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

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URL: https://www.frixlaw.com/law-library/documents/fr%3A2012-20808

## Record

- **Collection:** Federal Register
- **Document type:** Proposed Rule
- **Published:** September 7, 2012
- **Citation:** 77 FR 55272

## Text

BUREAU OF CONSUMER FINANCIAL PROTECTION
12 CFR Part 1026
[Docket No. CFPB-2012-0037]
RIN 3170-AA13
Truth in Lending Act (Regulation Z); Loan Originator Compensation

AGENCY:

Bureau of Consumer Financial Protection.

ACTION:

Proposed rule with request for public comment.

SUMMARY:

The Bureau of Consumer Financial Protection is publishing for public comment a proposed rule amending Regulation Z (Truth in Lending) to implement amendments to the Truth in Lending Act (TILA) made by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). The proposal would implement statutory changes made by the Dodd-Frank Act to Regulation Z's current loan originator compensation provisions, including a new additional restriction on the imposition of any upfront discount points, origination points, or fees on consumers under certain circumstances. In addition, the proposal implements additional requirements imposed by the Dodd-Frank Act concerning proper qualification and registration or licensing for loan originators. The proposal also implements Dodd-Frank Act restrictions on mandatory arbitration and the financing of certain credit insurance premiums. Finally, the proposal provides additional guidance and clarification under the existing regulation's provisions restricting loan originator compensation practices, including guidance on the application of those provisions to certain profit-sharing plans and the appropriate analysis of payments to loan originators based on factors that are not terms but that may act as proxies for a transaction's terms.

DATES:

Comments must be received on or before October 16, 2012, except for comments on the Paperwork Reduction Act analysis in part IX of this document, which must be received on or before November 6, 2012.

ADDRESSES:

You may submit comments, identified by Docket No. CFPB-2012-0037 or RIN 3170-AA13, by any of the following methods:

•
Electronic:

http://www.regulations.gov
. Follow the instructions for submitting comments.

•
Mail/Hand Delivery/Courier:
Monica Jackson, Office of the Executive Secretary, Consumer Financial Protection Bureau, 1700 G Street NW., Washington, DC 20552.

Instructions:
All submissions should include the agency name and docket number or Regulatory Information Number (RIN) for this rulemaking. Because paper mail in the Washington, DC area and at the Bureau is subject to delay, commenters are encouraged to submit comments electronically. In general, all comments received will be posted without change to
http://www.regulations.gov
. In addition, comments will be available for public inspection and copying at 1700 G Street NW., Washington, DC 20552, on official business days between the hours of 10 a.m. and 5 p.m. Eastern Time. You can make an appointment to inspect the documents by telephoning (202) 435-7275.

All comments, including attachments and other supporting materials, will become part of the public record and subject to public disclosure. Sensitive personal information, such as account numbers or Social Security numbers, should not be included. Comments will not be edited to remove any identifying or contact information.

FOR FURTHER INFORMATION CONTACT:

Daniel C. Brown and Michael G. Silver, Counsels; Krista P. Ayoub and R. Colgate Selden, Senior Counsels; Paul Mondor, Senior Counsel & Special Advisor; Charles Honig, Managing Counsel: Office of Regulations, at (202) 435-7700.

SUPPLEMENTARY INFORMATION:

I. Summary of the Proposed Rule

A. Background

The mortgage market crisis focused attention on the critical role that loan officers and mortgage brokers play in the loan origination process. Because consumers generally take out only a few home loans over the course of their lives, they often rely heavily on loan officers and brokers to guide them. But prior to the crisis, training and qualification standards for loan originators varied widely, and compensation was frequently structured to give loan originators strong incentives to steer consumers into more expensive loans. Often, consumers paid loan originators an upfront fee without realizing that their creditors also were paying the loan originators commissions that increased with the price of the loan.

The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act)
1

expanded on previous efforts by lawmakers and regulators to strengthen loan originator qualification requirements and regulate industry compensation practices. The Bureau is proposing new rules to implement the Dodd-Frank Act requirements, as well as to revise and clarify existing regulations and guidance on loan originator compensation.

1
Public Law 111-203, 124 Stat. 1376.

The Bureau is also proposing rules to implement a new Dodd-Frank Act requirement that appears to be designed to address broader consumer confusion about the relationship between certain upfront charges and loan interest rates. Specifically, for mortgage loans in which a brokerage firm or creditor pays a loan originator a transaction-specific commission, the Dodd-Frank Act would ban the imposition on consumers of discount points, origination points, or other upfront origination fees that are retained by the creditor, broker, or an affiliate of either. Although bona fide upfront payments to independent appraisers or other third parties would still be permitted, the Act would require creditors in the vast majority of transactions in today's market to restructure their current pricing practices.

