensation to loan officers and mortgage brokers in connection with 
closed-end mortgage transactions to account for the Dodd-Frank Act and 
to provide greater clarity and flexibility. Specifically, the proposal 
would have continued the general ban on paying or receiving commissions 
or other loan originator compensation based on the terms of the 
transaction (other than loan amount), with some refinements.
    Pricing Concessions: The proposal would have allowed loan 
originators to reduce their compensation to cover unanticipated 
increases in closing costs from non-affiliated third parties under 
certain circumstances.
    Proxies: The proposal would have clarified when a factor used as a 
basis for compensation is prohibited as a ``proxy'' for a transaction 
term.
    Profit-sharing: The proposal would have clarified and revised 
restrictions on pooled compensation, profit-sharing, and bonus plans 
for loan originators by permitting contributions from general profits 
derived from mortgage activity to 401(k) plans, employee stock plans, 
and other ``qualified plans'' under tax and employment law. The 
proposal would have permitted payment of bonuses or contributions to 
non-qualified profit-sharing or retirement plans from general profits 
derived from mortgage activity if either: (1) The loan originator 
affected has originated five or fewer mortgage transactions during the 
last 12 months; or (2) the company's mortgage business revenues are a 
limited percentage of its total revenues. The proposal solicited 
comment on other alternatives to the measure based on company revenue, 
including an individual loan originator total compensation test.
    Dual Compensation: The proposal would have continued the general 
ban on loan originators being compensated by both consumers and other 
persons but would have allowed mortgage brokerage firms that are paid 
by the consumer to pay their individual brokers a commission, so long 
as the commission is not based on the terms of the transaction.
2. Restriction on Upfront Points and Fees
    The Bureau proposed to use its exemption authority under the Dodd-
Frank Act to allow creditors and loan originator organizations to 
continue making available loans with consumer-paid upfront points or 
fees, so long as they also make available a comparable, alternative 
loan without those points or fees. The proposal generally would have 
required that, before a creditor or loan originator organization may 
impose upfront points or fees on a consumer in a closed-end mortgage 
transaction, the creditor must make available to the consumer a 
comparable, alternative loan with no upfront discount points, 
origination points, or origination fees that are retained by the 
creditor, broker, or an affiliate of either (a ``zero-zero 
alternative''). The requirement would not have applied where the 
consumer is unlikely to qualify for the zero-zero alternative. The 
Bureau solicited comments on variations and alternatives to this 
approach.
3. Loan Originator Qualification Requirements
    The proposal would have implemented the Dodd-Frank Act provision 
requiring each loan originator both to be ``qualified'' and to include 
his or her NMLSR ID on certain specified loan documents. The proposal 
would have required loan originator organizations to ensure their loan 
originators not already required to be licensed under the SAFE Act meet 
character, fitness, and criminal background check standards that are 
similar to SAFE Act requirements and receive training commensurate with 
their duties. The loan originator organization and the individual loan 
originators that are primarily responsible for a particular transaction 
would have been required to list their NMLSR ID and names on certain 
key loan documents.
4. Other Provisions
    The proposal would have banned both agreements requiring consumers 
to submit any disputes that may arise to mandatory arbitration rather 
than filing suit in court, and the financing of premiums for credit 
insurance.

D. Overview of Public Comments

    The Bureau received 713 comments on the 2012 Loan Originator 
Compensation Proposal. The comments came from individual consumers, 
consumer groups, community banks, large banks, large bank holding 
companies, secondary market participants, credit unions, nonbank 
servicers, State and national trade associations for financial 
institutions, local and national community groups, Federal and State 
regulators, academics, and other interested parties. Although

[[Page 11289]]

some commenters provided comments on all of the major provisions of the 
2012 Loan Originator Compensation Proposal, most commenters focused on 
specific aspects of the proposal, as discussed in greater detail in the 
section-by-section analysis below.
    Many commenters addressed the proposed provisions regarding records 
that creditors and loan originator organizations would have been 
required to maintain to demonstrate compliance with the compensation-
related provisions of the proposal. The majority of commenters agreed 
with the Bureau's belief that the proposed increase in the 
recordkeeping period from two years to three years would not 
significantly increase costs. Some commenters asked for clarification 
regarding what types of records would be required to be maintained.
    Numerous commenters addressed the proposed definition of ``loan 
originator,'' which determines which persons would be subject to 
several of the provisions in the proposal. The topic that the largest 
number of commenters addressed was the exception from the definition of 
``loan originator'' for certain persons who provide financing to 
consumers who purchase a dwelling from these persons (i.e., ``seller 
financing''). Individuals, industry professionals, and small business 
owners commented that the Bureau had overlooked the impact that the 
proposal would have on consumers, stating that it would reduce access 
to credit for some while eliminating a reliable retirement vehicle for 
others.
    A large number of commenters addressed the Bureau's proposal to 
allow creditors to charge upfront origination points, discounts, and 
fees in transactions in which someone other than the consumer pays 
compensation to a loan originator, provided that the creditor make 
available to the consumer loan terms without upfront origination 
points, discount points, or fees (i.e., the zero-zero alternative). One 
of the most common assertions from commenters relating to points and 
fees was that the zero-zero alternative restrictions were duplicative 
of other regulations, or that the restrictions being implemented in 
other rules were sufficient and more effective at protecting consumers.
    Many banks, credit unions, and mortgage professionals expressed 
concern that prohibiting discount points would result in higher 
interest rates, could reduce access to credit for consumers, and would 
subject the creditors to higher-priced mortgage rules. Banks and credit 
unions opined that complying with the proposal would make lower-value 
loans unprofitable and banks and credit unions would no longer be able 
to profitably serve that segment of the market.
    A significant number of commenters asserted that the proposal would 
have a negative impact on affiliated businesses, namely inconvenience, 
reduced pricing advantages, and duplicative processes. Other commenters 
advocated exempting fees for title services from the types of 
compensation treated as loan originator compensation when it is paid to 
an affiliate. Several commenters asserted that a restriction on title 
services would not benefit consumers and could detrimentally limit 
consumers' credit options.
    There was no consensus among consumer groups on whether, or how, 
the Bureau should use its exemption authority regarding the statutory 
ban on consumers paying upfront points and fees. Some industry 
commenters advocated adjustments or alternatives to the zero-zero 
proposal, rather than a complete exemption, although the approaches 
varied by commenter.
    A large number of comments addressed qualification standards for 
loan originators who are not subject to State licensing requirements. 
Representatives of banks stated that the proposed requirements were 
duplicative of existing requirements. Representatives of nonbank 
creditors and brokers argued that the proposal was too lenient, would 
allow for unqualified loan originators to work at depository 
institutions, and would create an unfair competitive advantage for 
these institutions.

E. Post-Proposal Outreach

    After the proposal was issued, the Bureau held roundtable meetings 
with other Federal banking and housing regulators, consumer groups, and 
industry representatives to discuss the proposal and the final rule. At 
the Bureau's request, many of the participants provided feedback, which 
the Bureau has considered in preparing the final rule.

F. Other Rulemakings

    In addition to this final rule, the Bureau is adopting several 
other final rules and issuing one proposal, all relating to mortgage 
credit to implement requirements of title XIV of the Dodd-Frank Act. 
The Bureau is also issuing a final rule jointly with other Federal 
agencies to implement requirements for mortgage appraisals in title 
XIV. Each of the final rules follows a proposal issued in 2011 by the 
Board or in 2012 by the Bureau alone or jointly with other Federal 
agencies. Collectively, these proposed and final rules are referred to 
as the Title XIV Rulemakings.
     Ability to Repay: The Bureau recently issued a rule, 
following a May 2011 proposal issued by the Board (the Board's 2011 ATR 
Proposal), 76 FR 27390 (May 11, 2011), to implement provisions of the 
Dodd-Frank Act (1) requiring creditors to determine that a consumer has 
a reasonable ability to repay covered mortgage loans and establishing 
standards for compliance, such as by making a ``qualified mortgage,'' 
and (2) establishing certain limitations on prepayment penalties, 
pursuant to TILA section 129C as established by Dodd-Frank Act sections 
1411, 1412, and 1414. 15 U.S.C. 1639c. The Bureau's final rule is 
referred to as the 2013 ATR Final Rule. Simultaneously with the 2013 
ATR Final Rule, the Bureau issued a proposal to amend the final rule 
implementing the ability-to-repay requirements, including by the 
addition of exemptions for certain nonprofit creditors and certain 
homeownership stabilization programs and a definition of a ``qualified 
mortgage'' for certain loans made and held in portfolio by small 
creditors (the 2013 ATR Concurrent Proposal). The Bureau expects to act 
on the 2013 ATR Concurrent Proposal on an expedited basis, so that any 
exceptions or adjustments to the 2013 ATR Final Rule can take effect 
simultaneously with that rule.
     Escrows: The Bureau recently issued a rule, following a 
March 2011 proposal issued by the Board (the Board's 2011 Escrows 
Proposal), 76 FR 11598 (Mar. 2, 2011), to implement certain provisions 
of the Dodd-Frank Act expanding on existing rules that require escrow 
accounts to be established for higher-priced mortgage loans and 
creating an exemption for certain loans held by creditors operating 
predominantly in rural or underserved areas, pursuant to TILA section 
129D as established by Dodd-Frank Act sections 1461. 15 U.S.C. 1639d. 
The Bureau's final rule is referred to as the 2013 Escrows Final Rule.
     HOEPA: Following its July 2012 proposal (the 2012 HOEPA 
Proposal), 77 FR 49090 (Aug. 15, 2012), the Bureau recently issued a 
final rule to implement Dodd-Frank Act requirements expanding 
protections for ``high-cost mortgages'' under the Homeownership and 
Equity Protection Act (HOEPA), pursuant to TILA sections 103(bb) and 
129, as amended by Dodd-Frank Act sections 1431 through 1433. 15 U.S.C. 
1602(bb) and 1639. The Bureau recently issued rules to implement 
certain title XIV requirements concerning homeownership counseling, 
including a

[[Page 11290]]

requirement that lenders provide lists of homeownership counselors to 
applicants for federally related mortgage loans, pursuant to RESPA 
section 5(c), as amended by Dodd-Frank Act section 1450. 12 U.S.C. 
2604(c). The Bureau's final rule is referred to as the 2013 HOEPA Final 
Rule.
     Servicing: Following its August 2012 proposals (the 2012 
RESPA Servicing Proposal and 2012 TILA Servicing Proposal), 77 FR 57200 
(Sept. 17, 2012) (RESPA); 77 FR 57318 (Sept. 17, 2012) (TILA), the 
Bureau recently issued final rules to implement Dodd-Frank Act 
requirements regarding force-placed insurance, error resolution, 
information requests, and payment crediting, as well as requirements 
for mortgage loan periodic statements and adjustable-rate mortgage 
reset disclosures, pursuant to section 6 of RESPA and sections 128, 
128A, 129F, and 129G of TILA, as amended or established by Dodd-Frank 
Act sections 1418, 1420, 1463, and 1464. 12 U.S.C. 2605; 15 U.S.C. 
1638, 1638a, 1639f, and 1639g. The Bureau also recently finalized rules 
on early intervention for troubled and delinquent borrowers, and loss 
mitigation procedures, pursuant to the Bureau's authority under section 
6 of RESPA, as amended by Dodd-Frank Act section 1463, to establish 
obligations for mortgage servicers that it finds to be appropriate to 
carry out the consumer protection purposes of RESPA, and its authority 
under section 19(a) of RESPA to prescribe rules necessary to achieve 
the purposes of RESPA. The Bureau's final rule under RESPA with respect 
to mortgage servicing also establishes requirements for general 
servicing standards policies and procedures and continuity of contact 
pursuant to its authority under section 19(a) of RESPA. The Bureau's 
final rules are referred to as the 2013 RESPA Servicing Final Rule and 
the 2013 TILA Servicing Final Rule, respectively.
     Appraisals: The Bureau, jointly with other Federal 
agencies,\51\ is issuing a final rule implementing Dodd-Frank Act 
requirements concerning appraisals for higher-risk mortgages, pursuant 
to TILA section 129H as established by Dodd-Frank Act section 1471. 15 
U.S.C. 1639h. This rule follows the agencies' August 2012 joint 
proposal (the 2012 Interagency Appraisals Proposal). 77 FR 54722 (Sept. 
5, 2012). The agencies' joint final rule is referred to as the 2013 
Interagency Appraisals Final Rule. In addition, following its August 
2012 proposal (the 2012 ECOA Appraisals Proposal), 77 FR 50390 (Aug. 
21, 2012), the Bureau is issuing a final rule to implement provisions 
of the Dodd-Frank Act requiring that creditors provide applicants with 
a free copy of written appraisals and valuations developed in 
connection with applications for loans secured by a first lien on a 
dwelling, pursuant to section 701(e) of the Equal Credit Opportunity 
Act (ECOA) as amended by Dodd-Frank Act section 1474. 15 U.S.C. 
1691(e). The Bureau's final rule is referred to as the 2013 ECOA 
Appraisals Final Rule.
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    \51\ Specifically, the Board of Governors of the Federal Reserve 
System, the Office of the Comptroller of the Currency, the Federal 
Deposit Insurance Corporation, the National Credit Union 
Administration, and the Federal Housing Finance Agency.
---------------------------------------------------------------------------

    The Bureau is not at this time finalizing proposals concerning 
various disclosure requirements that were added by title XIV of the 
Dodd-Frank Act, integration of mortgage disclosures under TILA and 
RESPA, or a simpler, more inclusive definition of the finance charge 
for purposes of disclosures for closed-end mortgage transactions under 
Regulation Z. The Bureau expects to finalize these proposals and to 
consider whether to adjust regulatory thresholds under the Title XIV 
Rulemakings in connection with any change in the calculation of the 
finance charge later in 2013, after it has completed quantitative 
testing, and any additional qualitative testing deemed appropriate, of 
the forms that it proposed in July 2012 to combine TILA mortgage 
disclosures with the good faith estimate (RESPA GFE) and settlement 
statement (RESPA settlement statement) required under RESPA, pursuant 
to Dodd-Frank Act section 1032(f) and sections 4(a) of RESPA and 105(b) 
of TILA, as amended by Dodd-Frank Act sections 1098 and 1100A, 
respectively (the 2012 TILA-RESPA Proposal). 77 FR 51116 (Aug. 23, 
2012). Accordingly, the Bureau already has issued a final rule delaying 
implementation of various affected title XIV disclosure provisions. 77 
FR 70105 (Nov. 23, 2012). The Bureau's approaches to coordinating the 
implementation of the Title XIV Rulemakings and to the finance charge 
proposal are discussed in turn below.

G. Coordinated Implementation of Title XIV Rulemakings

    As noted in all of its foregoing proposals, the Bureau regards each 
of the Title XIV Rulemakings as affecting aspects of the mortgage 
industry and its regulations. Accordingly, as noted in its proposals, 
the Bureau is coordinating carefully the Title XIV Rulemakings, 
particularly with respect to their effective dates. The Dodd-Frank Act 
requirements to be implemented by the Title XIV Rulemakings generally 
will take effect on January 21, 2013, unless final rules implementing 
those requirements are issued on or before that date and provide for a 
different effective date. See Dodd-Frank Act section 1400(c), 15 U.S.C. 
1601 note. In addition, some of the Title XIV Rulemakings are to take 
effect no later than one year after they are issued. Id.
    The comments on the appropriate implementation date for this final 
rule are discussed in detail below in part VI of this notice. In 
general, however, consumer groups requested that the Bureau put the 
protections in the Title XIV Rulemakings into effect as soon as 
practicable. In contrast, the Bureau received some industry comments 
indicating that implementing so many new requirements at the same time 
would create a significant cumulative burden for creditors. In 
addition, many commenters also acknowledged the advantages of 
implementing multiple revisions to the regulations in a coordinated 
fashion.\52\ Thus, a tension exists between coordinating the adoption 
of the Title XIV Rulemakings and facilitating industry's implementation 
of such a large set of new requirements. Some have suggested that the 
Bureau resolve this tension by adopting a sequenced implementation, 
while others have requested that the Bureau simply provide a longer 
implementation period for all of the final rules.
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    \52\ Of the several final rules being adopted under the Title 
XIV Rulemakings, six entail amendments to Regulation Z, with the 
only exceptions being the 2013 RESPA Servicing Final Rule 
(Regulation X) and the 2013 ECOA Appraisals Final Rule (Regulation 
B); the 2013 HOEPA Final Rule also amends Regulation X, in addition 
to Regulation Z. The six Regulation Z final rules involve numerous 
instances of intersecting provisions, either by cross-references to 
each other's provisions or by adopting parallel provisions. Thus, 
adopting some of those amendments without also adopting certain 
other, closely related provisions would create significant technical 
issues, e.g., new provisions containing cross-references to other 
provisions that do not yet exist, which could undermine the ability 
of creditors and other parties subject to the rules to understand 
their obligations and implement appropriate systems changes in an 
integrated and efficient manner.
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    The Bureau recognizes that many of the new provisions will require 
creditors and loan originators to make changes to automated systems 
and, further, that most administrators of large systems are reluctant 
to make too many changes to their systems at once. At the same time, 
however, the Bureau notes that the Dodd-Frank Act established virtually 
all of these changes to institutions' compliance responsibilities, and 
contemplated that they be implemented in a relatively short period of 
time. And, as already noted, the extent of interaction among

[[Page 11291]]

many of the Title XIV Rulemakings necessitates that many of their 
provisions take effect together. Finally, notwithstanding commenters' 
expressed concerns for cumulative burden, the Bureau expects that 
creditors and loan originators actually may realize some efficiencies 
from adapting their systems for compliance with multiple new, closely 
related requirements at once, especially if given sufficient overall 
time to do so.
    Accordingly, the Bureau is requiring that, as a general matter, 
creditors, loan originators, and other affected persons begin complying 
with the final rules on January 10, 2014. As noted above, section 
1400(c) of the Dodd-Frank Act requires that some provisions of the 
Title XIV Rulemakings take effect no later than one year after the 
Bureau issues them. Accordingly, the Bureau is establishing January 10, 
2014, one year after issuance of the Bureau's 2013 ATR, Escrows, and 
HOEPA Final Rules (i.e., the earliest of the title XIV final rules), as 
the baseline effective date for most of the Title XIV Rulemakings. The 
Bureau believes that, on balance, this approach will facilitate the 
implementation of the rules' overlapping provisions, while also 
affording creditors sufficient time to implement the more complex or 
resource-intensive new requirements.
    The Bureau has identified certain rulemakings or selected aspects 
thereof, however, that do not present significant implementation 
burdens for industry, including Sec.  1026.36(h) and (i) of this final 
rule. Accordingly, the Bureau is setting earlier effective dates for 
these paragraphs and certain other final rules or aspects thereof, as 
applicable. The effective dates for this final rule are set forth and 
explained in part VI. The effective dates for the other final rules are 
discussed in the Federal Register notices for those rules.
More Inclusive Finance Charge Proposal
    As noted above, the Bureau proposed in the 2012 TILA-RESPA Proposal 
to make the definition of finance charge more inclusive, thus rendering 
the finance charge and annual percentage rate a more useful tool for 
consumers to compare the cost of credit across different alternatives. 
77 FR 51116, 51143 (Aug. 23, 2012). Because the new definition would 
include additional costs that are not currently counted, it would cause 
the finance charges and APRs on many affected transactions to increase. 
This in turn could cause more such transactions to become subject to 
various compliance regimes under Regulation Z. Specifically, the 
finance charge is central to the calculation of a transaction's 
``points and fees,'' which in turn has been (and remains) a coverage 
threshold for the special protections afforded ``high-cost mortgages'' 
under HOEPA. Points and fees also will be subject to a 3-percent limit 
for purposes of determining whether a transaction is a ``qualified 
mortgage'' under the 2013 ATR Final Rule. Meanwhile, the APR serves as 
a coverage threshold for HOEPA protections as well as for certain 
protections afforded ``higher-priced mortgage loans'' under Sec.  
1026.35, including the mandatory escrow account requirements being 
amended by the 2013 Escrows Final Rule. Finally, because the 2013 
Interagency Appraisals Final Rule uses the same APR-based coverage test 
as is used for identifying higher-priced mortgage loans, the APR 
affects that rulemaking as well. Thus, the proposed more inclusive 
finance charge would have had the indirect effect of increasing 
coverage under HOEPA and the escrow and appraisal requirements for 
higher-priced mortgage loans, as well as decreasing the number of 
transactions that may be qualified mortgages--even holding actual loan 
terms constant--simply because of the increase in calculated finance 
charges, and consequently APRs, for closed-end mortgage transactions 
generally.
    As noted above, these expanded coverage consequences were not the 
intent of the more inclusive finance charge proposal. Accordingly, as 
discussed more extensively in the Escrows Proposal, the HOEPA Proposal, 
the ATR Proposal, and the Interagency Appraisals Proposal, the Board 
and subsequently the Bureau (and other agencies) sought comment on 
certain adjustments to the affected regulatory thresholds to counteract 
this unintended effect. First, the Board and then the Bureau proposed 
to adopt a ``transaction coverage rate'' for use as the metric to 
determine coverage of these regimes in place of the APR. The 
transaction coverage rate would have been calculated solely for 
coverage determination purposes and would not have been disclosed to 
consumers, who still would have received only a disclosure of the 
expanded APR. The transaction coverage rate calculation would exclude 
from the prepaid finance charge all costs otherwise included for 
purposes of the APR calculation except charges retained by the 
creditor, any mortgage broker, or any affiliate of either. Similarly, 
the Board and Bureau proposed to reverse the effects of the more 
inclusive finance charge on the calculation of points and fees; the 
points and fees figure is calculated only as a HOEPA and qualified 
mortgage coverage metric and is not disclosed to consumers. The Bureau 
also sought comment on other potential mitigation measures, such as 
adjusting the numeric thresholds for particular compliance regimes to 
account for the general shift in affected transactions' APRs.
    The Bureau's 2012 TILA-RESPA Proposal sought comment on whether to 
finalize the more inclusive finance charge proposal in conjunction with 
the Title XIV Rulemakings or with the rest of the TILA-RESPA Proposal 
concerning the integration of mortgage disclosure forms. 77 FR 51116, 
51125 (Aug. 23, 2012). Upon additional consideration and review of 
comments received, the Bureau decided to defer a decision whether to 
adopt the more inclusive finance charge proposal and any related 
adjustments to regulatory thresholds until it later finalizes the TILA-
RESPA Proposal. 77 FR 54843 (Sept. 6, 2012); 77 FR 54844 (Sept. 6, 
2012).\53\ Accordingly, the 2013 Escrows, HOEPA, ATR, and Interagency 
Appraisals Final Rules all are deferring any action on their respective 
proposed adjustments to regulatory thresholds.
---------------------------------------------------------------------------

    \53\ These notices extended the comment period on the more 
inclusive finance charge and corresponding regulatory threshold 
adjustments under the 2012 TILA-RESPA and HOEPA Proposals. They did 
not change any other aspect of either proposal.
---------------------------------------------------------------------------

IV. Legal Authority

    On July 21, 2011, section 1061 of the Dodd-Frank Act transferred to 
the Bureau the ``consumer financial protection functions'' previously 
vested in certain other Federal agencies, including the Board. The term 
``consumer financial protection function'' is defined to include ``all 
authority to prescribe rules or issue orders or guidelines pursuant to 
any Federal consumer financial law, including performing appropriate 
functions to promulgate and review such rules, orders, and 
guidelines.'' 12 U.S.C. 5581(a)(1). TILA is a Federal consumer 
financial law. Dodd-Frank Act section 1002(14), 12 U.S.C. 5481(14) 
(defining ``Federal consumer financial law'' to include the 
``enumerated consumer laws'' and the provisions of title X of the Dodd-
Frank Act); Dodd-Frank Act section 1002(12), 12 U.S.C. 5481(12) 
(defining ``enumerated consumer laws'' to include TILA). Accordingly, 
the Bureau has authority to issue regulations pursuant to TILA. This 
final rule is issued on January 20, 2013, in accordance with 12 CFR 
1074.1.

[[Page 11292]]

A. The Truth in Lending Act

TILA Section 103(cc)(2)(E)(v)
    As added by the Dodd-Frank Act, TILA section 103(cc)(2)(E)(v), 15 
U.S.C. 1602(cc)(2)(E)(v) authorizes the Bureau to prescribe other 
criteria that seller financers need to meet, aside from those 
enumerated in the statute, to qualify for the seller financer exclusion 
from the definition of the term ``mortgage originator. The Bureau's 
exercise of that authority is discussed in the section-by-section 
analysis of the seller financer exclusion.
TILA Section 105(a)
    As amended by the Dodd-Frank Act, TILA section 105(a), 15 U.S.C. 
1604(a), directs the Bureau to prescribe regulations to carry out the 
purposes of TILA, and provides that such regulations may contain 
additional requirements, classifications, differentiations, or other 
provisions, and may provide for such adjustments and exceptions for all 
or any class of transactions, that the Bureau judges are necessary or 
proper to effectuate the purposes of TILA, to prevent circumvention or 
evasion thereof, or to facilitate compliance. The purpose of TILA is 
``to assure a meaningful disclosure of credit terms so that the 
consumer will be able to compare more readily the various credit terms 
available to him and avoid the uninformed use of credit.'' TILA section 
102(a); 15 U.S.C. 1601(a). These stated purposes are tied to Congress's 
finding that ``economic stabilization would be enhanced and the 
competition among the various financial institutions and other firms 
engaged in the extension of consumer credit would be strengthened by 
the informed use of credit.'' TILA section 102(a). Thus, strengthened 
competition among financial institutions is a goal of TILA, achieved 
through the effectuation of TILA's purposes. In addition, TILA section 
129B(a)(2) establishes a purpose of TILA sections 129B and 129C to 
``assure consumers are offered and receive residential mortgage loans 
on terms that reasonably reflect their ability to repay the loans and 
that are understandable and not unfair, deceptive or abusive.'' 15 
U.S.C. 1639b(a)(2).
    Historically, TILA section 105(a) has served as a broad source of 
authority for rules that promote the informed use of credit through 
required disclosures and substantive regulation of certain practices. 
However, Dodd-Frank Act section 1100A clarified the Bureau's section 
105(a) authority by amending that section to provide express authority 
to prescribe regulations that contain ``additional requirements'' that 
the Bureau finds are necessary or proper to effectuate the purposes of 
TILA, to prevent circumvention or evasion thereof, or to facilitate 
compliance. This amendment clarified the authority to exercise TILA 
section 105(a) to prescribe requirements beyond those specifically 
listed in the statute that meet the standards outlined in section 
105(a). The Dodd-Frank Act also clarified the Bureau's rulemaking 
authority over certain high-cost mortgages pursuant to section 105(a). 
As amended by the Dodd-Frank Act, the Bureau's TILA section 105(a) 
authority to make adjustments and exceptions to the requirements of 
TILA applies to all transactions subject to TILA, except with respect 
to the substantive protections of TILA section 129, 15 U.S.C. 1639,\54\ 
which apply to the high-cost mortgages referred to in TILA section 
103(bb), 15 U.S.C. 1602(bb).
---------------------------------------------------------------------------

    \54\ TILA section 129 contains requirements for certain high-
cost mortgages, established by HOEPA, which are commonly called 
HOEPA loans.
---------------------------------------------------------------------------

    This final rule implements the Dodd-Frank Act requirements and 
establishes such additional requirements, adjustments, and exceptions 
as, in the Bureau's judgment, are necessary and proper to carry out the 
purposes of TILA, prevent circumvention or evasion thereof, or to 
facilitate compliance. In developing these aspects of the final rule 
pursuant to its authority under TILA section 105(a), the Bureau has 
considered the purposes of TILA, including ensuring meaningful 
disclosures, facilitating consumers' ability to compare credit terms, 
and helping consumers avoid the uninformed use of credit, as well as 
ensuring consumers are offered and receive residential mortgage loans 
on terms that reasonably reflect their ability to repay the loans and 
that are understandable and not unfair, deceptive or abusive. In 
developing this final rule and using its authority under TILA section 
105(a), the Bureau also has considered the findings of TILA, including 
strengthening competition among financial institutions and promoting 
economic stabilization.
TILA Section 129B(c)
    Dodd-Frank Act section 1403 amended TILA section 129B by imposing 
two limitations on loan originator compensation to reduce or eliminate 
steering incentives for residential mortgage loans.\55\ 15 U.S.C. 
1639b(c). First, it generally prohibits loan originators from receiving 
compensation for any residential mortgage loan that varies based on the 
terms of the loan, other than the amount of the principal. Second, TILA 
section 129B generally allows only consumers to compensate loan 
originators, though an exception permits other persons to pay ``an 
origination fee or charge'' to a loan originator, but only if two 
conditions are met: (1) The loan originator does not receive any 
compensation directly from a consumer; and (2) the consumer does not 
make an upfront payment of discount points, origination points, or fees 
(other than bona fide third-party fees that are not retained by the 
creditor, the loan originator, or the affiliates of either). The Bureau 
has authority to prescribe regulations to prohibit the above practices. 
In addition, TILA section 129B(c)(2)(B)(ii) authorizes the Bureau to 
create exemptions from the exception's second prerequisite, that the 
consumer must not make any upfront payments of points or fees, where 
the Bureau determines that doing so ``is in the interest of consumers 
and in the public interest.''
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    \55\ Section 1403 of the Dodd-Frank Act also added new TILA 
section 129B(c)(3), which requires the Bureau to prescribe 
regulations to prohibit certain kinds of steering, abusive or unfair 
lending practices, mischaracterization of credit histories or 
appraisals, and discouraging consumers from shopping with other 
mortgage originators. 15 U.S.C. 1639b(c)(3). This final rule does 
not address those provisions. Because they are structured as a 
requirement that the Bureau prescribe regulations establishing the 
substantive prohibitions, notwithstanding Dodd-Frank Act section 
1400(c)(3), 15 U.S.C. 1601 note, the Bureau believes that the 
substantive prohibitions cannot take effect until the regulations 
establishing them have been prescribed and taken effect. The Bureau 
intends to prescribe such regulations in a future rulemaking. Until 
such time, no obligations are imposed on mortgage originators or 
other persons under TILA section 129B(c)(3).
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TILA Section 129(p)(2)
    The Dodd-Frank Act amended TILA by adding, in new section 129, a 
broad mandate to prohibit certain acts and practices in the mortgage 
industry. In particular, TILA section 129(p)(2), as redesignated by 
Dodd-Frank Act section 1433(a) and amended by Dodd-Frank Act section 
1100A, requires the Bureau to prohibit, by regulation or order, acts or 
practices in connection with mortgage loans that the Bureau finds to be 
unfair, deceptive, or designed to evade the provisions of HOEPA. 15 
U.S.C. 1639(p)(2). Likewise, TILA requires the Bureau to prohibit, by 
regulation or order, acts or practices in connection with the 
refinancing of mortgage loans that the Bureau finds to be associated 
with abusive lending practices, or that are otherwise not in the 
interest of the consumer. Id.
    The authority granted to the Bureau under TILA section 129(p)(2) is 
broad.

[[Page 11293]]

It reaches mortgage loans with rates and fees that do not meet HOEPA's 
rate or fee trigger in TILA section 103(bb), 15 U.S.C. 1602(bb), as 
well as mortgage loans not covered under that section. TILA section 
129(p)(2) is not limited to acts or practices by creditors, or to loan 
terms or lending practices.
TILA Section 129B(e)
    Dodd-Frank Act section 1405(a) amended TILA to add new section 
129B(e), 15 U.S.C. 1639b(e). That section, as amended by Dodd-Frank Act 
section 1100A, provides for the Bureau to prohibit or condition terms, 
acts, or practices relating to residential mortgage loans on a variety 
of bases, including when the Bureau finds the terms, acts, or practices 
are not in the interest of the consumer. In developing proposed rules 
under TILA section 129B(e), the Bureau has considered all of the bases 
for its authority set forth in that section.
TILA Section 129C(d)
    Dodd-Frank Act section 1414(a) amended TILA to add new section 
129C(d), 15 U.S.C. 1639c(d). That section prohibits the financing of 
certain single-premium credit insurance products. As discussed more 
fully in the section-by-section analysis below, the Bureau is proposing 
to implement this prohibition in new Sec.  1026.36(i).
TILA Section 129C(e)
    Dodd-Frank Act section 1414(a) amended TILA to add new section 
129C(e), 15 U.S.C. 1639c(e). That section restricts mandatory 
arbitration agreements in residential mortgage loans and extensions of 
open-end credit secured by the consumer's principal dwelling. It also 
prohibits provisions of these loans and related agreements from being 
applied or interpreted to bar a consumer from bringing a Federal claim 
in court. As discussed more fully in the section-by-section analysis 
below, the Bureau is proposing to implement these restrictions in new 
Sec.  1026.36(h).

B. The Dodd-Frank Act

    Section 1022(b)(1) of the Dodd-Frank Act authorizes the Bureau to 
prescribe rules ``as may be necessary or appropriate to enable the 
Bureau to administer and carry out the purposes and objectives of the 
Federal consumer financial laws, and to prevent evasions thereof.'' 12 
U.S.C. 5512(b)(1). TILA and title X of the Dodd-Frank Act are Federal 
consumer financial laws. Accordingly, the Bureau is exercising its 
authority under Dodd-Frank Act section 1022(b)(1) to prescribe rules 
that carry out the purposes and objectives of TILA and title X and 
prevent evasion of those laws.

V. Section-by-Section Analysis of the Final Rule

    This final rule implements new TILA sections 129B(b)(1), (b)(2), 
(c)(1), and (c)(2) and 129C(d) and (e), as added by sections 1402, 
1403, and 1414(a) of the Dodd-Frank Act. As discussed in more detail in 
the section-by-section analysis of Sec.  1026.36(f) and (g), TILA 
section 129B(b)(1) requires each mortgage originator to be qualified 
and include unique identification numbers on loan documents. As 
discussed in more detail in the section-by-section analysis of Sec.  
1026.36(d)(1) and (2), TILA section 129B(c)(1) and (2) prohibits 
``mortgage originators'' in ``residential mortgage loans'' from 
receiving compensation that varies based on loan terms and from 
receiving origination charges or fees from persons other than the 
consumer except in certain circumstances. Additionally, as discussed in 
more detail in the section-by-section analysis of Sec.  1026.36(i), 
TILA section 129C(d) creates prohibitions on single-premium credit 
insurance. As discussed in the section-by-section analysis of Sec.  
1026.36(h), TILA section 129C(e) provides restrictions on mandatory 
arbitration agreements and waivers of Federal claims. Finally, as 
discussed in more detail in the section-by-section analysis of Sec.  
1026.36(j), TILA section 129B(b)(2), requires the Bureau to prescribe 
regulations requiring depository institutions to establish and maintain 
procedures reasonably designed to assure and monitor the compliance of 
such depository institutions, the subsidiaries of such institutions, 
and the employees of such institutions or subsidiaries with the 
requirements of TILA section 129B and the registration procedures 
established under section 1507 of the SAFE Act, 12 U.S.C. 5101 et seq.

Section 1026.25 Record Retention

    Existing Sec.  1026.25 requires creditors to retain evidence of 
compliance with Regulation Z. The Bureau proposed adding Sec.  
1026.25(c)(2) to establish record retention requirements for compliance 
with the loan originator compensation restrictions in TILA section 129B 
as implemented by Sec.  1026.36(d). Proposed section 1026.25(c)(2) 
would have: (1) Extended the time period for retention by creditors of 
compensation-related records from two years to three years; (2) 
required loan originator organizations (i.e., generally, mortgage 
broker companies) to maintain certain compensation-related records for 
three years; and (3) clarified the types of compensation-related 
records that are required to be maintained under the rule. Proposed 
Sec.  1026.25(c)(3) would have required creditors to maintain records 
evidencing compliance with the requirements related to discount points 
and origination points or fees set forth in proposed Sec.  
1026.36(d)(2)(ii).
25(a) General Rule
    Existing comment 25(a)-5 clarifies the nature of the record 
retention requirements under Sec.  1026.25 as applied to Regulation Z's 
loan originator compensation provisions. The comment provides that, for 
each transaction subject to the loan originator compensation provisions 
in Sec.  1026.36(d)(1), a creditor should maintain records of the 
compensation it provided to the loan originator for the transaction as 
well as the compensation agreement in effect on the date the interest 
rate was set for the transaction. The comment also states that where a 
loan originator is a mortgage broker, a disclosure of compensation or 
other broker agreement required by applicable State law that complies 
with Sec.  1026.25 is presumed to be a record of the amount actually 
paid to the loan originator in connection with the transaction.
    The Bureau proposed new Sec.  1026.25(c)(2), which sets forth 
certain new record retention requirements for compensation paid to loan 
originators, as discussed below. The Bureau also proposed new comments 
25(c)(2)-1 and -2, which incorporate substantially the same 
interpretations as existing comment 25(a)-5. For the sake of improved 
organization of the commentary and to prevent duplication, the Bureau 
proposed to remove existing comment 25(a)-5. No substantive change was 
intended by this proposal. The Bureau received no public comments on 
the proposal to remove comment 25(a)-5. Therefore, this final rule is 
removing comment 25(a)-5 as unnecessary, consistent with the proposed 
rule.
25(c) Records Related to Certain Requirements for Mortgage Loans
25(c)(2) Records Related to Requirements for Loan Originator 
Compensation
Three-Year Record Retention
    TILA does not contain requirements to retain specific records, but 
Sec.  1026.25 requires creditors to retain evidence of compliance with 
Regulation Z for two years after the date disclosures are required to 
be made or action is required to be taken. Section 1404 of the

[[Page 11294]]

Dodd-Frank Act amended TILA section 129B, which imposes substantive 
restrictions on loan originator compensation and provides civil 
liability for any mortgage originator for failure to comply with the 
requirements of TILA section 129B and any of its implementing 
regulations. 15 U.S.C. 1639b(d). Section 1416(b) of the Dodd-Frank Act 
amended section 130(e) of TILA to provide a three-year limitations 
period for civil actions alleging a violation of certain sections of 
TILA, including section 129B concerning loan originator compensation, 
beginning on the date of the occurrence of the violation. 15 U.S.C. 
1640(e). Prior to amendment by the Dodd-Frank Act, the limitations 
period for individual actions alleging violations of TILA was generally 
one year. 15 U.S.C. 1640(e) (2008). In view of the statutory changes to 
TILA, the provisions of existing Sec.  1026.25, which impose a two-year 
record retention period, do not reflect the applicable limitations 
period for causes of action that may be brought under TILA section 
129B. Moreover, the record retention provisions in Sec.  1026.25 
currently are limited to creditors, whereas the compensation 
restrictions in TILA section 129B, as added by the Dodd-Frank Act, 
cover all mortgage originators and not solely creditors.
    To reflect these statutory changes, the Bureau proposed Sec.  
1026.25(c)(2), which would have made two changes to the existing record 
retention provisions. First, the proposed rule would have required that 
a creditor maintain records sufficient to evidence the compensation it 
pays to a loan originator and the governing compensation agreement, for 
three years after the date of payment. Second, the proposed rule would 
have required a loan originator organization to maintain for three 
years records of the compensation: (1) It receives from a creditor, a 
consumer, or another person; and (2) it pays to any individual loan 
originators. The loan originator organization also must maintain the 
compensation agreement that governs those receipts or payments for 
three years after the date of the receipts or payments. The Bureau 
proposed these changes pursuant to its authority under section 105(a) 
of TILA to prevent circumvention or evasion of TILA by requiring 
records that can be used to establish compliance. The Bureau stated its 
belief that these proposed modifications would ensure records 
associated with loan originator compensation are retained for a time 
period commensurate with the statute of limitations for causes of 
action under TILA section 130 and are readily available for 
examination. In addition, the Bureau stated its belief that the 
modifications are necessary to prevent circumvention of and to 
facilitate compliance with TILA.
    The Bureau recognized that increasing the period a creditor must 
retain records for specific information related to loan originator 
compensation from two years, as currently provided in Regulation Z, to 
three years may impose some marginal increase in the creditor's 
compliance burden in the form of incremental cost of storage. The 
Bureau stated its belief, however, that creditors should be able to use 
existing recordkeeping systems to maintain the records for an 
additional year at minimal cost. Similarly, although loan originator 
organizations would incur some costs to establish and maintain 
recordkeeping systems, the Bureau expected that loan originator 
organizations would be able to adopt at minimal cost their existing 
recordkeeping systems to serve these newly required purposes. During 
the Small Business Review Panel, the Small Entity Representatives were 
asked about their current record retention practices and the potential 
impact of the proposed enhanced record retention requirements. Of the 
few Small Entity Representatives that provided feedback on the issue, 
one creditor Small Entity Representative stated that it maintained 
detailed records of compensation paid to all of its employees and that 
a regulator already reviews its compensation plans regularly. Another 
creditor Small Entity Representative reported that it did not believe 
that the proposed record retention requirement would require it to 
change its current practices.
    In addition, the Bureau recognized that applying the existing two-
year record retention period to information specified in Sec.  
1026.25(c)(2) could adversely affect the ability of consumers to bring 
actions under TILA. As the Bureau stated in the proposal, the extension 
also would serve to reduce litigation risk and maintain consistency 
between creditors and loan originator organizations. The Bureau 
therefore believed that it was appropriate to expand the time period 
for record retention to effectuate the three-year statute of 
limitations period established by Congress for actions against loan 
originators under section 129B of TILA.
    Most commenters agreed that extending the retention period from two 
years to three years would not significantly increase the cost of 
compliance. Though some commenters opined that the changes in Sec.  
1026.25(c) would significantly increase their compliance burden, those 
comments appeared to be directed to the proposed record retention 
provisions related to proposed restrictions on discount points and 
origination points or fees in proposed Sec.  1026.36(d)(2)(ii). Because 
the Bureau is not finalizing in this rule the points and fees proposal 
(or the attendant record retention requirement), the additional record 
retention requirement imposed by this final rule is minimal.
    The Bureau invited public comment on whether a record retention 
period of five years, rather than three years, would be appropriate. 
The Bureau explained that relevant actions and compensation practices 
that must be evidenced in retained records may in some cases occur 
prior to the beginning of the three-year period of enforceability that 
applies to a particular transaction. In addition, the running of the 
three-year period may be tolled under some circumstances, resulting in 
a period of enforceability that ends more than three years following an 
occurrence of a violation of applicable requirements. Accordingly, the 
proposal stated that a record retention period that is longer than 
three years may help ensure that consumers are able to avail themselves 
of TILA protections while imposing minimal incremental burden on 
creditors and loan originators. The Bureau noted that many State and 
local laws related to transactions involving real property may set a 
record retention period, or may depend on the information being 
available, for five years. Additionally, a five-year record retention 
period would be consistent with proposed provisions in the Bureau's 
2012 TILA-RESPA Proposal.
    Most commenters objected to a five-year record retention period as 
overly burdensome. In addition, the implementing regulations of the 
Paperwork Reduction Act (PRA) require that there be a showing of 
``substantial need'' to impose a record retention requirement of longer 
than three years. 5 CFR 1320.5(d)(2)(iv). Given the PRA's preference 
for retention periods of three years or less, the Bureau is adopting 
Sec.  1026.25(c)(2)'s three-year retention period as proposed, 
notwithstanding some of the noted advantages of a longer retention 
period.\56\
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    \56\ The language of Sec.  1025(c)(2)(i) is revised slightly 
from the proposal for the sake of simplicity. The proposal would 
have required a creditor to maintain records reflecting compensation 
paid to ``a loan originator organization or the creditor's 
individual loan originators.'' The final rule requires a creditor to 
maintain records reflecting compensation paid ``to a loan 
originator, as defined in Sec.  1026.36(a)(1).'' No substantive 
change is intended.

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[[Page 11295]]

Application to Loan Originator Organizations
    The Bureau stated in the proposal that it would be necessary to 
require both creditors and loan originator organizations to retain for 
three years evidence of compliance with the requirements of Sec.  
1026.36(d)(1). Although creditors would retain some of the records 
needed to demonstrate compliance with TILA section 129B and its 
implementing regulations, in some circumstances, the records would be 
available solely from the loan originator organization. For example, if 
a creditor compensates a loan originator organization for originating a 
transaction and the loan originator organization in turn allocates a 
portion of that compensation to an individual loan originator as a 
commission, the creditor may not possess a copy of the commission 
agreement setting forth the arrangement between the loan originator 
organization and the individual loan originator or any record of the 
payment of the commission. The Bureau stated that applying this 
requirement to both creditors and loan originator organizations would 
prevent circumvention of and facilitate compliance with TILA, as 
amended by the Dodd-Frank Act.
    The Bureau did not receive any comments regarding the extension of 
the record retention requirements to loan originator organizations. 
Because the Bureau continues to believe that requiring loan originator 
organizations to retain records related to compensation will facilitate 
compliance with TILA, the Bureau is adopting Sec.  1026.25(c)(2)'s 
applicability to loan originator organizations as proposed.
Exclusion of Individual Loan Originators
    Proposed Sec.  1026.25(c)(2) would not have applied Regulation Z 
recordkeeping requirements to individual loan originators. Although 
section 129B(d) of TILA, as added by the Dodd-Frank Act, permits 
consumers to bring actions against mortgage originators (which include 
individual loan originators), the Bureau stated its belief that 
applying the record retention requirements of Sec.  1026.25 to 
individual loan originators is unnecessary. Under Sec.  1026.25 as 
proposed, loan originator organizations and creditors would have been 
required to retain certain records regarding all of their individual 
loan originators. The preamble stated that applying the same record 
retention requirements to the individual loan originator employees 
themselves would be duplicative. In addition, such a requirement might 
not be feasible in all cases, because individual loan originators might 
not have access to the types of records required to be retained under 
Sec.  1026.25, particularly after they cease to be employed by the 
creditor or loan originator organization. Under the proposal, an 
individual loan originator who is a sole proprietor, however, would 
have been responsible for compliance with provisions that apply to the 
proprietorship (which is a loan originator organization) and, as a 
result, is responsible for compliance with the record retention 
requirements. Similarly, a natural person who is a creditor would have 
been subject to the requirements that apply to creditors.
    The Bureau did not receive comments on the exclusion of individual 
loan originators. For the reasons discussed above, the Bureau is 
adopting Sec.  1026.25(c)(2) without making it applicable to individual 
loan originators, as proposed. The Bureau notes that while the preamble 
to the proposal discussed individual loan originator employees, the 
exclusion applies to all individual loan originators, as that term is 
defined in Sec.  1026.36(a)(1), whether or not employees.
Substance of Record Retention Requirements
    As discussed above, proposed Sec.  1026.25(c)(2) would have made 
two changes to the existing record retention provisions. First, Sec.  
1026.25(c)(2)(i) would have required a creditor to maintain for three 
years records sufficient to evidence all compensation it pays to a loan 
originator and a copy of the governing compensation agreement. Second, 
Sec.  1026.25(c)(2)(ii) would have required a loan originator 
organization to maintain for three years records of all compensation 
that it receives from a creditor, a consumer, or another person or that 
it pays to its individual loan originators and a copy of the 
compensation agreement that governs those receipts or payments.
    Proposed comment 25(c)(2)-1.i would have clarified that, under 
Sec.  1026.25(c)(2), records are sufficient to evidence that 
compensation was paid and received if they demonstrate facts enumerated 
in the comment. The comment gives examples of the types of records 
that, depending on the facts and circumstances, may be sufficient to 
evidence compliance. One commenter expressed concern that the comment 
could be read to require retention of all records listed; however, the 
comment clearly states that the records listed are examples only and 
what records would be sufficient would be dependent on the facts and 
circumstances and would vary on a case-by-case basis. To prevent any 
uncertainty, however, the comment is clarified to describe which 
records might be sufficient depending on the type of compensation at 
issue in certain circumstances. For example, the comment explains that, 
for compensation in the form of a contribution to or benefit under a 
designated tax-advantaged retirement plan, records to be maintained 
might include copies of required filings under other applicable 
statutes relating to such plans, copies of the plan and amendments 
thereto and the names of any loan originators covered by such plans, or 
determination letters from the Internal Revenue Service (IRS) regarding 
such plans. The Bureau is also clarifying the comment by removing the 
reference to certain agreements being ``presumed'' to be a record of 
the amount of compensation actually paid to the loan originator. 
Instead, as revised, the comment provides that such agreements are a 
record of the amount actually paid to the loan originator unless actual 
compensation deviates from the amount in the disclosure or agreement.
    The Bureau is further revising comment 25(c)(2)-1.i to indicate 
that if compensation has been decreased to defray the cost, in whole or 
part, of an unforeseen increase in an actual settlement cost over an 
estimated settlement cost disclosed to the consumer pursuant to section 
5(c) of RESPA (or omitted from that disclosure), records to be 
maintained are those documenting the decrease in compensation and the 
reasons for it. This revision corresponds with changes to the 
commentary to Sec.  1026.36(d)(1) clarifying that the section prohibits 
a loan originator from reducing its compensation to bear the cost of a 
change in transaction terms except to defray such unforeseen increases 
in settlement cost. Retaining these records will allow for agency 
examination about whether a particular decrease in loan originator 
compensation is truly based on unforeseen increases to settlement 
costs, i.e., whether it indicates a pattern or practice of the loan 
originator repeatedly decreasing loan originator compensation to defray 
the costs of pricing concessions for the same categories of settlement 
costs across multiple transactions. Like other records sufficient to 
evidence compensation paid to loan originators, the Bureau believes 
that records of decreases in loan originator compensation in unforeseen 
circumstances to defray the costs of increased settlement cost above 
those estimated should be retained for a

[[Page 11296]]

time period commensurate with the statute of limitations for causes of 
action under TILA section 130 and be readily available for examination, 
which is necessary to prevent circumvention of and to facilitate 
compliance with TILA.
    Proposed comment 25(c)(2)-1.ii would have clarified that the 
compensation agreement, evidence of which must be retained under 
1026.25(c)(2), is any agreement, written or oral, or course of conduct 
that establishes a compensation arrangement between the parties. 
Proposed comment 25(c)(2)-1.iii provided an example where the 
expiration of the three-year retention period varies depending on when 
multiple payments of compensation are made. Proposed comment 25(c)(2)-2 
provided an example of retention of records sufficient to evidence 
payment of compensation. The Bureau did not receive any public comment 
on these proposed comments. The Bureau is adopting comments 25(c)(2)-
1.iii and 25(c)(2)-2 as proposed. Comment 25(c)(2)-1.ii is revised 
slightly from the proposal to clarify that where a compensation 
agreement is oral or based on a course of conduct and cannot itself be 
maintained, the records to be maintained are those, if any, evidencing 
the existence or terms of the oral or course of conduct compensation 
agreement.
25(c)(3) Records Related to Requirements for Discount Points and 
Origination Points or Fees
    Proposed Sec.  1026.25(c)(3) would have required creditors to 
retain records pertaining to compliance with the provisions of proposed 
Sec.  1026.36(d)(2)(ii), regarding the payment of discount points and 
origination points or fees. Because the Bureau is not adopting proposed 
Sec.  1026.36(d)(2)(ii), as discussed in the section-by-section 
analysis of that section, below, the Bureau is not adopting proposed 
Sec.  1026.25(c)(3).

Section 1026.36 Prohibited Acts or Practices and Certain Requirements 
for Credit Secured by a Dwelling

    The Bureau is redesignating comment 36-1 as comment 36(b)-1. The 
analysis of Sec.  1026.36(b) discusses comment 36(b)-1 in further 
detail.
    Existing comment 36-2 provides that the final rules on loan 
originator compensation in Sec.  1026.36(d) and (e), which were 
originally published in the Federal Register on September 24, 2010, 
apply to transactions for which the creditor receives an application on 
or after the effective date, which was in April 2011. The comment 
further provides an example for the treatment of applications received 
on March 25 or on April 8 of 2011. The Bureau is removing this comment 
because it is no longer relevant.
36(a) Definitions
    TILA section 103(cc), which was added by section 1401 of the Dodd-
Frank Act, contains definitions of ``mortgage originator'' and 
``residential mortgage loan.'' These definitions are important to 
determine the scope of new substantive TILA requirements added by the 
Dodd-Frank Act, including, the scope of restrictions on loan originator 
compensation; the requirement that loan originators be ``qualified;'' 
policies and procedures to ensure compliance with various requirements; 
and the prohibitions on mandatory arbitration, waivers of Federal 
claims, and single premium credit insurance. See TILA sections 
129B(b)(1) and (2), (c)(1) and (2) and 129C(d) and (e), as added by 
sections 1402, 1403, and 1414(a) of the Dodd-Frank Act. In the 
proposal, the Bureau noted that the statutory definitions largely 
parallel analogous definitions in the 2010 Loan Originator Final Rule 
and other portions of Regulation Z for ``loan originator'' and 
``consumer credit transaction secured by a dwelling,'' respectively.
    The proposal explained the Bureau's intent to retain the existing 
regulatory terms to maximize continuity, while adjusting the regulation 
and commentary to reflect differences between the existing Regulation Z 
definition of ``loan originator'' and the new TILA definition of 
``mortgage originator'' and to provide additional interpretation and 
clarification. In the case of ``residential mortgage loan'' and 
``consumer credit transaction secured by a dwelling,'' the Bureau did 
not propose to make any changes to the regulation or commentary.
    Finally, the proposal would have added three new definitions 
germane to the scope of the compensation restrictions and other aspects 
of the proposal: (1) ``Loan originator organization'' in new Sec.  
1026.36(a)(1)(ii); (2) ``individual loan originator'' in new Sec.  
1026.36(a)(1)(iii); and (3) ``compensation'' in new Sec.  
1026.36(a)(3).
    As noted in part III.F above, the Bureau separately is adopting 
several other final rules and issuing one proposal, all relating to 
mortgage credit, to implement requirements of title XIV of the Dodd-
Frank Act. Two of those final rules, the 2013 ATR Final Rule and 2013 
HOEPA Final Rule, require creditors to calculate the points and fees 
charged in connection with a transaction to determine whether certain 
coverage tests under those rules have been met. Both of these rules 
generally require that creditors include in the points and fees 
calculation all ``compensation'' paid directly or indirectly by a 
consumer or creditor to a ``loan originator,'' \57\ terms that are 
defined broadly in this final rule. While the Bureau believes that such 
broad definitions are well-suited to achieving the Dodd-Frank Act's 
goals for this rulemaking, the Bureau believes that it may be 
appropriate to interpret the terms more narrowly in the 2013 ATR and 
HOEPA Final Rules. The present rule, for example, contains a 
prohibition against paying compensation to a loan originator based upon 
loan terms. It would entirely defeat the purpose of this rule if a 
creditor were free to pay discretionary bonuses after a transaction was 
consummated based upon the terms of that transaction and thus for 
purposes of this rule the term compensation cannot be limited to 
payments made, or determined, at particular moments in time. In 
contrast, in the ATR and HOEPA contexts, the terms loan originator and 
compensation are used to define a discrete input into the points and 
fees calculation that needs to be made at a specific moment in time in 
order to determine whether the coverage tests are met. Thus, Sec.  
1026.32(b)(1)(ii) and associated commentary, as adopted in the 2013 ATR 
Final Rule, provide that compensation must be included in points and 
fees for a particular transaction only if such compensation can be 
attributed to that particular transaction at the time the interest rate 
is set. The commentary also provides examples of compensation types 
(e.g., base salary) that, in the Bureau's view, are not attributable to 
a particular transaction and therefore are excluded from the points and 
fees calculation.
---------------------------------------------------------------------------

    \57\ Specifically, as adopted in the 2013 ATR Final Rule, Sec.  
1026.32(b)(1)(ii) provides that points and fees for a closed-end 
credit transaction include ``[a]ll compensation paid directly or 
indirectly by a consumer or creditor to a loan originator, as 
defined in Sec.  1026.36(a)(1), that can be attributed to that 
transaction at the time the interest rate is set.''
---------------------------------------------------------------------------

    At the same time the Bureau issued the 2013 ATR and HOEPA Final 
Rules, the Bureau also issued the 2013 ATR Concurrent Proposal, which 
seeks public comment on other aspects of the definitions of 
``compensation'' and ``loan originator'' for purposes of the points and 
fees calculation. Among other things, the proposal solicits comment on 
whether additional guidance would be useful in the ATR and HOEPA 
contexts for the treatment of compensation paid to persons who are 
``loan originators'' but who are not employed by a creditor or mortgage

[[Page 11297]]

broker (e.g., certain employees of manufactured home retailers, 
servicers, and other parties that do not meet exclusions specified in 
this rule). Because of the overlapping issues addressed in these rules, 
the Bureau is carefully considering how these rules interact and 
requests comment in the concurrent proposal on whether there are 
additional factors that the Bureau should consider to harmonize the 
various provisions.
36(a)(1) Loan Originator
36(a)(1)(i)
    Existing Sec.  1026.36(a)(1) defines the term ``loan originator'' 
for purposes of Sec.  1026.36. Section 1401 of the Dodd-Frank Act 
defines the term ``mortgage originator'' in TILA section 103(cc)(2). As 
discussed further below, both definitions are similar to but not 
identical with the SAFE Act definition of ``loan originator'' for 
purposes of national registration and licensing requirements.
    The proposal would have retained the term ``loan originator'' in 
Sec.  1026.36, but would have made some changes to the definition and 
associated commentary to reflect certain distinctions in the Dodd-Frank 
Act's definition of mortgage originator. In the proposed rule, the 
Bureau stated that the regulatory definition of ``loan originator'' was 
generally consistent with the statutory definition of ``mortgage 
originator.'' The Bureau also noted ``loan originator'' has been in 
wide use since first adopted by the Board in 2010. The Bureau posited 
that changes to the terminology would likely require stakeholders to 
make corresponding revisions in many aspects of their operations, 
including policies and procedures, compliance materials, and software 
and training.
    A few credit union commenters urged the Bureau to use ``mortgage 
originator'' instead of ``loan originator'' to distinguish the 
terminology and its scope of coverage from those of the SAFE Act and 
its implementing regulations, Regulations G and H, which refer to a 
covered employee at a non-depository institution as a ``loan 
originator'' and a covered employee at a depository institution as a 
``mortgage loan originator.'' The Bureau has considered the comment, 
but continues to believe that the burdens outlined in the proposal 
would outweigh any of the potential benefits garnered by signaling 
differences in meaning. Thus, the final rule retains the terminology 
``loan originator.''
    Although the Bureau proposed to retain the term ``loan 
originator,'' it did propose changes to the definition of the term in 
Sec.  1026.36(a)(1) to reflect the scope of the term ``mortgage 
originator'' under section 103(cc)(2) of TILA. Specifically, the 
statute states ``mortgage originator'':

    (A) means any person who, for direct or indirect compensation or 
gain, or in the expectation of direct or indirect compensation or 
gain--(i) takes a residential mortgage loan application; (ii) 
assists a consumer in obtaining or applying to obtain a residential 
mortgage loan; or (iii) offers or negotiates terms of a residential 
mortgage loan;
    (B) includes any person who represents to the public, through 
advertising or other means of communicating or providing information 
(including the use of business cards, stationery, brochures, signs, 
rate lists, or other promotional items), that such person can or 
will provide any of the services or perform any of the activities 
described in subparagraph A.

    TILA section 103(cc)(4) further defines ``assists a consumer in 
obtaining or applying to obtain a residential mortgage loan'' to 
include, among other things, advising on terms, preparing loan 
packages, or collecting information on behalf of the consumer. TILA 
section 103(cc)(2)(C) through (G) provides certain exclusions from the 
general definition of mortgage originator, including an exclusion for 
certain administrative and clerical staff. These various elements are 
discussed further below.
    Existing Sec.  1026.36(a)(1) defines ``loan originator'' as: ``With 
respect to a particular transaction, a person who for compensation or 
other monetary gain, or in expectation of compensation or other 
monetary gain, arranges, negotiates, or otherwise obtains an extension 
of consumer credit for another person.'' The Bureau proposed to 
redesignate Sec.  1026.36(a)(1) as Sec.  1026.36(a)(1)(i) and explained 
that the phrase ``arranges, negotiates, or otherwise obtains an 
extension of consumer credit for another person'' in the definition of 
``loan originator'' encompassed a broad variety of activities \58\ 
including those described in new TILA section 103(cc)(2) with respect 
to the definition of ``mortgage originator.''
---------------------------------------------------------------------------

    \58\ This view is consistent with the Board's related 
rulemakings on this issue. See 75 FR 58509, 58518 (Sept. 24, 2010); 
74 FR 43232, 43279 (Aug. 26, 2009); 73 FR 44522, 44565 (July 30, 
2008); 73 FR 1672, 1726 (Jan. 9, 2008); 76 FR 27390, 27402 (May 11, 
2011).
---------------------------------------------------------------------------

    Nevertheless, the Bureau proposed to revise the general definition 
of loan originator and associated commentary to include a person who 
``takes an application, arranges, offers, negotiates, or otherwise 
obtains an extension of credit for another person'' as well as to make 
certain other revisions to the existing definition of ``loan 
originator'' to reflect new TILA section 103(cc)(2). The proposal 
explained that the Bureau interpreted ``arranges'' broadly to include 
any task that is part of the process of originating a credit 
transaction, including advertising or communicating to the public that 
one can perform loan origination services and referring a consumer to 
any other person who participates in the origination process.\59\ 
Participating in the origination process, in turn, includes any task 
involved in the loan origination process, from commencing the process 
of originating a transaction through arranging consummation of the 
credit transaction (subject to certain exclusions). That is, the 
definition includes both persons who participate in arranging a credit 
transaction with others and persons who arrange the transaction 
entirely, including initially contacting and orienting the consumer to 
a particular loan originator's or creditor's origination process, 
assisting the consumer to apply for a loan, taking the application, 
offering and negotiating transaction terms, and making arrangements for 
consummation of the credit transaction.
---------------------------------------------------------------------------

    \59\ Arrange is defined by the Merriam-Webster Online Dictionary 
to include: (1) ``To put into a proper order or into a correct or 
suitable sequence, relationship, or adjustment''; (2) ``to make 
preparations for''; and (3) ``to bring about an agreement or 
understanding concerning.'' Arrange Definition, Merriam-Webster.com, 
available at: http://www.merriam-webster.com/dictionary/arrange.
---------------------------------------------------------------------------

    The Bureau also stated that ``arranges, negotiates, or otherwise 
obtains an extension of consumer credit for another person'' in the 
existing definition of ``loan originator'' already included the 
following activities specified in TILA section 103(cc)(2)(A): (1) 
Taking a loan application; (2) assisting a consumer in obtaining or 
applying to obtain a loan; and (3) offering or negotiating terms of a 
loan. Nevertheless, to remove any uncertainty and facilitate 
compliance, the Bureau proposed to add ``takes an application'' and 
``offers,'' as used in TILA section 103(cc)(2)(A), to the definition of 
``loan originator'' in Sec.  1026.36(a) to state expressly that these 
core elements were included in the definition of ``loan originator.'' 
Similarly, proposed comment 36(a)-1.i.A would have stated that ``loan 
originator'' includes persons who assist a consumer in obtaining or 
applying to obtain a loan, including each specific activity identified 
in the statute as included in the meaning of ``assist.''
    Most commenters did not focus on the proposed revised definition as 
a whole, but rather on specific activities that they

[[Page 11298]]

believed should or should not be included in the general definition of 
loan originator. Manufactured housing financers generally commented 
that the proposed definition should include a more expansive list of 
specific activities that conform to those detailed by HUD's SAFE Act 
rulemakings for inclusion or exclusion from the definition of loan 
originator in Regulation H and its appendix A, with some modifications 
to exclude more employee activities. Some non-depository institution 
commenters stated that the proposed definition of ``loan originator'' 
should be more closely aligned with the SAFE Act definition. Many 
depository institution commenters stated that the proposed definition 
was overly broad because it included persons who normally would not be 
considered loan originators and should instead be narrowed to be 
similar to the definition of ``mortgage loan originator'' specified by 
the Federal banking agencies in their regulations implementing the SAFE 
Act. See 75 FR 44656 (July 28, 2010).
    As discussed in the proposal and in more detail below, the Dodd-
Frank Act gives broad meaning to the term ``mortgage originator,'' and 
the Bureau therefore believes it appropriate to give the regulatory 
term ``loan originator'' equally broad meaning. In light of commenters' 
concerns regarding particular activities covered by the definition, the 
Bureau also believes more clarity should be provided regarding the 
specific activities that are included or excluded by the definition of 
loan originator. In the following discussion, the Bureau first 
addresses why it is adopting a broad definition of ``loan originator'' 
and then explains specific elements of the definition and related 
comments.
    Congress defined ``mortgage originator'' for the purposes of TILA, 
as amended by the Dodd-Frank Act, to be broader than its definition of 
``loan originator'' in the SAFE Act, which it enacted just two years 
previously. Moreover, although Congress adopted legislation that 
effectively codified major provisions of the Board's 2009 Loan 
Originator Proposal, Congress used broader language than the Board had 
proposed.\60\ Under the Dodd-Frank Act amendments to TILA section 
103(cc)(2)(A), a person is a ``mortgage originator'' for TILA purposes 
if the person engages in any one of the following activities for, or in 
expectation of, direct or indirect compensation or gain: (1) Takes a 
loan application; (2) assists a consumer in obtaining or applying to 
obtain a loan; or (3) offers or negotiates terms of a loan. Under the 
SAFE Act a person is a ``loan originator'' only if the person engages 
in both of the following activities: (1) Takes a residential mortgage 
loan application; and (2) offers or negotiates terms of a residential 
mortgage loan for compensation or gain. 12 U.S.C. 5102(4).
---------------------------------------------------------------------------

    \60\ The Board's proposal defined a loan originator as one who 
for gain ``arranges, negotiates or otherwise obtains an extension of 
consumer credit.'' The Board finalized this definition in its 2010 
Loan Originator Final Rule.
---------------------------------------------------------------------------

    Thus, there are three main differences between the two definitions, 
in terms of the activities involved.\61\ First, any individual element 
under TILA, as amended by the Dodd-Frank Act, qualifies the person as a 
mortgage originator, while the SAFE Act requires that an individual 
must participate in both taking an application and offering or 
negotiating terms to trigger the statute's requirements. Second, the 
TILA definition of ``mortgage originator'' is separately triggered by 
assisting a consumer in obtaining or applying to obtain a loan, which 
is further defined under TILA to include, among other things, advising 
on terms, preparing loan packages, or collecting information on behalf 
of the consumer, while the SAFE Act does not specifically reference 
this activity. Third, ``mortgage originator'' under TILA section 
103(cc)(2)(B) further includes ``any person who represents to the 
public through advertising or other means of communicating or providing 
information * * * that such person can or will provide any of the 
services or perform any of the activities'' described in TILA section 
103(cc)(2)(A).
---------------------------------------------------------------------------

    \61\ Another difference, not pertinent here, is that the SAFE 
Act's ``loan originator'' includes only natural persons, whereas 
TILA's ``mortgage originator'' can include organizations.
---------------------------------------------------------------------------

    The Bureau believes that these differences between definitions 
evidence a congressional intention when enacting the Dodd-Frank Act to 
cast a wide net to ensure consistent regulation of a broad range of 
persons that may have financial incentives and opportunities to steer 
consumers to credit transactions with particular terms early in the 
origination process. The statutory definition even includes persons who 
simply inform consumers that they can provide mortgage origination 
services, prior to and independent of actually providing such services. 
The Bureau also believes that both TILA and the SAFE Act evidence a 
congressional concern specifically about the risk that trusted advisers 
or first-in-time service providers could steer consumers to particular 
credit providers, products, and terms. Thus, for instance, the Bureau 
notes that in both laws Congress specifically included real estate 
brokers that are compensated by a creditor or mortgage broker in the 
definitions of ``mortgage originator'' and ``loan originator'' 
respectively. 15 U.S.C. 1602(cc)(2)(D), 12 U.S.C. 5103(3)(A)(iii).
    For the reasons stated above and as discussed more extensively 
below, the Bureau is redesignating Sec.  1026.36(a)(1) as Sec.  
1026.36(a)(1)(i) and revising the general definition of loan originator 
in Sec.  1026.36(a)(1)(i). The Bureau also is adopting additional 
provisions in, and commentary to, Sec.  1026.36(a)(1) to provide 
further clarification and analysis for specific activities included or 
excluded from the definition of ``loan originator.'' As described 
further below, the Bureau is defining ``loan originator'' in Sec.  
1026.36(a)(1)(i) to include a person who takes an application, offers, 
arranges, assists a consumer in obtaining or applying to obtain, 
negotiates, or otherwise obtains or makes an extension of consumer 
credit for another person. The Bureau is also providing clarifications 
that address a variety of specific actions such as taking an 
application, management, underwriting, and administrative or clerical 
tasks, as well as the treatment of particular types of persons such as 
real estate brokers, seller financers, housing counselors, financial 
advisors, accountants, servicers and employees of manufactured home 
retailers. The revisions to Sec.  1026.36(a)(1)(i) further clarify 
that, to be a loan originator, a person needs only to receive or expect 
to receive direct or indirect compensation in connection with 
performing loan origination activities. The revisions additionally 
remove the phrase ``with respect to a particular transaction'' from the 
existing definition to clarify that the definition applies to persons 
engaged in the activities it describes regardless of whether any 
specific consumer credit transaction is consummated. Moreover, comment 
36(a)-1.i.B clarifies that the definition of loan originator includes 
not only employees but also agents and contractors of a creditor or 
mortgage broker that satisfy the definition.
Takes an Application, Offers, Arranges, Assists a Consumer, Negotiates, 
or Otherwise Obtains or Makes
    As described above, TILA section 103(cc)(2) defines ``mortgage 
originator'' to include a person who ``takes a residential mortgage 
loan application,'' ``assists a consumer in obtaining or applying to 
obtain a residential mortgage loan,'' or ``offers or negotiates terms 
of a residential mortgage loan.''

[[Page 11299]]

TILA section 103(cc)(4) provides that a person ``assists a consumer in 
obtaining or applying to obtain a residential mortgage loan'' by taking 
actions such as ``advising on residential mortgage loan terms 
(including rates, fees, and other costs), preparing residential 
mortgage loan packages, or collecting information on behalf of the 
consumer with regard to a residential mortgage loan.''
    The Bureau proposed comment 36(a)-1.i.A to provide further 
interpretation of the proposed phrase, ``takes an application, offers, 
arranges, negotiates, or otherwise obtains,'' to clarify the phrase's 
applicability in light of these statutory provisions. Specifically, the 
Bureau proposed to clarify in comment 36(a)-1.i.A that the definition 
of ``loan originator'' and, more specifically, ``arranges'' also 
includes all of the activities listed in TILA 103(cc)(4) that define 
the term ``assists a consumer in obtaining or applying for consumer 
credit,'' including advising on credit terms, preparing application 
packages (such as a loan or pre-approval application or supporting 
documentation), and collecting information on behalf of the consumer to 
submit to a loan originator or creditor. The comment also would have 
included any person that advertises or communicates to the public that 
such person can or will provide any of the listed services or 
activities. The Bureau addresses each of these and additional 
activities in the ``takes an application,'' ``offers, ``arranges,'' 
``assists,'' and ``negotiates or otherwise obtains or makes'' analyses 
below.
    Takes an application. The Bureau proposed to add ``takes an 
application,'' as used in the definition of ``mortgage originator'' in 
TILA section 103(cc)(2)(A), to the definition of ``loan originator'' in 
Sec.  1026.36(a). A few industry groups and several manufactured 
housing financers raised concerns that the proposal did not define or 
provide any interpretation of the phrase. One manufactured housing 
financer commented that the mere physical act of writing (or typing) 
information onto an application form on behalf of a consumer was a 
purely administrative and clerical act that should not be considered 
taking an application. This commenter indicated that such activity 
serves the interest of low-income consumers who may be uncomfortable 
with the home buying and credit application processes. The commenter 
further noted that completing the application in this manner ensures 
that the credit information is accurately conveyed and clearly written 
to avoid unnecessary delays in the application process. Another 
industry group commenter suggested that, under the proposal, merely 
delivering a completed application to a loan officer, without more, 
would qualify as ``takes an application.''
    In the proposal, the Bureau noted that, in connection with the 
application process, certain minor actions alone would not be included 
in the definition of loan originator. For instance, the proposal stated 
that physically handling a completed application form to deliver it to 
a loan officer would not constitute acting as a loan originator where 
the person performing the delivery does not assist the consumer in 
completing the application, process or analyze the information 
reflected in the application, or discuss specific transaction terms or 
products with the consumer. Instead, these activities would be 
considered administrative and clerical and thus within TILA section 
103(cc)(2)(C)'s express exclusion from the definition of ``mortgage 
originator'' of persons who perform ``purely administrative and 
clerical tasks on behalf of mortgage originators.'' In light of the 
comments received, the Bureau is revising comment 36(a)-4.i in the 
final rule to state explicitly that such activities are not included in 
the definition of loan originator.
    The Bureau believes, however, that filling out a consumer's 
application, inputting the information into an online application or 
other automated system, and taking information from the consumer over 
the phone to complete the application should be considered ``tak[ing] 
an application'' for the purposes of the rule. The Bureau believes that 
individuals performing these functions play an important enough role in 
the origination process that they should be subject to the requirements 
the Dodd-Frank Act establishes with respect to loan originators, 
including the prohibition on compensation that creates steering 
incentives. Consumers providing information for an application during 
the initial stages of the origination process are susceptible to 
steering influences that could be harmful. For example, the application 
taker could submit or characterize the application in a way that is 
more favorable to the application taker while limiting the consumer's 
options or qualifying the consumer for a transaction the consumer 
cannot repay. Or, when taking in the information provided by the 
consumer the application taker could encourage a consumer to seek 
certain credit terms or products. The Bureau is revising comment 36(a)-
1.i.A and comment 36(a)-4.i to clarify which activities do or do not 
constitute ``tak[ing] an application'' by discussing how persons merely 
aiding a consumer to understand how to complete an application would 
not be engaged in taking an application, while persons who actually 
fill out the application are taking an application.
    Offers. The Bureau proposed to revise the general definition of 
loan originator and associated commentary to include a person who 
``offers'' an extension of credit. This revision would reflect new TILA 
section 103(cc)(2) that includes in the definition of ``mortgage 
originator'' persons who ``offer'' terms of a residential mortgage 
loan.
    In proposed comment 36(a)-1 and the supplementary information of 
the proposal, the Bureau explained that ``arranges'' would also include 
any task that is part of the process of originating a credit 
transaction, including advertising or communicating to the public by a 
person that the person can perform loan origination services, as well 
as referring a consumer to any other person who participates in the 
origination process. Several industry associations, banks, and 
manufactured housing finance commenters urged the Bureau not to include 
in the definition of ``loan originator'' bank tellers, receptionists, 
customer service representatives, or others who periodically refer 
consumers to loan originators. A large bank commenter indicated that 
the TILA definition of mortgage originator does not expressly include 
employees who perform referral activities.
    Prior to the transfer of TILA rulemaking authority to the Bureau, 
the Board interpreted the definition of loan originator to include 
referrals when such activity was performed for compensation or other 
monetary gain or in the expectation of compensation or other monetary 
gain. The Bureau further notes that HUD also interpreted the SAFE Act 
``offers and negotiates'' to include referrals. Specifically, 
Regulation H, as restated by the Bureau, provides in 12 CFR 
1008.103(c)(2)(i)(C) that an individual ``offers or negotiates terms of 
a residential mortgage loan for compensation or gain'' if the 
individual: * * * (C) Recommends, refers, or steers a borrower or 
prospective borrower to a particular lender or set of residential 
mortgage loan terms, in accordance with a duty to or incentive from any 
person other than the borrower or prospective borrower * * * . 76 FR 
78483, 78493 (Dec. 19, 2011). See also 76 FR 38464, 38495 (June 30, 
2011).
    The Federal banking agencies, when implementing the SAFE Act, did 
not

[[Page 11300]]

specifically address whether referral activities are included in 
``offers or negotiates'' terms of a loan. However, the agencies noted 
that activities considered to be offering or negotiating loan terms do 
not require a showing that an employee received a referral fee. See 75 
FR 44656 (July 28, 2010). Thus, the agencies appear to have 
contemplated that referral activity is included in the meaning of 
``offers or negotiates'' terms of a loan.
    To maintain consistency with Regulation H and to facilitate 
compliance, the Bureau interprets ``offers'' for purposes of the 
definition of loan originator in Sec.  1026.36(a)(1) to include persons 
who: (1) Present for consideration by a consumer particular credit 
terms; or (2) recommend, refer, or steer a consumer to a particular 
loan originator, creditor, credit terms, or credit product. The Bureau 
believes that, even at initial stages of the mortgage origination 
process, persons who recommend, refer, or steer consumers to a 
particular loan originator, creditor, set of credit terms, or credit 
product could have influence over the particular credit products or 
credit terms that a consumer seeks or ultimately obtains. Moreover, 
because to be a loan originator someone who offers credit must do so 
for, or in the expectation of, direct or indirect compensation or gain, 
there not only is an incentive to steer the consumer to benefit the 
referrer but the referrer is also effectively participating in the 
extending of an offer of consumer credit on behalf of the person who 
pays the referrer's compensation. The Bureau believes that the statute 
was intended to reach such situations and that it appropriately 
regulates these activities without imposing significant burdens.\62\
---------------------------------------------------------------------------

    \62\ The Bureau also believes that referral activities are 
encompassed within the language ``assists a consumer in obtaining or 
applying to obtain a residential mortgage loan'' in TILA section 
103(cc)(2). TILA section 103(cc)(4) provides that ```a person 
assists a consumer in obtaining or applying to obtain a residential 
mortgage loan' by, among other things, advising on residential 
mortgage loan terms.* * *'' The Bureau believes that ``among other 
things'' encompasses referral, which is a form of advising a 
consumer on where to obtain consumer credit. To the extent there is 
any uncertainty with respect to whether a person engaging in 
referral activity for or in expectation of direct or indirect 
compensation is a loan originator, the Bureau is also exercising its 
authority under TILA section 105(a) to prescribe rules that contain 
additional requirements, differentiations, or other provisions. The 
Bureau believes that this adjustment is necessary or proper to 
effectuate the purposes of TILA and to prevent circumvention or 
evasion thereof.
---------------------------------------------------------------------------

    For instance, most persons engaged in compensated referral 
activities (e.g., employees being paid by their employers for referral 
activities) receive a flat fee for each referral. A flat fee is 
permissible under the existing and final rule, which in Sec.  
1026.36(d)(1) generally prohibits loan originators from receiving 
compensation that is based on a term of a transaction but permits 
compensation based on the amount of the transaction or on a flat per-
transaction basis. Accordingly, application of the regulation will not 
require a change in compensation practices where referrers are 
compensated on a flat fee basis. However, if referrers were to receive 
compensation based on transaction terms, the Bureau believes such 
persons would also likely be incentivized to steer consumers to 
particular transaction terms that may be harmful to the consumers. 
Moreover, most consumers are likely unaware that the person referring 
or recommending a particular creditor or a particular credit product 
may have a financial incentive to do so. There is even less consumer 
sensitivity to these potential harms when a trusted advisor is engaged 
in such referral activity. As also discussed in the proposal, the 
Bureau believes that one of the primary focuses of the Dodd-Frank Act 
and this rulemaking is to prevent such incentives.
    Similarly, the Bureau believes that provisions of the final rule 
requiring loan originators to be appropriately ``qualified'' under 
Sec.  1026.36(f), with regard to background checks, character 
screening, and training of loan originators, also will not be 
significantly burdensome. The Bureau believes that many referrers 
employed by non-depository institutions likely already meet the rule's 
qualification requirements. States that follow the interpretation of 
the SAFE Act in Regulation H already require certain persons who refer 
consumers, according to a duty or incentive, to obtain a loan 
originator license. Furthermore, in contrast with Regulation H, as 
described above, many States have enacted a broader definition of loan 
originator than is required under the SAFE Act by using the 
disjunctive, i.e., takes an application ``or'' offers or negotiates, 
with the result that persons who refer are already subject to State 
loan originator licensing requirements in those States even if they do 
not also ``take an application.'' \63\ Individuals who are licensed 
under the SAFE Act are not subject to additional substantive 
requirements to be ``qualified'' under this final rule, as discussed 
further in the section-by-section analysis of Sec.  1026.36(f) and (g) 
concerning loan originator qualification requirements.
---------------------------------------------------------------------------

    \63\ See the section-by-section analysis of Sec.  1026.36(f) and 
(g) below for additional background on the SAFE Act.
---------------------------------------------------------------------------

    The Bureau additionally believes that employees of depository 
institutions likely also already meet many of the final rule's criminal 
background and fitness qualification requirements in new Sec.  
1026.36(f) because they are subject to background-check requirements 
under the Federal Deposit Insurance Act or Federal Credit Union Act. 
Moreover, the qualification training requirements of this final rule 
for depository institution loan originators specify that the training 
be commensurate with the individual's loan origination activities. 
Accordingly, training that fulfills the final rule's qualification 
requirements for persons whose only loan origination activities are 
referrals is relatively modest as also further discussed in the 
section-by-section analysis of Sec.  1026.36(f) and related commentary.
    As discussed further below, the Bureau is providing greater 
clarification in comment 36(a)-4 to explain that administrative staff 
who provide contact or general information about available credit in 
response to requests from consumers generally are not for that reason 
alone loan originators. For example, an employee who provides a loan 
originator's or creditor's contact information to a consumer in 
response to the consumer's request does not become a loan originator, 
provided that the teller or receptionist does not discuss particular 
credit terms and does not refer the consumer, based on the teller's or 
receptionist's assessment of the consumer's financial characteristics, 
to a certain loan originator or creditor seeking to originate 
particular transactions to consumers with those financial 
characteristics. In contrast, a referral occurs (and an employee is a 
loan originator) when, for example, a bank teller asks a consumer if 
the consumer is interested in refinance loans with low introductory 
rates and provides contact information for a loan originator based on 
the teller's assessment of information provided by the consumer or 
available to the teller regarding the consumer's financial 
characteristics.\64\
---------------------------------------------------------------------------

    \64\ The Bureau believes that a referral based on the employee's 
assessment of the financial characteristics of the consumer occurs 
only if an individual in fact has the discretion to choose to direct 
a consumer to a particular loan originator.
---------------------------------------------------------------------------

    The Bureau is revising comment 36(a)-1.i.A.1 to clarify that the 
definition of loan originator includes a person who refers a consumer 
(when the referral activities are engaged in for compensation or other 
monetary gain) to a loan originator or creditor or an

[[Page 11301]]

employee, agent, or contractor of a loan originator or creditor. The 
Bureau is further clarifying the definition of ``referral'' as 
generally including any oral or written action directed to a consumer 
that can affirmatively influence the consumer to select a particular 
loan originator or creditor to obtain an extension of credit when the 
consumer will pay for such credit. In comment 36(a)-1.i.A.2 the Bureau 
is clarifying that arranging a credit transaction is one of the 
activities that can make a person a ``loan originator.'' The Bureau is 
also clarifying in comment 36(a)-1.i.A.4 that the definition of ``loan 
originator'' includes a person who presents for consideration by a 
consumer particular credit terms or communicates with a consumer for 
the purpose of reaching a mutual understanding about prospective credit 
terms.
    The Bureau is revising comment 36(a)-4 to clarify that the loan 
originator definition, nevertheless, does not include persons who 
(whether or not for or in the expectation of compensation or gain): (1) 
Provide general explanations, information, or descriptions in response 
to consumer queries, such as explaining terminology or lending 
policies; (2) as employees of a creditor or loan originator, provide 
loan originator or creditor contact information in response to the 
consumer's request, provided that the employee does not discuss 
particular transaction terms and does not refer the consumer, based on 
the employee's assessment of the consumer's financial characteristics, 
to a particular loan originator or creditor seeking to originate 
particular transactions to consumers with those financial 
characteristics; (3) describe product-related services; or (4) explain 
or describe the steps that a consumer would need to take to obtain a 
credit offer, including providing general clarification on 
qualifications or criteria that would need to be met that is not 
specific to that consumer's circumstances.
    Arranges. The Board's 2010 Loan Originator Final Rule defined 
``loan originator'' in Sec.  1026.36(a)(1) as: ``with respect to a 
particular transaction, a person who for compensation or other monetary 
gain, or in expectation of compensation or other monetary gain, 
arranges, negotiates, or otherwise obtains an extension of consumer 
credit for another person.'' The proposal would have broadly clarified 
``arranges'' to include, for example, any part of the process of 
originating a credit transaction, including advertising or 
communicating to the public that one can perform origination services 
and referring a consumer to another person who participates in the 
process of originating a transaction. The clarification in proposed 
comment 36(a)-1.i.A would have included both persons who participate in 
arranging a credit transaction with others and persons who arrange the 
transaction entirely, including through initial contact with the 
consumer, assisting the consumer to apply for mortgage credit, taking 
the application, offering and negotiating transaction terms, and making 
arrangements for consummation of the credit transaction.
    The term ``arranges'' is not part of the definition of mortgage 
originator in TILA section 103(cc)(2)(A) as enacted by the Dodd-Frank 
Act. Nevertheless, the Bureau proposed to preserve the existing 
regulation's use of the term and, as noted, indicated its belief that 
the term subsumes many of the activities described in the statutory 
definition. The Bureau did not propose to include the statutory 
``assists a consumer'' element, for example, for this reason. As 
discussed below, however, the Bureau is including that element in the 
final definition. The Bureau therefore considered removing ``arranges'' 
from the definition in this final rule. To prevent any inference that 
the final rule narrows the definition of loan originator, however, the 
Bureau has kept the term in the final rule.
    Several industry groups and a manufactured housing finance 
commenter stated that the Bureau's proposed interpretation of 
``arranges'' was overbroad. Several commenters questioned whether 
``arranges'' would include activities typically performed by or unique 
to certain commonly recognized categories of industry personnel. 
Specifically, these commenters sought clarification on whether the 
term's scope would include activities typically performed by 
underwriters, senior managers who work on underwriting and propose 
counter-offers to be offered to consumers, loan approval committees 
that approve or deny transactions (with or without conditions or 
counter-offers) and communicate this information to loan officers, 
processors who assemble files for submission to underwriters, loan 
closers, and individuals involved with secondary market pricing who 
establish rates that the creditor's loan officers quote to the public.
    The Bureau believes the meaning of ``arranges'' does include 
activities performed by these persons when those activities amount to 
offering or negotiating credit terms available from a creditor with 
consumers or assisting a consumer in applying for or obtaining an 
extension of credit, and thus also amount to other activities specified 
in the definition of loan originator. However, most of the activities 
these persons typically engage in would likely not amount to offering 
or negotiating and thus would likely not be included in the definition 
of ``loan originator.'' Comment 36(a)-4 and the corresponding analysis 
below on management, administrative, and clerical tasks provide 
additional clarifications on which of these and similar activities are 
not included in the definition of loan originator.
    In proposed comment 36(a)-1 and the supplementary information of 
the proposal, the Bureau explained that ``arranges'' would also include 
any task that is part of the process of originating a credit 
transaction, including advertising or communicating to the public by a 
person that the person can perform loan origination services, as well 
as referring a consumer to any other person who participates in the 
origination process. The Bureau is finalizing the definition of ``loan 
originator'' in Sec.  1026.36(a)(1)(i) and in related comment 36(a)-
1.i.A to include certain advertising activities and also to include 
referrals as discussed in more detail above in the analysis of 
``offers.'' Nevertheless, comment 36(a)-1, as adopted, does not state 
that ``arranges'' includes any task that is part of the process of 
originating a credit transaction because some loan origination 
activities under this final rule are included under elements other than 
``arranges.''
    Assists a consumer. TILA section 103(cc)(2)(A)(ii) provides that a 
mortgage originator includes a person who ``assists a consumer in 
obtaining or applying to obtain a residential mortgage loan.'' TILA 
section 103(cc)(4) provides that a person ``assists a consumer in 
obtaining or applying to obtain a residential mortgage loan'' by taking 
actions such as ``advising on residential mortgage loan terms 
(including rates, fees, and other costs), preparing residential 
mortgage loan packages, or collecting information on behalf of the 
consumer with regard to a residential mortgage loan.'' The Bureau 
proposed to clarify in comment 36(a)-1.i.A that the term ``loan 
originator'' includes a person who assists a consumer in obtaining or 
applying for consumer credit by: (1) Advising on specific credit terms 
(including rates, fees, and other costs); (2) filling out an 
application; (3) preparing application packages (such as a credit 
application or pre-approval application or supporting documentation); 
or (4) collecting application and supporting information

[[Page 11302]]

on behalf of the consumer to submit to a loan originator or creditor. 
Each component of this statutory provision (i.e., advising on 
residential mortgage loan terms, preparing residential mortgage loan 
packages, and collecting information on behalf of the consumer) is 
addressed below.
    TILA section 103(cc)(4) provides that a person ``assists a consumer 
in obtaining or applying to obtain a residential mortgage loan'' by, 
among other things, ``advising on residential mortgage loan terms 
(including rates, fees, and other costs).'' The Bureau proposed to 
clarify in comment 36(a)-1.i.A that ``takes an application, arranges, 
offers, negotiates, or otherwise obtains an extension of consumer 
credit for another person'' includes ``assists a consumer in obtaining 
or applying for consumer credit by advising on credit terms (including 
rates, fees, and other costs).'' In the proposal, the Bureau also 
stated that the definition of ``mortgage originator'' in TILA generally 
does not include bona fide third-party advisors such as accountants, 
attorneys, registered financial advisors, certain housing counselors, 
or others who advise a consumer on credit terms offered by another 
person and do not receive compensation directly or indirectly from that 
person. The Bureau indicated that the definition of ``mortgage 
originator'' would apply to persons who advise consumers regarding the 
credit terms being advertised or offered by that person or by the loan 
originator or creditor to whom the person brokered or referred the 
transaction in expectation of compensation, rather than objectively 
advising consumers on transaction terms already offered by an unrelated 
party to the consumer (i.e., in the latter scenario the advisor did not 
refer or broker the transaction to a mortgage broker or a creditor and 
is not receiving compensation from a loan originator or creditor 
originating the transaction or an affiliate of that loan originator or 
creditor). If the advisor receives payments or compensation from a loan 
originator, creditor, or an affiliate of the loan originator or 
creditor offering, arranging, or extending the consumer credit in 
connection with advising a consumer on credit terms, however, the 
advisor could be considered a loan originator.
    The Bureau is defining ``loan originator'' in Sec.  
1026.36(a)(1)(i) to include persons who ``assist a consumer in 
obtaining or applying to obtain'' an extension of credit. The Bureau is 
providing additional clarification in revised comments 36(a)-1 and 
36(a)-4 on the meaning of ``assists a consumer in obtaining or applying 
to obtain'' an extension of credit.
    Several industry groups and housing counselor commenters requested 
additional clarification on the meaning of ``assists a consumer in 
obtaining or applying for consumer credit by advising on credit terms 
(including rates, fees, and other costs).'' The Bureau interprets the 
phrase, ``advising on credit terms (including rates, fees, and other 
costs)'' to include advising a consumer on whether to seek or accept 
specific credit terms from a creditor. However, the phrase does not 
include persons who merely provide general explanations or descriptions 
in response to consumer queries, such as by explaining general credit 
terminology or the interactions of various credit terms not specific to 
a transaction. The Bureau also is adopting additional clarifications in 
comment 36(a)-1.v to reflect its interpretation that ``advising on 
credit terms'' does not include the activities performed by bona fide 
third-party advisors such as accountants, attorneys, registered 
financial advisors, certain housing counselors, or others who advise 
consumers on particular credit terms but do not receive compensation or 
other monetary gain, directly or indirectly, from the loan originator 
or creditor offering or extending the particular credit terms.
    The Bureau believes that payment from the loan originator or 
creditor offering or extending the credit usually evidences that the 
advisor is incentivized to depart from the advisor's core, objective 
consumer advisory activity to further the credit origination goals of 
the loan originator or creditor instead. Thus, this interpretation 
applies only to advisory activity that is part of the advisor's 
activities. Although not a requirement for the exclusion, the Bureau 
believes that advisers acting under authorization or the regulatory 
oversight of a governing body, such as licensed accountants advising 
clients on the implications of credit terms, registered financial 
advisors advising clients on potential effects of credit terms on 
client finances, HUD-approved housing counselors assisting applicants 
with understanding the origination process and various credit terms 
offered by a loan originator or a creditor, or a licensed attorney 
assisting clients to consummate the purchase of a home or with divorce, 
trust, or estate planning matters are generally already subject to 
substantial consumer protection requirements. Such third-party advisors 
would be loan originators, however, if they advise consumers on 
particular credit terms and receive compensation or other monetary 
gain, directly or indirectly, from the loan originator or creditor 
offering or extending the particular credit terms. Therefore, these 
persons may no longer be viewed as acting within the scope of their 
bona fide third-party activities, which typically do not involve any 
part of the loan origination process (i.e., no longer acting solely as 
an accountant, financial advisor, housing counselor, or an attorney 
instead of a loan originator).
    The Bureau understands that some nonprofit housing counselors or 
housing counselor organizations may receive fixed sums from creditors 
or loan originators as a result of agreements between creditors and 
local, State, or Federal agencies or where such compensation is 
expressly permitted by applicable local, State or Federal law that 
requires counseling. The Bureau believes that housing counselors acting 
pursuant to such permission or authority for a particular transaction 
should not be considered loan originators for that transaction. Thus, 
funding or compensation received by a housing counselor organization or 
person from a loan originator or a creditor or the affiliate of a loan 
originator or creditor that is not contingent on referrals or on 
engaging in loan origination activities other than assisting a consumer 
in obtaining or applying to obtain a residential mortgage transaction, 
where such compensation is expressly permitted by applicable local, 
State, or Federal law that requires counseling and the counseling 
performed complies with such law (for example, Sec.  1026.34(a)(5) and 
Sec.  1026.36(k)) or where the compensation is paid pursuant to an 
agreement between the creditor or loan originator (or either's 
affiliate) and a local, State, or Federal agency, would not cause these 
persons to be considered to be ``advising on credit terms'' within the 
meaning of the loan originator definition. The Bureau has added comment 
36(a)-1.v to clarify further that such third-party advisors are not 
loan originators.
    The Bureau has adopted further clarification in comment 36(a)-
1.i.A.3 to note that the phrase ``assists a consumer in obtaining or 
applying for consumer credit by advising on credit terms (including 
rates, fees, and other costs)'' applies to ``specific credit terms'' 
rather than ``credit terms'' generally. The Bureau has also clarified 
the exclusion for advising consumers on non-specific credit terms and 
the loan process generally from the definition of ``loan originator'' 
for persons performing management, administrative and clerical tasks in 
comment 36(a)-4 as discussed further below.