However, the Bureau is proposing to use its exception authority under the Dodd-Frank Act to allow creditors to continue making available loans with points and/or fees, so long as they also make available a comparable, alternative loan, as described below. The Bureau believes this approach would benefit consumers and industry alike. Making both options available would make it easier for consumers to evaluate different pricing options, while preserving their ability to make some upfront payments if they want to reduce their periodic payments over time. And the proposed approach would promote stability in the mortgage market, which would otherwise face radical restructuring of its existing pricing structures and practices to comply with the new Dodd-Frank Act requirement.

B. Restriction on Upfront Points and Fees

The proposed rule would generally require that, before a creditor or mortgage broker may impose upfront points and/or fees on a consumer in a closed-end mortgage transaction, the creditor must make available to the consumer a comparable, alternative loan with no upfront discount points, origination points, or origination fees that are retained by the creditor, broker, or an affiliate of either (a “zero-zero alternative”). The requirement would not be triggered by charges that are passed on to independent third parties that are not affiliated with the creditor or mortgage broker. The requirement

would not apply where the consumer is unlikely to qualify for the zero-zero alternative.

In transactions that do not involve a mortgage broker, the proposed rule would provide a safe harbor if, any time prior to application that the creditor provides a consumer an individualized quote for a loan that includes upfront points and/or fees, the creditor also provides a quote for a zero-zero alternative. In transactions that involve mortgage brokers, the proposed rule would provide a safe harbor under which creditors provide mortgage brokers with the pricing for all of their zero-zero alternatives. Mortgage brokers then would provide quotes to consumers for the zero-zero alternatives when presenting different loan options to consumers.

The Bureau is seeking comment on a number of related issues, including:

• Whether the Bureau should adopt as proposed a “bona fide” requirement to ensure that consumers receive value in return for paying upfront points and/or fees and, if so, the relative merits of several alternatives on the details of such a requirement;

• Whether additional adjustments to the proposal concerning the treatment of affiliate fees would make it easier for consumers to compare offers between two or more creditors;

• Whether to take a different approach concerning situations in which a consumer does not qualify for the zero-zero alternative; and

• Whether to require information about zero-zero alternatives to be provided not just in connection with informal quotes, but also in advertising and at the time that consumers are provided disclosures within three days after application.

C. Restrictions on Loan Originator Compensation

The proposal would adjust existing rules governing compensation to loan officers and mortgage brokers in connection with closed-end mortgage transactions to account for the Dodd-Frank Act and to provide greater clarity and flexibility. Specifically, the proposal would:

• Continue the general ban on paying or receiving commissions or other loan originator compensation based on the terms of the transaction (other than loan amount), with some refinements:

○ The proposal would allow reductions in loan originator compensation to cover unanticipated increases in closing costs from non-affiliated third parties under certain circumstances.

○ The proposal would clarify when a factor used as a basis for compensation is prohibited as a “proxy” for a transaction term.

• Clarify and revise restrictions on pooled compensation, profit-sharing, and bonus plans for loan originators, depending on the potential incentives to steer consumers to different transaction terms.

○ The proposal would permit employers to make contributions from general profits derived from mortgage activity to 401(k) plans, employee stock plans, and other “qualified plans” under tax and employment law.

○ The proposal would permit employers to pay bonuses or make 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 limited. The Bureau is proposing two alternatives, 25 percent or 50 percent of total revenues, as the applicable test.

○ Even though contributions and bonuses could be funded from general mortgage profits, the amounts of such contributions and bonuses could not be based on the terms of the transactions that the individual had originated.

• Continue the general ban on loan originators being compensated by both consumers and other parties, with some refinements:

○ The proposal would allow mortgage brokerage firms that are paid by the consumer to pay their individual brokers a commission, so long as the commission is not based on the terms of the transaction.

○ The proposal would clarify that certain funds contributed toward closing costs by sellers, home builders, home-improvement contractors, or similar parties, when used to compensate a loan originator, are considered payments made directly to the loan originator by the consumer.

D. Loan Originator Qualification Requirements

The proposal would implement a Dodd-Frank Act provision requiring both individual loan originators and their employers to be “qualified” and to include their license or registration numbers on certain specified loan documents.

• Where a loan originator is not already required to be licensed under the Secure and Fair Enforcement for Mortgage Licensing Act (SAFE Act), the proposal would require his or her employer to ensure that the loan originator meets character, fitness, and criminal background check standards that are equivalent to SAFE Act requirements and receives training commensurate with the loan originator's duties.

• Employers would be required to ensure that their loan originator employees are licensed or registered under the SAFE Act where applicable.

• Employers and the individual loan originators that are primarily responsible for a particular transaction would be required to list their license or registration numbers on certain key loan documents.