[[Page 11303]]

    TILA section 103(cc)(4) provides that a person ``assists a consumer 
in obtaining or applying to obtain a residential mortgage loan'' by, 
among other things, ``preparing residential mortgage loan packages.'' 
The proposal would have clarified ``preparing residential mortgage loan 
packages'' in comment 36(a)-1.i.A.3 by stating ``preparing application 
packages (such as credit or pre-approval application or supporting 
documentation).''
    Many industry group, bank, and manufactured housing finance 
commenters stated that individuals primarily engaged in ``back-office'' 
processing such as persons supervised by a loan originator who compile 
and assemble application materials and supporting documentation to 
submit to the creditor should not be considered loan originators. A 
housing assistance group and a State housing finance agency indicated 
that HUD-approved housing counselors often assist consumers with 
collecting and organizing documents for submitting application 
materials to loan originators or creditors. These commenters further 
requested clarification regarding whether housing counselors engaged in 
these activities would be considered loan originators.
    The Bureau agrees that persons generally engaged in loan processing 
or who compile and process application materials and supporting 
documentation and do not take an application, collect information on 
behalf of the consumer, or communicate or interact with consumers 
regarding specific transaction terms or products are not loan 
originators (see the separate discussion above on taking an application 
and collecting information on behalf of the consumer). Accordingly, 
while the Bureau is adopting the phrase ``preparing application 
packages (such as credit or pre-approval application or supporting 
documentation)'' as proposed, it also is providing additional 
interpretation in comment 36(a)-4 with respect to persons who engage in 
certain management, administrative, and clerical tasks and are not 
included in the definition of loan originator. The Bureau believes this 
commentary should clarify that persons providing general application 
instruction to consumers so consumers can complete an application or 
persons engaged in certain processing functions without interacting or 
communicating with the consumer regarding specific transaction terms or 
products (other than confirming terms that have already been 
transmitted to the consumer in a written offer) are not included in the 
definition of loan originator.
    As discussed above regarding advising on residential mortgage loan 
terms and below in the discussion of collecting information on behalf 
of the consumer, the Bureau does not believe the definition of loan 
originator includes bona fide third-party advisors, including certain 
housing counselors that aid consumers in collecting and organizing 
documents, or others who do not receive compensation from a loan 
originator, a creditor, or the affiliates of a loan originator or a 
creditor in connection with a consumer credit transaction (or those who 
only receive compensation paid to housing counselors where counseling 
is required by applicable local, State, or Federal law and the housing 
counselors' activities are compliant with such law). This 
interpretation is included in comment 36(a)-1.v.
    TILA section 103(cc)(4) provides that a person ``assists a consumer 
in obtaining or applying to obtain a residential mortgage loan'' by, 
among other things, ``collecting information on behalf of the consumer 
with regard to a residential mortgage loan.'' (Emphasis added.) The 
Bureau proposed to clarify in comment 36(a)-1.i.A that the definition 
of ``loan originator'' includes assisting a consumer in obtaining or 
applying for consumer credit by ``collecting information on behalf of 
the consumer to submit to a loan originator or creditor.''
    Several industry associations, banks, and manufactured housing 
finance commenters sought clarification on whether ``collecting 
information on behalf of the consumer to submit to a loan originator or 
creditor'' includes persons engaged in clerical activities with respect 
to such information. A bank, a manufactured housing financer, and an 
industry group commenter argued that persons who contact the consumer 
to collect application and supporting information on behalf of a loan 
originator or creditor should not be subject to the rule. Many of these 
commenters also suggested that activities such as collecting 
information would qualify for the exclusion from the SAFE Act 
definition of loan originator for ``administrative or clerical tasks.''
    As discussed above, the Bureau believes the Dodd-Frank Act 
definition of loan originator is broader in most ways than that in the 
SAFE Act. The Bureau also believes, however, that persons who, acting 
on behalf of a loan originator or creditor, verify information provided 
by the consumer in the credit application, such as by asking the 
consumer for documentation to support the information the consumer 
provided in the application, or for the consumer's authorization to 
obtain supporting documentation from third parties, are not collecting 
information on behalf of the consumer. Persons engaged in these 
activities are collecting information on behalf of the loan originator 
or creditor. Furthermore, this activity is administrative or clerical 
in nature as discussed further in the managers, administrative and 
clerical tasks analysis below. However, collecting information ``on 
behalf of the consumer'' would include gathering information or 
supporting documentation from third parties on behalf of the consumer 
to provide to the consumer, for the consumer then to provide in the 
application or for the consumer to submit to the loan originator or 
creditor, for compensation or in expectation of compensation from a 
loan originator, creditor, or an affiliate of the loan originator or 
creditor. Comment 36(a)-1.i.A.3 clarifies this point.
    The Bureau is finalizing comment 36(a)-1.i.A.3 to clarify that the 
definition of ``loan originator'' includes assisting a consumer in 
obtaining or applying for consumer credit by ``collecting information 
on behalf of the consumer to submit to a loan originator or creditor.'' 
Thus, a person performing these activities is a loan originator. The 
Bureau is also providing additional interpretation in comment 36(a)-4 
with respect to persons who engage only in certain management, 
administrative, and clerical tasks (i.e., typically loan processors for 
the purposes of this discussion) and are therefore not included in the 
definition of loan originator.
    TILA section 103(cc)(2)(B) provides that a mortgage originator 
``includes any person who represents to the public, through advertising 
or other means of communicating or providing information (including the 
use of business cards, stationery, brochures, signs, rate lists, or 
other promotional items), that such person can or will provide any of 
the services or perform any of the activities described in subparagraph 
(A).'' The Bureau proposed to revise comment 36(a)-1.i.A to clarify 
that a loan originator ``includes a person who in expectation of 
compensation or other monetary gain advertises or communicates to the 
public that such person can or will provide any of these (loan 
origination) services or activities.''
    The Bureau stated in the section-by-section analysis of proposed 
Sec.  1026.36(a) that the Bureau believes the existing definition of 
``loan originator''

[[Page 11304]]

in Sec.  1026.36(a) includes persons who, in expectation of 
compensation or other monetary gain, communicate or advertise loan 
origination activities or services to the public. The Bureau noted in 
the analysis that the phrase ``advertises or communicates to the 
public'' is very broad and includes, but is not limited to, the use of 
business cards, stationery, brochures, signs, rate lists, or other 
promotional items listed in TILA section 103(cc)(2)(B), if these items 
advertise or communicate to the public that a person can or will 
provide loan origination services or activities. The Bureau also stated 
in the analysis that the Bureau believed this clarification furthers 
TILA's goal in section 129B(a)(2) of ensuring that responsible, 
affordable credit remains available to consumers.
    A commenter questioned whether paid advertisers would be considered 
loan originators under the proposal. The Bureau believes a person 
performs the activity described in the ``advertises or communicates'' 
provision only if the person, or an employee or affiliate of the 
person, advertises that that person can or will provide loan 
origination services or activities. Thus, a person simply publishing or 
broadcasting an advertisement that indicates that a third party can or 
will perform loan origination services is not a loan originator. The 
Bureau notes that the more an advertisement is specifically directed at 
and communicated to a particular consumer or small number of consumers 
only, the more the advertisement could constitute a referral and not an 
advertisement (see the definition of referral in comment 36(a)-
1.i.A.1). The Bureau is finalizing comment 36(a)-1.i.A.5 to accommodate 
changes to surrounding proposed text as follows: ``The scope of 
activities covered by the term loan originator includes: * * * 
advertising or communicating to the public that one can or will perform 
any loan origination services. Advertising the services of a third 
party who engages or intends to engage in loan origination activities 
does not make the advertiser a loan originator.''
    TILA section 103(cc)(2)(B) does not contain an express requirement 
that a person must advertise for or in expectation of compensation or 
gain to be considered a ``mortgage originator.'' To the extent there is 
any uncertainty, the Bureau relies on its exception authority under 
TILA section 105(a) to clarify that such a person must advertise for or 
in expectation of compensation or gain in return for the services 
advertised to be a ``loan originator.'' Under TILA section 
103(cc)(2)(A), persons that engage in one or more of the core 
``mortgage originator'' activities of the statute and that do not 
receive or expect to receive compensation or gain are not ``mortgage 
originators.'' The Bureau believes that also applying the compensation 
requirement to persons who advertise that they can or will perform 
``mortgage originator'' activities maintains consistency throughout the 
definition of ``mortgage originator.'' This result effectuates the 
purposes of TILA in ensuring that responsible, affordable mortgage 
credit remains available to consumers and facilitates compliance by 
reducing uncertainty.
    Negotiates or otherwise obtains or makes. TILA section 103(cc)(2) 
defines ``mortgage originator'' to include a person who ``negotiates'' 
terms of a residential mortgage loan. Existing Sec.  1026.36(a)(1) 
contains ``negotiates'' and ``otherwise obtains'' in the definition of 
``loan originator,'' and the Bureau proposed to retain the terms in the 
definition. The Bureau did not define ``negotiates'' or ``otherwise 
obtains'' in the proposal except to state that ``arranges, negotiates, 
or otherwise obtains'' in the existing definition of ``loan 
originator'' already includes the core elements of the term ``mortgage 
originator'' in TILA section 103(cc)(2)(A).
    The Bureau did not receive any comments specific to the definition 
of ``negotiates'' or ``otherwise obtains.'' Consistent with the 
definition of ``negotiates'' in Regulation H and to facilitate 
compliance, in comment 36(a)-1.i.A.4, the Bureau interprets 
``negotiates'' as encompassing the following activities: (1) Presenting 
for consideration by a consumer particular credit terms; or (2) 
communicating with a consumer for the purpose of reaching a mutual 
understanding about prospective credit terms. The Bureau also is 
including in the definition of a loan originator the additional phrase 
``or makes'' to ensure that creditors that extend credit without the 
use of table funding, including those that do none of the other 
activities described in the definition in Sec.  1026.36(a)(1)(i) but 
solely provide the funds to consummate transactions, are loan 
originators for purposes of Sec.  1026.36(f) and (g). As discussed in 
more detail below, those requirements are applicable to all creditors 
engaged in loan origination activities, unlike the other provisions of 
Sec.  1026.36.
Manufactured Home Retailers
    The definition of ``mortgage originator'' in TILA section 
103(cc)(2)(C)(ii) expressly excludes certain employees of manufactured 
home retailers if they assist a consumer in obtaining or applying to 
obtain a residential mortgage loan by preparing residential mortgage 
loan packages or collecting information on behalf of the consumer with 
regard to a residential mortgage loan but do not take a residential 
mortgage loan application, do not offer or negotiate terms of a 
residential mortgage application, and do not advise a consumer on loan 
terms (including rates, fees, and other costs). The definition of 
``loan originator'' in existing Sec.  1026.36(a)(1) does not address 
such employees. The Bureau proposed to implement the new statutory 
exclusion by revising the definition of ``loan originator'' in Sec.  
1026.36(a)(1) to exclude employees of a manufactured home retailer who 
assist a consumer in obtaining or applying to obtain consumer credit, 
provided such employees do not take a consumer credit application, 
offer or negotiate terms of a consumer credit transaction, or advise a 
consumer on credit terms (including rates, fees, and other costs).
    Many manufactured housing finance commenters sought clarification 
on whether retailers and their employees would be considered loan 
originators. The commenters stated that some employees perform both 
sales activities and loan origination activities, but receive 
compensation characterized as a commission for the sales activities 
only. The Bureau notes that, under the statute and proposed rule, a 
person who for direct or indirect compensation engages in loan 
origination activities is a loan originator and that all forms of 
compensation count for this purpose, even if they are not structured as 
a commission or other transaction-specific form of compensation (i.e., 
compensation includes salaries, commissions, bonus, or any financial or 
similar incentive regardless of the label or name of the compensation 
as stated in existing comment 36(d)(1)-1, which this rulemaking 
recodifies as comment 36(a)-5). Thus, if a manufactured housing 
retailer employee receives compensation ``in connection with'' the 
employee's loan origination activities, the employee is a loan 
originator, regardless of the stated purpose or name of the 
compensation. To clarify this point further, the Bureau has revised 
Sec.  1026.36(a)(1)(i) and comment 36(a)-1.i.A to provide that, if a 
person receives direct or indirect compensation for taking an 
application, assisting a consumer in obtaining or applying to obtain, 
arranging, offering, negotiating, or otherwise obtaining or making an 
extension of consumer credit for another person, the person is a loan 
originator.
    A large number of manufactured housing industry commenters stated

[[Page 11305]]

that the Bureau should further clarify what activities would be 
considered ``assisting the consumer in obtaining or applying to 
obtain'' credit, ``taking an application,'' ``offering or negotiating 
terms,'' or ``advising'' on credit terms. The Bureau has included 
several clarifications of these elements of the definition of ``loan 
originator'' in this final rule in Sec.  1026.36(a)(1)(i) and comments 
36(a)-1.i.A and 36(a)-4, as discussed above.
    One manufactured housing finance commenter stated that, under the 
proposed exclusion for employees of a manufactured home retailer, 
employees could be compensated, in effect, for referring a consumer to 
a creditor without becoming a loan originator. The Bureau disagrees. 
The proposed exclusion was for ``employees of a manufactured home 
retailer who assist a consumer in obtaining or applying to obtain 
consumer credit, provided such employees do not take a consumer credit 
application, offer or negotiate terms of a consumer credit transaction, 
or advise a consumer on credit terms (including rates, fees, and other 
costs).'' As discussed above and clarified in comment 36(a)-1.i.A, the 
definition of ``loan originator'' includes referrals of a consumer to 
another person who participates in the process of originating a credit 
transaction because referrals constitute a form of ``offering * * * 
credit terms.'' The one core activity that the exclusion permits 
manufactured housing retail employees to perform without becoming loan 
originators, ``[a]ssisting a consumer in obtaining or applying to 
obtain'' credit, has a statutorily defined meaning that does not 
include referring consumers to a creditor. Thus, employees of 
manufactured home retailers who refer consumers to particular credit 
providers would be considered loan originators if they are compensated 
for such activity.
    Many manufactured housing financer commenters stated they were 
concerned that all compensation paid to a manufactured home retailer 
and its employees could be considered loan originator compensation and 
therefore counted as ``points and fees'' in the Board's 2011 ATR 
Proposal and the Bureau's 2012 HOEPA Proposal. As noted above, in the 
2013 ATR Concurrent Proposal, the Bureau is seeking public comment on 
whether additional clarification is necessary for determining when 
compensation paid to such loan originators must be included in points 
and fees.
Creditors
    Section 1401 of the Dodd-Frank Act amended TILA to add section 
103(cc)(2)(F), which provides that the definition of ``mortgage 
originator'' expressly excludes creditors (other than creditors in 
table-funded transactions) for purposes of TILA section 129B(c)(1), 
(2), and (4), which include restrictions on compensation paid to loan 
originators and are implemented in Sec.  1026.36(d). As noted, however, 
the TILA section 103(cc)(2)(F) exclusion from these compensation 
provisions for creditors does not apply to a table-funded creditor. 
Accordingly, a table-funded creditor that meets the definition of a 
loan originator in a transaction is subject to the compensation 
restrictions. The proposal noted this limited exclusion from the 
compensation provisions and also noted that TILA section 129B(b), added 
by section 1402 of the Dodd-Frank Act, imposes new qualification and 
loan document unique identifier requirements that apply to all 
creditors that otherwise meet the definition of a loan originator 
whether or not they make use of table-funding. These new requirements 
are implemented in Sec.  1026.36(f) and (g), respectively.
    Existing Sec.  1026.36(a) includes a creditor extending table-
funded credit transactions in the definition of a loan originator. That 
is, a creditor who originates the transaction but does not finance the 
transaction at consummation out of the creditor's own resources, 
including, for example, by drawing on a bona fide warehouse line of 
credit or out of deposits held by that creditor, is a loan originator. 
The Bureau proposed to amend the definition of loan originator in Sec.  
1026.36(a)(1)(i) to include all creditors, whether or not they engage 
in table-funded transactions, for purposes of Sec.  1026.36(f) and (g) 
only. The Bureau also proposed to make technical amendments to comment 
36(a)-1.ii on table funding to reflect the applicability of TILA 
section 129B(b)'s new requirements to such creditors.
    The Bureau received comments from a manufactured housing industry 
group and a manufactured housing financer seeking clarification 
regarding whether manufactured home retailers are table-funded 
creditors, general TILA creditors, or neither. These commenters stated 
that the Bureau should specifically clarify that manufactured home 
retailers are not table-funded creditors. These commenters noted that 
manufactured home purchases are often financed using retail installment 
sales contracts. The commenters further explained that the credit-sale 
form of financing is the creditor's choice and not the retailer's.
    Under the existing rule, manufactured housing retailers that assign 
the retail installment sales contract at consummation to another person 
that provides the funding directly are already considered tabled-funded 
creditors included in the definition of loan originator for such 
transactions. These table-funded creditors are subject to the 
restrictions on compensation paid to loan originators if the table-
funded creditor otherwise meets the definition of a loan originator. 
The Dodd-Frank Act did not provide a definition or treatment of table-
funded creditors that differs from the existing rule, and the Bureau 
believes it would be inconsistent to exempt manufactured housing 
retailers that act as table-funded creditors from the restrictions on 
compensation that apply to all table-funded creditors that also meet 
the definition of a loan originator.
    To accommodate the applicability of the new qualification and 
unique identifier requirements to creditors, the Bureau is defining 
``loan originator'' in Sec.  1026.36(a)(1)(i) and associated comment 
36(a)-1.i.A.2 to clarify that the term includes persons who ``make'' an 
extension of credit. The Bureau is also revising Sec.  1026.36(a)(1)(i) 
to clarify further that all creditors engaging in loan origination 
activities are loan originators for purposes of Sec.  1026.36(f) and 
(g). The Bureau is adopting the proposed clarification on the 
applicability of the loan originator compensation rules to creditors in 
table-funded transactions and the technical revisions as proposed.
Servicers
    TILA section 103(cc)(2)(G) defines ``mortgage originator'' to 
exclude a servicer or its employees, agents, or contractors, 
``including but not limited to those who offer or negotiate terms of a 
residential mortgage loan for purposes of renegotiating, modifying, 
replacing or subordinating principal of existing mortgages where 
borrowers are behind in their payments, in default or have a reasonable 
likelihood of being in default or falling behind.'' The term 
``servicer'' is defined by TILA section 103(cc)(7) as having the same 
meaning as ``servicer'' ``in section 6(i)(2) of the Real Estate 
Settlement Procedures Act of 1974 [RESPA] (12 U.S.C. 2605(i)(2)).''
    This provision in RESPA defines the term ``servicer'' as ``the 
person responsible for servicing of a loan (including the person who 
makes or holds a loan if such person also services

[[Page 11306]]

the loan).'' \65\ The term ``servicing'' is defined to mean ``receiving 
any scheduled periodic payments from a borrower pursuant to the terms 
of any loan, including amounts for escrow accounts described in section 
2609 of [title 12], and making the payments of principal and interest 
and such other payments with respect to the amounts received from the 
borrower as may be required pursuant to the terms of the loan.'' 12 
U.S.C. 2605(i)(3).
---------------------------------------------------------------------------

    \65\ RESPA defines ``servicer'' to exclude: (A) the FDIC in 
connection with changes in rights to assets pursuant to section 
1823(c) of title 12 or as receiver or conservator of an insured 
depository institution; and (B) Ginnie Mae, Fannie Mae, Freddie Mac, 
or the FDIC, in any case in which changes in the servicing of the 
mortgage loan is preceded by (i) termination of the servicing 
contract for cause; (ii) commencement of bankruptcy proceedings of 
the servicer; or (iii) commencement of proceedings by the FDIC for 
conservatorship or receivership of the servicer (or an entity by 
which the servicer is owned or controlled). 12 U.S.C. 2605(i)(2).
---------------------------------------------------------------------------

    Existing comment 36(a)-1.iii provides that the definition of ``loan 
originator'' does not apply to a servicer when modifying existing 
credit on behalf of the current owner. The loan originator definition 
only includes persons involved in extending consumer credit. Thus, 
modifications of existing credit, which are not refinancings that 
involve extinguishing existing obligations and replacing them with a 
new credit extension as described under Sec.  1026.20(a), are not 
subject to the rule. The Bureau's proposal would have amended comment 
36(a)-1.iii to clarify and reaffirm this distinction in implementing 
the Dodd-Frank Act's definition of mortgage originator.
    As stated in the supplementary information of the proposal, the 
Bureau believes the exception in TILA section 103(cc)(2)(G) applies to 
servicers and servicer employees, agents, and contractors only when 
engaging in specified servicing activities with respect to a particular 
transaction after consummation, including loan modifications that do 
not constitute refinancings. The Bureau stated that it does not believe 
that the statutory exclusion was intended to shield from coverage 
companies that intend to act as servicers on transactions that they 
originate when they engage in loan origination activities prior to 
consummation of such transactions or to apply to servicers of existing 
mortgage debts that engage in the refinancing of such debts. The Bureau 
believes that exempting such companies merely because of the general 
status of ``servicer'' with respect to some credit would be 
inconsistent with the general purposes of the statute and create a 
large potential loophole.
    The Bureau's rationale for the proposed amendment to the comment 
rested on analyzing the two distinct parts of the statute. Under TILA 
section 103(cc)(2)(G), the definition of ``mortgage originator'' does 
not include: (1) ``A servicer'' or (2) ``servicer employees, agents and 
contractors, including but not limited to those who offer or negotiate 
terms of a residential mortgage loan for purposes of renegotiating, 
modifying, replacing and subordinating principal of existing mortgages 
where borrowers are behind in their payments, in default or have a 
reasonable likelihood of being in default or falling behind.'' 
Considering the text of this provision in combination with the 
definition of ``servicer'' under RESPA in 12 U.S.C. 2605(i)(2), a 
servicer that is responsible for servicing a mortgage debt or that 
extends mortgage credit and services it is excluded from the definition 
of ``mortgage originator'' for that particular transaction after it is 
consummated and the servicer becomes responsible for servicing it. 
``Servicing'' is defined under RESPA as ``receiving and making payments 
according to the terms of the loan.'' Thus, a servicer cannot be 
responsible for servicing a transaction that does not yet exist. An 
extension of credit that may be serviced exists only after 
consummation. Therefore, for purposes of TILA section 103(cc)(2)(G), a 
person is a servicer with respect to a particular transaction only 
after it is consummated and that person retains or obtains its 
servicing rights.
    In the section-by-section analysis of the proposal, the Bureau 
further stated this interpretation of the statute is the most 
consistent with the definition of ``mortgage originator'' in TILA 
section 103(cc)(2). A person cannot be a servicer of a credit extension 
until after consummation of the transaction. A person taking an 
application, assisting a consumer in obtaining or applying to obtain a 
mortgage transaction, offering or negotiating terms of a transaction, 
or funding the transaction prior to or at consummation is a mortgage 
originator or creditor (depending upon the person's role). Thus, a 
person that funds a transaction from the person's own resources or a 
creditor engaged in a table-funded transaction is subject to the 
appropriate provisions in TILA section 103(cc)(2)(F) for creditors 
until the person becomes responsible for servicing the resulting debt 
obligation after consummation. The Bureau explained that this 
interpretation is also consistent with the definition of ``loan 
originator'' in existing Sec.  1026.36(a) and comment 36(a)-1.iii. If a 
loan modification by the servicer constitutes a refinancing under Sec.  
1026.20(a), the servicer is considered a loan originator or creditor 
until after consummation of the refinancing when responsibility for 
servicing the refinanced debt arises.
    The proposal's supplementary information stated the Bureau's belief 
that the second part of the statutory servicer provision applies to 
individuals (i.e., natural persons) who are employees, agents, or 
contractors of the servicer ``who offer or negotiate terms of a 
residential mortgage loan for purposes of renegotiating, modifying, 
replacing and subordinating principal of existing mortgages where 
borrowers are behind in their payments, in default or have a reasonable 
likelihood of being in default or falling behind.'' The Bureau further 
noted that, to be considered employees, agents, or contractors of the 
servicer for the purposes of TILA section 103(cc)(2)(G), the person for 
whom the employees, agent, or contractors are working first must be a 
servicer. Thus, as discussed above, the particular transaction must 
have already been consummated before such employees, agents, or 
contractors can be excluded from the statutory term, ``mortgage 
originator'' under TILA section 103(cc)(2)(G).
    In the supplementary information of the proposal, the Bureau 
interpreted the phrase ``offer or negotiate terms of a residential 
mortgage loan for purposes of renegotiating, modifying, replacing and 
subordinating principal of existing mortgages where borrowers are 
behind in their payments, in default or have a reasonable likelihood of 
being in default or falling behind'' to be examples of the types of 
activities the individuals are permitted to engage in that satisfy the 
purposes of TILA section 103(cc)(2)(G). The Bureau explained, however, 
that ``renegotiating, modifying, replacing and subordinating principal 
of existing mortgages'' or any other related activities does not extend 
to refinancings, such that persons that engage in a refinancing, as 
defined in Sec.  1026.20(a), do qualify as loan originators for the 
purposes of TILA section 103(cc)(2)(G). Under the Bureau's view as 
stated in the proposal, a servicer may modify an existing debt 
obligation in several ways without being considered a loan originator. 
A formal satisfaction of the existing obligation and replacement by a 
new obligation, however, is a refinancing that involves a new extension 
of credit.
    The Bureau further interpreted the term ``replacing'' in TILA 
section 103(cc)(2)(G) not to include refinancings of consumer credit. 
The term ``replacing'' is not defined in TILA or

[[Page 11307]]

Regulation Z, but the Bureau indicated its belief in the proposal that 
the term ``replacing'' in this context means replacing existing debt 
without also satisfying the original obligation. For example, two 
separate debt obligations secured by a first- and second-lien, 
respectively, may be ``replaced'' by a single, new transaction with a 
reduced interest rate and principal amount, the proceeds of which do 
not satisfy the full obligation of the prior debts. In such a 
situation, the agreement for the new transaction may stipulate that the 
consumer remains responsible for the outstanding balances that have not 
been refinanced, if the consumer refinances or defaults on the new 
transaction within a stated period of time. This is conceptually 
distinct from a refinancing as described in Sec.  1026.20(a), which 
refers to situations where an existing ``obligation is satisfied and 
replaced by a new obligation.'' \66\ (Emphasis added.)
---------------------------------------------------------------------------

    \66\ Comment 20(a)-1 clarifies: ``The refinancing may involve 
the consolidation of several existing obligations, disbursement of 
new money to the consumer or on the consumer's behalf, or the 
rescheduling of payments under an existing obligation. In any form, 
the new obligation must completely replace the prior one.'' 
(Emphasis added).
---------------------------------------------------------------------------

    The Bureau reasoned in the supplementary information of the 
proposal that the ability to repay provisions of TILA section 129C, 
which were added by section 1411 of the Dodd-Frank Act, make numerous 
references to certain ``refinancings'' for exemptions from the income 
verification requirement of section 129C. TILA section 128A, as added 
by section 1418 of the Dodd-Frank Act, contains a required disclosure 
that includes a ``refinancing'' as an alternative for consumers of 
hybrid adjustable rate mortgages to pursue before the interest rate 
adjustment or reset after the fixed introductory period ends. Moreover, 
prior to the Dodd-Frank Act amendments, TILA contained the term 
``refinancing'' in numerous provisions. For example, TILA section 
106(f)(2)(B) provides finance charge tolerance requirements specific to 
a ``refinancing,'' TILA section 125(e)(2) exempts certain 
``refinancings'' from right of rescission disclosure requirements, and 
TILA section 128(a)(11) requires disclosure of whether the consumer is 
entitled to a rebate upon ``refinancing'' an obligation in full that 
involves a precomputed finance charge. The Bureau stated for these 
reasons its belief that, if Congress intended ``replacing'' to include 
or mean a ``refinancing'' of consumer credit, Congress would have used 
the existing term, ``refinancing.'' Instead, without any additional 
guidance from Congress, for the purposes of proposed comment 36(a)-
1.iii, the Bureau deferred to the existing definition of 
``refinancing'' in Sec.  1026.20(a), where the definition of 
``refinancing'' requires both replacement and satisfaction of the 
original obligation as separate and distinct elements of the defined 
term.
    Furthermore, as the Bureau explained in the proposal's 
supplementary information, the above interpretation of ``replacing'' 
better accords with the surrounding statutory text in TILA section 
103(cc)(2)(G), which provides that servicers include persons offering 
or negotiating a residential mortgage loan for the purposes of 
``renegotiating, modifying, replacing or subordinating principal of 
existing mortgages where borrowers are behind in their payments, in 
default or have a reasonable likelihood of being in default or falling 
behind.'' Taken as a whole, this text applies to distressed consumers 
for whom replacing and fully satisfying the existing obligation(s) 
likely is not an option. The situation covered by the text is distinct 
from a refinancing in which a consumer would simply use the proceeds 
from the refinancing to satisfy an existing loan or existing loans.
    The Bureau stated in the proposal's supplementary information that 
this interpretation gives full effect to the exclusionary language as 
Congress intended, to avoid undesirable impacts on servicers' 
willingness to modify existing loans to benefit distressed consumers, 
without undermining the new protections generally afforded by TILA 
section 129B. The Bureau further stated that a broader interpretation 
that excludes servicers and their employees, agents, and contractors 
from those protections solely by virtue of their coincidental status as 
servicers would not be the best reading of the statute as a whole and 
likely would frustrate rather than further congressional intent.
    Indeed, as the Bureau also noted in the supplementary information 
of the proposal, if persons were not included in the definition of 
mortgage originator when making but prior to servicing a transaction or 
based purely on a person's status as a servicer under the definition of 
``servicer,'' at least two-thirds of mortgage creditors (and their 
originator employees) nationwide could be excluded from the definition 
of ``mortgage originator'' in TILA section 103(cc)(2)(G). Many, if not 
all, of the top ten mortgage creditors by volume either hold or service 
loans they originated in portfolio or retain servicing rights for the 
loans they originate and sell into the secondary market.\67\ Under an 
interpretation that would categorically exclude a person who makes and 
also services a transaction or whose general ``status'' is a 
``servicer,'' these creditors would be excluded as ``servicers'' from 
the definition of ``mortgage originator.'' Further, their employees, 
agents, and contractors would also be excluded from the definition 
under this interpretation.
---------------------------------------------------------------------------

    \67\ For example, the top ten U.S. creditors by mortgage 
origination volume in 2011 held 72.7 percent of the market share. 1 
Inside Mortg. Fin., The 2012 Mortgage Market Statistical Annual 52-
53 (2012) (these percentages are based on dollar amounts). These 
same ten creditors held 60.8 percent of the market share for 
mortgage servicing. 1 Inside Mortg. Fin., The 2012 Mortgage Market 
Statistical Annual 185-186 (2012) (these percentages are based on 
dollar amounts). Most of the largest creditors do not ordinarily 
sell their originations into the secondary market with servicing 
released.
---------------------------------------------------------------------------

    The Bureau explained in the proposal's supplementary information 
that this result would be not only contrary to the statutory text but 
also contrary to Congress's stated intent in section 1402 of the Dodd-
Frank Act, to ensure that responsible, affordable mortgage credit 
remains available to consumers by regulating practices related to 
residential mortgage loan origination. For example, based on the 
discussion above the top ten mortgage creditors by origination and 
servicing volume alone, as much as approximately 61 percent of the 
nation's loan originators, could not only be excluded from prohibitions 
on dual compensation and compensation based on transaction terms but 
also from the new qualification requirements added by the Dodd-Frank 
Act.
    The Bureau's proposed rule would have amended comment 36(a)-1.iii, 
to reflect the Bureau's interpretation of the statutory text as stated 
in the supplementary information of the proposal and again above, to 
facilitate compliance, and to prevent circumvention. In the 
supplementary information, the Bureau also interpreted the statement in 
existing comment 36(a)-1.iii that the ``definition of `loan originator' 
does not apply to a loan servicer when the servicer modifies an 
existing loan on behalf of the current owner of the loan'' as 
consistent with the definition of mortgage originator as it relates to 
servicers in TILA section 103(cc)(2)(G). Proposed comment 36(a)-1.iii 
would have clarified that the definition of ``loan originator'' 
excludes a servicer or a servicer's employees, agents, and contractors 
when offering or negotiating terms of a particular existing debt 
obligation on behalf of the current owner for purposes of 
renegotiating,

[[Page 11308]]

modifying, replacing, or subordinating principal of such a debt where 
the consumer is not current, is in default, or has a reasonable 
likelihood of becoming in default or not current. The Bureau also 
proposed to amend comment 36(a)-1.iii to clarify that Sec.  1026.36 
``only applies to extensions of consumer credit that constitute a 
refinancing under Sec.  1026.20(a). Thus, the rule does not apply if a 
renegotiation, modification, replacement, or subordination of an 
existing obligation's terms occurs, unless it is a refinancing under 
Sec.  1026.20(a).''
    Several industry groups and creditors supported the Bureau's 
approach to not including servicers in the definition of loan 
originator. Industry groups and several large banks stated that the 
final rule should make clear that the definition of loan originator 
does not include individuals facilitating loan modifications, short 
sales, or assumptions. An industry group commenter indicated that the 
final rule should clarify that persons who ``offer'' to modify an 
existing obligation should also not be included in the definition of 
loan originator. Other large banks and industry groups stated that the 
final rule should clarify that servicers include persons who permit a 
new consumer to assume an existing obligation. Furthermore, they 
argued, the exclusion for servicers should apply to companies that, for 
example, pay off a lien on the security property and allow the consumer 
to repay the amount required over time. A large secondary market 
commenter also stated that comment 36(a)-1.iii should be further 
clarified to include circumstances where the servicer is modifying a 
mortgage obligation on behalf of an assignee.
    The Bureau is adopting Sec.  1026.36(a)(1)(i)(E) to implement TILA 
section 103(cc)(2)(G) consistent with the analysis above, as well as 
comment 36(a)-1.iii as proposed with a few minor clarifications to 
address issues raised by several of the commenters. The final rule 
amends comment 36(a)-1.iii to clarify that the exclusion from the 
definition of loan originator for a ``servicer'' also excludes the 
servicer's employees, agents, and contractors. The final rule also 
revises the comment to exclude persons who ``offer'' to modify existing 
obligations from the definition of loan originator. The Bureau is also 
clarifying comment 36(a)-1.iii to exclude servicers that modify the 
obligations on behalf of an assignee or that modify obligations the 
servicer itself holds.
    The Bureau continues to believe, as noted in the supplementary 
information of the proposal, that a formal satisfaction of the 
consumer's existing obligation and replacement by a new obligation is a 
refinancing and not a modification. But, short of refinancing, a 
servicer may modify a mortgage obligation without being considered a 
loan originator. In both a short sale and an assumption, there is no 
new obligation for the consumer currently obligated to repay the debt. 
The existing obligation is effectively terminated from that consumer's 
perspective.
    In a short sale the security property is sold and the existing 
obligation is extinguished. Thus, the Bureau believes that a short sale 
constitutes a modification of the existing obligation assuming it is 
not being replaced by a new obligation on the seller. If the property 
buyer in the short sale receives financing from the person who was 
servicing the seller's obligation, this financing is a new extension of 
credit that is subject to Sec.  1026.36.
    In an assumption, however, a different consumer agrees to take on 
the existing obligation. From this consumer's perspective the existing 
obligation is a new extension of credit. The Bureau believes such 
consumers should be no less protected than the original consumer who 
first became obligated on the transaction. Therefore, assumptions are 
subject to Sec.  1026.36. The Bureau is clarifying comment 36(a)-1.iii 
to provide that persons that agree with a different consumer to accept 
the existing debt obligation are not servicers.
    Regarding the comment that servicers should include persons that 
pay off a lien on the security property and allow the consumer to repay 
the amount required over time, the Bureau generally does not interpret 
the ``servicer'' exclusion from the definition of loan originator to 
apply to such persons. The Bureau believes that, although paying off 
the lien and permitting the consumer to repay it over time is related 
to the existing obligation, such a transaction creates a new debt 
obligation of the consumer to repay the outstanding balance and is not 
a modification of the existing obligation. But whether such a person is 
a servicer also depends on the terms of the note and security 
instrument for the existing obligation. In some instances, under the 
terms of the existing agreement, an advance made by the debt holder to 
protect or maintain the holder's security interest may become part of 
the existing debt obligation in which case such an advance could 
effectively operate to modify the existing obligation by adding to the 
existing debt but not to create a new debt obligation. The Bureau would 
consider persons making advances under these circumstances, in 
accordance with the existing agreement to be servicers.
Real Estate Brokers
    TILA section 103(cc)(2)(D) states that the definition of ``mortgage 
originator'' does not ``include a person or entity that only performs 
real estate brokerage activities and is licensed or registered in 
accordance with applicable State law, unless such person or entity is 
compensated by a lender, a mortgage broker, or other mortgage 
originator or by any agent of such lender, mortgage broker, or other 
mortgage originator.'' As the Bureau stated in the proposal, a real 
estate broker that performs loan origination activities or services as 
described in Sec.  1026.36(a) is a loan originator for the purposes of 
Sec.  1026.36.\68\ The Bureau proposed to add comment 36(a)-1.iv to 
clarify that the term loan originator does not include real estate 
brokers that meet the statutory exclusion in TILA section 
103(cc)(2)(D).
---------------------------------------------------------------------------

    \68\ The Bureau understands that a real estate broker license in 
some States also permits the licensee to broker mortgage loans and 
in certain cases make mortgage loans. The Bureau does not consider 
brokering mortgage loans and making mortgage loans to be real estate 
brokerage activities.
---------------------------------------------------------------------------

    The Bureau stated in the proposal that the text of TILA section 
103(cc)(2)(D) related to payments to a real estate broker ``by a 
lender, a mortgage broker, or other mortgage originator or by any agent 
of such lender, mortgage broker, or other mortgage originator'' is 
directed at payments by such persons in connection with the origination 
of a particular consumer credit transaction secured by a dwelling to 
finance the acquisition or sale of that dwelling (e.g., to purchase the 
dwelling or to finance repairs to the property prior to selling it). If 
real estate brokers are deemed mortgage originators simply by receiving 
compensation from a creditor, then a real estate broker would be 
considered a mortgage originator if the real estate broker received 
compensation from a creditor for reasons wholly unrelated to loan 
origination (e.g., if the real estate broker found new office space for 
the creditor).
    The Bureau also stated in the proposal that it does not believe 
that either the definition of ``mortgage originator'' in TILA section 
103(cc)(2) or the statutory purpose of TILA section 129B(a)(2) to 
``assure consumers are offered and receive residential mortgage loans 
on terms that reasonably reflect their ability to repay the loans and 
that are understandable and not unfair, deception or abusive,'' 
demonstrate that Congress intended the provisions of

[[Page 11309]]

TILA section 129B applicable to mortgage originators to cover real 
estate brokerage activity that is wholly unrelated to a particular real 
estate transaction involving a residential mortgage loan. The Bureau 
concluded that, for a real estate broker to be included in the 
definition of ``mortgage originator,'' the real estate broker must 
receive compensation in connection with performing one or more of the 
three core ``mortgage originator'' activities for a particular consumer 
credit transaction secured by a dwelling such as referring a consumer 
to a mortgage originator or creditor as discussed above (i.e., a 
referral is a component of ``offering'' a residential mortgage loan).
    The Bureau included the following example in the supplementary 
information: Assume XYZ Bank pays a real estate broker for a broker 
price opinion in connection with a pending modification or default of a 
mortgage obligation for consumer A. In an unrelated transaction, 
consumer B compensates the same real estate broker for assisting 
consumer B with finding and negotiating the purchase of a home. 
Consumer B also obtains credit from XYZ Bank to purchase the home. The 
Bureau stated its belief that this real estate broker is not a loan 
originator under these facts. Proposed comment 36(a)-1.iv would have 
clarified this point. The proposed comment would also clarify that a 
payment is not from a creditor, a mortgage broker, other mortgage 
originator, or an agent of such persons if the payment is made on 
behalf of the consumer to pay the real estate broker for real estate 
brokerage activities performed for the consumer.
    The Bureau further noted in the proposal's supplementary 
information that the definition of ``mortgage originator'' in TILA 
section 103(cc)(2)(D) does not include a person or entity that only 
performs real estate brokerage activities and is licensed or registered 
in accordance with applicable State law. The Bureau stated its belief 
that, if applicable State law defines real estate brokerage activities 
to include activities that fall within the definition of loan 
originator in Sec.  1026.36(a), the real estate broker is a loan 
originator when engaged in such activities subject to Sec.  1026.36 and 
is not a real estate broker under TILA section 103(cc)(2)(D). In this 
situation, even though State law defines real estate brokerage 
activities to include loan origination activities, TILA section 
103(cc)(2)(d) excludes only persons who perform real estate brokerage 
activities. A person performing loan origination activities does not 
become a person performing real estate brokerage activities for the 
purposes of TILA section 103(cc)(2)(d) because State law declares such 
loan origination activities to be real estate brokerage activities. The 
Bureau invited comment on this proposed clarification of the meaning of 
``loan originator'' for real estate brokers.
    The Bureau received one comment from a real estate broker trade 
association generally agreeing with the Bureau's interpretation of the 
real estate broker exclusion from the definition of loan originator. 
The association also commented, however, that the Bureau should clarify 
that where a brokerage earns a real estate commission for selling a 
foreclosed property owned by a creditor such compensation does not turn 
real estate brokerage into loan originator activity.
    The Bureau is adopting Sec.  1026.36(a)(1)(i)(C) to implement TILA 
section 103(cc)(2)(D) in accordance with the foregoing principles, as 
well as comment 36(a)-1.iv as proposed with additional clarification 
regarding payments from the proceeds of a credit transaction to a real 
estate agent on behalf of the creditor or seller and with respect to 
sales of properties owned by a loan originator, creditor, or an 
affiliate of a loan originator or creditor. The Bureau agrees that 
where a real estate broker earns a real estate commission only for 
selling a foreclosed property owned by a creditor such compensation 
does not turn real estate brokerage into a loan originator activity. 
But if, for example, a real estate agent was paid compensation by the 
real estate broker, an affiliate of the creditor (e.g., the affiliate 
is a real estate brokerage that pays its real estate agents), for 
taking the consumer's credit application and performing other functions 
related to loan origination, the real estate agent would be considered 
a loan originator when engaging in such activity as set forth in Sec.  
1026.36(a)(1) and comment 36(a)-1.i.A. Accordingly, different parts of 
the commentary may apply depending on the circumstances.
Seller Financers
    As noted above, TILA section 103(cc)(2)(F) and Sec.  1026.36(a)(1) 
generally exclude creditors (other than table-funded creditors) from 
the definition of ``loan originator'' for most purposes under Sec.  
1026.36. Under existing Regulation Z, a person that sells property and 
permits the buyer to pay for the home in more than four installments, 
subject to a finance charge, generally is a creditor under Sec.  
1026.2(a)(17)(i). However, Sec.  1026.2(a)(17)(v) provides that the 
definition of creditor: (1) Does not include a person that extended 
credit secured by a dwelling (other than high-cost mortgages) five or 
fewer times in the preceding calendar year; and (2) does not include a 
person who extends no more than one high-cost mortgage (subject to 
Sec.  1026.32) in any 12-month period. Accordingly, absent special 
provision, certain ``seller financers'' that conduct a relatively small 
number of transactions per year are not ``creditors'' under Regulation 
Z and therefore could be subject to the loan originator compensation 
and other restrictions provided in Sec.  1026.36 when engaging in loan 
origination activities.
    The Dodd-Frank Act specifically addressed this issue in section 
1401, which amended TILA section 103(cc)(2)(E) to provide that the term 
``mortgage originator'' does not include a person, estate, or trust 
that provides mortgage financing in connection with the sale of up to 
three properties in any twelve-month period, each of which is owned by 
the person, estate, or trust and serves as security for the financing, 
but only if the financing meets a set of detailed prescriptions. 
Specifically, such seller-financed credit must:

    (i) Not [be] made by a person, estate, or trust that has 
constructed, or acted as a contractor for the construction of, a 
residence on the property in the ordinary course of business of such 
person, estate, or trust; (ii) [be] fully amortizing; (iii) [be] 
with respect to a sale for which the seller determines in good faith 
and documents that the buyer has a reasonable ability to repay the 
loan; (iv) [have] a fixed rate or an adjustable rate that is 
adjustable after 5 or more years, subject to reasonable annual and 
lifetime limitations on interest rate increases; and (v) meet any 
other criteria the Bureau may prescribe.

    The Bureau proposed comment 36(a)-1.v to implement these criteria. 
The proposed comment provided that the definition of ``loan 
originator'' does not include a natural person, estate, or trust that 
finances in any 12-month period the sale of three or fewer properties 
owned by such natural person, estate, or trust where each property 
serves as security for the credit transaction. It further stated that 
the natural person, estate, or trust also must not have constructed or 
acted as a contractor for the construction of the dwelling in its 
ordinary course of business. The proposed comment also stated that the 
natural person, estate, or trust must determine in good faith and 
document that the buyer has a reasonable ability to repay the credit 
transaction. Finally, the proposed comment stated that the credit 
transaction must be fully amortizing, have a fixed rate or an 
adjustable rate that adjusts only after five or more years, and be 
subject to

[[Page 11310]]

reasonable annual and lifetime limitations on interest rate increases.
    The Bureau also proposed to include further interpretation in the 
comment as to how a person may satisfy the criterion to determine in 
good faith that the buyer has a reasonable ability to repay the credit 
transaction. The comment would have provided that the natural person, 
estate, or trust makes such a good faith determination by complying 
with separate regulations to implement a general requirement under 
section 1411 of the Dodd-Frank Act for all creditors to make a 
reasonable and good faith determination of consumers' ability to repay 
before extending them closed-end mortgage credit. Those regulations, 
which were proposed by the Board in its 2011 ATR Proposal and which the 
Bureau intended to finalize in Sec.  1026.43, contain detailed 
requirements concerning the verification of income, debts, and other 
information; payment calculation rules; and other underwriting 
practices. The Bureau noted that the language of the general obligation 
on creditors to consider consumers' ability to repay in TILA section 
129C(a)(1), largely parallels the ability to repay criterion in the 
seller financer language of TILA section 103(cc)(2)(E), except that the 
general requirement mandates that the evaluation be made on ``verified 
and documented'' information.
    While the Bureau proposed to implement the statutory exclusion, 
however, the Bureau also posited an interpretation in the preamble to 
the proposal that would have excluded many seller financers from the 
definition of ``loan originator'' without having to satisfy the 
statutory criteria. Specifically, the interpretation would have treated 
persons who extend credit as defined under Regulation Z from their own 
resources (i.e., are not engaged in table-funded transactions in which 
they assign the seller financing agreement at consummation) as 
creditors for purposes of the loan originator compensation rules even 
if they were excluded from the first branch of the Regulation Z 
definition of ``creditor'' under Regulation Z's de minimis thresholds 
(i.e., no more than five mortgages generally). 77 FR at 55288. Under 
this interpretation, such persons would not have been subject to the 
requirements for ``loan originators'' under Sec.  1026.36, and still 
would not have been subject to other provisions of Regulation Z 
governing ``creditors.'' Instead, the only seller financers that would 
have been required to show that they satisfied the statutory and 
regulatory criteria were parties that engaged in up to three 
transactions and did not satisfy the second branch of the Regulation Z 
definition of creditor (i.e. made more than one high-cost mortgages per 
year.
    The Bureau received a large number of comments strongly opposing 
the proposed treatment of the seller financer exclusion. These comments 
noted that seller financers are typically natural persons who would be 
unable to satisfy the ability to repay criteria of the proposed 
exclusion given what the commenters viewed as the complexities involved 
in the ability to repay analysis and the fact that consumers obtaining 
seller financing typically do not meet traditional underwriting 
standards. In addition, several commenters stated that the criterion to 
investigate ability to repay may place the seller financer in an unfair 
bargaining position with respect to the real estate transaction because 
the seller financer would have access to the buyer's financial 
information while also negotiating the property sale. Moreover, 
commenters asserted, an average private seller cannot always provide 
financing in compliance with the specific balloon, interest-only, 
introductory period, and amortization restrictions required by the 
proposed exclusion. Some commenters urged that seller financers should 
not be prohibited from financing agreements with these features.
    Many commenters addressed the merits of seller financing in 
general. For example, some commenters noted that seller financing 
creates an opportunity for investors to buy foreclosed properties and 
resell them to buyers who cannot obtain traditional financing, thus 
helping to reduce the inventory of foreclosed properties via options 
unavailable to most creditors and buyers. Commenters additionally 
indicated that seller financing is one of only a few options in some 
cases, especially for first-time buyers, persons newly entering the 
workforce, persons with bad credit due to past medical issues, or where 
traditional creditors are unwilling to take a security interest in the 
property for various reasons. Many of these commenters asserted that 
this exclusion would curtail seller financing. Thus, certain buyers 
would be forced to seek financing from banks unlikely to lend to them, 
and many rural sales would not occur. Others argued that to qualify for 
this exclusion seller financers would need to meet onerous TILA and 
Regulation Z requirements.
    One escrow trade association suggested that the Bureau increase the 
de minimis exemption (regularly extending credit threshold) for the 
definition of creditor to 25 or fewer credit transactions. Other trade 
associations suggested that the Bureau create an exemption for 
occasional seller financing similar to the SAFE Act's de minimis 
exemption for depository institutions or the loan originator business 
threshold for non-depository institutions. Furthermore, these trade 
associations suggested that the Bureau amend Regulation Z to exempt 
anyone from the definition of loan originator who is exempt from the 
licensing and registration requirements of the SAFE Act.
    Many commenters who submitted a comment on the seller financer 
exclusion mistakenly believed that the proposal would amend Regulation 
Z to eliminate exclusions from the definition of creditor for persons 
who do not regularly extend credit and replace such exclusions with the 
exclusion in comment 36(a)-1.v. Many of these commenters also 
mistakenly stated that the exclusion would require all seller financers 
to finance sales of their homes according to the criteria in proposed 
comment 36(a)-1.v.
    In response to comments, the Bureau is adopting the seller financer 
exclusion set forth in the statute in Sec.  1026.36(a)(1)(i)(D), with 
additional clarifications, adjustments, and criteria in Sec.  
1026.36(a)(4) and (a)(5) and associated commentary discussed below.
    In the final rule, persons (including estates or trusts) that 
finance the sale of three or fewer properties in any 12-month period 
would be seller financers excluded from the definition of ``loan 
originator'' if they meet one set of criteria that largely tracks the 
criteria for the mortgage financing exclusion in TILA section 
103(cc)(2)(E). This exclusion is referred to as the ``three-property 
exclusion.'' Upon further consideration the Bureau believes it is also 
appropriate to exclude natural persons, estates, or trusts that finance 
the sale of only one property they own in any 12-month period under a 
more streamlined set of criteria provided in Sec.  1026.36(a)(5). This 
exclusion is referred to as the ``one-property exclusion.'' The Bureau 
is not, however, adopting the interpretation discussed in the proposal 
that would have treated only seller financers that engage in two or 
three high-cost mortgage transactions as being required to demonstrate 
compliance with the requirements of the rule to qualify for the 
exclusion from the definition of loan originator. The criteria for 
satisfying the three- and one-property exclusions are discussed in 
detail in the section-by-section analyses of Sec.  1026.36(a)(4) and 
(5), below.
    As discussed in the proposal, the seller financer exclusion from 
the definition of ``loan originator'' in the

[[Page 11311]]

statute is in addition to exclusions already available under TILA and 
Regulation Z, specifically the exclusion of creditors including seller 
financers that engage in five or fewer such transactions in a calendar 
year. Moreover, the exclusion is only for the purposes of provisions in 
Sec.  1026.36 that apply to loan originators. Any person relying on the 
seller financer exclusion is thereby excluded only from the loan 
originator requirements of Sec.  1026.36 and not the remaining 
requirements of Sec.  1026.36 or other provisions of Regulation Z. For 
example, such a person would still be subject to the restrictions in 
Sec.  1026.36(d) if the person pays compensation to a loan originator. 
Such a person would also have to comply with the Sec.  1026.36(h) 
provision on mandatory arbitration.
    In deciding to adopt two exclusions from the definition of loan 
originator for seller financers, the Bureau looked in part to the 
purposes of the seller financer exclusion in the statute, which the 
Bureau believes was designed primarily to accommodate persons or 
smaller-sized estates or family trusts with no, or less sophisticated, 
compliance infrastructures. Such persons and entities may engage in 
seller financer transactions on just a single or handful of properties, 
making it impracticable for them to develop and apply the types of 
underwriting practices and standards that are used routinely by 
traditional creditors. The Bureau has accordingly attempted to consider 
compliance burden and to calibrate the criteria appropriately to avoid 
unwarranted restrictions on access to responsible, affordable mortgage 
credit from such sources.
    At the same time, the Bureau is also aware of concerns that persons 
or entities have been exploiting the existing exclusion in Sec.  
1026.2(a)(17)(v) of Regulation Z for persons that extend credit secured 
by a dwelling (other than high-cost mortgages) five or fewer times in 
the preceding calendar year, and might do the same with regard to this 
exclusion from the definition of loan originator under Sec.  1026.36. 
In particular, the Bureau has received reports that persons may be 
recruiting multiple individuals or creating multiple entities to extend 
credit for five or fewer such transactions each and then acquiring the 
mortgages shortly after they have been consummated. Such conduct may be 
designed to evade the requirements of Regulation Z. In these 
circumstances, however, the person may in fact be extending credit for 
multiple transactions secured by a dwelling through an intermediary, 
and thus be subject to applicable requirements for creditors and/or 
loan originators under Regulation Z.
Managers, Administrative, or Clerical Staff
    TILA section 103(cc)(2)(C) defines ``mortgage originator'' to 
exclude persons who do not otherwise engage in the core activities 
listed in the originator definition and perform purely administrative 
or clerical tasks on behalf of mortgage originators. Existing comment 
36(a)-4 clarifies that managers, administrative staff, and similar 
individuals who are employed by a creditor or loan originator but do 
not arrange, negotiate, or otherwise obtain an extension of credit for 
a consumer, or whose compensation is not based on whether any 
particular loan is originated, are not loan originators. In the 
proposal, the Bureau stated that it believes the existing comment is 
largely consistent with TILA section 103(cc)(2)(C)'s treatment of 
administrative and clerical tasks.
    The Bureau proposed minor technical revisions to existing comment 
36(a)-4, however, to conform the language more closely to TILA section 
103(cc)(2)C) by including references to ``clerical'' staff and to 
taking applications and offering loan terms. The proposed revisions 
would also clarify that ``producing managers'' who meet the definition 
of a loan originator would be considered loan originators. The Bureau 
further stated in the proposal that producing managers generally are 
managers of an organization (including branch managers and senior 
executives) that, in addition to their management duties, also 
originate transactions subject to Sec.  1026.36. Thus, compensation 
such as salaries, commissions, bonuses, or other financial or similar 
incentives received by producing managers in connection with loan 
origination activities would be subject to the restrictions of Sec.  
1026.36. Non-producing managers (i.e., managers, senior executives, 
etc., who have a management role in an organization including, but not 
limited to, managing loan originators, but who do not otherwise meet 
the definition of loan originator) would not be considered loan 
originators if their compensation is not otherwise based on whether any 
particular loan is originated (i.e., this exclusion from the definition 
of loan originator does not apply to non-producing managers who receive 
compensation based on particular transactions originated by other loan 
originators).
    The Bureau also noted in the proposal that the statutory definition 
of the phrase, ``assists a consumer in obtaining or applying to obtain 
a residential mortgage loan,'' suggests that minor actions--e.g., 
accepting a completed application form and delivering it to a loan 
officer, without assisting the consumer in completing it, processing or 
analyzing the information, or discussing transaction terms--constitute 
administrative and clerical tasks. In such situations, the person is 
not actively aiding or further achieving a completed credit application 
or collecting information on behalf of the consumer specific to a 
mortgage transaction. In the proposal, the Bureau stated its belief 
that this interpretation was also consistent with the exclusion in TILA 
section 103(cc)(2)(C)(i) for certain administrative and clerical 
persons.
    Industry group and creditor commenters addressing proposed comment 
36(a)-4 generally supported the Bureau's proposed revision. However, 
many industry groups and banks sought further clarification regarding 
``producing managers.'' One bank commenter suggested that a manager who 
arranges, negotiates, or otherwise obtains an extension of consumer 
credit for another person but does not receive compensation specific to 
any particular transaction should not be considered a loan originator. 
Another industry association commenter was concerned that the proposal 
did not contain a clear definition of ``producing manager.'' The 
commenter noted that officers and managers need to be involved in loan 
originations from time to time and that their compensation is not 
directly based on such involvement in an individual transaction. 
Another industry association commenter described the issue as defining 
the boundary between a manager engaged in customary credit approval 
functions or setting terms in counter-offer situations, which are more 
akin to underwriting, and a manager actively arranging transactions for 
consumers.
    The Bureau generally agrees that a person who approves credit 
transactions or sets terms of the transaction in counter-offer 
situations is not a loan originator (and also not a ``producing 
manager'')--provided any communication to or with the consumer 
regarding specific transaction terms, an offer, negotiation, a counter-
offer, or approval conditions is made by a qualified loan originator. 
Moreover, persons who make underwriting decisions by receiving and 
evaluating the consumer's information to determine whether the consumer 
qualifies for a particular credit transaction or credit offer are 
considered to be engaged in management, administrative, or clerical 
tasks for the

[[Page 11312]]

purposes of the rule if the persons only advise the loan originator or 
creditor on whether the credit may be extended or purchased and all 
communications to or with the consumer regarding specific transaction 
terms, an offer, negotiation, a counter-offer, or approval conditions 
with the consumer are made by a loan originator. Also, the Bureau 
considers persons who establish pricing that the creditor offers 
generally to the public, via advertisements or other marketing or via 
other persons who are qualified loan originators, to be engaged in 
management, administrative, or clerical tasks rather than loan 
origination activities. The Bureau is providing further clarifications 
on these points accordingly, in comment 36(a)-4.
    The Bureau disagrees with the commenter suggesting that a manager 
who arranges, negotiates, or otherwise obtains an extension of consumer 
credit for another person but does not receive compensation specific to 
any particular transaction should not be considered a loan originator. 
Persons who receive compensation in connection with engaging in such 
loan origination activities, regardless of whether the compensation is 
specific to any particular transaction, are loan originators. For this 
reason, for other reasons discussed with respect to profits-based 
compensation plans and the new qualification and unique document 
identifier requirements in Sec.  1026.36(f) and (g), and for reasons 
related to persons who perform other activities in addition to loan 
origination activities, the Bureau is revising comments 36(a)-1.i, 
36(a)-4, 36(a)-4.v, and 36(a)-5 to clarify further that a person, 
including a manager, who is employed by a loan originator or creditor 
(and thus receives compensation from the employer) and who engages in 
the foregoing loan origination activities is a loan originator. The 
Bureau is therefore removing language referring to performance of loan 
origination activities not in the expectation of compensation because 
it believes that such language created circularity and could cause 
uncertainty in applying the broader definition of ``loan originator.''
    Industry trade associations, large and small banks, and a credit 
union requested in their comment letters further clarification on 
whether certain ``back-office'' loan processing activities would be 
considered assisting a consumer in obtaining or applying to obtain an 
extension of credit and thus included in ``arranging'' or ``otherwise 
obtaining an extension of credit'' for the purposes of the ``loan 
originator'' definition. The Bureau believes that after a loan 
application has been submitted by the consumer to the loan originator 
or creditor, persons who: (1) Provide general explanations or 
descriptions in response to consumer queries, such as explaining credit 
terminology or policies, or describing product-related services; (2) 
verify information provided by the consumer in the credit application, 
such as by asking the consumer for supporting documentation or the 
consumer's authorization to obtain supporting documentation from other 
persons; or (3) compile and assemble credit application packages and 
supporting documentation to submit to the creditor while acting on 
behalf of a loan originator or creditor are not ``arranging'' or 
``otherwise obtaining an extension of credit'' for the purposes of the 
definition of ``loan originator'' as described in more detail above. 
The Bureau is adding specific discussions of these activities to 
comment 36(a)-4.
    Several industry group and bank commenters stated that the final 
rule should not apply to senior employees who assist consumers only 
under limited or occasional circumstances. Similarly, these and other 
industry trade association and bank commenters asserted that the 
definition of loan originator should not include any employees who are 
not primarily and regularly engaged in taking the consumer's 
application and offering or negotiating transaction terms with 
consumers. A large industry trade association commenter and a bank 
commenter indicated that the definition of loan originator should not 
include persons such as managers who originate fewer than a de minimis 
number of transactions per year, i.e., five and twelve mortgages per 
year, respectively.
    The Bureau believes that creating a complete de minimis exclusion 
from the mortgage originator restrictions of the Dodd-Frank Act for any 
person otherwise subject to them and involved in the credit business 
would be inconsistent with the statutory scheme. TILA section 
103(cc)(2) contains a specific, conditional exclusion for seller 
financers who engage in three transactions or less in a 12-month 
period. It seems doubtful that Congress would have made that exclusion 
so limited if it intended other persons who are in the consumer credit 
business to benefit from a general exclusion where they participate in 
a perhaps even greater number of transactions. Unlike the licensing and 
registration provisions of the SAFE Act (12 U.S.C. 5103) for 
depositories and nondepositories respectively, Congress did not provide 
an explicit de minimis exclusion (see 12 U.S.C. 5106(c)) or reference 
individuals engaged in the ``business'' of loan origination in the 
Dodd-Frank Act for the new residential mortgage loan origination 
qualification and compensation requirements in section 129B(b) and (c) 
of TILA. In the Dodd-Frank Act, Congress merely referred to persons 
engaging in mortgage originator activities for compensation or gain 
with one narrow exclusion for seller financers not constructing or 
acting as a contractor for the construction of a residence on the 
property being financed in the ordinary course of business. Given the 
above, the Bureau believes that a narrow exemption for pooled 
compensation, for example, is more appropriate than a wholesale 
exclusion from the definition of loan originator for persons otherwise 
involved with the credit business.
    The Bureau believes that the absence of such an exclusion or 
exemption further demonstrates that Congress intended the definition of 
``mortgage originator'' in TILA, and thus the scope of coverage of 
TILA's compensation, qualification, and loan document unique identifier 
provisions, to be broader than the somewhat similar definition of 
``loan originator'' in the SAFE Act, which sets the scope of coverage 
of the SAFE Act's licensing and registration requirements. The Bureau 
therefore is not including in the final rule an exemption from its 
provisions for persons other than seller financers engaged in a limited 
number of credit transactions per year. The Bureau further believes 
that declining to create such a de minimis exemption for other persons 
provides protections for consumers that outweigh any other public 
benefit that an exemption might provide. However, as discussed in more 
detail in the section-by-section analysis of Sec.  1026.36(d)(1)(iv), 
the Bureau believes that a limited de minimis exemption from the 
prohibition on compensation based on a term of a transaction for 
participation in profits-based compensation plans is appropriate for 
loan originators who originate ten or fewer loans in a twelve-month 
period.
36(a)(1)(ii); 36(a)(1)(iii)
    Certain provisions of TILA section 129B, such as the qualification 
and loan document unique identifier requirements, as well as certain 
new clarifications in the regulation that the Bureau proposed (and now 
is adopting), necessitate a distinction between loan originators who 
are natural persons and those that are organizations. The Bureau 
therefore proposed to establish the distinction by creating new 
definitions

[[Page 11313]]

for ``individual loan originator'' and ``loan originator organization'' 
in new Sec.  1026.36(a)(1)(ii) and (iii). Proposed Sec.  
1026.36(a)(1)(ii) would have defined an individual loan originator as a 
natural person that meets the definition of loan originator in Sec.  
1026.36(a)(1)(i). Proposed Sec.  1026.36(a)(1)(iii), in turn, would 
have defined a loan originator organization as any loan originator that 
is not an individual loan originator.
    The Bureau proposed to revise comment 36(a)-1.i.B to clarify that 
the term ``loan originator organization'' is a loan originator other 
than a natural person, including but not limited to a trust, sole 
proprietorship, partnership, limited liability partnership, limited 
partnership, limited liability company, corporation, bank, thrift, 
finance company, or a credit union. As discussed in the supplementary 
information of the proposed rule, the Bureau understands that States 
have recognized many new business forms over the past 10 to 15 years. 
The Bureau believed that the additional examples provided in the 
proposal should help to facilitate compliance with Sec.  1026.36 by 
clarifying the types of persons that fall within the definition of 
``loan originator organization.'' The Bureau invited comment on whether 
other examples would be helpful for these purposes.
    The Bureau received very few comments on the proposed definitions 
for individual loan originator and loan originator organization. One 
creditor commenter thought that the additional definitions would add 
further complexity to describe the various persons acting in the 
mortgage market. This commenter thought the proposal should return to 
the definitions that existed in the TILA and Regulation Z framework 
prior to issuance by the Board of its 2010 Loan Originator Final Rule. 
That is, this commenter argued, the Bureau should use the terms 
``individual loan originator'' or ``individual loan officer'' and 
either ``mortgage broker'' or ``creditor'' as appropriate.
    The Bureau is adopting Sec.  1026.36(a)(1)(ii) and (iii) as 
proposed. The Bureau is also adopting comment 36(a)-1.i.B largely as 
proposed but with the further clarification that ``loan originator 
organization'' includes any legal existence other than a natural 
person. The comment is also adopted in comment 36(a)-1.i.D instead of 
comment 36(a)-1.i.B as proposed. The Bureau is using the terms 
``individual loan originator'' and ``loan originator organization'' to 
facilitate use of the Bureau's authority to permit loan originator 
organizations to share compensation on a particular transaction with 
individual loan originators. Moreover, creditors occasionally act as 
mortgage brokers and are considered loan originators in their own right 
for purposes of the qualification and unique identifier provisions in 
Sec.  1026.36(f) and (g). Accordingly, the Bureau believes use of the 
terms is appropriate and necessary to allow greater precision and to 
facilitate compliance with the statutory and regulatory requirements.
36(a)(2) Mortgage Broker
    TILA section 129B(b)(1) imposes new substantive requirements on all 
mortgage originators, including creditors involving qualification 
requirements and the requirement to include a unique identifier on loan 
documents, which the Bureau is proposing to implement in Sec.  
1026.36(f) and (g). The compensation restrictions applicable to loan 
originators in existing Sec.  1026.36 also applied to creditors engaged 
in table-funded transactions. Existing Sec.  1026.36(a)(2) defines 
``mortgage broker'' as ``any loan originator that is not an employee of 
the creditor.'' This definition would include creditors engaged in 
table-funded transactions. The Bureau therefore proposed a conforming 
amendment to exclude creditors for table-funded transactions from the 
definition of ``mortgage broker'' even though for certain purposes such 
creditors are loan originators to accommodate the new qualification and 
unique identifier requirements. Proposed Sec.  1026.36(a)(2) provided 
that a mortgage broker is ``any loan originator that is not a creditor 
or the creditor's employee.''
    The Bureau did not receive any comment on this proposal. The 
Bureau, however, is not revising the definition of ``mortgage broker'' 
as proposed. The revisions made by this final rule to the definition of 
``loan originator'' in Sec.  1026.36(a)(1)(i) accommodate creditors 
engaged in table-funded transactions and other creditors for the 
purposes of applying the new substantive requirements in Sec.  
1026.36(f) and (g) and the remaining requirements of Sec.  1026.36 
generally. Conforming amendments to existing Sec.  1026.36(a)(2) are no 
longer necessary.
36(a)(3) Compensation
    Sections 1401 and 1403 of the Dodd-Frank Act contain multiple 
references to the term ``compensation'' but do not define the term. The 
existing rule does not define the term in regulatory text. Existing 
comment 36(d)(1)-1, however, provides interpretation on the meaning of 
compensation.
Definition of Compensation and Comment 36(a)-5.i and ii
    Existing comment 36(d)(1)-1.i provides that the term 
``compensation'' includes salaries, commissions, and any financial or 
similar incentive provided to a loan originator that is based on any of 
the terms or conditions of the loan originator's transactions. The 
Bureau proposed to define the term ``compensation'' in new Sec.  
1026.36(a)(3) to include ``salaries, commissions, and any financial or 
similar incentive provided to a loan originator for originating 
loans,'' intending this definition to be consistent with the 
interpretation in the existing commentary in 36(d)(1)-1.i, as explained 
in the proposal. Consistent with this proposed definition, proposed 
comment 36(a)-5.i stated that compensation is defined in Sec.  
1026.36(a)(3) as salaries, commissions, and any financial or similar 
incentive provided to a person for engaging in loan origination 
activities. Existing comment 36(d)(1)-1.i also provides examples of 
compensation, and those provisions would have been transferred to 
proposed comment 36(a)-5.i without revision.
    Existing comment 36(d)(1)-1.ii clarifies that compensation includes 
amounts the loan originator retains and is not dependent on the label 
or name of any fee imposed in connection with the transaction. The 
Bureau proposed to transfer these provisions to new proposed comment 
36(a)-5.ii without revision.
    To clarify the intent of the definition of compensation, the final 
rule revises the definition in Sec.  1026.36(a)(3) to include 
``salaries, commissions, and any financial or similar incentive'' 
without specifying ``provided to a loan originator for originating 
loans.'' The Bureau believes that the definition of ``compensation'' 
adopted in the final rule is more consistent with the intent and 
wording of the existing interpretation on the meaning of compensation 
set forth in existing comment 36(d)(1)-1.i, and is less circular when 
viewed in conjunction with the definition of ``loan originator.'' 
Consistent with the definition of ``compensation'' as adopted in Sec.  
1026.36(a)(3), the final rule revises comment 36(a)-5.i to reflect that 
compensation is defined in Sec.  1026.36(a)(3) as salaries, 
commissions, and any financial or similar incentive. The final rule 
also revises comment 36(a)-5.ii to reflect that the definition of 
compensation in Sec.  1036(a)(3) applies to Sec.  1026.36 generally, 
including Sec.  1026.36(d) and (e).

[[Page 11314]]

Third-Party Charges and Charges for Services That Are Not Loan 
Origination Activities
    Existing comment 36(d)(1)-1.iii provides that compensation includes 
amounts the loan originator retains, but does not include amounts the 
originator receives as payments for bona fide and reasonable third-
party charges, such as title insurance or appraisals. The Bureau 
proposed to revise existing comment 36(d)(1)-1.iii (redesignated as 
proposed comment 36(a)-5.iii) to make more clear that the term ``third 
party'' does not include the creditor, its affiliates, or the 
affiliates of the loan originator. Specifically, proposed comment 
36(a)-5.iii would have clarified that the term ``compensation'' as used 
in Sec.  1026.36 does not include amounts a loan originator receives as 
payment for bona fide and reasonable charges, such as credit reports, 
where those amounts are not retained by the loan originator but are 
paid to a third party that is not the creditor, its affiliate, or the 
affiliate of the loan originator.
    The proposed revisions would have been consistent with provisions 
set forth in TILA section 129B(c)(2) concerning exceptions to the 
general prohibition on dual compensation for payments made to bona fide 
third-party service providers, as added by section 1403 of the Dodd-
Frank Act. Specifically, TILA section 129B(c)(2)(A) provides that, for 
any mortgage loan,\69\ a mortgage originator generally may not receive 
from any person other than the consumer any origination fee or charge 
except bona fide third-party charges not retained by the creditor, the 
mortgage originator, or an affiliate of either. Likewise, no person, 
other than the consumer, who knows or has reason to know that a 
consumer has directly compensated or will directly compensate a 
mortgage originator, may pay a mortgage originator any origination fee 
or charge except bona fide third-party charges as described above. In 
addition, TILA section 129B(c)(2)(B) provides that a mortgage 
originator may receive an origination fee or charge from a person other 
than the consumer if, among other things, the mortgage originator does 
not receive any compensation directly from the consumer. As discussed 
in more detail in the section-by-section analysis of Sec.  
1026.36(d)(2), the proposal interpreted ``origination fee or charge'' 
to mean compensation that is paid in connection with the transaction, 
such as commissions that are specific to, and paid solely in connection 
with, the transaction.
---------------------------------------------------------------------------

    \69\ TILA section 129B(c)(2) uses the term ``mortgage loan'' 
rather than the ``residential mortgage loan'' used in TILA section 
129B(c)(1), which generally prohibits compensation from being paid 
to loan originators based on loan terms. Nonetheless, the Bureau 
believes that the restrictions in TILA section 129B(c)(2) are 
limited to ``residential mortgage loans'' because TILA section 
129B(c)(2) applies to mortgage originators. The definition of 
``mortgage originator'' in TILA section 103(cc)(2) generally means a 
person who for compensation takes a residential mortgage loan 
application; assists a consumer in obtaining or applying to obtain a 
residential mortgage loan, or offers or negotiates terms of a 
residential mortgage loan.
---------------------------------------------------------------------------

    Nonetheless, TILA section 129B(c)(2) does not prevent a mortgage 
originator from receiving payments from a person other than the 
consumer for bona fide third-party charges not retained by the 
creditor, mortgage originator, or an affiliate of either, even if the 
mortgage originator also receives loan originator compensation directly 
from the consumer. For example, assume that a mortgage originator 
receives compensation directly from a consumer in a transaction. TILA 
section 129B(c)(2) does not restrict the mortgage originator from 
receiving payment from a person other than the consumer (e.g., a 
creditor) for bona fide charges, such as title insurance or appraisals, 
where those amounts are not retained by the loan originator but are 
paid to a third party that is not the creditor, its affiliate, or the 
affiliate of the loan originator.
    Consistent with TILA section 129B(c)(2), under proposed Sec.  
1026.36(d)(2)(i) and proposed comment 36(a)-5.iii, a loan originator 
that receives compensation directly from a consumer would not have been 
restricted under proposed Sec.  1026.36(d)(2)(i) from receiving a 
payment from a person other than the consumer for bona fide and 
reasonable charges where those amounts are not retained by the loan 
originator but are paid to a third party that is not the creditor, its 
affiliate, or the affiliate of the loan originator. In addition, a loan 
originator would not be deemed to be receiving compensation directly 
from a consumer for purposes of proposed Sec.  1026.36(d)(2)(i) where 
the originator imposes such a bona fide and reasonable third-party 
charge on the consumer.
    Like existing comment 36(d)(1)-1, proposed comment 36(a)-5.iii also 
would have recognized that, in some cases, amounts received for payment 
for such third-party charges may exceed the actual charge because, for 
example, the loan originator cannot determine with accuracy what the 
actual charge will be before consummation. In such a case, under 
proposed comment 36(a)-5.iii, the difference retained by the originator 
would not have been deemed compensation if the third-party charge 
collected from a person other than the consumer was bona fide and 
reasonable, and also complies with State and other applicable law. On 
the other hand, if the loan originator marks up a third-party charge 
and retains the difference between the actual charge and the marked-up 
charge, the amount retained would have been compensation for purposes 
of Sec.  1026.36(d) and (e).
    Proposed comment 36(a)-5.iii, like existing comment 36(d)(1)-1.iii, 
would have contained two illustrations. The illustrations in proposed 
comment 36(a)-5.iii.A and B would have been similar to the ones 
contained in existing comment 36(d)(1)-1.iii.A and B except that the 
illustrations would have been amended to clarify that the charges 
described in those illustrations are not paid to the creditor, its 
affiliates, or the affiliate of the loan originator. The proposed 
illustrations also would have simplified the existing illustrations.
    The Bureau solicited comment on proposed comment 36(a)-5.iii. 
Specifically, the Bureau requested comment on whether the term 
``compensation'' should exclude payment from the consumer or from a 
person other than the consumer to the loan originator, as opposed to a 
third party, for certain unambiguously ancillary services rather than 
core loan origination services, such as title insurance or appraisal, 
if the loan originator, creditor or the affiliates of either performs 
those services, so long as the amount paid for those services is bona 
fide and reasonable. The Bureau further solicited comment on how such 
ancillary services might be described clearly enough to distinguish 
them from the core origination charges that would not be excluded under 
such a provision.
    Several industry commenters suggested that the definition of 
``compensation'' in Sec.  1026.36(a)(3) should exclude payments to loan 
originators for services other than core loan origination services, 
such as title insurance or appraisal, regardless of whether the loan 
originator, creditor, or affiliates of either are providing these 
services, so long as the amount charged for those services are bona 
fide and reasonable. Other industry commenters suggested that the 
Bureau specifically exclude bona fide and reasonable affiliate fees 
from the definition of ``compensation'' in Sec.  1026.36(a)(3). These 
commenters argued that there is no basis for a distinction between 
affiliate and non-affiliate charges. These commenters also argued that 
a requirement that both affiliate and non-affiliate charges be bona 
fide and reasonable would be sufficient to

[[Page 11315]]

protect consumers. In addition, several commenters stated that 
affiliated business arrangements are expressly permitted and regulated 
by RESPA. One commenter further argued that the Bureau's proposal 
discourages the use of affiliates, which undercuts a goal of the 
Bureau's 2012 TILA-RESPA Proposal to increase certainty around the 
costs imposed by affiliated providers by providing for a zero tolerance 
for settlement charges of affiliated entities. Another commenter stated 
that fees paid to affiliated parties for services such as property 
insurance, home warranties (both service contract and insurance 
products), and similar services should be excluded from the definition 
of ``compensation'' in the same manner as third-party charges. The 
commenter stated that all of these types of services relate to the 
purchase of a home, and are traditionally purchased or maintained 
regardless of whether the home purchase is financed. Therefore, the 
commenter suggested that these types of services are clearly not 
related to core loan origination services, i.e., taking an application, 
assisting in obtaining a loan, or offering/negotiating loan terms.
    Certain industry commenters also expressed particular concern that 
affiliated title charges were not explicitly excluded from the 
definition of ``compensation.'' These commenters stated that there is 
no rational basis for not explicitly excluding affiliated title charges 
from the definition of ``compensation'' because, for example, title 
insurance fees are regulated at the State level either through 
statutorily prescribed rates or through a requirement that title 
insurance premiums be publicly filed. These commenters noted that, as a 
result of State regulation, there is little variation in title 
insurance charges from provider to provider and such charges are not 
subject to manipulation. In a variation of the argument that the Bureau 
generally should exclude affiliate charges from the definition of 
``compensation,'' some industry commenters suggested that the Bureau 
should adopt a specific exclusion for affiliates' title fees to the 
extent such fees are otherwise regulated at the State level, or to the 
extent that such charges are reasonable and do not exceed the cost for 
an unaffiliated issuers title insurance.
    With respect to third-party charges, the final rule adopts comment 
36(a)-5.iii substantially as proposed, except that the interpretation 
discussing situations where the amounts received for payment for third-
party charges exceeds the actual charge has been moved to comment 
36(a)-5.v, as discussed in more detail below. The Bureau notes that 
comment 36(a)-5.iii uses the term ``bona fide and reasonable'' to 
describe third-party charges. As in the 2013 ATR Final Rule and 2013 
HOEPA Final Rule, in response to commenters' concerns that the 
``reasonableness'' of third-party charges may be second-guessed, the 
Bureau notes its belief that the fact that a transaction for such 
third-party services is conducted arms-length ordinarily should be 
sufficient to make the charge reasonable.
    In addition, based on comments received and the Bureau's own 
analysis, the final rule revises comment 36(a)-5.iv to clarify whether 
payments for services that are not loan origination activities are 
compensation under Sec.  1026.36(a)(3). As adopted in the final rule, 
comment 36(a)-5.iv.A clarifies that the term ``compensation'' for 
purposes of Sec.  1026.36(a)(3) does not include: (1) A payment 
received by a loan originator organization for bona fide and reasonable 
charges for services it performs that are not loan origination 
activities; (2) a payment received by an affiliate of a loan originator 
organization for bona fide and reasonable charges for services it 
performs that are not loan origination activities; or (3) a payment 
received by a loan originator organization for bona fide and reasonable 
charges for services that are not loan origination activities where 
those amounts are not retained by the loan originator organization but 
are paid to the creditor, its affiliate, or the affiliate of the loan 
originator organization. Comment 36(a)-5.iv.C as adopted clarifies that 
loan origination activities for purposes of that comment means 
activities described in Sec.  1026.36(a)(1)(i) (e.g., taking an 
application, offering, arranging, negotiating, or otherwise obtaining 
an extension of consumer credit for another person) that would make a 
person performing those activities for compensation a loan originator 
as defined in Sec.  1026.36(a)(1)(i).
    The Bureau recognizes that loan originator organizations or their 
affiliates may provide services to consumers that are not loan 
origination activities, such as title insurance, if permitted by State 
and other applicable law. If the term ``compensation'' for purposes of 
Sec.  1026.36(a)(3) were applied to include amounts paid by the 
consumer or a person other than the consumer for services that are not 
loan origination activities, the loan originator organization or its 
affiliates could be restricted under Sec.  1026.36(d)(1) and (d)(2) 
from being paid for those services. For example, assume a loan 
originator organization provides title insurance services to consumers 
and that title insurance is required on a transaction and thus is a 
term of the transaction under Sec.  1026.36(d)(1)(ii). In addition, 
assume the loan originator organization receives compensation from the 
creditor in a transaction. If compensation for purposes of Sec.  
1026.36(a)(3) included amounts paid for these services by consumers to 
the loan originator organization, the payment of the charge to the loan 
originator organization for title insurance services would be 
prohibited by Sec.  1026.36(d)(1) because the amount of the loan 
originator organization's compensation would increase based on a term 
of the transaction, namely the fact that the consumer received the 
title insurance services from the loan originator instead of a third 
party. In addition, the loan originator organization would be 
prohibited by the dual compensation provisions in Sec.  1026.36(d)(2) 
(redesignated as Sec.  1026.36(d)(2)(i)) from both collecting the title 
insurance fee from the consumer, and also receiving compensation from 
the creditor for this transaction.
    Likewise, assume the same facts, except that the loan originator 
organization's affiliate provided the title insurance services to the 
consumer. The amount of any payment to the affiliate directly or 
through the loan originator organization for the title insurance would 
be considered compensation to the loan originator organization because 
under Sec.  1026.36(d)(3) the loan originator organization and its 
affiliates are treated as a single person. Thus, if compensation for 
purposes of Sec.  1026.36(a)(3) included amounts paid for the title 
insurance services to the affiliate, the affiliate could not receive 
payment for the title insurance services without the loan originator 
organization violating Sec.  1026.36(d)(1) and (d)(2).
    The Bureau also recognizes that loan originator organizations may 
receive payment for services that are not loan origination activities 
where those amounts are not retained by the loan originator but are 
paid to the creditor, its affiliate, or the affiliate of the loan 
originator organization. For example, assume a loan originator 
organization receives compensation from the creditor in a transaction. 
Further assume the loan originator organization collects from the 
consumer $25 for a credit report provided by an affiliate of the 
creditor, and this fee is bona fide and reasonable. Assume also that 
the $25 for the credit report is paid by the consumer to the loan 
originator organization but the loan originator organization does not 
retain this $25.

[[Page 11316]]

Instead, the loan originator organization pays the $25 to the 
creditor's affiliate for the credit report. If the term 
``compensation'' for purposes of Sec.  1026.36(a)(3) included amounts 
paid by the consumer or a person other than the consumer for such 
services that are not loan origination activities, the loan originator 
organization would be prohibited by Sec.  1026.36(d)(2) (redesignated 
as Sec.  1026.36(d)(2)(i)) from both collecting this $25 fee from the 
consumer, and also receiving compensation from the creditor for this 
transaction.
    The Bureau believes that it is appropriate for loan originator 
organizations and their affiliates to receive payments for services 
that are not loan origination activities, as described above, so long 
as the charge imposed on the consumer or collected from a person other 
than the consumer for these services is bona fide and reasonable. The 
Bureau believes that the bona fide and reasonable standards will 
provide sufficient protection to prevent loan originator organizations 
from circumventing the restrictions in Sec.  1026.36(d)(1) and (2) by 
disguising compensation for loan origination activities within 
ancillary service charges.
    The Bureau notes, however, that the final rule does not allow 
individual loan originators to distinguish between payments they 
receive for performing loan origination activities and payments 
purportedly being received for performing other activities. Comment 
36(a)-5.iv.B as adopted in the final rule makes clear that compensation 
includes any salaries, commissions, and any financial or similar 
incentive provided to an individual loan originator, regardless of 
whether it is labeled as payment for services that are not loan 
origination activities. The Bureau believes that allowing individual 
loan originators to distinguish between these two types of payments 
would promote circumvention of the restrictions on compensation in 
Sec.  1026.36(d)(1) and (2). For example, if an individual loan 
originator were allowed to exclude from the definition of 
``compensation'' payments to it by the loan originator organization by 
asserting that this payment was received for performing activities that 
are not loan origination activities, a loan originator organization 
and/or the individual loan originator could disguise compensation for 
loan origination activities by simply labeling those payments as 
received for activities that are not loan origination activities. The 
Bureau believes that it would be difficult for compliance and 
enforcement purposes to determine whether the payments that were 
labeled as received for activities that are not loan origination 
activities were legitimate payment for those activities or whether 
these payments were labeled as payments for activities that are not 
loan origination activities merely to evade the restrictions in Sec.  
1026.36(d)(1) and (2).
    The Bureau further notes that the additional interpretation in 
comment 36(a)-5.iv as adopted in the final rule does not permit a loan 
originator organization or an individual loan originator to receive 
compensation based on whether the consumer obtains an ancillary service 
from the loan originator organization or its affiliate if that service 
is a term of the transaction under Sec.  1026.36(d)(1). For example, 
assume that title insurance is required for a transaction and thus is a 
term of the transaction under Sec.  1026.36(d)(1)(ii). In this case, a 
loan originator organization would be prohibited under Sec.  
1026.36(d)(1) from charging the consumer compensation of 1.0 percent of 
the loan amount if the consumer obtains title insurance from the loan 
originator organization, but charging the consumer 2.0 percent of the 
loan amount if the consumer does not obtain title insurance from the 
loan originator organization. Likewise, in that transaction, an 
individual loan originator would be prohibited under Sec.  
1026.36(d)(1) from receiving a larger amount of compensation from the 
loan originator organization if the consumer obtained title insurance 
from the loan originator organization as opposed to obtaining title 
insurance from a third party.
    As discussed above, the final rule moves the interpretation in 
proposed comment 36(a)-5.iii discussing situations where the amounts 
received for payment for third-party charges exceeds the actual charge 
to comment 36(a)-5.v, and revises it. The final rule also extends this 
interpretation to amounts received by the loan originator organization 
for payment for services that are not loan origination activities where 
those amounts are not retained by the loan originator but are paid to 
the creditor, its affiliate, or the affiliate of the loan originator 
organization.
    Specifically, as discussed above, comment 36(a)-5.iii as adopted in 
the final rule clarifies that the term ``compensation'' as used in 
Sec.  1026.36 does not include amounts a loan originator receives as 
payment for bona fide and reasonable charges, such as credit reports, 
where those amounts are not retained by the loan originator but are 
paid to a third party that is not the creditor, its affiliate, or the 
affiliate of the loan originator. In addition, comment 36(a)-5.iv.A.3 
clarifies that compensation does not include the amount the loan 
originator organization receives as payment for bona fide and 
reasonable charges for services that are not loan origination 
activities where those amounts are not retained by the loan originator 
but are paid to the creditor, its affiliate, or the affiliate of the 
loan originator organization. Comment 36(a)-5.v notes that, in some 
cases, amounts received by the loan originator organization for payment 
for third-party charges described in comment 36(a)-5.iii or payment for 
services to the creditor, its affiliates, or the affiliates of the loan 
originator organization described in comment 36(a)-5.iv.A.3 may exceed 
the actual charge because, for example, the loan originator 
organization cannot determine with accuracy what the actual charge will 
be when it is imposed and instead uses average charge pricing (in 
accordance with RESPA). In such a case, comment 36(a)-5.v provides that 
the difference retained by the loan originator organization is not 
compensation if the charge imposed on the consumer or collected from a 
person other than the consumer was bona fide and reasonable, and also 
complies with State and other applicable law. On the other hand, if the 
loan originator organization marks up the charge (a practice known as 
``upcharging''), and the loan originator organization retains the 
difference between the actual charge and the marked-up charge, the 
amount retained is compensation for purposes of Sec.  1026.36, 
including Sec.  1026.36(d) and (e). Comment 36(a)-5.v as adopted in the 
final rule contains two examples illustrating this interpretation.
Returns on Equity Interests and Dividends on Equity Holdings
    In the proposal, the Bureau proposed new comment 36(a)-5.iv to 
clarify that the definition of compensation for purposes of Sec.  
1026.36(d) and (e) includes stock, stock options, and equity interests 
that are provided to individual loan originators and that, as a result, 
the provision of stock, stock options, or equity interests to 
individual loan originators is subject to the restrictions in Sec.  
1026.36(d) and (e). The proposed comment would have further clarified 
that bona fide returns or dividends paid on stock or other equity 
holdings, including those paid to loan originators who own such stock 
or equity interests, are not considered compensation for purposes of 
Sec.  1026.36(d) and (e). The comment would have explained that: (1) 
Bona fide returns or dividends are those

[[Page 11317]]

returns and dividends that are paid pursuant to documented ownership or 
equity interests allocated according to capital contributions and where 
the payments are not mere subterfuges for the payment of compensation 
based on transaction terms; and (2) bona fide ownership or equity 
interests are ownership or equity interests not allocated based on the 
terms of a loan originator's transactions. The comment would have given 
an example of a limited liability company (LLC) loan originator 
organization that allocates its members' respective equity interests 
based on the member's transaction terms; in that instance, the 
distributions are not bona fide and, thus, are considered compensation 
for purposes of Sec.  1026.36(d) and (e). The Bureau stated that it 
believed the clarification provided by proposed comment 36(a)-5.iv was 
necessary to distinguish legitimate returns on ownership from returns 
on ownership in companies that manipulate business ownership structures 
as a means to circumvent the restrictions on compensation in Sec.  
1026.36(d) and (e).
    The Bureau invited comment on proposed comment 36(a)-5.iv and on 
whether other forms of corporate structure or returns on ownership 
interest should have been specifically addressed in the definition of 
``compensation.'' The Bureau also sought comment generally on other 
methods of providing incentives to loan originators that the Bureau 
should have considered specifically addressing in the proposed 
interpretation of the term ``compensation.'' The Bureau received only 
one comment substantively addressing the issues raised in the proposed 
comment. A State credit union trade association commented that the 
proposed redefinition of compensation to include stock, stock options, 
and equity interests that are provided to individual loan originators 
would ``exponentially'' increase the cost of record retention because, 
the commenter argued, the records must be retained for each individual 
loan originator. The association believed the proposed three-year 
retention requirement in Sec.  1026.25(c)(2) would not otherwise be 
problematic but for the revised definition of compensation.
    The Bureau has not made any changes in response to this commenter. 
The Bureau disagrees with the commenter that the proposed redefinition 
of compensation to include stock, stock options, and equity interests 
that are provided to individual loan originators would increase the 
costs of record retention at all, let alone an ``exponential'' amount. 
The Bureau believes that records evidencing the award of stock and 
stock options are no more difficult and expensive to retain than 
records evidencing payment of cash compensation, particularly if such 
awards are made pursuant to a stock options plan or similar company-
wide plan. Moreover, the awarding of equity interests to an individual 
loan originator by a creditor or loan originator organization 
presumably would be documented by an LLC agreement or similar legal 
document, which can be easily and inexpensively retained (as can the 
records of any distributions made under the LLC or like agreement).
    Accordingly, the Bureau is adopting the substance of proposed 
comment 36(a)-5.iv (but codified as comment 36(a)-5.vi because of 
additional new comments being adopted) as proposed, with two changes. 
First, comment 36(a)-5.vi references ``loan originators'' rather than 
``individual loan originators'' whereas the proposal language used such 
terms inconsistently. Reference to ``loan originators'' is appropriate 
to account for the possibility that the comment could, depending on the 
circumstances, apply to a loan originator organization or an individual 
loan originator. Second, comment 36(a)-5.vi now includes an additional 
clarification about what constitutes ``bona fide'' ownership and equity 
interests. The proposed comment would have clarified that the term 
``compensation'' for purposes of Sec.  1026.36(d) and (e) does not 
include bona fide returns or dividends paid on stock or other equity 
holdings. The proposed comment would have clarified further that 
returns or dividends are ``bona fide'' if they are paid pursuant to 
documented ownership or equity interests, if they are not functionally 
equivalent to compensation, and if the allocation of bona fide 
ownership and equity interests according to capital contributions is 
not a mere subterfuge for the payment of compensation based on 
transaction terms. In addition to these clarifications which the Bureau 
is adopting as proposed, the final comment clarifies that ownership and 
equity interests are not ``bona fide'' if the formation or maintenance 
of the business organization from which returns or dividends are paid 
is a mere subterfuge for the payment of compensation based on the terms 
of transactions. The Bureau believes this additional language is 
necessary to prevent evasion of the rule through the use of 
corporations, LLCs, or other business organizations as vehicles to pass 
through payments to loan originators that otherwise would be subject to 
the restrictions of Sec.  1026.36(d) and (e).
36(a)(4) Seller Financers; Three Properties
    In support of the exclusion for seller financers in Sec.  
1026.36(a)(1)(i)(D) discussed above, under the statute's exclusion 
incorporated with clarifications, adjustments, and additional criteria 
into the rule as the three-property exclusion in Sec.  1026.36(a)(4), a 
person (as defined in Sec.  1026.2(a)(22), to include an estate or 
trust) that meets the criteria in Sec.  1026.36(a)(4) is not a loan 
originator under Sec.  1026.36(a)(1).\70\ In Sec.  1026.36(a)(4) the 
Bureau has largely preserved the statutory criteria for the seller 
financer exclusion but with some alternatives to reduce complexity and 
facilitate compliance, while balancing the needs of consumers, 
including by adding three additional criteria.
---------------------------------------------------------------------------

    \70\ The Bureau's proposal would have implemented the seller 
financer exclusion in TILA section 103(cc)(2)(E) to be available 
only to ``natural persons,'' estates, and trusts. See 77 FR at 
55288, 55357. As discussed below, the three-property exclusion in 
the final rule is available to ``persons,'' estates, and trusts, 
consistent with the language in TILA section 103(cc)(2)(E). 
``Person'' is defined in Sec.  1026.2(a)(22) to mean ``a natural 
person or an organization, including a corporation, partnership, 
proprietorship, association, cooperative, estate, trust, or 
government unit.'' See also 15 U.S.C. 1602(d) and (e). The Bureau is 
not including the words ``estate'' and ``trust'' in the three-
property exclusion, as the term ``person'' includes estates and 
trusts. In contrast, the one-property exclusion in the final rule is 
available only to ``natural persons,'' estates, and trusts.
---------------------------------------------------------------------------

    The first criterion is that the person provides seller financing 
for the sale of three or fewer properties in any 12-month period to 
purchasers of such properties, each of which is owned by the person and 
serves as security for the financing. This criterion tracks the 
introductory language of TILA section 103(cc)(2)(E).
    The second criterion is that the person has not constructed, or 
acted as a contractor for the construction of, a residence on the 
property in the ordinary course of business of the person. This 
criterion tracks TILA section 103(cc)(2)(E)(i).
    The third criterion is that the person provides seller financing 
that meets three requirements: First, the financing must be fully 
amortizing. This requirement tracks TILA section 103(cc)(2)(E)(ii). 
Second, the person must determine in good faith that the consumer has a 
reasonable ability to repay. The language of this requirement largely 
tracks TILA section 103(cc)(2)(E)(iii). It departs from the statute, 
however, in that it does not require documentation of the good faith