E. Other Provisions

The proposal would implement certain other Dodd-Frank Act requirements applicable to both closed-end and open-end mortgage credit:

• The proposal would ban general agreements requiring consumers to submit any disputes that may arise to mandatory arbitration rather than filing suit in court.

• The proposal would generally ban the financing of premiums for credit insurance.

• In the preamble below, the Bureau describes rule text that may be included in the final rule to implement a Dodd-Frank Act requirement that the Bureau require depository institutions to establish and maintain procedures to assure and monitor compliance with many of the requirements described above and the registration procedures established under the SAFE Act.

II. Background

A. The Mortgage Market

Overview of the Market and the Mortgage Crisis

The mortgage market is the single largest market for consumer financial products and services in the United States, with approximately $10.3 trillion in loans outstanding.
2

During the last decade, the market went through an unprecedented cycle of expansion and contraction. So many other parts of the American financial system were drawn into mortgage-related activities that, when the bubble collapsed in 2008, it sparked the most severe recession in the United States since the Great Depression.

2
2 Inside Mortg. Fin., The 2012 Mortgage Market Statistical Annual 7 (2012).

The expansion in the market was driven, in part, by an era of low interest rates and rising house prices. Interest rates dropped significantly—by more than 20 percent—from 2000 through

2003.
3

Housing prices increased dramatically—about 152 percent—between 1997 and 2006.
4

Driven by the decrease in interest rates and the increase in housing prices, the volume of refinancings was increasing, from about 2.5 million loans in 2000 to more than 15 million in 2003.
5

3

See
U.S. Dep't of Hous. & Urban Dev.,
An Analysis of Mortgage Refinancing, 2001-2003,
at 2 (2004), available at:
www.huduser.org/Publications/pdf/MortgageRefinance03.pdf
; Souphala Chomsisengphet & Anthony Pennington-Cross,
The Evolution of the Subprime Mortgage Market,
88 Fed. Res. Bank of St. Louis Rev. 31, 48 (2006), available at:
http://research.stlouisfed.org/publications/review/article/5019
.

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.

Growth in the mortgage loan market was particularly pronounced in what are known as “subprime” and “Alt-A” products. Subprime products were sold primarily to borrowers with poor or no credit history, although there is evidence that some borrowers who would have qualified for “prime” loans were steered into subprime loans as well.
6

The Alt-A category of loans permitted borrowers to take out mortgage loans while providing little or no documentation of income or other evidence of repayment ability. Because these loans involved additional risk, they were typically more expensive to borrowers than “prime” mortgages, although many of them had very low introductory interest rates. In 2003, subprime and Alt-A origination volume was about $400 billion; in 2006, it had reached $830 billion.
7

6
The Federal Reserve Board on July 18, 2011 issued a consent cease and desist order and assessed an $85 million civil money penalty against Wells Fargo & Company of San Francisco, a registered bank holding company, and Wells Fargo Financial, Inc., of Des Moines. The order addresses allegations that Wells Fargo Financial employees steered potential prime borrowers into more costly subprime loans and separately falsified income information in mortgage applications. In addition to the civil money penalty, the order requires that Wells Fargo compensate affected borrowers.
See

http://www.federalreserve.gov/newsevents/press/enforcement/20110720a.htm
.

7
Inside Mortg. Fin., The 2011 Mortgage Market Statistical Annual (2011).

So long as housing prices were continuing to increase, it was relatively easy for borrowers to refinance their loans to avoid interest rate resets and other adjustments. When housing prices began to decline in 2005, refinancing became more difficult and delinquency rates on these subprime and Alt-A products increased dramatically.
8

The private securitization-backed subprime and Alt-A mortgage market ground to a halt in 2007 in the face of these rising delinquencies. Fannie Mae and Freddie Mac, which supported the mainstream mortgage market, experienced heavy losses and were placed in conservatorship by the Federal government in 2008.

8
FCIC Report at 215-217.

Four years later, the United States continues to grapple with the fallout. Home prices are down 35 percent from the peak nationally, as the national market appears at or near its bottom.
9

Mortgage markets continue to rely on extraordinary U.S. government support, and distressed homeownership and foreclosure rates remain at unprecedented levels.
10

9

Standard & Poors/Case-Shiller 20-City Composite,
Bloomberg, LP, available at:
http://www.bloomberg.com
(data service accessible only through paid subscription).

10
PowerPoint Presentation, Lender Processing Servs.,
LPS Mortgage Monitor: May 2012 Mortgage Performance Observations, Data as of April 2012 Month End,
at 3, 11 (May 2012), available at:
http://www.lpsvcs.com/LPSCorporateInformation/CommunicationCenter/DataReports/Pages/Mortgage-Monitor.aspx
.