[[Page 11318]]

determination. Where seller financers retain such documentation, they 
will be able to respond to questions that could arise as to their 
compliance with TILA and Regulation Z. However, pursuant to its 
authority under TILA section 105(a), the Bureau is not adopting a 
requirement that the seller document the good faith determination. The 
Bureau believes that the statute's exclusion is designed primarily to 
accommodate persons or smaller-sized estates or family trusts with no, 
or less sophisticated, compliance infrastructures. If technical 
recordkeeping violations were sufficient to jeopardize a person's 
status as a seller financer, this could limit the value of the 
exclusion. Accordingly, the Bureau believes that alleviating such 
burdens for seller financers will effectuate the purposes of TILA by 
ensuring that responsible, affordable mortgage credit remains available 
to consumers and will facilitate compliance by seller financers.
    The third requirement of this third criterion is that the financing 
have a fixed rate or an adjustable rate that is adjustable after five 
or more years, subject to reasonable annual and lifetime limitations on 
interest rate increases. This requirement largely tracks TILA section 
103(cc)(2)(E)(iv). However, the Bureau believes that, for the financing 
to have reasonable annual and lifetime limitations on interest rate 
increases, the foundation upon which those limitations is based must 
itself be reasonable. This requirement can be met if the index is 
widely published. Accordingly, the final rule also provides: (1) If the 
financing agreement has an adjustable rate, the rate must be determined 
by the addition of a margin to an index and be subject to reasonable 
rate adjustment limitations; and (2) the index on which the adjustable 
rate is based must be a widely available index such as indices for U.S. 
Treasury securities or LIBOR. The Bureau is interpreting and adjusting 
the criterion in TILA section 103(cc)(2)(E)(iv) using its authority 
under TILA section 105(a). The Bureau believes its approach effectuates 
the purposes of TILA in ensuring consumers are offered and receive 
consumer credit that is understandable and not unfair, deceptive or 
abusive. To the extent the additional provisions could be considered 
additional criteria, the Bureau is also exercising its authority under 
TILA section 103(cc)(2)(E)(v) to add additional criteria.
    The Bureau is adding a new comment 36(a)(4)-1 to explain how a 
person can meet the criterion on a good faith determination of ability 
to repay under the three-property exclusion. It provides that the 
person determines in good faith that the consumer has a reasonable 
ability to repay the obligation if the person either complies with 
general ability-to-repay standards in Sec.  1026.43(c) or complies with 
alternative criteria described in the comment.
    The Bureau is providing the option of making the good faith 
determination of ability to repay based on alternative criteria using 
its interpretive authority under TILA section 105(a) and section 1022 
of the Dodd-Frank Act. The Bureau believes that many seller financers 
who may occasionally finance the sales of properties they own may not 
be in a position feasibly to comply with all of the requirements of 
Sec.  1026.43(c) in meeting the criterion in TILA section 
103(cc)(2)(E)(iii). As discussed above, the Bureau believes that the 
statute's exclusion is designed primarily to accommodate persons or 
smaller-sized estates or family trusts with no, or less sophisticated, 
compliance infrastructures. Furthermore, providing alternative 
standards to meet this criterion will help ensure that responsible, 
affordable seller financing remains available to consumers consistent 
with TILA section 129B(a)(1).
    New comment 36(a)(4)-1 explains how a person could consider the 
consumer's income to make the good faith determination of ability to 
repay. If the consumer intends to make payments from income, the person 
considers evidence of the consumer's current or reasonably expected 
income. If the consumer intends to make payments with income from 
employment, the person considers the consumer's earnings, which may be 
reflected in payroll statements or earnings statements, IRS Form W-2s 
or similar IRS forms used for reporting wages or tax withholding, or 
military Leave and Earnings Statements. If the consumer intends to make 
payments from other income, the person considers the consumer's income 
from sources such as from a Federal, State, or local government agency 
providing benefits and entitlements. If the consumer intends to make 
payments from income earned from assets, the person considers income 
from the relevant assets, such as funds held in accounts with financial 
institutions, equity ownership interests, or rental property. However, 
the value of the dwelling that secures the financing does not 
constitute evidence of the consumer's ability to repay. In considering 
these and other potential sources of income to determine in good faith 
that the consumer has a reasonable ability to repay the obligation, the 
person making that determination may rely on copies of tax returns the 
consumer filed with the IRS or a State taxing authority.
    New comment 36(a)(4)-2 provides safe harbors for the criterion that 
a seller financed adjustable rate financing be subject to reasonable 
annual and lifetime limitations on interest rate increases. New comment 
36(a)(4)-2.i. provides that an annual rate increase of two percentage 
points or less is reasonable. New comment 36(a)(4)-2.ii. provides that 
a lifetime limitation of an increase of six percentage points or less, 
subject to a minimum floor of the person's choosing and maximum ceiling 
that does not exceed the usury limit applicable to the transaction, is 
reasonable.
36(a)(5) Seller Financers; One Property
    In support of the exclusion for seller financers in Sec.  
1026.36(a)(1)(i)(D) discussed above, the Bureau is further establishing 
criteria for the one-property exclusion in Sec.  1026.36(a)(5). The 
Bureau has attempted to implement the statutory exclusion in a way that 
effectuates congressional intent, but remains concerned that the 
exclusion is fairly complex. The Bureau understands that natural 
persons, estates, and trusts that rarely engage in seller financing may 
engage in such transactions a few times during their lives in the case 
of natural persons or perhaps not more than once for estates or family 
trusts. For this reason, and given the complexities commenters 
highlighted of the seller financer exclusion in the statute, the Bureau 
is establishing an additional exclusion where only one property is 
financed in a given 12-month period.
    Under the exclusion incorporated into the final rule as the one-
property exclusion in Sec.  1026.36(a)(5), a natural person, an estate, 
or a trust (but not other persons) that meets the criteria in that 
paragraph is not a loan originator under Sec.  1026.36(a)(1). The first 
criterion is that the natural person, estate, or trust provides seller 
financing for the sale of only one property in any 12-month period to 
purchasers of such property, which is owned by the natural person, 
estate, or trust and serves as security for the financing. This 
criterion is similar to the introductory language of TILA section 
103(cc)(2)(E), except that rather than a three-property maximum per 12-
month period, the one-property exclusion uses a one-property maximum 
per 12-month period.
    The second criterion is that the natural person, estate, or trust 
has not constructed, or acted as a contractor for the construction of, 
a residence on the property in the ordinary course of

[[Page 11319]]

business of the person, estate or trust. Again, this criterion tracks 
TILA section 103(cc)(2)(E)(i).
    The third criterion is that the financing meet two requirements: 
First, the financing must have a repayment schedule that does not 
result in negative amortization. This requirement is narrower than the 
criterion in TILA section 103(cc)(2)(E)(ii), which requires that the 
financing be fully amortizing, not just that it does not result in 
negative amortization. The second requirement parallels the third 
criterion's third requirement for the three-property exclusion, 
described above, with regard to credit terms. Specifically, consistent 
with TILA section 103(cc)(2)(E)(iv), the financing must have a fixed 
rate or an adjustable rate that is adjustable after five or more years, 
subject to reasonable annual and lifetime limitations on interest rate 
increases. Further, if the financing agreement has an adjustable rate, 
the rate must be determined by the addition of a margin to an index and 
be subject to reasonable rate adjustment limitations. In addition, the 
index on which the adjustable rate is based must be a widely available 
index such as indices for U.S. Treasury securities or LIBOR. The Bureau 
has also adopted comment 36(a)(5)-1 to provide the same safe harbors 
regarding adjustable rate financing as apply under the three-property 
exclusion as discussed above with respect to the one-property 
exclusion.
    The Bureau believes that the one-property exclusion is appropriate 
because natural persons, estates, or trusts that may finance the sales 
of properties not more than once in a 12-month period (and perhaps only 
a few times in a lifetime) are not in a position to comply with all of 
the requirements of Sec.  1026.43(c) or even the alternative criteria 
under the three-property exclusion discussed above in meeting the 
criterion in TILA section 103(cc)(2)(E)(iii). Accordingly, the Bureau 
believes this exclusion will help ensure that responsible, affordable 
seller financing remains available to consumers consistent with TILA 
section 129B(a)(1). Natural persons, trusts, and estates using this 
exclusion do not need to comply with the criteria in TILA section 
103(cc)(2)(E) to be excluded from the definition of loan originator 
under Sec.  1026.36(a)(1) as seller financers.
    In creating the exclusion, the Bureau is relying on its authority 
under TILA section 105(a) to prescribe rules providing adjustments and 
exceptions necessary or proper to facilitate compliance with and 
effectuate the purposes of TILA. At the same time, to the extent the 
Bureau is imposing other criteria that are not in TILA section 
103(cc)(2)(E) on natural persons, trusts, and estates using this 
exclusion, the Bureau is exercising its authority under TILA section 
105(a) to impose additional requirements the Bureau determines are 
necessary or proper to effectuate the purposes of TILA or to facilitate 
compliance therewith. The Bureau also has authority to impose 
additional criteria under TILA section 103(cc)(2)(E)(v). The Bureau 
believes that any risk of consumer harm under the one-property 
exclusion is not appreciably greater than the risk under the three-
property exclusion.
36(b) Scope
Scope of Transactions Covered by Sec.  1026.36
    This rulemaking implements new TILA sections 129B(b)(1) and (2) and 
(c)(1) and (2) and 129C(d) and (e), as added by sections 1402, 1403, 
and 1414(a) of the Dodd-Frank Act. TILA section 129B(b)(1) and (2) and 
(c)(1) and (2) requires that loan originators be ``qualified;'' that 
depository institutions maintain policies and procedures to ensure 
compliance with various requirements; restrictions on loan originator 
compensation; and restrictions on the payment of upfront discount 
points and origination points or fees with respect to ``residential 
mortgage loans.'' TILA section 129B(c)(2) applies to mortgage 
originators engaging in certain activities with respect to ``any 
mortgage loan'' but for reasons discussed above, the Bureau interprets 
TILA section 129B(c)(2) to only apply to residential mortgage loans. 
TILA section 103(cc)(5) defines a ``residential mortgage loan'' as 
``any consumer credit transaction that is secured by a mortgage, deed 
of trust, or other equivalent consensual security interest on a 
dwelling or on residential real property that includes a dwelling, 
other than a consumer credit transaction under an open end credit 
plan'' or a time share plan under 11 U.S.C. 101(53D). TILA section 
129C(d) and (e) impose prohibitions on mandatory arbitration and 
single-premium credit insurance for residential mortgage loans or any 
extension of credit under an open-end consumer credit plan secured by 
the principal dwelling of the consumer.
    The Bureau proposed to recodify Sec.  1026.36(f) as Sec.  
1026.36(j) to accommodate new Sec.  1026.36(f), (g), (h), and (i). The 
Bureau also proposed to amend Sec.  1026.36(j) to reflect the scope of 
coverage for the proposals implementing TILA sections 129B (except for 
129B(c)(3)) and 129C(d) and (e), as added by sections 1402, 1403, and 
1414(a) of the Dodd-Frank Act, as discussed further below.
    The proposal would have applied, in Sec.  1026.36(h), the new 
prohibition on mandatory arbitration clauses, waivers of Federal 
claims, and related issues mandated by TILA section 129C(e) and, in 
Sec.  1026.36(i), the new prohibition on financing single-premium 
credit insurance mandated by TILA section 129C(e) both to home equity 
lines of credit (HELOCs), as defined by Sec.  1026.40, and closed-end 
credit transactions secured by the consumer's principal dwelling. In 
contrast, the proposal would have amended Sec.  1026.36(j) to apply the 
new loan originator qualification and loan document identification 
requirements in TILA section 129B(b), as implemented in new Sec.  
1026.36(f) and (g), to closed-end consumer credit transactions secured 
by a dwelling (which is broader than the consumer's principal 
dwelling), but not to HELOCs. This scope of coverage would have been 
the same as the scope of transactions covered by Sec.  1026.36(d) and 
(e) (governing loan originator compensation and the prohibition on 
steering), which coverage the proposal would not have amended. The 
proposal also would have made technical revisions to comment 36-1 to 
reflect these scope-of-coverage changes.
    A mortgage broker association and several mortgage brokers and 
mortgage bankers submitted similar comments specifically stating that 
the Bureau should exempt all prime, traditional, and government credit 
products from the compensation regulations while retaining restrictions 
for high-cost and subprime mortgages. These commenters suggested that 
the exemption would eliminate any incentive for placing a prime 
qualified consumer in a high-cost mortgage for the purpose of greater 
financial gain.
    A State housing finance authority submitted a comment requesting 
that the Bureau exempt products developed by and offered through 
housing finance agencies. The commenter stated that it developed credit 
products for at-or-below median income households and poorly served 
rural communities and assisted repairing and remediating code 
violations in urban centers. The commenter further stated that its 
products addressed unmet needs in the marketplace, including energy 
efficiency and repair credit, partnership credit programs with Habitat 
for Humanity, rehabilitation credit programs for manufactured housing, 
down-payment and closing cost

[[Page 11320]]

assistance programs for first-time homebuyers, and employee assistance 
programs for affordable homes near work.\71\
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    \71\ The same commenter noted that HUD expressly exempted 
housing finance agencies from the SAFE Act based on HUD's finding 
that these agencies ``carry out housing finance programs * * * 
without the purpose of obtaining profit.'' The SAFE Act applies only 
to individuals who engage ``in the business of a loan originator.'' 
See 12 U.S.C. 1504(a). The Dodd-Frank Act does not similarly require 
a nexus to business activity.
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    The Bureau believes that in most cases exempting certain credit 
products would be contrary to the Dodd-Frank Act compensation 
restrictions that apply to all mortgage loans regardless of the product 
type or the social or economic goals advanced by the creditor or loan 
originator organization. Section 1026.36(d) applies to all closed-end 
consumer credit secured by a dwelling except for certain time share-
secured transactions and does not make a distinction between whether a 
credit transaction is prime or subprime. The specific mortgage 
originator compensation restrictions and qualification requirements in 
TILA section 129B added by the Dodd-Frank Act do not specify different 
treatment on the basis of credit transaction type.\72\ The Bureau 
believes that, regardless of the type of mortgage product being sold or 
its value to consumers, the policy of ensuring that the loan originator 
is qualified and trained is still relevant. The Bureau likewise 
believes that, regardless of the product type, consumers are entitled 
to protection from loan originators with conflicting interests and thus 
that the restrictions on compensating the loan originator based on 
transaction terms and on dual compensation are relevant across-the 
board. Accordingly, the Bureau declines to create distinctions between 
credit products in setting forth this rulemaking's scope of coverage.
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    \72\ Moreover, the statement of Congressional findings in the 
Dodd-Frank Act accompanying the amendments to TILA that are the 
subject of this rulemaking supports the application of the 
rulemaking provisions to the prime mortgage market. Congress 
explained that it found ``that economic stabilization would be 
enhanced by the protection, limitation, and regulation of the terms 
of residential mortgage credit and the practices related to such 
credit, while ensuring that responsible, affordable mortgage credit 
remains available to consumers.'' Section 1402 of the Dodd-Frank Act 
(TILA section 129B(a)(1). This statement does not distinguish 
different types of credit products.
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    The Bureau received a comment noting discrepancies among the 
supplementary information, regulation text, and commentary regarding 
Sec.  1026.36(h) and (i). The Bureau is finalizing the scope provisions 
as proposed but adopting proposed Sec.  1026.36(j) as Sec.  1026.36(b) 
with the heading, ``Scope'' and providing in Sec.  1026.36(b) and 
comment 36-1 (now redesignated comment 36(b)-1) that Sec.  1026.36(h) 
and (i) also applies to closed-end consumer credit transactions secured 
by a dwelling. The Bureau believes that organizing the scope section 
after the definitions section in Sec.  1026.36(a) and providing a 
heading will facilitate compliance by making the scope and coverage of 
the rule easier to discern. The Bureau notes that, to determine the 
scope of coverage for any particular substantive provision in Sec.  
1026.36, the applicable scope of coverage provision in Sec.  
1026.36(b), the scope of coverage in comment 36(b)-1, and the 
substantive regulatory provision itself must be read together. The 
Bureau's redesignation of comment 36-1 to comment 36(b)-1 should 
additionally facilitate compliance by making the scope and coverage of 
the rule easier to discern.
    To the extent there is any uncertainty in TILA sections 129B 
(except for (c)(3)) and 129C(d) and (e) regarding which provisions 
apply to different types of transactions, the Bureau relies on its 
interpretive authority under TILA section 105(a).
Consumer Credit Transaction Secured by a Dwelling
    Existing Sec.  1026.36 applies the section's coverage to ``a 
consumer credit transaction secured by a dwelling.'' TILA section 129B 
uses the term ``residential mortgage loan'' for the purpose of 
determining the applicability of the provisions of this rulemaking. 
TILA section 103(cc)(5) defines a ``residential mortgage loan'' as 
``any consumer credit transaction that is secured by a mortgage, deed 
of trust, or other equivalent consensual security interest on a 
dwelling or on residential real property that includes a dwelling, 
other than a consumer credit transaction under an open end credit 
plan.'' The proposal would have continued to use ``consumer credit 
transaction secured by a dwelling'' and would not have adopted 
``residential mortgage loan'' in Sec.  1026.36.
    Existing Sec.  1026.2(a)(19) defines ``dwelling'' to mean ``a 
residential structure that contains one to four units, whether or not 
that structure is attached to real property. The term includes an 
individual condominium unit, cooperative unit, mobile home, and 
trailer, if it is used as a residence.'' In the proposal, the Bureau 
explained that the definition of ``dwelling'' in Sec.  1026.2(a)(19) 
was consistent with the meaning of dwelling in the definition of 
``residential mortgage loan'' in TILA section 103(cc)(5). The Bureau 
proposed to interpret ``dwelling'' also to include dwellings in various 
stages of construction. Consumer credit to finance construction is 
often secured by dwellings in this fashion. The Bureau proposed to 
maintain this definition of dwelling.
    The Bureau did not receive comment on its intention to continue to 
use consumer credit transaction secured by a dwelling or its 
interpretation of a dwelling. The Bureau continues to believe that 
changing the terminology of ``consumer credit transaction secured by a 
dwelling'' to ``residential mortgage loan'' is unnecessary because the 
same meaning would be preserved. Accordingly, the Bureau is adopting 
Sec.  1026.36(b) as proposed.
36(d) Prohibited Payments to Loan Originators
    Section 1026.36(d) contains the core restrictions on loan 
originator compensation in this final rule. Section 1026.36(d)(1) 
generally prohibits compensation based on the terms of the transaction, 
other than credit amount. This section is designed to address 
incentives that could cause a loan originator to steer consumers into 
particular credit products or features to increase the loan 
originator's own compensation. Section 1026.36(d)(2) generally 
prohibits loan originators from receiving compensation in connection 
with a transaction from both the consumer and other persons (dual 
compensation), and is designed to address potential consumer confusion 
about loan originator loyalty where a consumer pays an upfront fee but 
does not realize that the loan originator may also be compensated by 
the creditor. Each of these prohibitions is similar to one first 
enacted in the Board's 2010 Loan Originator Final Rule. Congress 
largely codified similar prohibitions in the Dodd-Frank Act, with some 
adjustments; this final rule reconciles certain differences between the 
statutory and regulatory provisions.
36(d)(1) Payments Based on a Term of a Transaction
    As discussed earlier, section 1403 of the Dodd-Frank Act added new 
TILA section 129B(c). This new statutory provision builds on, but in 
some cases imposes new or different requirements than, the existing 
Regulation Z provisions restricting compensation based on credit terms 
established by the 2010 Loan Originator Final Rule.\73\

[[Page 11321]]

Currently, Sec.  1026.36(d)(1)(i), which was added to Regulation Z by 
the 2010 Loan Originator Final Rule, provides that, in connection with 
a consumer credit transaction secured by a dwelling, ``no loan 
originator shall receive and no person shall pay to a loan originator, 
directly or indirectly, compensation in an amount that is based on any 
of the transaction's terms or conditions.'' \74\ Section 
1026.36(d)(1)(ii) states that the amount of credit extended is not 
deemed to be a transaction term or condition, provided that 
compensation received by or paid to a loan originator, directly or 
indirectly, is based on a fixed percentage of the amount of credit 
extended; the provision also states that such compensation may be 
subject to a minimum or maximum dollar amount. With certain 
adjustments, discussed below, the Dodd-Frank Act generally codifies 
these provisions in new TILA section 129B(c)(1). Specifically, new TILA 
section 129B(c)(1) provides that, ``[f]or any residential mortgage 
loan, no mortgage originator shall receive from any person and no 
person shall pay to a mortgage originator, directly or indirectly, 
compensation that varies based on the terms of the loan (other than the 
amount of the principal).'' 12 U.S.C. 1639b(c)(1).
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    \73\ The Board issued that final rule after passage of the Dodd-
Frank Act, but acknowledged that a subsequent rulemaking would be 
necessary to implement TILA section 129B(c). See 75 FR 58509 (Sept. 
24, 2010).
    \74\ In adopting this restriction, the Board noted that 
``compensation payments based on a loan's terms or conditions create 
incentives for loan originators to provide consumers loans with 
higher interest rates or other less favorable terms, such as 
prepayment penalties.'' 75 FR 58509, 58520 (Sept. 24, 2010). The 
Board cited ``substantial evidence that compensation based on loan 
rate or other terms is commonplace throughout the mortgage industry, 
as reflected in Federal agency settlement orders, congressional 
hearings, studies, and public proceedings.'' Id. Among the Board's 
stated concerns was that ``creditor payments to brokers based on the 
interest rate give brokers an incentive to provide consumers loans 
with higher interest rates. Large numbers of consumers are simply 
not aware this incentive exists.'' 75 FR 58509, 58511 (Sept. 24, 
2010). The Board adopted this prohibition based on its finding that 
compensating loan originators based on a loan's terms or conditions, 
other than the amount of credit extended, is an unfair practice that 
causes substantial injury to consumers. 75 FR 58509, 58520 
(September 24, 2010). The Board stated that it was relying on 
authority under TILA section 129(l)(2) (since redesignated as 
section 129(p)(2)) to prohibit acts or practices in connection with 
mortgage loans that it finds to be unfair or deceptive. Id.
---------------------------------------------------------------------------

    In addition, Congress set forth ``rules of construction'' in new 
TILA section 129B(c)(4). This provision states, among other things, 
that nothing in section 129B(c) of TILA shall be construed as 
``permitting yield spread premium or other similar compensation that 
would, for any residential mortgage loan, permit the total amount of 
direct and indirect compensation from all sources permitted to a 
mortgage originator to vary based on the terms of the loan (other than 
the amount of the principal).'' 12 U.S.C. 1639b(c)(4)(A).\75\ This 
provision also states that nothing in TILA section 129B(c) prohibits 
incentive payments to a mortgage originator based on the number of 
residential mortgage loans originated within a specified period of 
time, which is generally consistent with the interpretation provided in 
existing comment 36(d)(1)-3.\76\ 12 U.S.C. 1639b(c)(4)(D).
---------------------------------------------------------------------------

    \75\ Congress did not define ``yield spread premium.'' However, 
as discussed elsewhere in this notice, the Bureau is interpreting 
this term to mean compensation for loan originators that is 
calculated and paid as a premium above every $100 in principal.
    \76\ Existing comment 36(d)(1)-3 clarifies that the loan 
originator's overall loan volume delivered to the creditor is an 
example of permissible compensation for purposes of the regulation.
---------------------------------------------------------------------------

    These provisions of new TILA section 129B(c) differ from the 
existing regulations in a key respect: they expand the scope of the 
restrictions on loan originator compensation from transactions in which 
any person other than the consumer pays the loan originator to all 
residential mortgage loans. Under the 2010 Loan Originator Final Rule, 
transactions in which the consumer pays compensation directly to a loan 
originator organization are not subject to the restrictions, so the 
amount of the compensation may be based on the terms and conditions of 
the transaction.
    The proposal sought to implement new TILA section 129B by amending 
Sec.  1026.36(d) to reflect the fact that the Dodd-Frank Act applies 
the ban on compensation based on terms to all residential mortgage 
loans and to further harmonize the existing regulation's language with 
the statute's language. The Bureau also took the opportunity to address 
a number of interpretive questions about the 2010 Loan Originator Final 
Rule that have been frequently raised by industry with both the Board 
and the Bureau.
36(d)(1)(i)
    As noted above, section 1403 of the Dodd-Frank Act generally 
codifies the baseline rule in existing Sec.  1026.36(d). As the Bureau 
described in the proposal, however, the new statutory provisions differ 
from the existing regulatory provisions in three primary respects. 
First, unlike existing Sec.  1026.36(d)(1)(iii), the statute does not 
contain an exception to the general prohibition on varying compensation 
based on terms for transactions where the mortgage originator receives 
compensation directly from the consumer. Second, while existing Sec.  
1026.36(d)(1) prohibits compensation that is based on a transaction's 
``terms or conditions,'' TILA section 129B(c)(1) refers only to 
compensation that varies based on ``terms.'' Third, existing Sec.  
1026.36(d)(1)(i) provides that the loan originator may not receive and 
no person shall pay compensation in an amount ``that is based on'' any 
of the transaction's terms or conditions, whereas TILA section 
129B(c)(1) prohibits compensation that ``varies based on'' the terms of 
the loan.
Prohibition Against Payments Based on a Term of a Transaction
    Existing Sec.  1026.36(d)(1) provides that no loan originator shall 
receive and no person shall pay to a loan originator, directly or 
indirectly, compensation in an amount that is based on any of the 
transaction's terms or conditions. Similarly, new TILA section 
129B(c)(1) prohibits mortgage originators from receiving or being paid, 
directly or indirectly, compensation that varies based on the terms of 
the transaction. However, neither TILA nor existing Regulation Z 
defines a transaction's terms.
    The Board realized that the compensation prohibition in Sec.  
1026.36(d)(1) could be circumvented by compensating a loan originator 
based on a substitute factor that is not a transaction term or 
condition but effectively mimics a transaction term or condition. 
Existing comment 36(d)(1)-2 further clarifies that compensation based 
on a proxy for a term or condition of a transaction is also prohibited. 
The comment explains that compensation based on the consumer's credit 
score or similar representation of credit risk, such as the consumer's 
debt-to-income ratio is not one of the transaction's terms or 
conditions. However, if compensation varies in whole or in part with a 
factor that serves as a proxy for transaction terms or conditions, the 
compensation is deemed to be based on a transaction's terms or 
conditions.
    The Board and the Bureau have each received numerous inquiries on 
whether compensation based on various specified factors would be 
compensation based on a proxy for a term or condition of a transaction 
and thus prohibited. Based on the volume of questions received about 
the existing compensation prohibition and the commentary concerning 
proxies, the Bureau recognized in the proposal that this issue had 
become a significant source of confusion and uncertainty. The Bureau 
responded by proposing to revise Sec.  1026.36(d)(1)(i), comment 
36(d)(1)-2, and related commentary to

[[Page 11322]]

remove the term ``conditions'' and to clarify the meaning of proxy. 
Specifically, the proposal outlined a multi-stage analysis, starting 
first with a determination of whether a loan originator's compensation 
is ``based on'' a transaction's terms. If so, such compensation would 
generally violate Sec.  1026.36(d)(1)(i). If not, the second inquiry is 
whether compensation is based on a proxy for a transaction's terms. The 
proposal would have subjected a factor to a two-part test to determine 
if it is a prohibited proxy for a loan term. First, whether the factor 
substantially correlates with a term or terms of the transaction is 
analyzed. Second, whether the loan originator can, directly or 
indirectly, add, drop, or change the factor when originating the 
transaction. The Bureau also specifically solicited comment on the 
issue of transaction terms and proxies, alternatives to the Bureau's 
proposal, and whether any action to revise the proxy concept and 
analysis would be helpful and appropriate. 77 FR at 55293.
    As discussed further below, the Bureau is retaining this multi-
stage analysis in the final rule, with additional clarifications, 
examples, and commentary based on the comments and additional analysis. 
In response to the comments received, however, the Bureau has 
recognized that two additions would provide useful clarification and 
facilitate compliance. Accordingly, the Bureau is not only finalizing 
the multi-stage proxy analysis, but amending the regulation to define 
what is a ``term of a transaction'' in the first instance and providing 
additional commentary listing several compensation methods that are 
expressly permitted under the statute and regulation without need for 
application of a proxy analysis. The Bureau believes that this 
additional clarification will significantly reduce uncertainty 
regarding permissible and impermissible compensation methods, while 
maintaining critical safeguards against evasion of the Dodd-Frank Act 
mandate.
    Specifically, the final rule amends Sec.  1026.36(d)(1)(i) to 
prohibit compensation based on ``a term of a transaction,'' amends 
Sec.  1026.36(d)(1)(ii) to define that term to mean ``any right or 
obligation of the parties to a credit transaction,'' and makes 
conforming amendments to remove the term ``conditions'' from related 
regulatory text and commentary.
    The Bureau is also amending comment 36(d)(1)-1.iii to provide 
further clarification of this definition. Under comment 36(d)(1)-1.iii, 
the Bureau interprets ``credit transaction'' as the operative acts 
(e.g., the consumer's purchase of certain goods or services essential 
to the transaction) and written and oral agreements that, together, 
create the consumer's right to defer payment of debt or to incur debt 
and defer its payment. For the purposes of Sec.  1026.36(d)(1)(ii), 
this means: (1) The rights and obligations, or part of any rights or 
obligations, memorialized in a promissory note or other credit 
contract, as well as the security interest created by a mortgage, deed 
of trust, or other security instrument, and in any document 
incorporated by reference in the note, contract, or security 
instrument; (2) the payment of any loan originator or creditor fees or 
charges imposed on the consumer, including any fees or charges financed 
through the interest rate; and (3) the payment of any fees or charges 
imposed on the consumer, including any fees or charges financed through 
the interest rate, for any product or service required to be obtained 
or performed as a condition of the extension of credit. The potential 
universe of fees and charges as described above that could be included 
in the definition of a term of a transaction is limited to any of those 
required to be disclosed in either or both the Good Faith Estimate and 
the HUD-1 (or HUD-1A) and subsequently in any TILA and RESPA integrated 
disclosures promulgated by the Bureau as required by the Dodd-Frank 
Act.
    The Bureau believes the statutory text of TILA evidences a 
Congressional intent to define ``credit transaction'' within the 
definition of ``residential mortgage loan'' to include not only the 
note, security instrument and any document incorporated by reference 
into the note or security instrument but also any product or service 
required as a condition of the extension of credit. TILA section 
129B(c)(1) prohibits compensation ``that varies based on the terms of 
the [residential mortgage] loan.'' TILA section 103(cc)(5) defines 
``residential mortgage loan'' to mean ``any consumer credit transaction 
that is secured by a mortgage, deed of trust, or other equivalent 
consensual security interest on a dwelling or on residential real 
property that includes a dwelling'' other than certain specified forms 
of credit. TILA section 103(f) defines ``credit'' as ``the right 
granted by a creditor to a debtor to defer payment of debt or to incur 
debt and defer its payment.'' In other words, any product or service 
the creditor requires the acquisition or performance of prior to 
granting the right to the consumer to defer payment of debt or to incur 
debt and defer its payment (i.e., required as a condition of the 
extension of credit) is also included in the definition.
    Moreover, express Congressional support for including any product 
or service required as a condition of the extension credit in the 
definition of a term of a transaction can be found in TILA section 
103(cc)(2)(C) and (cc)(4). Both provisions contain this phrase: ``* * * 
loan terms (including rates, fees, and other costs)'' (emphasis added). 
The Bureau believes that fees and costs charged by the loan originator 
or creditor for the credit, or for a product or service provided by the 
loan originator or creditor related to the extension of that credit, 
impose additional costs on the consumer and thus are ``loan terms.'' 
The Bureau is not including other costs paid by the consumer as part of 
the overall transaction (i.e., the Bureau is not including costs other 
than those required as a condition of the extension of credit in the 
definition), because such costs are not part of the ``credit 
transaction'' and thus are not a term of a ``residential mortgage 
loan.'' For example, costs not included in a term of a transaction for 
the purposes of the final rule could include charges for owner's title 
insurance or fees paid by a consumer to an attorney representing the 
consumer's interests.
    Attempts to evade the prohibition on compensation based on a term 
of the transaction could be made by paying the loan originator based on 
whether a product or service has been purchased and not based on the 
amount of the fee or charge for it. The Bureau believes that payment 
based on whether the underlying product or service was purchased is 
equivalent to paying based on the existence of a fee or the charge. 
That is, payment based on either the amount of the fee or charge or the 
existence of a fee or charge would be payment based on a term of the 
transaction.
    To reduce uncertainty and facilitate compliance, the Bureau is 
limiting the universe of potential fees or charges that could be 
included in the definition of a term of the transaction to any fees or 
charges required to be disclosed in either or both the Good Faith 
Estimate and the HUD-1 (or HUD-1A) (and subsequently in any TILA-RESPA 
integrated disclosure promulgated by the Bureau). Moreover, to 
facilitate compliance, the Bureau believes the fees or charges that 
meet the definition of a term of a transaction should be readily 
identifiable under an existing regulatory regime or a regime that loan 
originators and creditors will be complying with in the future (i.e., 
the upcoming TILA-RESPA integrated disclosure regime). To

[[Page 11323]]

the extent there is any uncertainty regarding the definition of ``loan 
terms'' or ``consumer credit transaction'' in TILA section 
103(cc)(2)(C), (cc)(4), and (cc)(5), the Bureau relies on its 
interpretive authority and authority to prevent circumvention or 
evasion and facilitate compliance under TILA section 105(a).
    Thus, any provision or part of a provision included in the note or 
the security instrument or any document incorporated by reference that 
creates any right or obligation of the consumer or the creditor 
effectively is a term of the transaction. For example, the consumer's 
promise to pay interest at a yearly rate of X percent is a term of the 
transaction. The rate itself is also a term of the transaction. The 
existence of a prepayment penalty or the specific provision or part of 
the provision describing the prepayment penalty in the note 
additionally is a term of the transaction.
    Any provision set forth in riders to the note or security 
instrument such as covenants creating rights or obligations in an 
adjustable rate rider, planned unit development, second home, 
manufactured home, or condominium rider are also included. For example, 
a provision in a condominium rider requiring the consumer to perform 
all of the consumer's obligations under the condominium project's 
constituent documents is a term of a transaction. The name of the 
planned unit development is also a term of the transaction if it is 
part of the creditor's right described in the planned unit development 
rider to secure performance of the consumer's promise to pay.
    Any loan originator or creditor fee or charge imposed on the 
consumer for the credit or for a product or service provided by the 
loan originator or creditor that is related to the extension of that 
credit, including any fee or charge financed through the interest rate, 
is a term of a transaction. Thus, points, discount points, document 
fees, origination fees, and mortgage broker fees imposed on consumers 
are terms of a transaction. Also, if a creditor performs the appraisal 
or a second appraisal, and charges an appraisal fee, the appraisal fee 
is a term of the transaction regardless of whether it is required as a 
condition of the extension of credit if the appraisal is related to the 
credit transaction (i.e., the appraisal is for the dwelling that 
secures the credit). Fees and charges for goods obtained or services 
performed by the loan originator or creditor in a ``no cost'' loan 
where the fees and charges are financed through the interest rate 
instead of paid directly by the consumer at closing are also terms of 
the transaction.
    Moreover, any fees or charges for any product or service required 
to be obtained or performed as a condition of the extension of credit 
are also terms of a transaction. For example, creditors often require 
consumers to purchase hazard insurance or a creditor's title insurance 
policy. The amount charged for the insurance or the purchase of the 
underlying insurance policy itself is a term of the transaction if the 
policy is required as a condition of the extension of credit.
    Comment 36(d)(1)-2 explains that, among other things, the interest 
rate, annual percentage rate, collateral type (e.g., condominium, 
cooperative, detached home, or manufactured housing), and the existence 
of a prepayment penalty are terms of a transaction for purposes of 
Sec.  1026.26(d)(1). As discussed below, this comment also provides 
interpretations about permissible compensation factors that are neither 
terms of a transaction nor proxies for such terms under Sec.  
1026.36(d)(1).
    The Bureau recognizes that, under Sec.  1026.36(d)(1), a term of a 
transaction could also include, for example, creditor requirements that 
a consumer pay a recording fee for the county recording certain credit 
transaction documents, maintain an escrow account, or pay any upfront 
fee or charge as a condition of the extension of credit. Thus, the 
requirement for a consumer to pay recording fees or taxes to the county 
for the recording service as a condition of the extension of credit 
would be considered a term of a transaction. But, as with many other 
terms of the transaction, the requirement to pay recording taxes under 
this scenario would not likely present a risk of violating the 
prohibition against compensation based on a term of a transaction 
because a person typically would not compensate a loan originator based 
on whether the consumer paid recording taxes to the county.
    As noted above, compensation paid to a loan originator organization 
directly by a consumer (i.e., mortgage broker fees imposed on the 
consumer) is a term of a transaction under Sec.  1026.36(d)(1)(ii). As 
a result, the Bureau is concerned that Sec.  1026.36(d)(1) could be 
read to prohibit a loan originator organization from receiving 
compensation directly from a consumer in all cases because that 
compensation would necessarily be based on itself, and thus, based on a 
transaction term. The Bureau believes that Congress did not intend that 
the prohibition in TILA section 129B(c)(1) on compensation being paid 
based on the terms of the loan to prevent loan originator organizations 
from receiving compensation directly from a consumer in all cases. In 
fact, TILA section 129B(c)(2) specifically contemplates transactions 
where loan originators would receive compensation directly from the 
consumer.\77\ Thus, the final rule amends comment 36(d)(1)-2 to clarify 
that compensation paid to a loan originator organization directly by a 
consumer in a transaction is not prohibited by Sec.  1026.36(d)(1) 
simply because that compensation itself is a term of the transaction. 
Nonetheless, that compensation may not be based on any other term of 
the transaction or a proxy for any other term of the transaction. In 
addition, in a transaction where a loan originator organization is paid 
compensation directly by a consumer, compensation paid by the loan 
originator organization to individual loan originators is not 
prohibited by 1026.36(d)(1) simply because it is based on the amount of 
compensation paid directly by the consumer to the loan originator 
organization but the compensation to the individual loan originator may 
not be based on any other term of the transaction or proxy for any 
other term of the transaction.
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    \77\ Specifically, TILA section 129B(c)(2)(A) states that, for 
any mortgage loan, a mortgage originator generally may not receive 
from any person other than the consumer any origination fee or 
charge except bona fide third-party charges not retained by the 
creditor, mortgage originator, or an affiliate of either. Likewise, 
no person, other than the consumer, who knows or has reason to know 
that a consumer has directly compensated or will directly compensate 
a mortgage originator, may pay a mortgage originator any origination 
fee or charge except bona fide third-party charges as described 
above. Notwithstanding this general prohibition on payments of any 
origination fee or charge to a mortgage originator by a person other 
than the consumer, however, TILA section 129B(c)(2)(B) provides that 
a mortgage originator may receive from a person other than the 
consumer an origination fee or charge, and a person other than the 
consumer may pay a mortgage originator an origination fee or charge, 
if, among other things, the mortgage originator does not receive any 
compensation directly from the consumer.
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Prohibition Against Payment Based on a Factor That Is a Proxy for a 
Term of a Transaction
    In the 2010 Loan Originator Final Rule, the Board adopted comment 
36(d)(1)-2, which explains how the prohibition on compensation based on 
a transaction's terms is also violated when compensation is based on a 
factor that is a proxy for a term of a transaction. As an example, the 
comment notes that a consumer's credit score or similar representation 
of credit risk, such as the consumer's debt-to-income ratio, is not one 
of the transaction's terms or

[[Page 11324]]

conditions. The comment goes on to clarify, however, that if a loan 
originator's compensation varies in whole or in part with a factor that 
serves as a proxy for loan terms or conditions, then the originator's 
compensation is based on a transaction's terms or conditions. The 
comment also provides an example of payments based on credit score that 
would violate existing Sec.  1026.36(d)(1). As previously discussed, 
the Board realized the compensation prohibition in Sec.  1026.36(d)(1) 
could be circumvented by compensating a loan originator based on a 
substitute factor that is not a transaction term or condition but 
effectively mimics a transaction term or condition.
    Since the Board's 2010 Loan Originator Final Rule was promulgated, 
the Board and the Bureau have received numerous inquiries on the 
commentary regarding proxies and whether particular loan originator 
compensation practices would be prohibited because they set 
compensation based on factors that are proxies for transaction terms. 
Small entity representatives providing input during the Small Business 
Review Panel process also urged the Bureau to use this rulemaking to 
clarify this issue. While some industry stakeholders sought guidance or 
approval of particular compensation practices, the Bureau also learned 
through its outreach that a number of creditors felt that the existing 
proxy commentary was appropriate and should not in any event be made 
more permissive. Some of these institutions explained that they had 
always paid their loan originators the same commission--i.e., 
percentage of the amount of credit extended--regardless of type or 
terms of the transactions originated. In their opinion, changes in the 
Bureau's approach to proxies would allow unscrupulous loan originators 
to employ compensation practices that would violate the principles of 
the prohibition against compensation based on a transaction's terms.
    Based on this feedback and its own analysis, the Bureau proposed 
revisions to Sec.  1026.36(d)(1)(i) and comment 36(d)(1)-2.i to clarify 
how to determine whether a factor is a proxy for a transaction's term 
to facilitate compliance and prevent circumvention. The proposal's 
amendments to Sec.  1026.36(d)(1)(i) would have clarified in regulatory 
text that compensation based on a proxy for a transaction's terms would 
be prohibited. In addition, the proposed clarification in Sec.  
1026.36(d)(1)(i) and comment 36(d)(1)-2.i would have provided that a 
factor (that is not itself a term of a transaction originated by the 
loan originator) is a proxy for the transaction's terms if two 
conditions were satisfied: (1) The factor substantially correlates with 
a term or terms of the transaction; and (2) the loan originator can, 
directly or indirectly, add, drop, or change the factor when 
originating the transaction.\78\
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    \78\ As discussed in the proposal, the Bureau specifically 
sought input during the Small Business Review Panel process on 
clarifying the rule's application to proxies. The proxy proposal 
under consideration presented to the small entity representatives 
during the Small Business Review Panel process stated that ``a 
factor is a proxy if: (1) It substantially correlates with a term of 
a transaction; and (2) the MLO has discretion to use the factor to 
present credit to the consumer with more costly or less advantageous 
term(s) than term(s) of other credit available through the MLO for 
which the consumer likely qualifies.'' Upon further consideration, 
the Bureau believed the proxy proposal contained in the proposed 
rule would be easier to apply uniformly and would better addresses 
cases where the loan originator does not ``use'' the factor than the 
specific proposal presented to the Small Business Review Panel.
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    As proposed, both prongs of the proxy analysis would have to be met 
for a factor to be a proxy. If the factor substantially correlates with 
a term of a transaction originated by the loan originator, then the 
factor would be a proxy only if the loan originator could, directly or 
indirectly, add, drop, or change the factor when originating the 
transaction. In the supplementary information to the proposal, the 
Bureau noted that where a loan originator had no or minimal ability 
directly or indirectly to add, drop, or change a factor, that factor 
would not be a proxy for the transaction's terms because the loan 
originator would not be able to steer consumers based on that factor.
    The Bureau also proposed to delete the example of credit score as a 
proxy for a transaction's terms or conditions in existing comment 
36(d)(1)-2. The proposal explained that this example created 
uncertainty for creditors and loan originators and did not adequately 
reflect the Bureau's proposed treatment of proxies. Under the proposal, 
a credit score may or may not be a proxy for a term of a transaction 
depending on the facts and circumstances. Similarly, the proposal would 
have removed the example stating that loan-to-value ratio would not be 
a term of a transaction to conform to other aspects of the proposal.
    Instead, proposed comment 36(d)(1)-2.i, provided three new examples 
to illustrate use of the proposed proxy standard and to facilitate 
compliance with the rule.
    The Bureau proposed to add comment 36(d)(1)-2.i.A to provide an 
example of the application of the proposed proxy definition to address 
whether compensation based on a loan originator's employment tenure 
would be considered a proxy for a transaction term under the proposed 
definition. The proposal explained that this factor would likely not 
meet the first prong of the proposed proxy definition because 
employment tenure would likely have little correlation with a 
transaction's term and thus not be ``substantially correlated'' to a 
term of a transaction.
    The Bureau proposed to add comment 36(d)(1)-2.i.B to provide an 
example of the application of the proposed proxy definition to address 
whether compensation to a loan originator based on whether an extension 
of credit would be held in portfolio or sold into the secondary market 
would be considered a factor that is a proxy for a transaction term 
under the proposed definition. The example assumed an extension of 
credit would be held in portfolio or sold into the secondary market 
depending in large part on whether it had a five-year balloon feature 
or a 30-year term. Thus, the factor would meet the first prong of the 
proxy definition because whether an extension of credit would be held 
in portfolio or would be sold into the secondary market would 
substantially correlate with one or more transaction terms (i.e., 
interest rate, term). The loan originator in the example may be able to 
change the factor indirectly by steering the consumer to choose the 
five-year balloon or the 30-year term. Thus, whether an extension of 
credit is held in portfolio or sold into the secondary market would be 
a proxy for a transaction's terms under these particular facts and 
circumstances.
    The Bureau proposed to add comment 36(d)(1)-2.i.C to provide an 
example of the application of the proposed proxy definition to whether 
compensation to a loan originator based on the geographic location of 
the property securing a refinancing would be considered a proxy for a 
transaction term. In the example, the loan originator would be paid a 
higher commission for refinancings secured by property in State A than 
in State B. The first prong of the proxy definition would be satisfied 
because, under the facts assumed in the example, refinancings secured 
by property in State A would have lower interest rates than credit 
transactions secured by property in State B; thus, the property's 
location would substantially correlate with a term of a transaction 
(i.e., the interest rate). However, the second prong of the proxy 
definition would not be satisfied because the loan originator would not 
be able to change the presence or absence of the factor (i.e., whether 
the

[[Page 11325]]

refinancing is secured by property in State A or State B). Thus, 
geographic location, under the particular facts assumed in the example, 
would have not been considered a proxy for a transaction's term.
    The Bureau believed that the proposed changes would simplify and 
reduce uncertainty regarding the proxy analysis and, more generally, 
would align the treatment of proxies with the principles underlying the 
prohibition on compensation based on a transaction's terms. The Bureau 
solicited comment on the proposal, alternatives the Bureau should 
consider, and whether any action to revise the proxy concept and 
analysis would be helpful and appropriate. The Bureau also invited 
specific comment on two aspects of the first prong of the proxy 
definition: (1) Whether ``substantially'' was sufficient to explain the 
degree of correlation necessary under the proxy definition and, if not, 
what other term should be considered; and (2) how ``correlation'' to a 
term should be determined.
    Many industry commenters opposed the Bureau's proposed amendments 
to the proxy analysis and requested that the existing analysis be 
removed. Other commenters supported the Bureau's efforts to clarify the 
proxy analysis but criticized the proposed standard or requested 
additional guidance.
    A large bank, a few lender trade groups, and a number of credit 
unions and credit union leagues commented that the prohibition against 
compensation based on transaction terms in the Dodd-Frank Act was 
sufficient to protect consumers without the proxy concept. Many of 
these commenters also stated that the Dodd-Frank Act prohibition on 
compensation based on transaction terms was very clear and did not 
include the concept of a proxy analysis. These commenters further 
stated that inclusion of the proxy definition in the rule would impose 
a compliance burden that was not mandated by statute. Some of these 
commenters also indicated that the Bureau's approach to proxies created 
ambiguities that would make compliance difficult, which was 
particularly problematic given the significant liability that TILA 
would impose for non-compliance.
    Another industry trade group stated that, instead of addressing 
proxies, the Dodd-Frank Act expressly addressed steering and related 
conduct. Therefore, it urged the Bureau to abandon the proxy concept 
and focus instead on implementing clear guidance for the anti-steering 
provisions in the Dodd-Frank Act. One credit union also stated that the 
final rule should clarify that incentive arrangements adopted pursuant 
to NCUA regulations would be permissible under Regulation Z.
    One large national bank and an industry trade group criticized the 
proxy concept in the existing rule for presuming the existence of a 
proxy whenever a difference in transaction terms was correlated with a 
difference in compensation and the difference in compensation could not 
otherwise be justified on a permissible basis. One credit union league 
commenter stated that the Bureau's proposed changes would not reduce 
uncertainty and help simplify application of the prohibition of 
compensation based on transaction terms and urged the Bureau to refrain 
from amending the existing regulation and commentary. Several 
commenters stated that instead of, or in addition to, providing further 
clarification and a definition of proxies, the final rule should 
simply: (1) Permit differences in compensation based on cost 
differences among products; (2) allow differences in compensation to 
incentivize the offering of socially beneficial credit products such as 
state agency or Community Reinvestment Act loans; and (3) contain an 
inclusive list of proxies and exceptions.
    Several large industry groups, several large creditors, several 
State industry associations, and a credit union league made comments 
that were generally supportive of the Bureau's efforts to clarify the 
existing approach to proxies, but requested that the Bureau offer a 
more precise definition of the term ``proxy.'' Some of these commenters 
stated that ``substantially correlates with a term or terms of a 
transaction'' was too speculative and subjective or required more 
explanation. One large bank commenter stated that the proposed two-
pronged proxy definition would increase rather than reduce confusion. 
Despite the opposition to the proposed proxy definition voiced by the 
many commenters, there were no comments providing specific alternatives 
to the proposal's formulation.
    With respect to the Bureau's proposed revisions to discussion in 
comment 36(d)(1)-2, most of the larger trade groups representing 
creditors ranging from community banks to the largest banks agreed that 
credit score should not be considered a proxy for a transaction term. 
These commenters noted that loan originators have no discretion or 
influence over the credit score even though the score influences the 
secondary market value of the extension of credit. One large national 
bank commenter, however, was concerned that, by not characterizing a 
credit score as a proxy for transaction terms, the proposal would 
permit creditors to compensate loan originators more for credit 
extended to consumers with high credit scores. Credit scores, the bank 
noted, invariably correlate with a credit transaction's interest rate. 
In this commenter's view, certain factors that correlate with a 
transaction's terms should not be the basis of differences in 
compensation. This commenter also stated that debt-to-income ratio and 
the collateral's loan-to-value ratios were common factors that affect 
the interest rate and could typically be modified by a loan originator, 
thus implying these factors too should be considered proxies for a 
transaction's terms but may not be under the proposal.
    While the Bureau believes that the new definition of a ``term of a 
transaction'' in Sec.  1026.26(d)(1)(ii) will help clarify the 
permissibility of varying compensation based upon many of the factors 
that commenters raised questions about, there will still be factors 
that would not meet this definition and thus be subject to the analysis 
under the proxy definition. Accordingly, the Bureau has revised the 
proposed proxy definition in the final rule, while preserving the 
proposal's basic approach. By prohibiting compensation based on a 
factor that serves as a proxy for a term of a transaction, the Bureau 
believes that it is within its specific authority under TILA section 
105(a) to issue regulations to effectuate the purposes and prevent 
evasion or circumvention of TILA. A contrary approach would create an 
enormous loophole if persons were able to identify factors to base loan 
originator compensation on that, although not considered transaction 
terms, act in concert with particular terms. For example, many loan 
level price adjustments are not transaction terms per se, however, they 
often directly impact the price investors are willing to pay for a 
loan. Restated differently, the amount investors are willing to pay now 
for a stream of payments made by consumers in the future is highly 
dependent on the interest rate of the note. To the extent a loan 
originator is able to manipulate such factors the more attractive they 
become as a proxy for transaction terms upon which to base 
compensation. The Bureau further believes that by providing a proxy 
definition, the Bureau is also acting pursuant to its authority under 
TILA section 105(a) to facilitate compliance with TILA.
    Revised Sec.  1026.36(d)(1)(i) provides that ``[a] factor that is 
not itself a term of a transaction is a proxy for a term of a 
transaction if the factor consistently varies with a term over a 
significant

[[Page 11326]]

number of transactions, and the loan originator has the ability, 
directly or indirectly, to add, drop, or change the factor in 
originating the transaction.'' The final proxy definition revises the 
proposed definition in two ways: (1) Under the first prong, a factor is 
analyzed by reference to whether it ``consistently varies with a term 
over a significant number of transactions'' instead of whether it 
``substantially correlates with a term''; and (2) under the second 
prong, the analysis focuses on whether the loan originator ``has the 
ability to'' manipulate the factor rather than whether a loan 
originator ``can'' manipulate the factor. The Bureau also maintains in 
the final rule two of the three examples of the application of the 
proxy analysis to specific compensation and fact patterns. However, the 
proxy examples have been renumbered given the removal of the example in 
comment 36(d)(1)-2.i.A. The example proposed in comment 36(d)(1)-2.i.A. 
analyzed a hypothetical situation involving a creditor that increased 
loan originator compensation based on the loan originator's tenure with 
the creditor. The final rule orients the focus of the proxy analysis on 
factors substituted for a term of the transaction. This example 
involved facts that were unrelated to this analysis and is not included 
in the final rule to reduce confusion and facilitate compliance. The 
remaining examples are located in comment 36(d)(1)-2.ii instead of 
comment 36(d)(1)-2.i to accommodate a reorganization of the comments to 
facilitate compliance. The terminology in these examples has 
additionally been revised to reflect changes to the definitions of a 
``term of a transaction'' and ``proxy'' in the final rule.
    As stated above, the final rule revises the first prong of the 
proxy definition from the proposed ``substantially correlates with a 
term'' to ``consistently varies with a term over a significant number 
of transactions.'' First, the change is meant to avoid use of the word 
``correlates,'' which is given many conflicting technical meanings. 
Second, the inclusion of ``over a significant number of transactions'' 
is meant to explain that the nexus between the factor and a term of a 
transaction should be established over a sample set that is 
sufficiently large to ensure confidence that the variation is indeed 
consistent. Third, the emphasis on consistent variation with a term, 
over a significant number of transactions, like the use of correlation 
as proposed, is intended to make clear that there is no need to 
establish causation to satisfy the first prong. Finally, the consistent 
variation between the factor and term may be positive or negative.
    The Bureau has also made a minor change to the proposed second 
prong of the definition. The final rule replaces ``can'' with ``has the 
ability'' to emphasize that the loan originator must have substantive 
and not conjectural capacity to add, drop, or change the factor. That 
is, the ability to influence the factor must be actual rather than just 
hypothetical.
    The Bureau believes that the new definition for a ``term of a 
transaction'' and the revision to the proxy definition should help 
clarify whether a particular factor is a term of a transaction in the 
first place or is a proxy for a term of a transaction. To create 
further clarity, the Bureau is providing additional interpretation and 
examples on how the two definitions function together when applied to 
an analysis of the permissibility of compensating loan originators by 
reference to some of the numerous factors identified by commenters. 
Because the analysis of whether a factor upon which a loan originator 
would be compensated is a proxy is often dependent on particular facts, 
care should be taken before concluding that the Bureau has sanctioned 
any particular compensation factor in all circumstances.
    For example, the Bureau believes that compensation based on which 
census tract, county, state, or region of the country the property 
securing a credit transaction is located generally is not a term of a 
transaction. However, the geographic factors compensation is based on, 
that is the census tract, county, state, or region of the country, 
would be subject to analysis under the proxy definition.\79\ Location 
within a broad geographic unit is unlikely to be deemed a proxy for a 
term of a transaction. The factor must satisfy both prongs of the 
definition to be considered a proxy. Loan originators have no ability 
to change the location of property that a consumer purchases. Thus, 
absent very unusual circumstances, the second prong and thus the larger 
test would not be satisfied. Thus, the geographic location in this 
example would not be considered a proxy for a term of a transaction.
---------------------------------------------------------------------------

    \79\ The analysis would be different if, under specific facts 
and circumstances, geographic location were otherwise incorporated 
into the agreements that together constitute the credit transaction 
in a way that would satisfy the definition of a term of the 
transaction.
---------------------------------------------------------------------------

    For similar reasons, compensation based on whether a consumer is a 
low- to moderate-income borrower would also typically be neither 
compensation based on a term of a transaction nor compensation based on 
a proxy for a term of a transaction. First, whether a consumer is a 
low-to moderate-income borrower would typically not be a term of a 
transaction. Income level is not a right or obligation of the 
agreement. Moreover, income level is not a fee or charge. The 
determination of whether a particular consumer fits the definition of a 
low-to moderate-income borrower would depend on that consumer's income 
and the definition of low-to moderate-income pursuant to applicable 
government standards. With regard to the proxy text, credit extended to 
low-to moderate-income borrowers may tend to consistently have certain 
pricing or product features, but because a loan originator is typically 
unable to change whether a consumer is classified as a low-to moderate-
income borrower, compensating based on this factor would not satisfy 
the second prong of the definition of a proxy.
    Depending on the particular facts and circumstances, compensation 
based on a consumer's debt-to-income or loan-to-value ratio, although 
not typically a term of a transaction, could be considered compensation 
based on a proxy for a term of a transaction. Debt-to-income and loan-
to-value ratios are not typically transaction terms. Applying the first 
prong of the proxy definition, these factors could consistently vary, 
over a significant number of transactions, with a term of a transaction 
such as the interest rate. Depending on the particular facts and 
circumstances, if either of these factors does meet the first prong, 
the factors could meet the second prong of the proxy definition because 
a loan originator could have the ability to alter these factors by 
encouraging consumers to take out larger or smaller amounts of 
credit.\80\
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    \80\ Section 1026.36(d)(1)(ii) expressly permits compensation 
based on the amount of credit extended, but does not permit 
compensation based on the amount of credit extended combined with 
another factor.
---------------------------------------------------------------------------

    A diverse variety of industry commenters requested guidance on 
whether compensation based on variations in the amount of credit 
extended for different products, such as differentially compensating 
loan originators for jumbo loans, conventional loans, and credit 
extended pursuant to government programs for low-to moderate-income 
borrowers (which typically have smaller amounts of credit extended and 
smaller profit margins) would be prohibited as compensation based on a 
proxy for a term of a transaction. Commenters explained that loan 
originators paid as a percentage of the amount of credit

[[Page 11327]]

extended are de-incentivized to extend credit to low-to moderate-income 
consumers because these consumers usually take out smaller amounts of 
credit. Commenters also stated that creditors cap the percentage of the 
amount of credit extended they are willing to pay loan originators for 
originating jumbo loans.
    This issue is not properly a question that implicates a proxy 
analysis, but instead a question of the breadth of the exclusion of 
compensation based on a term of a transaction in Sec.  
1026.36(d)(1)(ii) for compensation based on the amount of credit 
extended. To the extent that commenters are asking whether it is 
permissible to compensate loan originators on the actual size of the 
amount of credit extended using a fixed percentage of credit extended 
as a factor, this is clearly permitted by Sec.  1026.36(d)(1)(ii). On 
the other hand, Sec.  1026.36(d)(1)(ii) does not permit loan 
originators to be compensated on a percentage that itself varies based 
on the amount of credit extended for a particular transaction. For 
example, existing comment 36(d)(1)-9 prohibits payment to a loan 
originator compensation that is 1.0 percent of the amount of credit 
extended for credit transactions of $300,000 or more, 2.0 percent for 
credit transactions between $200,000 and $300,000 and 3.0 percent on 
credit transactions of $200,000 or less.\81\ Existing Sec.  
1026.36(d)(1)(ii) and comment 36(d)(1)-9, however, also provide a 
permissible method by which a floor or ceiling may be placed on a 
particular loan originator's compensation on a per transaction basis. 
For example, a creditor may offer a loan originator 1.0 percent of the 
amount of credit extended for all credit transactions the originator 
arranges for the creditor, but not less than $1,000 or greater than 
$5,000 for each credit transaction.\82\
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    \81\ Existing comment 36(d)(1)-9 is consistent with the Bureau's 
interpretation of TILA section 129B(c). To the extent there is any 
uncertainty in the statute regarding whether loan originators are 
prohibited from being compensated based on a percentage of the loan 
that itself varies based on the amount of credit extended for a 
particular transaction, the Bureau relies on its interpretive 
authority under TILA section 105(a) to effectuate the purposes of 
TILA, prevent circumvention or evasion, and facilitate compliance 
therewith.
    \82\ As discussed above, it is also not permissible to 
differentiate compensation based on credit product type, since 
products are simply a bundle of particular terms.
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    A mix of commenters requested clarification on whether compensation 
can vary based on the geographic location of the individual loan 
originator instead of the property so that for instance individual loan 
originators located in a high cost of living area are paid a higher 
fixed percentage of the amount of credit extended relative to 
individual loan originators located in lower cost areas. The existing 
rule does not apply to differences in compensation between different 
individual loan originators. The rule applies to the compensation 
received by a particular individual loan originator. For example, this 
rule does not prohibit a particular individual loan originator located 
in New York City from receiving compensation based on a higher 
percentage of the amount of credit extended than a loan originator 
located in Knoxville, Tennessee. The final rule does not change the 
existing rule in this respect.
    A diverse group of commenters also requested clarification on 
whether compensation based on whether an extension of credit held in 
portfolio or sold into the secondary market would be considered 
compensation based on transaction terms. The Bureau finalizes as 
comment 36(d)(1)-2.ii.A the proposed example, described above, that 
discusses how, in specific circumstances presented in the example, 
compensation based on whether an extension of credit is held in 
portfolio or sold into the secondary market would violate Sec.  
1026.36(d)(1). Under the example, whether the extensions of credit were 
held in portfolio was a factor that consistently varied with 
transaction terms over a significant number of transactions (i.e., 
five-year term with a final balloon payment or a 30-year term). In the 
example, the loan originator also had the ability to encourage 
consumers to choose extensions of credit that were either held in 
portfolio or sold in the secondary market by steering them to terms 
that corresponded to their future status, e.g., the five-year term 
transactions were destined for portfolio. Thus, whether compensation 
could vary based on these factors as described above without violating 
Sec.  1026.36(d)(1) depends on the particular facts and 
circumstances.\83\
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    \83\ Commenters also requested clarification on whether 
compensation could vary based on whether an extension of credit was 
originated in wholesale or retail channels or whether credit was 
extended by a bank or the bank brokered the extension of credit to 
another creditor. Assuming that there was consistent variation 
between these factors and transaction terms, the analysis would 
depend on whether a loan originator could be deemed to vary the 
channel or control the creditor's role in the transaction.
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Permissible Methods of Compensation
    To reduce further regulatory uncertainty surrounding the interplay 
between a term of a transaction and a proxy for a term of a transaction 
and in response to commenters' inquiries implicating the scope of the 
comment's examples, the final rule revises the content of existing 
comment 36(d)(1)-3 and moves that content to comment 36(d)(1)-2.i for 
organizational purposes. Existing comment 36(d)(1)-3 provides nine 
``illustrative examples of compensation methods that are permissible'' 
and are ``not based on the transaction's terms or conditions.'' The 
final rule removes two of the examples, clarifies the scope of several 
others, and clarifies that the revised and remaining examples are not 
subject to a proxy analysis.
    Existing comment 36(d)(1)-3 declares compensation based on the 
following methods permissible: ``loan originator's overall loan volume 
* * * delivered to the creditor''; ``the long-term performance of the 
originator's loans''; ``[a]n hourly rate of pay to compensate the 
originator for the actual number of hours worked''; ``[w]hether the 
consumer is an existing customer of the creditor or a new customer''; a 
``payment that is fixed in advance for every loan the originator 
arranges for the creditor''; the ``percentage of applications submitted 
by the loan originator to the creditor that results in consummated 
transactions''; ``the quality of the loan originator's loan files 
(e.g., accuracy and completeness of the loan documentation) submitted 
to the creditor''; a ``legitimate business expense, such as fixed 
overhead costs''; and ``the amount of credit extended, as permitted by 
Sec.  1026.36(d)(1)(ii).''
    The 2010 Loan Originator Final Rule did not explicitly address 
whether these examples should be subject to a proxy analysis. 
Nonetheless, the Board strongly implied that compensation based on 
these factors would not be compensation based on a proxy for 
transaction terms or conditions by referring to them as ``permissible'' 
methods. The Bureau believes that compensation based on these methods 
is not compensation based on a term of a transaction under Sec.  
1026.36(d)(1)(ii) and should not be subjected to the proxy analysis. 
Because the final rule further develops the proxy concept and places it 
in regulatory text, the Bureau is revising the list to clarify that 
these are still permissible bases of compensation.\84\
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    \84\ In addition, the Bureau has removed the language stating 
that the list is not exhaustive. The Bureau believes there are 
factors not in the list that would also not meet the definition of a 
term of the transaction. These factors would be subject to analysis 
under the proxy definition, however.

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[[Page 11328]]

    The Bureau recognizes that there are few ways to compensate loan 
originators under this rule that are not subject to proxy analysis. The 
Bureau further acknowledges that some institutions will not want to 
subject factors to the proxy definition to determine if they may be 
permissible because of the fact-dependent nature of the analysis. The 
Bureau believes it is important to allow persons to compensate loan 
originators based on factors that the Bureau considers to be neither a 
term of the transaction nor a proxy for a term of the transaction. The 
Bureau believes that, although some of the compensation methods may 
give rise to negligible steering incentives, the benefits of allowing a 
person to compensate under these methodologies outweigh any such 
potential steering incentives. For example, periodically setting 
compensation levels (i.e., commissions) for loan originators based on 
the quality of loan files or long term performance of the credit 
transactions the loan originator has arranged should encourage behavior 
that benefits consumers and industry alike. The Bureau believes that 
providing this list of compliant factors will facilitate compliance 
with the rule.
    The final rule list deletes the last example that allows for 
compensation based on the amount of credit extended. The Bureau 
believes that this example is unnecessary because, as the example 
itself notes, this exception is expressly set forth in Sec.  
1026.36(d)(1)(ii). Moreover, the corollary to ``amount of credit 
extended'' is embodied in the first example on the list that permits 
compensation based on the loan originator's overall loan volume, which 
is further explained as either the ``total dollar amount of credit 
extended or total number of loans originated.'' The Bureau has moved 
the regulatory cross-reference to the first example.
    The Bureau has also removed the existing example that permits a 
loan originator to be compensated based on a legitimate business 
expense, such as fixed overhead costs. The Bureau has understood that 
the example applies to loan originator organizations (which incur 
business expenses such as fixed overhead costs) and not to individual 
loan originators. An example of the application of this exception would 
be a loan originator organization that has a branch in New York City 
and another in Oklahoma. The loan originator organization would be able 
to receive compensation from a creditor pursuant to a formula that 
reflects the additional overhead costs of maintaining an office in New 
York City. While the Bureau believes that this practice would normally 
not constitute compensation based on a term of a transaction given the 
definition adopted in this final rule, the final rule removes this 
example because the Bureau does not believe that this method of 
compensation should be insulated from a proxy analysis in every 
instance. The Bureau is concerned that under certain circumstances, 
differential compensation for corporate loan origination organization 
branches from creditors could create steering incentives that violate 
Sec.  1026.36(e). For example, loan originators working in a call 
center for the loan originator organization with the two branches 
described above could be incentivized to steer a consumer to the New 
York City branch that only offers subprime credit (and receives the 
most compensation per transaction from the creditor based on the 
additional overhead costs) to increase the amount of compensation the 
loan originator organization would receive.
    Many commenters, including large industry associations, questioned 
the extent of protection offered by existing comment 36(d)(1)-3.iii, 
which provides that an hourly rate of pay to compensate the originator 
for the actual number of hours worked is not compensation based on 
transaction terms. Commenters asked whether an employer would be 
permitted under the comment to create commissions for specific credit 
products based on the estimated typical hours needed to originate or 
process the product. Commenters explained that the ability to set a 
commission based on estimated hours instead of actual hours worked 
would eliminate costs that would otherwise be expended on tracking and 
documenting the actual time spent on originating each particular credit 
transaction.\85\
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    \85\ The comment from the industry groups urged the Bureau ``to 
clarify that if a creditor or broker makes a good faith 
determination of the time and effort to process a loan based upon 
the loan product or process, then it may use that information to 
vary loan originator compensation by product or process.''
---------------------------------------------------------------------------

    During outreach before the proposal, the Bureau learned that 
historically loan originators and processers generally spend more time 
on certain credit products. The outreach participants also noted, 
however, that in the current market there is no consistent variation in 
the typical time needed to originate or process different credit 
products, such as an FHA loan or nonconventional loan versus a 
conventional loan. These participants explained that stricter 
underwriting requirements have caused many conventional loans to take 
as long as, or longer than, FHA loans or other government program 
credit products. For example, participants noted that processing 
conventional loans for consumers with a higher net worth but little 
income or a higher income with large amounts of debt often take longer 
than processing FHA or other nonconventional loans for low-to moderate-
income consumers.
    Permitting a creditor or loan originator organization to establish 
different levels of compensation for different types of products would 
create precisely the type of risk of steering that the Act seeks to 
avoid unless the compensation were so carefully calibrated to the level 
of work required as to make the loan originators more-or-less 
indifferent as to whether they originated a product with a higher or 
lower commission. The Bureau believes, however, that periodic changes 
in the market and underwriting requirements and changing or unique 
consumer characteristics would likely lead to inaccurate estimates for 
the time a specific credit product takes to originate and thus lead to 
compensation structures that create steering incentives. The Bureau 
further believes that the accuracy of the estimates would be difficult 
to verify without recording the actual number of hours worked on 
particular credit products anyway. The Bureau believes that this 
information would be necessary not only to set the estimate initially 
but also to calibrate the estimate as market conditions and consumer 
characteristics rapidly evolve and to correct inaccuracies. The Bureau 
believes that the potential for inaccuracy or deliberate abuse and 
burdens of remedying and tracking inaccurate estimates outweighs any 
benefit gained by permitting estimates of the actual hours worked. 
These types of estimates are not currently covered by the exemption in 
comment 36(d)(1)-3.iii, and the Bureau is not amending the comment to 
permit them.\86\
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    \86\ If a loan originator's compensation was calculated on an 
estimate of hours worked for a specific product, or by any other 
methodology to determine time worked other than accounting for 
actual hours worked, the methodology would be permissible only if it 
did not meet the definition of a proxy (and complied with other 
applicable laws).
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    To provide further clarification the Bureau notes that certain 
``permissible methods of compensation'' specifically allow compensation 
methods to be calculated with reference to and applied to a specific 
transaction while others allow for compensation methods to be 
calculated with reference to and applied to multiple transactions. For 
example, the permissible methods of compensation in comment 36(d)(1)-
2.i.A (compensation adjustment for total

[[Page 11329]]

dollar amount or total number of transactions), B (long term 
performance), E (adjustment after certain number of transactions), F 
(the percentage of applications that result in consummated 
transactions), and G (quality of the loan files submitted to the 
creditor) permit compensation adjustments to be calculated with 
reference to and applied to multiple transactions. The other 
permissible methods of compensation in comment 36(d)(1)-2.i.C (hourly 
rate of pay) and D (existing or new customer) permit compensation 
methods to be calculated with reference to and applied to a specific 
transaction. The Bureau further notes that the permissible methods of 
compensation to be calculated with reference to and applied to multiple 
transactions should be considered together with existing comment 
36(d)(1)-6 that provides interpretation of ``periodic changes in loan 
originator compensation.'' That comment gives as an example 6-months as 
a permissible period for revising compensation after considering 
multiple transactions and other variables over time.
Varies Based On
    TILA section 129B(c)(1) prohibits a mortgage originator from 
receiving, and any person from paying a mortgage originator, 
``compensation that varies based on'' the terms of the loan (emphasis 
added). The prohibition in existing Sec.  1026.36(d)(1) is on 
``compensation in an amount that is based on'' the transaction's terms 
and conditions (emphasis added). In the proposal, the Bureau stated its 
belief that the meaning of the statute's reference to compensation that 
``varies'' based on transaction terms is already embodied in Sec.  
1026.36(d)(1). Thus, the Bureau's proposal would not have revised Sec.  
1026.36(d)(1) to include the word ``varies.''
    The Bureau further stated its belief in the proposal that 
compensation to loan originators violates the prohibition if the amount 
of the compensation is based on the terms of the transaction (that is, 
a violation does not require a showing of any person's subjective 
intent to relate the amount of the payment to a particular loan term). 
Proposed new comment 36(d)(1)-1.i would have clarified these points. 
The Bureau further proposed new comment 36(d)(1)-1 be adopted in place 
of existing comment 36(d)(1)-1, the substance of which would have been 
moved to comment 36(a)-5, as discussed above.
    The proposed comment also would have clarified that a difference 
between the amount of compensation paid and the amount that would have 
been paid for different terms might be shown by a comparison of 
different transactions, but a violation does not require a comparison 
of multiple transactions.
    The Bureau did not receive any comments on this proposal. The 
Bureau is adopting the substance of the comment as proposed but further 
clarifying that when there is a compensation policy in place and the 
objective facts and circumstances indicate the policy was followed, the 
determination of whether compensation would have been different if a 
transaction term had been different is made by analysis of the policy. 
A comparison of multiple transactions and amounts of compensation paid 
for those transactions is generally needed to determine whether 
compensation would have been different if a transaction term had been 
different when there is no compensation policy, or when a compensation 
policy exists but has not been followed. The revised comment is 
intended to provide loan originator organizations, creditors, and other 
persons that maintain and follow permissible loan originator 
compensation policies greater certainty about whether they are in 
compliance.
    For the reasons discussed above, this final rule adopts new comment 
36(d)(1)-1 as proposed and moves existing comment 36(d)(1)-1 to comment 
36(a)-5.
Pooled Compensation
    Comment 36(d)(1)-2 currently provides examples of compensation that 
is based on transaction terms or conditions. Mortgage creditors and 
others have raised questions about whether loan originators that are 
compensated differently than one another and originate loans with 
different terms are prohibited under Sec.  1026.36(d)(1) from pooling 
their compensation and sharing in that compensation pool. The Bureau 
proposed to revise comment 36(d)(1)-2.ii to make clear that, where loan 
originators have different commission rates or other compensation plans 
and they each originate loans with different terms, Sec.  1026.36(d)(1) 
does not permit the pooling of compensation so that the loan 
originators share in that pooled compensation. For example, assume that 
Loan Originator A receives a commission of 2 percent of the loan amount 
for each loan that he or she originates and originates loans that 
generally have higher interest rates than the loans that Loan 
Originator B originates. In addition, assume Loan Originator B receives 
a commission of 1 percent of the loan amount for each loan that he or 
she originates and originates loans that generally have lower interest 
rates than the loans originated by Loan Originator A. In this example, 
proposed comment 36(d)(1)-2.ii would have clarified that the 
compensation of the two loan originators may not be pooled so that the 
loan originators share in that pooled compensation.
    In the supplementary information to the proposal, the Bureau stated 
its belief that this type of pooling is prohibited by Sec.  
1026.36(d)(1) because each loan originator receives compensation based 
on the terms of the transactions they collectively make. This type of 
pooling arrangement could provide an incentive for the participating 
loan originators to steer some consumers to loan originators that 
originate loans with less favorable terms (for example, that have 
higher interest rates) to maximize their overall compensation.
    The Bureau received only one comment on this proposed revision, and 
that commenter favored the proposal. For the reasons discussed above, 
this final rule adopts comment 36(d)(1)-2.ii (redesignated as comment 
36(d)(1)-2.iii) as proposed in substance, although the proposed 
language has been streamlined.
Creditor's Flexibility in Setting Loan Terms
    Comment 36(d)(1)-4 currently clarifies that Sec.  1026.36(d)(1) 
does not limit the creditor's ability to offer certain loan terms. 
Specifically, comment 36(d)(1)-4 specifies that Sec.  1026.36(d)(1) 
does not limit a creditor's ability to offer a higher interest rate as 
a means for the consumer to finance the payment of the loan 
originator's compensation or other costs that the consumer would 
otherwise pay (for example, in cash or by increasing the loan amount to 
finance such costs). Thus, a creditor is not prohibited by Sec.  
1026.36(d)(1) from charging a higher interest rate to a consumer who 
will pay some or none of the costs of the transaction directly, or 
offering the consumer a lower rate if the consumer pays more of the 
costs directly. The comment states, for example, that Sec.  
1026.36(d)(1) does not prohibit a creditor from charging an interest 
rate of 6.0 percent where the consumer pays some or all of the 
transaction costs and an interest rate of 6.5 percent where the 
consumer pays none of those costs. The comment also clarifies that 
Sec.  1026.36(d)(1) does not limit a creditor from offering or 
providing different loan terms to the consumer based on the creditor's 
assessment of credit and other risks (such as where the creditor uses 
risk-

[[Page 11330]]

based pricing to set the interest rate for consumers). Finally, the 
comment notes that a creditor is not prohibited under Sec.  
1026.36(d)(1) from charging consumers interest rates that include an 
interest rate premium to recoup the loan originator's compensation 
through increased interest paid by the consumer (such as by adding a 
0.25 percentage point to the interest rate on each loan transaction). 
This interpretation recognized that creditors that pay a loan 
originator's compensation generally recoup that cost through a higher 
interest rate charged to the consumer.
    The Bureau proposed to revise comment 36(d)(1)-4 to harmonize it 
with the Bureau's proposal to implement TILA section 129B(c)(2)(B)(ii), 
which would have prohibited consumers from paying upfront points and 
fees on certain transactions. As discussed in the section-by-section 
analysis of Sec.  1026.36(d)(2)(ii), the Bureau is not adopting this 
restriction in the final rule. Nevertheless, the Bureau believes it is 
appropriate to revise this comment for clarity. Specifically, as 
revised, comment 36(d)(1)-4 provides that, if a creditor pays 
compensation to a loan originator in compliance with Sec.  1026.36(d), 
the creditor may recover the costs of the loan originator's 
compensation and other costs of the transaction by charging the 
consumer points or fees or a higher interest rate or a combination of 
these. Thus, the final comment clarifies the existing comment that in 
such transactions, a creditor may charge a higher interest rate to a 
consumer who will pay fewer of the costs of the transaction at or 
before closing, or it may offer the consumer a lower rate if the 
consumer pays more of the transaction costs at or before closing. For 
example, if the consumer pays half of the transaction costs at or 
before closing, a creditor may charge an interest rate of 6.0 percent 
but, if the consumer pays none of the transaction costs at or before 
closing, a creditor may charge an interest rate of 6.5 percent. In 
transactions where a creditor pays compensation to a loan originator in 
compliance with Sec.  1026.36(d), a creditor also may offer different 
consumers varying interest rates that include a consistent interest 
rate premium to recoup the loan originator's compensation through 
increased interest paid by the consumer (such as by consistently adding 
0.25 percentage points to the interest rate on each transaction where 
the loan originator is compensated based on a percentage of the amount 
of the credit extended).
Point Banks
    The Bureau stated in the proposal that it had considered proposing 
commentary language addressing whether there are any circumstances 
under which point banks are permissible under Sec.  1026.36(d).\87\ 
Based on the views expressed by the Small Entity Representatives 
participating in the Small Business Review Panel process, other 
stakeholders during outreach, and the Bureau's own analysis, the Bureau 
stated that it believed that there should be no circumstances under 
which point banks are permissible, and the proposal would have 
continued to prohibit them in all cases. A few commenters, including a 
community bank and an organization representing State bank supervisors, 
expressed support for the Bureau's decision not to allow point banks, 
and no commenters objected to the Bureau's proposed approach. The 
Bureau is not adopting in this final rule any provision purporting to 
describe circumstances under which point banks would be permissible 
under Sec.  1026.36(d)(1).
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    \87\ A point bank is a continuously maintained accounting 
balance of basis points credited to a loan originator by a creditor 
for originations. From the point bank, amounts are debited when 
``spent'' by the loan originator to obtain pricing concessions from 
the creditor on a consumer's behalf for any transaction. For further 
explanation of how point banks operate, see the section-by-section 
analysis of proposed Sec.  1026.36(d)(1)(i). 77 FR 55294 (Sept. 7, 
2012).
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Pricing Concessions
    As an outgrowth of the general ban on varying compensation based on 
the terms of a transaction, the Board's 2010 Loan Originator Final Rule 
included commentary that interprets Sec.  1026.36(d)(1)(i) to prohibit 
changes in loan originator compensation in connection with a pricing 
concession, i.e., a change in transaction terms. Specifically, comment 
36(d)(1)-5 clarifies that a creditor and loan originator may not agree 
to set the originator's compensation at a certain level and then 
subsequently lower it in selective cases (such as where the consumer is 
offered a reduced rate to meet a quote from another creditor). The 
Board adopted the commentary out of concern that permitting creditors 
to decrease loan originator compensation because of a change in terms 
favorable to the consumer would result in loopholes and permit evasions 
of the rule. 75 FR 58509, 58524 (Sept. 24, 2010). In particular, the 
Board reasoned, if a creditor could agree to set originators' 
compensation at a high level generally and then subsequently lower the 
compensation in selective cases based on the actual loan terms, that 
practice could have the same effect as increasing the originator's 
compensation for higher rate loans. Id. The Board stated that such 
compensation practices are harmful and unfair to consumers. Id.
    The Bureau proposed three revisions to the Sec.  1026.36(d)(1) 
commentary addressing whether a loan originator may bear the cost of a 
pricing concession through reduced compensation.\88\ The first change 
proposed by the Bureau was to revise comment 36(d)(1)-5 to clarify 
that, while the creditor may change loan terms or pricing to match a 
competitor, to avoid triggering high-cost mortgage provisions, or for 
other reasons, the loan originator's compensation on that transaction 
may not be changed for those reasons. Revised comment 36(d)(1)-5 would 
have further clarified that a loan originator may not agree to reduce 
its compensation or provide a credit to the consumer to pay a portion 
of the consumer's closing costs, for example, to avoid high-cost 
mortgage provisions. The revised comment also would have included a 
cross-reference to new proposed comment 36(d)(1)-7 for further 
interpretation, as discussed below.
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    \88\ The revisions to comment 36(d)(1)-5 and 36(d)(1)-7 address 
the following scenarios: (1) Where a creditor reduces the 
compensation paid to an individual loan originator in connection 
with a change in transaction terms; (2) where a creditor reduces the 
compensation paid to a loan originator organization in connection 
with a change in transaction terms, with or without a corresponding 
reduction by the loan originator organization in the compensation 
paid to an individual loan originator; or (3) in a transaction where 
the loan originator organization receives compensation directly from 
the consumer, where a loan originator organization reduces its own 
compensation with or without a corresponding reduction in 
compensation paid to an individual loan originator. Thus, these 
revisions do not address where a creditor or loan originator 
organization alters transaction terms that do not consist of or 
result in payment of loan originators.
---------------------------------------------------------------------------

    The proposal also would have removed existing comment 36(d)(1)-7, 
which states that the prohibition on compensation based on transaction 
terms does not apply to transactions in which any loan originator 
receives compensation directly from the consumer (i.e., consumer-paid 
compensation) under the existing rule. As discussed above, the Dodd-
Frank Act now applies the prohibition on compensation based on 
transaction terms to consumer-paid compensation. Thus, the Bureau 
stated that it believed it was appropriate to propose to remove 
existing comment 36(d)(1)-7 and to interpret comment 36(d)(1)-5 as 
applying to loan originator organizations that receive compensation 
directly from consumers as well as to

[[Page 11331]]

loan originators that receive compensation from creditors.
    Finally, in place of existing comment 36(d)(1)-7, the Bureau 
proposed to include a new comment 36(d)(1)-7, to clarify that the 
interpretation that Sec.  1026.36(d)(1)(i) prohibits loan originators 
from decreasing their compensation to bear the cost of pricing 
concessions does not apply where the transaction terms change after the 
initial offer due to an unanticipated increase in certain closing 
costs. The Bureau believed that it was appropriate to propose this 
clarification because such situations did not present a risk of 
steering and could allow additional flexibility to the parties to 
consummate a transaction after unexpected developments. Specifically, 
new comment 36(d)(1)-7 would have clarified that, notwithstanding 
comment 36(d)(1)-5, Sec.  1026.36(d)(1) does not prohibit loan 
originators from decreasing their compensation to cover unanticipated 
increases in non-affiliated third-party closing costs that exceed 
limits imposed under the RESPA disclosure rules and other applicable 
laws. The RESPA disclosure rules (implemented in Regulation X) require 
creditors to estimate the costs for settlement services within a few 
days of application, and restrict the amount of cost increases beyond 
those estimates (i.e., ``tolerance'' requirements \89\) depending on 
whether the settlement service provider is selected by the creditor, by 
the consumer from a list provided by the creditor, or by the consumer 
on the open market. Thus, the proposed comment would have permitted 
pricing concessions to cover unanticipated increases in non-affiliated 
third-party closing costs that exceed the Regulation X tolerances, 
provided that the creditor or the loan originator does not know or 
should not reasonably be expected to know the costs in advance.
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    \89\ Tolerance requirements (tolerances) are accuracy standards 
under Regulation X, with respect to the good faith estimate which 
summarizes estimated settlement charges and is provided to borrowers 
under RESPA section 5(c) (RESPA GFE). See generally 12 CFR 1024.7(e) 
and (f). Regulation X provides for three categories of tolerances. 
Section 1024.7(e)(1) of Regulation X provides that the actual 
settlement charges may not exceed the amounts included on the RESPA 
GFE for (1) the origination charge, (2) while the borrower's 
interest rate is locked, the credit or charge for the interest rate 
chosen, (3) while the borrower's interest rate is locked, the 
adjusted origination charge; and (4) transfer taxes (zero percent 
tolerance). Section 1024.7(e)(2) provides that the sum of the 
settlement charges for the following services may not be greater 
than 10 percent above the sum of the estimated charges for those 
services included on the RESPA GFE for (1) lender-required 
settlement services, where the lender selects the third-party 
settlement service provider, (2) lender-required services, title 
services and required title insurance, and owner's title insurance, 
when the borrower uses a settlement service provider identified by 
the loan originator, and (3) government recording charges (10 
percent tolerance). Section 1024.7(e)(3) provides that all other 
estimated charges may change by any amount prior to settlement (no 
tolerance). Under Regulation X, the estimates included on the RESPA 
GFE generally are binding within the tolerances. 12 CFR 1024.7(f). 
In limited instances, however, a revised RESPA GFE may be provided 
reflecting an increase in settlement charges (e.g., for changed 
circumstances, defined in 12 CFR 1024.2(b), that result in increased 
settlement charges or a change in the borrower's eligibility for the 
specific loan terms identified in the RESPA GFE). Id. In the 2012 
TILA-RESPA Proposal, the Bureau proposed certain changes to the 
tolerances, such as subjecting settlement charges by lender-
affiliated providers to zero percent tolerance. See 77 FR 51169-72 
(Aug. 23, 2012). For a discussion of tolerances more generally, see 
the 2012 TILA-RESPA Proposal, 77 FR 51165-75 (Aug. 23, 2012).
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    Proposed comment 36(d)(1)-7 also would have explained, by way of 
example, that a loan originator is reasonably expected to know the 
amount of the third-party closing costs in advance if the consumer is 
allowed to choose from among only three pre-approved third-party 
service providers. In contrast, where a consumer is permitted to shop 
for the third-party service provider and selects a third-party service 
provider entirely independently of any pre-approval or recommendation 
of the creditor or loan originator, the loan originator might not be 
reasonably expected to know the amount of the closing costs in advance 
because of the lack of communication and coordination between the loan 
originator and the third-party service provider prior to provision of 
the estimate. The Bureau stated in the proposal that if a loan 
originator repeatedly reduces its compensation to bear the cost of 
pricing concessions for the same categories of closing costs across 
multiple transactions based on a series of purportedly unanticipated 
expenses, proposed comment 36(d)(1)-7 would not apply to this situation 
because the loan originator would be reasonably expected to know the 
closing costs across multiple transactions.
    As noted above, the Bureau explained it believed the new comment 
was appropriate because reductions in loan originator compensation to 
bear the cost of pricing concessions, when made in response to 
unforeseen events outside the loan originator's control to comply with 
otherwise applicable legal requirements, do not raise concerns about 
the potential for steering consumers. The Bureau also stated that this 
further clarification would have effectuated the purposes of, and 
facilitated compliance with, TILA section 129B(c)(1) and Sec.  
1026.36(d)(1)(i) because, without it, creditors and loan originators 
might incorrectly conclude that a loan originator bearing the cost of 
these pricing concessions would violate those provisions, or creditors 
and loan originators could face unnecessary uncertainty with regard to 
compliance with these provisions and other laws, such as Regulation X's 
tolerance requirements (as applicable). The Bureau further solicited 
comment on whether the proposed revisions to the Sec.  1026.36(d)(1) 
commentary would be appropriate, too narrow, or create a risk of 
undermining the principal prohibition of compensation based on a 
transaction's terms.
    The Bureau received approximately 20 comments regarding the 
proposed revision to the Sec.  1026.36(d)(1) commentary to allow loan 
originators to reduce their compensation to cover unanticipated 
increases in non-affiliated third-party closing costs that would exceed 
applicable legal requirements. Several consumer groups expressed 
opposition to this proposal, asserting that the Bureau should not allow 
reductions in loan originator compensation to bear the cost of pricing 
concessions under any circumstances. They stated that permitting loan 
originators to reduce their compensation to account for increases in 
third-party fees will weaken the incentive for third parties to provide 
accurate estimates of their fees (thereby undermining the transparency 
of the market); place upward pressure on broker compensation to absorb 
unanticipated closing cost increases; and encourage violations of RESPA 
section 8's prohibition on giving or accepting a fee, kickback, or any 
other thing of value in exchange for referrals of settlement service 
business involving a federally related mortgage loan. The consumer 
groups also criticized as unrealistic the proposal to permit reductions 
in loan originator compensation to bear the cost of pricing concessions 
only when a loan originator does not know or should not reasonably be 
expected to know the amount of the closing cost in advance. In the 
consumer groups views, loan originators, by virtue of their experience, 
will or should always know the actual closing costs; thus, the Bureau's 
premise for the proposed exception to the prohibition on reducing loan 
originator compensation to bear the cost of a pricing concession will 
never occur in practice.
    An organization commenting on behalf of State bank supervisors 
supported allowing reductions in compensation to bear the cost of 
pricing concessions made in response to unforeseen events genuinely 
outside the control of the loan originator. The group

[[Page 11332]]

wrote that such reductions in loan originator compensation should not 
raise concerns about the potential for steering consumers to particular 
transaction terms. The group also stated that the proposed changes to 
the commentary to Sec.  1026.36(d)(1) would provide needed clarity and 
coherence in this area.
    Many industry commenters, including large and medium-sized 
financial institutions as well as several national trade associations, 
supported in principle the Bureau's interpretation of Sec.  
1026.36(d)(1) to permit reductions in loan originator compensation in 
the circumstances described in proposed revised comment 36(d)(1)-7. One 
community bank stated its appreciation for the Bureau providing better 
insight into an area that, according to the bank, has been vague since 
the existing regulation went into effect and asserted that the Bureau 
is correct in allowing for reductions in loan originator compensation 
to bear the cost of pricing concessions in certain instances where the 
consumer will not suffer material harm. The bank, however, criticized 
the circumstances described in proposed revised comment 36(d)(1)-7 as 
too subjective and narrow. A financial holding company commented that 
the language permitting a reduction in loan originator compensation to 
bear the cost of a pricing concession only if the loan originator does 
not know or is not reasonably expected to know the amount of the 
closing costs in advance was too ambiguous. A trade association 
representing the mortgage industry questioned the meaning in the 
proposed commentary provision of the term ``unanticipated expenses'' 
because, the association stated, these types of additional expenses 
would typically constitute changed circumstances, which are already the 
subject of redisclosure of the RESPA GFE.
    Some industry commenters urged the Bureau to allow reductions in 
loan originator compensation to bear the cost of pricing concessions 
under additional circumstances, such as to cover closing cost increases 
within the Regulation X tolerance requirements (in contrast to the 
proposal, which would permit pricing concessions only where the closing 
cost increase exceeds limits imposed by applicable law); to avoid the 
triggering of Federal and State high-cost mortgage provisions; and to 
ensure that a credit transaction is a qualified mortgage under Federal 
ability-to-repay provisions.\90\ One large depository institution asked 
that the commentary clarify that reductions in loan originator 
compensation to bear the cost of pricing concessions are permitted for 
closing cost increases quoted by pre-approved service providers if the 
increase was caused by an event that neither the service provider nor 
the loan originator reasonably could have predicted in the ordinary 
course of business. Several individual loan originators asked to allow 
reductions in loan originator compensation to cover rate-lock 
extensions. One mortgage broker suggested a cap of $500 for reductions 
in loan originator compensation to bear the cost of pricing 
concessions.
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    \90\ As discussed in part II.C above, the Bureau, as part of the 
Title XIV Rulemakings, has issued the 2013 ATR Final Rule and the 
2013 ATR Concurrent Proposal, which together would implement Dodd-
Frank Act provisions requiring creditors to determine that a 
consumer is able to repay a mortgage loan and establishing standards 
for compliance, such as by making a ``qualified mortgage.''
---------------------------------------------------------------------------

    Several industry commenters requested that reductions in loan 
originator compensation to bear the cost of pricing concessions be 
permitted in the case of loan originator ``error,'' though these 
commenters differed slightly on some details. For instance, one large 
depository institution urged the Bureau to allow reductions in loan 
originator compensation to bear the cost of pricing concessions to 
cover expenses incurred by the creditor as a result of inadvertent 
errors by the individual loan originator, such as misquoting a creditor 
or third-party charge and making clerical or other errors that result 
in a demonstrable loss to the creditor (e.g., where the loan originator 
assures the consumer that the interest rate is being locked but fails 
to do so). In addition, the same depository institution urged the 
Bureau to permit reductions in loan originator compensation to allow 
the creditor to penalize loan originators for their failure to comply 
with the creditor's policies and procedures even in the absence of a 
demonstrable loss to the creditor. Another large depository institution 
asked the Bureau to allow reductions in loan originator compensation to 
bear the cost of pricing concessions where the loan originator made an 
error on the RESPA GFE. A national industry trade association asked 
that a loan originator be allowed to reduce compensation to address an 
erroneous or mistaken charge on the RESPA GFE, or where poor customer 
service has been reported. One financial institution also requested 
that reductions in loan originator compensation to bear the cost of 
pricing concessions be permitted when there is a misunderstanding over 
consumer information or to cover ``reduced, waived, or uncollected 
third-party fees.'' One trade association asked that creditors be able 
to limit the discretion of loan originators to reduce their 
compensation to bear the cost of pricing concessions to avoid disparate 
impact issues under fair lending laws.
    One large depository institution and two national trade 
associations commented that the Bureau should allow reductions in loan 
originator compensation to bear the cost of pricing concessions granted 
to meet price competition. One of the trade associations commented that 
prohibiting reductions in loan originator compensation in these 
circumstances punishes motivated and informed consumers who are seeking 
more competitive loan originator compensation from the person closest 
to the transaction, which is the individual loan originator, by denying 
such consumers the benefit of their wish to bargain. A trade 
association representing mortgage brokers similarly stated that loan 
originators should be permitted to reduce their compensation to provide 
closing cost credits to a consumer or to match a competitor's price 
quote. This trade association also asserted that not allowing loan 
originator organizations to reduce their compensation to bear the cost 
of pricing concessions for competition creates an ``[un]level playing 
field'' between loan originator organizations and creditors.
    A State housing finance authority urged the Bureau not to impose 
the ban on reducing loan originator compensation to bear the cost of 
pricing concessions for loans purchased or originated by governmental 
instrumentalities. The commenter stated that, under its programs, 
creditors agree to receive below-market servicing release premiums, and 
they then pass on some or all of that loss by paying loan originators 
less for such transactions. The commenter stated further that the 
proposal would have disruptive effects on its programs because 
creditors have indicated that they cannot afford to participate if, as 
they interpret Sec.  1026.36(d)(1)(i) as mandating, they must absorb 
all of the loss associated with the below-market servicing release 
premiums. A mortgage company asked that the Bureau allow it to reduce 
the basis points it pays its loan originators for originating jumbo 
loans.
    The Bureau has considered the comments received and concluded that 
it is appropriate to finalize the basic approach to pricing concessions 
outlined in the proposal, while expanding the scope of circumstances in 
which the compensation paid to a loan originator may be reduced to bear 
the

[[Page 11333]]

cost of pricing concessions provided to consumers in response to 
unforeseen settlement cost increases. The Bureau believes that it is 
critical to continue restricting reductions in loan originator 
compensation to bear the cost of pricing concessions to truly 
unforeseen circumstances, because broader latitude would create 
substantial opportunities to evade the general rule. The Bureau 
believes this approach will balance the concerns of industry that the 
proposed commentary provision regarding permissible reductions in loan 
originator compensation to bear the cost of pricing concessions was too 
narrowly crafted, and thus ultimately would have hurt consumers and 
industry alike, with the concerns of consumer groups that any exception 
to the existing prohibition would vitiate the underlying rule.
    In this final rule, the Bureau is making only one substantive 
change and several technical changes to its proposed revisions to 
comment 36(d)(1)-5, which would have described in more detail the 
interpretation that Sec.  1026.36(d)(1)(i) prohibits reductions in loan 
originator compensation to bear the cost of pricing concessions. 
Comment 36(d)(1)-5 now clarifies that a loan originator organization 
may not reduce its own compensation in a transaction where the loan 
originator organization receives compensation directly from the 
consumer (i.e., consumer-paid compensation), with or without a 
corresponding reduction in compensation paid to an individual loan 
originator. This language is intended to make clearer that, in light of 
the deletion of existing Sec.  1026.36(d)(1)(iii) and the removal of 
existing comment 36(d)(1)-7 (see discussion below), comment 36(d)(1)-5 
applies to loan originator organizations that receive compensation 
directly from consumers.
    When a loan originator organization charges consumers fees that are 
based on the terms of a transaction, the individual loan originators 
who work for the organization will tend to sell consumers the terms 
that generate higher income for the loan originator organization, even 
if the compensation of the individual loan originator is not based on 
those terms. That is presumably why Congress elected to extend the loan 
originator compensation rule to cover consumer-paid transactions.\91\ 
The same risk exists if the loan originator organization establishes a 
uniform fee structure but then discounts its fees to fund pricing 
concessions. Thus, the Bureau believes that covering pricing 
concessions by a loan originator organization is required to faithfully 
implement the TILA section 129B(c)(1) prohibition on varying loan 
originator compensation based on the terms of a loan. While the Bureau 
bases this clarification on its interpretation of TILA section 
129B(c)(1), it is also supported by its authority under TILA section 
105(a) to prescribe rules providing adjustments and exceptions 
necessary or proper to facilitate compliance. See the section-by-
section analysis of Sec.  1026.36(d)(1)(iii) for further discussion of 
these issues. As a technical matter, this final rule substitutes 
``transaction'' for ``loan,'' ``high-cost mortgage'' for ``high-cost 
loan,'' and ``credit'' for ``loan'' where appearing in existing comment 
36(d)(1)-5 to be consistent with terminology used in this final rule 
and in Regulation Z generally, and in a few instances the word 
``originator'' is replaced with ``loan originator'' for consistency 
purposes.
---------------------------------------------------------------------------