Nevertheless, even with the economic downturn, approximately $1.28 trillion in mortgage loans were originated in 2011.
11

The overwhelming majority of homebuyers continue to use mortgage loans to finance at least some of the purchase price of their property. In 2011, 93 percent of all new home purchases were financed with a mortgage loan.
12

Purchase loans and refinancings together produced 6.3 million new first-lien mortgage loan originations in 2011.
13

Home equity loans and lines of credit resulted in an additional 1.3 million mortgage loan originations in 2011.
14

11

Credit Forecast 2012,
Moody's Analytics (2012), available at,
http://www.economy.com/default.asp
(reflects first-lien mortgage loans) (data service accessible only through paid subscription).

12
1 Inside Mortg. Fin., The 2012 Mortgage Market Statistical Annual 12 (2012).

13
Credit Forecast 2012. The proportion of loans that are for purchases as opposed to refinancings varies with the interest rate environment. In 2011, refinance transactions comprised 65 percent of the market, and purchase money mortgage loans comprised 35 percent, by dollar volume. 1 Inside Mortg. Fin., The 2012 Mortgage Market Statistical Annual 17 (2012). Historically the distribution has been more even. In 2000, refinancings accounted for 44 percent of the market as measured by dollar volume, while purchase money mortgage loans comprised 56 percent, and in 2005 the two types of mortgage loan were split evenly.
Id.

14
Credit Forecast (2012). Using a home equity loan or line of credit, a homeowner uses home equity as collateral for a loan. The loan proceeds can be used, for example, to pay for home improvements or to pay off other debts.

The Mortgage Origination Process and Origination Channels

Consumers must go through a mortgage origination process to obtain a mortgage loan. There are many actors involved in a mortgage origination. In addition to the creditor and the consumer, a transaction may involve a mortgage broker, settlement agent, appraiser, multiple insurance providers, local government clerks and tax offices, and others. Purchase money loans involve additional parties such as sellers and real estate agents. These third parties typically charge fees or commissions for the services they provide.

Application.
To obtain a mortgage loan, consumers must first apply through a loan originator. There are three different “channels” for mortgage loan origination in the current market:

•
Retail:
The consumer deals with a loan officer that works directly for the mortgage creditor, such as a bank, credit union, or specialized mortgage finance company. The creditor typically operates a network of branches, but may also communicate with consumers through mail and the Internet. The entire origination transaction is conducted within the corporate structure of the creditor, and the loan is closed using funds supplied by the creditor. Depending on the type of creditor, the creditor may hold the loan in its portfolio or sell the loan to investors on the secondary market, as discussed further below.

•
Wholesale:
The consumer deals with an independent mortgage broker, which may be an individual or a mortgage brokerage firm. The broker may seek offers from many different creditors, and then acts as a liaison between the consumer and whichever creditor ultimately makes the loan. At closing, the loan is funded using the creditor's funds and the mortgage note is written in the creditor's name.
15

Again, the creditor may hold the loan in its portfolio or sell the loan on the secondary market.

15
In some cases, mortgage brokers use a process called “table funding,” in which the wholesale creditor provides the funds to the settlement, but the loan is closed in the broker's name. The broker simultaneously assigns the closed loan to the creditor.

•
Correspondent:
The consumer deals with a loan officer that works directly for a “correspondent lender” that does not deal directly with the secondary market. At closing, the correspondent lender closes the loans using its own funds, but then immediately sells the loan to an “acquiring creditor,” which in turn either holds the loan in portfolio or sells it on the secondary market.

Both loan officers and mortgage brokers generally help consumers determine what kind of loan best suits their needs, and will take their

completed loan applications for submission to the creditor's loan underwriter. The application includes consumer credit and income information, along with information about the home to be purchased. Consumers can work with multiple loan originators to compare the loan offers that loan originators may obtain on their behalf from creditors. Once the consumer has decided to move forward with a loan, the loan originator may request additional information or documents from the consumer to support the information in the application and obtain an appraisal of the property.

Underwriting.
The creditor's loan underwriter uses the application and additional information to confirm initial information provided by the consumer. The underwriter will assess whether the creditor should take on the risk of making the mortgage loan. To make this decision, the underwriter considers whether the consumer can repay the loan and whether the home is worth enough to serve as collateral for the loan. If the underwriter finds that the consumer and the home qualify, the underwriter will approve the consumer's mortgage application.

Closing.
After being approved for a mortgage loan, completing any closing requirements, and receiving necessary disclosures, the consumer can close on the loan. Multiple parties participate at closing, including the consumer, the creditor, and the settlement agent.

Loan Pricing and Disposition of Closed Loans

Mortgage loan pricing is an extremely complex process that involves a series of trade-offs for both the consumer and the creditor between upfront and long-term payments. Some of the costs that borrowers pay to close the loan—such as third-party appraisal fees, title insurance, taxes, etc.—are independent of the other terms of the loan. But costs that are paid to the creditor, broker, or affiliates of either company often vary in connection with the interest rate because the consumer can choose whether to pay more money up front (through discount points, origination points, or origination fees) or over time (through the interest rate, which drives monthly payments). Borrowers face a complex set of decisions around whether to pay upfront charges to reduce the interest rate they would otherwise pay and, if so, how much to pay in such charges to receive a specific rate reduction.

Thus, from the consumer's perspective, loan pricing depends on several elements:

•
Loan terms.
The loan terms affect how the loan is to be repaid, including the type of loan “product,”
16

the interest rate, the payment amount, and the length of the loan term.

16
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 offer consumers a cash rebate at closing which can help cover upfront closing costs in exchange for paying a higher rate over the life of the loan. Both discount points and creditor rebates involve an exchange of cash now (in the form of a payment or credit at closing) for cash over time (in the form of a reduced or increased interest rate).

•
Origination points or fees.
Creditors and/or loan originators also sometimes charge origination points or fees, which are typically presented as charges to apply for the loan. Origination fees can take a number of forms: A flat dollar amount, a percentage of the loan amount (
i.e.,
an “origination point”), or a combination of the two. Origination points or fees may also be framed as a single lump sum or as several different fees (
e.g.,
application fee, underwriting fee, document preparation fee).

•
Closing costs.
Closing costs are the additional upfront costs of completing a mortgage transaction, including appraisal fees, title insurance, recording fees, taxes, and homeowner's insurance, for example. These closing costs, as distinct from upfront discount points and origination charges, often are paid to third parties other than the creditor or loan originator.

In practice, both discount points and origination points or fees are revenue to the lender and/or loan originator, and that revenue is fungible. The existence of two types of fees and the many names lenders use for origination fees—some of which may appear to be more negotiable than others—has the potential to confuse consumers.

Determining the appropriate trade-off between payments now and payments later requires a consumer to have a clear sense of how long he or she expects to stay in the home and in the particular loan. If the consumer plans to stay in the home for a number of years without refinancing, paying points to obtain a lower rate may make sense because the consumer will save more in monthly payments than he or she pays up front in discount points. If the consumer expects to move or refinance within a few years, however, then agreeing to pay a higher rate on the loan to reduce out of pocket expenses at closing may make sense because the consumer will save more up front than he or she will pay in increased monthly payments before moving or refinancing. There is a breakeven moment in time where the present value of a reduction/increase to the rate just equals the corresponding upfront points/credits. If the consumer moves or refinances earlier (in the case of discount points) or later (in the case of creditor rebates) than the breakeven moment, then the consumer will lose money compared to a consumer that neither paid discount points nor received creditor rebates.

The creditor's assessment of pricing—and in particular what different combinations of points, fees, and interest rates it is willing to offer particular consumers—is also driven by the trade-off between upfront and 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.

One mechanism that has developed to manage this risk is the creation of the secondary market, which allows creditors to sell off their loans to investors, recoup the capital they have invested in the loans and recycle that capital into new loans. The investors then benefit from the payment streams over time, as well as bearing the risk of early payment or default. And the creditor can go on to make additional money from additional loans. Thus, although some banks and credit unions hold some loans in portfolio over time, many creditors prefer not to hold loans until maturity.
17

17
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.
18

That upfront cash payment represents the buyer's present valuation of the loan's future cash flows, using assumptions about the rate of prepayments due to moves and refinancings, the rate of expected defaults, the rate of return relative to other investments, and other factors. Secondary market buyers assume considerable risk in determining the price they are willing to pay for a loan. If, for example, loans prepay faster than expected or default at higher rates than expected, the investor will receive a lower return than expected. Conversely, if loans prepay more slowly than expected, or default at lower rates than expected, the investor will earn a higher return over time than expected.
19

18
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.

19
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 as a multiple of the principal loan amount and are specific to a given interest rate. For illustrative purposes, at some point in time, a loan with an interest rate of 3.5 percent might earn 102.5 in the secondary market. This means that for every $100 in initial loan principal amount, the secondary market buyer will pay $102.50. Of that amount, $100 is to cover the principal amount and $2.50 is revenue to the creditor in exchange for the rights to the future interest payments on the loan.
20

The secondary market price of a loan increases or decreases along with the loan's interest rate, but the relationship is not typically linear. In other words, using the above example at the same point in time, loans with interest rates higher than 3.5 percent will typically earn more than 102.5, and loans with interest rates less than 3.5 percent will typically earn less than 102.5. However, each subsequent 0.125 percent increment in interest rate above or below 3.5 percent may not be associated with the same size increment in secondary market price.
21

20
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.

21
Susan E. Woodward, Urb. 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. The same style of pricing is used when correspondent lenders sell loans to acquiring creditors.