    \91\ For more discussion regarding a consumer's payment to a 
loan originator organization, see this section-by-section analysis 
of Sec.  1026.36(d)(1)(i) under the heading Prohibition Against 
Payments Based on a Term of a Transaction.
---------------------------------------------------------------------------

    The Bureau is finalizing the removal of existing comment 36(d)(1)-
7, which states that the prohibition on compensation based on 
transaction terms does not apply to transactions in which any loan 
originator receives compensation directly from the consumer (i.e., 
consumer-paid compensation) under the existing rule. The Bureau did not 
receive any comments addressing this specific proposal.\92\ As 
discussed above, the Dodd-Frank Act now applies the prohibition on 
compensation based on transaction terms to consumer-paid compensation. 
Thus, the Bureau continues to believe that it is appropriate to propose 
to remove existing comment 36(d)(1)-7. As discussed above, the Bureau 
is also revising comment 36(d)(1)-5 to clarify its application to loan 
originator organizations that receive compensation directly from 
consumers.
---------------------------------------------------------------------------

    \92\ As noted above, the Bureau did receive several comments 
urging it to allow loan originator organizations to reduce their 
compensation to meet price competition.
---------------------------------------------------------------------------

    In this final rule, comment 36(d)(1)-7 largely follows the approach 
set forth in the proposed comment 36(d)(1)-7, which would have 
permitted loan originators to reduce their compensation to bear the 
cost of pricing concessions in a very narrow set of circumstances where 
there was an unanticipated increase in certain settlement costs beyond 
applicable tolerance requirements. The Bureau believes that allowing 
reductions in loan originator compensation in too permissive 
circumstances would undermine the prohibition against compensation 
based on a transaction's terms. Existing comment 36(d)(1)-5 prevents 
creditors and loan originators from evading the prohibition in Sec.  
1026.36(d)(1) by systematically setting loan originator compensation at 
a non-competitive, artificially high baseline and then allowing 
discretion to loan originators to lower their compensation (by giving 
the concession) in selective cases, either unilaterally or upon request 
by consumers. More sophisticated consumers who choose to negotiate the 
loan originator compensation may benefit from the ability of loan 
originators to grant concessions. On the other hand, if reductions in 
loan originator compensation to bear the cost of pricing concessions 
were allowed under all circumstances, those consumers who do not shop 
or who otherwise lack the knowledge or expertise to negotiate 
effectively may be vulnerable to creditors or loan originators that 
consistently inflate price quotes. Thus, an interpretation of Sec.  
1026.36(d)(1)(i) to allow reductions in loan originator compensation to 
bear the cost of a pricing concession in a broad set of circumstances 
could create an opening to upcharge consumers across the board.
    For example, a creditor may have a standard origination fee of 
$2,000 that, pursuant to its arrangement with its individual loan 
originators, is split evenly between the creditor and the individual 
loan originators. The creditor budgets for this origination fee in 
terms of its expected revenues on each transaction. However, the 
creditor and its individual loan originators might have an additional 
arrangement whereby: (1) The individual loan originators initially 
estimate the origination fee as $3,000 to every consumer; (2) the 
individual loan originators are permitted to make pricing concessions 
to lower the quoted origination fee to a minimum of $2,000; and (3) the 
creditor and individual loan originators split equally the actual 
origination fee collected in each case, with or without any pricing 
concessions. Assume that sophisticated consumer X, when quoted the 
$3,000 origination fee, recognizes that the fee is not competitive and 
requests that the individual loan originator with whom the consumer is 
interacting to lower it, to which the individual loan originator 
agrees. On the other hand, less sophisticated consumer Y, when quoted 
the $3,000 origination fee, does not

[[Page 11334]]

attempt to negotiate the fee. Consumer Y would thus be vulnerable to 
this means of evading Sec.  1026.36(d)(1) that would exist but for 
comment 36(d)(1)-5 on reductions in loan originator compensation to 
bear the cost of pricing concessions.\93\ The Bureau is concerned that 
this practice would significantly undermine the prohibitions on 
compensation based on transaction terms in Sec.  1026.36(d)(1) and the 
similar statutory prohibition in Dodd-Frank Act section 1403, which 
this final rule is implementing.
---------------------------------------------------------------------------

    \93\ The Bureau believes that what would make this kind of 
arrangement viable, but for the interpretation in comment 36(d)(1)-
5, is the fact that the individual loan originator would have 
discretion to reduce its compensation to bear the cost of a 
selective pricing concession, as necessary to retain sophisticated 
consumer X's business. The Bureau recognizes that, even with comment 
36(d)(1)-5 in place, a creditor and individual loan originator still 
could engage in a similar business model involving non-competitive 
overall credit pricing to support inflated loan originator 
compensation--but they would have to be content to limit their 
business exclusively to less sophisticated consumers such as 
consumer Y because their inability to reduce their compensation to 
bear the cost of selective pricing concessions would mean foregoing 
more sophisticated consumers' business. The Bureau is skeptical that 
the regulatory limitations and market pressures would permit such a 
model to work on a large scale, if at all. Moreover, the 2013 ATR 
Final Rule and the 2013 HOEPA Final Rule include loan originator 
compensation in points and fees for the thresholds for both 
qualified mortgages and high-cost mortgages, so these points and 
fees limits impose additional constraints on the ability of 
creditors and loan originators to inflate loan originator 
compensation.
---------------------------------------------------------------------------

    In particular, the Bureau is not interpreting Sec.  1026.36(d)(1) 
to permit loan originators to reduce their compensation to bear the 
cost of a pricing concession in connection with matching a competitor's 
credit terms, an approach that was suggested by two industry trade 
associations and one large financial institution. The Bureau believes 
this interpretation would greatly undermine the general rationale for 
the prohibition of pricing concessions. As discussed above, a primary 
purpose of existing comment 36(d)(1)-5 is to prevent creditors and loan 
originators from effectively evading Sec.  1026.36(d)(1) by doing 
indirectly what it prohibits directly (i.e., paying loan originators 
compensation that is based on transaction terms). Although more 
sophisticated consumers who shop and seek alternative offers may 
benefit from the ability of loan originators to reduce their 
compensation in the case of price competition, those consumers who do 
not shop or who otherwise lack the knowledge or expertise to negotiate 
effectively may be vulnerable to creditors or loan originators that 
consistently inflate price quotes. Moreover, in the 2010 Loan 
Originator Final Rule, the Board recognized that in some cases a 
creditor may be unable to offer the consumer a more competitively-
priced loan without also reducing the creditor's own origination costs, 
but the Board also noted that creditors finding themselves in this 
situation frequently will be able to adjust their overall pricing and 
compensation arrangements to be more competitive generally with other 
creditors in the market. 75 FR 58509, 58524 (Sept. 24, 2010). The 
Bureau agrees with the Board's rationale. In light of these 
considerations, the Bureau is not revising comment 36(d)(1)-7 to permit 
reductions in loan originator compensation to bear the cost of pricing 
concessions for price competition.
    Moreover, the Bureau also does not agree with the assertion by one 
trade association that loan originator organizations should be entitled 
to reduce their compensation for price competition--even if they do not 
pass along the cost of the pricing concession to their individual loan 
originators--as a means of attaining parity with creditors. Under the 
existing regulation, creditors may make pricing concessions in specific 
cases but may not pass along the cost of such concessions to their 
individual loan originators or to loan originator organizations. The 
Bureau believes that changing this rule would be inconsistent with TILA 
section 103(cc)(2)(F), which was added by Dodd-Frank Act section 1401. 
TILA section 103(cc)(2)(F) provides that the definition of ``mortgage 
originator'' expressly excludes creditors (other than creditors in 
table-funded transactions) for purposes of TILA section 129B(c)(1).\94\ 
15 U.S.C. 1602(cc)(2)(F). The Dodd-Frank Act thus contemplated treating 
brokers and retail loan officers equivalently--they are both individual 
loan originators--but did not likewise contemplate equivalent treatment 
between creditors (other than those in table-funded transactions) and 
loan originator organizations. Therefore, the Bureau is not permitting 
loan originator organizations to reduce their compensation to meet 
price competition.
---------------------------------------------------------------------------

    \94\ As noted earlier, TILA section 129B(c)(1), as added by 
Dodd-Frank Act section 1403, provides that for any residential 
mortgage loan no mortgage originator shall receive from any person 
and no person shall pay to a mortgage originator, directly or 
indirectly, compensation that varies based on the terms of the loan 
(other than the amount of the principal). 12 U.S.C. 1639b(c)(1).
---------------------------------------------------------------------------

    At the same time, the Bureau believes it is appropriate to permit 
loan originators to reduce their compensation to bear the cost of 
pricing concessions in additional circumstances that, when 
appropriately cabined to prevent abuse, do not present a risk of 
steering and allow the parties to credit transactions greater 
flexibility to close transactions, which benefits consumers and 
industry alike. For example, several commenters questioned why the 
Bureau would prohibit a loan originator from covering a rate-lock 
extension fee when the original rate lock has expired through the loan 
originator's fault. The Bureau acknowledges that, even with the 
proposed new comment 36(d)(1)-7, the combined effect of Regulation X 
and Regulation Z disclosure rules and the prohibition on compensation 
based on transaction terms in Sec.  1026.36(d)(1)(i) would have been to 
bar loan originators from reducing their compensation to bear the cost 
of pricing concessions in these (and many other) circumstances, which 
could prove detrimental to consumers in some cases.\95\ Moreover, the 
proposal would have allowed reductions in loan originator compensation 
to bear the cost of pricing concessions only for unanticipated 
increases in non-affiliated third-party closing costs exceeding 
applicable legal limits. Where an increase in an actual settlement cost 
above that estimated on the RESPA GFE is not in excess of Regulation X 
tolerance limits, the proposed rule would not have permitted any 
reduction in loan originator compensation to cover the increase or a 
portion of it. Therefore, a consumer who wants to negotiate down a 
higher-than-estimated settlement cost could benefit from a loan 
originator being permitted to reduce its compensation to bear the cost 
of the reduction in the actual settlement cost.
---------------------------------------------------------------------------

    \95\ This could occur, for example, if the consumer enters into 
a rate-lock agreement with a creditor, a changed circumstance occurs 
under Regulation X the effect of which is a delay of the closing 
date, and the rate-lock expires during the delay. In such a 
scenario, if the consumer refuses to pay the rate-lock extension fee 
and the creditor is neither required nor willing to waive or reduce 
the fee, the transaction may never be consummated if the loan 
originator, although willing to do so, is not allowed to reduce its 
compensation to bear the cost of the rate-lock extension fee. See 12 
CFR 1024.7(f).
---------------------------------------------------------------------------

    The Bureau balances these considerations in the final rule. New 
comment 36(d)(1)-7 clarifies that, notwithstanding comment 36(d)(1)-5, 
Sec.  1026.36(d)(1) does not prohibit a loan originator from decreasing 
its compensation in unforeseen circumstances to defray the cost, in 
whole or part, of an increase in an actual settlement cost over an 
estimated settlement cost disclosed to the consumer pursuant to section 
5(c) of RESPA or an unforeseen actual settlement cost not disclosed to 
the

[[Page 11335]]

consumer pursuant to section 5(c) of RESPA.
    The comment explains that, for purposes of comment 36(d)(1)-7, an 
increase in an actual settlement cost over an estimated settlement cost 
(or omitted from that disclosure) is unforeseen if the increase occurs 
even though the estimate provided to the consumer (or the omission from 
that disclosure) is consistent with the best information reasonably 
available to the disclosing person at the time of the estimate. The 
Bureau believes that repeated increases in or omissions of one or more 
categories of settlement costs over multiple transactions may indicate 
that the disclosing person is not estimating the settlement cost 
consistent with the best information reasonably available, which in 
turn may suggest that the person is systematically underestimating (or 
omitting) such cost.\96\ While the Bureau bases this clarification on 
its interpretation of TILA section 129B(c)(1), it is also supported by 
its authority under TILA section 105(a) to prescribe rules providing 
adjustments and exceptions necessary or proper to facilitate 
compliance.
---------------------------------------------------------------------------

    \96\ In addition to reductions in loan originator compensation 
not being permitted under such circumstances pursuant to comment 
36(d)(1)-7, such activity may also constitute a violation of the 
RESPA section 5(c) requirement of a good faith estimate.
---------------------------------------------------------------------------

    Comment 36(d)(1)-7 provides two examples of reductions in 
compensation to bear the cost of pricing concessions that would be 
permitted under Sec.  1026.36(d)(1). Comment 36(d)(1)-7.i presents the 
example of a consumer who agrees to lock an interest rate with a 
creditor in connection with the financing of a purchase-money 
transaction. A title issue with the property being purchased delays 
closing by one week, which in turn causes the rate lock to expire. The 
consumer desires to re-lock the interest rate. Provided that the title 
issue was unforeseen, the loan originator may decrease the loan 
originator's compensation to pay for all or part of the rate-lock 
extension fee. Comment 36(d)(1)-7.ii presents the example of when 
applying the tolerance requirements under the regulations implementing 
RESPA sections 4 and 5(c), there is a tolerance violation of $70 that 
must be cured. The comment clarifies that, provided the violation was 
unforeseen, the rule is not violated if the individual loan 
originator's compensation decreases to pay for all or part of the 
amount required to cure the tolerance violation.
    Regarding certain other comments from industry, the Bureau has not, 
in this final rule, tied the permissibility of reducing loan originator 
compensation to bear the cost of pricing concessions to the specific 
type of transaction or the nature of the originator or secondary market 
purchaser, as two commenters requested (i.e., by urging the Bureau to 
exempt jumbo loans and loans purchased or originated by governmental 
instrumentalities). The Bureau believes that allowing reductions in 
loan originator compensation to bear the cost of pricing concessions on 
a categorical basis for certain loan types and originator or secondary 
market purchaser identity would ignore the possibility of steering 
incentives that may be present in such circumstances. Moreover, the 
Bureau believes that allowing reductions in compensation to bear the 
cost of pricing concessions for any reason up to a specified dollar 
amount, as one mortgage broker commenter suggested, would be 
inappropriate. In cases in which there are truly unforeseen 
circumstances, there is no reason to cap the dollar amount of the 
concession. And in other cases, a generic permissible amount of 
concessions could create precisely the type of incentive to upcharge 
across all consumers that the general prohibition is designed to 
prevent.
    The Bureau has not revised comment 36(d)(1)-7 to permit expressly 
reductions in loan originator compensation to bear the cost of a 
pricing concession for ``clerical error.'' As noted above, the 
commenters who suggested the Bureau permit reductions in compensation 
for ``clerical error'' gave different details about the scope of the 
suggested exception. The Bureau believes this term would be difficult 
to define. Moreover, the Bureau believes the scenarios cited by some 
commenters in urging the Bureau to allow concessions in these 
circumstances (e.g., where the loan originator assures the consumer 
that the interest rate is being locked but fails to do so) would 
already be covered by revised comment 36(d)(1)-7, which allows 
reductions in loan originator compensation to bear the cost of pricing 
concessions where there has been an unforeseen increase in a settlement 
cost above that estimated on the disclosure delivered to the consumer 
pursuant to RESPA section 5(c) (or omitted from that disclosure).
    The Bureau is not revising comment 36(d)(1)-7 to address expressly 
whether loan originators may reduce their compensation to bear the cost 
of pricing concessions made to avoid the triggering of Federal and 
State high-cost mortgage provisions or to ensure that a credit 
transaction is a qualified mortgage under Federal ability-to-repay 
provisions, as certain industry commenters requested. The Bureau 
believes that exceptions in these circumstances to the general 
prohibition on reducing loan originator compensation in connection with 
pricing concessions are not warranted because the rationale underlying 
the general prohibition is present. In other words, such an approach 
could incentivize creditors to systematically overestimate pricing in 
all circumstances and make selective concessions (of which loan 
originators would bear the cost) for the sole purpose of avoiding high-
cost mortgage triggers or noncompliance with Federal ability-to-repay 
provisions.
    The Bureau also believes that comment 36(d)(1)-7 need not address, 
as one commenter suggested, reductions in loan originator compensation 
to penalize a loan originator for its failure to comply with a 
creditor's policies and procedures in the absence of a demonstrable 
loss to the creditor. In this scenario, the consumer's transaction 
terms are not changing; there is no pricing concession. Thus, unless 
the proxy analysis under Sec.  1026.36(d)(1)(ii) applies, the Bureau 
believes a reduction in loan originator compensation as a penalty for 
the loan originator's failure to follow the creditor's policies and 
procedures where there is no demonstrable loss to the creditor is 
outside the scope of Sec.  1026.36(d)(1)(i) and thus need not be 
addressed by comment 36(d)(1)-7. Regarding one commenter's suggestion 
that the Bureau allow reductions in loan originator compensation if 
poor customer service is reported, the Bureau likewise does not believe 
it is necessary to address this issue in comment 36(d)(1)-7. Where poor 
customer service is reported and the creditor reduces the compensation 
of the loan originator, but the consumer's transaction terms do not 
change and the proxy analysis does not apply, the reduction in 
compensation is outside the scope of Sec.  1026.36(d)(1)(i). If, 
however, the creditor were to agree to reduce its origination fee or 
change another transaction term in response to the complaint about poor 
customer service, allowing reductions in compensation under these 
circumstances could lead to creditors and loan originators 
systematically overestimating settlement costs and selectively reducing 
them in response to complaints of poor customer service. The baseline 
prohibition thus would apply in that circumstance.

[[Page 11336]]

    Furthermore, the Bureau does not believe that reductions in loan 
originator compensation to bear the cost of pricing concessions should 
be permitted when, as one commenter suggested, there is a 
``misunderstanding over a consumer's information'' or to cover 
``reduced, waived, or uncollected third-party fees.'' Regarding a 
``misunderstanding over consumer information,'' the principles the 
commenter suggested are too vague to be included as a separate 
rationale for allowing pricing concessions in comment 36(d)(1)-7, and 
thus potentially would be over-inclusive and confusing. However, these 
circumstances may already be covered by the language in comment 
36(d)(1)-7 clarifying that the reduction in loan originator 
compensation may be made to defray an increase in an actual settlement 
cost above the estimated settlement cost disclosed to the consumer 
pursuant to section 5(c) of RESPA. Allowing reductions in loan 
originator compensation to cover reduced, waived, or uncollected third-
party fees may not result in any discernible benefit to consumers, and 
in any event the reduction, waiver, or collection of third-party fees 
is better addressed separately by the loan originator and creditor 
outside the context of the transaction.
    Finally, the Bureau has not revised comment 36(d)(1)-7 to state 
that creditors must control loan originators' reductions in 
compensation to prevent disparate impact issues under fair lending 
laws, as one commenter suggested. This clarification is not necessary 
because nothing in comment 36(d)(1)-7 requires reductions in loan 
originator compensation to bear the cost of pricing concessions or 
prevents creditors from exercising prudent control over them. Thus, 
creditors may prohibit their loan originators from reducing their 
compensation to bear the cost of concessions in certain circumstances, 
such as to prevent disparate impact issues under fair lending laws.
Compensation Based on Multiple Transactions of an Individual Loan 
Originator
    Section 1026.36(d)(1)(i) prohibits payment of an individual loan 
originator's compensation that is directly or indirectly based on the 
terms of ``the transaction.'' In the proposal, the Bureau stated that 
it believes that ``transaction'' should be read to include multiple 
transactions by a single individual loan originator because individual 
loan originators sometimes receive compensation derived from multiple 
transactions. Existing comment 36(d)(1)-3 lists several examples of 
compensation methods not based on transaction terms that take into 
account multiple transactions, including ``[t]he percentage of 
applications submitted by the loan originator to the creditor that 
results in consummated transactions.'' See existing comment 36(d)(1)-
3.vi. To avoid any possible uncertainty, however, the Bureau proposed 
to clarify, as part of proposed comment 36(d)(1)-1.ii, that Sec.  
1026.36(d)(1)(i) prohibits compensation based on the terms of multiple 
transactions by an individual loan originator. The Bureau did not 
receive any comments regarding this proposed clarification. The Bureau 
interprets TILA section 129B(c)(1) to prohibit compensation based on 
the terms of multiple transactions by the individual loan 
originator.\97\ Further, the Bureau believes that its approach will 
prevent circumvention or evasion of the statute, consistent with TILA 
section 105(a). Thus, the Bureau is finalizing the clarification in 
proposed comment 36(d)(1)-1.ii that Sec.  1026.36(d)(1)(i) prohibits 
compensation based on the terms of multiple transactions by an 
individual loan originator.
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    \97\ The Bureau believes this interpretation of section 
129B(c)(1) is reasonable in light of the common principle that 
singular words in a statute refer to the plural, and vice versa. See 
1 U.S.C. 1 (``[U]nless the context indicates otherwise,'' ``words 
importing the singular include and apply to several persons, 
parties, or things; words importing the plural include the 
singular.''); see also Congressional Research Report for Congress, 
Statutory Interpretation: General Principles and Recent Trends (Aug. 
31, 2008) at 9, available at http://www.fas.org/sgp/crs/misc/97-589.pdf.
---------------------------------------------------------------------------

Compensation Based on Terms of Multiple Individual Loan Originators' 
Transactions
    Although existing Sec.  1026.36(d)(1)(i) prohibits payment of an 
individual loan originator's compensation that is ``directly or 
indirectly'' based on the terms of ``the transaction,'' and TILA (as 
amended by the Dodd-Frank Act) similarly prohibits compensation that 
``directly or indirectly'' varies based on the terms of ``the loan,'' 
the existing regulation and its commentary do not expressly address 
whether a person may pay compensation that is based on the terms of 
multiple transactions of multiple individual loan originators. As a 
result, numerous questions have been posed regarding the applicability 
of the existing regulation to compensation programs of creditors or 
loan originator organizations, such as those that involve payment of 
bonuses or other deferred compensation under company profit-sharing 
plans \98\ or contributions to certain tax-advantaged retirement plans 
under the Internal Revenue Code (such as 401(k) plans),\99\ under which 
individual loan originators may be paid variable, additional 
compensation that is based in whole or in part on profitability of the 
creditor or loan originator organization.\100\ As the Bureau noted in 
the proposal, a profit-sharing plan, bonus pool, or profit pool set 
aside out of a portion of a creditor's or loan originator 
organization's profits from which bonuses are paid or contributions are 
made to qualified

[[Page 11337]]

plans or non-qualified plans may reflect transaction terms of multiple 
individual loan originators taken in the aggregate. Consequently, these 
types of compensation programs create potential incentives for 
individual loan originators to steer consumers to particular 
transaction terms based on the interests of the loan originator rather 
than the consumer, which is one of the fundamental problems that TILA 
section 129B(c) and the existing regulation are designed to address. 
Moreover, limiting the scope of compensation restrictions in Sec.  
1026.36(d)(1)(i) to an overly narrow interpretation of ``the 
transaction'' could undermine the rule. For example, a creditor or loan 
originator organization could restructure its compensation policies to 
pay a higher percentage of compensation through bonuses under company 
profit-sharing plans, rather than through compensation, such as 
commissions, that is not based on the terms of multiple transactions of 
multiple individual loan originators.
---------------------------------------------------------------------------

    \98\ As discussed below, the proposal sometimes used the term 
``profit-sharing plan'' to describe compensation programs (including 
``bonus plans,'' ``profit pools,'' and ``bonus pools'') under which 
individual loan originators are paid additional compensation based 
in whole or in part on the profitability of the company, business 
unit, or affiliate. As discussed below, this final rule effectively 
substitutes the term ``non-deferred profits-based compensation 
plan'' for ``profit-sharing plan'' but the term has a somewhat 
different meaning for purposes of Sec.  1026.36(d)(1)(iv). When 
referring to the proposal, the Small Business Panel Review process, 
or comments in response thereto in this section-by-section analysis, 
the term ``profit-sharing plan'' is retained whereas when referring 
to the provisions of this final rule, the term ``non-deferred 
profits-based compensation plan'' is used. The discussion of the 
proposal, Small Business Panel Review process, or comments in 
response thereto also sometimes refers to ``profit-sharing 
bonuses,'' whereas the final rule and the provisions of this 
section-by-section analysis of the final rule do not use that term.
    \99\ As discussed below, the proposal sometimes used the term 
``qualified plan'' to describe certain tax-advantaged defined 
benefit and defined contribution plans. The proposal sometimes used 
the term ``non-qualified plan'' to refer to other defined benefit 
plans and defined contribution plans. Final Sec.  1026.36(d)(1)(iii) 
and its commentary do not use the terms ``qualified plan'' and 
``non-qualified plan.'' Instead, they use the terms ``designated 
tax-advantaged plans'' (or ``designated plans'') and ``non-
designated plans,'' respectively. When referring to the proposal, 
the Small Business Panel Review process, or comments in response 
thereto in this section-by-section analysis, the terms ``qualified 
plan'' and ``non-qualified plan'' are retained. When referring to 
the provisions of this final rule, the terms ``designated tax-
advantaged plan'' (or ``designated plan'') and ``non-designated 
plan'' are used.
    \100\ The Bureau issued a bulletin on April 2, 2012 to address 
many of these questions. CFPB Bull. No. 2012-2, Payments to Loan 
Originators Based on Mortgage Transaction Terms or Conditions under 
Regulation Z (Apr. 2, 2012), available at http://files.consumerfinance.gov/f/201204_cfpb_LoanOriginatorCompensationBulletin.pdf (CFPB Bulletin 2012-2). CFPB 
Bulletin 2012-2 stated that, until this final rule was adopted, 
employers could make contributions to certain ``Qualified Plans'' 
(defined in CFPB Bulletin 2012-2 to include ``qualified profit 
sharing, 401(k), and employee stock ownership plans'') for 
individual loan originator employees even if the contributions were 
derived from profits generated by mortgage loan originations. It 
explicitly did not address how the rules applied to ``profit-sharing 
arrangements/plans that are not in the nature of Qualified Plans,'' 
which the Bureau wrote would be addressed in this rulemaking. Until 
the final rule goes into effect, the clarifications in CFPB Bulletin 
2012-2 will remain in effect.
---------------------------------------------------------------------------

    To address these concerns, the Bureau proposed a new comment 
36(d)(1)-1.ii in part to clarify that the prohibition on payment and 
receipt of compensation based on the transaction's terms under Sec.  
1026.36(d)(1)(i) covers compensation that directly or indirectly is 
based on the terms of multiple transactions of multiple individual loan 
originators employed by the person. Proposed comment 36(d)(1)-2.iii.C 
would have provided further clarification on these issues.
    The Bureau stated in the section-by-section analysis of proposed 
Sec.  1026.36(d)(1)(i) that the proposed approach was necessary to 
implement the statutory provisions, address the potential incentives to 
steer consumers to particular transaction terms that are present with 
profit-sharing plans, and prevent circumvention or evasion of the 
statute. The Bureau noted, however, that any standard would need to 
account for circumstances where potential incentives were sufficiently 
attenuated to permit such compensation. To that end, proposed Sec.  
1026.36(d)(1)(iii) would have permitted contributions by creditors or 
loan originator organizations to qualified plans in which individual 
loan originators participate. The proposal also would have permitted 
payment of bonuses under profit-sharing plans and contributions to non-
qualified plans even if the compensation were directly or indirectly 
based on the terms of multiple individual loan originators' 
transactions, so long as: (1) The revenues of the mortgage business did 
not constitute more than a certain percentage of the total revenues of 
the person or business unit to which the profit-sharing plan applies, 
as applicable, with the Bureau proposing alternative threshold amounts 
of 25 and 50 percent, pursuant to proposed Sec.  
1026.36(d)(1)(iii)(B)(1); or (2) the individual loan originator being 
compensated was the originator for a de minimis number of transactions 
(i.e., no more than five transactions in a 12-month period), pursuant 
to proposed Sec.  1026.36(d)(1)(iii)(B)(2). In all instances, however, 
the proposal stated that the creditor or loan originator organization 
could not take into account the terms of the individual loan 
originator's transactions, pursuant to the restriction on this 
compensation in proposed Sec.  1026.36(d)(1)(iii)(A). Thus, the 
creditor or loan originator organization could not vary the amount of 
the contribution or distribution based on whether the individual loan 
originator is the loan originator for high rate loans, for example. 
These aspects of the proposal are discussed in more detail in the 
section-by-section analysis of Sec.  1026.36(d)(1)(iii) and (iv) in 
this final rule, below.
    The Bureau sought comment on three additional issues related to the 
proposed commentary that would have clarified that terms of multiple 
loan originators' transactions were subject to the compensation 
restrictions under Sec.  1026.36(d)(1)(i). First, the proposal 
recognized that the strength of potential incentives to steer consumers 
to particular transaction terms presented in specific profit-sharing 
plans may vary based on many factors, including the organizational 
structure, size, diversity of business lines, and compensation 
arrangements. Thus, in certain circumstances, a particular combination 
of factors may substantially mitigate the potential steering incentives 
arising from profit-sharing plans.\101\ The Bureau thereby solicited 
comment on the scope of the steering incentive problem presented by 
profit-sharing plans, whether the proposal effectively addressed these 
issues, and whether a different approach would better address these 
issues. The Bureau also stated in the proposal that it was cognizant of 
the burdens compensation restrictions may impose on creditors, loan 
originator organizations, and individual loan originators. In addition, 
the proposal expressed the Bureau's belief that bonuses and 
contributions to defined contribution and benefit plans, when paid for 
legitimate reasons, could serve as beneficial inducements for 
individual loan originators to perform well and become invested in the 
success of their organizations. The Bureau solicited comment on whether 
the proposed restrictions accomplished the Bureau's objectives without 
unduly restricting compensation arrangements that addressed legitimate 
business needs. Lastly, the Bureau noted that it was not proposing any 
clarifications to existing comment 36(d)(1)-1,\102\ which addresses 
what constitutes compensation and refers to salaries, commissions, and 
similar payments, because the payment of salary and commissions from 
revenues earned from a company's mortgage business typically does not 
raise the same types of concerns about steering consumers to different 
terms to increase the size of a profit-sharing or bonus pool.\103\ The 
Bureau sought comment on whether the prohibition on compensation 
relating to transaction terms of multiple individual loan originators 
should encompass a broader array of compensation arrangements.
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    \101\ The Bureau discussed how, for example, the incentive of 
individual loan originators to upcharge likely diminishes as the 
total number of individual loan originators contributing to the 
profit pool increases. The incentives may be mitigated because: (1) 
Each individual loan originator's efforts will have increasingly 
less impact on compensation paid under profit-sharing plans; and (2) 
the ability of an individual loan originator to coordinate efforts 
with the other individual loan originators will decrease. The Bureau 
cited a number of economic studies regarding this ``free-riding'' 
behavior. The Bureau also stated that this may be particularly true 
at large institutions with many individual loan originators because 
the nexus among the terms of the transactions of the multiple 
individual loan originators, the revenues of the organization, the 
profits of the organization, and the compensation decisions may be 
more diffuse in a large organization.
    \102\ As discussed in the section-by-section analysis of 
proposed Sec.  1026.36(a), the Bureau proposed to move the text of 
this comment to proposed comment 36(a)-5.
    \103\ As the Bureau explained in the proposal, salary and 
commission amounts are more likely than bonuses to be set in 
advance. Salaries are typically paid out of budgeted operating 
expenses rather than a ``profit pool''; commissions typically are 
paid for individual transactions and without reference to the 
person's profitability; and the salary and commission amounts often 
are stipulated by an employment or commission agreement.
---------------------------------------------------------------------------

    Consumer groups commenting on the proposal generally supported the 
clarification that the prohibition on compensation based on transaction 
terms would include the terms of multiple transactions of multiple 
individual loan originators. One consumer group wrote that the proposal 
generally would provide robust protections and reform in loan 
originator compensation, and that the proposed comment 36(d)(1)-1.ii 
would prevent the abuses associated with yield spread premium payments 
to loan originators. A housing advocacy organization wrote that the 
Bureau should state specifically that

[[Page 11338]]

compensation from a loan originator organization to an individual loan 
originator cannot be tied to the terms of any loan, individually or in 
the aggregate. This organization cited two U.S. Department of Justice 
actions, later settled, that alleged that a large depository 
institution and a large mortgage company discriminated against African-
American and Hispanic borrowers by steering them into subprime 
mortgages as evidence of the need of the Bureau to disallow any 
``loophole'' in the final rule that could encourage similar practices. 
A coalition of consumer groups wrote that allowing individual loan 
originators to profit from compensation based on aggregate terms of 
loans they broker, such as higher interest rates, presents the same 
risks to consumers as allowing individual loan originators to profit 
from compensation based on terms of a single transaction. Anything 
short of a complete prohibition on this practice, they wrote, would 
permit a payment structure that Congress intended to ban and that makes 
loan originator compensation even less transparent to consumers.
    An organization writing on behalf of State bank supervisors noted 
that interpretation of existing loan originator compensation standards 
can be difficult for regulators and consumers and that adjustments to 
existing rules for purposes of clarity and coherence would be 
appropriate. The organization was generally supportive of the proposal 
to clarify and revise restrictions related to pooled compensation, 
profit-sharing, and bonus plans for originators, depending on the 
potential incentives to steer consumers to particular transaction 
terms.
    Industry commenters generally opposed new comment 36(d)(1)-1.ii and 
its underlying premise that compensating individual loan originators 
based on the terms of multiple individual loan originators' 
transactions likely creates steering risk. A national trade association 
representing community banks wrote that the Bureau is right to be 
concerned with creating conditions that could lead some individual loan 
originators to steer consumers into transactions that may not be in the 
best interest of a consumer but would benefit an individual loan 
originator through greater bonus compensation. The association 
asserted, however, that the nature of any bonus pool shared by multiple 
individuals or deferred compensation of any type inherently mitigates 
steering risk.\104\ A national trade association representing the 
banking industry acknowledged that bonuses can be improperly used as a 
``proxy'' for transaction terms, but urged the Bureau not to deem every 
revenue-based bonus decision to be a proxy. Instead, the association 
asserted, the possible use of bonuses as a subterfuge for transaction 
terms should be a focus for enforcement and examination.\105\ A large 
depository institution commenter acknowledged that each individual loan 
originator whose bonus comes from a profit-derived pool is indirectly 
incentivized to increase profits and thereby increase the pool's size, 
but stated that appropriately designed bonus plans consistent with risk 
management principles should be permissible when the bonus award is 
directly and primarily based on legitimate factors and incentives 
(i.e., not directly based on the terms of the transactions of each loan 
originator). A national industry trade association suggested that the 
Bureau permit creditors and loan originator organizations to pay a 
bonus to an individual loan originator when the awarding of the bonus 
and its amount are ``sufficiently attenuated'' from the terms of the 
transaction ``so as not to provide a material steering risk for the 
consumer.'' A State industry trade association commented that 
appropriately structured profit-sharing and bonus plans incentivize 
loan originators to make appropriate loans without taking on excessive 
risk or being overly cautious. Thus, the trade association stated that 
severely restricting certain types of profit-sharing or bonus plans 
would not provide consumers with significantly more protection but, 
instead, would limit the availability of credit to all but the most 
creditworthy consumers. A law firm that represents small and mid-sized 
bank clients suggested that the Bureau set forth factors that would be 
used to determine whether a bonus under a particular incentive 
compensation plan would be permissible because it was sufficiently 
attenuated from the terms of multiple loan originators' transactions.
---------------------------------------------------------------------------

    \104\ This commenter based this assertion on several points, 
including that participation by multiple employees dilutes the 
impact and reward for any one participant, the delayed nature of a 
bonus pool payout erodes the incentive to steer for quick gains, 
bonus pools merely supplement and augment an employee's 
compensation, and most bonus plans--especially for community bank 
loan originators--contain a variety of components other than 
mortgage revenue.
    \105\ Several commenters echoed this argument that the types of 
practices the Bureau is regulating are better suited for examination 
and enforcement. One State trade association wrote that if bonuses 
are improperly designed to reward specific individual loan 
originators for transaction terms, this fact will be ascertainable 
through examination. A national trade association representing the 
mortgage industry suggested the Bureau use its authority under the 
Dodd-Frank Act to prevent unfair, deceptive, or abusive acts or 
practices. A State credit union trade association suggested the 
Bureau enforce existing regulations before imposing new regulations. 
One commenter claimed that the Bureau overreached in its proposal 
and needed to provide evidence that a profit motive in a transparent 
cost environment could be an example of an unfair or deceptive 
practice in order to support the approach it followed in the 
proposal.
---------------------------------------------------------------------------

    Among industry commenters, credit unions and their trade 
associations expressed particular opposition to the proposal. A 
national trade association representing credit unions questioned the 
Bureau's authority to add comment 36(d)(1)-1.ii, stating that it 
stretched the bounds of section 1403 of the Dodd-Frank Act by 
interpreting the statutory prohibition against compensation that varies 
based on the terms of the ``loan'' to apply to multiple transactions of 
multiple individual loan originators. A State credit union association 
wrote that it was unnecessary to extend the prohibitions to 
compensation based on the terms of multiple loan originators' 
transactions because: (1) Neither TILA nor existing regulations 
addresses payment of compensation based on terms of multiple individual 
loan originators; and (2) it would be tremendously difficult to 
construct a scheme to evade the existing requirements. This association 
also stated that the proposal was internally inconsistent because the 
proposal's section-by-section analysis acknowledged that profit-sharing 
plans could be a useful and important inducement by employers to 
individual loan originators to perform well. Another State credit union 
association stated that credit unions merited special treatment under 
the rule because there was nothing in the Bureau's administrative 
record to connect credit union compensation or salary practices to the 
abuses or practices that contributed to the financial crisis of 2008. 
This association also asserted that National Credit Union 
Administration (NCUA) regulations permit certain types of compensation 
that would be prohibited under the proposal and, thus, urged the Bureau 
to state that a federally insured credit union that adheres to these 
regulations is deemed compliant with the loan originator compensation 
provisions.\106\ A State credit union association commented that the 
Bureau should exempt credit unions from the

[[Page 11339]]

proposed restrictions because credit unions were structured in a way 
that significantly decreases steering risks (i.e., credit unions 
provide loan services to member-owners only and member-owners can file 
complaints in response to any activity detrimental to loan applicants).
---------------------------------------------------------------------------

    \106\ The association specifically cited 12 CFR 
701.21(c)(8)(iii), which permits credit unions to pay bonuses or 
incentives to credit union employees either based on the credit 
union's overall financial performance or in connection with a loan 
or loans, provided that the credit union board of directors 
establishes written policies and internal controls for such 
incentives or bonuses.
---------------------------------------------------------------------------

    Several commenters either asked for clarification on whether 
compensation tied to company-wide performance would be permitted under 
the proposal or stated their support for such an approach. A financial 
holding company suggested that bonus or incentive programs of this sort 
should be permitted because of the unlikelihood, it asserted, that the 
loan originator steering a consumer into a higher-profit product would 
improve the profitability of the entire bank. A large financial 
services company commented that some uncertainty remained as to when 
``indirect'' compensation would be sufficiently remote to be outside 
the purview of the rule and, consequently, requested an express 
exemption for bonuses paid to individual loan originators when the 
company: (1) Calculates the bonuses under a company-wide program that 
applies in a similar manner to individuals who are not loan 
originators; (2) uses predetermined company performance metrics to 
calculate the bonus; and (3) does not take transaction terms directly 
into account.\107\ A State trade association representing creditors 
stated that the Bureau should permit compensation plans that relate not 
only to the performance of an overall organization, but also to the 
performance of a specific team, branch, or business unit.
---------------------------------------------------------------------------

    \107\ This commenter also questioned the interplay of the 
proposal with the 2012 HOEPA Proposal insofar as the 2012 HOEPA 
Proposal would have redefined points and fees to include certain 
compensation paid to individual loan originators. As noted earlier 
in the section-by-section analysis of Sec.  1026.36(a), however, the 
definition of points and fees across the 2013 HOEPA Final Rule and 
the 2013 ATR Final Rule includes only compensation that can be 
attributed to a particular transaction at the time the interest rate 
is set.
---------------------------------------------------------------------------

    A mortgage company wrote that limiting compensation that was 
indirectly based on terms of transactions would cover almost any form 
of compensation derived from lender profitability, and the rulemaking 
instead should focus on compensation specific to the loan originator 
and the transaction. This commenter also disagreed with the Bureau's 
statement in the proposal that creditors would restructure their 
compensation policies to shift more compensation to bonuses in an 
effort to evade the strictures of the prohibition on compensation based 
on transaction terms because creating a profit-sharing plan involved 
many more considerations, particularly for diversified companies.\108\
---------------------------------------------------------------------------

    \108\ As a general matter, this commenter suggested an 
alternative approach whereby the creditor would provide a 
disclosure--in bold face or larger font and set off from other 
disclosures--urging the consumer to be aware that the loan 
originator's compensation may increase or decrease based on the 
profitability of the creditor and urging the consumer to shop for 
credit to ensure that he or she has obtained the most favorable loan 
terms.
---------------------------------------------------------------------------

    A few industry commenters raised procedural criticisms and asked 
for differential treatment for particular institutions. One industry 
commenter wrote that, based on the volume of proposed rules and the 
relatively short comment periods, it did not have sufficient time to 
analyze fully and comprehend the proposal and its potential impact on 
the commenter's business. A community bank requested that the Bureau 
exempt all savings institutions with under $1 billion in assets from 
the rule's compensation restrictions. Another community bank asked the 
Bureau to make distinctions between portfolio lenders and lenders that 
generate most revenues from selling loans.
    Some industry commenters expressed support for the Bureau's 
proposed approach on compensation based on transaction terms. A 
mortgage banker stated that any bonus pool or profit-sharing plan 
should not be permitted to be derived from the terms of loans because 
``the overages [could] work their way back into the pockets of loan 
originators.'' A mortgage company affiliated with a national 
homebuilder wrote that it was prudent practice not to compensate loan 
originators on the terms of the transaction other than the amount of 
credit extended. A community bank generally praised the proposal for 
taking into account the impacts of the Dodd-Frank Act on the mortgage 
banking industry and raised no specific objections to proposed comment 
36(d)(1)-1.ii. The bank, however, stated that to attract talented loan 
originators it needed the ability to offer flexible and competitive 
compensation programs that rewarded loan production.\109\ A financial 
services company wrote that the provisions in the proposal provided 
helpful additional commentary to elucidate the rules, particularly 
because incentive compensation plans at small to mid-size financial 
institutions that may look to profitability as a component often 
include senior executive officers who may be covered under the 
definition of loan originator. Also, some industry commenters that were 
generally critical of proposed comment 36(d)(1)-1.ii acknowledged that 
the Bureau's concern that individual loan originators would steer 
consumers to obtain higher bonuses was not misplaced.
---------------------------------------------------------------------------

    \109\ The community bank commenter also argued that, to attract 
quality loan originators without having the ability to pay incentive 
compensation, the bank would have to pay such a high salary that it 
could risk creating a disincentive for the individual loan 
originator to produce high volume.
---------------------------------------------------------------------------

    The Bureau is finalizing the substance of comment 36(d)(1)-1.ii 
largely as proposed. However, the principle that the terms of multiple 
transactions by an individual loan originator, or the terms of multiple 
transactions by multiple individual loan originators are encompassed by 
the baseline prohibition in Sec.  1026.36(d)(1)(i) is now included in 
text of Sec.  1026.36(d)(1)(i) itself. The Bureau believes that it is 
appropriate to state clearly in the regulatory text that compensation 
based on the terms of multiple transactions of multiple individual loan 
originators is invalid unless expressly permitted by other provisions 
of this final rule. A clear standard will enhance consumer protections 
by reducing the potential for abuse and evasion of the underlying 
prohibition on compensation based on a term of a transaction. Moreover, 
a clear standard also will reduce industry uncertainty about how the 
regulation applies to bonuses from non-deferred profits-based 
compensation plans and contributions to designated plans or non-
designated plans in which individual loan originators participate.
    In the final rule, comment 36(d)(1)-2.ii has been revised to 
clarify that compensation to a loan originator that is based upon 
profits that are determined with reference to mortgage-related business 
is considered compensation that is based on the terms of transactions 
of multiple individual loan originators, and thus would be subject to 
the prohibition on compensation based on a term of a transaction under 
Sec.  1026.36(d)(1)(i) (although it may be permitted under Sec.  
1026.36(d)(1)(iii) or (iv)). The comment cross-references other 
sections of the regulatory text and commentary for discussion of 
exceptions permitting compensation based upon profits pursuant to 
either a ``designated tax-advantaged plan'' or a ``non-deferred 
profits-based compensation plan,'' and for clarification about the term 
``mortgage-related business.'' This language has been added to make 
more explicit the Bureau's rationale in the proposal that profits from 
mortgage-related business (i.e., from transactions subject to Sec.  
1026.36(d)) are inextricably linked to the terms of multiple 
transactions of multiple individual loan originators

[[Page 11340]]

when taken in the aggregate and therefore create potential incentives 
for individual loan originators to steer consumers to particular 
transaction terms. The Bureau believes that creditor or loan originator 
organization profitability from mortgage-related business usually, if 
not always, depends on the terms of transactions of individual loan 
originators working for the creditor or loan originator 
organization.\110\ Moreover, to the extent a creditor or loan 
originator organization wanted to demonstrate that there is no nexus 
whatsoever between transaction terms and profitability, it would have 
to disaggregate the components of its profitability. The Bureau is 
skeptical that this would be feasible and, if so, that it could be done 
in a way that would not create challenges for examination (by requiring 
substantial analysis of, e.g., company revenues and profits, and of 
relationships among business lines and between affiliate profits and 
revenues).
---------------------------------------------------------------------------

    \110\ As discussed above, many industry commenters objected to 
the premise in the proposal that compensation programs that feature 
profits-based bonuses or contributions to qualified plans or non-
qualified plans presumptively create steering incentives, but some 
of those that did so acknowledged that bonuses can be improperly 
used as a ``proxy'' for transaction terms and, in one case, 
specifically stated that each individual loan originator whose bonus 
comes from a profit-derived pool is indirectly incentivized to 
increase profits and thereby increase the pool's size.
---------------------------------------------------------------------------

    The Bureau agrees with industry commenters that the payment of 
profit-sharing bonuses and the making of contributions to designated 
plans in which individual loan originators participate do not create 
steering potential under all circumstances. As the Bureau acknowledged 
in the proposal,\111\ any regulation of loan originator compensation 
needs to account for the variation in organization size, type, 
compensation scheme, and other factors that, individually or 
collectively, affect the calculus of whether the steering risk is 
sufficiently attenuated. For example, one commenter asked the Bureau to 
permit paying an individual loan originator a bonus as part of a 
compensation program that uses predetermined performance metrics to 
determine compensation for all company employees. This type of 
compensation program, depending on the circumstances, may not be tied 
directly or indirectly to transaction terms and thus may not implicate 
the basic rule or, even if tied to profits, may not be structured in a 
manner that would incentivize individual loan originators to place 
consumers in mortgages with particular transaction terms. The 
mitigation or absence of steering potential with respect to this 
compensation program in one particular setting, however, does not mean 
that a slightly different compensation program in the same setting or 
the same compensation program in a slightly different setting would 
sufficiently mitigate steering incentives.
---------------------------------------------------------------------------

    \111\ 77 FR 55296 (Sept. 7, 2012).
---------------------------------------------------------------------------

    The Bureau believes that it is preferable to adopt a baseline clear 
prohibition on the payment of compensation based on the terms of 
multiple transactions of multiple loan originators (with commentary 
clarifying that this encompasses compensation that is based upon 
profits that are determined with reference to mortgage-related 
business) than to adopt any sort of standard focused on attenuation, 
materiality, or other legal principles (a ``principles-based'' standard 
or approach) that would have to be applied to the design and operation 
of each company's specific compensation program, as suggested by some 
commenters. Application of a principles-based standard would involve 
the application of the relevant principles to the design and operation 
of each company's specific compensation program. Because the 
application of these principles would necessarily involve a substantial 
amount of subjectivity, and the design and operation of these programs 
are varied and complex, the legality of many companies' programs would 
likely be in doubt. This uncertainty would present challenges for 
industry compliance, for agency supervision, and agency and private 
enforcement of the underlying regulation.
    The Bureau believes, further, that the disparate standards 
suggested by industry commenters prove the inherent difficulty of 
crafting a workable principles-based approach. For example, as noted 
earlier, one commenter urged the Bureau to permit the use of 
``appropriately designed bonus plans consistent with risk management 
principles'' when the bonus award is ``directly and primarily based on 
legitimate factors and incentives'' and where ``sufficient mitigating 
and attenuating factors'' exist, and another industry commenter 
suggested that the Bureau permit creditors and loan originator 
organizations to pay a bonus to an individual loan originator when the 
awarding of the bonus and its amount are ``sufficiently attenuated'' 
from the terms of the transaction ``so as not to provide a material 
steering risk for the consumer.'' These standards do not have commonly 
understood meanings and would need to be defined by the Bureau or left 
for elaboration through supervisory and enforcement activities and 
private litigation. Although these definitional and line-drawing 
judgments are not impossible, they would inevitably add complexity to 
the rule.
    The Bureau, furthermore, disagrees with the industry commenters 
that asserted that the relationship between incentive compensation 
programs and individual loan originator steering behavior should be a 
focus of examination and enforcement to the exclusion of rulemaking. 
Given the multiplicity and diversity of parties and variability of 
compensation programs potentially subject to this rulemaking, robust 
supervision and enforcement in this area would be extremely difficult, 
if not impossible, without appropriate clarity in the regulation. As 
noted earlier, an organization commenting on behalf of State banking 
supervisors stated that the existing rules can be difficult for 
regulators and consumers to interpret and supported the proposed 
changes to the existing regulation for purposes of clarity and 
coherence.
    The Bureau also shares the concerns expressed by consumer groups 
that failing to prohibit compensation based on the terms of multiple 
transactions of multiple individual loan originators would potentially 
undermine the existing prohibition on compensation based on transaction 
terms in Sec.  1026.36(d)(1)(i) and Dodd-Frank Act section 1403. As the 
consumer groups asserted, setting a baseline rule too loosely could 
allow for a return of the types of lending practices that contributed 
to the recent mortgage-lending crisis. This, in turn, would 
significantly undermine the effect of the Dodd-Frank Act reforms and 
the 2010 Loan Originator Final Rule. The Bureau believes that defining 
``loan'' to mean only a single loan transaction by a single individual 
loan originator is an overly narrow interpretation of the statutory 
text and could lead to evasion of the rule. To this end, the Bureau 
disagrees with the assertion by one commenter that the Bureau lacks 
authority to interpret the statute in this manner. The Bureau is 
squarely within its general interpretive authority to implement the 
Dodd-Frank Act provision. The Bureau is also fully within its specific 
authority under TILA section 105(a) to issue regulations to effectuate 
the purposes and prevent evasion or circumvention of TILA. Moreover, 
the Bureau disagrees with the suggestion by one commenter that it is 
unnecessary to clarify that Sec.  1026.36(d)(1)(i) covers multiple 
transactions by multiple individual loan originators because neither 
TILA nor

[[Page 11341]]

existing Regulation Z addresses payment of compensation based on the 
terms of multiple transactions of multiple loan originators. The Bureau 
believes that given the uncertainty described by some commenters, about 
the regulation's application to bonuses and qualified and non-qualified 
plans, industry would benefit from clarification.\112\
---------------------------------------------------------------------------

    \112\ As noted earlier, numerous questions by industry to the 
Board and the Bureau precipitated the Bureau issuing CFPB Bulletin 
2012-2 and clarifying these issues in this rulemaking.
---------------------------------------------------------------------------

    The Bureau declines to adopt a special rule for credit unions as 
proposed by two State credit union associations. The Bureau recognizes 
that credit unions as well as community banks have a business model and 
a set of incentives and constraints that set them apart from other 
types of institutions engaged in similar activities and also are of a 
smaller scale than many such institutions. However, the Bureau does not 
believe that individual loan originators who work for a credit union or 
community bank are less susceptible of steering influences if their 
compensation can be based on the terms of the transactions either 
directly or indirectly as through bonuses or contributions tied to 
profits generated through mortgage-related business. Thus, the Bureau 
does not believe that it is appropriate to create a blanket exemption 
for credit unions and community banks from this rule. Moreover, TILA 
generally is structured around regulating the extension of consumer 
credit based on the type of transaction, not type of creditor. 12 
U.S.C. 5511(b)(4). Absent a sufficiently compelling reason, the Bureau 
declines to introduce such a differentiation contrary to that general 
approach.\113\ As discussed below, the Bureau is, however, adopting a 
special safe harbor rule with respect to compensation under a non-
deferred profits-based compensation plan to individual loan originators 
who are loan originators for ten or fewer transactions (under Sec.  
1026.36(d)(1)(iv)(B)(2)), which rule, the Bureau expects, will be of 
particular importance to credit unions and community banks. 
Furthermore, the Bureau disagrees with commenters who argued that 
credit unions should be treated differently because NCUA regulations 
permit the payment of certain incentives or bonuses to credit union 
individual loan originators based on the credit union's overall 
financial performance or in connection with loans made by credit 
unions, some of which incentives would be restricted under the Bureau's 
rule.\114\ Accepting the commenters' characterization of the NCUA's 
regulations as more permissive than the Bureau's, a credit union could 
comply with both sets of regulations by adhering to the more 
restrictive one.
---------------------------------------------------------------------------

    \113\ For similar reasons, the Bureau has also not made any 
changes to the proposal based on comments requesting the Bureau 
exempt certain institutions from the effect of Sec.  1026.36(d), 
such as those with under $1 billion in assets and those that keep 
their loans in portfolio. The commenters provided little to no 
evidence about why they should be exempt and the factors that would 
mitigate the steering incentives this rule addresses.
    \114\ As noted earlier, 12 CFR 701.21(c)(8)(i) generally 
prohibits officials or employees and their immediate family members 
from receiving, ``directly or indirectly, any commission, fee or 
other compensation in connection with any loan made by the credit 
union.'' 12 CFR 701.21(c)(8)(iii) provides that such prohibition 
does not cover, in relevant part: (1) an incentive or bonus to an 
employee based on the credit union's overall financial performance; 
and (2) an incentive or bonus to an employee in connection with a 
loan or loans made by the credit union, provided that the board of 
directors establishes written policies and internal controls for 
such incentives or bonuses.
---------------------------------------------------------------------------

    Although the Bureau in this final rule generally prohibits 
compensation that is based on the terms of multiple transactions of 
multiple individual loan originators (as discussed above), Sec.  
1026.36(d)(1)(iii) and (iv) permit compensation that is directly or 
indirectly based on the terms of multiple individual loan originators' 
transactions provided that certain conditions are satisfied. These 
provisions effectively create exceptions to the underlying prohibition 
on compensation based on transaction terms under appropriately tailored 
circumstances. For the background discussion of these provisions, 
including a summary of comments received to proposed Sec.  
1026.36(d)(1)(iii) and the Bureau's response to these comments, see the 
section-by-section analysis of proposed Sec.  1026.36(d)(1)(iii) and 
(iv).\115\
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    \115\ In some cases, the Bureau's response to the comments 
summarized above regarding comment 36(d)(1)-1.ii is subsumed into 
the section-by-section analysis of Sec.  1026.36(d)(1)(iii) and (iv) 
because of the topic overlap.
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36(d)(1)(ii)
Amount of Credit Extended
    As discussed above, Sec.  1026.36(d)(1)(i) currently provides that 
a loan originator may not receive and a person may not pay to a loan 
originator, directly or indirectly, compensation in an amount that is 
based on any of the transaction's terms or conditions. Section 
1026.36(d)(1)(ii) provides that the amount of credit extended is not 
deemed to be a transaction term or condition, provided compensation is 
based on a fixed percentage of the amount of credit extended. Such 
compensation may be subject to a minimum or maximum dollar amount.
    Use of the term ``amount of credit extended.'' TILA section 
129B(c)(1), which was added by section 1403 of the Dodd-Frank Act, 
provides that a mortgage originator may not receive (and no person may 
pay to a mortgage originator), directly or indirectly, compensation 
that varies based on the terms of the loan (other than the amount of 
the principal). 12 U.S.C. 1639b(c)(1). Thus, TILA section 129B(c)(1) 
permits mortgage originators to receive (and a person to pay mortgage 
originators) compensation that varies based on the ``amount of the 
principal'' of the loan. Section 1026.36(d)(1)(ii) currently uses the 
phrase ``amount of credit extended'' instead of the phrase ``amount of 
the principal'' as set forth in TILA section 129B(c)(1). Those phrases, 
however, typically are used to describe the same amount and generally 
have the same meaning. The term ``principal,'' in certain contexts, 
sometimes may mean only the portion of the total credit extended that 
is applied to the consumer's primary purpose, such as purchasing the 
home or paying off the existing balance, in the case of a refinancing. 
When used in this sense, the ``amount of the principal'' might 
represent only a portion of the amount of credit extended, for example 
where the consumer also borrows additional amounts to cover transaction 
costs. However, the Bureau does not believe that Congress intended 
``amount of the principal'' in this narrower, less common way, because 
the exception appears intended to accommodate existing industry 
practices, under which loan originators generally are compensated based 
on the total amount of credit extended without regard to the purposes 
to which any portions of that amount may be applied.
    For the foregoing reasons, pursuant to its authority under TILA 
section 105(a) to facilitate compliance with TILA, the Bureau proposed 
to retain the phrase ``amount of credit extended'' in Sec.  
1026.36(d)(1)(ii) instead of replacing it with the statutory phrase 
``amount of the principal.'' The Bureau believed that using the same 
phrase that is in the existing regulatory language will ease compliance 
burden without diminishing the consumer protection afforded by Sec.  
1026.36(d) in any foreseeable way. Creditors already have developed 
familiarity with the term ``amount of credit extended'' in complying 
with the existing regulation. The Bureau solicited comment on its 
proposal to keep the existing regulatory language in place and its 
assumptions underlying the proposal.

[[Page 11342]]

    The Bureau did not receive comment on this aspect of the proposal. 
For the reasons described above, this final rule retains the phrase 
``amount of credit extended'' in Sec.  1026.36(d)(1)(ii) as proposed.
    Fixed percentage with minimum and maximum dollar amounts. Section 
1026.36(d)(1)(ii) currently provides that loan originator compensation 
paid as a fixed percentage of the amount of credit extended may be 
subject to a minimum or maximum dollar amount. In contrast, TILA 
section 129B(c)(1), as added by section 1403 of the Dodd-Frank Act, 
permits mortgage originators to receive (and a person to pay the 
mortgage originator) compensation that varies based on the ``amount of 
the principal'' of the loan, without addressing the question of whether 
such compensation may be subject to minimum or maximum limits. 12 
U.S.C. 1639b(c)(1). Pursuant to its authority under TILA section 105(a) 
to facilitate compliance with TILA, the Bureau proposed to retain the 
existing restrictions in Sec.  1026.36(d)(1)(ii) governing when loan 
originators are permitted to receive (and when persons are permitted to 
pay loan originators) compensation that is based on the amount of 
credit extended. Specifically, proposed Sec.  1026.36(d)(1)(ii) 
continued to provide that the amount of credit extended is not deemed 
to be a transaction term, provided compensation received by or paid to 
a loan originator is based on a fixed percentage of the amount of 
credit extended; however, such compensation may be subject to a minimum 
or maximum dollar amount. The Bureau also proposed to retain existing 
comment 36(d)(1)-9, which provides clarification regarding this 
provision and an example of its application.
    The Bureau received comments on this aspect of the proposal from 
two industry commenters and one consumer group commenter, and those 
comments favored the proposal. This final rule retains Sec.  
1026.36(d)(1)(ii) as proposed. The Bureau believes that permitting 
creditors to set a minimum and maximum dollar amount is consistent 
with, and therefore furthers the purposes of, the statutory provision 
allowing compensation based on a percentage of the principal amount, 
consistent with TILA section 105(a). As noted above, the Bureau 
believes the purpose of excluding the principal amount from the 
``terms'' on which compensation may not be based is to accommodate 
common industry practice. The Bureau also believes that, for some 
creditors, setting a maximum and minimum dollar amount also is common 
and appropriate because, without such limits, loan originators may be 
unwilling to originate very small loans and could receive unreasonably 
large commissions on very large loans. The Bureau therefore believes 
that, consistent with TILA section 105(a), permitting creditors to set 
minimum and maximum commission amounts may facilitate compliance and 
also may benefit consumers by ensuring that loan originators have 
sufficient incentives to originate particularly small loans.
    In addition, comment 36(d)(1)-9 currently clarifies that Sec.  
1026.36(d)(1) does not prohibit an arrangement under which a loan 
originator is compensated based on a percentage of the amount of credit 
extended, provided the percentage is fixed and does not vary with the 
amount of credit extended. The comment also clarifies that compensation 
that is based on a fixed percentage of the amount of credit extended 
may be subject to a minimum or maximum dollar amount, as long as the 
minimum and maximum dollar amounts do not vary with each credit 
transaction. The comment provides as an example that a creditor may 
offer a loan originator 1 percent of the amount of credit extended for 
all loans the originator arranges for the creditor, but not less than 
$1,000 or greater than $5,000 for each loan. On the other hand, as 
comment 36(d)(1)-9 clarifies, a creditor may not compensate a loan 
originator 1 percent of the amount of credit extended for loans of 
$300,000 or more, 2 percent of the amount of credit extended for loans 
between $200,000 and $300,000, and 3 percent of the amount of credit 
extended for loans of $200,000 or less. For the same reasons discussed 
above, consistent with TILA section 105(a), the Bureau believes this 
interpretation is consistent with and furthers the statutory purposes 
of TILA. To the extent a creditor seeks to avoid disincentives to 
originate small loans and unreasonably high compensation amounts on 
larger loans, the Bureau believes the ability to set minimum and 
maximum dollar amounts meets such goals. The Bureau therefore is 
adopting comment 36(d)(1)-9 as proposed.
    Reverse mortgages. Industry representatives have asked what the 
phrase ``amount of credit extended'' means in the context of closed-end 
reverse mortgages. Under the FHA's Home Equity Conversion Mortgage 
(HECM) program, a creditor calculates a ``maximum claim amount,'' which 
is the appraised value of the property, as determined by the appraisal 
used in underwriting the loan, or the applicable FHA loan limit, 
whichever is less. See 24 CFR 206.3. For HECM loans, the creditor then 
calculates the maximum dollar amount the consumer is authorized to 
borrow (typically called the ``initial principal limit'') by 
multiplying the ``maximum claim amount'' by an applicable ``principal 
limit factor,'' which is calculated based on the age of the youngest 
borrower and the interest rate. The initial principal limit sets the 
maximum proceeds available to the consumer for the reverse mortgage. 
For closed-end HECM reverse mortgages, a consumer borrows the initial 
principal limit in a lump sum at closing. There can also be payments 
from the loan proceeds on behalf of the consumer such as to pay off 
existing tax liens.
    Reverse mortgage creditors have requested guidance on whether the 
maximum claim amount or the initial principal limit is the ``amount of 
credit extended'' in the context of closed-end HECM reverse mortgages. 
The Bureau indicated in the proposal that it believes that the initial 
principal limit is the most analogous amount to the amount of credit 
extended on a traditional ``forward'' mortgage. Thus, consistent with 
Dodd-Frank Act section 1403 and pursuant to its authority under TILA 
section 105(a) to facilitate compliance with TILA, the Bureau proposed 
to add comment 36(d)(1)-10 to provide that, for closed-end reverse 
mortgage loans, the ``amount of credit extended'' for purposes of Sec.  
1036.36(d)(1) means the maximum proceeds available to the consumer 
under the loan, which is the initial principal limit on a HECM loan.
    The Bureau received only one comment on this proposed revision, and 
that commenter, an industry trade group that represents the reverse 
mortgage industry, favored the proposal. The trade group supported the 
proposal but noted that the terms ``maximum claim amount,'' ``principal 
limit factor,'' and ``initial principal limit'' used by the Bureau in 
the supplementary information to the proposal are primarily HECM terms 
and are not terms used universally with all reverse mortgage programs. 
This trade group also requested that the Bureau expressly state in the 
commentary that maximum claim amount is not a proxy for a loan term 
under Sec.  1026.36(d)(1).
    This final rule revises proposed comment 36(d)(1)-10 to provide 
that for closed-end reverse mortgages, the ``amount of credit 
extended'' for purposes of Sec.  1026.36(d)(1) means either (1) the 
maximum proceeds available to the consumer under the loan; or (2) the 
maximum claim amount as defined in 24 CFR 206.3 if the loan is a HECM 
loan or the appraised value of the property, as determined by the 
appraisal used in underwriting the loan, if the loan is not

[[Page 11343]]

a HEMC loan. Upon further analysis, the Bureau believes that it is 
appropriate to consider these additional values to be the ``amount of 
credit extended'' for a closed-end reverse mortgage, as applicable, for 
purposes of Sec.  1026.36(d)(1). While the maximum proceeds available 
to the consumer will be the amount of proceeds that the consumer 
borrows at consummation, the maximum claim amount on a HECM loan will 
be the maximum future value of the loan to investors at repayment, 
including compounded interest. For non-HECM loans, this final rule 
allows creditors to consider the appraised value of the property, as 
determined by the appraisal used in underwriting the loan, to be 
considered the ``amount of credit extended.'' The Bureau believes that 
the final rule gives additional flexibility to creditors, without 
raising concerns that a creditor could manipulate the ``amount of 
credit extended'' in order to produce greater compensation to the loan 
originator.
36(d)(1)(iii)
Consumer Payments Based on Transaction Terms
    TILA section 129B(c)(1), which was added by section 1403 of the 
Dodd-Frank Act, provides that mortgage originators may not receive (and 
no person may pay to mortgage originators), directly or indirectly, 
compensation that varies based on the terms of the loan (other than the 
amount of principal). 12 U.S.C. 1639b(c)(1). Thus, TILA section 
129B(c)(1) imposes a ban on compensation that varies based on loan 
terms even in transactions where the mortgage originator receives 
compensation directly from the consumer. For example, under the 
amendment, even if the only compensation that a loan originator 
receives comes directly from the consumer, that compensation may not 
vary based on the loan terms.
    As discussed above, Sec.  1026.36(d)(1) currently provides that no 
loan originator may receive, and no person may pay to a loan 
originator, compensation based on any of the transaction's terms or 
conditions, except in transactions in which a loan originator receives 
compensation directly from the consumer and no other person provides 
compensation to a loan originator in connection with that transaction. 
Thus, even though, in accordance with Sec.  1026.36(d)(2), a loan 
originator organization that receives compensation from a consumer may 
not split that compensation with its individual loan originator, 
existing Sec.  1026.36(d)(1) does not prohibit a consumer's payment of 
compensation to the loan originator organization from being based on 
the transaction's terms or conditions.
    Consistent with TILA section 129B(c)(1), the Bureau proposed to 
remove existing Sec.  1026.36(d)(1)(iii) and a related sentence in 
existing comment 36(d)(1)-7. Thus, transactions where a loan originator 
receives compensation directly from the consumer would no longer be 
exempt from the prohibition set forth in Sec.  1026.36(d)(1)(i). As a 
result, whether the consumer or another person, such as a creditor, 
pays a loan originator compensation, that compensation may not be based 
on the terms of the transaction. Comment 36(d)(1)-7 addresses when 
payments to a loan originator are considered compensation received 
directly from the consumer. The Bureau proposed to remove the first 
sentence of this comment and move the other content of this comment to 
new comment 36(d)(2)(i)-2.i.
    The Bureau did not receive comments on its proposal to remove Sec.  
1026.36(d)(1)(iii). The Bureau did receive comments on the ability of 
loan originator organizations to make pricing concessions in the 
amounts of compensation they receive in individual transactions, 
including in transactions where these organizations receive 
compensation directly from consumers, as discussed in the section-by-
section analysis of Sec.  1026.36(d)(1)(i). For the reasons discussed 
above, this final rule removes existing Sec.  1026.36(d)(1)(iii) as 
proposed.
    The Bureau also did not receive any comments on deleting the first 
sentence of comment 36(d)(1)-7 and moving the other content of that 
comment to new comment 36(d)(2)(i)-2.i. The Bureau did receive one 
comment on the substance of proposed comment 36(d)(2)(i)-2.i, which is 
discussed in the section-by-section analysis of Sec.  1026.36(d)(2). 
This final rule deletes the first sentence of comment 36(d)(1)-7, moves 
the other content of that comment to new comment 36(d)(2)(i)-2.i, and 
makes revisions to this other content as discussed in the section-by-
section analysis of Sec.  1026.36(d)(2).
Designated Tax-Advantaged Plans and Non-Deferred Profits-Based 
Compensation Plans
    The Bureau proposed a new Sec.  1026.36(d)(1)(iii), which would 
permit the payment of compensation that is directly or indirectly based 
on the terms of transactions of multiple individual loan originators in 
limited circumstances. In this final rule, the language in Sec.  
1026.36(d)(1)(iii) has been revised to focus specifically on designated 
tax-advantaged plans and a new Sec.  1026.36(d)(1)(iv) has been added 
to address non-deferred profits-based compensation plans as discussed 
further below.
    Designated Tax-Advantaged Plans. As noted above, following a number 
of inquiries about how the restrictions in the existing regulation 
apply to qualified retirement plans and other bonus and profit-sharing 
plans, the Bureau issued CFPB Bulletin 2012-2 stating that 
contributions to certain qualified plans out of loan origination 
profits were permissible under the existing rules.\116\ The Bureau's 
position was based in part on certain structural and operational 
requirements that the Internal Revenue Code imposes on qualified plans, 
including contribution and benefit limits, deferral requirements 
(regarding both access to and taxation of the funds contributed), 
additional taxes for early withdrawal, non-discrimination provisions, 
and requirements to allocate among plan participants based on a 
definite allocation formula. Consistent with its position in CFPB 
Bulletin 2012-2, the Bureau stated in the proposal that it believed 
these structural and operational requirements would greatly reduce the 
likelihood that firms would use such plans to provide steering 
incentives.
---------------------------------------------------------------------------

    \116\ CFPB Bulletin 2012-2 defined ``Qualified Plans'' to 
include ``qualified profit sharing, 401(k), and employee stock 
ownership plans.''
---------------------------------------------------------------------------

    Based on these considerations, proposed Sec.  1026.36(d)(1)(iii) 
would have permitted a person to compensate an individual loan 
originator through a contribution to a qualified defined contribution 
or defined benefit plan in which an individual loan originator 
participates, provided that the contribution would not be directly or 
indirectly based on the terms of that individual loan originator's 
transactions. Proposed comments 36(d)(1)-2.iii.B and 36(d)(1)-2.iii.E 
would have discussed the meaning of qualified plans and other related 
terms as relevant to the proposal. Additionally, the Bureau solicited 
comment on whether any other types of retirement plans, profit-sharing 
plans, or other tax-advantaged plans should be treated similarly for 
purposes of permitting contributions to such plans, even if the 
compensation relates directly or indirectly to the transaction terms of 
multiple individual loan originators.
    Industry commenters generally supported the Bureau's proposal to 
permit creditors and loan originator organizations to contribute to 
individual

[[Page 11344]]

loan originators' qualified plan accounts even if the contributions 
were based directly or indirectly on the terms of multiple individual 
loan originators' transactions. For example, a national trade 
association representing banking institutions wrote that it especially 
welcomed the ``clean and straightforward'' proposed clarifications 
regarding qualified plans. A national trade association representing 
mortgage lenders appreciated the clarification that contributions to 
the qualified plan accounts of individual loan originators would be 
permitted. A financial holding company commented that the proposal to 
allow contributions to qualified plans was necessary for creditors to 
adequately compensate their individual loan originators.
    Several industry commenters, however, questioned certain aspects of 
how the Bureau proposed treating qualified plans under proposed Sec.  
1026.36(d)(1)(iii). A group commenting on behalf of community mortgage 
lenders wrote that the IRS governing rules and regulations regarding 
qualified retirement plans should govern whether any employees, 
including loan originators, should be eligible to participate in 
qualified plans. The commenter stated that any exclusion of a class of 
employees from a qualified plan would render the plan non-qualified 
under IRS regulations. A large mortgage lending company wrote that the 
Bureau's attempt to regulate employee benefit plans was complicated, 
fraught, and imposed unspecified ``conditions'' on the use of qualified 
plans. Another commenter specifically objected to the language in 
proposed Sec.  1026.36(d)(1)(iii) requiring that the contribution to a 
qualified plan ``not be directly or indirectly based on the terms of 
that individual loan originator's transactions.'' The commenter 
reasoned that these restrictions would interfere with other agencies' 
regulation of qualified plans and could cause employers to incur 
penalties under other regulations and statutes, which must be accounted 
for in pricing risk and could increase the costs of credit. One trade 
association expressed concern that smaller creditors would be 
disadvantaged by a rule that treats qualified plans more permissively 
than non-qualified plans because qualified plans can be prohibitively 
expensive and smaller creditors thus would likely be unable to take 
advantage of the exception in Sec.  1026.36(d)(i)(iii).
    SBA Advocacy commented that the Bureau should analyze the incentive 
issues arising from qualified plans before issuing clarifications on 
existing regulations or proposing new regulations. SBA Advocacy also 
reminded the Bureau of comments to this effect made by Small Entity 
Representatives during the Small Business Review Panel process.
    Consumer groups commenting on the proposal did not specifically 
address qualified plans. They stated as a general matter, however, that 
permitting compensation to loan originators based on the terms of a 
transaction would be in contravention of the Dodd-Frank Act and would 
make loan originator compensation even less transparent to consumers. 
Three consumer groups, in a joint letter, commented that bonuses and 
retirement plan contributions change the behavior of individual loan 
originators and that permitting compensation from profit pools would 
not remove the danger that individual loan originators would seek to 
originate transactions with abusive terms to boost their overall 
compensation packages. These consumer groups also commented that 
allowing individual loan originators to profit from compensation based 
on aggregate terms of transactions they originate, such as higher 
interest rates, presents the same risks to consumers as allowing 
individual loan originators to profit from compensation based on terms 
in a single transaction. As discussed above, a housing advocacy 
organization expressed its concern that the exceptions in the proposed 
regulation would lead to a resurgence of the same individual 
compensation-driven loan origination tactics that were the subject of 
U.S. Department of Justice actions, later settled, that alleged 
steering of minority borrowers into subprime mortgages.
    An organization submitting comments on behalf of State bank 
supervisors wrote that, as a general matter, adjustments to existing 
loan originator compensation rules for purposes of clarity and 
coherence are appropriate because existing standards can be difficult 
for regulators and consumers to interpret. The organization further 
stated that qualified plans are one of the primary areas under the rule 
that needs clarification, and it endorsed the Bureau's proposal to 
permit contributions to qualified plans.
    The Bureau is finalizing the proposal's treatment of ``qualified 
plans'' (now referred to as ``designated tax-advantaged plans'' in 
Sec.  1026.36(d)(1)(iii) and as that term or, alternatively, 
``designated plans'' in this preamble) with limited substantive changes 
to clarify what plans can be exempted from the baseline prohibition in 
Sec.  1026.36(d)(1)(i) of compensation that is based on the terms of 
multiple transactions of multiple individual loan originators. Section 
1026.36(d)(1)(iii), as clarified by comment 36(d)(1)-3.i, provides that 
an individual loan originator may receive, and a person may pay to an 
individual loan originator, compensation in the form of a contribution 
to a defined contribution plan that is a designated tax-advantaged plan 
or a benefit under a defined benefit plan that is a designated tax-
advantaged plan, even if the contribution or benefit, as applicable, is 
directly or indirectly based on the terms of the transactions of 
multiple individual loan originators. In the case of a contribution to 
a defined contribution plan, however, Sec.  1026.36(d)(1)(iii) provides 
that the contribution must not be directly or indirectly based on the 
terms of that individual loan originator's transactions.
    The final rule adds language to Sec.  1026.36(d)(1)(iii) similar to 
what was previously proposed in commentary and also to define 
``designated tax-advantaged plans.'' Specifically, Sec.  
1026.36(d)(1)(iii) defines the term to include any plan that meets the 
requirements of Internal Revenue Code section 401(a), 26 U.S.C. 401(a); 
employee annuity plans described in Internal Revenue Code section 
403(a), 26 U.S.C. 403(a); simple retirement accounts, as defined in 
Internal Revenue Code section 408(p), 26 U.S.C. 408(p); simplified 
employee pensions described in Internal Revenue Code section 408(k), 26 
U.S.C. 408(k); annuity contracts described in Internal Revenue Code 
section 403(b), 26 U.S.C. 403(b); and eligible deferred compensation 
plans, as defined in Internal Revenue Code section 457(b), 26 U.S.C. 
457(b). The term ``designated tax-advantaged plan'' corresponds to the 
proposed term ``qualified plan,'' and the set of plans that qualify as 
``designated'' plans under the final rule is largely the same as those 
that were ``qualified'' as described in proposed comment 36(d)(1)-
2.iii.E.
    The Bureau has, however, also substantially reorganized and 
clarified the proposed commentary. In particular, proposed comment 
36(d)(1)-2.iii has been moved into a new comment 36(d)(1)-3 and 
restructured for internal consistency and clarity. New comment 
36(d)(1)-3 clarifies that designated tax-advantaged plans are permitted 
even if the compensation is directly or indirectly based on the terms 
of multiple transactions of multiple individual loan originators. This 
language clarifies that Sec.  1026.36(d)(1)(iii) (as well as Sec.  
1026.36(d)(1)(iv), which is discussed further below with regard to non-
deferred profits-based compensation

[[Page 11345]]

plans) permits certain types of compensation that are otherwise 
prohibited under Sec.  1026.36(d)(1)(i). This is a technical change to 
improve on the consistency of the proposal's language.
    There are two categories of designated tax-advantaged plans: (1) 
Designated defined contribution plans; and (2) designated defined 
benefit plans. Comment 36(d)(1)-3.i explains that the Bureau uses these 
terms as defined in section 414 of the Internal Revenue Code, 26 U.S.C. 
414. Thus, a ``defined contribution plan'' is one ``which provides for 
an individual account for each participant and for benefits based 
solely on the amount contributed to the participant's account, and any 
income, expenses, gains and losses, and any forfeitures of accounts of 
other participants which may be allocated to such participant's 
account.'' 26 U.S.C. 414(i). Any plans that do not meet this definition 
are called defined benefit plans. 26 U.S.C. 414(j).
    Under the final rule, the Bureau permits individual loan 
originators to participate in designated defined contribution plans, 
provided that contributions to these plans are not based on the terms 
of the specific transactions of each individual loan originator, 
pursuant to Sec.  1026.36(d)(1)(iii). The Bureau recognizes, as 
expressed by industry commenters, that creditors, loan originator 
organizations, and individual loan originators derive substantial 
benefits from being able to establish and participate in designated 
defined contributions plans. These types of plans provide specific tax 
advantages for employees saving for their eventual retirement, are 
commonly used across many markets and made available to employees 
across many income classes, and in a given firm generally are made 
equally available to employees across different job categories. The 
final rule permits individual loan originators to participate in these 
plans because the Bureau believes that certain structural, legal, and 
operational features of designated defined contribution plans, combined 
with the additional restriction of Sec.  1026.36(d)(1)(iii), will 
significantly reduce the likelihood that participation in these plans 
will provide individual loan originators substantial incentives to 
steer consumers.
    First, withdrawals from designated defined contribution plans are 
subject to time deferral requirements, and tax penalties generally 
apply to early withdrawals.\117\ The fact that individual loan 
originators may not receive funds contributed to a designated defined 
contribution plan for years (or even decades) without paying an 
additional tax for early withdrawal reduces the incentive for an 
individual loan originator to steer consumers because the potential 
benefit from the potential steering can be so remote in time. Second, 
designated defined contribution plans are subject to limits in the 
Internal Revenue Code on the contributions to any individual 
participant's account.\118\ This further reduces the degree to which a 
designated defined contribution plan can give an individual loan 
originator an incentive to steer simply to increase general company 
profits. Third, to maintain their tax-advantaged status, these plans 
are subject to a variety of rules under the Internal Revenue Code that 
limit their potential use as steering incentives and complement and 
buttress the anti-steering protections of Sec.  1026.36(d)(1)(iii). 
These may include, for example, depending on the type of plan, rules 
about the manner in which contributions are allocated to participants 
and prohibitions on discriminating between highly-compensated employees 
and other employees.
---------------------------------------------------------------------------

    \117\ See, e.g., 26 U.S.C. 72(t).
    \118\ For example, for certain types of plan, contributions to 
an individual loan originator's account are generally limited to the 
lesser of 100 percent of the individual loan originator's yearly 
compensation (as defined in Internal Revenue Code section 415(c)(3)) 
or an annual dollar amount ($51,000 for 2013), which the IRS adjusts 
each year to account for inflation. See 26 U.S.C. 415(c); IRS 
Publication 560 at 15; Internal Revenue Service Web site, ``IRS 
Announces 2013 Pension Plan Limitations; Taxpayers May Contribute Up 
To $17,500 To Their 401(k) Plans in 2013,'' http://www.irs.gov/uac/2013-Pension-Plan-Limitations (last accessed Dec. 17, 2012) (IRS 
2013 Qualified Plan Adjustments). The annual cap includes the 
employee contributions, see 26 U.S.C. 415(c).), which may be subject 
to a separate annual limit.
---------------------------------------------------------------------------

    Section 1026.36(d)(1)(iii) also permits participation in the second 
category of designated tax-advantaged plans, which are defined benefit 
plans. In this final rule, however, the Bureau has not applied 
additional restrictions on benefits payable under defined benefit plans 
as it has done in Sec.  1026.36(d)(1)(iii) with regard to contributions 
under defined contribution plans, as described above. A defined benefit 
plan differs from a defined contribution plan in that, under the 
former, a participant's benefits depend on factors other than amounts 
contributed to an account established for that individual participant 
(and the investment returns and expenses on such amounts). Commonly, 
benefits are paid to individuals at retirement or another point of 
eligibility based on a benefits formula. Indeed, employer contributions 
to a defined benefit plan are generally made to the plan as a whole, 
rather than being allocated to the accounts of individual participants. 
For these reasons, the Bureau believes that defined benefit plans 
further attenuate any potential steering incentives a firm might try to 
incorporate in a defined benefit plan. In addition, attempts by 
creditors or loan originator organizations to structure such plans to 
take into account the terms of the transactions of the individual loan 
originators participating in the plans would likely present 
considerable regulatory obstacles. The Bureau is continuing to study 
the structural differences in plan type and will issue additional 
guidance or restrictions in the future that are specific to the 
particular structures of defined benefit plans as necessary and 
appropriate to effectuate the intent of the Dodd-Frank Act in 
prohibiting steering incentives.
    The Bureau disagrees with the few commenters who suggested that the 
Bureau's proposal places unwarranted restrictions on the use of 
designated plans that potentially conflict with other Federal 
regulations and adds uncertainty regarding an individual loan 
originator's eligibility to participate in a designated plan. To the 
contrary, Sec.  1026.36(d)(1)(iii) explicitly contemplates that 
individual loan originators may participate in a designated plan. The 
creditor or loan originator organization would be free, to the extent 
permitted by other applicable law, to match an individual loan 
originator's contribution to a designated plan account or pay a fixed 
percentage of the individual loan originator's compensation in the form 
of a contribution to a designated plan account.
    The rule simply prohibits a creditor or loan originator 
organization from basing the amount of contributions to an individual 
loan originator's designated plan account, in the case of a defined 
contribution plan, on the terms of that individual loan originator's 
transactions. The Bureau believes that implementing the statutory 
prohibition on compensation based on the terms of the loan under 
section 1403 of the Dodd-Frank Act requires a regulation that prohibits 
this practice. Compensating any individual loan originator more based 
on the terms of his or her transactions is a core, direct danger that 
the statute and this final rule are designed to counteract. The Bureau 
is not convinced that the structure or operation of designated defined 
contribution plans would sufficiently mitigate the steering incentives 
an employer could create by using such a practice. Moreover, the Bureau 
is not aware of any conflict

[[Page 11346]]

between this final rule and other applicable Federal laws and 
regulations (e.g., the Internal Revenue Code and its implementing 
regulations) that would prevent compliance with all applicable legal 
requirements.
    Non-Deferred Profits-Based Compensation Plans. In addition to 
addressing qualified plans as described above, proposed Sec.  
1026.36(d)(1)(iii) would have provided that, notwithstanding Sec.  
1026.36(d)(1)(i), an individual loan originator may receive, and a 
person may pay to an individual loan originator, compensation in the 
form of a bonus or other payment under a profit-sharing plan or a 
contribution to some other form of non-qualified plan even if the 
compensation directly or indirectly was based on the terms of the 
transactions of multiple individual loan originators, provided that the 
conditions set forth in proposed Sec.  1026.36(d)(1)(iii)(A) and (B) 
were satisfied. Proposed Sec.  1026.36(d)(1)(iii)(A) would have 
prohibited payment of compensation to an individual loan originator 
that directly or indirectly was based on the terms of that individual 
loan originator's transaction or transactions. The Bureau explained in 
the section-by-section analysis of the proposal that this language was 
intended to prevent a person from paying compensation to an individual 
loan originator based on the terms of that individual loan originator's 
transactions regardless of whether the compensation would otherwise be 
permitted in the limited circumstances under Sec.  
1026.36(d)(1)(iii)(B).
    Proposed Sec.  1026.36(d)(1)(iii)(B)(1) would have permitted 
compensation in the form of a bonus or other payment under a profit-
sharing plan or a contribution to a non-qualified plan, even if the 
compensation related directly or indirectly to the terms of the 
transactions of multiple individual loan originators, provided: (1) The 
conditions set forth in proposed Sec.  1026.36(d)(1)(iii)(A) were met; 
and (2) not more than a certain percentage of the total revenues of the 
person or business unit to which the profit-sharing plan applies, as 
applicable, were derived from the person's mortgage business during the 
tax year immediately preceding the tax year in which the compensation 
is paid. The Bureau proposed two alternatives for the threshold 
percentage--50 percent, under Alternative 1, or 25 percent, under 
Alternative 2. The approach set forth under proposed Sec.  
1026.36(d)(1)(iii)(B)(1) is sometimes referred to as the ``revenue 
test.''
    The Bureau explained in the proposal that to meet the conditions 
under proposed Sec.  1026.36(d)(1)(iii)(B)(1), a person would measure 
the revenue of its mortgage business divided by the total revenue of 
the person or business unit, as applicable.\119\ Proposed Sec.  
1026.36(d)(1)(iii)(B)(1) also would have addressed how total revenues 
are determined,\120\ when the revenues of a person's affiliates are or 
are not taken into account, and how total revenues derived from the 
mortgage business are determined.\121\ Proposed comment 36(d)(1)-2.iii 
would have provided additional interpretation of the terms ``total 
revenue,'' ``mortgage business,'' and ``tax year'' \122\ used in 
proposed Sec.  1026.36(d)(1)(iii)(B)(1).
---------------------------------------------------------------------------

    \119\ Proposed comment 36(d)(1)-2.iii.G.1 would have clarified 
that, under the proposed revenue test, whether the revenues of the 
person or business unit would be used would depend on the level 
within the person's organizational structure at which the profit-
sharing plan was established and whose profitability was referenced 
for purposes of compensation payment.
    \120\ Proposed Sec.  1026.36(d)(1)(iii)(B)(1) would have 
provided that total revenues would be determined through a 
methodology that: (1) Is consistent with generally accepted 
accounting principles and, as applicable, the reporting of the 
person's income for purposes of Federal tax filings or, if none, any 
industry call reports filed regularly by the person; and (2) as 
applicable, reflects an accurate allocation of revenues among the 
person's business units. The Bureau solicited comment on: (1) 
Whether this standard would be appropriate in light of the diversity 
in size of the financial institutions that would be subject to the 
requirement and, more generally, on the types of income that should 
be included; and (2) whether the definition of total revenues should 
incorporate a more objective standard.
    \121\ Section 1026.36(d)(1)(iii)(B)(1) would have provided that 
the revenues derived from mortgage business are the portion of those 
total revenues that are generated through a person's transactions 
that are subject to Sec.  1026.36(d). Proposed comment 36(d)(1)-
2.iii.G would have explained that a person's revenues from its 
mortgage business include, for example: Origination fees and 
interest associated with loans for purchase money or refinance 
purposes originated by individual loan originators employed by the 
person, income from servicing of loans for purchase money or 
refinance purposes originated by individual loan originators 
employed by the person, and proceeds of secondary market sales of 
loans for purchase money or refinance purposes originated by 
individual loan originators employed by the person. The proposed 
comment also would have noted certain categories of income and fees 
that would not be included under the definition of mortgage-related 
revenues, such as servicing income where the loans being serviced 
were purchased by the person after their origination by another 
person. The Bureau requested comment on the scope of revenues 
included in the definition of mortgage revenues.
    \122\ Proposed comment 36(d)(1)-2.iii.G.1 would have clarified 
that a tax year is the person's annual accounting period for keeping 
records and reporting income and expenses.
---------------------------------------------------------------------------

    Proposed comment 36(d)(1)-2.iii.A would have clarified that the 
term ``profit-sharing plans'' includes ``bonus plans,'' ``bonus 
pools,'' or ``profit pools'' from which individual loan originators are 
paid bonuses or other compensation with reference to company or 
business unit profitability, as applicable. The proposed comment also 
would have noted that a bonus made without reference to profitability, 
such a retention payment budgeted for in advance, would not violate the 
prohibition on compensation based on transaction terms. Proposed 
comment 36(d)(1)-2.iii.C would have clarified that compensation is 
``directly or indirectly based'' on the terms of multiple transactions 
of multiple individual loan originators when the compensation, or its 
amount, results from or is otherwise related to the terms of multiple 
transactions of multiple individual loan originators. The proposed 
comment would have provided that, if a creditor did not permit its 
individual loan originators to deviate from the creditor's pre-
established credit terms, such as the interest rate offered, then the 
creditor's payment of a bonus at the end of a calendar year to an 
individual loan originator under a profit-sharing plan would not be 
related to the transaction terms of multiple individual loan 
originators. The proposed comment also would have clarified that, if a 
loan originator organization whose revenues were derived exclusively 
from fees paid by the creditors that fund its originations pays a bonus 
under a profit-sharing plan, the bonus would be permitted. Proposed 
comment 36(d)(1)-2.iii.D would have clarified that, under proposed 
Sec.  1026.36(d)(1)(iii), the time period for which the compensation 
was paid is the time period for which the individual loan originator's 
performance was evaluated for purposes of the compensation decision 
(e.g., calendar year, quarter, month), whether the compensation was 
actually paid during or after that time period.
    In the proposal, the Bureau explained that the revenue test was 
intended as a bright-line rule to distinguish circumstances in which a 
compensation plan creates a substantial risk of consumers being steered 
to particular transaction terms from circumstances in which a 
compensation plan creates only an attenuated incentive and risk of 
steering. The Bureau also explained that the proposal would treat 
revenue as a proxy for profitability and profitability as a proxy for 
terms of multiple transactions of multiple individual loan originators. 
Furthermore, the Bureau stated that it was proposing a threshold of 50 
percent because, if more than 50 percent of the person's total revenues 
were derived from the person's mortgage business, the mortgage business 
revenues would predominate, which would increase the likelihood of

[[Page 11347]]

steering incentives. The Bureau recognized, however, that a bright-line 
rule with a 50 percent revenue test threshold might still permit 
steering incentives in light of the differing sizes, organizational 
structures, and compensation structures of the persons affected by the 
proposed rule. The Bureau thus proposed an alternative threshold of 25 
percent and more generally solicited comment on which threshold would 
best effectuate the purposes of the rule.
    The Bureau also sought comment on the effect of this proposed 
provision on small entities. The Bureau stated in the proposal that it 
was aware of the potential differential effects the revenue test may 
have on small creditors and loan originator organizations that employ 
individual loan originators--particularly those institutions that 
originate mortgage loans as their exclusive, or primary, line of 
business (hereinafter referred to as ``monoline mortgage 
businesses'')--when compared to the effects on larger institutions that 
are more likely to engage in multiple business lines. In the proposal, 
the Bureau noted the feedback it had received during the Small Business 
Review Panel process regarding these issues.
    The Bureau discussed in the proposal three possible alternative 
approaches to the revenue test in proposed Sec.  
1026.36(d)(1)(iii)(B)(1). First, the Bureau solicited comment on 
whether the formula under Sec.  1026.36(d)(1)(iii)(B)(1) should be 
changed from the consideration of revenue to a consideration of 
profits. Under this profits test, total profits of the mortgage 
business would be divided by the total profits of the person or 
business unit, as applicable. The Bureau further solicited comment on 
how profits would be calculated if a profits test were adopted. The 
Bureau stated that it was soliciting comment on this approach because 
the test's use of revenue and not profits may result in an improper 
alignment with the steering incentives to the extent that it would be 
possible for a company to earn a large portion of its profits from a 
proportionally much smaller mortgage-business-related revenue 
stream.\123\ But the Bureau stated that it recognized that a profits 
test would create definitional challenges and could lead to evasion if 
a person were to allocate costs in a manner across business lines that 
would understate mortgage business profits for purposes of the profits 
test.
---------------------------------------------------------------------------

    \123\ The Bureau posited an example where a company could derive 
40 percent of its total revenues from its mortgage business, but 
that same line of business may generate 80 percent of the company's 
profits. In such an instance, the steering incentives could be 
significant given the impact the mortgage business has on the 
company's overall profitability. Yet, under the proposed revenue 
test this organization would be permitted to pay certain 
compensation based on terms of multiple individual loan originators' 
transactions taken in the aggregate.
---------------------------------------------------------------------------

    Second, the Bureau solicited comment on whether to establish a 
``total compensation'' test either in addition to or in lieu of the 
proposed revenue test. The total compensation test would cap the 
percentage of an individual loan originator's total compensation that 
could be attributable to the types of compensation addressed by the 
proposed revenue test (i.e., bonuses under profit-sharing plans and 
contributions to non-qualified plans). The Bureau also solicited 
comment on the appropriate threshold amount if the Bureau were to adopt 
a total compensation test. The Bureau solicited comment on the total 
compensation test because it believed the proportion of an individual 
loan originator's total compensation that is attributable to mortgage-
related business would provide one relatively simple and broadly 
accurate metric of the strength of individual loan originators' 
steering incentives.
    Third, the Bureau solicited comment on whether it should include an 
additional provision under Sec.  1026.36(d)(1)(iii)(B) that would 
permit bonuses under a profit-sharing plan or contributions to non-
qualified plans where the compensation bears an ``insubstantial 
relationship'' to the terms of multiple transactions of multiple 
individual loan originators. The Bureau solicited comment on this 
approach because it recognized that the terms of multiple individual 
loan originators' transactions taken in the aggregate would not, in 
every instance, have a substantial effect on profitability. The Bureau 
stated, however, that any test would likely be both under- and over-
inclusive, and it was unclear how such a test would work in practice 
and what standards would apply to determine if compensation bore an 
insubstantial relationship to the terms of multiple transactions of 
multiple individual loan originators.
    Consumer groups generally criticized the revenue test as too 
permissive with regard to payment of compensation through profit-
sharing bonuses or contributions to non-qualified plans. A coalition of 
consumer groups stated that the revenue test would merely create a 
``back door,'' whereby there would be indirect incentives to promote 
certain credit terms for an individual loan originator's personal gain. 
They urged the Bureau to restrict all profit-sharing bonuses or 
contributions to non-qualified plans to those based on volume of 
mortgages originated. One consumer advocacy organization, however, 
supported the revenue test with a 25 percent threshold. This commenter 
asserted that the larger the percentage of revenue derived from a 
company's mortgage lending unit, the more opportunity would exist for 
the mortgage unit to skew the results of the overall pool of funds 
available for distribution as profit-sharing bonuses or contributions 
to non-qualified plans.
    Industry commenters, including small and large institutions and 
trade associations, nearly unanimously urged the Bureau not to finalize 
the revenue test. Industry opposition arose primarily for three 
reasons. First, many industry commenters asserted that the revenue test 
was unduly complex and would be very difficult to implement. Two large 
financial institutions stated that large creditors would face 
challenges in calculating total revenue and mortgage-related revenues 
under the revenue test if the creditor had different origination 
divisions or affiliates or typically aggregated closed-end and open-end 
transaction revenues. A national trade association representing 
community banks stated that community banks would have faced 
difficultly complying with the revenue test based on the proposed 
requirement that the determination of total revenue be consistent with 
the reporting of Federal tax filings and industry call reports, 
because, the association stated, revenue from various business units is 
not separated out in bank ``call reports,'' and mortgage revenue comes 
from multiple sources. One commenter asserted that the terminology was 
confusing, citing the example of the proposal using the phrase 
``profit-sharing plan'' to refer to profit pools and bonus pools in the 
non-qualified plan context when such phrase has a commonly understood 
meaning in the context of qualified plans.
    Second, numerous industry commenters asserted that application of 
the revenue test would have a disparate negative impact on monoline 
mortgage businesses. These businesses, the commenters stated, would not 
be able to pay profit-sharing bonuses or make contributions to non-
qualified plans because, under the revenue test, their mortgage-related 
revenue would always exceed 50 percent of total revenues. A trade 
association representing community mortgage bankers commented that the 
revenue test would favor large institutions that have alternate sources 
of income outside mortgage banking. Another trade