Discount points are also valuable to creditors (and secondary market investors) for another reason: Because payment of discount points signals the consumer's expectations about how long he or she expects to stay in the loan, they make prepayment risk easier to predict. The more discount points a consumer pays, the longer the consumer likely expects to keep the loan in place. This fact mitigates a creditor's or investor's uncertainty about how long interest payments can be expected to continue, which facilitates assigning a present value to the loan's yield and, therefore, setting the loan's price.

Loan Originator Compensation

Prior to 2010, compensation for individual loan officers and mortgage brokers was also often calculated and paid as a premium above every $100 in principal. This was typically called a “yield spread premium.” The loan originator might keep the entire yield spread premium as a commission, or he or she might provide some of the yield spread premium to the borrower as a credit against closing costs.
22

22
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 quoted to its brokers and loan officers was somewhat lower than the price that the creditor expected to receive from the secondary market—the creditor kept the difference as corporate revenue. However, the underlying mechanics of the secondary market flowed through to the loan originator's compensation. The higher the interest rate on the loan or the more in upfront charges the consumer pays to the creditor (or both), the greater the yield spread premium available to the loan originator. This created a situation in which the loan originator had a financial incentive to steer consumers into the highest interest rate possible or to impose on the consumer additional upfront charges payable to the creditor.

In a perfectly competitive and transparent market, competition would ensure that this incentive would be countered by the need to compete with other loan originators to offer attractive loan terms to consumers. However, the mortgage origination market is neither always perfectly competitive nor always transparent, and consumers (who take out a mortgage only a few times in their lives) may be uninformed about how prices work and what terms they can expect.
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Moreover, prior to 2010, mortgage brokers were free to charge consumers directly for additional origination points or fees, which were generally described as compensating for the time and expense of working with the consumer to submit the loan application. This compensation structure was problematic both because the loan originator had an incentive to steer borrowers into less favorable pricing terms and because the consumer may have paid origination fees to the loan originator believing that the loan originator was working for the borrower, without knowing that the loan originator was receiving compensation from the creditor as well.

23
James Lacko and Janis Pappalardo,
Improving Consumer Mortgage Disclosures: An Empirical Assessment of Current and Prototype Disclosure Forms,
Federal Trade Commission, p. 26 (June 2007), available at:
http://www.ftc.gov/os/2007/06/P025505MortgageDisclosureReport.pdf
, Brian K. Bucks and Karen M. Pence,
Do Borrowers Know their Mortgage Terms?,
J. of Urban Econ. (2008), available at:
http://works.bepress.com/karen_pence/5
, Hall and Woodward,
Diagnosing Consumer Confusion and Sub-Optimal Shopping Effort: Theory and Mortgage-Market Evidence
(2012), available at:
http://www.stanford.edu/~rehall/DiagnosingConsumerConfusionJune2012
.

The 2010 Loan Originator Final Rule

In the aftermath of the mortgage crisis, regulators and lawmakers began focusing on concerns about the steering of consumers into less favorable loan terms than those for which they otherwise qualified. Both the Board of Governors of the Federal Reserve System (Board) and the Department of Housing and Urban Development (HUD) had explored the use of disclosures to inform consumers about loan originator compensation practices. HUD did adopt a new disclosure regime under the Real Estate Settlement Procedures Act (RESPA), in a 2008 final rule, which addressed among other matters the

disclosure of mortgage broker compensation.
24

The Board, on the other hand, first proposed a disclosure-based approach to addressing concerns with mortgage broker compensation.
25

The Board later determined, however, that the proposed approach presented a significant risk of misleading consumers regarding both the relative costs of brokers and creditors and the role of brokers in their transactions and, consequently, withdrew that aspect of the 2008 proposal as part of its 2008 Home Ownership and Equity Protection Act (HOEPA) Final Rule.
26

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

25

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

26
73 FR 44522, 44564 (Jul. 30, 2008). The Board indicated that it would continue to explore available options to address potential unfairness associated with loan originator compensation practices.
Id.
at 44565.

The Board in 2009 proposed new rules addressing in a more substantive fashion loan originator compensation practices.
27

Although this proposal was prior to the enactment of the Dodd-Frank Act, Congress subsequently codified significant elements of the Board's proposal.
28

Specifically, the Board's new proposal prohibited the payment and receipt of loan originator compensation based on transaction terms or conditions, and banned the receipt by a loan originator of compensation on a particular transaction from both the consumer and any other person; the Dodd-Frank Act substantially paralleled both of these provisions. The Board therefore decided in 2010 to finalize those rules, while acknowledging that some adjustments would need to be made to account for the statutory language.
29

The Board's 2010 Loan Originator Final Rule took effect in April of 2011.

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

28
Sections 1402 and 1403 of the Dodd-Frank Act, codified at 15 U.S.C. 1639b.

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

Most notably, the Board's 2010 Loan Originator Final Rule substantially restricted the use of yield spread premiums. Under the current regulations, creditors may not base a loan originator's compensation on the transaction's terms or conditions, other than the mortgage loan amount. In addition, the rule prohibits “dual compensation,” in which a loan originator is paid compensation by both the consumer and the creditor (or any other person).
30

The existing rules, however, do not address broader consumer confusion regarding the relationship between loan originator compensation and general trade-offs between points, fees, and interest rates.

30

See generally
12 CFR 226.36(d). The CFPB restated this rule at 12 CFR 1026.36(d). 76 FR 79768 (Dec. 22, 2011).

B. TILA and Regulation Z

Congress enacted the Truth in Lending Act (TILA) based on findings that the informed use of credit resulting from consumers' awareness of the cost of credit would enhance economic stability and would strengthen competition among consumer credit providers. 15 U.S.C. 1601(a). One of the purposes of TILA is to provide meaningful disclosure of credit terms to enable consumers to compare credit terms available in the marketplace more readily and avoid the uninformed use of credit.
Id.
TILA's disclosures differ depending on whether credit is an 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's Regulation Z, 12 CFR part 226, has implemented TILA.
31

31
The Board's rule remains applicable to certain motor vehicle dealers.
See
section 1029 of the Dodd-Frank, 12 U.S.C. 5519.

On August 26, 2009, as discussed above, the Board published proposed amendments to Regulation Z to include new limits on loan originator compensation for all closed-end mortgages (Board's 2009 Loan Originator Proposal). 74 FR 43232 (Aug. 26, 2009). The Board considered, among other changes, prohibiting certain payments to a mortgage broker or loan officer based on the transaction's terms or conditions, prohibiting dual compensation as described above, and prohibiting a mortgage broker or loan officer from “steering” consumers to transactions not in their interest, to increase mortgage broker or loan officer compensation. The Board issued the 2009 Loan Originator Proposal using its authority to prohibit acts or practices in the mortgage market that the Board found to be unfair, deceptive, or (in the case of refinancings) abusive under TILA section 129(
l
)(2) (now re-designated as TILA section 129(p)(2), 15 U.S.C. 1639(p)(2)).

On September 24, 2010, the Board issued the 2010 Loan Originator Final Rule, which finalized the 2009 Loan Originator Proposal and included the above prohibitions. 75 FR 58509 (Sept. 24, 2010). The Board acknowledged, however, that further rulemaking would be required to address certain issues and adjustments made by the Dodd-Frank Act, which was signed on July 21, 2010.
32

Public Law 111-203, 124 Stat. 1376.

32
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).

C. The SAFE Act

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

D. The Dodd-Frank Act

Effective July 21, 2011, the Dodd-Frank Act transferred rulemaking authority for TILA and the SAFE Act, among other laws, to the Bureau.
33

See
sections 1061 and 1100A of the Dodd-Frank Act. In addition, the Dodd-Frank Act added section 129B to TILA, which

imposes two new duties on mortgage originators. The first such duty is to be “qualified” and (where applicable) registered and licensed in accordance with the SAFE Act and other applicable State or Federal law. The second new duty of mortgage originators is to include on all loan documents the originator's identifier number from the NMLSR.
See
section 1402 of the Dodd-Frank Act.

33
Section 1029 of the Dodd-Frank Act excludes from this transfer of authority, subject to certain exceptions, any rulemaking authority over a motor vehicle dealer that is predominantly engaged in the sale and servicing of motor vehicles, the leasing and servicing of motor vehicles, or both. 12 U.S.C. 5519. Pursuant to the Dodd-Frank Act and TILA, as amended, the Bureau published for public comment an interim final rule establishing a new Regulation Z, 12 CFR part 1026, implementing TILA (except with respect to persons excluded from the Bureau's rulemaking authority by section 1029 of the Dodd-Frank Act). 76 FR 79768 (Dec. 22, 2011). Similarly, the Bureau's Regulations G and H are recodifications of predecessor agencies' regulations implementing the SAFE Act. 76 FR 78483 (Dec. 19, 2011). The Bureau's Regulations G, H, and Z took effect on December 30, 2011. These rules did not impose any new substantive obligations but did make certain technical, conforming, and stylistic changes to reflect the transfer of authority and certain other changes made by the Dodd-Frank Act.