[[Page 11348]]

association asserted that the revenue test would place smaller 
businesses at a competitive disadvantage for recruiting and retaining 
talented loan originators. A law firm that represents small and medium-
sized financial institutions expressed particular concern about the 
impact of the revenue test on small entities, citing data from briefing 
materials circulated by the Bureau during the Small Business Review 
Panel process that a majority of small savings institutions would fail 
the revenue test if it were set at the higher proposed threshold of 50 
percent.\124\ This commenter also asserted that a ``not insubstantial 
number'' of savings institutions with between $175 million and $500 
million in assets would also fail the revenue test if the threshold 
were set at 50 percent. One financial holding company stated that the 
revenue test would have a negative impact on creditors that keep 
mortgage loans in portfolio, which, it stated, would likely 
disproportionately affect smaller creditors and community banks, 
because accrued interest on mortgages the creditor had originated and 
held over many years would count toward the calculation of mortgage-
related revenues under the revenue test. The commenter urged the Bureau 
to craft a narrower definition of mortgage-related revenues that would 
capture only recent lending activity.
---------------------------------------------------------------------------

    \124\ See Consumer Fin. Prot. Bureau, ``Small Business Review 
Panel for Residential Mortgage Loan Origination Standards 
Rulemaking: Outline of Proposals under Consideration and 
Alternatives Considered'' 18 (May 9, 2012), available at http://files.consumerfinance.gov/f/201205_cfpb_MLO_SBREFA_Outline_of_Proposals.pdf (Small Business Review Panel Outline). In the Small 
Business Review Panel Outline, the Bureau noted that at the proposed 
threshold of 50 percent for the revenue test then-under 
consideration, 56 percent of small savings institutions whose 
primary business focus is on residential mortgages would have been 
restricted from paying bonuses based on mortgage-related profits to 
their individual loan originators. In the Small Business Review 
Panel Outline, the Bureau noted that its estimate was based on 2010 
call report data, and revenue from loan originations was assumed to 
equal fee and interest income from 1-4 family residences as 
reported. The Bureau noted that to the extent that other revenue on 
the call reports is tied to loan originations, the numbers may be 
underestimated. In the proposal, the Bureau discussed the same data 
but updated the figure to 59 percent. See 77 FR 55272, 55347 (Sept. 
7, 2012).
---------------------------------------------------------------------------

    Third, several industry commenters expressed concern that 
application of the revenue test would lead to TILA liability if an 
accounting error in calculating total revenues or mortgage revenues 
resulted in bonuses being paid to loan originators improperly. A 
national trade association stated that none of its members would avail 
themselves of the revenue test because of their concern that, if the 
threshold percentage numbers were miscalculated, the entire pool of 
loans originated by that bank would be ``poisoned,'' the compensation 
scheme would be deemed defective, and the bank would be subject to 
investor repurchase demands and full TILA liability. One State banking 
trade association expressed concern about the personnel repercussions 
of rescinding bonuses that were found to have been made improperly. A 
trade association that represents loan originators (both organizations 
and individuals) expressed concern that the compensation restrictions 
in the revenue test would lead to ``unacceptable litigation'' for 
creditors and loan originators.
    A compensation consulting firm commented that drawing a bright line 
at 50 or 25 percent would be inherently subjective, would result in 
inequitable treatment, and would actually create a potential incentive 
for companies to manipulate financial statements to fall on the 
permissive side of the measurement to ensure the continued payment of 
profit-sharing bonuses or making of contributions to non-qualified 
plans. The commenter asserted that this result would directly conflict 
with interagency guidance provided on incentive compensation 
policies,\125\ and the commenter recommended that the Bureau instead 
adopt an approach modeled after the implementation of G-20 task force 
recommendations regarding incentive compensation.\126\
---------------------------------------------------------------------------

    \125\ In the proposal, the Bureau noted that incentive 
compensation practices at large depository institutions were the 
subject of final guidance issued in 2010 by the Board, the Office of 
the Comptroller of the Currency, the Federal Deposit Insurance 
Corporation, and the Office of Thrift Supervision (Interagency 
Group). 75 FR 36395 (June 17, 2010) (Interagency Guidance). The 
Bureau wrote that the Interagency Guidance was issued to help ensure 
that incentive compensation policies at large depository 
institutions do not encourage imprudent risk-taking and are 
consistent with the safety and soundness of the institutions. 77 FR 
55272, 55297 (Sept. 7, 2012). The Bureau stated in the proposal that 
the Bureau's proposed rule would not affect the Interagency Guidance 
on loan origination compensation. Id. In addition, the Bureau stated 
that to the extent a person is subject to both the Bureau's 
rulemaking and the Interagency Guidance, compliance with Bureau's 
rulemaking is not deemed to be compliance with the Interagency 
Guidance. Id. The Bureau reiterates these statements for purposes of 
this final rule. The Bureau also acknowledges that the same 
statements apply with respect to the proposal by the Interagency 
Group to implement rules consistent with the standards set forth in 
the Interagency Guidance. See 76 FR 21170 (Apr. 14, 2011). The 
proposal by the Interagency Group has not yet been finalized.
    \126\ The G-20 recommendations to which the commenter was 
referring appear to be the Financial Stability Forum (FSF) 
Principles for Sound Compensation Practices, issued in April 2009 
(FSF Principles). See http://www.financialstabilityboard.org/publications/r_0904b.pdf. The FSF Principles were intended to 
ensure effective governance of compensation, alignment of 
compensation with prudent risk-taking and effective supervisory 
oversight and stakeholder engagement in compensation. See id. at 2.
---------------------------------------------------------------------------

    Industry commenters who expressed a preference, if the revenue test 
were nonetheless adopted, primarily favored a threshold of 50 percent 
rather than 25 percent. One large financial institution, while 
criticizing the complexity of the revenue test, recommended that the 
Bureau consider adopting it as a safe harbor. One mortgage company 
commenter suggested exempting organizations from the restrictions on 
the payment of profit-sharing bonuses and the making of contributions 
to non-qualified plans if they do not offer high or higher-cost 
mortgages and their individual loan originators have limited pricing 
discretion because, the commenter stated, the risk for steering of 
consumers would be extremely low or nonexistent.
    SBA Advocacy urged the Bureau to analyze the incentive issues 
arising from non-qualified plans carefully before clarifying existing 
or proposing new regulations. SBA Advocacy reiterated concerns raised 
by the small entity representatives during the Small Business Review 
Panel process that: (1) Even if the revenue test threshold were set at 
50 percent, it may not provide relief for many small businesses because 
their revenues are often derived predominately from mortgage 
originations; (2) the Bureau should consider relaxing the revenue test 
to exclude revenue derived from existing loans held in portfolio; (3) 
the Bureau should provide further clarification on the definition of 
revenue; and (4) the Bureau should develop a mortgage-related revenue 
limit that reflects the unique business structure of smaller industry 
members and provides relief to small entities.\127\ SBA Advocacy also 
referenced concerns raised at its outreach roundtable that the 
definition was too broad and that it would be difficult to determine 
what is and is not compensation. SBA Advocacy further referenced 
concerns that if a mistake was made on the compensation structure, all 
loans sold on the secondary market might be susceptible to repurchase 
demands. SBA Advocacy discussed the suggestion by participants at its 
outreach roundtable of a safe harbor to prevent one violation from 
poisoning an entire pool of loans.
---------------------------------------------------------------------------

    \127\ Similarly, a law firm that represents small and medium-
sized banks commented that the Bureau should consider a higher 
threshold under the revenue test for small savings institutions.
---------------------------------------------------------------------------

    An organization writing on behalf of State bank supervisors stated 
that the Bureau's proposed regulatory changes

[[Page 11349]]

regarding profit-sharing bonuses and contributions to non-qualified 
plans were largely appropriate. The organization noted, however, that 
enforcing standards based on thresholds for origination, such as the 
approach in the proposed de minimis test, could be problematic because 
the number of transactions originated may have differing degrees of 
significance in different scenarios. The organization encouraged the 
Bureau either to justify the threshold levels through study or to adopt 
a more flexible approach that could be tailored to various situations 
appropriately.
    A few industry commenters proposed alternative approaches to the 
revenue test or specifically responded to alternative approaches on 
which the Bureau solicited comment. A trade association representing 
independent community banks recommended that the Bureau not finalize 
the revenue test and instead cap at 25 percent the percentage of an 
individual loan originator's total cash compensation paid during a 
calendar year from a non-qualified bonus plan. The association asserted 
that this structure would be easy to track, manage and monitor. A law 
firm that represents small and medium-sized banks discussed whether to 
permit profit-sharing bonuses or contributions to non-qualified plans 
where the creditor or loan originator organization can demonstrate that 
there is an insubstantial relationship between the compensation and the 
terms of multiple transactions of multiple individual loan originators. 
This commenter agreed with the Bureau's assertion in the proposal that 
this test would be difficult to implement in practice. One bank 
commenter, however, wrote that the marginal difference in loan 
originator compensation based on upcharging consumers is not a 
significant incentive to charge a customer a higher rate. The commenter 
provided an example of a loan originator receiving a $1,000 bonus of 
which only $20 was attributable to profit from transaction terms.
    After consideration of comments received to the proposal and 
additional internal analysis, the Bureau has decided not to adopt the 
revenue test in this final rule. Based on this consideration and 
analysis, the Bureau believes the revenue test suffers from a variety 
of flaws.
    First, the Bureau believes that the revenue test is not an 
effectively calibrated means of measuring the level of incentives 
present for individual loan originators to steer consumers to 
particular transaction terms. At a basic level, revenues would be a 
flawed measure of the relationship between the mortgage business and 
the profitability of the firm. Indeed, the Bureau believes that the 
revenue test would present a substantial risk of evasion. For example, 
if the revenue test were set at 50 percent, a creditor whose mortgage 
origination division generates 40 percent of the creditor's total 
revenues but 90 percent of the creditor's total profits could set a 
profit-sharing plan at the level of the entire company (rather than the 
mortgage business division) so that all company employees are eligible, 
but then pay out 90 percent of the bonuses to the individual loan 
originators. Although this compensation program would technically 
comply with the revenue test because less than 50 percent of total 
revenues would have been generated from mortgage business, steering 
incentives might still exist because individual loan originators would 
receive a disproportionate amount of bonuses relative to other 
individuals working for the creditor or loan originator organization. 
Moreover, firms would also have incentives to manipulate corporate 
structures to minimize mortgage revenues. The inherent misalignment 
between the revenue test and company profitability, which more directly 
drives decisions about compensation, would result in a rule that is 
both under-inclusive and over-inclusive. The revenue test's under-
inclusiveness is illustrated by the example above in this paragraph. 
One example of the revenue test's over-inclusiveness is the effect of 
the revenue test on monoline mortgage businesses, discussed below. The 
Bureau believes that it would be difficult to fashion additional 
provisions for the revenue test to prevent such outcomes and any such 
provisions would add further complexity to a rule that as proposed was 
already heavily criticized for its complexity.
    The Bureau believes that a test based on profitability instead of 
revenues, while designed to address the potential misalignment between 
revenues and profits discussed above, would present substantial risks. 
In the proposal, the Bureau solicited comment on this alternative 
approach, while expressing concern that using profitability as the 
metric could encourage firms to allocate costs across business lines to 
understate mortgage business profits. While revenues may be less prone 
to accounting manipulation than profits, a similar potential for 
accounting manipulation would also be present if the revenue test were 
adopted.
    Second, the complexity of the rule also would prove challenging for 
industry compliance and supervision and enforcement. The Bureau is 
particularly mindful of the criticism by some commenters that the 
complexity of the proposal would have posed compliance burdens of such 
significance that creditors and loan originator organizations would 
have avoided paying profit-sharing bonuses to individual loan 
originators or making contributions to their non-qualified plans. 
Moreover, monitoring for evasion of the proposed rule would have 
required substantial analysis of how the company's mortgage-related 
revenue interplays with the revenue from other lines of business across 
the company and affiliates of the company (or a similar analysis for 
profits if profitability were used as an alternative metric). Assessing 
the relationship among different business lines within the company and 
affiliates would have been particularly challenging with a large, 
multi-layered organization.
    Third, the Bureau has concluded, following consideration of the 
many comments from industry and SBA Advocacy, that the proposed revenue 
test would disadvantage monoline mortgage businesses, many of which are 
small entities, by effectively precluding them from paying profit-
sharing bonuses and making contributions to non-qualified plans under 
any circumstances regardless of the particular aspects of their 
compensation programs. The Bureau believes that, as a general matter, 
steering incentives may be present to a greater degree with mortgage 
businesses that are small in size because the incentive of individual 
loan originators to upcharge likely increases as the total number of 
individual loan originators in an organization decreases.\128\ The 
negative effect of the proposed rule, however, on monoline mortgage 
businesses would have been uniform; regardless of where

[[Page 11350]]

the threshold would have been set, these businesses never would have 
been able to ``pass'' the revenue test. Thus, the revenue test would 
have been over-inclusive with respect to monoline mortgage businesses.
---------------------------------------------------------------------------

    \128\ See earlier discussion of ``free-riding'' behavior in the 
section-by-section analysis of Sec.  1026.36(d)(1)(i); see also 77 
FR 55272, 55296-97 (Sept 7. 2012). In the proposal, the Bureau also 
noted that for small depository institutions and credit unions 
(defined as those institutions with assets under $175 million), 
regulatory data from 2010 indicate that for small savings 
institutions whose primary business focus is on residential 
mortgages, 59 percent of these firms would be restricted from paying 
bonuses based on mortgage-related profits to their individual loan 
originators under the revenue test if set at 50 percent. The Bureau 
noted that it lacks comprehensive data on nonbank lenders and, in 
particular, does not have information regarding the precise range of 
business activities that such companies engage in, and as a result, 
it was unclear the extent to which such nonbank lenders will face 
restrictions on their compensation practices. 77 FR 55272, 55347 
(Sept. 7, 2012). While the Bureau has received additional data 
regarding nonbank lenders from the NMLSR confirming the original 
data, information regarding the range of revenue sources is still 
incomplete.
---------------------------------------------------------------------------

    For these reasons, the Bureau does not believe that the revenue 
test (or a test that substitutes profitability for revenues) can be 
structured in a way that is sufficiently calibrated to prevent steering 
incentives. Thus, the Bureau is not adopting either type of test and, 
instead, as discussed below, is adopting a total compensation test 
consistent with an alternative on which the Bureau sought comment in 
the proposal.
36(d)(1)(iv)
    As noted above, proposed Sec.  1026.36(d)(1)(iii) would have 
permitted payment of compensation that is directly or indirectly based 
on the terms of transactions of multiple individual loan originators in 
limited circumstances. In this final rule, the provisions that would 
have been included in Sec.  1026.36(d)(1)(iii) regarding the payment of 
compensation in the form of profit-sharing bonuses and contributions to 
non-qualified plans have been revised and redesignated as Sec.  
1026.36(d)(1)(iv), which addresses payments of compensation under 
``non-deferred profits-based- compensation plans'' as defined in the 
rule. A non-deferred profits-based compensation plan is any arrangement 
for the payment of non-deferred compensation that is determined with 
reference to profits of the person from mortgage-related business. The 
commentary clarifying Sec.  1026.36(d)(1)(iv), previously contained in 
proposed comment 36(d)(1)-2.iii.G, has also been reorganized and 
incorporated into comment 36(d)(1)-3.v in the final rule.
36(d)(1)(iv)(A)
    Proposed Sec.  1026.36(d)(1)(iii)(A) would have prohibited payment 
of compensation to an individual loan originator that directly or 
indirectly was based on the terms of that individual loan originator's 
transaction or transactions. The Bureau explained in the section-by-
section analysis of the proposal that this language was intended to 
prevent a person from paying compensation to an individual loan 
originator based on the terms of that individual loan originator's 
transactions regardless of whether the compensation would otherwise be 
permitted in the limited circumstances under Sec.  
1026.36(d)(1)(iii)(B). Proposed comment 36(d)(1)-2.iii.F would have 
clarified the provision by giving an example and cross-referencing 
proposed comment 36(d)(1)-1 for further interpretation concerning 
whether compensation was ``based on'' transaction terms.
    The Bureau did not receive comments specifically addressing this 
provision. The Bureau is finalizing this section and comment 36(d)(1)-
2.iii.F as proposed, except that Sec.  1026.36(d)(1)(iii)(A) has been 
redesignated as Sec.  1026.36(d)(1)(iv)(A) and comment 36(d)(1)-2.iii.F 
has been redesignated as comment 36(d)(1)-3.iv for technical reasons.
36(d)(1)(iv)(B)
36(d)(1)(iv)(B)(1)
    Although the Bureau is not adopting the revenue test, the Bureau 
still believes that the final rule should permit the payment of 
compensation under non-deferred profits-based compensation plans to 
individual loan originators under limited circumstances where the 
incentives for the individual loan originators to steer consumers to 
different loan terms are sufficiently attenuated. As noted earlier, the 
Bureau shares the concerns of consumer groups that setting a baseline 
rule too loosely would undermine the general prohibition of 
compensation based on transaction terms under TILA section 129B(c)(1) 
and Sec.  1026.36(d)(1)(i), which could allow for a return of the types 
of lending practices that contributed to the recent mortgage-market 
crisis. However, as the Bureau stated above and in the proposal, 
compensation under non-deferred profits-based compensation plans does 
not always raise steering concerns, and this form of compensation, when 
appropriately structured, can provide inducements for individual loan 
originators to perform well and to become invested in the success of 
their organizations. The Bureau believes that allowing payment of 
compensation under non-deferred profits-based compensation plans under 
carefully circumscribed circumstances would appropriately balance these 
objectives. The Bureau also believes that implementing the TILA section 
129B(c)(1) prohibition on compensation that varies based on loan terms 
to allow for these types of carefully circumscribed exceptions (with 
clarifying interpretation in the commentary) is consistent with the 
Bureau's interpretive authority under the Dodd-Frank Act and the 
Bureau's authority under section 105(a) of TILA to issue regulations to 
effectuate the purposes of TILA, prevent circumvention or evasion, or 
to facilitate compliance. Neither the TILA prohibition on compensation 
varying based on loan terms nor the existing regulatory prohibition on 
compensation based on transaction terms and conditions expressly 
addresses non-deferred profits-based compensation plans. Therefore, the 
clarity provided by Sec.  1026.36(d)(1)(iv) and its commentary will 
help prevent circumvention or evasion of, and facilitate compliance 
with, TILA by clearly stating when these types of payments and 
contributions are permissible.
    The Bureau, additionally, believes that a bright-line approach 
setting a numerical threshold above which compensation under a non-
deferred profits-based compensation plan is prohibited is preferable to 
a principles-based approach, which was suggested by some commenters. 
Application of a principles-based approach would necessarily involve a 
substantial amount of subjectivity. Because the design and operation of 
these programs are varied and complex, the legality of many of them 
would likely be in doubt, creating uncertainty and challenges for 
industry compliance, agency supervision, and agency and private 
enforcement of the underlying regulation.\129\
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    \129\ As noted earlier, one commenter urged the Bureau to look 
to the implementation of certain G-20 task force recommendations on 
incentive compensation practices (i.e., the FSF Principles) as a 
model for a principles-based rather than a rules-based approach. 
However, the FSF Principles are primarily focused on compensation 
programs at significant financial institutions that incentivize 
imprudent risk-taking, which is not the subject of this rulemaking. 
FSF Principles at 1-2. Thus, the Bureau believes this suggested 
precedent for a qualitative, principles-based approach is 
inapposite.
---------------------------------------------------------------------------

    Therefore, the Bureau is adopting, in Sec.  
1026.36(d)(1)(iv)(B)(1), a rule that permits an individual loan 
originator to receive, and a person to pay, compensation under a non-
deferred profits-based compensation plan where the compensation is 
determined with reference to the profits of the person from mortgage-
related business, provided that the compensation to the individual loan 
originator under non-deferred profits-based compensation plans does 
not, in the aggregate, exceed 10 percent of the individual loan 
originator's total compensation corresponding to the same time period. 
Section 1026.36(d)(1)(iv)(B)(1) permits this compensation even if it is 
directly or indirectly based on the terms of transactions of multiple 
individual loan originators, provided that, pursuant to Sec.  
1026.36(d)(1)(iv)(A), the compensation is not directly or indirectly 
based on the terms of the individual loan originator's 
transactions.\130\
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    \130\ The provisions of Sec.  1026.36(d)(1)(iv)(B)(1) are 
sometimes hereinafter referred to as the ``10-percent total 
compensation test'' or the ``10-percent total compensation limit''; 
and the restrictions on compensation contained within the rule are 
sometimes hereinafter referred to as the ``10-percent limit.'' 
Compensation paid under a non-deferred profits-based compensation 
plan is sometimes hereinafter referred to as ``non-deferred profits-
based compensation.''

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[[Page 11351]]

    Proposed comment 36(d)(1)-2.iii.A, which would have clarified the 
meaning of ``profit-sharing plan'' under proposed Sec.  
1026.36(d)(1)(iii), has been revised to clarify the meaning of ``non-
deferred profits-based compensation plan'' under Sec.  
1026.36(d)(1)(iv) and is adopted as comment 36(d)(1)-3.ii. The Bureau 
is adopting in this final rule much of the language in the proposed 
comment, with a few exceptions (in addition to technical changes and 
reorganization). The comment clarifies that a non-deferred profits-
based compensation plan is any compensation arrangement where an 
individual loan originator may be paid variable, additional 
compensation based in whole or in part on the profits of the mortgage-
related business of the person paying the compensation. However, the 
comment now clarifies that a non-deferred profits-based compensation 
plan does not include a designated tax-advantaged plan (as defined in 
Sec.  1026.36(d)(1)(iii)), or a deferred compensation plan that is not 
a designated plan as defined in the rule, including plans under 
Internal Revenue Code section 409A, 26 U.S.C. 409A.
    The Bureau proposed to treat profits-based deferred compensation 
under non-qualified plans in the same manner as non-deferred profit-
sharing payments (e.g., bonuses). Although the proposal preamble 
discussion focused primarily on profit-sharing bonus programs, the 
reference to non-qualified plans also potentially could have included 
certain deferred-compensation plans (such as plans covered by Internal 
Revenue Code section 409A, 26 U.S.C. 409A) that do not receive the same 
tax-advantaged status as the plans covered by Sec.  1026.36(d)(1)(iii) 
of the final rule. The Bureau also solicited comment on whether there 
are additional types of non-qualified plans that should be treated 
similar to qualified plans under the rule. The Bureau received only one 
response that specifically focused on this issue by urging that the 
Bureau not place restrictions on ``nonqualified retirement 
arrangements'' that restore benefits that are limited under designated 
tax-advantaged plans. The commenter asserted that companies use these 
agreements in an attempt to give favorable treatment to highly-
compensated employees under their company retirement plans, but 
provided no data regarding how frequently they are used to compensate 
loan originators.
    The Bureau has considered the comment but declines to either 
include such plans within the exception for non-deferred compensation 
plans or to provide a separate exception to Sec.  1026.36(d)(1) for 
such deferred compensation plans at this time. Applying the 10 percent 
cap on compensation under non-deferred profits-based compensation plans 
to compensation under non-designated plans in general would be 
administratively complex given the variety of such plans and the 
consequent difficulty of constructing formulae for including them in 
the calculations of income required to apply the 10 percent cap. Nor is 
the Bureau prepared to create a separate rule for deferred compensation 
plans that are not designated plans. The Bureau understands that such 
plans are generally quite rare and has no detailed evidence as to the 
extent or nature of their use in compensating loan originators. The 
Bureau also notes that they are not generally subject to many of the 
same restrictions that apply to the designated tax-advantaged plans 
discussed in the section by section analysis of Sec.  
1026.36(d)(1)(iii). The Bureau also does not have enough information 
regarding the structure of non-designated plans to determine what 
measures would be appropriate or necessary to cabin any potential for 
them to create steering incentives. Accordingly, the Bureau does not 
believe that it would be appropriate to provide an exception for such 
plans at this time.
    Comment 36(d)(1)-3.ii further clarifies that under a non-deferred 
profits-based compensation plan, the individual loan originator may, 
for example, be paid directly in cash, stock, or other non-deferred 
compensation, and the amount to be paid out under the non-deferred 
profits-based compensation plan and the distributions to the individual 
loan originators may be determined by a fixed formula or may be at the 
discretion of the person (e.g., such person may elect not to make any 
payments under the non-deferred profits-based compensation plan in a 
given year), provided the compensation is not directly or indirectly 
based on the terms of the individual loan originator's transactions. 
The comment further elaborates that, as used in Sec.  1026.36(d)(1)(iv) 
and its commentary, non-deferred profits-based compensation plans 
include, without limitation, bonus pools, profits pools, bonus plans, 
and profit-sharing plans established by the person, a business unit 
within the person's organizational structure, or any affiliate of the 
person or business unit within the affiliate's organizational 
structure. The comment also provides examples illustrating application 
of this interpretation to certain types of non-deferred profits-based 
compensation plans.
    Comment 36(d)(1)-3.ii (proposed as comment 36(d)(1)-2.iii.A) has 
been revised in several additional respects. The comment now clarifies 
that compensation under a non-deferred profits-based compensation plan 
could include, without limitation, annual or periodic bonuses, or 
awards of merchandise, services, trips, or similar prizes or incentives 
where the bonuses, contributions, or awards are determined with 
reference to the profitability of the person, business unit, or 
affiliate, as applicable. Reference to ``any affiliate'' has been added 
to include compensation programs where compensation is paid through an 
affiliate of the person. Moreover, in the proposal, the term ``business 
unit'' was included in this comment without elaboration. The final 
comment clarifies that the term ``business unit'' as used in Sec.  
1026.36(d)(1)(iv) and its commentary means a division, department, or 
segment within the overall organizational structure of the person or 
affiliate, as applicable, that performs discrete business functions and 
that the person treats separately for accounting or other 
organizational purposes. The examples in the comment have been revised 
to reflect that a performance bonus paid out of a bonus pool set aside 
at the beginning of the company's annual accounting period as part of 
the company's operating budget does not violate the baseline 
prohibition on Sec.  1026.36(d)(1)(i), meaning that the limitations of 
Sec.  1026.36(d)(1)(iv) do not apply to such bonuses. Finally, several 
technical changes have been made to the comment.
    Comment 36(d)(1)-3.v (which was proposed as comment 36(d)(1)-
2.iii.G) contains six paragraphs and clarifies a number of aspects of 
the regulatory text in Sec.  1026.36(d)(1)(iv)(B)(1). Comment 36(d)(1)-
3.v.A clarifies that the individual loan originator's total 
compensation (i.e., the denominator under the 10-percent total 
compensation test) consists of the sum total of: (1) all wages and tips 
reportable for Medicare tax purposes in box 5 on IRS form W-2 \131\ 
(or, if the individual loan originator is an independent contractor, 
reportable

[[Page 11352]]

compensation on IRS form 1099-MISC \132\); \133\ and (2) at the 
election of the person paying the compensation, all contributions by 
the creditor or loan originator organization to the individual loan 
originator's accounts in designated tax-advantaged plans that are 
defined contribution plans.
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    \131\ See the IRS Instructions to Form W-2, available at http://www.irs.gov/pub/irs-pdf/iw2w3.pdf.
    \132\ See the IRS Instructions to Form 1099-MISC, available at 
http://www.irs.gov/pub/irs-pdf/i1099msc.pdf.
    \133\ Total compensation of individual loan originators employed 
by the creditor or loan originator organization would be reflected 
on a W-2, whereas total compensation of an individual loan 
originator working for a creditor or loan originator organization as 
an independent contractor would be reflected on a 1099-MISC form. If 
an individual loan originator has some compensation that is 
reportable on the W-2 and some that is reportable on the 1099-MISC, 
the total compensation is the sum total of what is reportable on 
each of the two forms.
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    The Bureau believes that linking the definition of total 
compensation to the types of compensation required to be included on 
the IRS W-2 or 1099-MISC forms, as applicable, will make the 
calculation simpler for the 10-percent total compensation limit because 
loan originator organizations and creditors already must prepare W-2 
and 1099-MISC forms for their employees and independent contractors, if 
any. Thus, creditors and loan originator organizations presumably 
already have systems in place to track and aggregate the types and 
amounts of individual loan originator compensation that are required to 
be reported on the IRS forms. Moreover, as explained in comment 
36(d)(1)-3.v, a creditor or loan originator organization is not 
required to factor into the calculation of total compensation any 
contribution to a designated defined contribution plan other than 
amounts reported on the W-2 or 1099-MISC forms. In addition, the Bureau 
believes this approach will yield a more precise ratio of compensation 
paid under non-deferred profits-based compensation plans determined 
with reference to mortgage-related profits to total compensation than a 
definition that selectively includes or excludes certain types of 
compensation, and this more accurate result will more closely align 
with the incentives of loan originators.
    Comment 36(d)(1)-3.v.B clarifies the requirement under Sec.  
1026.36(d)(1)(iv)(B)(1) that compensation paid to the individual loan 
originator that is determined with reference to the profits of the 
person from mortgage-related business is subject to the 10-percent 
total compensation limit (i.e., the ``numerator'' of the 10-percent 
total compensation limit). The comment clarifies that ``profits of the 
person'' include, as applicable depending on where the non-deferred 
profits-based compensation plan is set, profits of the person, the 
business unit to which the individual loan originators are assigned for 
accounting or other organizational purposes, or an affiliate of the 
person. The comment notes that profits from mortgage-related business 
are any profits of the person or the business unit to which the 
individual loan originators are assigned for accounting or other 
organizational purposes that are determined with reference to revenue 
generated from transactions subject to Sec.  1026.36(d), and that 
pursuant to Sec.  1026.36(b) and comment 36(b)-1, Sec.  1026.36(d) 
applies to closed-end consumer credit transactions secured by 
dwellings.
    The comment further notes this revenue would include, without 
limitation, and as applicable based on the nature of the business of 
the person, business unit, or affiliate origination fees and interest 
associated with dwelling-secured transactions for which individual loan 
originators working for the person were loan originators, income from 
servicing of such transactions, and proceeds of secondary market sales 
of such transactions. The non-exhaustive list of mortgage-related 
business revenue provided in the comment largely parallels the 
definition of ``mortgage-related revenue'' that the Bureau had proposed 
in Sec.  1026.36(d)(1)(iii)(B)(1) as part of the revenue test approach. 
The comment also clarifies that, if the amount of the individual loan 
originator's compensation under non-deferred profits-based compensation 
plans for a time period does not, in the aggregate, exceed 10 percent 
of the individual loan originator's total compensation corresponding to 
the same time period, compensation under non-deferred profits-based 
compensation plans may be paid under Sec.  1026.36(d)(1)(iv)(B)(1) 
regardless of whether or not it was determined with reference to the 
profits of the person from mortgage-related business.
    Comment 36(d)(1)-3.v.C discusses how to determine the applicable 
time period under Sec.  1026.36(d)(1)(iv)(B)(1). The comment also 
clarifies that a company may pay compensation subject to the 10-percent 
limit during different time periods falling within the company's annual 
accounting period for keeping records and reporting income and 
expenses, which may be a calendar year or a fiscal year depending on 
the person's annual accounting period, but in such instance, the 10-
percent limit applies both as to each time period and cumulatively as 
to the annual accounting period. Comment 36(d)(1)-3.v.C also 
illustrates the clarification in the comment through two examples.
    The Bureau believes that the time period for which the individual 
loan originator's performance, loan volume, or other factors was 
evaluated for purposes of determining the bonus that the individual 
loan originator is to receive is the most appropriate and practicable 
measuring period for the 10-percent total compensation limit. For 
example, the Bureau considered using as the measuring period for 
applying the 10-percent total compensation limit the time period during 
which the compensation subject to the 10-percent limit is actually 
paid. This measuring period would track when the bonuses are reportable 
as Federal income by the individual loan originators. However, if this 
measuring period were used, a year-end bonus determined with respect to 
one year and paid during January of the following year would result in 
the company having to project the total compensation for the entire 
year in which the bonus was paid to assess whether the bonus determined 
with reference to the previous year met the 10-percent limit.\134\ This 
would make compliance difficult, if not impossible, and also lead to 
imprecision between the numerator (which is an actual amount) and the 
denominator (which is an estimated amount). Designating the measuring 
period as an annual period (whether a calendar or fiscal year) in all 
circumstances, for example, would raise similar issues about the need 
to project total compensation over a future period to determine whether 
a periodic bonus (such as a quarterly bonus) is in compliance with the 
10-percent total compensation limit.
---------------------------------------------------------------------------

    \134\ Paying a year-end bonus after the end of the calendar year 
does not render the bonus a form of deferred compensation since the 
bonus, once paid, is immediately taxable to the recipient.
---------------------------------------------------------------------------

    The Bureau acknowledges that the approach reflected in this final 
rule may require some adjustments to creditors' and loan originator 
organizations' systems of accounting and payment of bonuses if they do 
not pay compensation under a non-deferred profits-based compensation 
plan until after a quarter, calendar year, or other benchmark measuring 
period for which the compensation is calculated (namely, to ensure that 
total compensation in a given time period is net of any compensation 
under a non-deferred profits-based compensation plan paid

[[Page 11353]]

during that given time period but attributable to a previous time 
period). The Bureau believes that no other approach would align 
entirely with current industry practice, however.\135\
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    \135\ The Bureau understands there is variation in the market 
about whether creditors and loan originator organizations typically 
pay non-deferred profits-based compensation near the end of, but 
within, the time period evaluated for purposes of paying the non-
deferred profits-based compensation or during a subsequent time 
period.
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    Comment 36(d)(1)-3.v.D discusses how profits-based awards of 
merchandise, services, trips, or similar prizes or incentives are 
treated for purposes of the 10-percent total compensation test. This 
comment clarifies that, if any compensation paid to an individual loan 
originator under Sec.  1026.36(d)(1)(iv) pursuant to a non-deferred 
profits-based compensation plan consists of an award of merchandise, 
services, trips, or similar prizes or incentives, the cash value of the 
award is factored into the calculations of the compensation subject to 
the 10-percent limit and the total compensation under Sec.  
1026.36(d)(1)(iv)(B)(1). This comment also gives an example 
illustrating how the award of a trip to an individual loan originator 
would be treated under the rule in contrast to a cash bonus. The Bureau 
believes that this comment will ensure that non-cash bonus awards made 
with reference to mortgage-related business profits will be included 
and appropriately valued for purposes of calculating the 10-percent 
compensation and the total compensation under Sec.  
1026.36(d)(1)(iv)(B)(1).
    Comment 36(d)(1)-3.v.E clarifies that the 10-percent total 
compensation limit under Sec.  1026.36(d)(1)(iv) does not apply if the 
compensation under a non-deferred profits-based compensation plan is 
determined solely with reference to profits from non-mortgage-related 
business as determined in accordance with reasonable accounting 
principles. The comment further notes that reasonable accounting 
principles: (1) Reflect an accurate allocation of revenues, expenses, 
profits, and losses among the person, any affiliate of the person, and 
any business units within the person or affiliates; and (2) are 
consistent with the accounting principles utilized by the person or the 
affiliate with respect to, as applicable, its internal budgeting and 
auditing functions and external reporting requirements. The comment 
also notes examples of external reporting and filing requirements that 
may be applicable to creditors and loan originator organizations are 
Federal income tax filings, Federal securities law filings, or 
quarterly reporting of income, expenses, loan origination activity, and 
other information required by GSEs.
    To the extent a company engages in both mortgage-related and non-
mortgage-related business, the potential exists for commingling of 
mortgage- and non-mortgage-related business profits. In this instance, 
the Bureau believes that non-deferred profits-based compensation for 
individual loan originators is to be exempt from the general rule under 
Sec.  1026.36(d)(1), the determination of the amount of the non-
mortgage-related business profits must be made in accordance with 
reasonable accounting principles. The Bureau does not believe this 
requirement will be burdensome because if a creditor or loan originator 
organization chooses to separately calculate profits from mortgage and 
non-mortgage related businesses either for internal accounting 
purposes, public reporting, or simply for the purposes of paying 
compensation under a non-deferred profits-based compensation plan 
pursuant to this regulation, the firm will do so in accordance with 
reasonable accounting principles. Where the firm does not segregate its 
profits in this way for Regulation Z purposes, all profits will be 
regarded as being from mortgage-related business.
    Comment 36(d)(1)-3.v.F.1 provides an additional example of the 
application of 1026.36(d)(1)(iv)(B)(1). The comment assumes that, in a 
given calendar year, a loan originator organization pays an individual 
loan originator employee $40,000 in salary and $125,000 in commissions, 
and makes a contribution of $15,000 to the individual loan originator's 
401(k) plan (for a total of $180,000). At the end of the year, the loan 
originator organization pays the individual loan originator a bonus 
based on a formula involving a number of performance metrics, to be 
paid out of a profit pool established at the level of the company but 
that is derived in part through the company's mortgage originations. 
The loan originator organization derives revenues from sources other 
than transactions covered by Sec.  1026.36(d). The comment notes that, 
in this example, the performance bonus would be directly or indirectly 
based on the terms of multiple individual loan originators' 
transactions pursuant to Sec.  1026.36(d)(1)(i), as clarified by 
comment 36(d)(1)-1.ii, because it is being funded out of a profit pool 
derived in part from mortgage originations. Thus, the comment notes 
that the bonus is permissible under Sec.  1026.36(d)(1)(iv)(B)(1) only 
if it does not exceed 10 percent of the loan originator's total 
compensation, which, in this example, consists of the individual loan 
originator's salary, commissions, and may include the performance 
bonus. The comment concludes that the loan originator organization may 
pay the individual loan originator a performance bonus of up to $20,000 
(i.e., 10 percent of $200,000 in total compensation).
    Comment 36(d)(1)-3.v.F also gives an example of the different 
treatment under Sec.  1026.36(d)(1)(iv)(B)(1) of two different profits-
based bonuses for an individual loan originator working for a creditor: 
a ``performance'' bonus based on the individual loan originator's 
aggregate loan volume for a calendar year that is paid out of a bonus 
pool determined with reference to the profitability of the mortgage 
origination business unit, and a year-end ``holiday'' bonus in the same 
amount to all company employees that is paid out of a company-wide 
bonus pool. As explained in the comment, because the performance bonus 
is paid out of a bonus pool that is determined with reference to the 
profitability of the mortgage origination business unit, it is 
compensation that is determined with reference to mortgage-related 
business profits, and the bonus is therefore subject to the 10-percent 
total compensation limit. The comment notes that the ``holiday'' bonus 
is also subject to the 10-percent total compensation limit if the 
company-wide bonus pool is determined, in part, with reference to the 
profits of the creditor's mortgage origination business unit. The 
comment further clarifies that the ``holiday'' bonus is not subject to 
the 10-percent total compensation limit if the bonus pool was not 
determined with reference to the profits of the mortgage origination 
business unit as determined in accordance with reasonable accounting 
principles. The comment also clarifies that, if the ``performance'' 
bonus and the ``holiday'' bonus in the aggregate do not exceed 10 
percent of the individual loan originator's total compensation, such 
bonuses may be paid under Sec.  1026.36(d)(1)(iv)(B)(1) without the 
necessity of determining from which bonus pool they were paid or 
whether they were determined with reference to the profits of the 
creditor's mortgage origination business unit.
    Comment 36(d)(1)-3.v.G clarifies that an individual loan originator 
is deemed to comply with its obligations regarding receipt of 
compensation under Sec.  1026.36(d)(1)(iv)(B)(1) if the individual loan 
originator relies in good faith on an accounting or a statement 
provided by the person who determined the individual loan originator's 
compensation under a non-deferred

[[Page 11354]]

profits-based compensation plan under Sec.  1026.36(d)(1)(iv)(B)(1) and 
where the statement or accounting is provided within a reasonable time 
period following the person's determination. This comment is intended 
to reduce the compliance burdens on individual loan originators by 
providing a safe harbor for complying with the restrictions on 
receiving compensation under a non-deferred profits-based compensation 
plan under Sec.  1026.36(d)(1)(iv)(B)(1).\136\ The safe harbor will be 
available to any individual loan originator receiving compensation that 
is subject to the 10-percent limit where the person paying the 
compensation subject to the 10-percent limit elects to provide the 
individual loan originator with an accounting or statement in 
accordance with the specifications in the safe harbor and the 
individual relies in good faith on the accounting or statement.
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    \136\ The restrictions on non-deferred profits-based 
compensation under Sec.  1026.36(d)(1)(iv)(B)(1) impose obligations 
on both the person paying the compensation and on the individual 
loan originator receiving the compensation.
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    In the proposal, the Bureau indicated that it crafted the proposal 
so as to implement the Dodd-Frank Act provisions on loan originator 
compensation in a way that would reduce the compliance burdens on 
covered persons. Furthermore, the Bureau sought comment on the 
potential impact on all types of loan originators of the proposed 
restrictions on the methods by which a loan originator is remunerated 
in a transaction. As noted above, a trade association that represents 
loan originators (both organizations and individuals) expressed concern 
that the compensation restrictions in the revenue test would lead to 
``unacceptable litigation'' for individual loan originators (in 
addition to creditors and loan originator organizations).
    In developing the final rule, the Bureau has paid particular 
attention to the compliance burdens on individual loan originators with 
respect to complying with the restrictions on receiving compensation 
subject to the 10-percent total compensation limit under Sec.  
1026.36(d)(1)(iv). The Bureau has crafted the final rule to facilitate 
the compliance of individual loan originators without undue burden or 
cost. The Bureau believes that in most cases, individual loan 
originators would not have the knowledge of or control over the 
information that would enable them to determine their compliance, and 
the Bureau does not believe it would be reasonable to expect them to do 
so. The Bureau has also crafted the final rule to avoid subjecting 
these individuals to unnecessary litigation and agency enforcement 
actions.\137\
---------------------------------------------------------------------------

    \137\ As noted earlier, the Dodd-Frank Act extended the 
limitations period for civil liability under TILA section 130 from 
one year to three years and also made mortgage originators civilly 
liable for violations of TILA.
---------------------------------------------------------------------------

    The Bureau does not believe a similar safe harbor is warranted for 
creditors and loan originator organizations that elect to pay 
compensation under Sec.  1026.36(d)(1)(iv). Creditors and loan 
originator organizations can choose whether or not to pay this type of 
compensation, and if they do they should be expected to comply with the 
provisions. Moreover, in contrast to a recipient of compensation, a 
payer of compensation has full knowledge and control over the numerical 
and other information used to determine the compensation. The Bureau 
acknowledges that in response to the proposed revenue test, several 
industry commenters as well as SBA Advocacy (on behalf of participants 
at its roundtable) expressed concern about potential TILA liability or 
repurchase risk where an error is made under the revenue test 
calculation. Under the revenue test, an error in determining the amount 
of total revenues or mortgage-related revenues could have potentially 
impacted all awards of compensation under a non-deferred profits-based 
compensation plan to individual loan originators for a particular time 
period. Because the 10-percent total compensation test focuses on 
compensation at the individual loan originator level, however, the 
potential liability implications of a calculation error largely would 
be limited to the effect of that error alone. In other words, in 
contrast to the revenue test, an error under the 10-percent total 
compensation test would not likely have downstream liability 
implications as to other compensation payments across the company or 
business unit. The Bureau also believes that creditors and loan 
originator organizations will develop policies and procedures to 
minimize the possibility of such errors.
    The Bureau is adopting the 10-percent total compensation test 
because the Bureau believes it will more effectively restrict the 
compensation programs that actually incentivize steering behavior on 
the part of individual loan originators than the proposed revenue test. 
Like the proposed revenue test, the 10-percent total compensation test 
clarifies the treatment of profits-based bonuses and aims to limit 
their payment to circumstances where incentives to individual loan 
originators to steer consumers to different loan terms are small. 
However, the Bureau believes that the 10 percent compensation test will 
be more effective at accomplishing that goal because it calibrates the 
restriction not based on a general measurement of the company's profits 
or revenues, but rather on the amount of money paid to the individual 
loan originator, which provides the most concrete form of incentive. 
Moreover, the Bureau believes that the 10-percent total compensation 
test will avoid the revenue test's disparate impact on certain segments 
of the industry, will be less complex, and will be less prone to 
circumvention and manipulation.
    Furthermore, the constitution of the individual loan originator's 
compensation package, including the presence and relative distribution 
of compensation under non-deferred profits-based compensation plans 
compared to other components of the total compensation, is a more 
direct and accurate indicator than company revenues or profitability of 
an individual loan originator's incentive to steer consumers to 
different loan terms. In contrast, a revenue or profitability test 
would completely bar all individual loan originators working for 
creditors or loan originator organizations that are above the relevant 
thresholds from certain compensation irrespective of the differential 
effects particular compensation arrangements would have on each 
individual's loan originator's incentives. Conversely, a revenue or 
profitability test would allow unchecked bonus and other compensation 
under a non-deferred profits-based compensation plan for individual 
loan originators working for a creditor or loan originator organization 
that falls below the relevant threshold. By their nature, these types 
of tests would create substantial problems of under- and over-
inclusiveness.
    The 10-percent total compensation test, unlike the revenue test, 
will not disadvantage creditors and loan originator organizations that 
are monoline mortgage businesses. The Bureau also believes that it will 
have less burdensome impact on small entities than the revenue test. As 
discussed above, the revenue test would have effectively precluded 
monoline mortgage businesses from paying profit-sharing bonuses to 
their individual loan originators or making contributions to those 
individuals' non-qualified plans because these institutions' mortgage-
related revenues as a percentage of total revenues would always exceed 
50 percent. A test focused on compensation at the individual loan 
originator level, rather than revenues at the level of the company or 
the division within the company at which the compensation

[[Page 11355]]

program is set up, would be available to all companies regardless of 
the diversity of their business lines. Moreover, as the Bureau noted in 
the proposal, creditors and loan originator organizations that are 
monoline mortgage businesses disproportionately consist of small 
entities.\138\ Unlike the revenue test, the 10-percent total 
compensation test will place restrictions on compensation under a non-
deferred profits-based compensation plan (such as bonuses) that are 
neutral across entity size. The Bureau also believes that the relative 
simplicity of the 10-percent total compensation test in comparison to 
the revenue test or a principles-based approach suggested by some 
commenters will also benefit small entities.\139\
---------------------------------------------------------------------------

    \138\ See earlier discussion of the regulatory data on small 
savings institutions whose primary business focus is on residential 
mortgages that was cited in the proposal.
    \139\ The impacts on small entities are described in more detail 
in the Final Regulatory Flexibility Analysis (FRFA) contained in 
part VII below.
---------------------------------------------------------------------------

    Moreover, the 10-percent total compensation test establishes a 
bright line rule that is less complex than the revenue test. The 10-
percent total compensation test does not require the Bureau to 
establish, and industry to comply with, a definition of total revenues 
or assess how the revenues of affiliates would be treated for purposes 
of the test. If a mortgage business wishes to provide compensation to 
its loan originators up to the 10-percent limit, it need only determine 
the amount of compensation under a non-deferred profits-based 
compensation plan and the amount of total compensation. As described 
above, the denominator of the test, total compensation, consists of the 
sum total of compensation that is reportable on box 5 of the IRS W-2 
(or, as applicable, the 1099-MISC form) filed with respect to the 
individual loan originator plus any contributions to the individual 
loan originator's account under designated tax-advantaged defined 
contribution plans where the contributions are made by the person 
sponsoring the plan. Creditors and loan originator organizations 
presumably already have systems in place to track and aggregate this 
information. Creditors and loan originator organizations would need to 
calculate non-mortgage-related business profits only if they are paying 
compensation under a non-deferred profits-based compensation plan 
outside of the 10-percent limit. The Bureau expects that this will be 
largely unnecessary because of the ample other methods to compensate 
individual loan originators and the principle that most creditors and 
loan originator organizations will wish to compensate their individual 
loan originators from a non-deferred profits-based compensation plan 
that is established with reference to mortgage-related business profits 
(i.e., to align the individual loan originators' incentives 
properly).\140\
---------------------------------------------------------------------------

    \140\ Furthermore, many individual loan originators who 
originate loans infrequently and not typically as part of their job 
will be otherwise exempt pursuant to the de minimis test.
---------------------------------------------------------------------------

    The Bureau acknowledges that the 10-percent total compensation test 
is not completely without complexity and that some institutions may 
have more difficulty than others determining which bonuses are subject 
to the regulation. For example, as noted above, the 10-percent total 
compensation test requires creditors or loan originator organizations 
that wish to pay compensation under a non-deferred profits-based 
compensation plan to their individual loan originators in excess of the 
10-percent limit to determine whether the non-deferred profits-based 
compensation is determined with reference to non-mortgage-related 
business profits, in accordance with reasonable accounting principles. 
Comment 36(d)(1)-3.v.E provides clarifications as to these 
requirements, as described above. As noted above, however, the Bureau 
believes that creditors and loan originator organizations that are 
subject to this final rule and that choose to pay non-deferred profits-
based compensation determined with reference to non-mortgage-related 
business profits already use, or would in the normal course use, 
reasonable accounting principles to make these calculations. Firms also 
could simply account for profits on a company-wide basis for purposes 
of meeting the 10-percent total compensation limit, which would negate 
the need for specifically calculating mortgage-related profits.
    The Bureau believes that the 10-percent total compensation test 
also presents less complexity than the alternative principles-based 
standards suggested by some commenters. As discussed in the section-by-
section analysis of Sec.  1026.36(d)(1)(i), application of a 
principles-based standard as a general matter would necessarily involve 
a substantial amount of subjectivity and present challenges for 
industry compliance, agency supervision, and agency and private 
enforcement of the underlying regulation. Moreover, the disparate 
standards suggested by industry commenters reveal the inherent 
difficulty of crafting a workable principles-based approach. These 
standards would need to be defined by the Bureau to be applied 
consistently across creditors and loan originator organizations. The 
complexity involved in crafting such principles would make it difficult 
to calibrate properly the countervailing interests for industry 
compliance, agency supervision and enforcement, and private 
enforcement.
    Some commenters supported the principles behind a test involving 
limits on individual loan originator's non-deferred profits-based 
compensation based on the Bureau's solicitation of comment on such an 
approach as an alternative to the revenue test. As noted above, a 
national trade association of community banks and depositories 
supported limiting compensation from a non-qualified bonus plan to no 
more than 25-percent of an individual loan originator's total 
compensation. As discussed above, a mortgage company commented that 
limiting compensation that is indirectly based on terms would cover 
almost any form of compensation determined with reference to lender 
profitability and urged that, instead, the rulemaking focus on 
compensation specific to the loan originator and the transaction.\141\ 
As with any line-drawing exercise, there is no universally acceptable 
place to draw the line that definitively separates payments that have a 
low likelihood of causing steering behavior from those that create an 
unacceptably high likelihood. This Bureau believes, however, that the 
steering incentives would be too high were loan originators permitted 
to receive up to 25 percent of their compensation from mortgage-related 
profits, especially given the availability of compensation from 
mortgage-related profits through contributions to a designated tax-
advantaged plan. Instead, a bonus of up to 10 percent of the individual 
loan originator's compensation will achieve the positive effects 
thought to be associated with non-deferred profits-based compensation 
plans.
---------------------------------------------------------------------------

    \141\ As noted above, this commenter recommended an alternative 
disclosure approach to make the consumer aware that the loan 
originator's compensation may increase or decrease based on the 
profitability of the creditor and urging the consumer to shop for 
credit to ensure that he or she has obtained the most favorable loan 
terms. The Bureau believes that this suggestion, while creative, 
would not have been feasible because there would have been no time 
to engage in consumer testing prior to the statutory deadline for 
issuing a final rule. Moreover, the Bureau does not believe a 
disclosure-only approach would implement the statute as faithfully, 
which as a substantive matter prohibits loan originator compensation 
that varies based on loan terms.
---------------------------------------------------------------------------

    The Bureau acknowledges that the 10-percent total compensation test 
does not

[[Page 11356]]

fully reflect that different types of non-deferred profits-based 
compensation plans in particular market settings might be shown to 
create substantially fewer steering incentives. As noted above, this 
final rule is not without complexity, particularly regarding the 
definition of the numerator of the 10-percent total compensation test. 
On balance, however, the Bureau believes this approach is less complex 
than the revenue test, and the burdens for both compliance and 
supervision will be reduced in comparison to the revenue test.
    Finally, the Bureau believes that the potential for circumvention 
and manipulation are less pronounced than under the revenue test. The 
revenue test would have required all regulated persons to calculate 
mortgage-related revenues and non-mortgage-related revenues separately 
to determine the relative contribution of the two to the firm's total 
revenues. Here, however, the Bureau believes that most creditors and 
loan originator organizations will not choose to account for their 
profits across business lines and instead will choose to limit the 
payment of non-deferred profits-based compensation to 10 percent of 
total compensation. For the firms that choose to do such disaggregated 
accounting, comment 36(d)(1)-3.v.E clarifies that they are to use 
reasonable accounting principles. If, notwithstanding the commentary, 
firms were to attempt to use unreasonable accounting principles or 
manipulate corporate structures to circumvent the rule, the Bureau will 
consider appropriate action.
    In this final rule, the Bureau has made other changes to the 
commentary to Sec.  1026.36(d)(1) that reflect substantive or technical 
changes from language that was in the proposal. The Bureau has made 
several technical changes to comment 36(d)(1)-1.ii. For example, where 
applicable, reference to ``transaction terms'' in this comment (and 
others) has been replaced with ``a term of a transaction,'' consistent 
with the substitution of this term throughout Sec.  1026.36(d)(1) and 
its commentary.
    In addition to being redesignated as comment 36(d)(1)-3, proposed 
comment 36(d)(1)-2.iii has been revised in several respects from the 
proposal. Reference to Sec.  1026.36(d)(1)(iv) has been added to the 
commentary to Sec.  1026.36(d), where applicable, to track the 
distinctions between designated plan provisions in Sec.  
1026.36(d)(1)(iii) and non-deferred profits-based compensation plans in 
Sec.  1026.36(d)(1)(iv). Moreover, language has been added clarifying 
that subject to certain restrictions, Sec.  1026.36(d)(1)(iii) and (iv) 
permits the payment of certain compensation that otherwise would be 
prohibited by Sec.  1026.36(d)(1)(i), because it is directly or 
indirectly based on the terms of multiple transactions of multiple 
individual loan originators. The cross-references to other sections and 
commentary clarifying the scope of Sec.  1026.36(d) have been excluded 
from the comment, because this clarification of the scope of Sec.  
1026.36(d) is not necessary in light of other changes to the regulatory 
text of Sec.  1026.36(d) in this final rule. Several technical changes 
were made as well.
    In this final rule, proposed comment 36(d)(1)-2.iii.B has been 
adopted as comment 36(d)(1)-3.i. This comment clarifies the meaning of 
defined benefit and defined contribution plans as such terms are used 
in Sec.  1026.36(d)(1)(iii).
    The Bureau has not finalized the portion of proposed comment 
36(d)(1)-2.iii.C that would have clarified that if a creditor did not 
permit its individual loan originator employees to deviate from the 
creditor's pre-established loan terms, such as the interest rate 
offered, then the creditor's payment of a bonus at the end of a 
calendar year to an individual loan originator under a profit-sharing 
plan would not be related to the transaction terms of multiple 
individual loan originators, and thus would be outside the scope of the 
prohibition on compensation based on terms under Sec.  
1026.36(d)(1)(i). Upon further consideration of the issues addressed in 
this proposed comment, the Bureau believes that inclusion of the 
comment does not appropriately clarify the restrictions under Sec.  
1026.36(d)(1)(i) as clarified by comment 36(d)(1)-1.ii. The existence 
of a potential steering risk where loan originator compensation is 
based on the terms of multiple transactions of multiple individual loan 
originators is not predicated exclusively on whether an individual loan 
originator has the ability to deviate from pre-established loan terms. 
This is because the individual loan originator may have the ability to 
steer consumers to different loan terms at the pre-application stage, 
when the presence or absence of a loan originator's ability to deviate 
from pre-established loan terms would not yet be relevant during these 
interactions. For example, a consumer might contact the individual loan 
originator for a preliminary price quote or, if the process is further 
along, the consumer and individual loan originator might meet so that 
the individual loan originator can begin gathering the items necessary 
to constitute a loan application under RESPA (which triggers the RESPA 
good faith estimate and TILA early disclosure requirements). All of 
these interactions would take place prior to the application and 
underwriting. Yet, steering potential would exist to the extent the 
individual loan originator might have the ability, for example, to 
suggest the consumer consider different loan products based on the 
individual loan originator's knowledge and experience of the market or 
his or her anticipation of the underwriting decision based on the 
information delivered by the consumer. The Bureau recognizes that 
certain industry commenters supported the proposed comment. However, 
the Bureau believes that the comment could potentially lead to 
confusion and misinterpretation about the applicability of the 
underlying prohibition on compensation based on transaction terms.
    The last sentence of proposed comment 36(d)(1)-2.iii.C (adopted as 
comment 36(d)(1)-3.iii in the final rule) also has been revised from 
the proposal. The proposed comment would have permitted a loan 
originator organization to pay a bonus to or contribute to a non-
qualified profit-sharing plan of its loan originator employees from all 
its revenues provided those revenues were derived exclusively from fees 
paid by a creditor to the loan origination organization for originating 
loans funded by the creditor. The comment explains that a bonus or 
contribution in these circumstances would not be directly or indirectly 
based on multiple individual loan originators' transaction terms 
because Sec.  1026.36(d)(1)(i) precludes the creditor from paying a 
loan originator organization compensation based on the terms of the 
loans it is purchasing. The Bureau is finalizing this portion of the 
comment as proposed, with three substantive changes. First, the comment 
now clarifies that loan originator organizations covered by the comment 
are those whose revenues are ``from transactions subject to Sec.  
1026.36(d),'' to emphasize that the revenues at issue are those 
determined with reference to transactions covered by this final rule. 
Second, the comment clarifies that such revenues must be ``exclusively 
derived from transactions covered by Sec.  1026.36(d)'' not that such 
revenues must be ``derived exclusively from fees paid by creditors that 
fund its originations.'' This change reflects that the compensation 
referenced in the comment may not necessarily be called a fee and may 
come from creditors or consumers or both. Third, the Bureau has added 
some additional language to the portion of the comment clarifying that 
if a loan originator organization's revenues from transactions subject 
to

[[Page 11357]]

Sec.  1026.36(d) are exclusively derived from transactions subject to 
Sec.  1026.36(d) (whether paid by creditors, consumers, or both), and 
that loan originator organization pays its individual loan originators 
a bonus under a non-deferred profits-based compensation plan, the bonus 
is not considered to be directly or indirectly based on the terms of 
multiple transactions of multiple individual loan originators. The 
Bureau also has made a few additional technical changes to the comment; 
no substantive change is intended.
    This final rule does not include proposed comment 36(d)(1)-2.iii.D, 
which clarified that under Sec.  1026.36(d)(1)(iii), the time period 
for which the compensation is paid is the time period for which the 
individual loan originator's performance was evaluated for purposes of 
the compensation determination (e.g., calendar year, quarter, month), 
whether or not the compensation is actually paid during or after the 
time period. This comment clarified the measuring period for total 
revenues and mortgage-related revenue under the revenue test. Because 
the revenue test is not being finalized, this comment is not 
applicable. The commentary under Sec.  1026.36(d)(1) reflects a re-
designation of comment subsection references as a consequence of this 
proposed comment not being included in this final rule (e.g., proposed 
comment 36(d)(1)-2.iii.E has been redesignated as comment 36(d)(1)-
3.iv).
    The final rule has made only a few technical changes to proposed 
comment 36(d)(1)-2.iii.F, which has been adopted as comment 36(d)(1)-
3.iv in the final rule. The many revisions to proposed comment 
36(d)(1)-2.iii.G (adopted as comment 36(d)(1)-3.v) are discussed 
earlier in this section-by-section analysis.
36(d)(1)(iv)(B)(2)
    Proposed Sec.  1026.36(d)(1)(iii)(B)(2) would have permitted a 
person to pay, and an individual loan originator to receive, 
compensation in the form of a bonus or other payment under a profit-
sharing plan sponsored by the person or a contribution to a non-
qualified plan if the individual is a loan originator (as defined in 
proposed Sec.  1026.36(a)(1)(i)) for five or fewer transactions subject 
to Sec.  1026.36(d) during the 12-month period preceding the 
compensation decision. This compensation would have been permitted even 
when the payment or contribution relates directly or indirectly to the 
terms of the transactions subject to Sec.  1026.36(d) of multiple 
individual loan originators. Proposed Sec.  1026.36(d)(1)(iii)(B)(2) is 
sometimes hereinafter referred to as the ``de minimis origination 
exception.''
    The Bureau stated in the proposal that the intent of proposed Sec.  
1026.36(d)(1)(iii)(B)(2) would have been to exempt individual loan 
originators who engage in a de minimis number of transactions subject 
to Sec.  1026.36(d) from the restrictions on payment of bonuses and 
making of contributions to non-qualified plans. An individual loan 
originator who is a loan originator for five or fewer transactions, the 
Bureau stated in the proposal, is not truly active as a loan originator 
and, thus, is insufficiently incentivized to steer consumers to 
different loan terms.
    The de minimis origination exception was intended to cover, in 
particular, branch or unit managers at creditors or loan originator 
organizations who act as loan originators on an occasional, one-off 
basis to, for example, cover for individual loan originators who are 
out sick, on vacation, or need assistance resolving issues on loan 
applications. Existing comment 36(a)-4 clarifies that the term ``loan 
originator'' as used in Sec.  1026.36 does not include managers, 
administrative staff, and similar individuals who are employed by a 
creditor or loan originator but do not arrange, negotiate, or otherwise 
obtain an extension of credit for a consumer, or whose compensation is 
not based on whether any particular loan is originated. In the 
proposal, the Bureau proposed to clarify in comment 36(a)-4 that a 
``producing manager'' who also arranges, negotiates, or otherwise 
obtains an extension of consumer credit for another person is a loan 
originator and that a producing manager's compensation thus is subject 
to the restrictions of Sec.  1026.36. The proposed regulatory text and 
commentary to Sec.  1026.36(d)(1)(iii)(B)(2) did not distinguish among 
managers and individual loan originators who act as originators for 
five or fewer transactions in a given 12-month period, however.
    The Bureau solicited comment on the number of individual loan 
originators who will be affected by the exception and whether, in light 
of such number, the de minimis test is necessary. The Bureau also 
solicited comment on the appropriate number of originations that should 
constitute the de minimis standard, over what time period the 
transactions should be measured, and whether this standard should be 
intertwined with the potential 10-percent total compensation test on 
which the Bureau is soliciting comment, discussed in the section-by-
section analysis of proposed Sec.  1026.36(d)(1)(iii)(B)(1). The 
Bureau, finally, solicited comment on whether the 12-month period used 
to measure whether the individual loan originator has a de minimis 
number of transactions should end on the date on which the compensation 
is paid, rather than the date on which the compensation decision is 
made.
    Proposed comment 36(d)(1)-2.iii.H also would have provided an 
example of the de minimis origination exception as applied to a loan 
originator organization employing six individual loan originators. 
Proposed comment 36(d)(1)-2.iii.I.1 and -2.iii.I.2 would have 
illustrated the effect of proposed Sec.  1026.36(d)(1)(iii)(A) and (B) 
on a company that has mortgage and credit card businesses and 
harmonizes through examples the concepts discussed in other proposed 
comments to Sec.  1026.36(d)(1)(iii).
    Consumer groups generally opposed permitting creditors and loan 
originator organizations to pay profit-sharing bonuses and make 
contributions to non-qualified plans where the individual loan 
originator is the loan originator for a de minimis number of 
transactions. A coalition of consumer groups asserted--consistent with 
their comments to the qualified plan and revenue test aspects of the 
proposal--that there should be no exceptions to the underlying 
prohibition on compensation based on transaction terms other than for 
volume of mortgages originated. These groups expressed concern that the 
proposal would allow an individual loan originator to be compensated 
based on the terms of its transactions so long as the individual loan 
originator is the originator for five or fewer transactions.\142\
---------------------------------------------------------------------------

    \142\ As discussed below, proposed Sec.  1026.36(d)(1)(iii)(A) 
prohibits an individual loan originator from being compensated based 
directly or indirectly on the terms of the individual loan 
originator's transactions, and this prohibition applies to 
individual loan originators who otherwise would fall under the de 
minimis origination exception in proposed Sec.  
1026.36(d)(1)(iii)(B)(2).
---------------------------------------------------------------------------

    Industry commenters generally either did not object to the proposed 
de minimis origination exception or expressly supported the exception 
if the threshold were set at a number greater than five. A national 
trade association representing the banking industry supported 
establishing a de minimis origination exception but asked that the 
threshold be increased to 15. The association reasoned that a threshold 
of five would not have been high enough to capture managers in 
community banks and smaller mortgage companies across jurisdictions who 
step in to act as loan originators on an ad hoc basis to assist 
individual loan originators under

[[Page 11358]]

their employ. In most instances, the association stated, these so 
called ``non-producing managers'' would not receive transaction-
specific compensation, yet under the proposal their participation in a 
few transactions would have potentially disqualified them from 
incentive compensation programs in which other managers could 
participate. The association stated that should the Bureau deem 15 as 
too high of a threshold, it could adopt 15 as the threshold applicable 
to managers and administrative staff only. A bank and a credit union 
commenter urged the Bureau to increase the threshold to 25 for similar 
reasons (i.e., to allow managers who occasionally originate loans more 
flexibility to participate in bonus programs).
    A few industry commenters criticized the de minimis origination 
exception. One national trade association stated that the exception 
would be of only limited use and benefit, e.g., for branch managers who 
assist with originations in very rare circumstances. A trade 
association representing community mortgage lenders commented that the 
de minimis exception, in conjunction with the revenue test, would have 
disparate impacts on small mortgage lenders that do not have alternate 
revenue sources. A compensation consulting firm stated that, similar to 
its comment on the revenue test, any bright line threshold will result 
in inequitable treatment.\143\
---------------------------------------------------------------------------

    \143\ The commenter posited an example of a branch manager who 
originates five loans with an aggregate principal amount of $2 
million and another branch manager who originates six loans with 
aggregate principal amount of $1 million.
---------------------------------------------------------------------------

    As discussed previously with respect to comments received on the 
revenue test, an organization writing on behalf of State bank 
supervisors stated that the Bureau's proposed regulatory changes 
regarding profit-sharing bonuses and contributions to non-qualified 
plans were largely appropriate, but the organization noted that 
enforcing standards based on thresholds for origination can be 
problematic because the number of transactions originated may have 
differing degrees of significance in different scenarios. The 
organization specifically noted the de minimis origination exception as 
an example of a potentially problematic threshold. The organization 
encouraged the Bureau either to justify the threshold levels through 
study or adopt a more flexible approach that can be tailored to various 
situations appropriately.
    The Bureau is finalizing Sec.  1026.36(d)(1)(iii)(B)(2) as proposed 
with four changes. First, the Bureau has redesignated proposed Sec.  
1026.36(d)(1)(iii)(B)(2) as Sec.  1026.36(d)(1)(iv)(B)(2) in the final 
rule. This change was made to distinguish the regulatory text 
addressing non-deferred profits-based compensation plans from the 
regulatory text addressing designated plans.
    Second, Sec.  1026.36(d)(1)(iv)(B)(2) now reads ``a'' loan 
originator rather than ``the'' loan originator, as proposed. This 
change was made to emphasize that a transaction may have more than one 
loan originator under the definition of loan originator in Sec.  
1026.36(a)(1)(i).
    Third, Sec.  1026.36(d)(1)(iii)(B)(2) clarifies that the 
``transactions'' subject to the minimis threshold are those 
transactions that are consummated. Where the term is used in Sec.  
1026.36 and associated commentary, ``transaction'' is deemed to be a 
consummated transaction; this clarification merely makes the point 
expressly clear for purposes of the de minimis origination exception, 
where the counting of transactions is critical toward establishing the 
application of the exception to a particular individual loan 
originator.
    Fourth, the Bureau has increased the de minimis origination 
exception threshold number from five to ten transactions in a 12-month 
period. The Bureau is persuaded by feedback from several industry 
commenters that the proposed threshold number of five would likely have 
been too low to provide relief for managers who occasionally act as 
loan originators in order, for example, to fill in for individual loan 
originators who are sick or on vacation.\144\ The higher threshold will 
allow additional managers (or other individuals working for the 
creditor or loan originator organization) who act as loan originators 
only on an occasional, one-off basis to be eligible for non-deferred 
profits-based compensation plans that are not limited by the 
restrictions in Sec.  1026.36(d)(1)(iv). Without a de minimis 
exception, for example, a manager or other individual who is a loan 
originator for a very small number of transactions per year may, 
depending on the application of the restrictions on non-deferred 
profits-based compensation under Sec.  1026.36(d)(1)(iv), be ineligible 
to participate in a company-wide bonus pool or other bonus pool that is 
determined in part with reference to mortgage-related profits. The 
Bureau believes this exception is appropriate because the risk that the 
manager or other individual will steer consumers to particular 
transaction terms is more attenuated than for individuals working for 
the creditor or loan originator organization whose loan origination 
activities constitute a primary or even secondary (as opposed to 
occasional) portion of their job responsibilities. The steering risk is 
also more attenuated, because managers or other individuals who act as 
loan originators for a small number of closed transactions per year are 
less likely to be able to significantly influence the amount of funds 
available from which to pay these individuals bonuses or other 
compensation under non-deferred profits-based compensation plans.
---------------------------------------------------------------------------

    \144\ Some commenters referred to the individuals that the de 
minimis origination exception is intended in part to cover as ``non-
producing managers.'' In this final rule, comment 36(a)-4 has been 
revised to clarify that a loan originator includes a manager who 
takes an application, offers, arranges, assists a consumer with 
obtaining or applying to obtain, negotiate, or otherwise obtain or 
make a particular extension of credit for another person, if the 
person receives or expects to receive compensation for these 
activities. The comment further clarifies that an individual who 
performs any of these activities in the ordinary course of 
employment is deemed to be compensated for these activities. 
Therefore, the de minimis exception is intended to cover producing 
managers as the term is used in comment 36(a)-1.4.v.
---------------------------------------------------------------------------

    In the proposal, the Bureau solicited comment on the appropriate 
threshold number for the de minimis origination exception. The Bureau 
received no quantitative data on the number of originations typically 
engaged in by managers, however, and little to no anecdotal data 
generally. The commenters who requested 15 and 25 as the threshold 
amount did not provide data on why that number was appropriate.
    The Bureau has chosen ten as the threshold amount, rather than 15 
or 25 as suggested by some commenters, because the Bureau believes 
those numbers stray too far from a threshold that suggests only 
occasional loan originator activity (which, in turn, suggests 
insufficient incentive to steer consumers to different loan terms). The 
Bureau stated in the proposal that an individual engaged in five or 
fewer transactions per calendar year is not truly active as an 
individual loan originator, citing by analogy the TILA provision 
implemented in Sec.  1026.2(a)(17)(v) providing that a person does not 
``regularly extend credit'' unless, for transactions there are five 
such transactions in a calendar year with respect to consumer credit 
transactions secured by a dwelling. The Bureau continues to believe 
that the TILA provision is a useful analogue to determining when an 
individual loan originator would be active and thus sufficiently 
incentivized to steer consumers to different loan terms, but the 
analogue is not determinative, and the Bureau is sensitive to the 
industry comments regarding the capture of

[[Page 11359]]

managers under the exception. In light of these countervailing 
considerations, the Bureau is raising the threshold to ten.
    The Bureau is not aware of available data or estimates of the 
typical number of originations by producing managers. The Bureau is 
similarly not aware of available data or estimates of the distribution 
of origination activity by originators of different asset size classes. 
In aggregate, however, loan originators at depository institutions are 
estimated to originate 43 loans per year.\145\ As such, the Bureau 
believes that an origination threshold of 10 would not capture a 
typical individual loan originator who acts as loan originator in a 
regular or semi-regular capacity for a typical institution of any asset 
class. In light of the limited data, however, the Bureau does not 
believe these data provide sufficient evidence to justify raising the 
threshold number to higher than ten.
---------------------------------------------------------------------------

    \145\ Based on data from HMDA and Call Report data, the Bureau 
estimates that there were approximately 5.6 million closed-end 
mortgage originations by depository institutions in 2011. Data from 
the BLS indicate that there were 132,400 loan officers at depository 
institutions in 2011. Thus, these estimates imply an aggregate ratio 
of roughly 43 originations per loan originator. Bureau estimates 
using other methodologies yield similar results. The Bureau also 
notes that loan originators at the threshold of 10 loans, would earn 
roughly $19,000 per year assuming compensation of one point per loan 
and an average loan size of $190,000 (approximately the average loan 
amount of home-secured mortgages reported in the 2011 HMDA data).
---------------------------------------------------------------------------

    The Bureau acknowledges that increasing the threshold number from 
five to ten may exempt from the restrictions on non-deferred profits-
based compensation under Sec.  1026.36(d)(1)(iv) individual loan 
originators who act as loan originators in a relatively small number of 
transactions but do so in a regular capacity. The Bureau believes that 
the steering incentives for such individuals would be minimal because 
their origination activity is low, regardless of the fact that loan 
origination is a regular or semi-regular part of their job description, 
and they thus will not substantially increase the availability of 
mortgage-related profits or expect to gain much compensation from these 
profits. Moreover, based on the data noted above, the Bureau does not 
believe that increasing the threshold number from five to ten would 
capture more than a marginal amount of these types of additional 
individual loan originators.
    The Bureau has also made some technical changes to the provision. 
In Sec.  1026.36(d)(1)(iv)(B)(2), the words ``payment or contribution'' 
have been replaced with ``compensation'' to reflect a change in 
terminology in an earlier portion of the regulatory provision. The 
phrase ``compensation decision'' has been replaced with ``compensation 
determination'' to be consistent with the wording of Sec.  
1026.36(d)(1)(iv)(B)(1) and commentary regarding the time period for 
which compensation is ``determined.'' In the final rule, comment 
36(d)(1)-2.iii.H has been redesignated as comment 36(d)(1)-3.vi and has 
been revised to reflect the Bureau's decision to raise the de minimis 
origination exception threshold number from five to ten, including the 
examples illustrating where certain individual loan originators would 
fall above or below the threshold. The examples presented in the 
comment also have been revised to reflect that one of the individual 
loan originators is a manager, to illustrate that managers will be 
covered by Sec.  1026.36(d)(1)(iv)(B)(2) depending on the 
circumstances.
    In this final rule, proposed comment 36(d)(1)-2.iii.I has been 
deleted because it is duplicative with other comments providing 
illustrative examples of the provisions of Sec.  1026.36(d)(1)(iii) and 
(iv).
36(d)(2) Payments by Persons Other Than the Consumer
36(d)(2)(i) Dual Compensation
Background
    Existing Sec.  1026.36(d)(2) restricts loan originators from 
receiving compensation in connection with a transaction from both the 
consumer and other persons. As discussed in more detail below, section 
1403 of the Dodd-Frank Act amended TILA to codify the same basic 
prohibition against dual compensation, though it also imposed 
additional requirements related to consumers' payment of upfront points 
and fees that could significantly change the rule's scope and impact.
    Specifically, Sec.  1026.36(d)(2) currently provides that, if any 
loan originator receives compensation directly from a consumer in a 
consumer credit transaction secured by a dwelling: (1) No loan 
originator may receive compensation from another person in connection 
with the transaction; and (2) no person who knows or has reason to know 
of the consumer-paid compensation to the loan originator (other than 
the consumer) may pay any compensation to a loan originator in 
connection with the transaction. When the Dodd-Frank Act was enacted, 
this provision had been proposed but not finalized; the Board 
subsequently adopted Sec.  1026.36(d)(2) in its 2010 Loan Originator 
Final Rule, which is discussed in more detail in part I.
    Comment 36(d)(2)-1 currently clarifies that the restrictions 
imposed under Sec.  1026.36(d)(2) relate only to payments, such as 
commissions, that are specific to and paid solely in connection with 
the transaction in which the consumer has paid compensation directly to 
a loan originator. Thus, the phrase ``in connection with the 
transaction'' as used in Sec.  1026.36(d)(2) does not refer to 
salaries, hourly wages, or other forms of compensation that are not 
tied to a specific transaction.
    Thus, under existing Sec.  1026.36(d)(2), a loan originator that 
receives compensation directly from the consumer may not receive 
compensation in connection with the transaction (e.g., a commission) 
from any other person (e.g., a creditor). In addition, if any loan 
originator is paid compensation directly by the consumer in a 
transaction, no other loan originator may receive compensation in 
connection with the transaction from a person other than the consumer. 
Moreover, if any loan originator receives compensation directly from a 
consumer, no person who knows or has reason to know of the consumer-
paid compensation to the loan originator (other than the consumer) may 
pay any compensation to a loan originator in connection with the 
transaction. For example, assume that a loan originator that is not a 
natural person (i.e., a loan originator organization) receives 
compensation directly from the consumer in a mortgage transaction 
subject to existing Sec.  1026.36(d)(2). The loan originator 
organization may not receive compensation in connection with that 
particular transaction (e.g., a commission) from a person other than 
the consumer (e.g., the creditor). In addition, because the loan 
originator organization is a person other than the consumer, the loan 
originator organization may not pay individual loan originators any 
compensation in connection with that particular transaction, such as a 
transaction-specific commission. Consequently, under existing rules, in 
the example above, the loan originator organization must pay individual 
loan originators only in the form of a salary or an hourly wage or 
other compensation that is not tied to the particular transaction. As a 
result of the 2010 Loan Originator Final Rule, loan originator 
organizations have expressed concern that currently it is difficult to 
structure transactions where consumers pay loan originator 
organizations compensation directly, because it is not economically 
feasible for the organizations to pay their

[[Page 11360]]

individual loan originators purely a salary or hourly wage, instead of 
a commission that is tied to the particular transaction either alone or 
in combination with a base salary.
The Dodd-Frank Act
    Section 1403 of the Dodd-Frank Act added TILA section 129B(c) which 
states that, for any mortgage loan, a mortgage originator generally may 
not receive from any person other than the consumer any origination fee 
or charge except bona fide third-party charges not retained by the 
creditor, mortgage originator, or an affiliate of either. TILA section 
129B(c)(2)(A); 12 U.S.C. 1639b(c)(2)(A). Likewise, no person, other 
than the consumer, who knows or has reason to know that a consumer has 
directly compensated or will directly compensate a mortgage originator, 
may pay a mortgage originator any origination fee or charge except bona 
fide third-party charges as described above. Notwithstanding this 
general prohibition on payments of any origination fee or charge to a 
mortgage originator by a person other than the consumer, however, TILA 
section 129B(c)(2)(B) provides that a mortgage originator may receive 
from a person other than the consumer an origination fee or charge, and 
a person other than the consumer may pay a mortgage originator an 
origination fee or charge, if: (1) ``The mortgage originator does not 
receive any compensation directly from the consumer;'' and (2) ``the 
consumer does not make an upfront payment of discount points, 
origination points, or fees, however denominated (other than bona fide 
third-party charges not retained by the mortgage originator, creditor, 
or an affiliate of the creditor or originator).'' TILA section 
129B(c)(2)(B) also provides the Bureau authority to waive or create 
exemptions from this prohibition on consumers paying upfront discount 
points, origination points, or origination fees where it determines 
that doing so is in the interest of consumers and in the public 
interest.
The Bureau's Proposal
    Setting aside the ban on payment of certain points and fees as 
explained in more detail below, the Bureau interprets the general 
restrictions on dual compensation set forth in TILA section 129B(c)(2) 
to be consistent with the restrictions on dual compensation set forth 
in existing Sec.  1026.36(d)(2) despite the fact that the statute is 
structured differently and uses different terminology than existing 
Sec.  1026.36(d)(2).
    Nonetheless, the Bureau proposed several changes to existing Sec.  
1026.36(d)(2) (redesignated as Sec.  1026.36(d)(2)(i)) to provide 
additional clarity and flexibility to loan originators. For example, 
Sec.  1026.36(d)(2) currently prohibits a loan originator organization 
that receives compensation directly from a consumer in connection with 
a transaction from paying compensation in connection with that 
transaction to individual loan originators (such as its employee loan 
officers), although the organization could pay compensation that is not 
tied to the transaction (such as salary or hourly wages) to individual 
loan originators. As explained in more detail below, the Bureau 
proposed to revise Sec.  1026.36(d)(2) (redesignated as Sec.  
1026.36(d)(2)(i)) to provide that, if a loan originator organization 
receives compensation directly from a consumer in connection with a 
transaction, the loan originator organization may pay compensation in 
connection with the transaction to individual loan originators and the 
individual loan originators may receive compensation from the loan 
originator organization. As explained in more detail below, the Bureau 
believed that allowing loan originator organizations to pay 
compensation in connection with a transaction to individual loan 
originators, even if the loan originator organization has received 
compensation directly from the consumer in that transaction, is 
consistent with the statutory purpose of ensuring that a loan 
originator organization is not compensated by both the consumer and the 
creditor for the same transaction.
    As discussed in more detail below, the Bureau also explained in the 
proposal that it believes the original purpose of the restriction in 
existing Sec.  1026.36(d)(2) that prevents loan originator 
organizations from paying compensation in connection with a transaction 
to individual loan originators if the loan originator organization has 
received compensation directly from the consumer in that transaction is 
addressed separately by other revisions pursuant to the Dodd-Frank Act. 
Under existing Sec.  1026.36(d)(1)(iii), compensation paid directly by 
a consumer to a loan originator effectively is free to be based on 
transaction terms or conditions. Consequently, individual loan 
originators could have incentives to steer a consumer into a 
transaction where the consumer compensates the loan originator 
organization directly, resulting in greater compensation to the loan 
originator organization than it likely would receive if compensated by 
the creditor subject to the restrictions of Sec.  1026.36(d)(1). The 
Dodd-Frank Act, however, amended TILA to prohibit compensation based on 
loan terms even when a consumer is paying compensation directly to a 
mortgage originator. Thus, under the statute and the final rule, if an 
individual loan originator receives compensation in connection with the 
transaction from the loan originator organization (where the loan 
originator organization receives compensation directly from the 
consumer), the amount of the compensation paid by the consumer to the 
loan originator organization, and the amount of the compensation paid 
by the loan originator organization to the individual loan originator, 
may not be based on transaction terms.
    In addition, the Bureau explained that it believed relaxing the 
rule might make more loan originator organizations willing to structure 
transactions where consumers pay loan originator compensation directly. 
The Bureau believed that this result may enhance the interests of 
consumers and the public by giving consumers greater flexibility in 
structuring the payment of loan originator compensation.
The Final Rule
    As discussed in more detail below, the final rule adopts the 
Bureau's proposals relating to dual compensation with some revisions.
    Compensation in connection with the transaction. Under existing 
Sec.  1026.36(d)(2), if any loan originator receives compensation 
directly from a consumer in a transaction, no person other than the 
consumer may provide any compensation to a loan originator, directly or 
indirectly, in connection with that particular credit transaction. The 
Bureau believes that additional clarification may be needed about the 
term ``in connection with'' for purposes of Sec.  1026.36(d)(2) 
(redesignated as Sec.  1026.36(d)(2)(i)). Accordingly, the final rule 
revises comment 36(d)(2)-1 (redesignated as comment 36(d)(2)(i)-1) to 
clarify that, for purposes of Sec.  1026.36(d)(2)(i), compensation is 
considered ``in connection with'' a particular transaction, regardless 
of whether this compensation is paid before, at, or after consummation. 
The Bureau believes that limiting the term ``in connection with'' a 
particular transaction for purposes of Sec.  1026.36(d)(2) to 
compensation that is paid at or before consummation could allow 
creditors to evade the restriction in Sec.  1026.36(d)(2) by simply 
paying the compensation after consummation, to the detriment of 
consumers.

[[Page 11361]]

    The Bureau also believes that additional clarification is needed on 
whether the prohibition on dual compensation in Sec.  1026.36(d)(2) 
(redesignated as Sec.  1026.36(d)(2)(i)) restricts a creditor from 
providing any funds for the benefit of the consumer in a transaction, 
if the loan originator receives compensation directly from a consumer 
in connection with that transaction. The final rule amends comment 
36(d)(2)-1 (redesignated as comment 36(d)(2)(i)-1) to provide that in a 
transaction where a loan originator receives compensation directly from 
a consumer, a creditor still may provide funds for the benefit of the 
consumer in that transaction, provided such funds are applied solely 
toward costs of the transaction other than loan originator 
compensation. See the section-by-section analysis of Sec.  
1026.36(a)(3) for a discussion of the definition of ``compensation.''
    Compensation received directly from the consumer. As discussed 
above, under existing Sec.  1026.36(d)(2), a loan originator that 
receives compensation directly from the consumer may not receive 
compensation in connection with the transaction (e.g., a commission) 
from any other person (e.g., a creditor). In addition, if any loan 
originator is paid compensation directly by the consumer in a 
transaction, no other loan originator (such as an employee of a loan 
originator organization) may receive compensation in connection with 
the transaction from another person. Moreover, if any loan originator 
receives compensation directly from a consumer, no person who knows or 
has reason to know of the consumer-paid compensation to the loan 
originator (other than the consumer) may pay any compensation to a loan 
originator, directly or indirectly, in connection with the transaction. 
Existing comment 36(d)(1)-7 interprets when payments to a loan 
originator are considered compensation received directly from the 
consumer. As discussed in more detail in the section-by-section 
analysis of Sec.  1026.36(d)(1)(iii), consistent with TILA section 
129B(c)(1), the Bureau proposed to remove existing Sec.  
1026.36(d)(1)(iii), which allowed a loan originator to receive 
compensation based on any of the terms or conditions of a transaction, 
if the loan originator received compensation directly from the consumer 
in connection with the transaction and no other person provides 
compensation to a loan originator in connection with that transaction. 
The Bureau also proposed to remove the first sentence of existing 
comment 36(d)(1)-7, which stated that the prohibition in Sec.  
1026.36(d)(1)(i) that restricts a loan originator from receiving 
compensation based on the terms or conditions of a transaction does not 
apply to transactions in which any loan originator receives 
compensation directly from the consumer. The Bureau proposed to delete 
this first sentence as no longer relevant given that the Bureau 
proposed to remove Sec.  1026.36(d)(1)(iii). The Bureau also proposed 
to move the other content of this comment to proposed comment 
36(d)(2)(i)-2.i; no substantive change was intended.
    The Bureau received one comment on proposed comment 36(d)(2)(i)-
2.i. One industry commenter that specializes in the financing of 
manufactured housing indicated that the comment was confusing because 
its first sentence states that payments to a loan originator from loan 
proceeds are considered compensation received directly from the 
consumer, while payments derived from an increased interest rate are 
not considered compensation received directly from the consumer. The 
commenter believed that the second sentence of the proposed comment 
seemed to contradict the first sentence by stating that points paid on 
the loan by the consumer to the creditor are not considered payments to 
the loan originator that are received directly from the consumer 
whether they are paid directly by the consumer (for example, in cash or 
by check) or out of the loan proceeds. The commenter requested that the 
Bureau make clear that when a creditor, in establishing a charge to be 
imposed on a consumer, considers the average cost incurred by the 
creditor to originate residential mortgage loans of that type 
(including the compensation paid to an employee in connection with that 
particular transaction), then that compensation is deemed to be paid by 
the creditor and will not trigger any dual compensation prohibitions.
    This final rule revises the first two sentences of proposed comment 
36(d)(2)(i)-2.i, and deletes the third sentence of that proposed 
comment. The Bureau believes that these revisions will clarify that, 
while payments by a consumer to a loan originator from loan proceeds 
are considered compensation received directly from the consumer, 
payments by the consumer to the creditor are not considered payments to 
the loan originator that are received directly from the consumer 
whether they are paid in cash or out of the loan proceeds.
    Existing comment 36(d)(2)-2 references Regulation X, which 
implements RESPA, and provides that a yield spread premium paid by a 
creditor to the loan originator may be characterized on the RESPA 
disclosures as a ``credit'' that will be applied to reduce the 
consumer's settlement charges, including origination fees. Existing 
comment 36(d)(2)-2 clarifies that a yield spread premium disclosed in 
this manner is not considered to be received by the loan originator 
directly from the consumer for purposes of Sec.  1026.36(d)(2). The 
Bureau proposed to move this clarification to proposed comment 
36(d)(2)(i)-2.ii and revise it, eliminating the reference to yield 
spread premiums and instead using the terms ``rebate'' and ``credit.'' 
Rebates are disclosed as ``credits'' under the existing Regulation X 
disclosure regime.
    The Bureau did not receive comments specifically on this aspect of 
the proposal. This final rule, however, revises proposed comment 
36(d)(2)(i)-2.ii to further clarify the intent of the comment. 
Specifically, comment 36(d)(2)(i)-2.ii as adopted provides that funds 
from the creditor that will be applied to reduce the consumer's 
settlement charges, including origination fees paid by a creditor to 
the loan originator, that are characterized on the disclosures made 
pursuant to RESPA as a ``credit'' are nevertheless not considered to be 
received by the loan originator directly from the consumer for purposes 
of Sec.  1026.36(d)(2)(i).
    The Bureau also proposed to add Sec.  1026.36(d)(2)(i)(B) and 
comment 36(d)(2)(i)-2.iii to provide additional clarity on the meaning 
of the phrase ``compensation directly from the consumer'' as used in 
new TILA section 129B(c)(2)(B), as added by section 1403 of the Dodd-
Frank Act, and Sec.  1026.36(d)(2) (as redesignated proposed Sec.  
1026.36(d)(2)(i)). Mortgage creditors and other industry 
representatives have raised questions about whether payments to a loan 
originator on behalf of the consumer by a person other than the 
creditor are considered compensation received directly from a consumer 
for purposes of existing Sec.  1026.36(d)(2). For example, non-creditor 
sellers, home builders, home improvement contractors, or real estate 
brokers or agents may agree to pay some or all of the consumer's 
closing costs. Some of this payment may be used to compensate a loan 
originator. The Bureau proposed in Sec.  1026.36(d)(2)(i)(B) to 
interpret the phrase ``compensation directly from the consumer,'' as 
used in new TILA section 129B(c)(2)(B) and proposed Sec.  
1026.36(d)(2)(i), to include payments to a loan originator made 
pursuant to an agreement between the consumer and a person other than 
the creditor or its affiliates. Proposed comment

[[Page 11362]]

36(d)(2)(i)-2.iii would have clarified that whether there is an 
agreement between the parties will depend on State law. See Sec.  
1026.2(b)(3). Also, proposed comment 36(d)(2)(i)-2.iii would have 
clarified that the parties do not have to agree specifically that the 
payments will be used to pay for the loan originator's compensation, 
just that the person will make a payment toward the consumer's closing 
costs. For example, assume that a non-creditor seller has an agreement 
with the consumer to pay $1,000 of the consumer's closing costs on a 
transaction. Any of the $1,000 that is used to pay compensation to a 
loan originator is deemed to be compensation received directly from the 
consumer, even if the agreement does not specify that some or all of 
the $1,000 must be used to compensate the loan originator. In such 
cases, the loan originator would be permitted to receive compensation 
from both the consumer and the other person who has the agreement with 
the consumer (but not from any other person).
    A few commenters raised concerns about these proposed revisions. A 
trade group representing mortgage brokers raised concerns that, without 
guidance on how and where to apply contributions from sellers and 
others, these proposed revisions would generate uncertainty leading to 
further frustration of both consumers and industry participants.
    Three consumer groups, in a joint letter, indicated that the people 
the Bureau identifies--such as sellers, home improvement contractors, 
and home builders--have been implicated in every form of abusive 
lending. They cited as a risk of this proposal that third parties will 
simply inflate their charges by the amount of the payment toward the 
closing costs. They also stated that, in recent years, HUD has spent 
considerable energy investigating kickback arrangements between 
creditors and home builders. These consumer groups suggested an 
alternative to the proposal whereby, if a consumer and a third party 
have an agreement of the kind envisioned by the proposal, the third 
party can simply give the consumer a check, rather than permitting 
these payments to be ``laundered'' through the closing.
    After consideration of the comments received, the Bureau has 
decided to revise proposed Sec.  1026.36(d)(2)(i)(B) to clarify the 
intent of the provision. Specifically, Sec.  1026.36(d)(2)(i)(B) is 
revised to provide that compensation received directly from a consumer 
includes payments to a loan originator made pursuant to an agreement 
between the consumer and a third party (i.e., the seller or some other 
person that is not the creditor, loan originator, or an affiliate of 
either), under which such other person agrees to provide funds toward 
the consumer's cost of the transaction (including loan originator 
compensation). This final rule also revises related comments to provide 
additional interpretation. Specifically, comment 36(d)(2)(i)-2.i is 
revised to state that payments by the consumer to the creditor are not 
considered payments to the loan originator that are received directly 
from the consumer. Accordingly, comment 36(d)(2)(i)-2.iii has been 
revised to also state that payments in the transaction to the creditor 
on behalf of the consumer by a person other than the creditor or its 
affiliates are not considered payments to the loan originator that are 
received directly from the consumer. As proposed, comment 36(d)(2)(i)-
2.iii stated that payments by a person other than the creditor or its 
affiliates to the loan originator pursuant to an agreement with the 
consumer are compensation directly by the consumer. Comment 
36(d)(2)(i)-2.iii has been revised to state also that payments by a 
person other than the creditor or its affiliates to the creditor are 
not considered payments of compensation to the loan originator directly 
by the consumer. The Bureau believes that these revisions will help 
avoid the uncertainty cited by the industry commenters.
    With regard to the comments received from several consumer groups 
discussed above, the Bureau notes that RESPA will still apply to these 
transactions to prevent illegal kickbacks, including kickbacks between 
the loan originator and a person that is not the creditor or its 
affiliate. For purposes of the dual compensation rules set forth in 
Sec.  1026.36(d)(2), the Bureau continues to believe that arrangements 
where a person other than a creditor or its affiliate pays compensation 
to a loan originator on behalf of the consumer do not raise the same 
concerns as when that compensation is being paid by the creditor or its 
affiliates. The Bureau believes that one of the primary goals of 
section 1403 of the Dodd-Frank Act is to prevent a loan originator from 
receiving compensation both directly from a consumer and from the 
creditor or its affiliates, which more easily may occur without the 
consumer's knowledge. Allowing loan originators to receive compensation 
from both the consumer and the creditor can create inherent conflicts 
of interest, of which consumers may not be aware. When a loan 
originator organization charges the consumer a direct fee for 
originating the consumer's mortgage loan, this charge may lead the 
consumer to infer that the broker accepts the consumer-paid fee to 
represent the consumer's financial interests. Consumers also may 
reasonably believe that the fee they pay is the originator's sole 
compensation. This may lead reasonable consumers erroneously to believe 
that loan originators are working on their behalf and are under a legal 
or ethical obligation to help them obtain the most favorable loan terms 
and conditions. Consumers may regard loan originators as ``trusted 
advisors'' or ``hired experts,'' and consequently rely on originators' 
advice. Consumers who regard loan originators in this manner may be 
less likely to shop or negotiate to assure themselves that they are 
being offered competitive mortgage terms.
    The Bureau believes, however, that the statutory goals discussed 
above are facilitated by Sec.  1026.36(d)(2)(i)(B) and comment 
36(d)(2)(i)-2.iii. Under the final rule, a payment by a person other 
than a creditor or its affiliates to the loan originator is considered 
received directly from the consumer for purposes of Sec.  1026.36(d)(2) 
only if the payment is made pursuant to an agreement between the 
consumer and that person. Thus, if there is an agreement, the consumer 
will be aware of the payment to the loan originator. In addition, 
because this payment to the loan originator would be considered 
compensation directly received from the consumer, the consumer remains 
the only person permitted to pay compensation in connection with the 
transaction to the loan originator, in accordance with Sec.  
1026.36(d)(2)(i). For example, the creditor or its affiliates could not 
pay compensation in connection with the transaction to the loan 
originator.
    Moreover, the Bureau believes that Sec.  1026.36(d)(2)(i)(B) and 
comment 36(d)(2)(i)-2.iii also benefit consumers in transactions where 
the consumer directly pays compensation to the loan originator. If a 
payment to the loan originator by a person other than the creditor or 
its affiliates were not deemed to be compensation coming directly from 
the consumer, the person would be prevented under existing Sec.  
1026.36(d)(2) from paying some of the compensation to the loan 
originator on behalf of the consumer pursuant to an agreement, if the 
consumer also pays some of the compensation to the loan originator. 
Thus, consumers could not receive the benefit of contributions by 
persons other than the creditor or its affiliates in these transactions 
unless such contributions

[[Page 11363]]

were at least large enough to cover the loan originator's entire 
compensation.
    As adopted in this final rule, under Sec.  1026.36(d)(2)(i)(B) and 
comment 36(d)(2)(i)-2.iii, payment of loan originator compensation by 
an affiliate of the creditor, including a seller, home builder, or home 
improvement contractor, to a loan originator is not deemed to be made 
directly by the consumer for purposes of Sec.  1026.36(d)(2)(i), even 
if the payment is made pursuant to an agreement between the consumer 
and the affiliate. That is, for example, if a home builder is an 
affiliate of a creditor, Sec.  1026.36(d)(2)(i) prohibits this person 
from paying compensation in connection with a transaction if a consumer 
pays compensation to the loan originator in connection with the 
transaction. This final rule is consistent with existing Sec.  
1026.36(d)(3), which states that for purposes of Sec.  1026.36(d) 
affiliates must be treated as a single ``person.'' In addition, 
considering payments of compensation to a loan originator by an 
affiliate of the creditor to be payments made directly by the consumer 
could allow creditors to circumvent the restrictions in Sec.  
1026.36(d)(2)(i). A creditor could provide compensation to the loan 
originator indirectly by structuring the arrangement such that the 
creditor pays the affiliate and the affiliate pays the loan originator.
    Prohibition on a loan originator receiving compensation in 
connection with a transaction from both the consumer and a person other 
than the consumer. As discussed above, under existing Sec.  
1026.36(d)(2), a loan originator that receives compensation directly 
from the consumer in a closed-end consumer credit transaction secured 
by a dwelling may not receive compensation from any other person in 
connection with the transaction. In addition, in such cases, no person 
who knows or has reason to know of the consumer-paid compensation to 
the loan originator (other than the consumer) may pay any compensation 
to the loan originator in connection with the transaction. Existing 
comment 36(d)(2)-1 provides that, for purposes of Sec.  1026.36(d)(2), 
compensation that is ``in connection with the transaction'' means 
payments, such as commissions, that are specific to, and paid solely in 
connection with, the transaction in which the consumer has paid 
compensation directly to a loan originator. To illustrate: Assume that 
a loan originator organization receives compensation directly from the 
consumer in a mortgage transaction subject to Sec.  1026.36(d)(2). 
Because the loan originator organization is receiving compensation 
directly from the consumer in this transaction, the loan originator 
organization is prohibited under Sec.  1026.36(d)(2) from receiving 
compensation in connection with that particular transaction (e.g., a 
commission) from a person other than the consumer (e.g., the creditor). 
Similarly, a person other than the consumer may not pay the loan 
originator any compensation in connection with the transaction.
    The Bureau generally proposed to retain the prohibition described 
above in existing Sec.  1026.36(d)(2) (redesignated as proposed Sec.  
1026.36(d)(2)(i)), as consistent with the restriction on dual 
compensation set forth in TILA section 129B(c)(2). Specifically, TILA 
section 129B(c)(2)(A) provides that, for any mortgage loan, a mortgage 
originator generally may not receive from any person other than the 
consumer any origination fee or charge except bona fide third-party 
charges not retained by the creditor, the mortgage originator, or an 
affiliate of either. Likewise, no person, other than the consumer, who 
knows or has reason to know that a consumer has directly compensated or 
will directly compensate a mortgage originator, may pay a mortgage 
originator any origination fee or charge except bona fide third-party 
charges as described above. In addition, TILA section 129B(c)(2)(B) 
provides that a mortgage originator may receive an origination fee or 
charge from a person other than the consumer if, among other things, 
the mortgage originator does not receive any compensation directly from 
the consumer.
    Pursuant to its authority under TILA section 105(a) to effectuate 
the purposes of TILA and facilitate compliance with TILA, in the 
proposal, the Bureau proposed to interpret ``origination fee or 
charge'' to mean compensation that is paid ``in connection with the 
transaction,'' such as commissions, that are specific to, and paid 
solely in connection with, the transaction. In the proposal, the Bureau 
explained its belief that, if Congress intended the prohibitions on 
dual compensation to apply to salary or hourly wages that are not tied 
to a specific transaction, Congress would have used the term 
``compensation'' in TILA section 129B(c)(2), as it did in TILA section 
129B(c)(1), which prohibits compensation based on loan terms. Thus, the 
Bureau explained that, like existing Sec.  1026.36(d)(2), TILA section 
129B(c)(2) prohibits a mortgage originator that receives compensation 
directly from the consumer in a closed-end consumer credit transaction 
secured by a dwelling from receiving compensation, directly or 
indirectly, from any person other than the consumer in connection with 
the transaction.
    Several industry trade groups and individual creditors disagreed 
with the Bureau's interpretation of the statutory term ``origination 
fee or charge.'' Two trade groups believed that the Bureau should 
interpret the term ``origination charge or fee'' to include 
compensation paid in connection with a transaction only when that 
compensation is paid by the consumer to the creditor or the loan 
originator organization, or is paid by the creditor to the loan 
originator organization. These trade groups argued that the term 
``origination fee or charge'' commonly refers to an amount paid to a 
creditor or loan originator organization, and is not generally 
understood to mean an amount of compensation paid to an individual loan 
originator. In addition, one of these trade groups indicated that there 
is no indication that Congress intended ``origination fee or charge'' 
to be considered compensation in connection with a transaction. This 
trade group commenter argued that Congress separately uses the term 
``origination fee or charge,'' the term ``compensation,'' and the term 
``compensation that varies based on the terms of the loan,'' and that 
therefore, if Congress intended an origination fee or charge to be 
considered compensation in connection with a transaction, it could 
easily have written the statute that way. The other trade group argued 
that the statute's use of a variety of specific terms (i.e., 
``origination fees or charges,'' ``compensation,'' and ``discount 
points, origination points, or fees'') in TILA section 129B(c)(2) 
indicates that the provision was intended to apply only to 
circumstances in which a broker is involved and the creditor seeks to 
pay the broker's compensation. This commenter argued that, under that 
scenario, TILA section 129B(c)(2) would make sense, as typically a 
broker may receive amounts labeled as ``origination fees or charges,'' 
or amounts labeled as ``compensation.'' This commenter also argued that 
it is unlikely Congress intended to address circumstances in which a 
third party pays an origination fee or charge to an individual loan 
originator of the creditor, which is not a common practice.
    In addition, a creditor commenter argued that the Bureau should 
interpret ``origination fee or charge'' to exclude compensation paid in 
connection with a transaction by a creditor to an individual loan 
originator. The creditor commenter noted that Regulation Z treats an 
origination fee or charge paid

[[Page 11364]]

by the consumer to the creditor as a part of the finance charge but 
excludes salaries and commissions paid by creditors to retail loan 
originators from the finance charge. This commenter pointed out that 
other consumer credit laws and regulations, including statutes and 
regulations now administered by the Bureau, do not use the terms 
``origination fee'' and ``charge'' to cover salaries or commissions 
paid to retail loan originators.
    The Bureau continues to believe that the best interpretation of the 
statutory term ``origination fee or charge'' is that it means 
compensation that is paid ``in connection with the transaction,'' such 
as commissions, that are specific to, and paid solely in connection 
with, the transaction. While the finance charge includes payments by 
the consumer to the creditor or mortgage broker, the Bureau does not 
believe that the finance charge is dispositive or, accordingly, that 
limiting the term ``origination fee or charge'' to payments by the 
consumer to the creditor or mortgage broker for purposes of this 
statutory provision is appropriate. TILA section 129B(c)(2) clearly 
contemplates that an ``origination fee or charge'' includes payments to 
a loan originator by a person other than the consumer. The provision in 
TILA section 129B(c)(2) prohibiting a loan originator from receiving an 
``origination fee or charge'' from a person other than the consumer 
except in certain circumstances would be meaningless if the term 
``origination fee or charge'' did not include payments from a person 
other than the consumer to a loan originator.
    Because the term ``origination fee or charge'' must include 
payments from a person other than the consumer to at least some loan 
originators, the Bureau believes that the better reading of this term 
is to treat payments to loan originators consistently, regardless of 
whether the loan originator is an individual loan originator or a loan 
originator organization. Otherwise, compensation paid in connection 
with a transaction (such as a commission) paid by a creditor to a loan 
originator organization would be considered an ``origination fee or 
charge,'' but a similar payment to an individual loan originator by the 
creditor would not be considered an ``origination fee or charge.'' The 
Bureau notes that other provisions in TILA section 129B(c), such as the 
prohibition on loan originators receiving compensation based on loan 
terms, apply to loan originators uniformly, regardless of whether the 
loan originator is an individual loan originator or a loan originator 
organization.
    TILA section 129B(c)(2) does not prohibit a mortgage originator 
from receiving payments from a person other than the consumer for bona 
fide third-party charges not retained by the creditor, mortgage 
originator, or an affiliate of the creditor or mortgage originator, 
even if the mortgage originator receives compensation directly from the 
consumer. For example, assume that a loan originator receives 
compensation directly from a consumer in a transaction. TILA section 
129B(c)(2) does not bar the loan originator from receiving payment from 
a person other than the consumer (e.g., a creditor) for bona fide and 
reasonable charges, such as credit reports, where those amounts are not 
retained by the loan originator but are paid to a third party that is 
not the creditor, its affiliate, or the affiliate of the loan 
originator. Because the loan originator does not retain such charges, 
they are not considered part of the loan originator's compensation for 
purposes of Sec.  1026.36(d).
    Consistent with TILA section 129B(c)(2), the Bureau proposed to 
amend existing comment 36(d)(1)-1.iii (redesignated as proposed comment 
36(a)-5.iii) to clarify that the term ``compensation'' does not include 
amounts a loan originator receives as payment for bona fide and 
reasonable charges, such as credit reports, where those amounts are not 
retained by the loan originator but are paid to a third party that is 
not the creditor, its affiliate, or the affiliate of the loan 
originator. Thus, under proposed Sec.  1026.36(d)(2)(i) and comment 
36(a)-5.iii, a loan originator that receives compensation directly from 
a consumer would be permitted to receive a payment from a person other 
than the consumer for bona fide and reasonable charges where those 
amounts are not retained by the loan originator but are paid to a third 
party that is not the creditor, its affiliate, or the affiliate of the 
loan originator.
    For example, assume a loan originator receives compensation 
directly from a consumer in a transaction. Further assume the loan 
originator charges the consumer $25 for a credit report provided by a 
third party that is not the creditor, its affiliate, or the affiliate 
of the loan originator, and this fee is bona fide and reasonable. 
Assume also that the $25 for the credit report is paid by the creditor 
but the loan originator does not retain this $25. Instead, the loan 
originator pays the $25 to the third party for the credit report. The 
loan originator in that transaction is not prohibited by proposed Sec.  
1026.36(d)(2)(i) from receiving the $25 from the creditor, even though 
the consumer paid compensation to the loan originator in the 
transaction.
    In addition, under proposed Sec.  1026.36(d)(2)(i) and comment 
36(a)-5.iii, a loan originator that receives compensation in connection 
with a transaction from a person other than the consumer could receive 
a payment from the consumer for a bona fide and reasonable charge where 
the amount of that charge is not retained by the loan originator but is 
paid to a third party that is not the creditor, its affiliate, or the 
affiliate of the loan originator. For example, assume a loan originator 
receives compensation in connection with a transaction from a creditor. 
Further assume the loan originator charges the consumer $25 for a 
credit report provided by a third party that is not the creditor, its 
affiliate, or the affiliate of the loan originator, and this fee is 
bona fide and reasonable. Assume the $25 for the credit report is paid 
by the consumer to the loan originator but the loan originator does not 
retain this $25. Instead, the loan originator pays the $25 to the third 
party for the credit report. The loan originator in that transaction is 
not prohibited by proposed Sec.  1026.36(d)(2)(i) from receiving the 
$25 from the consumer, even though the creditor paid compensation to 
the loan originator in connection with the transaction.
    As discussed in more detail in the section-by-section analysis of 
proposed Sec.  1026.36(a), proposed comment 36(a)-5.iii also recognized 
that, in some cases, amounts received for payment for such third-party 
charges may exceed the actual charge because, for example, the loan 
originator cannot determine precisely what the actual charge will be at 
the time the charge is imposed and instead uses average charge pricing 
(in accordance with RESPA). In such a case, under proposed comment 
36(a)-5.iii, the difference retained by the originator would not have 
been deemed compensation if the third-party charge collected from the 
consumer or a person other than the consumer was bona fide and 
reasonable, and also complied with State and other applicable law. On 
the other hand, if the originator marks up a third-party charge and 
retains the difference between the actual charge and the marked-up 
charge (a practice known as ``upcharging''), the amount retained is 
compensation for purposes of Sec.  1026.36(d) and (e). Proposed comment 
36(a)-5.iii contained two illustrations, which are discussed in more 
detail in the section-by-section analysis of Sec.  1026.36(a).
    As discussed in more detail in the section-by-section analysis of 
Sec.  1026.36(a), the final rule adopts 36(a)-

[[Page 11365]]

5.iii as proposed in substance, except that the interpretation 
discussing situations where the amounts received for payment for third-
party charges exceeds the actual charge has been moved to comment 
36(a)-5.v.
    In addition, the final rule adds comment 36(a)-5.iv to clarify 
whether payments for services that are not loan origination activities 
are compensation under Sec.  1026.36(a)(3). As adopted in the final 
rule, comment 36(a)-5.iv.A clarifies that the term ``compensation'' for 
purposes of Sec.  1026.36(a)(3) does not include: (1) A payment 
received by a loan originator organization for bona fide and reasonable 
charges for services it performs that are not loan origination 
activities; (2) a payment received by an affiliate of a loan originator 
organization for bona fide and reasonable charges for services it 
performs that are not loan origination activities; or (3) a payment 
received by a loan originator organization for bona fide and reasonable 
charges for services that are not loan origination activities where 
those amounts are not retained by the loan originator organization but 
are paid to the creditor, its affiliate, or the affiliate of the loan 
originator organization. Comment 36(a)-5.iv.C as adopted clarifies that 
loan origination activities, for purposes of that comment means 
activities described in Sec.  1026.36(a)(1)(i) (e.g., taking an 
application, arranging, assisting, offering, negotiating, or otherwise 
obtaining an extension of consumer credit for another person) that 
would make a person performing those activities for compensation a loan 
originator as defined in Sec.  1026.36(a)(1)(i).
    Thus, under Sec.  1026.36(d)(2)(i) and comment 36(a)-5.iv as 
adopted in the final rule, a loan originator organization that receives 
compensation in connection with a transaction from a person other than 
the consumer (e.g., creditor) would not be prohibited under Sec.  
1026.36(d)(2)(i) from receiving a payment from the consumer for a bona 
fide and reasonable charge for services that are not loan origination 
activities where (1) the loan originator organization itself performs 
those services; or (2) the payment amount is not retained by the loan 
originator organization but is paid to the creditor, its affiliate, or 
the affiliate of the loan originator organization, as described in 
comment 36(a)-5.iv.A.1 and .3. Likewise, a loan originator organization 
that receives compensation directly from a consumer would not be 
prohibited under Sec.  1026.36(d)(2)(i) from receiving a payment from a 
person other than the consumer for bona fide and reasonable charges for 
services that are not loan origination activities as described above.
    In addition, a loan originator organization's affiliate would not 
be prohibited under Sec.  1026.36(d)(2)(i) from receiving from a 
consumer a payment for bona fide and reasonable charges for services it 
performs that are not loan origination activities; as described in 
comment 36(a)-5.iv.A.2, even if the loan originator organization 
receives compensation in connection with a transaction from a person 
other than the consumer (e.g., the creditor). Similarly, a loan 
originator organization's affiliate would not be prohibited under Sec.  
1026.36(d)(2)(i) from receiving from a person other than the consumer 
(e.g., a creditor) a payment for bona fide and reasonable charges for 
services the affiliate performs that are not loan origination 
activities; as described in comment 36(a)-5.iv.A.2, even if the loan 
originator organization receives compensation directly from a consumer 
in connection with a transaction.
    Moreover, as discussed above, the final rule moves the 
interpretation in proposed comment 36(a)-5.iii discussing situations 
where the amounts received for payment for third-party charges exceeds 
the actual charge to comment 36(a)-5.v, and revises it. The final rule 
also extends this interpretation to amounts received by the loan 
originator organization for payment for services that are not loan 
origination activities where those amounts are not retained by the loan 
originator but are paid to the creditor, its affiliate, or the 
affiliate of the loan originator organization. See the section-by-
section analysis of Sec.  1026.36(a)(3) for a more detailed discussion.
    If any loan originator receives compensation directly from the 
consumer, no other loan originator may receive compensation in 
connection with the transaction. Under existing Sec.  1026.36(d)(2), if 
any loan originator is paid compensation directly by the consumer in a 
transaction, no other loan originator may receive compensation in 
connection with the transaction from a person other than the consumer. 
For example, assume that a loan originator organization receives 
compensation directly from the consumer in a mortgage transaction 
subject to Sec.  1026.36(d)(2). The loan originator organization may 
not receive compensation in connection with the transaction (e.g., a 
commission) from a person other than the consumer (e.g., the creditor). 
In addition, the loan originator organization may not pay individual 
loan originators any transaction-specific compensation, such as 
commissions, in connection with that particular transaction. 
Nonetheless, the loan originator organization may pay individual loan 
originators a salary or hourly wage or other compensation that is not 
tied to the particular transaction. See existing comment 36(d)(2)-1. In 
addition, a person other than the consumer (e.g., the creditor) may not 
pay compensation in connection with the transaction to any loan 
originator, such as a loan originator that is employed by the creditor 
or by the loan originator organization.
    TILA section 129B(c)(2), which was added by section 1403 of the 
Dodd-Frank Act, generally is consistent with the above prohibition in 
existing Sec.  1026.36(d)(2) (redesignated as proposed Sec.  
1026.36(d)(2)(i)). 12 U.S.C. 1639b(c)(2). TILA section 129B(c)(2)(B) 
provides that a mortgage originator may receive from a person other 
than the consumer an origination fee or charge, and a person other than 
the consumer may pay a mortgage originator an origination fee or 
charge, if: (1) ``the mortgage originator does not receive any 
compensation directly from the consumer;'' and (2) ``the consumer does 
not make an upfront payment of discount points, origination points, or 
fees, however denominated (other than bona fide third-party charges not 
retained by the mortgage originator, creditor, or an affiliate of the 
creditor or originator).'' As discussed above, the Bureau interprets 
``origination fee or charge'' to mean compensation that is paid ``in 
connection with the transaction,'' such as commissions, that are 
specific to, and paid solely in connection with, the transaction. The 
individual loan originator is the one that is receiving compensation in 
connection with a transaction from a person other than the consumer, 
namely the loan originator organization. Thus, TILA section 
129B(c)(2)(B) permits the individual loan originator to receive 
compensation tied to the transaction from the loan originator 
organization if: (1) The individual loan originator does not receive 
any compensation directly from the consumer; and (2) the consumer does 
not make an upfront payment of discount points, origination points, or 
origination fees, however denominated (other than bona fide third-party 
charges not retained by the individual loan originator, creditor, or an 
affiliate of the creditor or originator). The individual loan 
originator is not deemed to be receiving compensation in connection 
with the transaction from a consumer simply because the loan originator 
organization is receiving compensation from the consumer in

[[Page 11366]]

connection with the transaction. The loan originator organization and 
the individual loan originator are separate persons. Nonetheless, the 
consumer is making ``an upfront payment of discount points, origination 
points, or fees'' in the transaction when it pays the loan originator 
organization compensation. The payment of the origination point or fee 
by the consumer to the loan originator organization is not a bona fide 
third-party charge under TILA section 129B(c)(2)(B)(ii). Thus, because 
the loan originator organization has received an upfront payment of 
origination points or fees from the consumer in the transaction, unless 
the Bureau exercises its exemption authority as discussed in more 
detail below, no loan originator (including an individual loan 
originator) may receive compensation tied to the transaction from a 
person other than the consumer.
    Nonetheless, TILA section 129B(c)(2)(B) also provides the Bureau 
authority to waive or create exemptions from this prohibition on 
consumers paying upfront discount points, origination points or 
origination fees, where it determines that doing so is in the interest 
of consumers and in the public interest. Pursuant to this waiver or 
exemption authority, the Bureau proposed to add Sec.  
1026.36(d)(2)(i)(C) to provide that, even if a loan originator 
organization receives compensation directly from a consumer in 
connection with a transaction (i.e., in the form of the upfront payment 
of discount points, origination points or origination fees), the loan 
originator organization may pay compensation to individual loan 
originators, and the individual loan originators may receive 
compensation from the loan originator organization (but the individual 
loan originators may not receive compensation directly from the 
consumer). The Bureau also proposed to amend comment 36(d)(2)-1 
(redesignated as proposed comment 36(d)(2)(i)-1) to be consistent with 
proposed Sec.  1026.36(d)(2)(i)(C).
    In the supplementary information to the proposal, the Bureau stated 
its belief that the risk of harm to consumers that the existing 
restriction was intended to address would be likely no longer present, 
in light of new TILA section 129B(c)(1). Under existing Sec.  
1026.36(d)(1)(iii), compensation paid directly by a consumer to a loan 
originator is permitted to be based on transaction terms or conditions. 
Thus, if a loan originator organization were allowed to pay an 
individual loan originator it employs a commission in connection with a 
transaction, the individual loan originator could have incentives to 
steer the consumer into a loan with terms and conditions that would 
produce greater compensation to the loan originator organization, and 
the individual loan originator, because of this steering, could receive 
greater compensation if he or she were allowed to receive compensation 
in connection with the transaction. However, the risk is now expressly 
addressed by the Dodd-Frank Act. Specifically, TILA section 129B(c)(1), 
as added by section 1403 of the Dodd-Frank Act, prohibits any 
compensation based on loan terms, including compensation paid by a 
consumer directly to a mortgage originator. 12 U.S.C. 1639b(c)(1). 
Thus, pursuant to TILA section 129B(c)(1), and under proposed Sec.  
1026.36(d)(1) as amended in this final rule, even if an individual loan 
originator is permitted to receive compensation in connection with the 
transaction from the loan originator organization where the loan 
originator organization receives compensation directly from the 
consumer, the amount of the compensation paid by the consumer to the 
loan originator organization, and the amount of the compensation paid 
by the loan originator organization to the individual loan originator, 
cannot be based on transaction terms.
    In the supplementary information to the proposal, the Bureau also 
stated its belief that it would be in the interest of consumers and in 
the public interest to allow loan originator organizations to pay 
compensation in connection with the transaction to individual loan 
originators, even when the loan originator organization is receiving 
compensation directly from the consumer. As discussed above, the Bureau 
believed the risk of the harm to the consumer that the restriction was 
intended to address would be remedied by the statutory amendment 
prohibiting even compensation that is paid by the consumer from being 
based on the terms of the transaction. With that protection in place, 
allowing this type of compensation to the individual loan originator no 
longer would present the same risk to the consumer of being steered 
into a transaction involving direct compensation from the consumer 
because both the loan originator organization and the individual loan 
originator can realize greater compensation. In addition, with this 
proposed revision, more loan originator organizations might be willing 
to structure transactions where consumers pay loan originator 
compensation directly. Loan originator organizations had expressed 
concern that currently it is difficult to structure transactions where 
consumers pay loan originator organizations compensation directly, 
because it is not economically feasible for the organizations to pay 
their individual loan originators purely a salary or hourly wage, 
instead of a commission that is tied to the particular transaction 
either alone or in combination with a base salary. The Bureau believed 
that this proposal would enhance the interests of consumers and the 
public by giving consumers greater flexibility in structuring the 
payment of loan originator compensation. In a transaction where the 
consumer pays compensation directly to the loan originator, the amount 
of the compensation may be more transparent to the consumer. In 
addition, in these transactions, the consumer may have more flexibility 
to choose the pricing of the loan. In a transaction where the consumer 
pays compensation directly to the loan originator, the consumer would 
know the amount of the loan originator compensation and could pay all 
of that compensation up front, rather than the creditor determining the 
compensation and recovering the cost of that compensation from the 
consumer through the rate, or a combination of the rate and upfront 
origination points or fees.
    The Bureau received comments from two trade groups representing 
mortgage brokers, which favored this aspect of the proposal. In 
addition, in the Bureau's outreach, consumer groups agreed that loan 
originator organizations that receive compensation directly from a 
consumer in a transaction should be permitted to pay individual loan 
originators that work for the organization compensation in connection 
with the transaction, such as a commission. For the reasons discussed 
above, the final rule adopts Sec.  1026.36(d)(2)(i)(C) and related 
provisions in comment 36(d)(2)(i)-1 as proposed. The Bureau has 
determined that it is in the interest of consumers and in the public 
interest to allow a loan originator organization to pay individual loan 
originators compensation in connection with the transaction. It is in 
the public interest even when the loan originator organization has 
received compensation in connection with the transaction directly from 
the consumer, given that neither the organization's nor the individual 
originator's compensation may be based on the terms of the transaction.

[[Page 11367]]

36(d)(2)(ii) Exemption
The Dodd-Frank Act
    The Dodd-Frank Act contains a number of discrete provisions 
addressing points and fees paid by consumers in connection with 
mortgages. Section 1412 of the Dodd-Frank Act adds new TILA section 
129C(b) which defines the criteria for a ``qualified mortgage'' as to 
which there is a presumption of compliance with the new ability-to-
repay rules prescribed in accordance with TILA section 129C(a), as 
added by section 1411 of the Dodd-Frank Act. Under new TILA section 
129C(b), one of the criteria for a qualified mortgage is that the total 
``points and fees'' paid do not exceed 3 percent of the loan 
amount.\146\ See TILA section 129C(b)(2)(A)(vii), as added by section 
1412 of the Dodd-Frank Act. In making this calculation, up to two 
``bona fide discount points'' may be excluded from the 3 percent 
threshold.\147\ TILA section 129C(b)(2)(C)(ii). In a similar vein, 
section 1431 of the Dodd-Frank Act amends TILA section 103(aa)(1) to 
create a new definition of ``high cost mortgage.'' \148\ Under that new 
definition, a mortgage qualifies as a ``high cost mortgage'' if any of 
the prescribed coverage tests are met, including if the ``points and 
fees'' charged on the mortgage exceed defined thresholds.\149\ TILA 
section 103(bb)(1). For these purposes too, up to two ``bona fide 
discount points'' may be excluded.\150\ TILA section 103(dd).
---------------------------------------------------------------------------

    \146\ The term ``points and fees'' for purposes of new TILA 
section 129C(b) is defined in new TILA section 129C(b)(2)(C), as 
added by section 1412 of the Dodd-Frank Act.
    \147\ The term ``bona fide discount points'' for purposes of new 
TILA section 129C is defined in new TILA section 129C(b)(2)(C)(iii).
    \148\ The Dodd-Frank Act amends existing TILA section 103(aa) 
and renumbers it as section 103(bb).
    \149\ The term ``points and fees'' for purposes of TILA section 
103(bb)(1) is defined in TILA section 103(bb)(4), as revised by 
section 1431 of the Dodd-Frank Act.
    \150\ The term ``bona fide discount points'' for purposes of 
TILA section 103(bb)(1) is defined in new TILA section 103(dd), as 
added by section 1431 of the Dodd-Frank Act.
---------------------------------------------------------------------------

    At the same time that Congress enacted these provisions, new TILA 
section 129B(c)(2) was added by section 1403 of the Dodd-Frank Act. 
That new TILA section provides in relevant part that a mortgage 
originator can receive an ``origination fee or charge'' from someone 
other than a consumer (e.g. from a creditor or loan originator 
organization) if, but only if, ``the mortgage originator does not 
receive any compensation directly from the consumer'' and the consumer 
``does not make an upfront payment of discount points, origination 
points, or fees (other than bona fide third-party charges not retained 
by the mortgage originator, creditor or an affiliate of the creditor or 
originator'').'' However, TILA section 129B(c)(2)(B), as amended by 
section 1100A of the Dodd-Frank Act, also provides the Bureau authority 
to waive or create exemptions from this prohibition on consumers paying 
upfront discount points, origination points or origination fees where 
the Bureau determines that doing so ``is in the interest of consumers 
and in the public interest.''
    The Bureau understands and interprets the phrase ``origination fee 
or charge'' as used in new TILA section 129B(c)(2) to mean compensation 
that is paid ``in connection with the transaction,'' such as 
commissions that are specific to, and paid solely in connection with, 
the transaction. Thus, if the statutory ban were allowed to go into 
effect as it reads, the prohibition in TILA section 129B(c)(2)(B)(ii) 
on the consumer paying upfront discount points, origination points, or 
origination fees would apply in residential mortgage transactions 
where: (1) The creditor pays compensation in connection with the 
transaction (e.g., a commission) to individual loan originators, such 
as the creditor's employees; (2) the creditor pays a loan originator 
organization compensation in connection with a transaction, regardless 
of how the loan originator organization pays compensation to individual 
loan originators; and (3) the loan originator organization receives 
compensation directly from the consumer in a transaction and pays 
individual loan originators compensation in connection with the 
transaction.\151\ The prohibition in TILA section 129B(c)(2)(B)(ii) on 
the consumer paying upfront discount points, origination points, or 
origination fees in a residential mortgage transaction generally would 
not apply where: (1) The creditor pays individual loan originators, 
such as the creditor's employees, only in the form of a salary, hourly 
wage or other compensation that is not tied to the particular 
transaction; or (2) the loan originator organization receives 
compensation directly from the consumer and pays individual loan 
originators that work for the organization only in the form of a 
salary, hourly wage, or other compensation that is not tied to the 
particular transaction.
---------------------------------------------------------------------------

    \151\ In this final rule, the Bureau uses its exemption 
authority in TILA section 129B(c)(2)(B)(ii) to permit a loan 
originator organization to pay compensation in connection with a 
transaction to individual loan originators, even if the loan 
originator organization received compensation directly from the 
consumer, so long as the individual loan originator does not receive 
compensation directly from the consumer. See the section-by-section 
analysis of Sec.  1026.36(d)(2)(i) for a detailed discussion. 
Nonetheless, these transactions would be subject to the restriction 
on upfront points and fees in TILA section 129B(c)(2)(B)(ii), unless 
the Bureau exercises its exemption authority.
---------------------------------------------------------------------------

    The Bureau understands that in most mortgage transactions today, 
loan originators typically receive compensation tied to a particular 
transaction (such as a commission) from a person other than the 
consumer. For example, in transactions that involve loan originator 
organizations, creditors typically pay a commission to the loan 
originator organization. In addition, in transactions that do not 
involve loan originator organizations, creditors typically pay a 
commission to the individual loan originators that work for the 
creditors. Thus, absent a waiver or exemption by the Bureau, 
substantially all mortgage transactions would be covered by TILA 
section 129B(c)(2) and would be subject to the statutory ban on upfront 
points and fees.
    Such a ban on upfront points and fees would have two foreseeable 
impacts. First, the ban would result in a predictable increase in 
mortgage interest rates. Creditors incur significant costs in 
originating a mortgage, including marketing, sales, underwriting, and 
closing costs. Typically, creditors recover some or all of those costs 
through upfront charges paid by the consumer. These charges can take 
the form of flat fees (such as an application fee or underwriting fee) 
or fees stated as a percentage of the mortgage (``origination 
points''). If creditors were prohibited from assessing these upfront 
charges, creditors would necessarily need to increase the interest rate 
on the loan to recoup the upfront costs. Creditors who hold loans in 
portfolio would then earn back these fees over time through higher 
monthly payments; creditors who sell loans into the secondary market 
would expect to earn through the sale what would otherwise have been 
earned through upfront points and fees.
    Second, implementation of the statutory ban on points and fees 
would necessarily limit the range of pricing options available to 
consumers. Creditors today typically offer a variety of pricing options 
on closed-end mortgages, such that consumers generally have the ability 
to buy down the interest rate on a loan by paying ``discount points.'' 
i.e., upfront charges, stated as a percentage of the loan amount, and 
offered in return for a reduction in the interest rate. For creditors 
who hold loans in portfolio, discount points are intended to make up

[[Page 11368]]

for the revenue that will be foregone over time due to lower monthly 
payments; for creditors who sell loans into the secondary market, the 
discount points are designed to compensate for the lower purchase price 
that the mortgage will attract because of its lower interest rate. In a 
similar vein, many creditors offer consumers the opportunity to, in 
essence, buy ``up'' the interest rate in order to reduce or eliminate 
the upfront costs that would otherwise be assessed. If the statutory 
ban were allowed to go into effect, creditors would no longer be able 
to offer pricing options to consumers in any transaction in which a 
loan originator is paid compensation (e.g., commission) tied to the 
transaction.
The Bureau's Proposal
    In developing its proposal, the Bureau concluded that, in light of 
concerns about the impact of the statutory ban on the price of 
mortgages, the range of consumers' choices in mortgage pricing, and 
consumers' access to credit, it would not be in the interest of 
consumers or in the public interest to permit the prohibition to take 
effect. The Bureau sought instead to develop an alternative which would 
establish conditions under which upfront points and fees could be 
charged that would better serve the interest of consumers and the 
public interest than simply waiving the prohibition or allowing it to 
take effect.
    During the Small Business Review Panel process, as discussed in 
part II, the Bureau sought comment on an alternative which would have 
allowed creditors to charge discount points and origination fees that 
could not vary with the size of the transaction (i.e., flat fees) but 
would not have permitted creditors to charge origination points. The 
alternative would have also required creditors to provide consumers 
with a bona fide reduction in the interest rate for each discount point 
paid and to offer an option of a no discount point loan. The intent of 
this alternative was to address potential consumer confusion between 
discount points, which are paid by the consumer at the consumer's 
option to obtain a reduction in the interest rate, and other 
origination charges which the originator assesses. The Small Entity 
Representatives who participated in the Small Business Review Panel 
process were unanimous in opposing the requirement that fees could not 
vary with the size of the transaction and generally opposed the bona 
fide discount point requirement. The Bureau also reviewed the 
alternative with various industry and consumer stakeholders. The 
industry stakeholders were also generally opposed to both the 
requirement that fees could not vary with the size of the transaction 
and the bona fide discount point fee requirement, while consumer groups 
held mixed views. As a result of the lack of general support for the 
Bureau's approach to flat fees, the view that some costs do vary with 
the size of the transaction, and the fact that the distinction between 
origination and discount points may not be the most relevant one from 
the consumer's perspective, the Bureau abandoned the flat fee aspect of 
the alternative in developing its proposal.
    Instead, proposed Sec.  1026.36(d)(2)(ii) would have generally 
required that, before a creditor or loan originator organization may 
impose upfront points or fees on a consumer in a closed-end mortgage 
transaction in which the creditor or loan originator organization will 
also pay a loan originator compensation tied to the transaction, the 
creditor must make available to the consumer a comparable, alternative 
loan with no upfront discount points, origination points, or 
origination fees that are retained by the creditor, broker, or an 
affiliate of either (a ``zero-zero alternative''). The requirement 
would not have been triggered if the only upfront charges paid by a 
consumer are charges that are passed on to independent third parties 
that are not affiliated with the creditor or loan originator 
organization. The requirement also would not have applied where the 
consumer is unlikely to qualify for the zero-zero alternative. To 
facilitate shopping based on the zero-zero alternative, the proposal 
would have provided a safe harbor for compliance with the requirement 
to make available the zero-zero alternative to a consumer if any time 
prior to providing the disclosures required by RESPA after application 
that the creditor provides a consumer an individualized quote for the 
interest rate or other key terms for a loan that includes upfront 
points and fees, the creditor also provides a quote for a zero-zero 
alternative.
    Thus, the Bureau proposed to structure the use of its exemption 
authority to enable consumers to receive the benefits of obtaining 
loans that do not include discount points, origination points or 
origination fees, while preserving consumers' ability to choose a loan 
with upfront points and fees. The Bureau believed the proposal would 
address the problems in the current mortgage market that the Bureau 
believes the prohibition on discount points, origination points or 
origination fees was designed to address by advancing two goals: (1) 
Facilitating consumer shopping by enhancing the ability of consumers to 
make comparisons using transactions that do not include discount 
points, origination points or origination fees available from different 
creditors as a basis for comparison; and (2) enhancing consumer 
decision-making by facilitating a consumer's ability to understand and 
make meaningful trade-offs on transactions available from a particular 
creditor of paying discount points, origination points or origination 
fees in exchange for a lower interest rate. Underlying both these goals 
was the concern that some consumers may be harmed by paying points and 
fees in certain circumstances.
    The Bureau also sought comment on a number of related issues, 
including:
    [cir] Whether the Bureau should adopt a ``bona fide'' requirement 
to ensure that consumers receive value in return for paying upfront 
points and/or fees and, if so, the relative merits of several 
alternatives on the details of such a requirement;
    [cir] Whether additional adjustments to the proposal concerning the 
treatment of affiliate fees would make it easier for consumers to 
compare offers between two or more creditors;
    [cir] Whether to require that a consumer may not pay upfront points 
and fees unless the consumer qualifies for the zero-zero alternative; 
and
    [cir] Whether to require information about the zero-zero 
alternative to be provided not just in connection with customized 
quotes given prior to application, but also in advertising and at the 
time that consumers are provided disclosures within three days after 
application.
Comments Received on the Proposal
    Consumer group commenters. There was no consensus among consumer 
groups on whether, and how, the Bureau should use its exemption 
authority regarding the statutory ban on consumers paying upfront 
points and fees. Four consumer groups argued that the Bureau should 
allow the statutory ban to go into effect. These consumer groups 
asserted that paying points is generally a bad idea for most consumers 
given the time it takes to recoup the cost, the difficulty of 
predicting whether the consumer will refinance or sell before that time 
comes, the mathematical difficulty of calculating when that time is, 
and the difficulty of comparing a variety of different offers. These 
consumer groups indicated that in transactions where the creditor 
compensates the loan originator, creditors typically increase the 
interest

[[Page 11369]]

rate to some extent to recoup at least in part the compensation paid to 
the loan originators. These consumer groups indicated that consumers 
pay fees in the expectation of decreasing the interest rate. The 
consumer groups asserted that when both upfront fees and interest rates 
that are increased to pay loan originator compensation are present in 
the transaction, the consumer's payment of cash, paid to buy down the 
interest rate, is wasted because the creditor has brought the interest 
rate up. These consumer groups also asserted that this ``see-saw'' of 
incentive payments obscures the cost of credit to consumers and results 
in higher costs for consumers.
    These consumer groups also opposed the Bureau's proposal on the 
zero-zero alternative based on concerns that the Bureau's proposal 
would be a very difficult rule to enforce and very easy to manipulate. 
These consumer groups indicated that additional rules to address these 
risks will only add greater complexity to the rules. These consumer 
groups stated that if the Bureau decides to use its exemption 
authority, creditors should only be allowed to offer or disclose a loan 
with upfront points and fees upon a consumer's written request.
    Other consumer groups, however, advocated different approaches. One 
consumer group supported the Bureau's use of its exemption authority 
because this group believed that use of origination fees to cover 
origination costs and discount points to reduce the interest rate for a 
loan can provide value to the borrower in certain circumstances and 
that other protections regarding points and fees in the Dodd-Frank Act 
will decrease the risks to consumers from paying upfront points and 
fees. Specifically, this commenter pointed out additional protections 
on points and fees contained in the Dodd-Frank Act, such as limits on 
points and fees for qualified mortgages as implemented by the 2013 ATR 
Final Rule, and new disclosures to be issued by the Bureau when the 
2012 TILA-RESPA Proposal is finalized that will provide a clearer 
description of points and fees paid on loans. Nonetheless, this 
consumer group did not support the Bureau's proposal regarding the 
zero-zero alternative. This consumer group believed that requiring 
creditors to offer a product with no upfront origination fees or 
discount points would not provide significant protections to borrowers, 
would likely be confusing to consumers, and could also harm creditors. 
For example, this commenter stated that while the zero-zero alternative 
offered by a particular creditor may be less complicated than other 
options that creditors offer, it may not be the best deal for the 
consumer. Because the zero-zero alternative would be a required 
disclosure, creditors may be discouraged from making the case to the 
consumer that a zero-zero alternative is less advantageous, even when 
it really is. This consumer group suggested that in lieu of the zero-
zero alternative, creditors should be required to disclose all points 
and fees charged when they give a quote to a borrower.
    Other consumer groups generally supported the Bureau's use of its 
exemption authority and supported the proposal regarding the zero-zero 
alternative with some revisions. Suggestions for revisions included 
requiring information about zero-zero alternatives to be provided at 
the time that consumers are provided disclosures within three days 
after application.
    Industry commenters. All of the industry commenters stated that the 
Bureau should use its exemption authority so that the statutory ban on 
upfront points and fees does not go into effect. Most industry 
commenters raised concerns about access to credit if the statutory ban 
on upfront points and fees went into effect, or if a creditor was 
restricted in making a loan with upfront points and fees unless the 
creditor also makes available the zero-zero alternative. Several 
industry commenters indicated that some consumers will not qualify for 
the loans without upfront points and fees because of debt-to-income 
requirements. If the statutory ban were allowed to go into effect, 
these consumers would not have the opportunity to pay upfront points 
and fees to lower the interest rate so that they could qualify for the 
loan.
    Some industry commenters also indicated that loans without upfront 
points and fees are not always feasible for all consumers and all types 
of loans. In some cases, creditors cannot recover foregone origination 
fees by increasing the interest rate on the loan because the 
incremental premium paid by the secondary market for loans with higher 
interest rates may be insufficient, especially for smaller loans or 
higher-risk borrowers. In addition, one GSE indicated that an increase 
in loans without upfront points and fees could have an impact on 
prepayment speed which could reduce the value of mortgage securities 
and thereby drive up mortgage prices (interest rates). Some industry 
commenters also noted that some mortgage programs, particularly those 
designed for lower income people, do not allow the creditor to vary 
origination fees, or may cap the interest rate on the loan such as it 
would be difficult for the creditor to recoup the entire origination 
costs through a higher interest rate. Many industry commenters also 
raised concerns that the loans without points and fees and higher 
interest rates might trigger APR thresholds for high-cost loans under 
Sec.  1026.32 and/or similar state laws, and state that creditors 
typically are not willing to make these types of high-cost loans.
    In addition, some industry commenters also raised concerns about 
managing prepayment risk for portfolio lending if they were limited in 
their ability to impose upfront points and fees (especially because 
they will be limited in imposing prepayment penalties under the 2013 
ATR Final Rule and the 2013 HOEPA Final Rule). One industry trade group 
noted that financial institution prudential regulators have previously 
warned institutions about offering zero-zero loans, as they tend to 
have significantly higher prepayment speeds.
    One industry trade group commenter also stated that if the 
statutory ban on upfront points and fees were to go into effect, it 
would require creditors in the vast majority of transactions in today's 
market to restructure their current pricing practices or compensation. 
This trade group indicated that some community bankers have informed it 
that those community banks will discontinue their mortgage lines. The 
trade group indicated that the short-term effects would be very 
damaging, as mortgage sources would shrink, and rates would rise since 
originators that cannot receive upfront points or fees from the 
consumer would be forced to recoup their origination costs through 
higher rates. Several credit union commenters also were concerned about 
the cost of complying with the proposal requiring a zero-zero 
alternative and a bona fide trade-off, indicating that implementation, 
training and system changes would be expensive and resource intensive. 
These credit union commenters indicated that some smaller institutions 
like credit unions and community banks may deem the cost too high and 
exit the mortgage business, leaving the largest mortgage loan operators 
with more market share and consumers with fewer choices.
    Nearly all of the industry commenters also stated that the zero-
zero alternative as proposed was unworkable or undesirable. Industry 
commenters raised a number of compliance and operational issues, such 
as the difficulty in determining pre-application whether a consumer is 
likely to qualify for the zero-zero alternative.
    Some industry commenters also questioned whether the zero-zero 
alternative, as proposed, would be

[[Page 11370]]

beneficial to consumers. Several commenters raised concerns that 
consumers when they are given information about the zero-zero 
alternative might be confused about why they are receiving such 
information and might believe that the zero-zero loan was always the 
best option for them even when it is not. Some commenters expressed 
concern that consumers may be confused by receiving information about a 
zero-zero alternative that they did not request. Some commenters also 
indicated that including information about the zero-zero alternative in 
advertisements might not in fact enable consumers properly to determine 
the lowest cost loan, especially if affiliates' fees were treated as 
upfront points and fees, but non-affiliates, third-party fees were not. 
Some of these commenters also urged the Bureau to conduct consumer 
testing on the zero-zero alternative, similar to what it has done to 
prepare to integrate the existing mortgage loan disclosures under TILA 
and RESPA.
    Many industry commenters suggested that the Bureau should provide a 
complete exemption. These commenters generally believed that the Bureau 
should continue to study the impact of regulating points and fees 
instead of finalizing an approach in January 2013. Some of these 
commenters stated that the Bureau should study the impacts of the other 
Title XIV rulemakings on the mortgage market before adopting any new 
regulation on upfront points and fees, while other commenters stated 
that the Bureau should address the issue as part of finalizing the 2012 
TILA-RESPA Proposal. Other industry commenters did not advocate for a 
complete exemption, but instead advocated for various different 
approaches than the zero-zero alternative as proposed. Suggested 
alternatives included requiring creditors to provide a generic 
disclosure stating that additional options for rates, fees, and 
payments are available, to make the zero-zero alternative available 
only upon request of the consumer, or to disclose the loan with the 
fewest points and fees for which the consumer is likely to qualify. 
Finally, other industry commenters stated that the zero-zero 
alternative approach was unworkable but did not suggest alternative 
approaches.
    State bank supervisor commenters. A group submitting comments on 
behalf of State bank supervisors supported the zero-zero alternative 
without suggesting any revisions.
The Final Rule
    Use of the Bureau's exemption authority. As discussed in more 
detail below, the Bureau adopts in this final rule a complete exemption 
to the statutory ban on upfront points and fees set forth in TILA 
section 129B(c)(2)(B)(ii). Specifically, this final rule revises 
proposed Sec.  1026.36(d)(2)(ii) to provide that a payment to a loan 
originator that is otherwise prohibited by section 129B(c)(2)(A) of the 
Truth in Lending Act is nevertheless permitted pursuant to section 
129B(c)(2)(B) of the Act, regardless of whether the consumer makes any 
upfront payment of discount points, origination points, or fees, as 
described in section 129B(c)(2)(B)(ii) of the Act, as long as the loan 
originator does not receive any compensation directly from the consumer 
as described in section 129B(c)(2)(B)(i) of the Act.
    The Bureau is including Sec.  1026.36(d)(2)(ii) in the final rule 
under its authority in TILA section 129B(c)(2)(B), as amended by 
section 1100A of the Dodd-Frank Act, to waive or create exemptions from 
this prohibition on consumers paying upfront discount points, 
origination points or origination fees where the Bureau determines that 
doing so is in the interest of consumers and in the public 
interest.\152\ The Bureau has determined that it is in the interest of 
consumers and in the public interest to exercise its exemption 
authority in this way, to avoid the detrimental effect of the statutory 
ban on consumers paying upfront points and fees. The Bureau's exercise 
of the exemption authority will preserve access to credit and consumer 
choice. The complete exemption also will allow the Bureau to continue 
to conduct consumer testing and market research to improve its ability 
to regulate upfront points and fees in a way that maximizes consumer 
protection while preserving access to credit and empowering consumer 
choice. The Bureau is concerned that the alternative it proposed might 
not serve consumers or the public. Accordingly, the proposed exemption 
from the statutory prohibition as described above, and contained in 
proposed Sec.  1026.36(d)(2)(ii), is not adopted.
---------------------------------------------------------------------------

    \152\ The Bureau's inclusion of Sec.  1026.36(d)(2)(ii) of the 
final rule is also an exercise of its exemption authority under TILA 
section 105(a). This exemption will effectuate the purpose stated in 
TILA section 129B of ensuring that responsible, affordable mortgage 
credit remains available to consumers by preserving access to credit 
and consumer choice in credit as explained in this supplementary 
information.
---------------------------------------------------------------------------

    As explained above, eliminating upfront points and fees would 
result in an increase in interest rates and thus in monthly payments. 
The Bureau is concerned that, at the margins, some consumers would not 
qualify for the loans at the higher interest rate because of debt-to-
income ratio underwriting requirements. If the statutory ban were 
allowed to go into effect, these consumers would not have the 
opportunity to pay upfront points and fees to lower the interest rate 
so that they could qualify for the loan.
    In addition, the Bureau is concerned that it may not always be 
feasible for a creditor to offer loans without upfront points and fees 
to all consumers and various types of loan products. In some cases, 
increasing the interest rate on a loan will not generate sufficient 
incremental premium to allow creditors to cover their costs, especially 
for smaller loans or higher-risk borrowers. For example, one commenter 
indicated that historical data shows that premiums paid by the 
secondary market for 30-year fixed-rate mortgages have, at times, made 
it difficult for creditors to recover foregone upfront charges by 
increasing the interest rate. The commenter noted, for example, that 
prior to 2009, when the Board was not generally a purchaser of 
mortgage-backed securities, creditors had difficulty offering zero-zero 
alternatives for 30-year fixed-rate mortgages. While it is possible 
that if the statutory ban were to go into effect the secondary market 
might adjust so as to enable creditors to recoup origination costs by 
interest rate increases that generate sufficient increases in the 
premium paid by the secondary market, the Bureau remains concerned that 
this may not happen for all segments of the market, and as a result 
access to credit for some consumers may be impaired.
    The Bureau also is concerned that creditors may curtail certain 
types of portfolio lending if the statutory ban were to go into effect. 
Community banks and some credit unions, in particular, tend to make 
loans to their customers or members, which cannot be sold into the 
secondary market because of, for example, unique features of the 
property or the consumer's finances. These creditors may not be able to 
afford to wait to recoup their origination costs over the life of the 
loan and, even if they can, they may have difficulty managing 
prepayment risk, especially because creditors will be limited in 
imposing prepayment penalties under the Dodd-Frank Act, the 2013 ATR 
Final Rule and the 2013 HOEPA Final Rule. For example, one credit union 
indicated that it currently makes many short-term (10- to 12-year) 
fixed-rate loans held in portfolio where it charges a relatively small 
($250-$500) flat origination fee to offset its direct costs. The credit 
union does not offer a zero-zero alternative in

[[Page 11371]]

these instances because it does not sell the loan into the secondary 
market or generate any upfront revenue. The credit union indicated that 
it would reconsider originating this type of loan if it was not allowed 
to charge upfront fees on these loans.
    The Bureau also notes that some Federal and State mortgage 
programs, particularly those designed for lower-income people, do not 
allow the creditor to vary origination fees, or may cap the interest 
rate on the loan such that it would be difficult for the creditor to 
recoup the entire origination costs through a higher interest rate. 
While it may be possible in some cases for these Federal and State 
mortgage programs to be restructured to accommodate zero-zero 
alternatives, the Bureau remains concerned that it might not always be 
feasible to do so, which could impair access to credit for lower income 
consumers that these programs are designed to help.
    In sum, the Bureau believes that allowing the statutory ban in TILA 
section 129B(c)(2)(B)(ii) to go into effect has the potential to 
curtail access to credit for consumers, which would be particularly 
detrimental to consumers given the current fragile state of the 
mortgage market. Given the current tight underwriting standards and 
limited supply of credit, driving up interest rates and thus monthly 
payments, and constricting the number of creditors in the market, could 
be particularly damaging to consumers who are already having difficulty 
qualifying for credit.
    The Bureau also believes that allowing the statutory ban on upfront 
points and fees in TILA section 129B(c)(2)(B)(ii) to go into effect 
would significantly limit consumer choice for financial products to the 
detriment of consumers. Some mortgage consumers may want the lowest 
rate possible on their loans. For example, given today's low interest 
rate environment, a consumer who has purchased a house in which the 
consumer plans to live for many years may be best served by paying 
upfront origination charges in order to get the full benefit of the 
current low interest rates or even paying discount points to buy down 
that rate. In addition, some mortgage consumers may prefer to lower the 
future monthly payment on the loan below some threshold amount, and 
paying discount points, origination points or origination fees would 
allow consumers to achieve this lower monthly payment by reducing the 
interest rate.\153\ This is possible today as creditors typically offer 
a variety of pricing options on mortgages, such as the ability of a 
consumer to pay less in upfront points and fees in exchange for a 
higher interest rate or to pay more in upfront points and fees in 
exchange for a lower interest rate. Creditors also may offer loans 
without upfront points and fees to some, but not all, consumers.
---------------------------------------------------------------------------

    \153\ Consumers can also reduce monthly payments by making a 
bigger down payment, in order to reduce the loan amount. 
Nonetheless, it may take a significant increase in the down payment 
to achieve the desired reduction in the monthly payment. In other 
words, if the consumer applied the same funds that he or she would 
otherwise pay in discount points, origination points, or origination 
fees and applied it to a larger down payment to reduce the loan 
amount, the consumer may not gain as large a reduction in the 
monthly payment as if the consumer used that money to pay discount 
points, origination points or origination fees to reduce the 
interest rate. Some consumers may also obtain a tax benefit by 
paying discount points that applying such funds to a down payment 
would not achieve.
---------------------------------------------------------------------------

    Finally, the Bureau believes that preserving the ability of 
consumers to pay upfront points and fees enhances the efficiency of the 
mortgage market. Investors in mortgage securities face the risk that in 
declining interest rate environments consumers will prepay their 
mortgages. Investors factor in this prepayment risk in determining how 
much they will pay for a mortgage backed security. Consumers who pay 
discount points and secure a lower rate ``signal'' to investors their 
reduced likelihood to prepay. This signaling, in turn, facilitates a 
more efficient market in which creditors are able to provide such 
consumers with a better deal.
    The Bureau has carefully considered the countervailing 
considerations noted by some, although by no means all, consumer 
groups. The Bureau recognizes that some consumers--particularly less 
sophisticated consumers--may be harmed because they do not fully 
understand the complexity of the financial trade-offs when they pay 
upfront points and fees and thus do not get fair value for them. 
Additionally, other consumers may misperceive their likelihood of 
prepaying their mortgage (either as the result of a refinance or a home 
sale) and, as a result, may make decisions that prove not to be in 
their long-term economic self-interest. The Bureau also recognizes that 
there is some evidence that consumers pay lower, all-in costs when they 
do not pay any upfront costs although the Bureau notes that the leading 
study of this phenomenon was based on a period of time when the 
compensation paid to originators could vary with the terms of the 
transaction.
    Nevertheless, the Bureau also believes, for the reasons discussed 
above, that, most consumers generally benefit from having a mix of 
pricing options available, so that consumers can select financial 
products that best fit their needs. Allowing the statutory ban to go 
into effect would prohibit the payment of points and fees irrespective 
of the circumstances of their payment, which the Bureau believes would 
significantly restrict consumers' choices in mortgage products and, in 
aggregate, acts to the detriment of consumers and the public interest. 
While the Bureau believes that additional study may show that 
additional restrictions on upfront points and fees are needed beyond 
the restrictions that are contained in the Title XIV Rulemakings, the 
Bureau believes that it would be imprudent at this time to restrict 
consumers' choices of mortgage products to only one type--those without 
upfront points and fees--especially because this limitation may impair 
consumers' access to credit, as discussed above. Thus, the Bureau has 
determined that it is in the interest of consumers and the public 
interest to provide a complete exemption at this time, to avoid the 
detrimental effects of the statutory ban on consumers.
    As part of the Bureau's ongoing monitoring of the mortgage market 
and for the purposes of the Dodd-Frank Act section 1022(d) five-year 
review, the Bureau will assess how the complete exemption of the 
prohibition on points and fees is affecting consumers, and the impact 
of the other Title XIV Rulemakings and the final rule to be adopted 
under the 2102 TILA-RESPA Proposal on consumers' understanding of 
points and fees. If the Bureau were to determine over this time that 
eliminating or narrowing the exemption is in the interest of consumers 
and in the public interest, the Bureau would issue a new proposal for 
public notice and comment. The Bureau notes, however, that although it 
is providing a complete exemption to the statutory ban on upfront 
points and fees in TILA section 129B(c)(2)(B)(ii) at this time, the 
Bureau will continue to ensure that creditors are complying with all 
existing restrictions on upfront points and fees. In the event that 
problems develop in the marketplace, the Bureau may use its enforcement 
authority, such as authority to prevent unfair, deceptive, or abusive 
acts or practices (UDAAP) under section 1031 of the Dodd-Frank Act, as 
well as considering further action under section 1031 or other 
authority.
    Zero-zero alternative. The Bureau also does not believe it is 
prudent at this time to adopt the proposal regarding the zero-zero 
alternative. As discussed above, the Bureau proposed to structure the 
use of its exemption authority to enable consumers to receive the 
benefits

[[Page 11372]]

of obtaining loans that do not include discount points, origination 
points or origination fees, but also to preserve consumers' ability to 
choose a loan with such points and fees. Based on comments received on 
the zero-zero alternative and its own further analysis, the Bureau has 
concerns whether the zero-zero alternative as proposed would accomplish 
what the Bureau believes to be the objectives of the statute, which is 
to facilitate consumer shopping and enhance consumer decision-making.
    The Bureau is concerned that some consumers might find the zero-
zero alternative confusing, and it believes that testing would be 
needed to determine whether a variant of the zero-zero alternative can 
be fashioned to provide information and protections to consumers that 
outweigh possible disadvantages. Several commenters raised concerns 
that when consumers are given information about the zero-zero 
alternative, they might be confused about why they are receiving such 
information and might believe that a zero-zero alternative was always 
the best option for them even when it is not. For example, one consumer 
group commenter stated that while the zero-zero alternative offered by 
a particular creditor may be less complicated than other options that 
creditor offers, it may not be the best deal for the consumer.
    The Bureau also solicited comment on adopting rules that would 
require creditors to advertise the zero-zero alternative when 
advertising loans with upfront points and fees. Through the proposal, 
the Bureau had intended to facilitate consumer shopping by enhancing 
the ability of consumers to make comparisons using loans that do not 
include discount point, origination points or origination fees made 
available by different creditors as a basis for comparison. As 
discussed above, for transactions that do not involve a loan originator 
organization, under the proposal a creditor would be deemed to be 
making the zero-zero alternative available if, in providing a consumer 
with an interest rate quote specific to the consumer for a loan which 
included points or fees, the creditor also provided a quote for a 
comparable, alternative loan that did not include points and fees 
(unless the consumer is unlikely to qualify for the loan). In putting 
this proposal forward, the Bureau recognized that by the time a 
consumer receives a quote from a particular creditor for an interest 
rate specific to that consumer the consumer may have already completed 
his or her shopping in comparing rates from different creditors. Thus, 
the Bureau suggested, without a specific proposal, that revising the 
advertising rules in Sec.  1026.24(d) might be a critical building 
block to enable consumers to make comparisons using loans that does not 
include discount points, origination points or origination fees made 
available by different creditors as a basis for comparison.
    Some industry commenters argued that requiring information about 
the zero-zero alternative in advertisements would present the serious 
risk of providing too much information for consumers to digest and may 
only confuse consumers. Some industry commenters also indicated that 
including information about the zero-zero alternative in advertisements 
might not in fact enable consumers properly to determine the lowest 
cost loan, especially if affiliates' fees were treated as upfront 
points and fees, but non-affiliate, third-party fees were not. To 
address this further issue and facilitate shopping on zero-zero 
alternatives made available by multiple creditors, the proposal also 
had solicited comment on which fees to include in the definition of 
upfront points and fees, including whether to include fees irrespective 
of affiliate status or fees based on the type of service provided. 
Comments on the proposal, however, did not point to a clear way to 
resolve these interlinked issues. Moreover, the Bureau has not 
conducted consumer testing on how advertising rules could be structured 
and the definition of points and fees adjusted to facilitate shopping 
and reduce consumer confusion or whether requiring a zero-zero price 
quote without modifying the advertising rules would facilitate consumer 
shopping.
    Finally, based on comments received, the Bureau has concerns 
whether a zero-zero alternative can be crafted that is not easily 
evaded by creditors. In developing its proposal, the Bureau recognized 
that because a loan with no upfront points and fees will carry a higher 
interest rate, not every consumer can qualify for both a loan with 
upfront costs and a loan with none. Under the Bureau's proposal, 
therefore, the creditor was not required to make available the zero-
zero alternative to consumers that were unlikely to qualify for it. In 
including this provision, the Bureau was concerned that creditors that 
do not wish to make available loans without upfront points and fees to 
certain consumers could possibly manipulate their underwriting 
standards so that those consumers would not qualify for such loans or 
could set the interest rates on their purported alternatives without 
upfront points and fees high enough for certain consumers that those 
consumers could not satisfy the creditor's underwriting standards. 
Thus, the Bureau solicited comment on another alternative, whereby a 
creditor would be permitted to make available a loan that includes 
discount points, origination points or origination fees only when the 
consumer also qualifies for the zero-zero alternative. The Bureau was 
concerned, however, that adoption of such an alternative could impair 
access to credit to the extent there were consumers who could only 
qualify for a loan with upfront points or fees. The Bureau solicited 
comment on this issue.
    Industry commenters indicated that the alternative approach would 
limit access to credit to some consumers, similar to the types of risks 
to consumers' access to credit that would result if the statutory 
provision was implemented unaltered, as discussed above. In addition, 
several consumer group commenters argued that the ``unlikely to 
qualify'' standard would be difficult to enforce and very easy to 
manipulate. These commenters expressed concern that creditors may be 
dishonest about how they decide who is unlikely to qualify for the 
zero-zero alternative, may manipulate underwriting standards, or may 
set interest rates high for certain consumers to avoid being required 
to offer the zero-zero alternative, which they additionally argued 
could pose risks for violations of fair lending laws. The Bureau is 
concerned that the zero-zero alternative as proposed may not provide 
the intended benefits if the requirement can be easily evaded by 
creditors.
    The Bureau has gained substantial knowledge from these discussions 
about the zero-zero alternative and believes that there is some 
potential in the future to adopt some variant of the zero-zero 
alternative that sufficiently mitigates the concerns discussed above 
and that strikes the appropriate balance between these competing 
considerations. The Bureau believes, however, that finalizing now any 
particular variant of the zero-zero alternative absent further study on 
a variety of unsettled issues and further notice and comment on a 
refined proposal would risk harm to consumer interests and the public 
interest in a period of market fragility and concurrent fundamental 
changes in the regulatory framework.
    There remain unresolved many crucial issues relating to the design, 
operation, and likely effects of adopting the zero-zero alternative, 
including whether disclosing the zero-zero alternative to consumers 
either pre- or post-application or both is in fact beneficial to 
consumers in shopping for a mortgage and consumer understanding

[[Page 11373]]

of trade-offs; how best to structure advertising rules, post-
application disclosures, and the bona fide requirement if they are 
determined to be valuable to consumers; and the assessment of the 
effects on consumer and market behaviors of the other Title XIV 
Rulemakings and the final rule to be adopted under the 2102 TILA-RESPA 
Proposal. The Bureau, while mindful of its goal to help consumers make 
better informed decisions, is not currently able to judge whether and 
how to structure the zero-zero alternative or whether a different 
approach to the regulation of upfront points or fees would be more 
effective to advance Congress's purposes in enacting the points and 
fees provision.
    Additional study needed. The Bureau considers the issues presented 
in this rulemaking related to the payment of points and fees to be a 
crucial unresolved piece of its Title XIV Rulemaking efforts to reform 
the mortgage market after the consumer abuses that contributed to the 
mortgage crisis and its negative impact on the U.S. economy. The Bureau 
is committed to determining what additional steps, if any, are 
warranted to advance the interests of consumers and the public. The 
mortgage market has undergone significant shifts in the past few years, 
and the Bureau believes it will continue to do so as the Title XIV 
protections are implemented and the new disclosure-regime in the 2012 
TILA-RESPA Proposal is finalized and implemented.
    For example, the Board's 2010 Loan Originator Final Rule reshaped 
how loan originators may be compensated, and this rulemaking, while 
continuing the basic approach of that earlier rulemaking, makes 
significant adjustments to remove loan originators' incentives to steer 
consumers to particular loans to their detriment. In addition, as noted 
above, the 2013 ATR Final Rule imposes limits on the points and fees 
for a qualified mortgage, the 2013 HOEPA Final Rule lowers the points 
and fees threshold for high-cost loans, and both rules include loan 
originator compensation in the calculation of points and fees. 
Moreover, the Bureau also is in the process of finalizing its 2012 
TILA-RESPA Proposal to revise loan disclosures for closed-end 
mortgages, including the Loan Estimate, which would be given within 
three days after application and is designed to enhance consumers' 
understanding of points and fees charged on the loan and to facilitate 
consumer shopping. The Bureau also is in the process of receiving 
comments on its 2013 ATR Concurrent Proposal which will address the 
issue of how loan originator compensation should be factored in to the 
calculation of points and fees which determines whether a loan can be a 
qualified mortgage or whether a loan is covered by HOEPA.
    Without experience under the new regulatory regime and without 
consumer testing and market research, the Bureau is uncertain whether 
finalizing a version of the zero-zero alternative or some other 
alternative would benefit consumers. Once the new rules take effect, 
the Bureau intends to direct its testing and research to identify the 
impact of the rules on the prevalence and size of upfront points and 
fees, consumers' understanding of those charges and the alternatives to 
them, and the choices consumers make, including whether consumers 
understand and make informed choices based on the trade-off between the 
payment of upfront points and fees and the interest rate. Based on the 
results of that research and analysis, the Bureau will consider whether 
some additional actions, such as proposing a different version of the 
zero-zero alternative, are appropriate to enhance consumer decision 
making and consumer choice and, if so, how to best effectuate those 
goals.
    The Bureau is required by section 1022(d) of the Dodd-Frank Act to 
conduct an assessment of the effectiveness of each significant rule the 
Board issues and to publish a report of that assessment within five 
years of the effective date of each such rule. To prepare for such an 
assessment, the Bureau intends to conduct baseline research to 
understand consumers' current understanding and decision making with 
respect to the tradeoffs between upfront charges and interest rates. 
The Bureau will undertake further research once this rule, and the 
related rules discussed above, take effect. Through this research, the 
Bureau will assess how the complete exemption of the prohibition on 
points and fees is affecting consumers and how best to further consumer 
protection in this area.

36(e) Prohibition on Steering

36(e)(3) Loan Options Presented
    Existing Sec.  1026.36(e)(1) provides that a loan originator may 
not direct or ``steer'' a consumer to consummate a transaction based on 
the fact that the originator will receive greater compensation from the 
creditor in that transaction than in other transactions the originator 
offered or could have offered to the consumer, unless the consummated 
transaction is in the consumer's interest. Section 1026.36(e)(2) 
provides a safe harbor that loan originators may use to comply with the 
prohibition set forth in Sec.  1026.36(e)(1). Specifically, Sec.  
1026.36(e)(2) provides that a transaction does not violate Sec.  
1026.36(e)(1) if the consumer is presented with loan options that meet 
certain conditions set forth in Sec.  1026.36(e)(3) for each type of 
transaction in which the consumer expressed an interest. The term 
``type of transaction'' refers to whether: (1) A loan has an annual 
percentage rate that cannot increase after consummation; (2) a loan has 
an annual percentage rate that may increase after consummation; or (3) 
a loan is a reverse mortgage.
    As set forth in Sec.  1026.36(e)(3), to qualify for the safe harbor 
in Sec.  1026.36(e)(2), a loan originator must obtain loan options from 
a significant number of the creditors with which the originator 
regularly does business and must present the consumer with the 
following loan options for each type of transaction in which the 
consumer expressed an interest: (1) The loan with the lowest interest 
rate; (2) the loan with the lowest total dollar amount for origination 
points or fees and discount points; and (3) the loan with the lowest 
interest rate without negative amortization, a prepayment penalty, a 
balloon payment in the first seven years of the loan term, shared 
equity, or shared appreciation, or, in the case of a reverse mortgage, 
a loan without a prepayment penalty, shared equity, or shared 
appreciation. Under Sec.  1026.36(e)(3)(ii), the loan originator must 
have a good faith belief that the options presented to the consumer as 
discussed above are loans for which the consumer likely qualifies.
Discount Points, Origination Points and Origination Fees
    As discussed above, to qualify for the safe harbor in Sec.  
1026.36(e)(2), a loan originator must present to a consumer particular 
loan options, one of which is the loan with the lowest total dollar 
amount for ``origination points or fees and discount points'' for which 
the loan originator has a good faith belief that the consumer likely 
qualifies. See Sec.  1026.36(e)(3)(i)(C) and (e)(3)(ii). For 
consistency, the Bureau proposed to revise Sec.  1026.36(e)(3)(i)(C) to 
use the terminology ``discount points and origination points or fees,'' 
a defined term in proposed Sec.  1026.36(d)(2)(ii)(B).
    In addition, the Bureau proposed to amend Sec.  1026.36(e)(3)(i)(C) 
to address the situation where two or more loans have the same total 
dollar amount of discount points, origination points or origination 
fees. This situation would have been more likely to occur in

[[Page 11374]]

transactions subject to proposed Sec.  1026.36(d)(2)(ii). As discussed 
above, proposed Sec.  1026.36(d)(2)(ii)(A) would have required, as a 
prerequisite to a creditor, loan originator organization, or affiliate 
of either imposing any discount points, origination points or 
origination fees on a consumer in a transaction, that the creditor also 
make available to the consumer a comparable, alternative loan that does 
not include discount points, origination points or origination fees, 
unless the consumer is unlikely to qualify for such a loan. Under the 
proposal, for transactions that involve a loan originator organization, 
a creditor would make available to the consumer a comparable, 
alternative loan that does not include discount points, origination 
points or origination fees if the creditor communicates to the loan 
originator organization the pricing for all loans that do not include 
discount points, origination points or origination fees, unless the 
consumer is unlikely to qualify for such a loan. Thus, under the 
proposal, each creditor with whom a loan originator organization 
regularly does business generally would have been communicating pricing 
to the loan originator organization for all loans that do not include 
discount points, origination points or origination fees.
    Proposed Sec.  1026.36(e)(3)(i)(C), read in conjunction with Sec.  
1026.36(e)(3)(ii), provided that, with respect to the loan with the 
lowest total dollar amount of discount points and origination points or 
fees, if two or more loans have the same total dollar amount of 
discount points, origination points or origination fees, the loan 
originator must present the loan from among those alternatives that has 
the lowest interest rate for which the loan originator has a good faith 
belief that the consumer likely qualifies.
    The Bureau did not receive any comments on this aspect of the 
proposal. This final rule adopts proposed Sec.  1026.36(e)(3)(i)(C) 
with one revision. As discussed above, this final rule does not adopt 
the proposed requirement that, as a prerequisite to a creditor, loan 
originator organization, or affiliate of either imposing any discount 
points, origination points or origination fees on a consumer in a 
transaction, that the creditor also make available to the consumer a 
comparable, alternative loan that does not include discount points, 
origination points or origination fees, unless the consumer is unlikely 
to qualify for such a loan. In addition, this final rule does not adopt 
the definition of ``discount points and origination points or fees'' as 
proposed in Sec.  1026.36(d)(2)(ii)(B). Accordingly, Sec.  
1026.36(e)(3)(i)(C), as adopted in this final rule, does not use the 
term ``discount points and origination points or fees'' as proposed in 
Sec.  1026.36(e)(3)(i)(C). As adopted, Sec.  1026.36(e)(3)(i)(C) is 
revised to use the phrase ``discount points, origination points or 
origination fees'' to make more clear which points and fees are 
included for purposes of this provision. Even though the provision in 
Sec.  1026.36(d)(2)(ii) regarding the comparable, alternative loan is 
not adopted in this final rule, the Bureau believes that the additional 
clarification added to Sec.  1026.36(e)(3)(i)(C) is still useful. The 
Bureau believes that there still may be cases where two or more loans 
available to be presented to a consumer by a loan originator for 
purposes of the safe harbor in Sec.  1026.36(e)(2) have the same total 
dollar amount of discount points, origination points or origination 
fees. In these cases, Sec.  1026.36(e)(i)(3)(C) as adopted in this 
final rule, and read in conjunction with Sec.  1026.36(e)(ii), would 
provide that the loan originator must present the loan with the lowest 
interest rate that has the lowest total dollar amount of discount 
points, origination points or origination fees for which the loan 
originator has a good faith belief that the consumer likely qualifies.
The Loan With the Lowest Interest Rate
    As discussed above, to qualify for the safe harbor in Sec.  
1026.36(e)(2), a loan originator must present to a consumer particular 
loan options, one of which is the loan with the lowest interest rate 
for which the loan originator has a good faith belief that the consumer 
likely qualifies. See Sec.  1026.36(e)(3)(i)(A) and (e)(3)(ii). 
Mortgage creditors and other industry representatives have asked for 
additional guidance on how to identify the loan with the lowest 
interest rate, as set forth in Sec.  1026.36(e)(3)(i)(A), given that a 
consumer generally can obtain a lower rate by paying discount points. 
To provide additional clarification, the Bureau proposed to amend 
comment 36(e)(3)-3 to clarify that the loan with the lowest interest 
rate for which the consumer likely qualifies is the loan with the 
lowest rate the consumer can likely obtain, regardless of how many 
discount points the consumer must pay to obtain it.
    The Bureau did not receive any comments on this aspect of the 
proposal. The final rule adopts comment 36(e)(3)-3 as proposed in 
substance, with several revisions to clarify the intent of the comment. 
Comment 36(e)(3)-3 is revised to clarify that the loan with the lowest 
interest rate for which the consumer likely qualifies is the loan with 
the lowest rate the consumer can likely obtain, regardless of how many 
discount points, origination points or origination fees the consumer 
must pay to obtain it. As adopted in this final rule, comment 36(e)(3)-
3 uses the phrase ``discount points, origination points or origination 
fees,'' consistent with Sec.  1026.36(e)(3)(i)(C), as discussed above. 
In addition, the first sentence of the comment is revised to reference 
the requirement in Sec.  1026.36(e)(3)(ii) that the loan originator 
must have a good faith belief that the options presented to the 
consumer under Sec.  1026.36(e)(3)(i) are loans for which the consumer 
likely qualifies.

36(f) Loan Originator Qualification Requirements

    Section 1402(a)(2) of the Dodd-Frank Act added TILA section 129B(a) 
and (b)(1), which imposes new requirements for mortgage originators, 
including requirements for them to be licensed, registered, and 
qualified, and to include their identification numbers on loan 
documents. 15 U.S.C. 1639b. It also added TILA section 129B(b)(2), 
which, as amended by section 1100A of the Dodd-Frank Act, requires the 
Bureau to prescribe regulations requiring depository institutions to 
establish and maintain procedures reasonably designed to assure and 
monitor the compliance of such depository institutions, the 
subsidiaries of such institutions, and the employees of such 
institutions or subsidiaries with the requirements of TILA section 129B 
and the registration procedures established under section 1507 of the 
SAFE Act, 12 U.S.C. 5101, et seq.
    TILA section 129B(b)(1)(A) authorizes the Bureau to issue 
regulations requiring mortgage originators to be registered and 
licensed in compliance with State and Federal law, including the SAFE 
Act. TILA section 129B(b)(1)(A) also authorizes the Bureau's 
regulations to require mortgage originators to be ``qualified.'' As 
discussed in the section-by-section analysis of Sec.  1026.36(a)(1) 
above, for purposes of TILA section 129B(b) the term ``mortgage 
originator'' includes natural persons and organizations. Moreover, for 
purposes of TILA section 129B(b), the term includes creditors, 
notwithstanding that the definition of mortgage originator in TILA 
section 103(cc)(2) excludes creditors for certain other purposes.
    The SAFE Act imposes licensing and registration requirements on 
individuals. Under the SAFE Act, loan originators who are employees of 
a depository institution or a Federally regulated subsidiary of a 
depository institution are subject to registration,

[[Page 11375]]

and other loan originators are generally required to obtain a State 
license and also comply with registration. Regulation H, 12 CFR part 
1008, which implements SAFE Act standards applicable to State 
licensing, provides that a State is not required to impose licensing 
and registration requirements on loan originators who are employees of 
a bona fide nonprofit organization. 12 CFR 1008.103(e)(7). The SAFE Act 
requires individuals who are subject to SAFE Act registration or State 
licensing to obtain a unique identification number from the NMLSR, 
which is a system and database for registering, licensing, and tracking 
loan originators.
    SAFE Act licensing is implemented by States. To grant an individual 
a SAFE Act-compliant loan originator license, section 1505 of the SAFE 
Act, 12 U.S.C. 5104, requires the State to determine that the 
individual has never had a loan originator license revoked; has not 
been convicted of enumerated felonies within specified timeframes; has 
demonstrated financial responsibility, character, and fitness; has 
completed 20 hours of pre-licensing classes that have been approved by 
the NMLSR; has passed a written test approved by the NMLSR; and has met 
net worth or surety bond requirements. Licensed loan originators must 
take eight hours of continuing education classes approved by the NMLSR 
and must renew their licenses annually. Some States impose additional 
or higher minimum standards for licensing of individual loan 
originators under their SAFE Act-compliant licensing regimes. 
Separately from their SAFE Act-compliant licensing regimes, most States 
also require licensing or registration of loan originator 
organizations.
    Section 1507 of the SAFE Act, 12 U.S.C. 5106, generally requires 
individual loan originators who are employees of depository 
institutions to register with the NMLSR by submitting identifying 
information and information about their employment history and certain 
criminal convictions, civil judicial actions and findings, and adverse 
regulatory actions. The employee must also submit fingerprints to the 
NMLSR and authorize the NMLSR and the employing depository institution 
to obtain a criminal background check and information related to 
certain findings and sanctions against the employee by a court or 
government agency. Regulation G, 12 CFR part 1007, which implements 
SAFE Act registration requirements, imposes an obligation on the 
employing depository institution to have and follow policies to ensure 
compliance with the SAFE Act. The policies must also provide for the 
depository institution to review employee criminal background reports 
and to take appropriate action consistent with Federal law, including 
the criminal background standards for depository employees in section 
19 of the Federal Deposit Insurance Act (FDIA), 12 U.S.C. 1829, section 
206 of the Federal Credit Union Act, 12 U.S.C. 1786(i), and section 
5.65(d) of the Farm Credit Act of 1971, as amended, 12 U.S.C. 2277a-
14(a). 12 CFR 1007.104(h).
    Proposed Sec.  1026.36(f) would have implemented, as applicable, 
TILA section 129B(b)(1)(A)'s mortgage originator licensing, 
registration, and qualification requirements by requiring a loan 
originator for a consumer credit transaction to meet the requirements 
described above. Proposed Sec.  1026.36(f) tracked the TILA requirement 
that mortgage originators comply with State and Federal licensing and 
registration requirements, including those of the SAFE Act, where 
applicable. Proposed comment 36(f)-1 noted that the definition of loan 
originator includes individuals and organizations and, for purposes of 
Sec.  1026.36(f), includes creditors. Proposed comment 36(f)-2 
clarified that Sec.  1026.36(f) does not affect the scope of 
individuals and organizations that are subject to State and Federal 
licensing and registration requirements. The remainder of proposed 
Sec.  1026.36(f) set forth standards that loan originator organizations 
would have to meet to comply with the TILA requirement that they and 
their employees be qualified, as discussed below.
    Proposed Sec.  1026.36(f) also would have provided that its 
requirements do not apply to government agencies and State housing 
finance agencies, employees of which are not required to be licensed or 
registered under the SAFE Act. The Bureau proposed this differentiation 
pursuant to TILA section 105(a) to effectuate the purposes of TILA, 
which, as provided in TILA section 129B(a)(2), include ensuring that 
consumers are offered and receive residential mortgage loans on terms 
that reasonably reflect their ability to repay the loans and that are 
understandable and not unfair, deceptive, or abusive. The Bureau stated 
in the proposal that it does not believe that it is necessary to apply 
the proposed qualification requirements to employees of government 
agencies and State housing finance agencies because the agencies 
directly regulate and control the manner of their employees' loan 
origination activities, thereby providing consumers adequate protection 
from these types of harm.
    One nonprofit loan originator organization that has been designated 
a bona fide nonprofit organization by several States objected to the 
proposal's lack of an exemption for nonprofit loan originator 
organizations from the requirements of proposed Sec.  1026.36(f). The 
commenter's objection was based on the concern that the effect of 
applying the proposed TILA qualification standards to it and other 
nonprofit loan originator organizations would be to alter and add to 
the standards that State regulators must apply in opting not to require 
an employee of a bona fide nonprofit loan originator organization to be 
licensed under the SAFE Act and Regulation H. In addition, the 
commenter expressed concern that the qualification standard would call 
into question the commenter's individual loan originators' exemption 
from State licensing requirements in States that have granted 
exemptions. The commenter noted that nonprofit loan originators and 
State regulators had worked together extensively to implement the 
processes for nonprofit organizations to apply for exemption under, and 
demonstrate compliance with, the Regulation H standards for bona fide 
nonprofits, as well as processes for State examination procedures to 
ensure that bona fide nonprofit organizations continue to meet the 
standards. The commenter was concerned that the proposal would require 
those processes to be developed all over again. The commenter suggested 
that, to reduce possible uncertainty, the Bureau should at least revise 
Sec.  1026.36(f) to require that, to be qualified, a loan originator 
must be registered or licensed ``when required by,'' rather than ``in 
accordance with'' the SAFE Act.
    An association of State bank regulators also urged that bona fide 
nonprofit organizations should be fully exempt from the qualification 
standards, just as government agencies and State housing finance 
agencies would be exempted under the proposal. The commenter 
recommended that an organization that has been determined to meet the 
Regulation H standards for bona fide nonprofit organizations has been 
determined to have a public or charitable purpose, to offer loan 
products that are favorable to borrowers, and to meet other standards, 
such that the nonprofit should not have to apply further standards to 
determine whether its individual loan originator employees meet the 
proposed qualification standards.
    The Bureau does not believe that a complete exemption of bona fide

[[Page 11376]]

nonprofit organizations from the TILA qualification standards is 
warranted, for the reasons discussed further below. However, in 
response to the concerns of the bona fide nonprofit organization, the 
Bureau emphasizes that the TILA qualification standards do not change 
existing law regarding which entities or individuals must be licensed 
under Federal or State law. Accordingly, for instance, the standards 
for States to determine whether a particular organization is a bona 
fide nonprofit and whether to require such a nonprofit's employees to 
be licensed under the SAFE Act and Regulation H are not affected by the 
final rule. As proposed comment 36(f)-2 stated Sec.  1026.36(f) does 
not affect the scope of individuals and organizations that are subject 
to State and Federal licensing and registration requirements. To 
emphasize and explain further how this principle applies in the context 
of bona fide nonprofit organizations, the final rule removes the 
statement from comment 36(f)-2 and adds it to a new comment 36(f)-3. 
Comment 36(f)-3 goes on to explain that, if an individual is an 
employee of an organization that a State has determined to be a bona 
fide nonprofit organization and the State has not subjected the 
employee to that State's SAFE Act loan originator licensing, the State 
may continue not to subject the employee to that State's SAFE Act 
licensing even if the individual meets the definition of loan 
originator in Sec.  1026.36(a)(1) and is therefore subject to the 
requirements of Sec.  1026.36. It states that the qualification 
requirements imposed under Sec.  1026.36(f) do not add to or affect the 
criteria that States must consider in determining whether an 
organization is a bona fide nonprofit organization under the SAFE Act.
    The Bureau is also adopting, in part, the commenter's suggestion to 
revise the regulatory text to provide that a loan originator must be 
registered or licensed ``when required by'' State or Federal law, 
including the SAFE Act, to eliminate any further uncertainty. However, 
the final rule, like the proposal, specifies that, where State or 
Federal law requires the loan originator to be registered or licensed, 
the registration or licensing must be ``in accordance with'' those 
laws.
    As discussed below, the TILA qualification standards primarily 
require the loan originator organization to screen its individual loan 
originators for compliance with criminal, financial responsibility, 
character, and general fitness standards and to provide periodic 
training to its individual loan originators commensurate with their 
loan origination activities. For these reasons, the Bureau disagrees 
with the comment of the association of State banking regulators that 
the TILA qualification standards are unnecessary for bona fide 
nonprofit organizations. The standards that a State must apply in 
determining whether an organization is a bona fide nonprofit 
organization all pertain to the mission and activities of the 
organization, but they do not address the background or knowledge of 
the organization's individual loan originators. The Bureau believes 
that the standards will be minimally burdensome for bona fide nonprofit 
organizations to implement and that consumers who obtain residential 
mortgage loans from them will benefit from increased screening and 
training of individual loan originators.
36(f)(1)
    Proposed Sec.  1026.36(f)(1) would have required loan originator 
organizations to comply with applicable State law requirements for 
legal existence and foreign qualification, meaning the requirements 
that govern the legal creation of the organization and the authority of 
the organization to transact business in a State. Proposed comment 
36(f)(1)-1 stated, by way of example, that the provision encompassed 
requirements for incorporation or other type of formation and for 
maintaining an agent for service of process. The Bureau explained that 
the requirement would help ensure that consumers are able to seek 
remedies against loan originator organizations that fail to comply with 
requirements for legal formation and, when applicable, for operating as 
foreign businesses.
    One commenter asked the Bureau to confirm that the provision does 
not imply that State law requirements for formation and legal existence 
apply to Federally chartered lending institutions. The Bureau is 
adopting Sec.  1026.36(f)(1) and comment 36(f)(1)-1 as proposed. The 
final rule does not affect the extent to which Federally chartered 
lending institutions must comply with State law but rather, like the 
proposal, includes the qualifier ``applicable'' to acknowledge there 
are situations where certain State law requirements may not apply.
36(f)(2)
    Proposed Sec.  1026.36(f)(2) would have required loan originator 
organizations to ensure that their individual loan originators are in 
compliance with SAFE Act licensing and registration requirements. 
Proposed comment 36(f)(2)-1 noted that the loan originator organization 
can comply with the requirement by verifying information that is 
available on the NMLSR consumer access Web site.
    One nondepository institution commenter objected to the proposed 
requirement that it ensure that its individual loan originators are 
licensed in compliance with the SAFE Act and applicable State licensing 
laws. The commenter noted that having to determine that its employee 
loan originators are properly licensed would be burdensome because 
licensing requirements vary by State.
    The Bureau disagrees. First, the Bureau notes that employers are 
generally already responsible under State law for ensuring their 
employees comply with all State licensing requirements that apply to 
activities within the scope of their employment. The proposed provision 
imposes the same duty under TILA and simply renders it somewhat more 
universal. In any case, imposing this duty on loan originator 
organizations will benefit consumers by giving them recourse if an 
individual who has failed to obtain a loan originator license 
nonetheless acts as a loan originator for the benefit of the loan 
originator organization and causes harm to a consumer in originating 
the loan. The Bureau believes that it is not an unreasonable burden for 
a loan originator organization to ensure that the individual loan 
originators through which it conducts its business are not acting in 
violation of the law. As proposed, comment 36(f)(2)-1 stated that a 
loan originator organization can confirm the licensing or registration 
status of individual loan originators on the NMLSR consumer access Web 
site. The Bureau therefore is adopting Sec.  1026.36(f)(2) as proposed, 
except that it is clarifying that a loan originator organization must 
ensure its individual loan originator are in compliance with SAFE Act 
licensing and registration requirements before the individuals act as a 
loan originator in a consumer credit transaction secured by a dwelling. 
It also clarifies that the individual loan originators whose licensing 
or registration status the loan originator organization must verify are 
those individual loan originators who work for the loan originator 
organization. Comment 36(f)(2)-1 clarifies that individual loan 
originators who work for the loan originator organization include 
employees or independent contractors who operate under a brokerage 
agreement with the loan originator organization. The Bureau notes that 
the requirement to ensure that each individual loan originator who 
works for the loan origination organization is licensed or registered 
to

[[Page 11377]]

the extent applicable applies regardless of the date the loan 
originator began working directly for the loan originator organization.
36(f)(3)
    Proposed Sec.  1026.36(f)(3) set forth actions that a loan 
originator organization must take for its individual loan originators 
who are not required to be licensed and are not licensed pursuant to 
the SAFE Act and State SAFE Act implementing laws. Individual loan 
originators who are not required to be licensed generally include 
employees of depository institutions under Regulation G and 
organizations that a State has determined to be bona fide nonprofit 
organizations, in accordance with criteria in Regulation H, 12 CFR 
1008.103(e)(7).
    The proposed requirements in Sec.  1026.36(f)(3)(ii) applied to 
unlicensed individual loan originators two of the core standards from 
SAFE Act State licensing requirements: the criminal background 
standards and the financial responsibility, character, and general 
fitness standards. Proposed Sec.  1026.36(f)(3)(iii) would also have 
required loan originator organizations to provide periodic training to 
these individual loan originators, a requirement that is analogous to 
but, as discussed below, more flexible than the continuing education 
requirement that applies to individuals who have SAFE Act-compliant 
State licenses.
    As explained in the proposal, the Bureau believes its approach is 
consistent with both the SAFE Act's application of the less stringent 
registration standards to employees of depository institutions and 
Regulation H's provision for States to exempt employees of bona fide 
nonprofit organizations from State licensing (and registration). The 
Bureau believes that the decision in both cases not to apply the full 
SAFE Act licensing, training, and screening requirements was based in 
part on an assumption that these institutions already carry out basic 
screening and training of their employee loan originators to comply 
with prudential regulatory requirements or to ensure a minimum level of 
protection of and service to consumers (consistent with the charitable 
or similar purposes of nonprofit organizations). The Bureau explained 
that the proposed requirements in Sec.  1026.36(f)(3) would help ensure 
that this assumption is in fact accurate and that all individual loan 
originators meet core standards of integrity and competence, regardless 
of the type of loan originator organization for which they work, 
without imposing undue or duplicative obligations on depository 
institutions and bona fide nonprofit employers.
    The Bureau did not propose to apply to employees of depository 
institutions and bona fide nonprofit organizations the more stringent 
requirements that apply to individuals seeking a SAFE Act-compliant 
State license: to pass a standardized test and to be covered by a 
surety bond. The Bureau explained that it had not found evidence that 
consumers who obtain mortgage loans from depository institutions and 
bona fide nonprofit organizations face risks that are not adequately 
addressed through existing safeguards and proposed safeguards in the 
proposal. However, the Bureau stated that it will continue to monitor 
the market to consider whether additional measures are warranted.
    Several bank and credit union commenters objected to the Bureau 
imposing any qualification standards on their individual loan 
originators, arguing that doing so is inconsistent with the SAFE Act's 
statutory exemption of employees of depository institutions from 
licensing requirements. One commenter stated that a better way to 
increase standards for loan originators would be for Congress to amend 
the SAFE Act rather than through a regulation. Several bank commenters 
objected to qualification standards, which they perceived as requiring 
their individual loan originator employees to meet all of the standards 
of loan originators who are subject to State licensing. One commenter 
stated it is inappropriate to impose any standards that apply under 
State licensing to depository institution employees because those 
standards were intended for nondepository creditors and brokers, which 
the commenter stated use questionable business practices. Several 
credit union and bank trade associations stated that compliance with 
SAFE Act registration should constitute ``equivalent compliance'' with 
the Dodd-Frank Act requirement for loan originators to be qualified. 
One commenter stated that the qualification standards should apply only 
to nondepository institutions that fail to comply with the SAFE Act.
    Many bank and credit union commenters stated that the proposed 
qualification standards were both duplicative of practices that they 
already routinely undertake and would also be burdensome for them to 
implement because of the cost of ensuring compliance and demonstrating 
compliance to examiners. Some bank commenters stated that the Bureau 
had cited no evidence that their individual loan originators were not 
qualified or that the proposed standards would benefit consumers. Other 
commenters encouraged the Bureau to study the issue further. One bank 
stated that it would be unfair to impose TILA liability on depository 
institutions for failing to ensure their employees meet the 
qualification standards, but not on nondepository institutions. The 
commenter stated that, if SAFE Act licensing standards are burdensome 
for nondepository institutions, then the solution is for Congress to 
repeal them.
    One State association of banks stated that its member banks do not 
object to this part of the proposal because they already comply with 
the proposed screening and training standards. Several commenters 
supported the proposal as a step toward more equal treatment of 
depository institutions and nondepository institutions through the 
establishment of basic loan originator qualification standards and also 
recognized that depository institutions already provide training to 
their loan originator employees. A State association of mortgage 
bankers supported the proposal because it would prevent unsuitable and 
unscrupulous individuals from seeking employment at institutions with 
lower standards.
    Numerous nondepository institution commenters supported the 
qualification standards in the proposal but were critical of the 
proposal for not imposing more rigorous requirements on depository 
institutions. One commenter stated that the Bureau had committed to 
fully ``leveling the playing field'' between depository and 
nondepository institutions but had failed to do so in the proposal. 
Commenters stated that, when they have hired former depository 
institution employees as loan originators, they have found them to be 
highly unprepared. Several commenters objected that the proposal did 
not include a requirement for loan originators employed by depository 
institutions to take the standardized test that applicants for State 
loan originator licenses must take. One commenter stated that 
depository institution loan originators are not capable of passing the 
standardized test, and that those who do take and fail the test simply 
continue to serve consumers poorly at a bank. Others objected that the 
proposal did not require depository institutions' individual loan 
originator employees to take the minimum number of hours of NMLSR-
approved classes that State license applicants and licensees must take. 
One commenter who reported working at both depository and nondepository 
institutions stated that

[[Page 11378]]

the training at depository institutions is inferior.
    Still other commenters objected that the proposal permitted 
depository institutions to self-police (i.e., to determine whether 
their own individual loan originator employees meet the proposed 
standards); some commenters stated that the rule should impose State 
licensing on all loan originators to require State regulators to make 
these determinations. Several commenters stated that any disparity 
between the standards that apply to depository and nondepository loan 
originators creates an unfair competitive advantage for depository 
institutions. One association of mortgage brokers stated that consumers 
assume that banks provide screening and training to their loan 
originators but that the assumption is incorrect.
    The Bureau disagrees with the assertion that the promulgation of 
qualification standards is inconsistent with Congressional intent. In 
enacting the SAFE Act, Congress imposed licensing (and registration) 
requirements on individual loan originators who are not employees of 
depository institutions and imposed less stringent registration 
requirements for individual loan originators who are employees of 
depository institutions. In enacting the Dodd-Frank Act, Congress then 
mandated all loan originators ``when required'' comply with the 
licensing and registration requirements of other applicable State or 
Federal law, including the SAFE Act, and also imposed an additional 
requirement that they be ``qualified.'' Congress left significant 
discretion to the Bureau to determine what additional standards a loan 
originator must meet to demonstrate compliance with the new 
``qualified'' requirement, but the Bureau believes that Congress would 
not have imposed the requirement in the first place if it had not 
intended to create a meaningful protection for consumers. The Bureau 
also does not assume that Congress intended to disturb the basic 
framework of the SAFE Act with regard to licensing and registration, 
given that it limited the duty to be licensed only to situations ``when 
required'' by other law. The Bureau declines to read the latter 
provision out of the Dodd-Frank Act or to perpetuate uncertainty by 
leaving the statutory requirement undefined.
    As it explained in the proposal, the Bureau sought to define 
certain minimum qualification standards for all loan originators to 
allow consumers to be confident that all loan originators meet core 
standards of integrity and competence, regardless of the type of 
institution for which they work. The standards also serve to ensure 
that depository institutions in fact carry out basic screening and 
provide basic training to their employee loan originators because the 
assumption that they do so was, in the Bureau's view, a critical 
component of Congress's decision to exempt them from State licensing 
requirements of the SAFE Act. Moreover, the standards implement 
Congress's determination reflected in the Dodd-Frank Act that all loan 
originators, including depository loan originators who are exempt from 
SAFE Act licensing, must be qualified. In this sense, one purpose of 
the proposal was to help equalize the treatment of and compliance 
burdens on depository and nondepository institutions.
    The Bureau emphasizes, however, that the provisions of the final 
rule are not intended to achieve a perfectly level playing field, such 
as by imposing requirements on depository institutions for the sake of 
mechanically equalizing certain burdens and costs faced by depository 
and nondepository institutions. Nor do the provisions impose on 
depository institution individual loan originators all of the 
requirements of full licensing, as some nonbank commenters suggested. 
Instead, the provisions are intended to ensure that consumers receive 
certain basic benefits and protections, regardless of the type of 
institution with which they transact business. For this reason, the 
Bureau declines to adopt the bank commenter's suggestion that 
compliance with the SAFE Act be deemed to be adequate to comply with 
the separate requirement for loan originators to be qualified. 
Similarly, the Bureau is declining to apply the qualification standards 
only to nondepository institutions whose individual loan originators 
act in violation of the SAFE Act and State licensing laws, as suggested 
by one commenter.
    In proposing to define the minimum qualification standards, the 
Bureau carefully evaluated the benefits of these requirements as well 
as the burdens to loan originators. The Bureau continues to believe 
that the proposed standards, as further clarified below, will not 
impose significant burdens on loan originator organizations and will 
provide important consumer protections. As many bank and credit union 
commenters stated, most depository institutions already comply with the 
criminal background and screening provisions and provide training to 
their loan originators as a matter of sound business practice and to 
comply with the requirements and guidance of prudential regulators. The 
qualification standards build on these requirements and provide greater 
parity and clarity for criminal background and character standards 
across types of institution. The Bureau recognizes that the 
consequences for an individual who is determined not to meet the 
standards is significant, but it does not believe that many individual 
loan originators will be affected. The Bureau's view is that there is 
no reason why a consumer should expect that a loan originator who fails 
to meet the criminal background and character standards for loan 
originators at one class of institution should be able to act as a loan 
originator for that consumer at another class of institution.
    The Bureau disagrees with some commenters' assertions that the 
provisions would result in significantly higher compliance burden 
compared with existing requirements. For example, as further discussed 
below, a depository institution will not be required to obtain multiple 
criminal background reports or undertake multiple reviews of a criminal 
background report. Instead, the required criminal background report is 
the same report the institution already obtains under Regulation G 
after submission of the individual's fingerprints to the NMLSR (12 CFR 
1007.103(d)(1)(ix) and 1007.104(h)). In reviewing the criminal 
background report, the institution will be required to apply somewhat 
broader criteria for disqualifying crimes. Similarly, the training 
provisions comport with consumers' legitimate expectations that a loan 
originator should be knowledgeable of the legal protections and 
requirements that apply to the types of loans that the individual 
originates. As further discussed below, the provisions seek to ensure 
this outcome while avoiding imposition of training requirements that 
needlessly duplicate training that loan originators already receive.
    The Bureau also disagrees with one commenter's assertion that the 
provisions unfairly impose TILA liability for compliance with the 
qualifications requirements on depository institutions, but not on 
nondepository institutions. As discussed above, Sec.  1026.36(f)(2) 
imposes a TILA obligation on all loan originator organizations--
mortgage brokers and both nondepository and depository institution 
mortgage creditors--to ensure that their individual loan originators 
are licensed or registered to the extent required under the SAFE Act, 
its implementing regulations, and State SAFE Act implementing laws.
    The Bureau is not adopting a requirement, advocated by several

[[Page 11379]]

commenters, that all loan originators take and pass the NMLSR-approved 
standardized test that currently applies only to applicants for State 
loan originator licenses. The Bureau recognizes that independent 
testing of loan originators' knowledge provides a valuable consumer 
protection and that individual loan originators at depository 
institutions are not currently required to take and pass the test. 
Imposing such a requirement for all individual loan originators, 
however, would carry with it significant costs and burdens for 
depository institutions. In addition, the Bureau does not at this time 
have evidence to show that combining existing bank practices with the 
new training requirements contained in this final rule will be 
inadequate to ensure that the knowledge of depository loan originators 
is comparable to that of loan originators who pass the standardized 
test. In light of the short rulemaking timeline imposed by the Dodd-
Frank Act, and cognizant of the potential burdens on the NMLSR and its 
approved testing locations that could result from expansion of the test 
requirement to bank and credit union employees, the Bureau believes it 
is prudent to continue studying the issue to determine if further 
qualification requirements are warranted.
    The Bureau is not adopting the suggestion of some commenters to 
impose State licensing requirements on all loan originators. The 
commenters suggested that such a measure was needed because it is not 
appropriate for depository institutions to ``self-police'' by making 
the required determinations about their own loan originator employees. 
The Bureau believes requiring registration and licensing only ``when 
required'' already under other State or Federal law, including the SAFE 
Act, is more faithful to the statutory directive in section 
129B(b)(1)(A) of TILA. That statutory language in that section makes 
clear that Congress intended to require compliance with existing State 
and Federal licensing requirements but did not intend to create new 
licensing requirements.
36(f)(3)(i)
    Proposed Sec.  1026.36(f)(3)(i) provided that the loan originator 
organization must obtain for each individual loan originator who is not 
required to be licensed and is not licensed as a loan originator under 
the SAFE Act a State and national criminal background check; a credit 
report from a nationwide consumer reporting agency in compliance, where 
applicable, with the requirements of section 604(b) of the Fair Credit 
Reporting Act (FCRA), 15 U.S.C. 1681b; and information about any 
administrative, civil, or criminal findings by any court or government 
agency. Proposed comment 36(f)(3)(i)-1 clarified that loan originator 
organizations that do not have access to this information in the NMLSR 
(generally, bona fide nonprofit organizations) could satisfy the 
requirement for a criminal background check by obtaining a criminal 
background check from a law enforcement agency or commercial service. 
It also clarified that such a loan originator organization could 
satisfy the requirement to obtain information about administrative, 
civil, or criminal determinations by requiring the individual to 
provide it with this information directly to the loan originator 
organization. The Bureau noted that the information in the NMLSR about 
administrative, civil, or criminal determinations about an individual 
is generally supplied to the NMLSR by the individual, rather than by a 
third party. The Bureau invited public comment on whether loan 
originator organizations that do not have access to this information in 
the NMLSR should be permitted to satisfy the requirement by requiring 
the individual loan originator to provide it directly to the loan 
originator organization or if, instead, there are other means of 
obtaining the information that are more reliable or efficient.
    One commenter stated that performing a criminal background check is 
no longer necessary for loan originators because they can no longer be 
compensated based on the terms of a residential mortgage loan.
    A bank commenter requested that the Bureau clarify the proposed 
regulatory text requiring a ``State and national criminal background 
check'' because it could be read to require a separate State criminal 
background check for each State in which the loan originator operates. 
The commenter asked for clarification that the FBI criminal background 
check obtained from the NMLSR is sufficient.
    A bank commented that it was not clear what protection was achieved 
by requiring a depository institution to review the credit report of a 
prospective individual loan originator. The commenter speculated that 
the only reason the SAFE Act requires review of credit reports of 
prospective individual loan originator licensees may be that mortgage 
brokers, unlike banks, are often thinly capitalized, such that the 
financial circumstances of the individual applicant are relevant. The 
commenter urged that, in a depository institution, the financial 
circumstances of a loan originator are not relevant to consumer 
protection.
    An association of banks stated that the consumer benefit of 
requiring review of credit reports of prospective loan originators is 
outweighed by the expense and burden to the bank. A credit union stated 
that credit history rarely correlates with operating unfairly or 
dishonestly and therefore there is no benefit to reviewing it. An 
association of credit unions stated that all credit unions already use 
credit reports to evaluate prospective employees.
    Finally, commenters requested clarification on how to reconcile the 
requirement to review credit reports with FCRA provisions and Equal 
Employment Opportunity Commission (EEOC) guidance on employer credit 
checks. They also requested clarification of language that could have 
been read to suggest that credit reports should be obtained from the 
NMLSR.
    The Bureau disagrees with the comment that screening for criminal 
background is no longer warranted for loan originators merely because 
loan originator compensation cannot vary based on loan terms. Steering 
a consumer to a particular loan based on the compensation the loan 
originator expects to receive is not the only way in which a loan 
originator could cause harm to a consumer. The Bureau's view is that 
consumers should not have their financial well-being subject to the 
influence of a loan originator with a recent history of felony 
convictions.
    The Bureau is adopting Sec.  1026.36(f)(3)(i)(A) as proposed but 
with the bank commenter's suggested clarification to prevent any 
misunderstanding that multiple State criminal background checks are 
required for an individual. The Bureau is revising the regulatory text 
to refer simply to ``a criminal background check from the NMLSR'' (or 
in the case of a loan originator organization without access to the 
NMLSR, ``a criminal background check'') and adding an express statement 
to comment 36(f)(3)(i)-1 that a loan originator organization with 
access to the NMLSR satisfies the requirement by reviewing the standard 
criminal background check that the loan originator receives upon 
submission of the individual loan originator's fingerprints to the 
NMLSR. The Bureau is also making minor organizational revisions to the 
comment to prevent any implication that the credit report must be 
obtained from the NMLSR.
    The Bureau disagrees with the commenter's statement that the only 
reason the SAFE Act requires review of

[[Page 11380]]

a credit report of an applicant for a State license is the thin 
capitalization of mortgage brokers and that, therefore, there is no 
consumer protection achieved by requiring a loan originator 
organization to review the credit report of an individual employed by a 
depository institution. Instead, the Bureau believes the credit report 
is useful for determining whether an individual meets the criteria for 
financial responsibility, which is a requirement under the SAFE Act 
and, as further discussed below, this final rule. The Bureau believes 
the cost of obtaining a credit report is modest and, as a number of 
commenters stated, many credit unions and depository institutions 
already obtain credit reports as part of established hiring and 
screening procedures.
    Finally, the Bureau agrees that the credit report must be obtained 
in compliance with provisions of the FCRA on employer credit checks. 
The Bureau is not aware of any conflict between its rule and EEOC 
guidance on obtaining credit reports for employment screening.\154\ 
Accordingly, it is adopting Sec.  1026.36(f)(3)(i)(B) as proposed, 
requiring that the credit report be obtained in compliance with section 
604(b) of the FCRA.
---------------------------------------------------------------------------

    \154\ See, e.g., EEOC, informal discussion letter, http://www.eeoc.gov/eeoc/foia/letters/2010/titlevii-employer-creditck.html.
---------------------------------------------------------------------------

    The Bureau is providing in Sec.  1026.36(f)(3)(i) and in comments 
36(f)(3)(i)-1 and 36(f)(3)(i)-2 that the requirement to obtain the 
specified information only applies to an individual whom the loan 
originator organization hired on or after January 10, 2014 (or whom the 
loan originator organization hired before this date but for whom there 
were no applicable statutory or regulatory background standards in 
effect at the time of hire or before January 10, 2014, used to screen 
the individual). Since these provisions track similar provisions in 
Sec.  1026.36(f)(3)(ii) and related comments, they are discussed in 
more detail in the section-by-section analysis of those provisions.
36(f)(3)(ii)
    Proposed Sec.  1026.36(f)(3)(ii) specified the standards that a 
loan originator organization must apply in reviewing the information it 
is required to obtain. The standards were the same as those that State 
agencies must apply in determining whether to grant an individual a 
SAFE Act-compliant loan originator license. Proposed comment 
36(f)(3)(ii)-1 clarified that the scope of the required review includes 
the information required to be obtained under Sec.  1026.36(f)(3)(i) as 
well as information the loan originator organization has obtained or 
would obtain as part of its reasonably prudent hiring practices, 
including information from application forms, candidate interviews, and 
reference checks.
36(f)(3)(ii)(A)
    Under proposed Sec.  1026.36(f)(3)(ii)(A), a loan originator 
organization would be required to determine that the individual loan 
originator has not been convicted (or pleaded guilty or nolo 
contendere) to a felony involving fraud, dishonesty, a breach of trust, 
or money laundering at any time, or any other felony within the 
preceding seven-year period. Depository institutions already apply 
similar standards in complying with the SAFE Act registration 
requirements under 12 CFR 1007.104(h) and other applicable Federal 
requirements, which generally prohibit employment of individuals 
convicted of offenses involving dishonesty, money laundering, or breach 
of trust. For depository institutions, the incremental effect of the 
proposed standard generally would be to expand the scope of 
disqualifying crimes to include felonies other than those involving 
dishonesty, money laundering, or breach of trust if the conviction was 
in the previous seven years. The Bureau stated that it does not believe 
that depository institutions or bona fide nonprofit organizations 
currently employ many individual loan originators who would be 
disqualified by the proposed provision, but that the proposed provision 
would give consumers confidence that individual loan originators meet 
common minimum criminal background standards, regardless of the type of 
institution or organization for which they work.
    The proposed description of potentially disqualifying convictions 
was the same as that in the SAFE Act provision that applies to 
applicants for State licenses and includes felony convictions in 
foreign courts. The Bureau recognized that records of convictions in 
foreign courts may not be easily obtained and that many foreign 
jurisdictions do not classify crimes as felonies. The Bureau invited 
public comment on what, if any, further clarifications the Bureau 
should provide for this provision.
    One commenter observed that criminal background checks, credit 
reports, and the NMLSR information on disciplinary and enforcement 
actions could contain errors. Another commenter stated that an 
individual must be allowed to correct any incorrect information in the 
report. Several commenters asked for clarification about what 
information a loan originator organization must or may consider in 
making the determination and specifically asked the Bureau to clarify 
that it should be able to rely on information and explanations provided 
by the individual.
    Several bank commenters stated that they already perform criminal 
background checks pursuant to the FDIA and that the proposed standard 
would be duplicative and unnecessary. Commenters stated that the 
provision would be especially burdensome if they were required to apply 
it to current employees who have already been screened for compliance 
with the FDIA.
    One commenter objected to the provision disqualifying individuals 
for seven years following the date of conviction for felonies not 
involving fraud, dishonesty, breach of trust, or money laundering. The 
commenter stated that the provision was too strict and that the 
standard should consider all the relevant factors, including whether 
these types of crimes are relevant to a loan originator's job. Other 
commenters stated that criminal background standards have a disparate 
impact on minorities and that EEOC enforcement guidelines state that 
standards for felonies should only exclude individuals convicted of 
crimes that relate to their jobs. One commenter requested clarification 
on how pardoned and expunged convictions would be treated. Depository 
institutions noted that the look-back periods under the FDIA and 
Federal Credit Union Act for certain enumerated crimes are ten years.
    The Bureau agrees with the commenter's observation that criminal 
background checks, as well as credit reports and NMLSR information on 
enforcement actions, could contain errors. For this reason, the loan 
originator organization can and should permit an individual to provide 
additional evidence to demonstrate that the individual meets the 
standard, consistent with the requirement in Sec.  1026.36(f)(3)(ii) 
that the loan originator organization consider any ``other information 
reasonably available'' to it. To clarify this, the Bureau is revising 
comment 36(f)(3)(ii)-1 to state expressly that this other information 
includes, in addition to information from candidate interviews, ``other 
reliable information and evidence provided by a candidate.''
    The Bureau disagrees that the requirement to review a criminal 
background check to determine compliance with the SAFE Act criminal

[[Page 11381]]

background standard is duplicative of existing requirements of 
prudential regulators or of Regulation G. As discussed above, the 
provision does not require a depository institution to obtain multiple 
criminal background checks or to conduct multiple reviews. A depository 
institution could meet the requirement in this final rule by obtaining 
the same criminal background check required by the prudential 
regulators and Regulation G and reviewing it one time for compliance 
with applicable criminal background standards, including the standard 
of this final rule.
    The Bureau disagrees with the commenters that urged using a shorter 
cutoff time and narrower list of disqualifying crimes. Congress has 
judged the standard as directly relevant to the job of being a loan 
originator. As discussed above, the standard is largely the same 
standard that the SAFE Act imposes for applicants for State loan 
originator licenses. The Bureau sees no reason why a loan originator 
who categorically fails to meet the criminal background and character 
standards for loan originators at one class of institution should 
categorically be permitted to act as a loan originator at another class 
of institution. The Bureau believes a seven-year prohibition period is 
not too strict of a standard to protect consumers from the risk that 
such individuals could present to them.
    In view of these considerations, the Bureau does not believe it 
would be appropriate to establish standards in this rule that are 
materially different from those applicable under the SAFE Act. However, 
as noted by commenters, other regulators, including the Federal Deposit 
Insurance Corporation (FDIC), are already empowered to consent to the 
employment of individuals who would otherwise be barred under the 
Federal Deposit Insurance Act or other relevant laws because of certain 
prior convictions. To harmonize the qualification standards with those 
of other regulators, the Bureau is providing in the final rule that a 
conviction (or plea of guilty or nolo contendere) does not render an 
individual unqualified under Sec.  1026.36(f) if the FDIC (or the Board 
of Governors of the Federal Reserve System, as applicable) pursuant to 
section 19 of the Federal Deposit Insurance Act, 12 U.S.C. 1829, the 
National Credit Union Administration pursuant to section 205 of the 
Federal Credit Union Act, 12 U.S.C. 1785(d), or the Farm Credit 
Administration pursuant to section 5.65(d) of the Farm Credit Act of 
1971, 12 U.S.C. 227a-14(d), has granted consent to employ the 
individual notwithstanding the conviction or plea that would have 
rendered the individual barred under those laws.
    In response to commenter requests, the Bureau is clarifying in 
Sec.  1026.36(f)(3)(ii)(A)(2) that a crime is a felony only if, at the 
time of conviction, it was classified as such under the law of the 
jurisdiction under which the individual was convicted, and that 
expunged and pardoned convictions do not render an individual 
unqualified. These clarifications are consistent with implementation of 
the SAFE Act criminal background standards in Sec.  1008.105(b)(2) of 
Regulation H. However, the Bureau is not adopting the provision in the 
proposal that would have disqualified an individual from acting as a 
loan originator because of a felony conviction under the law of a 
foreign jurisdiction. The Bureau is concerned that loan originator 
organizations might not be able to determine whether a foreign 
jurisdiction classifies crimes as felonies, and foreign convictions may 
be unlikely to be included in a criminal background check.
    The Bureau is adopting Sec.  1026.36(f)(3)(ii)(A) with these 
revisions and clarifications.
36(f)(3)(ii)(B)
    Under proposed Sec.  1026.36(f)(3)(ii)(B), a loan originator 
organization would have been required to determine that the individual 
loan originator has demonstrated financial responsibility, character, 
and general fitness to warrant a determination that the individual loan 
originator will operate honestly, fairly, and efficiently.\155\ This 
standard is identical to the standard that State agencies apply to 
applicants for SAFE Act-compliant loan originator licenses, except that 
it does not include the requirement to determine that the individual's 
financial responsibility, character, and general fitness are ``such as 
to command the confidence of the community.'' The Bureau believes that 
responsible depository institutions and bona fide nonprofit 
organizations already apply similar standards when hiring or 
transferring any individual into a loan originator position. The 
proposed requirement formalized this practice to ensure that the 
determination considers reasonably available, relevant information to 
ensure that, as with the case of the proposed criminal background 
standards, consumers could be confident that all individual loan 
originators meet common minimum qualification standards for financial 
responsibility, character, and general fitness. Proposed comment 
36(f)(3)(ii)(B)-1 clarified that the review and assessment need not 
include consideration of an individual's credit score but must include 
consideration of whether any of the information indicates dishonesty or 
a pattern of irresponsible use of credit or of disregard for financial 
obligations. As an example, the comment stated that conduct revealed in 
a criminal background report may show dishonest conduct, even if the 
conduct did not result in a disqualifying felony conviction. It also 
distinguished delinquent debts that arise from extravagant spending 
from those that arise, for example, from medical expenses. The proposal 
stated the Bureau's view that an individual with a history of 
dishonesty or a pattern of irresponsible use of credit or of disregard 
for financial obligations should not be in a position to interact with 
or influence consumers in the loan origination process, during which 
consumers must decide whether to assume a significant financial 
obligation and determine which of any presented mortgage options is 
appropriate for them.
---------------------------------------------------------------------------

    \155\ While the proposed regulatory text also included the 
requirement to determine that the individual's financial 
responsibility, character, and general fitness are ``such as to 
command the confidence of the community,'' the preamble indicated 
that this requirement would not be included. 77 FR at 55327. The 
inclusion of that language in the regulatory text was inadvertent.
---------------------------------------------------------------------------

    The Bureau recognized that, even with the proposed comment, any 
standards for financial responsibility, character, and general fitness 
inherently include subjective components. During the Small Business 
Review Panel, some Small Entity Representatives expressed concern that 
the proposed standard could lead to uncertainty whether a loan 
originator organization was meeting it. The proposed standard excluded 
the phrase ``such as to command the confidence of the community'' to 
reduce the potential for such uncertainty. Nonetheless, in light of the 
civil liability imposed under TILA, the Bureau invited public comment 
on how to address this concern while also ensuring that the loan 
originator organization's review of information is sufficient to 
protect consumers. For example, the Bureau asked whether a loan 
originator organization that reviews the required information and 
documents a rational explanation for why relevant negative information 
does not show that the standard is violated should be presumed to have 
complied with the requirement.
    Several depository institution commenters stated that the proposed 
standards for financial responsibility,

[[Page 11382]]

character, and general fitness were too subjective. One civil rights 
organization commenter expressed concern that the standards could be 
used by loan originator organizations as a pretext for discriminating 
against job applicants. Several bank and credit union commenters stated 
that subjective or vague standards could lead to litigation by rejected 
applicants. Many of the same commenters requested that the Bureau 
include a safe harbor under the standard, such as a minimum credit 
score. One bank commenter noted it already follows FDIC guidance that 
calls on depository institutions to establish written procedures for 
screening applicants. Some depository commenters stated that an 
individual could have negative information in his or her credit report 
resulting from divorce or the death of a spouse, and that it is usually 
not possible to determine from a credit report whether negative 
information was the result of dishonesty or profligate spending, rather 
than situations beyond the control of the individual. One commenter 
agreed with the Bureau's view that the language from the SAFE Act 
standard requiring that an individual ``command the confidence of the 
community'' is especially vague and should be omitted.
    The Bureau appreciates and agrees with the concerns expressed in 
several of the public comments. The Bureau continues to believe that it 
is important for covered loan originator organizations to evaluate 
carefully the financial responsibility, character, and general fitness 
of individuals before employing them in the capacity of a loan 
originator, but the Bureau also agrees that loan originator 
organizations should not face increased litigation risk or uncertainty 
about whether they are properly implementing a standard that 
necessarily includes a subjective component. Accordingly, although the 
Bureau is adopting Sec.  1026.36(f)(3)(ii)(B) as described above, it is 
revising comment 36(f)(3)(ii)(B)-1 to provide further interpretation 
concerning factors to consider in making the required determinations. 
In addition, the Bureau is adding comment 36(f)(3)(ii)(B)-2 to provide 
a procedural safe harbor so that loan originator organizations can have 
greater certainty that they are in compliance.
    Comment 36(f)(3)(ii)(B)-1 is revised to remove references to 
factors that may not be readily determined from the information that 
the loan originator organization is required to obtain under Sec.  
1026(f)(3)(i) and to conform the comment more closely to the factors 
that State regulators use in making the corresponding determinations 
for loan originator licensing applicants. For example, it is revised to 
avoid any implication that a loan originator organization is expected 
to be able to determine from a credit report whether an individual's 
spending has been extravagant or has acted dishonestly or subjectively 
decided to disregard financial obligations. The comment enumerates 
factors that can be objectively identified for purposes of the 
financial responsibility determination, including the presence or 
absence of current outstanding judgments, tax liens, other government 
liens, nonpayment of child support, or a pattern of bankruptcies, 
foreclosures, or delinquent accounts. Following the practice of many 
States, the comment specifies that debts arising from medical expenses 
do not render an individual unqualified. It further specifies that a 
review and assessment of character and general fitness is sufficient if 
it considers, as relevant factors, acts of dishonesty or unfairness, 
including those implicated in any disciplinary actions by a regulatory 
or professional licensing agency as may be evidenced in the NMLSR. The 
comment, however, does not mandate how a loan originator organization 
must weigh any information that is relevant under the specified 
factors. It clarifies that no single factor necessarily requires a 
determination that the individual does not meet the standards for 
financial responsibility, character, or general fitness, provided that 
the loan originator organization considers all relevant factors and 
reasonably determines that, on balance, the individual meets the 
standards.
    As the Bureau anticipated in the proposal, even with clarifications 
about the factors that make a loan originator organization's review and 
assessment of financial responsibility, character, and fitness 
sufficient, the provision still requires significant subjective 
judgment. Accordingly, the Bureau believes that a procedural provision 
is warranted to ensure that loan originator organizations have 
reasonable certainty that they are complying with the requirement. 
Accordingly, comment 36(f)(3)(ii)(B)-2 clarifies that a loan originator 
organization that establishes written procedures for determining 
whether individuals meet the financial responsibility, character, and 
general fitness standards under Sec.  1026.36(f)(3)(ii)(B) and follows 
those written procedures for an individual is deemed to have complied 
with the requirement for that individual. The comment specifies that 
such procedures may provide that bankruptcies and foreclosures are 
considered under the financial responsibility standard only if they 
occurred within a timeframe established in the procedures. In response 
to the suggestion in public comments, the comment provides that, 
although review of a credit report is required, such procedures are not 
required to include a review of a credit score.
    The Bureau declines to provide the safe harbor suggested by the 
commenter that further review and assessment of financial 
responsibility is not required for an individual with a credit score 
exceeding a high threshold. The Bureau is concerned that credit scores 
are typically developed for the purpose of predicting the likelihood of 
a consumer to repay an obligation and for similar purposes. A credit 
score may not correlate to the criteria for financial responsibility in 
this final rule. It is the Bureau's understanding that, for this 
reason, the major consumer reporting agencies do not provide credit 
scores on credit reports obtained for the purpose of employment 
screening.
    The procedural safe harbor provides a mechanism for a loan 
originator organization to specify how it will weigh information under 
the factors identified in comment 36(f)(3)(ii)(B)-1, including 
instances identified by the commenters, such as financial difficulties 
arising from divorce or the death of a spouse or outstanding debts or 
judgments that the individual is in the process of satisfying.
    The Bureau notes that, as further discussed below, the final rule 
requires in Sec.  1026.36(j) that depository institutions must 
establish and maintain procedures for complying with Sec.  1026.36(d), 
(e), (f), and (g), including the requirements to make the 
determinations of financial responsibility, character, and general 
fitness. The Bureau expects that a depository institution could have a 
single set of procedures to comply with these two provisions, as well 
as, for example, those under Sec.  1007.104 of Regulation G and those 
in the regulations and guidance of prudential regulators, such as the 
FDIC guidance on screening candidates identified by the commenter.
    The proposal would not have required employers of unlicensed 
individual loan originators to obtain the covered information and make 
the required determinations on a periodic basis. Instead, it 
contemplated that these employers would obtain the information and make 
the determinations under the criminal, financial responsibility, 
character, and general fitness standards before an individual acts as a 
loan

[[Page 11383]]

originator in a closed-end consumer credit transaction secured by a 
dwelling. However, the Bureau invited public comment on whether such 
determinations should be required on a periodic basis or whether the 
employer of an unlicensed loan originator should be required to make 
subsequent determinations only when it obtains information that 
indicates the individual may no longer meet the applicable standards.
    Commenters urged the Bureau to clarify that a loan originator 
organization is required to make the determinations only once, rather 
than periodically, or a second time only if the loan originator 
organization learns the individual loan originator has been convicted 
of a felony after the initial determination. Several commenters asked 
the Bureau to clarify that loan originator organizations are not 
required to make the determinations for individual loan originators who 
are already employed and have already been screened by the loan 
originator organization. Large bank commenters stated that having to 
make the determinations for current loan originator employees would be 
extremely burdensome.
    The Bureau agrees that it would be burdensome and somewhat 
duplicative for a loan originator organization to have to obtain a 
credit report, a new criminal background check, and information about 
enforcement actions and apply retroactively the criminal background, 
financial responsibility, character, and general fitness standards of 
this final rule to individual loan originators that it had already 
hired and screened prior to the effective date of this final rule under 
the then-applicable standards, and is now supervising on an ongoing 
basis. As explained in the proposal, the Bureau believes that most loan 
originator organizations were already screening their individual loan 
originators under applicable background standards, and the Bureau does 
not seek to impose duplicative compliance burdens on loan originator 
organizations with respect to individual loan originators that they 
hired and in fact screened under standards in effect at the time of 
hire. Accordingly, this final rule clarifies in Sec.  1026.36(f)(3)(i) 
and (ii) and in new comment 36(f)(3)(ii)-2 that the requirements apply 
for an individual that the loan originator organization hires on or 
after January 10, 2014, the effective date of these provisions, as well 
as for individuals hired prior to this date but for whom there were no 
applicable statutory or regulatory background standards in effect at 
the time of hire or before January 10, 2014, used to screen the 
individual.\156\
---------------------------------------------------------------------------

    \156\ The Bureau's decision not to apply certain qualification 
requirements otherwise imposed by this rule to loan originators 
hired before January 10, 2014, is also an exercise of the Bureau's 
authority under TILA section 105(a). This rule differentiates loan 
originators based on their date of hire to facilitate compliance.
---------------------------------------------------------------------------

    Additional revisions to Sec.  1026.36(f)(3)(i) and (ii) and new 
comment 36(f)(3)(ii)-3 respond to the commenter's concerns about when a 
loan originator organization is required to make subsequent 
determinations. They specify that such determinations are required only 
if the loan originator organization has knowledge of reliable 
information indicating that the individual loan originator likely no 
longer meets the required standards, regardless of when the individual 
loan originator was previously hired and screened. As an example, 
comment 36(f)(3)(ii)-3 states that if the loan originator organization 
has knowledge of criminal conduct of its individual loan originator 
from a newspaper article, a previously obtained criminal background 
report, or the NMLSR, the loan originator organization must determine 
whether any resulting conviction, or any other information, causes the 
individual to fail to meet the standards in Sec.  1026.36(f)(3)(ii), 
regardless of when the loan originator was hired or previously 
screened.
    The Bureau believes that comments 36(f)(3)(ii)-2 and 36(f)(3)(ii)-
3, taken together, provide an appropriate balance for determining when 
a loan originator organization is required to screen an individual loan 
originator hired prior to January 10, 2014, under the standards in 
Sec.  1026.36(f)(3)(i) and (ii). The approach recognizes that, as the 
Bureau stated in the proposal, many loan originator organizations 
already screened their employees under applicable statutory or 
regulatory standards for criminal background, character, fitness, and 
financial responsibility that are similar to those in this final rule, 
prior to the this rule's effective date. To the extent that an 
individual was determined to meet such standards in effect at the time 
the individual was hired, but does not meet the standards of this final 
rule, the Bureau believes the loan originator organization is likely to 
have knowledge of reliable information indicating that may be the case. 
For example, the criminal background check that the loan originator 
organization previously obtained or an entry in the NMLSR may have 
indicate a felony conviction covered by this rule. Likewise, the loan 
originator organization is highly likely to have knowledge of the 
individual loan originator's character and fitness as a result of 
monitoring the individual's performance over the course of the 
individual's employment.
    The Bureau does not agree that the subsequent review should apply 
only if the loan originator organization learns that the individual has 
committed a felony because such a rule would categorically exclude 
information that seriously implicates the financial responsibility, 
character, and general fitness standards. However, the Bureau notes 
that the procedural safe harbor discussed above provides a mechanism 
for loan originator organizations to adopt specific procedures for when 
and how such information is considered in subsequent determinations.
36(f)(3)(iii)
    In addition to the screening requirements discussed above, proposed 
Sec.  1026.36(f)(3)(iii) would have required loan originator 
organizations to provide periodic training to their individual loan 
originators who are not licensed under the SAFE Act and thus not 
covered by that Act's training requirements. The proposal provided that 
the training must cover the Federal and State law requirements that 
apply to the individual loan originator's loan origination activities. 
The proposed requirement was analogous to, but more flexible than, the 
continuing education requirement that applies to loan originators who 
are subject to SAFE Act licensing. Whereas the SAFE Act requires 20 
hours of pre-licensing education and eight hours of preapproved classes 
every year, the proposed requirement is intended to be flexible to 
accommodate the wide range of loan origination activities in which loan 
originator organizations engage and for which covered individuals are 
responsible. For example, the proposed training provision would have 
applied to a large depository institution providing complex mortgage 
loan products as well as a nonprofit organization providing only basic 
home purchase assistance loans secured by a subordinate lien on a 
dwelling. The proposed provision also recognized that covered 
individuals may already possess a wide range of knowledge and skill 
levels. Accordingly, it required loan originator organizations to 
provide training to close any gap in the individual loan originator's 
knowledge of Federal and State law requirements that apply to the 
individual's loan origination activities.
    The proposed requirement also differed from the analogous SAFE Act 
requirement by not including a requirement to provide training on

[[Page 11384]]

ethical standards beyond those that amount to State or Federal legal 
requirements. In light of the civil liability imposed under TILA, the 
Bureau solicited public comment on whether there exist ethical 
standards for loan originators that are sufficiently concrete and 
widely applicable to allow loan originator organizations to determine 
what subject matter must be included in the required training, if the 
Bureau were to include ethical standards in the training requirement.
    Proposed comment 36(f)(3)(iii)-1 included explanations of the 
training requirement and also described the flexibility available under 
Sec.  1026.36(f)(3)(iii) regarding how the required training is 
delivered. It clarified that training may be delivered by the loan 
originator organization or any other party through online or other 
technologies. In addition, it stated that training that a Federal, 
State, or other government agency or housing finance agency has 
approved or deemed sufficient for an individual to originate loans 
under a program sponsored or regulated by that agency is sufficient to 
meet the proposed requirement, to the extent that the training covers 
the types of loans the individual loan originator originates and 
applicable Federal and State laws and regulations. It further stated 
that training approved by the NMLSR to meet the continuing education 
requirement applicable to licensed loan originators is sufficient to 
meet the proposed requirement to the extent that the training covers 
the types of loans the individual loan originator originates and 
applicable Federal and State laws and regulations. The proposed comment 
recognized that many loan originator organizations already provide 
training to their individual loan originators to comply with 
requirements of prudential regulators, funding agencies, or their own 
operating procedures. Thus, the proposed comment clarified that Sec.  
1026.36(f)(3)(iii) did not require training that is duplicative of 
training that loan originator organizations are already providing if 
that training meets the standard in Sec.  1026.36(f)(3)(iii). These 
clarifications were intended to respond to questions that Small Entity 
Representatives raised during the Small Business Review Panel discussed 
above.
    Several bank and credit union commenters stated that they already 
provide the training required under the proposal to comply with the 
requirements of prudential regulators. One commenter stated that more 
specific requirements are needed so that loan originator organizations 
can be certain they are in compliance. One commenter stated that the 
standard should cover training in legal requirements only and not in 
ethics. One credit union association expressed concern that regardless 
of what the rule provided, agency examiners would ultimately require 
credit union loan originators to take eight hours of NMLSR classes 
annually. A provider of NMLSR-approved training urged the Bureau to 
require loan originators to take 20 hours of NMLSR-approved classes 
initially and five hours annually thereafter, including classes in 
ethics. The commenter stated that depository institution employees 
should have to take NMLSR-approved training because many of the worst 
loan originators who contributed to the subprime lending crisis were 
employed by depository institutions. One bank commenter stated that a 
loan originator who opts to take and passes the national component of 
the NMLSR standardized test should be exempt from periodic training 
requirements, and that a loan originator who does receive training 
should be able to do so before or after obtaining a unique identifier 
issued by the NMLSR (also referred to as an NMLSR ID). The same 
commenter asked for clarification that a national bank-employed loan 
originator need not be trained in state legal requirements, and that a 
bank-employed loan originator should be presumed to be well trained and 
qualified.
    As stated in the proposal, the Bureau agrees that the training that 
many depository institutions already provide to comply with prudential 
regulator requirements will be sufficient to meet the proposed 
requirement in Sec.  1026.36(f)(3)(iii), which the Bureau is adopting 
without change. The Bureau did not propose to require covered 
individual loan originators to take a fixed number of NMLSR-approved 
classes initially or each year precisely out of the concern that such 
training could be largely duplicative of training that individual loan 
originators already receive. Accordingly, the Bureau is not adopting 
the commenter's suggestion that it require NMLSR-approved training. The 
Bureau notes that comment 36(f)(3)(iii)-1 clarifies that a loan 
originator organization may satisfy the training requirement by taking 
the NMLSR-approved continuing education class. The Bureau is not in a 
position to address the commenter's concern that prudential regulators 
would require individual loan originators to take NMLSR-approved 
classes notwithstanding the flexibility of Bureau's training 
requirement.
    The Bureau also declines to adopt a provision that any individual 
loan originator employed by a bank, or an individual loan originator 
who opts to take and passes the NMLSR standardized test, should be 
deemed trained and qualified and therefore exempt from periodic 
training. The requirement that training be provided on a periodic basis 
addresses the fact that legal requirements change over time and that an 
individual's memory and knowledge of applicable requirements may fade 
over time. Taking and passing a test one time would therefore not be an 
adequate substitute for periodic training. Finally, the Bureau notes 
that the provision does not specify that training must be provided 
after a loan originator receives an NMLSR ID. It also does not provide 
for training to be reported to or tracked through the NMLSR.
    The Bureau did not receive substantive comments indicating that 
there exists a definable body of ethical standards specific for loan 
originators and is not expanding the training requirement to mandate 
training in ethical standards in addition to the proposed training in 
legal requirements. Finally, the Bureau does not believe it is 
necessary or practical to specify in a generally applicable rule which 
laws apply to the wide range of loans originated by loan originators at 
various loan originator organizations, and therefore what subject 
matter must be included in an individual loan originator's training. 
The Bureau believes each loan originator organization should know the 
types of loans that each of its individual loan originators originates 
and which substantive legal requirements (including provisions of State 
law, to the extent applicable) apply to those loans. The Bureau notes 
that the training requirements under Sec.  1026.36(f)(3)(iii) apply 
individual loan originators regardless of when they were hired.

36(g) Name and NMLSR Identification Number on Loan Documents

    TILA section 129B(b)(1)(B), which was added by Dodd-Frank Act 
section 1402(a), provides that ``subject to regulations'' issued by the 
Bureau, a mortgage originator shall include on ``all loan documents any 
unique identifier of the mortgage originator'' issued by the NMLSR. 
Individuals who are subject to SAFE Act registration or State licensing 
are required to obtain an NMLSR ID, and many organizations also obtain 
NMLSR IDs pursuant to State or other requirements. Proposed Sec.  
1026.36(g), as described further below, would have implemented the 
statutory requirement that mortgage originators must include

[[Page 11385]]

their NMLSR ID on loan documents and would have provided several 
clarifications. The Bureau stated its belief that the purpose of the 
statutory requirement is not only to permit consumers to look up the 
loan originator's record on the consumer access Web site of the NMLSR 
(www.nmlsconsumeraccess.org) before proceeding further with a mortgage 
transaction, but also to help ensure accountability of loan originators 
both before and after a transaction has been originated.
36(g)(1)
    Proposed Sec.  1026.36(g)(1) provided that loan originators must 
include both their NMLSR IDs and their names on loan documents because, 
without the associated names, a consumer may not understand whom or 
what the NMLSR ID number serves to identify. The proposal explained 
that having the loan originator's name may help consumers understand 
that they have the opportunity to assess the risks associated with a 
particular loan originator in connection with the transaction, which in 
turn promotes the informed use of credit. The Bureau explained that it 
believed that this was consistent with TILA section 105(a)'s provision 
for additional requirements that are necessary or proper to effectuate 
the purposes of TILA or to facilitate compliance with TILA. These 
provisions also clarified, consistent with the statutory requirement 
that mortgage originators include ``any'' NMLSR ID, that the 
requirement applies if the organization or individual loan originator 
has ever been issued an NMLSR ID. For example, an individual loan 
originator who works for a bona fide nonprofit organization is not 
required to obtain an NMLSR ID, but if the individual was issued an 
NMLSR ID for purposes of a previous job, that NMLSR ID must be 
included. Proposed Sec.  1026.36(g)(1) also provided that the name and 
NMLSR IDs must be included each time any of these documents is provided 
to a consumer or presented to a consumer for signature.
    Proposed comment 36(g)(1)-1 clarified that for purposes of Sec.  
1026.36(g), creditors would not be excluded from the definition of 
``loan originator.'' Proposed comment 36(g)(1)-2 clarified that the 
proposed requirement applied regardless of whether the organization or 
individual loan originator is required to obtain an NMLSR ID under the 
SAFE Act or otherwise. Proposed Sec.  1026.36(g)(1)(ii), recognizing 
that there may be transactions in which more than one individual meets 
the definition of a loan originator, provided that the individual loan 
originator whose NMLSR ID must be included is the individual with 
primary responsibility for the transaction at the time the loan 
document is issued.
    In its 2012 TILA-RESPA Proposal, the Bureau proposed to integrate 
TILA and RESPA mortgage disclosure documents as mandated by sections 
1032(f), 1098, and 1100A of the Dodd-Frank Act. 12 U.S.C. 5532(f); 12 
U.S.C. 2603(a); 15 U.S.C. 1604(b). As discussed below, the loan 
documents that would be required to include the name and NMLSR IDs 
include these mortgage disclosure documents. That separate rulemaking 
also addresses inclusion of the name and NMLSR IDs on the proposed 
integrated disclosures, as well as the possibility that in some 
circumstances more than one individual may meet the criteria that 
require inclusion of the NMLSR ID. To ensure harmonization between the 
two rules, proposed comment 36(g)(1)(ii)-1 stated that, if more than 
one individual acts as a loan originator for the transaction, the 
requirement in Sec.  1026.36(g)(1)(ii) may be met by complying with the 
applicable provision governing disclosure of NMLSR IDs in rules issued 
by the Bureau pursuant to Dodd-Frank Act sections 1032(f), 1098, and 
1100A.
    Commenters generally supported the proposed provision as a way to 
increase accountability. One commenter urged the Bureau to change the 
format of NMLSR IDs to allow consumers to determine whether the loan 
originator is licensed or registered because the commenter was 
concerned that a consumer might incorrectly assume that all loan 
originators are licensed. Several commenters asked for more clarity on 
how to determine which loan originator has primary responsibility for a 
transaction and has to include his or her name and NMLSR ID on a 
document. Commenters stated that the loan originator with primary 
responsibility should be, variously, the person who took a consumer's 
application, the person whose name appears on the loan application 
under Federal Housing Finance Agency requirements, the person who is 
the consumer's point of contact, or the person reasonably determined by 
the loan originator organization. One commenter asked for clarification 
that the names and NMLSR IDs must appear only once on each loan 
document rather than on every page of the loan document. Another 
commenter urged the Bureau to standardize exactly where on each loan 
document the names and NMLSR IDs must appear. Another commenter asked 
the Bureau to confirm that if the loan originator with primary 
responsibility for a transaction changes during the course of the 
transaction, issued loan documents do not have to be reissued merely to 
change the name and NMLSR on those documents.
    In response to commenters' requests for more specificity on how to 
determine which individual loan originator has primary responsibility, 
the Bureau is clarifying in comment 36(g)(1)(ii)-1 that a loan 
originator organization that establishes and follows a reasonable, 
written policy for determining which individual loan originator has 
primary responsibility for the transaction at the time the document is 
issued complies with the requirement. The Bureau notes that, as further 
discussed below, the final rule requires in Sec.  1026.36(j) that 
depository institutions must establish and maintain procedures for 
complying with Sec.  1026.36(d), (e), (f), and (g) of this section, 
including the requirement to include names and NMLSR IDs on loan 
documents. The Bureau is also clarifying in comment 36(g)(1)-2 that, 
even if the loan originator does not have an NMLSR ID, the loan 
originator must still include his or her name on the covered loan 
documents.
    The Bureau agrees with the comment urging that the names and NMLSR 
IDs should be required to appear only once on each loan document rather 
than on each page of a loan document. New comment 36(g)(1)-3 includes 
this clarification. The Bureau does not agree that it should mandate 
exactly where the names and NMLSR IDs must appear on the credit 
application, note, and security instrument. Doing so would be 
impractical because State and local law may specify placement of items 
on documents that are to be recorded, such as the note and security 
instrument, and revising the format of the most commonly used credit 
application forms would implicate other rules beyond the scope of this 
rulemaking.
    Finally, the Bureau agrees that, if the loan originator with 
primary responsibility for a transaction changes during the course of 
the transaction, previously issued loan documents do not have to be 
reissued merely to change the names and NMLSR IDs on those documents. 
This clarification is included in comment 36(g)(1)(ii)-1.
36(g)(2)
    Proposed Sec.  1026.36(g)(2) identified the documents that must 
include loan originators' names and NMLSR IDs as the credit 
application, the disclosure provided under section 5(c) of RESPA, the 
disclosure provided under TILA section 128, the note or loan contract,

[[Page 11386]]

the security instrument, and the disclosure provided to comply with 
section 4 of RESPA. Proposed comment 36(g)(2)-1 clarified that the name 
and NMLSR ID must be included on any amendment, rider, or addendum to 
the note or loan contract or security instrument. These clarifications 
were provided in response to concerns that Small Entity Representatives 
expressed in the Small Business Review Panel that the statutory 
reference to ``all loan documents'' would lead to uncertainty as to 
what is or is not considered a ``loan document.'' The proposed scope of 
the requirement's coverage was intended to ensure that loan 
originators' names and NMLSR IDs are included on documents that include 
the terms or prospective terms of the transaction or borrower 
information that the loan originator may use to identify loan terms 
that are potentially available or appropriate for the consumer. To the 
extent that any document not listed in Sec.  1026.36(g)(2) is arguably 
a ``loan document,'' the Bureau stated that it was specifying an 
exhaustive list of loan documents that must include loan originators' 
names and NMLSR IDs using its authority under TILA section 105(a), 
which allows the Bureau to make exceptions that are necessary or proper 
to effectuate the purposes of TILA or to facilitate compliance with 
TILA.
    The proposal explained that this final rule implementing the 
proposed requirements to include names and NMLSR IDs on loan documents 
might be issued, and might generally become effective, prior to the 
effective date of a final rule implementing the Bureau's 2012 TILA-
RESPA Integration Proposal. As a result, the requirement to include the 
name and NMLSR ID would apply to the current RESPA GFE and settlement 
statement and TILA disclosure until the issuance of the integrated 
disclosures. The Bureau recognized that such a sequence of events might 
cause loan originator organizations to have to incur the cost of 
adjusting their systems and procedures to accommodate the name and 
NMLSR IDs on the current disclosures even though those disclosures will 
be replaced in the future by the integrated disclosures. Accordingly, 
the Bureau solicited public comment on whether the effective date of 
the provisions regarding inclusion of the NMLSR IDs on the RESPA and 
TILA disclosures should be delayed until the date that the integrated 
disclosures are issued.
    One commenter opposed what it perceived as a requirement to include 
the NMLSR ID in the RESPA settlement costs information booklet provided 
to consumers. Another commenter stated that the NMLSR should be 
required only on the application, note, and security instrument. One 
commenter stated that the names and NMLSR IDs should not be required on 
amendments, riders, or addenda to the note or security instruments 
because the note and security instrument will already have the names 
and NMLSR IDs on them. Several commenters urged the Bureau not to 
require the names and NMLSR IDs on the current RESPA GFE and settlement 
statement because those forms do not currently have space for the 
information and will be discontinued soon. For the same reason, several 
commenters urged the Bureau to delay the effective date of the 
provision until after the integrated forms and regulations are issued 
and effective.
    The Bureau agrees that the loan originator names and NMLSR IDs 
should not be required to be included on the current RESPA GFE and HUD-
1 (or HUD-1A) forms. The current RESPA GFE form has a designated space 
for the originator's name but not for the NMLSR ID. The current HUD-1 
form (and HUD-1A form) has a designated space for the lender's name, 
but not for the originator's name and NMLSR ID. While the Bureau has no 
objection to loan originator names and NMLSR IDs being included on the 
current forms where not required, the Bureau believes it would be 
duplicative and unnecessarily expensive for the issuers of these forms 
to have to revise their systems only to have to revise them again once 
the Bureau implements its 2012 TILA-RESPA Integration Proposal. For 
this reason, the Bureau is generally implementing all Title XIV 
disclosure requirements to take effect at the same time.
    Accordingly, the Bureau expects to adopt the requirement to include 
loan originator names and NMLSR IDs on the integrated disclosures at 
the same time that the rules implementing the 2012 TILA-RESPA 
Integration Proposal are adopted. The Bureau is adopting Sec.  
1026.36(g)(2) with Sec.  1026.36(g)(2)(ii), reserved in this final 
rule. The Bureau expects to adopt references to the integrated 
disclosures in Sec.  1026.36(g)(2)(ii) in the final rule implementing 
the 2012 TILA-RESPA Integration Proposal. In response to the 
commenter's concern that the loan originator names and NMLSR IDs should 
not be required to be included on preprinted booklets, the final rule, 
like the proposal, does not require inclusion on the booklets. The 
revisions to Sec.  1026.36(g)(2) described above are expected to 
prevent any such misinterpretation.
    The Bureau disagrees that the loan originator names and NMLSR IDs 
should be required only on the application, note, and security 
instrument. To promote accountability of loan originators throughout 
the course of the transaction, it is important for the names and NMLSR 
IDs to appear on the integrated loan estimate and closing disclosure as 
well, because these loan documents include the loan terms offered or 
negotiated by loan originators. However, as clarified above, the names 
and NMLSR IDs will not be required to be included on these additional 
loan documents until the use of those documents becomes mandatory under 
the Bureau's upcoming final rule on TILA-RESPA Integration.
    The Bureau agrees with the commenter that the loan originator names 
and NMLSR IDs should not be required on amendments, riders, or addenda 
to the note or security instruments, as such documents will be attached 
the note or security instrument, which themselves are required to 
include the names and NMLSR IDs. Accordingly, the Bureau is not 
adopting proposed comment 36(g)(2)-1. Removal of this requirement is 
consistent with the Bureau's clarification in comment 36(g)(1)-3 that 
for any loan document, the names and NMLSR IDs are required to be 
included only one time, and not on each page.
36(g)(3)
    Proposed Sec.  1026.36(g)(3) defined ``NMLSR identification 
number'' as a number assigned by the NMLSR to facilitate electronic 
tracking of loan originators and uniform identification of, and public 
access to, the employment history of, and the publicly adjudicated 
disciplinary and enforcement actions against, loan originators. The 
definition is consistent with the definition of ``unique identifier'' 
in section 1503(12) of the SAFE Act, 12 U.S.C. 5102(12). The Bureau did 
not receive any public comments on this definition and is adopting it 
as proposed.

36(h) Prohibition on Mandatory Arbitration Clauses and Waivers of 
Certain Consumer Rights

    Section 1414 of the Dodd-Frank Act added TILA section 129C(e)(1), 
which prohibits a closed-end consumer credit transaction secured by a 
dwelling or an extension of open-end consumer credit secured by the 
consumer's principal dwelling from containing terms that require 
arbitration or any other non-judicial procedure as the method for

[[Page 11387]]

resolving disputes arising out of the transaction. TILA section 
129C(e)(2) provides that, subject to TILA section 129C(e)(3) a consumer 
and creditor or any assignee may nonetheless agree, after a dispute 
arises, to use arbitration or other non-judicial procedure to resolve 
the dispute. The statute further provides in section 129C(e)(3) that no 
covered transaction secured by a dwelling, and no related agreement 
between the consumer and creditor, may be applied or interpreted to bar 
a consumer from bringing a claim in court in connection with any 
alleged violation of Federal law.
    The Bureau proposed Sec.  1026.36(h) to implement these statutory 
provisions, pursuant to TILA section 105(a) and section 1022(b) of the 
Dodd-Frank Act. Proposed Sec.  1026.36(h)(2) would have clarified the 
interaction between TILA sections 129C(e)(2) and (e)(3), and the 
section-by-section analysis noted that TILA section 129C(e)(3) and 
Sec.  1026.36(h)(2) do not address State law causes of action.
    Commenters generally supported the proposal. Although some 
commenters addressed details of the substance of the proposal, many 
commenters addressed the timing of the provisions' implementation. For 
example, several consumer groups stated that the proposal did not make 
any substantive changes to the statutory provisions and should be 
withdrawn because there was no reason to delay the effective date of 
the statutory provisions. One commenter acknowledged that the 
provisions were mandated by the Dodd-Frank Act but urged the Bureau to 
encourage mandatory arbitration anyway. SBA Advocacy stated that some 
Small Entity Representatives did not understand why the provisions were 
being included in this rule and asked the Bureau to consider adopting 
it at a later date. A bank association commenter urged the Bureau to 
delay the provisions until after it completed its required general 
study of arbitration clauses in consumer transactions, pursuant to 
section 1028 of the Dodd-Frank Act.
    One commenter requested clarification on whether the provisions 
apply to waivers of rights to a jury trial. Other commenters questioned 
variously whether the proposal altered the statutory provisions: By 
applying the provision on waivers of causes of action to post-dispute 
agreements; by applying that provision to loans other than residential 
mortgage loans and open-end consumer credit plans secured by a 
principal dwelling; by limiting it to Federal causes of action; or by 
prohibiting mandatory arbitration clauses in contracts and agreements 
other than the note and agreements related to the note. One commenter 
stated that the applicability of the proposed rule provisions was 
confusing because the provisions refer to consumer transactions secured 
by a dwelling but their scope is also addressed separately in proposed 
Sec.  1026.36(j). (Proposed Sec.  1026.36(j) is finalized as Sec.  
1026.36(b) of the rule.) Finally, one commenter suggested that the 
statute and the rule would prohibit nonjudicial foreclosures and 
prevent a servicer from settling a dispute with a consumer through a 
settlement agreement.
    The provisions on mandatory arbitration and waiver are contained in 
the Dodd-Frank Act. Absent action by the Bureau, they would take effect 
on January 21, 2013. The Bureau believes that it is necessary and 
appropriate to provide implementing language to facilitate compliance 
with the statute. At the same time, the Bureau recognizes the point 
made by several commenters regarding the importance of these consumer 
protections. The fact that the Bureau is implementing the provisions by 
regulation does not require the Bureau to delay the provisions' 
effective date for an extended period, as the commenters may have 
assumed. Instead, the Bureau is providing an effective date of June 1, 
2013. The Bureau believes this effective date will give consumers the 
benefit of these statutory protections within a short timeframe, while 
also providing industry time to adjust its systems and practices. The 
Bureau does not believe that industry needs a longer period because the 
prohibitions on mandatory arbitration agreements and waivers of Federal 
claims have been known since the Dodd-Frank Act was enacted, and this 
final rule will not require extensive changes to origination systems. 
Furthermore, Fannie Mae and Freddie Mac do not accept loans that 
require arbitration or other nonjudicial procedures to resolve 
disputes, so the Bureau believes this aspect of the statute and final 
rule will not necessitate significant changes to current practices in 
most circumstances. The Bureau is not providing that the provision 
become effective immediately, however, in order to provide industry a 
short period to make any needed adjustments.
    In response to the comments, the Bureau does not interpret TILA 
section 129C(e)(3) to limit waivers of rights to a jury trial because 
bench trials are judicial procedures, not nonjudicial procedures. The 
Bureau does not interpret TILA section 129C(e)(1) to limit deeds of 
trust providing for nonjudicial foreclosure because such instruments 
are not agreements to use nonjudicial procedures to resolve 
controversies or settle claims arising out of the transaction, in 
contrast with agreements to use arbitration, mediation, and other forms 
of alternative dispute resolution. Nor does the Bureau interpret TILA 
section 129C(e)(3) to limit nonjudicial foreclosures because 
nonjudicial foreclosures still allow consumers to bring actions in 
court alleging violations of Federal law.
    Similarly, the Bureau does not interpret the statute to bar 
settlement agreements. Such a result would be a highly unusual--perhaps 
unprecedented--prohibition, and the Bureau believes that Congress would 
have spoken expressly about settlement agreements if that was the 
result it intended.\157\ Instead, the Bureau reads the statute to mean 
that if a consumer and creditor or assignee agree, after a dispute or 
claim arises, to settle the dispute or claim, the settlement agreement 
may be applied or interpreted to waive the consumer's right to bring 
that dispute or claim in court, even if it is a Federal law claim. 
Accordingly, the Bureau is revising the regulatory text to clarify that 
Sec.  1026.36(h) does not limit a consumer and creditor or any assignee 
from agreeing, after a dispute or claim under the transaction arises, 
to settle that dispute or claim. Under TILA section 129C(e)(3) and 
Sec.  1026.36(h)(2), however, no settlement agreement may be applied or 
interpreted to bar the consumer from bringing an action in court for 
any other alleged violation of Federal law.
---------------------------------------------------------------------------

    \157\ See, e.g., Robinson v. Shelby Cnty. Bd. of Educ., 566 F.3d 
642, 648 (6th Cir. 2009) (``[I]t is also well-established that 
`[p]ublic policy strongly favors settlement of disputes without 
litigation. * * * Settlement agreements should therefore be upheld 
whenever equitable and policy considerations so permit.''').
---------------------------------------------------------------------------

    The Bureau is further revising the regulatory text to address the 
belief of some commenters that the Bureau had altered the scope of the 
statutory provision. As discussed above, TILA section 129C(e)(2) 
provides that the exception for post-dispute agreements from the 
prohibition on mandatory arbitration agreements is itself subject to 
the prohibition on waivers of rights to bring Federal causes of action 
in court. The proposal specified that a post-dispute agreement to use 
arbitration or other nonjudicial procedure could not limit the ability 
of the consumer to bring a covered claim through the agreed-upon 
procedure. This final rule clarifies that, consistent with the 
discussion of waivers of causes of action in settlement

[[Page 11388]]

agreements above, the Bureau interprets the statute to mean that if a 
consumer and creditor or assignee agree, after a dispute or claim 
arises, to use arbitration or other nonjudicial procedure to resolve 
that dispute or claim, the agreement may be applied or interpreted to 
waive the consumer's right to bring that dispute or claim in court, 
even if it is a Federal law claim. The Bureau believes that, in such an 
instance, the consumer is aware of the specific dispute or claim at 
issue and is therefore in a better position to make a knowing decision 
whether to resolve the dispute or claim without bringing an action in 
court. But no post-dispute agreement to use arbitration or other 
nonjudicial procedure may be applied or interpreted to bar the consumer 
from bringing an action in court for any other alleged violation of 
Federal law.
    The Bureau disagrees with commenters who stated it had expanded the 
scope of TILA section 129C(e) to cover open-end consumer credit plans 
other than those secured by the principal dwelling of the consumer. 
Proposed Sec.  1026.36(j) (implemented in this final rule as Sec.  
1026.36(b)) clarifies the scope of each of the other substantive 
paragraphs in Sec.  1026.36 and provides that the only open-end 
consumer credit plans to which Sec.  1026.36(h) applies are those 
secured by the principal dwelling of the consumer. However, to reduce 
uncertainty, the Bureau is including a statement in Sec.  1026.36(h) 
that it is applicable to ``a home equity line of credit secured by the 
consumer's principal dwelling.''
    The Bureau also disagrees that the proposed language changed the 
scope of the prohibition on waivers of causes of action by including 
the word ``Federal'' in the paragraph (h)(2) heading, ``No waivers of 
Federal statutory causes of action.'' The contents of paragraph (h)(2) 
and the corresponding statutory paragraph (e)(3) both provide that the 
prohibition applies to alleged violations of Section 129C of TILA, any 
other provision of TILA, or any other Federal law. Thus, the scope of 
the statutory prohibition is limited to Federal law, and the 
implementing regulation is properly so limited.
    Finally, the Bureau disagrees that the prohibition on agreements to 
use mandatory arbitration applies only to the note itself. TILA section 
129C(e)(1) provides that it applies to the terms of a residential 
mortgage loan and to an extension of credit under an open-end consumer 
credit plan secured by the principal dwelling of the consumer. The 
terms of such transactions are frequently memorialized in multiple 
documents. Plainly, the prohibition cannot be evaded simply by 
including a provision for mandatory arbitration in a document other 
than the note if that document is executed as part of the transaction. 
The prohibition applies to the terms of the whole transaction, 
regardless of which particular document contains those terms. However, 
to prevent any misunderstanding that the prohibition applies to 
agreements that are not part of the credit transaction, the Bureau is 
replacing the phrase ``contract or agreement in connection with a'' 
consumer credit transaction with the phrase ``contract or other 
agreement for'' a consumer credit transaction.

36(i) Prohibition on Financing Single-Premium Credit Insurance

    Dodd-Frank Act section 1414 added TILA section 129C(d), which 
generally prohibits a creditor from financing any premiums or fees for 
credit insurance in connection with a closed-end consumer credit 
transaction secured by a dwelling or an extension of open-end consumer 
credit secured by the consumer's principal dwelling. The prohibition 
applies to credit life, credit disability, credit unemployment, credit 
property insurance, and other similar products. The same provision 
states, however, that the prohibition does not apply to credit 
insurance for which premiums or fees are calculated and paid in full on 
a monthly basis or to credit unemployment insurance for which the 
premiums are reasonable, the creditor receives no compensation, and the 
premiums are paid pursuant to a separate insurance contract and are not 
paid to the creditor's affiliate.
    Proposed Sec.  1026.36(i) would have implemented these statutory 
provisions. The authority to implement these statutory provisions by 
rule is TILA section 105(a) and section 1022(b) of the Dodd-Frank Act. 
Rather than repeating Dodd-Frank Act section 1414's list of covered 
credit insurance products, the proposed language cross-referenced the 
existing description of insurance products in Sec.  1026.4(d)(1) and 
(3). The Bureau explained that the proposal was not intended to make 
any substantive change to the statutory provision's scope of coverage. 
The proposal stated the Bureau's belief that these provisions are 
sufficiently straightforward that they require no further 
clarification. The Bureau requested comment, however, on whether any 
issues raised by the provision require clarification and, if so, how 
they should be clarified. The Bureau also solicited comment on when the 
provision should become effective, for example, 30 days following 
publication of the final rule, or at a later time.
    Commenters generally supported the proposed provision. Two 
commenters asked the Bureau to permit financing of credit insurance 
when doing so would be beneficial to a consumer. SBA Advocacy stated 
that some Small Entity Representatives did not understand why the 
provision was being included and asked the Bureau to consider adopting 
it at a later date.
    Several consumer groups stated that the proposal did not make any 
substantive changes to the statutory provision and stated that there is 
no reason to delay the effective date of the statutory provision. The 
same commenters asked the Bureau to clarify that a creditor cannot 
evade the prohibition by charging a fixed monthly payment that does not 
decrease as the principal is paid off or by adding the monthly charge 
to the loan balance. The commenters stated that the cross-reference to 
credit insurance products described elsewhere in Regulation Z could be 
read to narrow the scope of the prohibition and asked the Bureau to 
clarify what a ``reasonable'' credit unemployment insurance premium is.
    A credit union sought clarification that the prohibition does not 
apply to mortgage insurance premiums. Finally, one commenter requested 
that the effective date of the prohibition be delayed for six months so 
that software programmers could program appropriate warnings and 
blockages in their loan originating systems.
    The prohibition of financing of credit insurance is required by the 
Dodd-Frank Act. Absent action by the Bureau, they would take effect on 
January 21, 2013. The Bureau agrees with the commenters who stated that 
the provision is an important consumer protection that should not be 
delayed without good reason. The fact that the Bureau is implementing 
the provision by regulation does not require it to delay the 
provision's effective date for a long period, as the commenters may 
have assumed. Instead, the Bureau is providing an effective date of 
June 1, 2013. The Bureau believes this effective date will give 
consumers the benefit of this important protection within a short 
timeframe, while also providing industry time to adjust its systems and 
practices. The Bureau does not believe that industry needs a longer 
period of time because the prohibition, which is not substantially 
changed by this final rule, has been known since the Dodd-Frank Act was 
enacted and the codified regulation will not require extensive 
calibration of origination systems. Furthermore, Freddie Mac and Fannie

[[Page 11389]]

Mae have prohibited the same practice for years.\158\ The Bureau is not 
providing that the provision become effective immediately, however, 
because industry may need to make some adjustments based on the 
clarifications made in this final rule.
---------------------------------------------------------------------------

    \158\ See, e.g., 2000 Freddie Mac policy, at http://www.freddiemac.com/sell/guide/bulletins/pdf/421indltr.pdf and 2004 
Fannie Mae policy, https://www.fanniemae.com/content/announcement/04-05.pdf.
---------------------------------------------------------------------------

    The Bureau is adopting the consumer groups' suggestion to 
incorporate the full list of covered insurance products from TILA 
section 129C(d) to prevent any perception that the Bureau did not 
intend for the regulatory provision to cover all of those insurance 
products. As revised, the final rule provides that the listed types of 
insurance are what insurance ``means,'' not just what it ``includes,'' 
because the list provided in the statute seems to be exclusive. The 
Bureau declines to define at this time what insurance premiums are 
``reasonable'' for purposes of the exception for certain credit 
unemployment insurance products because the Bureau does not currently 
have sufficient data and other information to make this judgment for a 
rule of general applicability.
    With regard to the requests for clarification that a creditor 
cannot evade the prohibition by charging a fixed monthly payment that 
does not decrease as the principal is paid off or by adding the monthly 
charge to the loan balance, the Bureau believes that the two practices 
identified would directly violate the prohibition. Adding a monthly 
charge for the insurance to the loan balance would amount to financing 
the premiums for credit insurance rather than paying them in full on a 
monthly basis. Similarly, charging a fixed monthly charge for the 
credit insurance that does not decline as the loan balance declines 
would fail to meet the requirement for the premium to be ``calculated * 
* * on a monthly basis.'' As a result, this practice would fail to 
satisfy the conditions for the exclusion from what constitutes 
``financ[ing], directly or indirectly'' credit insurance premiums.
    The Bureau agrees with the commenter that the provision does not 
apply to mortgage insurance. Mortgage insurance is not listed in TILA 
section 129C(d). Credit insurance generally insures a consumer in the 
event of a specified event, and the benefit provided is to make the 
consumer's periodic payments while the consumer is unable to make them. 
Mortgage insurance is distinguishable in that it insures a creditor (or 
its assignee) against loss in the event of default by the consumer or 
in other specified events.

36(j) Depository Institution Compliance Procedures

    Dodd-Frank Act section 1402(a)(2) added TILA section 129B(b)(2), 
which provides that the Bureau ``shall prescribe regulations requiring 
depository institutions to establish and maintain procedures reasonably 
designed to assure and monitor the compliance of such depository 
institutions, and subsidiaries of such institutions, and the employees 
of such institutions or subsidiaries with the requirements of this 
section and the registration procedures established under section 1507 
of the [SAFE Act].'' 15 U.S.C. 1639b(b)(2). The Bureau notes that one 
week after the Dodd-Frank Act was signed into law, the Federal 
prudential regulatory agencies for banks, thrifts, and credit unions 
jointly issued a final rule requiring the institutions they regulate, 
among other things, to adopt and follow written policies and procedures 
designed to assure compliance with the registration requirements of the 
SAFE Act. That final rule was inherited by the Bureau and is designated 
as Regulation G. The Bureau believes that Regulation G largely 
satisfies the provision under TILA section 129B(b)(2) for regulations 
requiring compliance policies and procedures, with regard to mortgage 
originator qualification requirements. TILA section 129B(b)(2) also 
requires the Bureau to prescribe regulations requiring depository 
institutions to establish and maintain procedures reasonable designed 
to assure and monitor compliance with all of TILA section 129B.
    The proposal did not contain specific regulatory language to 
implement TILA section 129B(b)(2), but the Bureau stated that it might 
adopt such language in this final rule. Accordingly, it described the 
language it was considering in detail and solicited comment on the 
described text.
    Specifically, the proposal stated the Bureau's expectation that 
such a rule would require depository institutions to establish and 
maintain procedures reasonably designed to ensure and monitor the 
compliance of themselves, their subsidiaries, and the employees of both 
with the requirements of Sec.  1026.36(d), (e), (f), and (g). The 
Bureau stated that the rule would provide further that the required 
procedures must be appropriate to the nature, size, complexity, and 
scope of the mortgage credit activities of the depository institution 
and its subsidiaries. The Bureau solicited public comment on whether it 
should define ``depository institution'' using the FDIA's definition 
(which does not include credit unions), the SAFE Act's definition 
(which includes credit unions), or some other definition.
    The Bureau further noted that under Regulation G only certain 
subsidiaries (those that are ``covered financial institutions'') are 
required by 12 CFR 1007.104 to adopt and follow written policies and 
procedures designed to assure compliance with Regulation G. 
Accordingly, the proposal noted that it may be appropriate to apply the 
duty to ensure and monitor compliance of subsidiaries and their 
employees under TILA section 129B(b)(2) only to subsidiaries that are 
covered financial institutions under Regulation G. Exercising TILA 
section 105(a) authority to make an adjustment or exception in this way 
may facilitate compliance by aligning the scope of the subsidiaries 
covered by the TILA and SAFE Act requirements.
    Finally, the proposal questioned whether extending the scope of a 
regulation requiring procedures even further, to apply to other loan 
originators that are not covered financial institutions under 
Regulation G (such as independent mortgage companies), would help 
ensure consistent consumer protections and more equal compliance 
responsibilities among types of creditor. The Bureau discussed whether 
exercising TILA section 105(a) authority in this way is necessary or 
proper to effectuate the purpose stated in TILA section 129B(a)(2) of 
ensuring that consumers are offered and receive residential mortgage 
loans that are not unfair, deceptive, or abusive.
    The Bureau therefore solicited comment on whether a regulation 
requiring procedures to comply with TILA section 129B should apply only 
to depository institutions as defined in section 3 of the FDIA, or also 
to credit unions, other covered financial institutions subject to 
Regulation G, or any other loan originators such as independent 
mortgage companies. Additionally, the Bureau solicited comment on 
whether it should apply the duty to ensure and monitor compliance of 
subsidiaries and their employees only with respect to subsidiaries that 
are covered financial institutions under Regulation G. With respect to 
all of the foregoing, the Bureau also solicited comment on whether any 
of the potential exercises of TILA section 105(a) authority should 
apply with respect to procedures concerning only SAFE Act registration, 
or with respect to procedures for all the

[[Page 11390]]

duty of care requirements (i.e., the qualifications and loan document 
provisions) in TILA section 129B(b)(1), or with respect to procedures 
for all the requirements of TILA section 129B, including the 
compensation and steering provisions and those added by section 1402 of 
the Dodd-Frank Act.
    The Bureau also recognized that a depository institution's failure 
to establish and maintain the required procedures under the 
implementing regulation would constitute a violation of TILA, thus 
potentially resulting in significant civil liability risk to depository 
institutions under TILA section 130. See 15 U.S.C. 1640. The Bureau 
anticipated concerns on the part of depository institutions regarding 
their ability to avoid such liability risk and therefore sought comment 
on the appropriateness of establishing a safe harbor that would 
demonstrate compliance with the rule requiring procedures. It stated 
that such a safe harbor might provide that a depository institution is 
presumed to have met the requirement for procedures if it, its 
subsidiaries, and the employees of it and its subsidiaries do not 
engage in a pattern or practice of violating Sec.  1026.36(d), (e), 
(f), or (g).
    The Bureau did not receive any public comments on the contemplated 
provision requiring compliance procedures. The Bureau is adopting the 
contemplated provision to implement TILA section 129B(b)(2) in Sec.  
1026.36(j), which requires compliance policies and procedures 
corresponding only to the substantive requirements of TILA section 129B 
implemented through this final rule, namely those in Sec.  1026.36(d), 
(e), (f), and (g). The adopted provision clarifies that the required 
procedures must be ``written'' to promote transparency, consistency, 
and accountability. The Bureau is adopting, for purposes of Sec.  
1026.36(j), the definition of ``depository institution'' in the SAFE 
Act, which includes credit unions, because the substantive provisions 
in Sec.  1026.36(d), (e), (f), and (g) apply to credit unions. The 
Bureau notes that provisions implicating the contents of the written 
procedures that a depository institution establishes and maintains 
pursuant to Sec.  1026.36(j) are included in Sec.  
1026.36(f)(3)(ii)(B)(3) and comment 36(g)(1)(ii)-1.

VI. Effective Date

    The amendments to Sec.  1026.36(h) and (i) of this final rule are 
effective on June 1, 2013. The rule applies to transactions for which 
the creditor received an application on or after that date. All other 
provisions of the rule are effective on January 10, 2014. As discussed 
above in part III.G, the Bureau believes that this approach is 
consistent with the timeframes established in section 1400(c) of the 
Dodd-Frank Act and, on balance, will facilitate the implementation of 
the rules' overlapping provisions, while also affording creditors 
sufficient time to implement the more complex or resource-intensive new 
requirements.
    In the proposal, the Bureau recognized that this rulemaking 
addresses issues important for consumer protection and thus should be 
implemented as soon as practical. The Bureau also recognized, however, 
that creditors and loan originators will need time to make systems 
changes, establish appropriate policies and procedures, and retrain 
their staff to address the Dodd-Frank Act provisions and other 
requirements implemented through this rulemaking. The Bureau stated 
that ensuring that industry has sufficient time to properly implement 
the necessary changes will inure to the benefit of consumer through 
better industry compliance, and solicited comment on an appropriate 
implementation period for the final rule in light of these competing 
considerations.
    In response to the proposal, the Bureau received approximately 20 
comments from industry participants with respect to the appropriate 
effective date for the requirements in the proposed rule. The majority 
of commenters, including large and small banks, credit unions, non-
depository creditors, and State and national trade associations, 
requested that the Bureau provide the industry with ample time to 
implement the requirements of the final rule, but did not suggest a 
specific effective date or timeframe. For example, one State trade 
association representing banks and a mortgage company did not propose a 
specific effective date, but urged the Bureau to carefully consider the 
challenges involved with implementing such massive changes and to make 
every effort to avoid significant adverse impact on consumers, 
creditor, and the economy as a whole. Two commenters also noted that 
their software vendors were concerned about their ability to meet 
potential effective dates. A State trade association representing 
credit unions expressed concern about the number of changes required by 
the rule and suggested that the Bureau delay the effective date until 
all of the related proposals have been finalized. Further, another 
trade association representing credit unions stated that, if credit 
unions were not exempt from the new regulations, the Bureau should 
apply maximum flexibility in determining the implementation and 
effective dates of the final rule.
    For commenters requesting a specific date for implementation, the 
time periods suggested ranged from 12 to 36 months. One large and one 
small credit union indicated that the Bureau should establish an 
implementation period of 18 months, while a leading industry trade 
association and a large bank advocated for an effective date of 18 to 
24 months and 24 months, respectively. Further, one trade association 
representing manufactured housing providers requested that the Bureau 
use its authority to extend the effective date to the greatest extent 
possible and suggested an implementation date of up to 36 or 48 months 
after issuance of the rule. Each of the commenters generally stated 
that the requested time was necessary to effectively implement the 
regulations because of the complexity of the proposed rules, the impact 
on systems changes and staff training, and the cumulative impact of the 
proposed loan originator compensation rules when combined with other 
requirements imposed by the Dodd-Frank Act or proposed by the Bureau. 
One major trade association referred to the complexity faced by HUD in 
implementing the RESPA reform rules from 2009 to 2011 and urged the 
Bureau to provide industry with an opportunity to review the rule and 
have uncertainties and ambiguities addressed before the implementation 
period begins. Similarly, another bank recommended that the Bureau 
establish an internal group to respond to industry questions and 
concerns regarding implementation.
    The Bureau received three comments specifically regarding the 
effective date for Sec.  1026.36(g), which requires the loan 
originator's name and NMLSR ID on all loan documents. One trade 
association requested that the Bureau delay the effective date for 
including the NMLSR IDs on forms until the rule implementing the TILA-
RESPA integrated disclosure forms takes effect. The commenter urged 
that a delayed effective date would eliminate unnecessary costs for 
creditor to update the technology related to disclosures for this rule 
and then again once the new integrated disclosures are finalized. A 
large bank stated that the new NMLSR ID requirement, if adopted, should 
become effective no sooner than January 2014 to provide industry with 
enough time to make document forms and system changes. The bank 
commenter also recommended that a 12-month implementation period may 
not be adequate if banks do not timely receive

[[Page 11391]]

updated note and security interest forms supplied by the Government 
Sponsored Enterprises (``GSEs'') and federal agencies. One information 
services company did not propose a timeframe, but sought clarification 
of the effective date to ensure consistency across the industry.
    Additionally, the Bureau received two comments from consumer groups 
specifically regarding the effective date of the ban on mandatory 
arbitration clauses in Sec.  1026.36(h) and certain financing practices 
for single-premium credit insurance in Sec.  1026.36(i). One of the 
consumer groups stated that the proposed regulation adds little to the 
statutory requirements and, thus, should take effect no later than 
January 21, 2013. The other consumer group did not propose a specific 
implementation date, but stated generally that the ban on mandatory 
arbitration clauses in section 1414 of the Dodd-Frank Act should be 
implemented immediately.
    For the reasons already discussed above, the Bureau believes that 
an effective date of January 10, 2014 for most of the other title XIV 
final rules and all provisions of this final rule except Sec.  
1026.36(h) regarding mandatory arbitration and waivers of federal 
claims and Sec.  1026.36(i) regarding certain financing practices for 
single-premium credit insurance will ensure that consumers receive the 
protections in these rules as soon as reasonably practicable. These 
effective dates take into account the timeframes established by the 
Dodd-Frank Act, the need for a coordinated approach to facilitate 
implementation of the rules' overlapping provisions, and the need to 
afford loan originators, creditors and other affected entities 
sufficient time to implement the more complex or resource-intensive new 
requirements. Accordingly, except for Sec.  1026.36(h) and (i), the 
effective date for implementation of the regulations adopted in this 
notice is January 10, 2014. This time period is consistent with: (1) 
The request for the majority of comments for an ample amount of time to 
implement the requirements: (2) outreach conducted by the Bureau with 
vendors and systems providers regarding timeframes for updating core 
systems: and (3) the implementation period for other requirements 
imposed by the Dodd-Frank Act or regulations issued by the Bureau that 
may have a cumulative impact on loan originators and creditors. 
Although some commenters requested a longer time period to come into 
compliance with this rule, the Bureau believes that the implementation 
period adopted appropriately balances the need of industry to have a 
sufficient amount of time to bring their systems and practices into 
compliance with the goal of providing consumers the benefits of these 
new protections as soon as practical.
    With respect to the Dodd-Frank Act's ban on mandatory arbitration 
clauses, waivers of Federal claims, and certain financing practices for 
single-premium credit insurance, the Bureau agrees with commenters that 
these requirements should be implemented without further delay. 
Accordingly, the requirements banning mandatory arbitration clauses, 
waivers of Federal claims, and certain financing practices for single-
premium credit insurance in Sec.  1026.36(h) and (i) take effect June 
1, 2013. Thus, compliance with these provisions of this final rule will 
be mandatory nearly eight months earlier than the January 21, 2014 
baseline mandatory compliance date that the Bureau is adopting for the 
other parts of this final rule and most of the Title XIV Rulemakings, 
as discussed above in part III.G. As that discussion notes, the Bureau 
is carefully coordinating the implementation of the Title XIV 
Rulemakings, including their mandatory compliance dates. The Bureau is 
including Sec.  1026.36(h) and (i) of this final rule, however, among a 
subset of the new requirements of the Title XIV Rulemakings that will 
have earlier effective dates because the Bureau believes that they do 
not present significant implementation burdens for industry.

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

    In developing the final rule, the Bureau has considered potential 
benefits, costs, and impacts.\159\ The proposed rule set forth a 
preliminary analysis of these effects, and the Bureau requested and 
received comments on this analysis. In addition, the Bureau has 
consulted or offered to consult with the prudential regulators, HUD, 
the FHFA, and the Federal Trade Commission, including regarding 
consistency with any prudential, market, or systemic objectives 
administered by such agencies.
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    \159\ Specifically, section 1022(b)(2)(A) of the Dodd-Frank Act 
calls for the Bureau to consider the potential benefits and costs of 
a regulation to consumers and covered persons, including the 
potential reduction of access by consumers to consumer financial 
products or services; the impact on depository institutions and 
credit unions with $10 billion or less in total assets as described 
in section 1026 of the Dodd-Frank Act; and the impact on consumers 
in rural areas.
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    In this rulemaking, the Bureau amends Regulation Z to implement 
amendments to TILA made by the Dodd-Frank Act. The amendments to 
Regulation Z implement certain provisions in Dodd-Frank Act sections 
1402 (new duties of mortgage originators concerning proper 
qualification, registration, and related requirements), 1403 
(limitations on loan originator compensation to reduce steering 
incentives for residential mortgage loans), and 1414(a) (restrictions 
on the financing of single-premium credit insurance products and 
mandatory arbitration agreements and waivers of Federal claims in 
residential mortgage loan transactions). The final rule also provides 
clarification of certain provisions in the 2010 Loan Originator Final 
Rule, including the application of those provisions to certain profit-
based compensation plans and the appropriate analysis of other payments 
made to loan originators.
    The Board and Congress acted in 2010, as discussed in Part II 
above, to address concerns that certain methods of compensating loan 
originators could create potential moral hazard in the residential 
mortgage market, creating incentives for originators to persuade 
consumers to agree to loan terms, such as higher interest rates, that 
are more profitable to originators but detrimental to consumers. The 
final rule will continue the protections provided in the 2010 Loan 
Originator Final Rule while implementing additional provisions Congress 
included in the Dodd-Frank Act that, as discussed previously, improve 
the transparency of mortgage loan originations, preserve consumer 
choice and access to credit, and enhance the ability of consumers to 
accurately interpret and select among the alternative loan terms 
available to them.

A. Provisions To Be Analyzed

    The analysis below considers the benefits, costs, and impacts of 
the following major provisions:
    1. A complete exemption, pursuant to Dodd-Frank Act section 1403 
and other authority, from the statutory prohibition in section 1403 on 
consumers paying upfront points and fees in all loan transactions where 
a loan originator receives compensation from someone other than a 
consumer for that particular transaction.
    2. Clarification of the applicability of the prohibition on payment 
and receipt of loan originator compensation based on transaction terms 
to compensation by creditors or loan originator organizations through 
designated tax-advantaged plans in which individual loan originators 
participate and to payment of non-deferred profits-based compensation.
    3. New requirements for loan originators, including requirements 
related to their licensing, registration, and qualifications, and a 
requirement to

[[Page 11392]]

include their identification numbers and names on loan documents.
    The prohibition of mandatory arbitration clauses and waivers of 
Federal claims in residential mortgage contracts and restrictions on 
the financing of single-premium credit insurance are also discussed.
    The analysis considers the benefits and costs to consumers and 
covered persons from each of these provisions. The analysis also 
addresses comments the Bureau received on the proposed 1022(b)(2) 
analysis as well as certain other comments on the benefits or costs of 
provisions of the proposed rule when doing so is helpful to 
understanding the section 1022(b)(2) analysis. Comments that mention 
the benefits or costs of a provision of the rule in the context of 
commenting on the merits of that provision are addressed in the 
section-by-section analysis for that provision. The analysis also 
addresses the benefits, costs, and impacts of certain alternative 
provisions that were considered by the Bureau in the development of the 
final rule, including in response to comments. Broader and more 
detailed discussions of these alternative provisions, including the 
requirement to make available to the consumer an alternative loan that 
would not include discount points, origination points, or origination 
fees and the use of a revenue test to determine circumstances under 
which loan originators may receive certain compensation on the basis of 
profits from mortgage origination activities, can also be found in the 
section-by-section analysis above.
    As noted, section 1022 of the Dodd-Frank Act requires that the 
Bureau, in adopting the rule, consider potential benefits and costs to 
consumers and covered persons resulting from the rule, including the 
potential reduction of access by consumers to consumer financial 
products or services resulting from the rule, as noted above; it also 
requires the Bureau to consider the impact of proposed rules on covered 
persons and the impact on consumers in rural areas. These potential 
benefits and costs, and these impacts, however, are not generally 
susceptible to particularized or definitive calculation in connection 
with this rule. The incidence and scope of such potential benefits and 
costs, and such impacts, will be influenced very substantially by 
economic cycles, market developments, and business and consumer choices 
that are substantially independent from adoption of the rule. No 
commenter has advanced data or methodology that it claims would enable 
precise calculation of these benefits, costs, or impacts. Moreover, the 
potential benefits of the rule on consumers and covered persons in 
creating market changes anticipated to address market failures are 
especially hard to quantify.
    In considering the relevant potential benefits, costs, and impacts, 
the Bureau has utilized the available data discussed in this preamble, 
where the Bureau has found it informative, and applied its knowledge 
and expertise concerning consumer financial markets, potential business 
and consumer choices, and economic analyses that it regards as most 
reliable and helpful, to consider the relevant potential benefits and 
costs, and relevant impacts. The data relied upon by the Bureau 
includes the public comment record established by the proposed 
rule.\160\ However, the Bureau notes that for some aspects of this 
analysis, there are limited data available with which to quantify the 
potential costs, benefits, and impacts of the final rule. The absence 
of public data regarding the specific distribution of loan products 
offered to consumers, for example, eliminates the ability to estimate 
precisely any empirical benefits from increased consumer choice.
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    \160\ The Bureau noted in the mortgage proposals issued in 
summer 2012 that it sought to obtain additional data to supplement 
its consideration of the rulemakings, including additional data from 
the National Mortgage License System (NMLS) and the NMLS Mortgage 
Call Report, loan file extracts from various lenders, and data from 
the pilot phases of the National Mortgage Database. Each of these 
data sources was not necessarily relevant to each of the 
rulemakings. The Bureau used the additional data from NMLS and NMLS 
Mortgage Call Report data to better corroborate its estimate of the 
contours of the non-depository segment of the mortgage market. The 
Bureau has received loan file extracts from three lenders, but at 
this point, the data from one lender is not usable and the data from 
the other two is not sufficiently standardized nor representative to 
inform consideration of the final rules. Additionally, the Bureau 
has thus far not yet received data from the National Mortgage 
Database pilot phases. The Bureau also requested that commenters 
submit relevant data. All probative data submitted by commenters are 
discussed in this document.
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    In light of these data limitations, the analysis below generally 
provides a qualitative discussion of the benefits, costs, and impacts 
of the final rule. General economic principles, together with the 
limited data that are available, provide insight into these benefits, 
costs, and impacts. Where possible, the Bureau has made quantitative 
estimates based on these principles and the data that are available. 
For the reasons stated in this preamble, the Bureau considers that the 
rule as adopted faithfully implements the purposes and objectives of 
Congress in the statute. Based on each and all of these considerations, 
the Bureau has concluded that the rule is appropriate as an 
implementation of the Act.

B. Baseline for Analysis

    The amendments to TILA in sections 1403 and 1414(a) of the Dodd-
Frank Act would have taken effect automatically on January 21, 2013, in 
the absence of these final rules implementing those requirements.\161\ 
Specifically, new TILA section 129B(c)(2), which was added by section 
1403 of the Dodd-Frank Act and restricts the ability of a creditor, the 
mortgage originator, or any affiliate of either to collect from the 
consumer upfront discount points, origination points, or origination 
fees in a transaction in which the mortgage originator receives from a 
person other than the consumer an origination fee or charge, would have 
taken effect automatically unless the Bureau exercised its authority to 
waive or create exemptions from this prohibition. New TILA section 
129B(b)(1) requires each mortgage originator to be qualified and 
include unique identification numbers on loan documents. TILA section 
129B(c)(1) prohibits mortgage originators in residential mortgage loans 
from receiving compensation that varies based on loan terms. TILA 
section 129C(d) creates prohibitions on single-premium credit 
insurance, and TILA section 129C(e) provides restrictions on mandatory 
arbitration agreements and waivers of Federal claims. These statutory 
amendments to TILA also would have taken effect automatically in the 
absence of the Bureau's instant regulation.
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    \161\ Sections 129B(b)(2) and 129B(c)(3) of TILA, as added by 
sections 1402 and 1403 of the Dodd-Frank Act, however, do not impose 
requirements on mortgage originators until Bureau implementing 
regulations take effect.
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    In some instances, this final rule provides exemptions to certain 
statutory provisions. These exemptions are made to enhance the benefits 
received by consumers relative to allowing the TILA amendments to take 
effect automatically. In particular, the Dodd-Frank Act prohibits 
consumer payment of upfront discount points, origination points, and 
origination fees in all residential mortgage transactions where someone 
other than the consumer pays a loan originator compensation tied to the 
transaction (e.g., a commission). Pursuant to its authority under 
section 1403 of the Dodd-Frank Act to create exemptions from this 
prohibition when doing so would be in the interest of consumers and in 
the public interest, and other authority, the Bureau's final rule does 
not prohibit the use of upfront points and fees. In exercising its 
exemption authority, the Bureau maintains the current degree of choice 
available to consumers and the current

[[Page 11393]]

methods by which creditors can hedge prepayment risk inherent in 
mortgage loans.
    Thus, many costs and benefits of the provisions of the final rule 
arise largely or entirely from the statute, and not from the final 
rule. The final rule would provide substantial benefits compared to 
allowing these provisions to take effect by clarifying parts of the 
statute that are ambiguous. Greater clarity on these issues should 
reduce the compliance burdens on covered persons by reducing costs for 
attorneys and compliance officers as well as potential costs of over-
compliance and unnecessary litigation. In addition, the final rule 
would provide substantial benefits by granting the exemptions to the 
statute described above that will benefit consumers and avoid 
disruption to the mortgage industry. Section 1022 of the Dodd-Frank Act 
permits the Bureau to consider the benefits and costs of the rule 
solely compared to the state of the world in which the statute takes 
effect without an implementing regulation. To provide the public better 
information about the benefits and costs of the statute, however, the 
Bureau has nonetheless chosen to evaluate the benefits, costs, and 
impacts of the major provisions of the final rule against a pre-
statutory baseline. That is, the Bureau's analysis below considers the 
benefits, costs, and impacts of the relevant provisions of the Dodd-
Frank Act combined with the final rule implementing those provisions 
relative to the regulatory regime that pre-dates the Act and remains in 
effect until the final rule takes effect. The one exception is the 
analysis of the Bureau's adoption in the final rule of a complete 
exemption to the statutory ban on upfront points and fees. Evaluating 
this provision relative to a pre-statutory baseline would be an empty 
exercise, as the exemption preserves the pre-statute status-quo.

C. Coverage of the Final Rule

    The final rule applies to loan originators, as that term is defined 
in Sec.  1036.36(a)(1)(i). The new qualification and document 
identification requirements also apply to creditors that finance 
transactions from their own resources and meet the definition of a loan 
originator. The required compliance procedures only apply to depository 
institutions. Like existing Sec.  1026.36(d) and (e), the new 
qualification, document identification, and compliance procedure 
requirements apply to closed-end consumer credit transactions secured 
by a dwelling (as opposed to the consumer's principal dwelling). The 
new arbitration, waiver, and single-premium credit insurance provisions 
apply to both closed-end consumer credit transactions secured by a 
dwelling and HELOCs subject to Sec.  1026.40 and secured by the 
consumer's principal dwelling.

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

1. Full Exemption of Discount Points and Origination Points or Fees
    The Dodd-Frank Act prohibits consumer payment of upfront points and 
fees in all residential mortgage loan transactions, except those where 
a loan originator does not receive compensation that is tied to the 
specific transaction (e.g., a commission) from someone other than a 
consumer.
    Pursuant to its authority under section 1403 of the Dodd-Frank Act 
to create exemptions from this prohibition when doing so would be in 
the interest of consumers and in the public interest, the Bureau 
earlier proposed to provide that a creditor or loan originator 
organization may charge a consumer discount points or fees when someone 
other than the consumer pays a loan originator transaction-specific 
compensation, but only if the creditor also makes available to the 
consumer a comparable, alternative loan that excludes discount points, 
origination points, or origination fees. The proposal to require the 
creditor to satisfy this prerequisite was termed the ``zero-zero 
alternative.''
    The Bureau chooses, at this time, to adopt a complete exemption to 
the statutory ban on upfront points and fees in the final rule, rather 
than the proposed zero-zero alternative. The Bureau believes that 
providing a complete exemption at this time, while preserving its 
ability to revisit the scope of the exemption in the future, will 
benefit consumers and the public interest by maintaining access to 
credit and the range of alternative mortgage products available to 
consumers at this time, and by avoiding any unanticipated effects on 
the nascent recovery of domestic mortgage and housing markets.
    The Bureau strongly believes, however, that while an exemption from 
the statutory restrictions on points and fees is, at this time and 
under the current state of knowledge of the mortgage market, in the 
consumer and the public interests, future research could indicate that 
amending the existing regulations regarding points and fees would 
benefit consumers and the public. The Bureau intends to conduct 
research into this issue over the next five years. This five-year 
timeframe corresponds to the Bureau's responsibility to conduct a five-
year review of the rule as required by the Dodd-Frank Act. Based on its 
research findings, the Bureau would, as part of this review, assess 
consumer and public welfare under a complete exemption of the statutory 
prohibition on points and fees. This five-year review period will allow 
the Bureau, as part of its research on points and fees, to assess 
effects on the mortgage market arising from the new disclosures to be 
issued by the Bureau when the 2012 TILA-RESPA Integration Proposal is 
finalized, the 2013 ATR Final Rule, the 2013 HOEPA Final Rule, and 
other relevant Title XIV rulemakings. The Bureau notes that these Title 
XIV rulemakings are likely to have a significant impact on how points 
and fees are structured in the mortgage market. If the Bureau 
determines over this period that additional requirements are needed, 
the Bureau would issue a new proposal for public notice and comment.
Potential Benefits and Costs to Consumers
    In any mortgage transaction, the consumer has the option to prepay 
the loan and exit the existing contract. This option to repay has some 
inherent value to the consumer and imposes a cost on the creditor.\162\ 
In particular, consumers usually pay for part of this option through 
one of three alternative means: (1) ``Discount points,'' which are the 
current payment of the value of future interest; (2) a ``prepayment 
penalty,'' which is a payment of the same market value deferred until 
the time at which the loan balance is actually repaid; or (3) a higher 
coupon rate on the loan.
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    \162\ Consumers who expect to pay the balance of their loan 
prior to maturity can purchase from creditors the sole right to 
choose the date of this payoff. This right is valuable and its price 
is the market value such a sale creates for creditors in regard to 
the date of this potential payoff. Creditors exchange rights with 
consumers but in the opposite direction with ``callable'' bonds. 
This type of bond exhibits an exactly opposite trade, in which the 
borrower cedes to the creditor the choice of time at which the 
creditor can require, if it chooses, the borrower to remit the 
remaining value of the bond.
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    In many instances, creditors or loan originators will charge 
consumers an origination point or fee. When many loan originator 
organizations serve a mortgage market, competition between them drives 
these upfront payments to a level just sufficient to cover the cover 
the labor and material costs the organization incurs from processing 
the loan and these payments do not represent a source of economic 
profit for that loan originator organization. Here too, the loan 
originator could offer the

[[Page 11394]]

consumer a loan with a higher interest rate in order to recover the 
creditor's costs. In this sense, discount points and origination points 
or fees are similar; from the consumer's perspective, they are various 
upfront charges the consumer may pay where the possibility may exist to 
trade some or all of this payment in exchange for a higher interest 
rate.
    By permitting discount points under certain circumstances, the 
Bureau's final rule offers consumers greater choice over the terms of 
the coupon payments on their loans and a choice between paying discount 
points or a higher rate for the purchase of the prepayment option 
embedded in their loans.\163\ In theory consumers make this choice, at 
least in part, based on how long they will stay in the particular loan. 
This, in turn, will depend primarily on how long they expect to stay in 
the property and their beliefs about future conditions in the mortgage 
market. At the time of origination, however, consumers necessarily have 
some uncertainty about future events; the actual outcome of such events 
could induce these consumers to pay off their loan after a shorter 
period than planned. Consequently, the benefits the consumer actually 
obtains at the termination of the loan may be less than those the 
consumer expected at the time of origination and could even result in 
the consumer suffering a realized loss.\164\
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    \163\ The two options are not mutually exclusive. In some 
transactions, consumers may pay for the embedded option through more 
than one of the methods outlined. See, e.g., Donald Keenan & James J 
Kau, An Overview of the Option-Theoretic Pricing of Mortgages, 6 
Journal of Housing Research 217 (1995) (providing an overview of 
options embedded in residential mortgages); James J Kau, Donald 
Keenan, Walter Muller & James Epperson, A Generalized Valuation 
Model for Fixed-Rate Mortgages with Default and Prepayment, 11 
Journal of Real Estate Finance & Economics 5 (1995) (providing a 
traditional method to value these options numerically); Robert R. 
Jones and David Nickerson, Mortgage Contracts, Strategic Options and 
Stochastic Collateral, 24 Journal of Real Estate Finance & Economics 
35 (2002) (generating numerical values, in current dollars, for 
option-embedded mortgages in a continuous-time environment).
    \164\ Similarly, consumers who expect to pay their loans over a 
period sufficiently short as to make the purchase of discount loans 
unattractive may find it better at the end of this expected period 
to continue to pay their mortgage and, consequently, suffer an 
unanticipated loss from refraining from the purchase of points. See 
Yan Chang & Abdullah Yavas, Do Borrowers Make Rational Choices on 
Points and Refinancing?, 37 Real Estate Economics 635 (2009) 
(offering empirical evidence that consumers in their sample data 
remain in their current fixed-rate mortgages for too short a time to 
recover their initial investment in discount points). Other 
empirical evidence, however, conflicts with these results in regard 
to both the frequency and magnitude of losses. Simple numerical 
calculations that take into account taxes, local volatility in 
property values, and returns on alternative assets highlight the 
difficulty in drawing conclusions from much of the empirical data.
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    Greater choice over the terms of transactions and greater choice 
over how to pay for the prepayment option should, under all but rare 
circumstances, increase the ex ante welfare of consumers.\165\ The 
degree to which individual consumers ultimately benefit after 
origination will depend on their individual circumstances and their 
relative degree of financial acuity.\166\
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    \165\ Such a circumstance includes, for example, the case in 
which the need to understand and decide among loans with different 
points and fees combinations imposes a burden on some consumers. The 
existence of increased choice made available by this provision 
would, in this case, be itself a cost to the consumer. Based on 
standard economic reasoning, the Bureau believes, however, that the 
circumstances in which the exercise of its exemption authority has 
the potential to reduce consumer welfare, relative to the statutory 
prohibition, are, for the most part, quite rare.
    \166\ The choice over the means by which consumers compensate 
creditors for the prepayment option is of particular potential 
benefit to consumers who currently enjoy high liquidity but who 
either face prospects of diminished liquidity in the future or are 
more sensitive to the risk posed by a high variance in their future 
income or wealth. Examples of such consumers include retiring or 
older individuals wishing to secure their future housing, 
individuals who are otherwise predisposed to use their wealth for a 
one-time payment, consumers with relocation funds available, and 
consumers offered certain rebates by developers or other sellers. In 
situations where consumers are unaware of their own circumstance or 
their own relative financial acuity, some creditors may be able to 
benefit. For example, an unethical creditor may persuade those 
consumers unaware of their lower relative financial ability to make 
incorrect decisions regarding purchasing points. The outcome of this 
type of adverse selection will be reversed when consumers have a 
more accurate knowledge of their financial abilities than does the 
creditor.
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    Relative to permitting the statutory provision to go into effect 
unaltered, the Bureau's exemption also provides the potential for an 
additional benefit to consumers when adverse selection in the mortgage 
market compounds the costs of uncertainty over early repayment. 
Consumers' purchase of discount points signals to creditors that the 
expected maturity of their loans is longer than those loans taken out 
by consumers who do not purchase discount points. This results in the 
consumer being offered a rate below the rate that would be offered if 
the rate-point trade-off did not incorporate the signal about the 
likely length of time that consumers paying points will hold the loan. 
Creditors respond by offering a lower average rate on each class of 
mortgages over which creditors have discretion in pricing.\167\
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    \167\ Conversely, the elimination of the option to pay upfront 
points and fees could, depending on the extant risk in creditors' 
portfolios and their perceptions of differential risk between 
neighborhoods, seriously reduce the access to mortgage credit for 
some consumers.
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Potential Benefits and Costs to Covered Persons
    Relative to implementation of the general statutory prohibition on 
points and fees without exercise of Bureau's exception authority, the 
ability to trade a lower loan rate to consumers in exchange for the 
upfront payment of discount points and origination points or fees is of 
significant benefit to all creditors participating in loan origination. 
When purchasing a mortgage, consumers also receive an option to prepay 
their mortgage balance at a time only they choose. While this 
``prepayment'' option is valuable to consumers, it is also a source of 
risk to creditors, which lose future interest rate payments should the 
consumer prepay the consumer's loan prior to the loan's maturity. The 
potential for a mutually beneficial exchange of lower rates for current 
payment of points and fees allows a creditor to recoup a portion of the 
(market) value of this option, which is equivalent to the creditor's 
cost of bearing prepayment risk. This is a primary means by which a 
creditor can hedge the risk posed by fixed-rate mortgages, whether held 
or sold, to its portfolio and the value of its business.\168\
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    \168\ In contrast, the prohibition on payment of upfront points 
and fees in the Dodd-Frank Act under most circumstances would ensure 
that the value of the option to share risk through discount points 
is lost to both the creditor and the consumer in those 
circumstances. Absent other means of hedging prepayment risk, 
creditors would either need to reduce the volume of loans they 
originate or incur greater costs of raising capital to fund such 
loans, owing to the increased risk to their business and, 
consequently, to their solvency.
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    A related benefit for creditors arises from the presence of adverse 
selection among consumers in the mortgage market, which compounds the 
risks borne from early repayment. Allowing consumers to purchase 
discount points allows them to signal to creditors that they expect to 
make payments on their loans for a longer period than other consumers 
who choose not to purchase such points. Creditors gain from that 
information and will respond to such differences in behavior.\169\ 
Increasing a creditor's ability to measure more precisely the 
prepayment risk and credit risk posed by an individual consumer allows 
it to more precisely adjust the prices or loans to correspond to the 
particular risk presented by each

[[Page 11395]]

individual consumer. By charging different loan rates to consumers who 
pose different degrees of risk, creditors will earn a greater overall 
return from funding mortgage loans.\170\
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    \169\ Credible signaling in such a situation, from the 
creditor's perspective, distinguishes two groups of consumers--one 
with low prepayment risk who purchase discount points, and the 
second a group not purchasing discount points and, consequently, 
expect to prepay their loan more rapidly than average--in what would 
otherwise be a pool of consumers who are perceived by the creditor 
to exhibit an equivalent measure of prepayment risk.
    \170\ In this situation where the efficiency of the market is 
only impaired by adverse selection, this increase in creditor 
returns is independent of whether the creditor sells loans in the 
secondary market or chooses to engage in hedging to hold these 
mortgages in portfolio.
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    Both creditors and consumers, consequently, benefit from the role 
of discount points as a credible signal. This enhances the economic 
efficiency of the mortgage markets. The Bureau believes that this 
private means for reducing the risk that the mortgage loan (a liability 
for the consumer) can pose to the assets of the creditor is a 
significant source of efficiency in the mortgage market.
    In addition, the final rule benefits covered persons by avoiding 
the imposition of transition costs, including such things as internal 
accounting procedures and origination software systems, which would 
have been imposed had the full statutory prohibition taken effect.
    Finally, mindful of the state of the United States housing and 
mortgage markets, the final rule also reduces the chance that potential 
disruptions to the mortgage market might arise from the significant 
changes to the regulations under which loan originators, creditors, and 
consumers operate. This final rule should help promote the recovery and 
stability of those markets.
2. Compensation Based on Transaction Terms
    Restricting the means by which a loan originator receives 
compensation is a way to mitigate potential harm to consumers arising 
from moral hazard on the part of loan originators.\171\ Similar to the 
existing rule, the Dodd-Frank Act includes such restrictions to 
mitigate the potential harm to consumers arising from such moral 
hazard.
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    \171\ Moral hazard, in the current context of mortgage 
origination, depends fundamentally on the advantage the loan 
originator has in knowing the least expensive transaction terms 
acceptable to creditors and greater overall knowledge of the 
functioning of mortgage markets. See Holden Lewis, ``Moral Hazard'' 
Helps Shape Mortgage Mess, Bankrate (Apr. 18, 2007), available at 
http://www.bankrate.com/brm/news/mortgages/20070418_subprime_mortgage_morality_a1.asp (providing a practitioner description of 
the costs of such moral hazard on the current mortgage and housing 
industries).
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    The Dodd-Frank Act generally follows the existing rule's 
prohibition on compensating an individual loan originator based on the 
terms of a transaction. Although the statute and the existing rule are 
clear that an individual loan originator cannot be compensated 
differently based on the terms of the individual loan originator's 
transactions, they do not expressly address whether the individual loan 
originator may be compensated based on the terms of multiple 
transactions, taken in the aggregate, of multiple individual loan 
originators employed by the same creditor or loan originator 
organization.
    The Bureau is aware that loan originator organizations may be 
unsure of how the restrictions on compensation in the current rule 
apply to compensation based on the profits of the organization.\172\ 
The final rule and commentary address this uncertainty by clarifying 
the scope of the compensation restrictions in existing Sec.  
1026.36(d)(1)(i).\173\ The final rule treats different methods of 
compensation differently based on an analysis of the incentives for 
originators to engage in moral hazard, as created for originators by 
each such method. The final rule permits a creditor or loan originator 
organization to make contributions to designated tax-advantaged plans 
(which include defined benefit and contribution plans that satisfy the 
qualification requirements of Internal Revenue Code section 401(a) or 
certain other Internal Revenue Code sections), even if the 
contributions are made out of mortgage-related business profits. The 
final rule also permits compensation under non-deferred profits-based 
compensation plans even if the amounts paid are funded through 
mortgage-related business profits, if: (1) The percentage of a loan 
originator's compensation attributable to such compensation is equal to 
or less than 10 percent of total compensation; or (2) the individual 
loan originator has been a loan originator for ten or fewer 
transactions during the preceding 12-month period, i.e., a de minimis 
test for individuals who originate a very small number of transactions 
per year. The final rule, however, generally reaffirms the existing 
rule insofar as it does not permit, under non-deferred profit-based 
compensation plans and designated defined contribution plans, that 
individual loan originators be compensated based on the terms of their 
individual transactions.
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    \172\ Such compensation includes bonuses paid under profit-
sharing plans, and contributions by creditors and loan originator 
organizations to designated and non-designated benefit and 
contribution plans.
    \173\ As noted in the section-by-section analysis, the Bureau 
issued CFPB Bulletin 2012-2 in response to the questions it received 
regarding the applicability of the current regulation to designated 
plans and non-designated plans, and this regulation is intended in 
part to provide further clarity on such issues. Until the final rule 
goes into effect, the clarifications in CFPB Bulletin 2012-2 will 
remain in effect.
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Potential Benefits and Costs to Consumers
    The final rule benefits consumers by clarifying the existing rule 
to address and mitigate the moral hazard inherent in the nature of 
profits-based compensation and other types of compensation that are 
directly or indirectly based on the terms of multiple transactions of 
an individual loan originator (these are referred to in this section 
and the next section as ``profits-based compensation''). Limiting such 
profits-based compensation for many firms limits the incentives to 
steer consumers into more expensive loans. To the extent that the 
existing rule already prohibits a type of compensation plan for loan 
originators, the final rule's prohibition of such a plan will not 
result in any new benefits to consumers. The Bureau's approach permits 
compensation under non-deferred profits-based compensation plans and 
compensation through designated tax-advantaged plans \174\ only in 
cases in which the relationship between transaction terms and such 
forms of compensation are sufficiently weak to render insignificant any 
potential for steering incentives.
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    \174\ Payments to designated retirement plans include, for 
example, employer contributions to employee 401(k) plans.
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    These forms of compensation are designed to provide individual loan 
originators and other individuals working for the creditor or loan 
originator organization with greater performance incentives and to 
align their interests with those of the owners of the entity they work 
for.\175\ When moral hazard exists, however, such compensation 
determined with reference to profits could lead to misaligned 
incentives on the part of individual loan originators with respect to 
consumers. The magnitude of adverse incentives arising from profits-
based compensation, however, depends on several variables.\176\ These 
include the

[[Page 11396]]

number of individual loan originators working for the creditor or loan 
originator organization that contributes to the funds available for 
profits-based compensation, the means by which shares of the profits 
are distributed to the individual loan originators working for the same 
firm, and the ability of owners to monitor the current value of a loan 
on an ongoing basis.
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    \175\ Bengt Holmstrom, Moral Hazard and Observability, Bell 
Journal of Economics 74 (1979), provides the first careful analysis 
of the effects such compensation methods have on employee 
incentives.
    \176\ When multiple originators are working for a given loan 
originator organization or creditor, the compensation to each 
individual loan originator will depend upon on the aggregate efforts 
of all the loan originators working for this entity, rather than 
directly on the individual loan originator's own performance. 
Consequently, if we compare the efforts of an individual loan 
originator working for a smaller entity with those of another 
individual at a larger entity, the effort by the individual at the 
larger entity will be less than the effort of the individual at the 
smaller entity, owing to the smaller influence any individual at the 
larger entity has on the amount of compensation awarded to the 
individual. This relationship between individual effort and the 
total number of peers in a given entity is termed ``free-riding.'' 
Free riding behavior has been extensively analyzed: Surveys of these 
analyses appear in Martin L. Weitzman, Incentive Effects of Profit 
Sharing, in Trends in Business Organization: Do Participation and 
Cooperation Increase Competitiveness? (Kiel Inst. of World 
Econs.1995), available at http://ws1.ad.economics.harvard.edu/faculty/weitzman/files/IncentiveEffectsProfitSharing.pdf.;
---------------------------------------------------------------------------

    The Bureau received a number of comments from industry disagreeing 
with the premise that profits-based compensation could create 
incentives for individual loan originators to persuade consumers to 
accept transactions terms that are costly for the consumer but more 
profitable for the loan originator. Some industry commenters admitted 
that such incentives existed but believed that, with regard to profits-
based compensation, the incentives were insignificant. Commenters from 
consumer groups generally asserted that profits-based compensation 
creates incentives for individual loan originators to steer consumers 
into loans that are more costly to the consumer.
    The Bureau recognizes that the potential that profits-based 
compensation has to create adverse incentives for individual loan 
originators depends, in general, on both how the efforts of individual 
loan originators affect profits and how those profits affect the 
compensation distributed to individual loan originators. The Bureau 
also recognizes that, depending on the particular environment in which 
a particular individual loan originator conducts business, these 
adverse incentives could decline as the number of individual loan 
originators involved in the specified profit-sharing plan increases.
    The Bureau, however, notes that the current state of academic 
research has not provided an unequivocal answer to the question of 
whether any given profit-based compensation arrangement will produce 
incentives sufficiently strong for individual loan originators to 
engage in consumer steering. The Bureau also notes that this research, 
whether based on theoretical or empirical methods, shows that the 
potential for any profit-sharing plan to create adverse incentives are 
acutely sensitive to the specific features of the working environment 
and the means by which such profits are distributed to the relevant 
individual loan originators.\177\ Finally, the Bureau notes that any 
potential reduction in the strength of these incentives is almost 
surely insufficient, under all realistic circumstances, to eliminate 
them entirely.\178\
---------------------------------------------------------------------------

    \177\ Economic research has established the general principle 
that the amount of work individuals put into a given task, in 
response to remuneration based on the sharing of profits, declines 
as the number of their peers increases (``free-riding.''). No 
principle with such generality has been shown, however, in regard to 
the rate of this decline and the amount of individual work effort 
for any particular group of employees. Features of the means by 
which profits are distributed to individuals and the individual's 
environment within a given firm, such as the individual's ability to 
observe the performance of his peers and the frequency of managerial 
monitoring of individual performance, strongly affect these 
variables, as shown in a number of recent studies, including 
empirical and experimental research papers: Susan Helper, et al., 
Analyzing Compensation Methods in Manufacturing: Piece Rates, Time 
Rates, or Gain-Sharing?, (NBER Working Paper No. 16540, 2010); R. 
Mark Isaac & James M. Walker, Group Size Effects in Public Goods 
Provision: The Voluntary Contributions Mechanism, Quarterly Journal 
of Economics, 1988, 103 (1), 179-199; Xavier Gine & Dean Karlan Peer 
Monitoring and Enforcement: Long Term Evidence from Microcredit 
Lending Groups with and without Group Liability, (2008); and in a 
vast number of theoretical research papers, such as that of Bengt 
Holmstr[ouml]m and Paul Milgrom, 1991, Multitask Principal Agent 
Analyses: Incentive Contracts, Asset Ownership and Job Design, 
Journal of Law, Economics and Organizations. Several surveys of this 
research have been published, including that of Candice Prendergast, 
The Provision of Incentives in Firms, J Econ. Literature, 7, 37 
(1999), among others.
    \178\ Examples of empirical evidence of the persistence of moral 
hazard among employees in commercial and retail lending, include 
originators of residential mortgages, appears in Sumit Agarwal & 
Itzhak Ben-David, Do Loan Officers' Incentives Lead to Lax Lending 
Standards?, (Federal Reserve Bank of Chicago, Working Paper, 2012); 
Aritje Berndt, et al., The Role of Mortgage Brokers in the Subprime 
Crisis, (Carnegie Mellon University, Working Paper, 2010). Shawn 
Coleet, et al., Rewarding Calculated Risk-Taking: Evidence from a 
Series of Experiments with Commercial Bank Loan Officers, (Harvard 
Business School, Working Paper, 2010).
---------------------------------------------------------------------------

    Despite the uncertainties the remain in the economic literature, 
the Bureau believes that the approach taken in the final rule will 
benefit consumers by mitigating the moral hazard inherent in 
compensation systems that are based, directly or indirectly, on the 
terms of mortgage loan transactions, including those based on multiple 
transactions.
Potential Benefits and Costs to Covered Persons
    As described above, considering the benefits, costs, and impacts of 
this provision requires the understanding of current industry practice 
against which to measure any changes. As discussed, the Bureau is 
aware, based in part on outreach to and inquiries received from 
industry, that originator organizations may be unclear about the 
application of the existing rule to profits-based compensation plans, 
including non-deferred profits-based compensation and employer 
compensation through designated plans. In light of this lack of 
clarity, the Bureau believes that industry practice likely varies and 
therefore any determination of the costs and benefit of the final rule 
depend critically on assumptions about current firm practices.
    Firms that currently offer profits-based compensation for 
individual loan originators that would continue to be allowed under the 
final rule should incur no costs from the final rule. They could, 
however, benefit from the presence of a regulation and accompanying 
official commentary that clarifies which methods of loan originator 
compensation are permissible. Notably, the final rule explicitly states 
that employer contributions to designated defined contribution plans in 
which individual loan originators participate are permitted, provided 
that the contributions are not based on the terms of the individual 
loan originator's transactions. Such firms can continue to benefit from 
these arrangements, which have the potential to motivate individual 
productivity, to reduce potential intra-firm moral hazard by aligning 
the interests of individual originators with those of creditor or loan 
originator organization for whom they work and to reduce the potential 
for increased costs arising from adverse selection in the retention of 
more productive individual loan originators. Firms that do not offer 
such plans would benefit, with the increased clarity of the final rule, 
from the opportunity to do so should they so choose.\179\
---------------------------------------------------------------------------

    \179\ Some firms may choose not to offer such compensation. In 
certain circumstances, an originating institution (perhaps unable to 
invest in sufficient management expertise) will see reduced 
profitability from adopting profits-based compensation plans.
---------------------------------------------------------------------------

    Similarly, some firms may currently compensate their individual 
loan originators through methods, such as designated defined benefit 
plans, the legality of which may have been unclear, with different 
originator organizations interpreting the existing rule differently. 
The final rule benefits these firms by clarifying the legality of 
various compensation practices.

[[Page 11397]]

    As discussed above, the final rule permits compensation under non-
deferred profits-based compensation plans, including bonuses, to be 
paid from mortgage-related profits if such compensation for an 
individual loan originator does not, in the aggregate, exceed 10 
percent of the individual loan originator's total compensation. This 
will benefit firms that would prefer to pay these types of bonuses or 
make these types of contributions out of mortgage-related profits, but 
do not because of uncertainty about the application of the existing 
rule. Firms that currently compensate individual loan originators 
through non-deferred profits-based compensation plans in excess of 10 
percent of individual loan originators' total compensation might have 
to adjust their non-deferred profits-based compensation to comply with 
the 10-percent total compensation test under the final rule. This may 
impose some adjustment costs or may make it more costly to attract or 
retain qualified loan originators.
    The final rule also contains a de minimis provision exempting 
individuals who originate ten or fewer loans per year from limitations 
on non-deferred profits-based compensation. This provision is intended 
to avoid penalizing those individuals whose compensation from the 
origination of a small number of loans is insufficient to give them 
incentives inimical to the welfare of consumers. Industry commenters 
generally favored the de minimis exception, although a few commenters 
preferred a higher value for the de minimis threshold (e.g., one trade 
association representing banks requested a threshold of 15). The 
Bureau's survey of recent research into the relation of the total 
number of employees in a given firm, the value of total compensation to 
any individual employee, and the effects on the behavior of individual 
employees of compensation that is based on the profits arising from the 
collective effort of all employees of that firm corroborates the 
judgment that any adverse incentives from profits-based compensation to 
an individual under the final rule's de minimis threshold are 
insignificant and do not affect the welfare of consumers.\180\
---------------------------------------------------------------------------

    \180\ See footnotes 100 and 101 for a number of examples of 
research in this area.
---------------------------------------------------------------------------

3. Qualification Requirements for Loan Originators
    Section 1402 of the Dodd-Frank Act amends TILA to impose a duty on 
loan originators to be ``qualified'' and, where applicable, registered 
or licensed as a loan originator under State law and the Federal SAFE 
Act. Employees of depositories, certain of their subsidiaries, and bona 
fide nonprofit organizations currently do not have to meet the SAFE Act 
standards that apply to licensing, such as taking pre-licensure 
classes, passing a test, meeting character and fitness standards, 
having no felony convictions within the previous seven years, or taking 
annual continuing education classes. To implement the Dodd-Frank-Act's 
requirement that entities employing or retaining the services of 
individual loan originators be ``qualified,'' the final rule requires 
entities whose individual loan originators are not subject to SAFE Act 
licensing, including depositories and bona fide nonprofit loan 
originator entities, to: (1) Ensure that their individual loan 
originators meet character and fitness and criminal background 
standards similar to the licensing standards that the SAFE Act applies 
to employees of non-bank loan originators; and (2) provide appropriate 
training to their individual loan originators commensurate with the 
mortgage origination activities of the individual. The final rule 
mandates training appropriate for the actual lending activities of the 
individual loan originator and does not impose a minimum number of 
training hours.
    Industry commenters to the proposal disagreed that there is a need 
for individual loan officers to meet qualification standards because 
loan originators already must comply with the requirements of 
prudential regulations. The Bureau also received a number of requests 
from industry representatives to refrain from adopting mandatory 
testing and education requirements in favor of instead requiring taking 
courses and passing examinations approved by the NMLSR. Finally, an 
association of mortgage bankers requested that the Bureau explore 
imposing a national test for all bank employees or employees of 
creditors that offer loans.
    The Bureau notes that it is not opposed to the idea of future 
testing for all bank employees or employees of creditors who offer 
loans. Conditional on the current state of the mortgage market, 
however, the Bureau believes that the burden imposed by comprehensive 
testing might, at this time, be sufficiently burdensome to further 
decrease benefits to consumers, and covered persons as a whole.
Potential Benefits and Costs to Consumers
    The primary benefit to consumers of the qualification provisions of 
the final rule are that tighter qualifications will screen out, on an 
ongoing basis after implementation of the final rule and with regard to 
some loan officers currently employed who have not previously been 
screened, those individual originators with backgrounds suggesting they 
could pose risks to consumers and will raise the level of loan 
originator expertise regarding the origination process. Both of these 
effects will likely decrease the harm that could be borne, unknowingly 
at the time of origination, by any individual consumer.
    Several industry representatives, including national and State 
industry trade associations and large depository institutions, 
expressed doubt about whether consumers would receive significant 
benefits from the change in qualification requirements.
    The Bureau believes that its qualification requirement will improve 
consumer welfare because it will help ensure that any individual loan 
originator with whom a consumer negotiates a loan will possess levels 
of expertise and integrity no less than those required in the final 
rule and assures consumer that they bear relatively little risk of 
encountering a loan originator who lacks these qualifications. While 
measuring the magnitude of this benefit is impossible with currently 
available public data, the Bureau notes that the its qualification 
requirement will not only convey a direct benefit to consumers, it 
will, in addition, benefit both consumers and covered persons through 
the reduction of this source of adverse selection among new 
originators. This reduction will increase economic efficiency in the 
market and allow more mutually beneficial loan transactions to occur.
Potential Benefits and Costs to Covered Persons
    The increased requirements for institutions that employ individuals 
not licensed under the SAFE Act would further assure that the 
individual loan originators in their employ satisfy those levels of 
expertise and standards of probity as specified in the final rule.\181\ 
This would have a positive effect by tending to reduce any potential 
liability they incur in future mortgage transactions and to enhance 
their reputation among consumers. If the requirements, as expected, 
reduce the likelihood that consumers will encounter loan originators 
with

[[Page 11398]]

inadequate expertise or integrity, this may lead to an increase in 
consumer confidence and may possibly increase the number of consumers 
willing to engage in these transactions. Some entities could, however, 
face increased recruitment, training, and related costs in complying 
with these new requirements.
---------------------------------------------------------------------------

    \181\ Under Regulation G, depository institutions must already 
obtain criminal background checks for their individual loan 
originator employees and review them for compliance under Section 19 
of the FDIA.
---------------------------------------------------------------------------

    In addition, relative to current market conditions, the final rule 
would create a more level ``playing field'' between non-depository 
institutions and depository and nonprofit institutions with regard to 
the enhanced training requirements and background checks that would be 
required of depository institutions. This may help mitigate possible 
adverse selection in the market for individual originators, in which 
individuals who cannot meet the requirements for non-depository 
institutions might seek employment by depository and nonprofit 
institutions.
    These requirements may also slightly limit the pool of employees 
from which to hire, relative to the pool from which they can hire under 
existing requirements. Similarly, the requirement for credit checks for 
new hires (and those who were not screened under standards in effect at 
the time of hire) will result in some minimal increased costs. Bona 
fide nonprofit institutions not currently subject to the SAFE Act will 
have to incur the costs of both the criminal background check and the 
credit check.
4. Mandatory Arbitration and Waivers of Federal Claims
    Section 1414 of the Dodd-Frank Act added section 129C(e) to TILA. 
Section 129C(e)(1) prohibits the inclusion of terms in any contract or 
agreement for a residential mortgage loan (as defined in the Dodd-Frank 
Act) or extension of open-end credit secured by the principal dwelling 
of the consumer that require arbitration or any other non-judicial 
procedure as the method for resolving any controversy or settling any 
claims arising out of the transaction. Section 129C(e)(2) provides that 
a consumer and creditor may nonetheless agree, after a dispute arises, 
to use arbitration or other non-judicial procedure to resolve the 
dispute. The statute further provides in section 129C(e)(3) that no 
covered transaction secured by a dwelling, and no related agreement 
between the consumer and creditor, may bar a consumer's ability to 
bring a claim in court in connection with any alleged violation of 
Federal law. Section 1026.36(h) of the final rule implements and 
clarifies these statutory provisions.
    The restrictions on mandatory arbitration and waiver of Federal 
claims are imposed by the Dodd-Frank Act. The Bureau is implementing 
these protections by regulation. The Bureau believes that implementing 
regulations provide benefits to consumers and covered persons by 
providing clarity and thereby facilitating compliance with the 
statutory provisions.
    The Bureau received one comment from an industry association 
asserting that the prohibition of mandatory arbitration as a means of 
resolving disputes between consumer and creditor, and instead allowing 
the consumer to seek resolution through the court system would increase 
the cost of credit to consumers. One member of industry also speculated 
that, by allegedly expanding the statutory prohibition of mandatory 
arbitration to cover open-end consumer credit plans other than those 
secured by the principal dwelling of the consumer, the final rule could 
impose significant costs on those creditors making open-ended and other 
forms of credit available to consumers. Several consumer groups 
expressed concern regarding the timing of the implementation of the 
provision, asserting that, since the proposal made no substantive 
changes to the statutory provision, the effective date of 
implementation provided by the statute should also be maintained.
    To the extent that contractual terms requiring mandatory 
arbitration and restricting waiver Federal claims benefit covered 
persons by reducing litigation and other expenses, the statute and 
implementing regulation will create costs for covered persons. The 
Bureau notes, however, that covered persons and consumers will still be 
permitted to agree, after a dispute has arisen, to submit that dispute 
to arbitration. The Bureau also notes that, to its knowledge, no 
compelling empirical evidence supports the comments that consumer 
access to the court system for the resolution of disputes would 
increase the cost of such mortgages to consumers. In addition, no 
evidence supporting this prediction was presented by the industry 
association making this assertion or by any other industry or consumer 
representative.
    The Bureau disagrees with the assertion that the final rule would 
impose costs on those creditors marketing open-ended loans and other 
forms of credit not secured by principal dwelling of the consumer. 
Since proposed Sec.  1026.36(j), implemented in the final rule as Sec.  
1026.36(b), clarifies that the only open-end consumer credit plans to 
which Sec.  1026.36(h) applies are those secured by the principal 
dwelling of the consumer, no additional litigation cost is imposed on 
these creditors from this source.\182\
---------------------------------------------------------------------------

    \182\ However, to reduce uncertainty, the Bureau is including a 
statement in Sec.  1026.36(h) that it is applicable to ``a home 
equity line of credit secured by the consumer's principal 
dwelling.''
---------------------------------------------------------------------------

5. Creditor Financing of ``Single Premium'' Credit Insurance
    Dodd-Frank Act section 1414 added section 129C(d) to TILA. Section 
129C(d) pertains to a creditor financing credit insurance fees for the 
consumer. Although the provision permits insurance premiums to be 
calculated and paid in full per month, this provision prohibits a 
creditor from financing any fees, including premiums, for credit 
insurance in closed- and certain open-end loan transactions secured by 
a dwelling. The final rule implements the relevant statutory provision 
of the Dodd-Frank Act. Owing to the lack of transparency consumers may 
experience in negotiating a mortgage loan with a creditor while 
simultaneously needing to decide to finance their insurance, such as 
through an increase in their mortgage payments, with this same 
creditor, the Bureau believes there is significant potential for such a 
combined transaction to harm the consumer. The final rule should, on 
this basis, benefit consumers.
6. Additional Potential Benefits and Costs
    Covered persons will have to incur some costs in reviewing the 
final rule and adapting their business practices to any new 
requirements. The Bureau notes that many of the provisions of the final 
rule do not require significant changes to current practice, since many 
of the provisions in this final rule are also in the existing rule, and 
therefore these costs should be minimal for most covered persons.
    The Bureau has considered whether the final rule would lead to a 
potential reduction in access to consumer financial products and 
services. Firms will not have to incur substantial operational costs 
nor any potential loss owing to adverse selection among loan 
originators. As a result, the Bureau does not anticipate any material 
impact on existing consumer access to mortgage credit. The Bureau, 
however, does note that its final rule precludes any reduction in 
credit access that could otherwise occur without its exemption from the 
statutory prohibition on points and fees.

[[Page 11399]]

E. Potential Specific Impacts of the Final Rule

1. Depository Institutions and Credit Unions With $10 Billion or Less 
in Total Assets, as Described in Section 1026 \183\
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    \183\ Approximately 50 banks with under $10 billion in assets 
are affiliates of large banks with over $10 billion in assets and 
subject to Bureau supervisory authority under Section 1025. However, 
these banks are included in this discussion for convenience.
---------------------------------------------------------------------------

    The Bureau believes that its final rule will provide significant 
benefits to smaller creditors. Although some creditors could incur 
potential costs associated with stricter qualification standards for 
newly hired loan officers, because of the Bureau's use of its exemption 
authority, smaller creditors will receive a significant benefit from 
their ability to continue to hedge the prepayment risk inherent in 
fixed-rate mortgages through the sale of discount points to their 
consumers. Smaller creditors normally use this method to hedge such 
risk because the relatively small volume of loans they finance make 
prohibitive the costs they incur in using other means of hedging, such 
as the sale of their loans in the secondary market or through 
transactions in swap and other derivatives markets. Absent the Bureau's 
use of its exemption authority, the statue's prohibition on the sale of 
discount points combined with extensive restrictions on prepayment 
penalties would have resulted in virtually all smaller creditors 
choosing to either originate a smaller volume of mortgage loans or 
bearing a higher degree of portfolio risk. This would result in the 
average smaller creditor being far less competitive with their larger 
rivals, losing market share, paying higher costs of funds, and bearing 
a greater risk of insolvency. The consequence of these disadvantages 
would inevitably be higher frequencies among small creditors of both 
bankruptcy and absorption by large financial holding companies. This 
would result in higher interest rates and reduced access to credit to 
consumers. The final rule saves smaller creditors from these potential 
costs by exempting them from the ban on points and fees.
2. Impact on Consumers in Rural Areas
    Consumers in rural areas are unlikely to experience benefits or 
costs from the final rule that significantly differ from those 
experienced by consumers in general. To the extent that consumers in 
rural areas may depend more heavily on small creditors, however, they 
may be more affected by the effects of the rule on small creditors, as 
described above.

VIII. Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA) generally requires an agency 
to conduct an initial regulatory flexibility analysis (IRFA) and a 
final regulatory flexibility analysis (FRFA) of any rule subject to 
notice-and-comment rulemaking requirements, unless the agency certifies 
that the rule will not have a significant economic impact on a 
substantial number of small entities. The Bureau is also subject to 
certain additional procedures under the RFA involving the convening of 
a panel to consult with small business representatives prior to 
proposing a rule for which an IRFA is required.\184\ The Small Business 
Administration (SBA) designates an entity as ``small'' based on whether 
the primary products or services it offers are within thresholds for 
these products and services set by the North American Industry 
Classification System (NAICS). An entity is considered ``small'' if it 
is an insured depository institution or credit union and holds $175 
million or less in assets, or, if it is a non-depository mortgage 
lender, a mortgage brokerage or a mortgage servicer, if it generates $7 
million or less in annual receipts.\185\
---------------------------------------------------------------------------

    \184\ 5 U.S.C. 609.
    \185\ The current SBA size standards are found on SBA's Web site 
at http://www.sba.gov/content/table-small-business-size-standards.
---------------------------------------------------------------------------

    The Bureau did not certify that the proposed rule would have no 
significant economic impact on a substantial number of small entities. 
The Bureau, consequently, convened a Small Business Review Panel to 
obtain advice and recommendations of representatives of the regulated 
small entities. The section-by-section analysis in the proposal 
included detailed information on the Small Business Review Panel.\186\ 
The Panel's advice and recommendations may be found in the Small 
Business Review Panel Report.\187\ The section-by-section analysis in 
the proposal also included discussion of each Small Business Review 
Panel Report recommendation, and many of recommendations were included 
in the proposal.
---------------------------------------------------------------------------

    \186\ 77 FR 55272, 55341-55343 (Sept. 7, 2012).
    \187\ Final Panel Report available in the Proposed Rule Docket: 
Docket ID No. CFPB-2012-0037, available at http://www.regulations.gov/#!documentDetail;D=CFPB-2012-0037-0001.
---------------------------------------------------------------------------

    The proposal contained an Initial Regulatory Flexibility Analysis 
(IRFA),\188\ pursuant to section 603 of the RFA. In the IRFA, the 
Bureau solicited comment on the impact to small entities that would 
have resulted from the proposed provisions regarding record retention; 
the prohibition on the payment of upfront points and fees; the 
prohibition on compensation based on a transaction's terms; the use of 
mandatory arbitration in mortgage loan agreements; the prohibition on 
creditor financing of single premium credit insurance; loan originator 
qualification requirements; the prohibition of dual compensation of 
loan originators; restrictions on reducing loan originator compensation 
to cover the cost of pricing concessions; and the prohibition on 
compensation of loan originators based on a proxy for a relevant term 
in the mortgage transaction. Comments addressing the impacts of record 
retention, the prohibition on the payment of upfront points and fees, 
the prohibition on compensation based on a mortgage transaction's 
terms, the use of mandatory arbitration in mortgage loan transactions, 
and the prohibition on creditor financing of single premium credit 
insurance are discussed below. Comments addressing loan originator 
qualification requirements, the dual compensation of loan originators, 
the reduction in loan originator compensation to bear the cost of 
pricing concessions, and the compensation of loan originators based on 
a proxy for a term in the mortgage transaction are addressed in the 
section-by-section analysis above. The section-by-section analysis 
above also notes the exemption granted by the Bureau under Dodd-Frank 
Act section 1403 and other authority in the final rule of all entities, 
including small entities, from the statutory ban on upfront points and 
fees.
---------------------------------------------------------------------------

    \188\ 77 FR 55272, 55341-55343 (Sept. 7, 2012).
---------------------------------------------------------------------------

    Based on the comments received, and for the reasons stated below, 
the Bureau is not certifying that the final rule will not have a 
significant economic impact on a substantial number of small entities. 
Accordingly, the Bureau has prepared the following final regulatory 
flexibility analysis pursuant to section 604 of the RFA.

A. A Statement of the Need for, and Objectives of, the Rule

    During the aftermath of the recent crisis in financial markets, in 
2010 the Board issued the 2010 Loan Originator Final Rule. Authority 
for that rule now resides with the Bureau.\189\
---------------------------------------------------------------------------

    \189\ A prior description of the details of the origin and 
nature of the 2010 Loan Originator Final Rule may be found in 
Background, Part II, appearing above.
---------------------------------------------------------------------------

    The 2010 Loan Originator Final Rule addressed many concerns 
regarding the lack of transparency, consumer confusion, and steering 
incentives created by certain residential loan originator compensation 
structures. The Dodd-Frank Act included a number of provisions that 
substantially resembled

[[Page 11400]]

those in the 2010 Loan Originator Final Rule, but also added further 
provisions.
    The Board noted, in adopting the 2010 Loan Originator Final Rule, 
that the Dodd-Frank Act would necessitate further rulemaking to 
implement the additional provisions of the legislation not reflected by 
the regulation. These provisions are new TILA sections 129B(b)(1) 
(requiring each mortgage originator to be qualified and include unique 
identification numbers on loan documents), (b)(2) (requiring depository 
institution compliance procedures), (c)(1) and (c)(2) (prohibiting 
steering incentives including prohibiting mortgage originators from 
receiving compensation that varies based on loan terms and from 
receiving origination charges or fees from persons other than the 
consumer except in certain circumstances), and 129C(d) and (e) 
(prohibiting financing of single-premium credit insurance and providing 
restrictions on mandatory arbitration agreements and waivers of Federal 
claims), as added by sections 1402, 1403, and 1414 of the Dodd-Frank 
Act.
    The Bureau, in undertaking this rulemaking, is also clarifying 
certain provisions of the 2010 Loan Originator Final Rule to provide 
additional clarity and reduce uncertainty to both consumers and covered 
persons.
    The Dodd-Frank Act and TILA authorize the Bureau to adopt 
implementing regulations for the statutory provisions provided by 
sections 1402, 1403, and 1414 of the Dodd-Frank Act. The Bureau is 
using this authority to issue regulations to provide creditors and loan 
originators with clarity about their obligations under these 
provisions. The Bureau is also adjusting or providing exemptions to the 
statutory requirements, including the obligations of small entities, in 
certain circumstances. The Bureau is taking this action in order to 
ease burden when doing so would not sacrifice adequate protection of 
consumers.\190\
---------------------------------------------------------------------------

    \190\ The new statutory requirements relating to compensation 
take effect automatically on January 21, 2013, as written in the 
statute, unless final rules are issued on or prior to that date that 
provide for a later effective date.
---------------------------------------------------------------------------

    The objectives of this rulemaking are: (1) To revise current Sec.  
1026.36 and commentary to implement substantive requirements in new 
TILA sections 129B(b), (c)(1), and (c)(2) and 129C(d) and (e), as added 
by sections 1402, 1403, and 1414 of the Dodd-Frank Act; (2) to clarify 
ambiguities resulting from differences between current Sec.  1026.36 
and the new TILA amendments; (3) to adjust existing rules governing 
compensation to individual loan originators to account for Dodd-Frank 
Act amendments to TILA; and (4) to provide greater clarity and 
flexibility on several issues.
    The Bureau adopts, in the final rule, a complete exemption to the 
Dodd-Frank Act ban on the consumer paying upfront points and fees that 
would otherwise apply to all covered transactions in which anyone other 
than the consumer pays compensation to a loan originator. Specifically, 
the final rule amends Sec.  1026.36(d)(2)(ii) to provide that a payment 
to a loan originator that is otherwise prohibited by section 
129B(c)(2)(A) of the Truth in Lending Act is nevertheless permitted 
pursuant to section 129B(c)(2)(B) of the Act, regardless of whether the 
consumer makes any upfront payment of discount points, origination 
points, or fees, as described in section 129B(c)(2)(B)(ii) of the Act, 
as long as the mortgage originator does not receive any compensation 
directly from the consumer as described in section 129B(c)(2)(B)(i) of 
the Act. Accordingly, the Bureau does not adopt the portion of the 
proposal that would have required creditors or loan originator 
organizations to generally make available an alternative loan without 
discount points or origination points or fees where they offer a loan 
with discount points or origination points or fees. This complete 
exemption is being implemented by the Bureau under Dodd-Frank Act 
section 1403 because, as explained in the section-by-section analysis, 
it is in the interest of consumers and the public interest, as well as 
under other authority.
    The final rule also implements certain other Dodd-Frank Act 
requirements applicable to closed-end consumer credit transactions 
secured by a dwelling and open-end extensions of consumer credit 
secured by a consumer's principal dwelling. Specifically, the rule 
codifies TILA section 129C(d), which creates prohibitions on financing 
of premiums for single-premium credit insurance. The provisions of this 
rule also implement TILA section 129C(e), which restricts agreements 
requiring consumers to submit any disputes to arbitration and limits 
waivers of Federal claims, thereby preserving consumers' ability to 
seek redress through the court system after a dispute arises. The final 
rule also implements TILA section 129B(b)(2), which requires the Bureau 
to prescribe regulations requiring depository institutions to establish 
and monitor compliance of such depository institutions, the 
subsidiaries of such institutions, and the employees of both with the 
requirements of TILA section 129B and the registration procedures 
established under section 1507 of the SAFE Act.
    In addition, the Dodd-Frank Act extended previous efforts by 
lawmakers and regulators to strengthen loan originator qualifications 
and regulate industry compensation practices. New TILA section 129B(b) 
imposes a duty on loan originators to be ``qualified'' and, where 
applicable, registered or licensed as a loan originator under State law 
and the Federal SAFE Act and to include unique identification numbers 
on loan documents. The final rule implements this section and expands 
consumer protections by requiring entities whose individual loan 
originators are not subject to SAFE Act licensing requirements, 
including depositories and bona fide nonprofit loan originator 
entities, to: (1) Ensure that their individual loan originators, hired 
on or after the rule's effective date (or otherwise not screened 
according to procedures in place when they were hired), meet character 
and fitness and criminal background standards similar to the licensing 
standards that the SAFE Act applies to employees of non-bank loan 
originators; and (2) provide appropriate training to their individual 
loan originators commensurate with the mortgage origination activities 
of the individual.
    Furthermore, the final rule adjusts existing rules governing 
compensation to individual loan originators in connection with closed-
end mortgage transactions to account for Dodd-Frank Act amendments to 
TILA and provide greater clarity and flexibility. Specifically, the 
final rule preserves, with some refinements, the prohibition on the 
payment or receipt of commissions or other loan originator compensation 
based on the terms of the transaction (other than loan amount) and on 
loan originators being compensated simultaneously by both consumers and 
other persons in the same transaction. To further reduce potential 
steering incentives for loan originators created by certain 
compensation arrangements, the final rule also clarifies and revises 
restrictions on profits-based compensation for loan originators, 
depending on the potential for incentives to steer consumers to 
different transaction terms.
    Finally, the final rule makes two changes to the current record 
retention provisions of Sec.  1026.25 of TILA. The revised provisions: 
(1) Require a creditor to maintain records of the compensation paid to 
a loan originator, and the governing compensation

[[Page 11401]]

agreement, for three years after the date of payment; and (2) require a 
loan originator organization to maintain records of the compensation it 
receives from a creditor, a consumer, or another person and that it 
pays to its individual loan originators, as well as the compensation 
agreement that governs those receipts or payments, for three years 
after the date of the receipts or payments. By ensuring that records 
associated with loan originator compensation are retained for a time 
period commensurate with the statute of limitations for causes of 
action under TILA section 130 and are readily available for 
examination, these modifications to the existing recordkeeping 
provisions will prevent circumvention or evasion of TILA and facilitate 
compliance.
    The legal basis for the final rule is discussed in detail in the 
legal authority analysis in the section-by-section analysis above.

B. Summary of Issues Raised by Comments in Response to the Initial 
Regulatory Flexibility Analysis.

    In accordance with section 3(a) of the RFA, the Bureau prepared an 
IRFA. In the IFRA, the Bureau estimated the possible compliance costs 
for small entities from each major component of the rule against a pre-
statute baseline. The Bureau requested comments on the IRFA but did not 
receive any such comments. The Bureau did receive some comments 
describing in general terms the impact of the proposed rule on small 
creditors and loan originator organizations and the need for exemptions 
for small entities from various provisions of the proposed rule. These 
comments, and the responses, are discussed in the section-by-section 
analysis.

C. Response to the Comment From the Small Business Administration 
Office of Advocacy

    SBA Advocacy provided a formal comment letter to the Bureau in 
response to the proposal. Among other things, the letter expressed 
concern about the following issues: Record retention; the prohibition 
of consumer payment of upfront points and fees; the restrictions on 
compensation based on transaction terms; and the mandatory arbitration, 
waiver of Federal claims, and credit insurance provisions.
1. Record Retention
    SBA Advocacy noted that the Small Entity Representatives had 
expressed concern that the proposed requirements for a loan originator 
organization or creditor to retain for three years documents evidencing 
the amount of compensation paid to a loan originator were unclear and 
overbroad, especially given the broad definition of ``compensation'' in 
the proposed rule. The Bureau disagrees that the record retention 
requirements are either unclear or overbroad, and the Bureau provides 
examples in the commentary to Sec.  1026.25(c)(2) of the types of 
records that could be sufficient to satisfy the record-retention 
requirements, depending on the type of compensation.
2. Upfront Points and Fees
    SBA Advocacy relayed the Small Entity Representatives' strong 
support of the Bureau's proposed use of its exemption authority under 
the Dodd-Frank Act to allow consumers to pay upfront discount and 
origination points and fees. SBA Advocacy noted that the Small Entity 
Representatives were concerned, however, that the proposal's 
requirement for creditors or loan originator organizations to offer an 
alternative loan without discount points or origination points or fees 
(the ``zero-zero alternative'') would have been unrealistic for small 
entities. For reasons discussed in the section-by-section analysis, the 
Bureau is not implementing the zero-zero alternative and is instead 
exercising its authority under the points and fees provision to effect 
a complete exemption to the prohibition on consumer payment of upfront 
points and fees.
3. Compensation Based on Transaction Terms
    SBA Advocacy expressed concern with the portion of the proposal 
that would have permitted bonuses and contributions to non-designated 
plans from mortgage-related profits only if the mortgage-business 
revenue component of total revenues is below a certain threshold.\191\ 
For reasons discussed in the section-by-section analysis, the final 
rule does not include this provision. Instead, the Bureau is 
implementing a final rule that permits compensation under non-deferred 
profits-based compensation plans, in which the compensation is 
determined with reference to profits from mortgage-related business, 
provided that the compensation is not directly or indirectly based on 
the terms of the individual's residential mortgage loan transactions 
and the compensation is equal to or less than 10 percent of the loan 
originator's total compensation.
---------------------------------------------------------------------------

    \191\ The Bureau previously used the term ``qualified,'' not 
``designated.''
---------------------------------------------------------------------------

    SBA Advocacy also expressed concern that any mistake in 
compensation structure might result in loans being returned from the 
secondary market and a massive buyback. To the extent that violations 
of the rule could lead to this result, it is possible that such an 
event could occur today because Regulation Z already contains 
provisions that prohibit the payment of compensation based on 
transaction terms as well as payment of loan originator compensation by 
both a consumer and a person other than the consumer on the same 
transaction. The final rule provides clarifications and grants relief 
under certain circumstances with respect to these existing 
restrictions.
    The Bureau believes that the application of the 10-percent total 
compensation test will be less likely to result in the scenarios 
described by SBA Advocacy than the proposed revenue test. The Bureau 
acknowledges that several industry commenters expressed concern about 
potential TILA liability where an error is made under the revenue test 
calculation; SBA Advocacy's concern about buyback is related to these 
concerns. As a threshold matter, creditors and loan originator 
organizations can choose whether or not to pay this type of 
compensation, and a payer of compensation has full knowledge and 
control over the numerical and other information used to determine the 
compensation. That said, the Bureau is sensitive to SBA Advocacy's 
concerns but believes they are not warranted to nearly the same degree 
with the 10-percent total compensation test. Under the revenue test, an 
error in determining the amount of total revenues or mortgage-related 
revenues could have potentially impacted all awards of profits-based 
compensation to individual loan originators for a particular time 
period. Because the 10-percent total compensation test focuses on 
compensation at the individual loan originator level, however, the 
potential liability implications of a calculation error largely would 
be limited to the effect of that error alone. In other words, in 
contrast to the revenue test, an error under the 10-percent total 
compensation test would not likely have downstream liability 
implications as to other compensation payments across the company or 
business unit and, therefore, would be extremely unlikely to result in 
the ``massive buyback'' described by SBA Advocacy. The Bureau also 
believes that creditors and loan originator organizations will develop 
policies and procedures to minimize the possibility of such errors.

[[Page 11402]]

4. Mandatory Arbitration, Waivers of Federal Claims, and Credit 
Insurance
    SBA Advocacy commented that it was uncertain why the mandatory 
arbitration and credit insurance provisions were addressed in the loan 
originator compensation rule. The provisions in the final rule are 
intended to clarify the prohibitions on mandatory arbitration, waivers 
of Federal claims, and creditor financing of single premium credit 
insurance in the Dodd-Frank Act.

D. Description and, Where Feasible, Provision of an Estimate of the 
Number of Small Entities to Which the Final Rule Will Apply

    As discussed in the Small Business Review Panel Report, for 
purposes of assessing the impacts of the regulations being implemented 
on small entities, ``small entities'' are defined in the RFA to include 
small businesses, small nonprofit organizations, and small government 
jurisdictions. 5 U.S.C. 601(6). A ``small business'' is determined by 
application of SBA regulations and reference to the North American 
Industry Classification System (``NAICS'') classifications and size 
standards.\192\ 5 U.S.C. 601(3). A ``small organization'' is any ``not-
for-profit enterprise which is independently owned and operated and is 
not dominant in its field.'' 5 U.S.C. 601(4). A ``small governmental 
jurisdiction'' is the government of a city, county, town, township, 
village, school district, or special district with a population of less 
than 50,000. 5 U.S.C. 601(5).
---------------------------------------------------------------------------

    \192\ The current SBA size standards are available on the SBA's 
Web site at http://www.sba.gov/content/table-small-business-size-standards.
---------------------------------------------------------------------------

    During the Small Business Review Panel process, the Bureau 
identified six categories of small entities that may be subject to the 
proposed rule for purposes of the RFA:
     Commercial banks (NAICS 522110);
     savings institutions (NAICS 522120); \193\
---------------------------------------------------------------------------

    \193\ Savings institutions include thrifts, savings banks, 
mutual banks, and similar institutions.
---------------------------------------------------------------------------

     credit unions (NAICS 522130);
     firms providing real estate credit (NAICS 522292);
     mortgage brokers (NAICS 522310); and
     small nonprofit organizations.
    Commercial banks, savings institutions, and credit unions are small 
businesses if they have $175 million or less in assets. Firms providing 
real estate credit and mortgage brokers are small businesses if their 
average annual receipts do not exceed $7 million.
    A small nonprofit organization is any not-for-profit enterprise 
that is independently owned and operated and is not dominant in its 
field. Small nonprofit organizations engaged in loan origination 
typically perform a number of activities directed at increasing the 
supply of affordable housing in their communities. Some small nonprofit 
organizations originate mortgage loans for low and moderate-income 
individuals while others purchase loans originated by local community 
development lenders.
    The Bureau's estimated number of affected and small entities by 
NAICS Code and engagement in loan origination appears in the table 
below. The estimates in this analysis are based upon data and 
statistical analyses performed by the Bureau. To estimate counts and 
properties of mortgages for entities that do not report under HMDA, the 
Bureau has matched HMDA data to Call Report data and NMLS and has 
statistically projected estimated loan counts for those depository 
institutions that do not report these data either under HMDA or on the 
NCUA call report. The Bureau has projected originations of higher-
priced mortgage loans for depositories that do not report HMDA in a 
similar fashion. These projections use Poisson regressions that 
estimate loan volumes as a function of an institution's total assets, 
employment, mortgage holdings and geographic presence.

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                      Entities that      Small entities
                                                                                                                      originate any      that originate
                         Category                              NAICS code       Total entities     Small entities     mortgage loans      any mortgage
                                                                                                                           \b\               loans
--------------------------------------------------------------------------------------------------------------------------------------------------------
Commercial Banking.......................................             522110              6,505              3,601          \a\ 6,307          \a\ 3,466
Savings Institutions.....................................             522120                930                377            \a\ 922            \a\ 373
Credit Unions \c\........................................             522130              7,240              6,296          \a\ 4,178          \a\ 3,240
Real Estate Credit d e...................................             522292              2,787              2,294              2,787          \a\ 2,294
Mortgage Brokers.........................................             522310              8,051              8,049            \f\ N/A            \f\ N/A
                                                          ----------------------------------------------------------------------------------------------
    Total \g\............................................  .................             25,513             20,617             14,194              9,373
--------------------------------------------------------------------------------------------------------------------------------------------------------
Source: 2011 HMDA, Dec 31, 2011 Bank and Thrift Call Reports, Dec 31, 2011 NCUA Call Reports, 2010 and 2011 NMLSR.
\a\ For HMDA reporters, loan counts from HMDA 2011. For institutions that are not HMDA reporters, loan counts projected based on Call Report data fields
  and counts for HMDA reporters.
\b\ Entities are characterized as originating loans if they make one or more loans.
\c\ Does not include cooperatives operating in Puerto Rico. The Bureau has limited data about these institutions, which are subject to Regulation Z, or
  their mortgage activities.
\d\ NMLSR Mortgage Call Report (``MCR'') for 2011. All MCR reporters that originate at least one loan or that have positive loan amounts are considered
  to be engaged in real estate credit (instead of purely mortgage brokers). For any institutions with missing revenue values, the probability that the
  institution was a small entity is estimated based on the count and amount of originations and the count and amount of brokered loans.
\e\ Data do not distinguish nonprofit from for-profit organizations, but Real Estate Credit presumptively includes nonprofit organizations.
\f\ Mortgage brokers do not originate (back as a creditor) loans.
\g\ The total may be overstated to the extent that some entities that act as mortgage brokers also appear in other entity categories.


[[Page 11403]]

E. Projected Reporting, Recordkeeping, and Other Compliance 
Requirements of the Final Rule, Including an Estimate of the Classes of 
Small Entities Which Will Be Subject to the Requirement and the Type of 
Professional Skills Necessary for the Preparation of the Report

1. Reporting Requirements
    The final rule does not impose new reporting requirements.
2. Recordkeeping Requirements
    Regulation Z currently requires creditors to create and maintain 
records to demonstrate their compliance with provisions that apply to 
the compensation paid to or received by a loan originator. As discussed 
above in part V, the final rule requires creditors to retain these 
records for a three-year period, rather than for a two-year period as 
currently required. The rule applies the same requirement to 
organizations when they act as a loan originator in a transaction, even 
if they do not act as a creditor in the transaction. The revised 
recordkeeping requirements, however, do not apply to individual loan 
originators.
    As discussed in the section-by-section analysis, the Bureau 
recognizes that increasing the period a creditor must retain records 
for specific information related to loan originator compensation from 
two years, as currently provided in Regulation Z, to three years may 
impose some marginal increase in the creditor's compliance burden in 
the form of the incremental cost of storage. The Bureau believes, 
however, that creditors should be able to use existing recordkeeping 
systems to maintain the records for an additional year at minimal cost. 
Similarly, although loan originator organizations may incur some costs 
to establish and maintain recordkeeping systems, loan originator 
organizations may be able to use existing recordkeeping systems that 
they maintain for other purposes at minimal cost. During the Small 
Business Review Panel process, the Small Entity Representatives were 
asked about their current record retention practices and the potential 
impact of the proposed enhanced record retention requirements. Of the 
few Small Entity Representatives who provided feedback on the issue, 
one creditor stated that it maintained detailed records of compensation 
paid to all of its employees and that a regulator already reviews its 
compensation plans regularly, and another creditor reported that it did 
not believe the proposed record retention requirement would require it 
to change its current practices. Therefore, the Bureau does not believe 
that the record retention requirements will create undue burden for 
small entity creditors and loan originator organizations.
3. Compliance Requirements
    As discussed in detail in the section-by-section analysis, the 
final rule imposes new compliance requirements on creditors and loan 
originator organizations. The possible compliance costs for small 
entities from each major component of the final rule are presented 
below. In most cases, the Bureau presents these costs against a pre-
statute baseline. As noted above in the section 1022(b)(2) analysis in 
part VII above, provisions where the Bureau has used its exemption 
authority are discussed relative to the statutory provisions. The 
analysis below considers the benefits, costs, and impacts of the 
following major provisions on small entities: (1) Upfront points and 
fees; (2) compensation based on a term of a transaction; and (3) 
qualification requirements for loan originations. It also discusses 
other provisions in less detail.
a. Upfront Points and Fees
    The Dodd-Frank Act prohibits consumer payment of upfront points and 
fees in all residential mortgage loan transactions except those where 
no one other than the consumer pays a loan originator compensation tied 
to the transaction (e.g., a commission) and provides the Bureau 
authority to waive or create exemptions from this prohibition if doing 
so is in the interest of consumer and in the public interest. As 
discussed in the Background and section-by-section analysis, the Bureau 
adopts in the final rule a complete exemption to the statutory ban on 
upfront points and fees. Specifically, the final rule amends Sec.  
1026.36(d)(2) to provide that a payment to a loan originator that is 
otherwise prohibited by section 129B(c)(2)(A) of TILA is nevertheless 
permitted pursuant to section 129B(c)(2)(B) of TILA, regardless of 
whether the consumer makes any upfront payment of discount points, 
origination points, or fees, as described in section 129B(c)(2)(B)(ii) 
of TILA, as long as the mortgage originator does not receive any 
compensation directly from the consumer as described in section 
129B(c)(2)(B)(i) of TILA.
Benefits to Small Entities
    The final rule's treatment of the payment of upfront points and 
fees has a number of potential benefits for small entities. First, 
relative to the complete prohibition on the payment of points and fees 
that the Dodd-Frank Act would have applied absent the exercise of the 
Bureau's exemption authority, the final rule maintains the opportunity 
during origination for the current wide choice consumers have in 
selecting a specific mortgage product from the current variety of 
mortgage products available to them. The ability of creditors and loan 
originator organizations, particularly small ones, to offer consumers 
this wide variety of choices, relative to that available under the 
baseline, occurs primarily because under the final rule consumers and 
particularly small creditors and loan originator organizations retain 
the opportunity to exchange, at the time of origination, a mutually 
agreeable share of the financial risk inherent in the future payments 
required by any given mortgage loan. Consumers, in this exchange, may 
decide to purchase discount points from the loan originator and in 
return receive a reduced loan rate which is commensurate with the lower 
degree of credit and prepayment risk now borne by the creditor holding 
the loan.
    Moreover, the ability of small creditors to charge discount points 
in exchange for lower interest rates would accommodate those consumers 
who prefer to pay more at settlement in exchange for lower monthly 
interest charges and could produce a greater volume of available credit 
in residential mortgage markets. Preserving this ability would 
potentially allow a wider access to homeownership, which would benefit 
consumers, creditors, loan originator organizations, and individual 
loan originators. The ability to charge origination fees upfront also 
would allow small creditors to recover fixed costs at the time they are 
incurred rather than over time through increased interest payments or 
through the secondary market prices. And similarly, preserving the 
flexibility for affiliates of creditors and loan originator 
organizations to charge fees upfront should allow for these firms to 
charge directly for their services. This means that creditors and loan 
originator organizations may be less likely to divest such entities 
than if the Dodd-Frank Act mandate takes effect as written.
Costs to Small Entities
    The Bureau's exercise of its statutory authority to create a full 
exemption from the Dodd-Frank Act prohibition on consumer payment of 
upfront points and fees maintains the current financial environment in 
which small creditors operate. Small creditors, and indirectly, loan 
originator organizations funding their loans through such creditors, 
have, relative to their larger rivals, limited

[[Page 11404]]

means of hedging the costs of all the financial (credit and interest 
rate/prepayment) risk posed to them by the origination of a mortgage. 
These costs are borne by a creditor retaining such mortgages in its 
portfolio, but they are also borne by those that sell their mortgages 
in the secondary market, owing to the lower price investors will pay 
for mortgage pools with higher credit and prepayment risk.
    Small creditors bear relatively high costs of participating in 
ancillary markets for financial instruments through which their larger 
rivals can more easily hedge mortgage risk. The primary means by which 
these small institutions can hedge this type of risk is by allowing 
consumers to purchase discount points. The sale of discount points to 
consumers in exchange for lower interest rates on loans can still cost 
smaller creditors relatively more, per dollar of current loan value, 
than their larger rivals, but, to the extent it exists, this relative 
cost posed to small creditors is far lower than that of using 
alternative means of hedging. If the Bureau had decided to finalize the 
prohibition on the payment of discount points, it would have, in 
combination with current regulatory restrictions on prepayment 
penalties, entirely eliminated the ability of small institutions to 
hedge risk at a price that allows them to compete with larger financial 
institutions. This inability to compete could conceivably have resulted 
in a significant reduction in the number of small creditors, whether 
through dissolution or through absorption by larger financial firms.
    This ability to hedge risk through the continued ability of 
consumers to purchase discount points, however, could inflict losses to 
small creditors. These losses, while relatively minor in comparison to 
those benefits previously described, could nevertheless be of 
significant concern.
    First, limiting the advantage of larger creditors in offering 
different combinations of points and fees would aid the competitiveness 
of small creditors.
    Second, small creditors most often serve relatively specialized 
markets that are distinguished by several criteria, including a 
relatively more stable consumer base. Implementation of the prohibition 
on consumer payment of upfront points and fees without exercise of 
exemption authority could have further increased both the stability and 
size of this base, by enhancing consumer perceptions of the greater 
degree of transparency exhibited by small creditors in comparison to 
larger institutions in the provision of all financial services. Larger 
creditors, for example, would have an incentive to offset any risk to 
mortgage profits from the statutory ban on points and fees by charging 
additional service fees to borrowers, depositors, and other clients. 
Since small creditors engage in these activities to a lesser extent, 
implementation of the prohibition on consumer payment of upfront points 
and fees could have enhanced the favorable reputation of small 
creditors in all lines of their business, allowing them to preserve 
their relatively larger percentage of long-term consumer relationships 
while potentially increasing the size of all of the financial markets 
they serve.
    Third, even in periods of significant interest rate volatility, 
small creditors often exhibit a relatively greater willingness to hold 
mortgages in portfolio rather than selling them in the secondary 
market, as do larger institutions. This propensity mitigates the need 
for small creditors to follow the practices imposed by the secondary 
market on larger creditors. Mortgage pooling, for example, which is 
necessary to securitization, requires larger creditors to focus on 
lending to consumers with relatively standard credit profiles. The 
comparative advantage of smaller creditors in serving consumers 
exhibiting a wider array of credit histories could conceivably increase 
when the variety of mortgage products offered by larger creditors 
decreases and, consequently, the value of diversity in consumers served 
increases.
b. Compensation Based on Transaction Terms
    The final rule clarifies and revises restrictions on profits-based 
compensation from mortgage-related business profits for loan 
originators based on the analysis of the potential incentives that loan 
originators have to steer consumers to different transaction terms in a 
variety of contexts. As discussed in the section-by-section analysis, 
Sec.  1026.3(d)(1)(iii) permits creditors or loan originators 
organizations to make contributions from mortgage-related profits to 
``designated tax-advantaged plans'' as listed in that paragraph.
    As discussed in the section-by-section analysis, Sec.  
1026.36(d)(1)(iii) permits creditors or loan originator organizations 
to make contributions from mortgage-related profits to 401(k) plans, 
and other ``designated tax-advantaged plans,'' such as Simplified 
Employee Pensions (SEPs) and savings incentive match plans for 
employees (SIMPLE plans), provided the contributions are not based on 
the terms of the individual loan originator's transactions. Section 
1026.36(d)(1)(iv) permits creditors or loan originator organizations to 
pay compensation under non-deferred profits-based compensation plans 
from mortgage-related business profits if: (1) The individual loan 
originator is the loan originator for ten or fewer mortgage 
transactions during the preceding 12 months (a de minimis number of 
originations); or (2) the percentage of an individual loan originator's 
compensation under a non-deferred profits-based compensation plan is 
equal to or less than 10 percent of that individual loan originator's 
total compensation. While such contributions and bonuses can be funded 
from general mortgage profits, the amounts paid to individual loan 
originators cannot be based on the terms of the transactions that the 
individual had originated.
Benefits to Small Entities
    Small entities have, through outreach and inquiries, expressed 
concern over the potential costs they could incur owing to their 
difficulty, particularly in contrast to large institutions, in 
interpreting the restrictions the existing rule imposes on methods of 
compensation for individual loan originators, such as compensation 
under non-deferred profits-based compensation plans paid to individual 
loan originators or compensation by creditors or loan originator 
organizations through designated tax-advantaged plans. Small entities 
will benefit, in both absolute and relative terms, from clarification 
regarding permissible forms of loan originator compensation. Such 
clarification will reduce legal and related costs of interpreting the 
existing rule and the risk of unintended violations of that regulation.
    Small entities engaging in compensating individual loan originators 
through contributions to designated tax-advantaged plans in which the 
individual loan originators participate will also continue to benefit 
from this practice under the final rule. Those small entities that do 
not currently offer such plans would benefit, with the increased 
clarity of the final rule, from the opportunity to do so should they so 
choose.\194\ For small entities that currently do not pay bonuses out 
of mortgage-related profits

[[Page 11405]]

because of uncertainty about the application of the existing rule, the 
final rule will allow these types of compensation up to the 10-percent 
cap or under the de minimis exception. A final benefit is provided to 
those small entities that have working for them individual loan 
originators who are the loan originators for no more than 10 
transactions per year, owing to the de minimis provision in the final 
rule that exempts these employees from limitations on profits-based 
bonuses. The Bureau believes that small entities are more likely than 
larger institutions to have producing managers or other employees whose 
day-to-day responsibilities are diverse and fluid, in which case they 
are more likely to act as a loan originator on occasion outside of 
their primary or secondary responsibilities. As a result, small 
entities for which such individuals work, as well as the individuals 
themselves, would benefit from the de minimis exception to allow their 
participation in profits-based compensation from mortgage-related 
business profits for which they might otherwise not be eligible under 
the other restrictions in the final rule.
---------------------------------------------------------------------------

    \194\ Some firms may choose not to offer such compensation. In 
certain circumstances an originating institution (perhaps unable to 
invest in sufficient management expertise) will see reduced 
profitability from adopting profits-based compensation plans.
---------------------------------------------------------------------------

Costs to Small Entities
    Small entities that currently compensate their individual loan 
originators through profits-based compensation, such as by compensation 
under a non-deferred profits-based compensation plan limited by the 
final rule, will incur compliance costs if they currently pay, or wish 
to pay in the future, compensation under a non-deferred profits-based 
compensation plan to individual loan originators outside of the 10-
percent cap or the de minimis exception set forth in the final rule. 
Small entities that currently compensate individual loan originators 
through non-deferred profits-based compensation in excess of 10 percent 
of individual loan originators' total compensation might have to adjust 
their profits-based compensation to comply with the 10-percent total 
compensation test under the final rule. This cost to comply will likely 
be minimal to nominal, however, because the final rule allows firms to 
pay profits-based compensation from non-mortgage related business above 
the 10-percent limits so long as those profits are determined in 
accordance with reasonable accounting methods and the compensation is 
not based on the terms of that individual's residential mortgage 
transactions. Thus, this would presumably create a compliance cost only 
for small entities that do not currently utilize reasonable accounting 
methods for internal accounting or other purposes: For these entities, 
the costs of compliance with the final rule could include making needed 
revisions to internal accounting practices, re-negotiating the 
remuneration terms in the contracts of individual loan originators 
currently working for the small entity, and updating any other 
practices essential to these methods of compensation. Owing to their 
current usage of these compensation programs, these firms may encounter 
higher retention costs and possibly lower levels of ability on the part 
of new hires, relative to the average ability displayed by the loan 
originators they currently employ.
c. Loan Originator Qualification Requirements
    The final rule implements a Dodd-Frank Act provision requiring both 
individual loan originators and loan originator organizations to be 
``qualified'' and to include their license or registration numbers on 
loan documents. Loan originator organizations are required to ensure 
that individual loan originators who work for them are licensed or 
registered under the SAFE Act where applicable. Loan originator 
organizations and the individual loan originators that are primarily 
responsible for a particular transaction are required to list their 
license or registration numbers on key loan documents along with their 
names. Loan originator organizations are required to ensure that their 
loan originator employees meet applicable character, fitness, and 
criminal background check requirements.
Benefits to Small Entities
    Benefits from an enhanced reputation among consumers will accrue to 
those small entities employing originators not currently required to be 
licensed under the SAFE Act. Increased consumer confidence in such 
institutions arises from the knowledge that the small entity has 
ensured that the loan originators it employs have satisfied training 
requirements commensurate with their responsibilities as originators 
and they have met the character, fitness, and criminal background check 
requirements similar to those specified for licensees in the SAFE Act.
Costs to Small Entities
    The final rule requires small entities, such as many depositories 
and bona fide nonprofit organizations, to adopt standards similar to 
those of the SAFE Act in regard to ongoing training, and the 
satisfaction of character and fitness standards, including having no 
felony convictions within the previous seven years. The Bureau 
estimates the costs of compliance with these standards to include the 
cost of obtaining a criminal background check and credit reports for 
new hires and existing employees who were not screened at the time of 
hire, and the time involved in checking employment and character 
references of any such individuals and evaluating the information. The 
additional time and cost required to provide occasional, appropriate 
training to individual loan originators will vary as a consequence of 
the skill and experience level of those individuals.
    The Bureau believes that virtually all small depositories and 
nonprofit organizations have already adopted such screening and 
training requirements as a matter of good business practice and the 
Bureau anticipates that the training that many individual originators 
employed by small depositories and nonprofits already receive will be 
adequate to meet the requirement. The Bureau expects that in no case 
would the training needed to satisfy the requirement be more 
comprehensive, time-consuming, or costly than the online training 
approved by the NMLSR to satisfy the continuing education requirement 
imposed under the SAFE Act on those individuals who are subject to 
state licensing.
    The requirement to include the names and NMLSR identifiers of 
originators on loan documents may impose some additional costs relative 
to current practice. These costs, however, may be mitigated by the 
existing requirement of the Federal Housing Finance Agency to include 
the NMLSR numerical identifier of individual loan originators and loan 
originator organizations on all applications for Fannie Mae and Freddie 
Mac loans.
d. Other Provisions
    The final rule adjusts existing rules governing compensation to 
loan originators in connection with closed-end mortgage transactions to 
implement Dodd-Frank Act amendments to TILA, to provide greater clarity 
on the 2010 Loan Originator Final Rule, and to provide loan originator 
increased flexibility to engage in certain compensation practices. 
These provisions prohibit the compensation of loan originators by both 
consumers and other persons in the same transaction. They also preserve 
the current prohibition on the payment or receipt of commissions or 
other compensation based on the ``transaction terms'' governing the 
mortgage loan or factors that, for purposes of compensation,

[[Page 11406]]

serve an equivalent role and may consequently be regarded as 
``proxies'' for any of these transactions terms. The final rule, 
however, clarifies the existing prohibition by providing a new and 
explicit definition of a ``term of a transaction'' and explicitly 
addresses the criteria that determine whether a factor appearing in the 
loan is prohibited by its role as a proxy for a loan term and serving 
as a basis for compensation.
    The final rule also clarifies several additional aspects of 
compensation provided to a loan originator. First, the final rule 
revises the existing rule to allow ``broker splits'' by permitting a 
loan originator organization receiving compensation directly from a 
consumer in connection with a given transaction to pay and an 
individual loan originator to receive compensation in connection with 
this transaction (e.g., a commission). Second, the final rule clarifies 
that payments to a loan originator paid on the consumer's behalf by a 
person other than a creditor or its affiliates, such as a non-creditor 
seller, home builder, home improvement contractor, or real estate 
broker, are considered compensation received directly from the consumer 
if they are made pursuant to an agreement between the consumer and the 
person other than the creditor or its affiliates. Third, the final rule 
allows reductions in loan originator compensation where there are 
unforeseen circumstances to defray the cost, in whole or part, of an 
increase in the actual settlement cost above an estimated settlement 
cost disclosed to the consumer pursuant to section 5(c) of RESPA or 
omitted from that disclosure.
    These provisions will provide greater clarity and flexibility, 
relative to the statutory provisions of the Dodd-Frank Act, for the 
purposes of compliance with the final rule. They should lower the costs 
of compliance for small entities. The final rule's allowance of broker 
splits, for example, provides small entities a greater degree of 
flexibility in their choice of compensation practices than under the 
2010 Loan Originator Rule. Small entities, by virtue of their size, 
often have a disadvantage in competing with larger institutions in the 
market for skilled labor. The final rule will, as a consequence, lower 
the overall costs incurred by the small entity in retaining the 
individual loan originators they currently employ as well as the hiring 
of new originators. Greater clarity provided by the final rule in the 
definition of a ``term of a transaction'' and by explicitly addressing 
factors on which compensation cannot be based because they are 
``proxies'' for a term of a transaction, will significantly reduce the 
uncertainty faced by small entities in their adoption of compensation 
procedures and in negotiating compensation with individual loan 
originators. They also serve, at the same time, to reduce the risk to 
small entities, particularly in relation to large institutions 
employing specialized staff, of unintentional violations of prohibited 
compensation practices. The final rule also bestows a similar benefit 
to small entities, in regard to the risk and consequent costs of 
unintentional noncompliance, by clarifying the nature of payments to an 
individual originator from unaffiliated third parties in a loan 
transaction which serve as compensation paid by the consumer to that 
individual.
    The final rule also implements the Dodd-Frank Act requirement that 
prohibits mandatory arbitration clauses in mortgage loan agreements. It 
also implements the Dodd-Frank Act requirement concerning waivers of 
Federal claims in court. Finally, the final rule implements the Dodd-
Frank Act requirement that prohibit the financing of single-premium 
credit insurance. Firms may incur some costs to comply with each of 
these prohibitions, such as amending standard contract forms.

F. Estimate of the Classes of Small Entities Which Will Be Subject to 
the Requirement and the Type of Professional Skills Necessary for the 
Preparation of the Report or Record

    Section 603(b)(4) of the RFA requires an estimate of the classes of 
small entities that will be subject to the requirements. The classes of 
small entities that will be subject to the reporting, recordkeeping, 
and compliance requirements of the final rule are the same classes of 
small entities that are identified above in part VIII.
    Section 603(b)(4) of the RFA also requires an estimate of the type 
of professional skills necessary for the preparation of the reports or 
records. The Bureau anticipates that the professional skills required 
for compliance with the final rule are the same or similar to those 
required in the ordinary course of business of the small entities 
affected by the final rule. Compliance by the small entities that will 
be affected by the final rule will require continued performance of the 
basic functions that they perform today.

G. Description of the Steps the Agency Has Taken To Minimize the 
Significant Economic Impact on Small Entities

1. Upfront Points and Fees
    The Dodd-Frank Act prohibits consumer payment of upfront points and 
fees in all residential mortgage loan transactions (as defined in the 
Dodd-Frank Act) except those where no one other than the consumer pays 
a loan originator compensation tied to the transaction (e.g., a 
commission). As discussed in the Background and section-by-section 
analysis, the Bureau adopts in the final rule a complete exemption to 
the statutory ban on upfront points and fees under its Dodd-Frank Act 
authority to create such an exemption in the interest of consumers and 
in the public interest, and other authority. Specifically, the final 
rule amends Sec.  1026.36(d)(2)(ii) to provide that a payment to a loan 
originator that is otherwise prohibited by section 129B(c)(2)(A) of 
TILA is nevertheless permitted pursuant to section 129B(c)(2)(B) of 
TILA, regardless of whether the consumer makes any upfront payment of 
discount points, origination points, or fees, as described in section 
129B(c)(2)(B)(ii) of TILA, as long as the mortgage originator does not 
receive any compensation directly from the consumer as described in 
section 129B(c)(2)(B)(i) of TILA. The Bureau has attempted to mitigate 
the burden of the more limited exemption in the proposal that would 
have required creditors or loan originator organizations to generally 
make available an alternative loan without discount points or 
origination points or fees, where they offer a loan with discount 
points or origination points or fees.
2. Compensation Based on Transaction Terms
    The final rule clarifies and revises restrictions on profits-based 
compensation from mortgage-related business profits for loan 
originators, depending on the potential incentives to steer consumers 
to different transaction terms. As discussed in the section-by-section 
analysis, the final rule permits creditors or loan origination 
organizations to make contributions from profits derived from mortgage-
related business to 401(k) plans, and other ``designated tax-advantaged 
plans'' as long as the compensation is not based on the terms of that 
individual loan originator's residential mortgage loan transactions. 
Because these designated plans include Simplified Employee Pensions 
(SEPs) and savings incentive match plans for employees (SIMPLE plans) 
that may

[[Page 11407]]

particularly benefit small entities who are eligible to set them up, 
the impact of this provision on small entities is minimized.
    The final rule also permits creditors or loan originator 
organizations to pay non-deferred profits-based compensation from 
mortgage-related business profits if the compensation is not based on 
the terms of that individual loan originator's residential mortgage 
loan transactions and if: (1) The individual loan originator affected 
has been the loan originator for ten or fewer mortgage transactions 
during the prior 12 months; or (2) the percentage of an individual loan 
originator's compensation that may be attributable to the bonuses is 
equal to or less than 10 percent of that loan originator's total 
compensation. The Bureau attempted to minimize the burden of these 
requirements by modifying the final rule from the proposed requirements 
in two respects.
    First, the Bureau is not adopting the proposed revenue test and is 
instead adopting the 10-percent total compensation test. The Bureau 
believes that, relative to the revenue test, the 10-percent total 
compensation test reduces the cost of the compensation restrictions to 
small entities. As described earlier in the section-by-section 
analysis, the Bureau received a number of comments asserting that the 
revenue test would disadvantage creditors and loan originator 
organizations that are monoline mortgage businesses. The revenue test 
would have effectively precluded monoline mortgage businesses from 
paying profits-based bonuses to their individual loan originators or 
making contributions to those individuals' non-designated plans because 
these institutions' mortgage-related revenues as a percentage of total 
revenues would always exceed 25 or 50 percent (the alternative 
thresholds proposed). A test focused on compensation at the individual 
loan originator level, rather than company-wide, would be available to 
all companies regardless of the diversity of their business lines. 
Further, as the Bureau noted in the Small Business Review Panel Outline 
(and as stated by at least one commenter), creditors and loan 
originator organizations that are monoline mortgage businesses 
disproportionately consist of small entities. Unlike the revenue test, 
the 10-percent total compensation test will place restrictions on 
profits-based compensation (such as non-deferred profits-based 
compensation) that are neutral across entity size. The Bureau also 
believes that the relative simplicity of the 10-percent total 
compensation test in comparison to the revenue test--e.g., calculation 
of total revenues is not required--will also benefit small entities.
    Second, the Bureau, as described in the section-by-section analysis 
above, has increased the threshold of the de minimis origination 
exception under Sec.  1026.36(d)(1)(iv)(B)(2) from five to ten 
consummated transactions. As noted earlier in this FRFA, the Bureau 
believes that small entities are more likely than larger institutions 
to have producing managers or other employees whose day-to-day 
responsibilities are diverse and fluid, in which case they are more 
likely to act as loan originators on occasion outside of their primary 
or secondary responsibilities. As a result, small entities for which 
such individuals work, as well as the individuals themselves, would 
benefit from the de minimis exception to allow their participation in 
non-deferred profits-based compensation from mortgage-related business 
profits for which they might otherwise not be eligible under the other 
restrictions in the final rule. The final rule has expanded slightly 
the scope of this exception to capture potentially more individuals who 
work for covered persons, including small entities.
3. Broker Splits
    The final rule revises the existing Loan Originator Rule to provide 
that if a loan originator organization receives compensation directly 
from a consumer in connection with a transaction, the loan originator 
organization may pay compensation in connection with the transaction 
(e.g., a commission) to individual loan originators and the individual 
loan originators may receive compensation from the loan originator 
organization. As discussed in the section-by-section analysis, this 
mitigates the burden of the existing rule on loan originator 
organizations.

H. Description of the Steps the Agency Has Taken To Minimize Any 
Additional Cost of Credit for Small Entities

    Section 603(d) of the RFA requires the Bureau to consult with small 
entities regarding the potential impact of the proposed rule on the 
cost of credit for small entities and related matters. 5 U.S.C. 603(d). 
To satisfy this statutory requirement, the Bureau notified the Chief 
Counsel on May 9, 2012, that the Bureau would collect the advice and 
recommendations of the same Small Entity Representatives identified in 
consultation with the Chief Counsel during the Small Business Review 
Panel process concerning any projected impact of the proposed rule on 
the cost of credit for small entities.\195\ The Bureau sought 
information from the Small Entity Representatives during the Small 
Business Review Panel Outreach Meeting regarding the potential impact 
on the cost of business credit, since the Small Entity Representatives, 
as small providers of financial services, could also provide valuable 
input on any such impact related to the proposed rule.\196\
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    \195\ See 5 U.S.C. 603(d)(2)(A). The Bureau provided this 
notification as part of the notification and other information 
provided to the Chief Counsel with respect to the Small Business 
Review Panel process pursuant to section 609(b)(1) of the RFA.
    \196\ See 5 U.S.C. 603(d)(2)(B).
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    The Bureau had no evidence at the time of the Small Business Review 
Panel Outreach Meeting that the proposals then under consideration 
would result in an increase in the cost of business credit for small 
entities under any plausible economic conditions. The proposals under 
consideration at the time applied to consumer credit transactions 
secured by a mortgage, deed of trust, or other security interest on a 
residential dwelling or a residential real property that includes a 
dwelling, and the proposals would not apply to loans obtained primarily 
for business purposes.
    At the Small Business Review Panel Outreach Meeting, the Bureau 
asked the Small Entity Representatives a series of questions regarding 
any potential increase in the cost of business credit. Specifically, 
the Small Entity Representatives were asked if they believed any of the 
proposals under consideration would impact the cost of credit for small 
entities and, if so, in what ways and whether there were any 
alternatives to the proposals under consideration that could minimize 
such costs while accomplishing the statutory objectives addressed by 
the proposal.\197\ Although some Small Entity Representatives expressed 
the concern that any additional Federal regulations, in general, had 
the potential to increase credit and other costs, all Small Entity 
Representatives responding to these questions stated that the proposals 
under consideration in this rulemaking would have little to no impact 
on the cost of credit to small businesses. After receiving feedback 
from Small Entity Representatives at the Small Business Review Panel 
Outreach Meeting, the Bureau had no evidence that the proposed rule 
would result in an

[[Page 11408]]

increase in the cost of credit for small business entities.
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    \197\ See Final Panel Report available in the Proposed Rule 
Docket: Docket ID No. CFPB-2012-0037, available at. http://www.regulations.gov/#!documentDetail;D=CFPB-2012-0037-0001.
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    In the IRFA, the Bureau asked interested parties to provide data 
and other factual information regarding whether the proposed rule would 
have any impact on the cost of credit for small entities. The Bureau 
did not receive any comments on this issue. In summary, the Bureau 
believes that the Final Rule will leave the cost of credit paid by 
small entities unchanged from its current value and, as a consequence, 
avoid those additional costs to those entities, created by an inability 
to hedge mortgage risk and other restrictions, that are an inevitable 
consequence under the baseline.

IX. Paperwork Reduction Act

A. Overview

    The Bureau's collection of information requirements contained in 
this rule, and identified as such, were submitted to the Office of 
Management and Budget (OMB) for review under section 3507(d) of the 
Paperwork Reduction Act of 1995 (44 U.S.C. 3501, et seq.) (Paperwork 
Reduction Act or PRA). Further, the PRA (44 U.S.C 3507(a), (a)(2) and 
(a)(3)) requires that a Federal agency may not conduct or sponsor a 
collection of information unless OMB approved the collection under the 
PRA and the OMB control number obtained is displayed. Notwithstanding 
any other provision of law, no person is required to comply with, or is 
subject to any penalty for failure to comply with, a collection of 
information does not display a currently valid OMB control number (44 
U.S.C. 3512).
    This Final Rule contains revised information collection 
requirements that have not been approved by the OMB and, therefore, are 
not effective until OMB approval is obtained. The information 
collection requirements contained in this rule are described below. The 
Bureau will publish a separate notice in the Federal Register 
announcing the submission of these information collection requirements 
to OMB as well as OMB's action on these submissions; including, the OMB 
control number and expiration date.
    This rule amends 12 CFR Part 1026 (Regulation Z). Regulation Z 
currently contains collections of information approved by OMB, and the 
Bureau's OMB control number is 3170-0015 (Truth in Lending Act 
(Regulation Z) 12 CFR 1026). As described below, the rule amends 
certain collections of information currently in Regulation Z.
    On September 7, 2012, a notice of proposed rulemaking was published 
in the Federal Register (77 FR 55271). In the proposed rule, the Bureau 
invited comment on: (1) Whether the proposed collections of information 
are necessary for the proper performance of the functions of the 
Bureau, including whether the information will have practical utility; 
(2) the accuracy of the estimated burden associated with the proposed 
collections of information; (3) how to enhance the quality, utility, 
and clarity of the information to be collected; and (4) how to minimize 
the burden of complying with the proposed collections of information, 
including the application of automated collection techniques or other 
forms of information technology. The comment period for the proposed 
rule expired on November 6, 2012. In conjunction with the notice of 
proposed rulemaking, the Bureau received one comment addressing the 
Bureau's PRA analysis. This comment, received from a nonprofit loan 
originator organization, related to the Bureau's estimated number of 
respondents and is discussed in section B(2)(b) below.
    The title of this information collection is: Loan Originator 
Compensation. The frequency of response is on-occasion. The information 
collection required provides benefits for consumers and is mandatory. 
See 15 U.S.C. 1601, et seq. Because the Bureau does not collect any 
information under the rule, no issue of confidentiality arises. The 
likely respondents are commercial banks, savings institutions, credit 
unions, mortgage companies (non-bank creditors), mortgage brokers, and 
nonprofit organizations that make or broker closed-end mortgage loans 
for consumers.
    Under the rule, the Bureau generally accounts for the paperwork 
burden associated with Regulation Z for the following respondents 
pursuant to its administrative enforcement authority: insured 
depository institutions with more than $10 billion in total assets, 
their depository institution affiliates, and certain non-depository 
loan originator organizations. The Bureau and the FTC generally both 
have administrative enforcement authority over non-depository 
institutions for Regulation Z. Accordingly, the Bureau has allocated to 
itself half of its estimated burden for non-depository institutions. 
Other Federal agencies, including the FTC, are responsible for 
estimating and reporting to OMB the total paperwork burden for the 
institutions for which they have administrative enforcement authority. 
They may, but are not required, to use the Bureau's burden estimation 
methodology.
    It should be noted that the Bureau's estimation of burdens arising 
from those provisions of the final rule regarding loan originator 
qualifications takes into account the prior screening activities in 
which, the Bureau believes, most loan originator organizations have 
previously engaged, including obtaining credit reports, criminal 
background checks, and information about prior administrative, civil, 
or criminal findings by any government jurisdiction actions. This 
estimation of burdens, consequently, avoids including any costs 
associated with performing criminal background, financial 
responsibility, character, and general fitness standards for individual 
loan originators that loan originator organizations had already hired 
and screened prior to the effective date of this final rule under the 
then-applicable statutory or regulatory background standards, except 
for those individual loan originators already employed but about whom 
the loan originator organization knows of reliable information 
indicating that the individual loan originator likely no longer meets 
the required standards, regardless of when that individual was hired 
and screened.\198\
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    \198\ The final rule clarifies, in Sec.  1026.36(f)(3)(i) and 
(ii) and in new comments 36(f)(3)(ii)-2 and 36(f)(3)(ii)-3, that 
these requirements apply for an individual that the loan originator 
organization hires on or after January 10, 2014, the effective date 
of these provisions, as well as for individuals hired prior to this 
date who were not screened under standards in effect at the time of 
hire.
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    Using the Bureau's burden estimation methodology, the total 
estimated burden for the approximately 22,800 institutions subject to 
the rule, including Bureau respondents,\199\ is approximately 64,600 
hours annually and 164,700 one-time hours. The aggregate estimates of 
total burden presented in this part IX are based on estimated costs 
that are averages across respondents. The Bureau expects that

[[Page 11409]]

the amount of time required to implement each of the changes for a 
given institution may vary based on the size, complexity, and practices 
of the respondent.
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    \199\ There are 153 depository institutions (and their 
depository affiliates) that are subject to the Bureau's 
administrative enforcement authority. In addition there are 146 
privately insured credit unions that are subject to the Bureau's 
administrative enforcement authority. For purposes of this PRA 
analysis, the Bureau's respondents under Regulation Z are 135 
depository institutions that originate closed-end mortgages; 77 
privately insured credit unions that originate closed-end mortgages; 
an estimated 2,787 non-depository institutions that originate 
closed-end mortgages and that are subject to the Bureau's 
administrative enforcement authority, an assumed 230 not-for profit 
originators (which may overlap with the other non-depository 
creditors), and 8,051 loan originator organizations. Unless 
otherwise specified, all references to burden hours and costs for 
the Bureau respondents for the collection under Regulation Z are 
based on a calculation that includes one half of burden for all 
respondents except the depository institutions.
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B. Information Collection Requirements

1. Record Retention Requirements
    Regulation Z currently requires creditors to create and maintain 
records to demonstrate their compliance with Regulation Z provisions 
regarding compensation paid to or received by a loan originator. As 
discussed above in part V, the final rule requires creditors to retain 
these records for a three-year period, rather than for a two-year 
period as currently required. The rule applies the same requirement to 
organizations when they act as a loan originator in a transaction, even 
if they do not act as a creditor in the transaction.
    For the requirement extending the record retention requirement for 
creditors from two years, as currently provided in Regulation Z, to 
three years, the Bureau assumes that there is no additional marginal 
cost. For most, if not all firms, the required records are in 
electronic form. The Bureau believes that, as a consequence, all 
creditors should be able to use their existing recordkeeping systems to 
maintain the required documentation for mortgage origination records 
for one additional year at a negligible cost of investing in new 
storage facilities.
    Loan originator organizations, but not creditors, will incur costs 
from the new requirement to retain records related to compensation. For 
the requirement that organizations retain records related to 
compensation on loan transactions, these firms will need to build the 
requisite reporting regimes. At some firms this may require the 
integration of information technology systems; for others simple 
reports can be generated from existing core systems.
    For the roughly 8,000 Bureau respondents that are non-depository 
loan originator organizations but not creditors, the one-time burden is 
estimated to total approximately 163,400 hours, or approximately 20 
hours per organization, to review the regulation and establish the 
requisite systems to retain compensation information. The Bureau 
estimates the requirement for these Bureau respondents to retain 
documentation of compensation arrangements is assumed to require 64,400 
ongoing burden hours, or approximately 8 hours per organization, 
annually. The Bureau has allocated to itself one-half of this burden.
    Those record-keeping requirements that would have arisen had the 
Bureau chosen to retain in its final rule the proposed requirement to 
make available a zero-zero alternative are now absent. The overall 
burden to covered persons created by this final rule, however, remains 
unchanged, since the Bureau found no additional cost or burden was 
created by that earlier provision.
2. Requirement To Obtain Criminal Background Checks, Credit Reports, 
and Other Information for Certain Individual Loan Originators
    To the extent loan originator organizations hire new originators 
who are not required to be licensed under the SAFE Act, and who are not 
so licensed, the loan originator organizations are required to obtain a 
criminal background check and credit report for these individual loan 
originators. Loan originator organizations are also required to obtain 
from the NMLSR or individual loan originator information about any 
findings against such individual loan originator by a government 
jurisdiction. In general, the loan originator organizations that are 
subject to this requirement are depository institutions (including 
credit unions) and bona fide nonprofit organizations whose loan 
originators are not subject to State licensing because the State has 
determined to provide an exemption for bona fide nonprofit 
organizations and determined the organization to be a bona fide 
nonprofit organization. The burden of obtaining this information may be 
different for a depository institution than it is for a nonprofit 
organization because depository institutions already obtain criminal 
background checks for their loan originators to comply with Regulation 
G and have access to information about findings against such individual 
loan originator by a government jurisdiction through the NMLSR.
a. Credit Check
    Both depository institutions and nonprofit organizations will incur 
costs related to obtaining credit reports for all loan originators that 
are hired or transfer into this function on or after January 10, 2014. 
For the estimated 370 Bureau respondents, which include depository 
institutions over $10 billion, their depository affiliates, and 
nonprofit nondepository organizations, the estimated one time burden is 
roughly 25 hours and the estimated on going burden is 90 hours. This 
includes the total burden for the depository institutions and one-half 
the estimated burdens for the nonprofit nondepository organizations.
b. Criminal Background Check
    Nonprofit organizations will incur costs related to obtaining 
criminal background checks for all loan originators that are hired or 
transfer into this function on or after January 10, 2014. Depository 
institutions already obtain criminal background checks for each of 
their individual loan originators through the NMLSR for purposes of 
complying with Regulation G. A criminal background check provided by 
the NMLSR to the depository institution is sufficient to meet the 
requirement to obtain a criminal background check in this rule. 
Accordingly, the Bureau believes they will not incur any additional 
burden.
    Non-depository loan originator organizations that do not have 
access to information about criminal history in the NMLSR, including 
bona fide nonprofit organizations, could satisfy the latter 
requirements by obtaining a national criminal background check.\200\ 
For the assumed 200 nonprofit originators,\201\ the one-time burden is 
estimated to be roughly 20 hours.\202\ The ongoing cost to perform the 
check for new hires is estimated to be 10 hours annually. The Bureau 
has allocated to itself one-half of these burdens.
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    \200\ This check, more formally known as an individual's FBI 
Identification Record, uses the individual's fingerprint submission 
to collect information about prior arrests and, in some instances, 
federal employment, naturalization, or military service.
    \201\ The Bureau has not been able to determine how many loan 
originators organizations qualify as bona fide nonprofit 
organizations or how many of their employee loan originators are not 
subject to SAFE Act licensing. Accordingly, the Bureau has estimated 
these numbers.
    \202\ The organizations are also assumed to pay $50 to get a 
national criminal background check. Several commercial services 
offer an inclusive fee, ranging between $48.00 and $50.00, for 
fingerprinting, transmission, and FBI processing. Based on a sample 
of three FBI-approved services, accessed on 2012-08-02: Accurate 
Biometrics, available at: http://www.accuratebiometrics.com/index.asp; Daon Trusted Identity Servs., available at: http://daon.com/prints; and Fieldprint, available at http://www.fieldprintfbi.com/FBISubPage_FullWidth.aspx?ChannelID=272.
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    The Bureau did receive one comment from a nonprofit firm primarily 
involved in the purchase and rehabilitation of HUD-FHA REO homes, which 
queried the definition of a nonprofit firm used by the Bureau in its 
calculations. The Bureau included all affiliates and regional offices 
of a parent nonprofit firm in its original estimate of 200 such firms 
that would be covered by the rule. After receiving this comment, 
however, the Bureau engaged in extensive research in order to create,

[[Page 11410]]

from information provided by government and private sources, a national 
census of nonprofit loan