In addition, the Dodd-Frank Act generally codified, but in some cases imposed new or different requirements than, the Board's 2009 Loan Originator Proposal. Shortly after the legislation, the Board adopted the 2010 Loan Originator Final Rule, which prohibits loan originator compensation based on transactions' terms or conditions and compensation from both the consumer and another person, as discussed above. Those regulatory provisions were consistent with some aspects of the Dodd-Frank Act. In addition, the Dodd-Frank Act generally prohibits any person from requiring consumers to pay any upfront discount points, origination points, or fees, however denominated, where a mortgage originator is being paid transaction-specific compensation by any person other than the consumer (subject to the Bureau's express authority to make an exemption from the prohibition of such upfront charges if the Bureau finds such an exemption to be in the interest of consumers and the public).
See
section 1403 of the Dodd-Frank Act. Finally, the Dodd-Frank Act also added new restrictions on the financing of single-premium credit insurance and mandatory arbitration agreements.
See
section 1414 of the Dodd-Frank Act.

E. Other Rulemakings

In addition to this proposal, the Bureau currently is engaged in six other rulemakings relating to mortgage credit to implement requirements of the Dodd-Frank Act:

•
TILA-RESPA Integration:
On July 9, 2012, the Bureau published a proposed rule and proposed integrated forms combining the TILA mortgage loan disclosures with the Good Faith Estimate (GFE) and settlement statement required under the Real Estate Settlement Procedures Act (RESPA), pursuant to Dodd-Frank Act section 1032(f) and sections 4(a) of RESPA and 105(b) of TILA, as amended by Dodd-Frank Act sections 1098 and 1100A, respectively. 12 U.S.C. 2603(a); 15 U.S.C. 1604(b). The public has until November 6, 2012 to review and provide comments on most of this proposal, except that comments are due by September 7, 2012 for specific portions of the proposal.

•
HOEPA:
The Bureau proposed on July 9, 2012 to implement Dodd-Frank Act requirements expanding protections for “high-cost” mortgage loans under the Home Ownership and Equity Protection Act (HOEPA), pursuant to TILA sections 103(bb) and 129, as amended by Dodd-Frank Act sections 1431 through 1433. 15 U.S.C. 1602(bb) and 1639. The public has until September 7, 2012 to review and provide comment on this proposal, except comments on the Paperwork Reduction Act.

•
Servicing:
The Bureau proposed on August 9, 2012 to implement Dodd-Frank Act requirements regarding force-placed insurance, error resolution, and payment crediting, as well as forms for mortgage loan periodic statements and “hybrid” adjustable-rate mortgage reset disclosures, pursuant to sections 6 of RESPA and 128, 128A, 129F, and 129G of TILA, as amended or established by Dodd-Frank Act sections 1418, 1420, 1463, and 1464. 12 U.S.C. 2605; 15 U.S.C. 1638, 1638a, 1639f, and 1639g. The Bureau also proposed rules on reasonable information management, early intervention for delinquent consumers, continuity of contact, and loss mitigation, pursuant to the Bureau's authority to carry out the consumer protection purposes of RESPA in section 6 of RESPA, as amended by Dodd-Frank Act section 1463. 12 U.S.C. 2605. The public has until October 9, 2012 to review and provide comment on these proposals, except comments on the Paperwork Reduction Act.

•
Appraisals:
The Bureau, jointly with Federal prudential regulators and other Federal agencies, on August 15, 2012 issued a proposal to implement Dodd-Frank Act requirements concerning appraisals for higher-risk mortgages, appraisal management companies, and automated valuation models, pursuant to TILA section 129H as established by Dodd-Frank Act section 1471, 15 U.S.C. 1639h, and sections 1124 and 1125 of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) as established by Dodd-Frank Act sections 1473(f), 12 U.S.C. 3353, and 1473(q), 12 U.S.C. 3354, respectively. In addition, the Bureau on the same date issued rules to implement section 701(e) of the Equal Credit Opportunity Act (ECOA), as amended by Dodd-Frank Act section 1474, to require that creditors provide applicants with a free copy of written appraisals and valuations developed in connection with applications for loans secured by a first lien on a dwelling. 15 U.S.C. 1691(e).

•
Ability to Repay:
The Bureau is in the process of finalizing a proposal issued by the Board to implement provisions of the Dodd-Frank Act requiring creditors to determine that a consumer can repay a mortgage loan and establishing standards for compliance, such as by making a “qualified mortgage,” pursuant to TILA section 129C as established by Dodd-Frank Act sections 1411 and 1412. 15 U.S.C. 1639c.

•
Escrows:
The Bureau is in the process of finalizing a proposal issued by the Board to implement provisions of the Dodd-Frank Act requiring certain escrow account disclosures and exempting from the higher-priced mortgage loan escrow requirement loans made by certain small creditors, among other provisions, pursuant to TILA section 129D as established by Dodd-Frank Act sections 1461 and 1462. 15 U.S.C. 1639d.

With the exception of the TILA-RESPA Integration Proposal, the Dodd-Frank Act requirements will take effect on January 21, 2013 unless final rules implementing those requirements are issued on or before that date and provide for a different effective date.

The Bureau regards the foregoing rulemakings as components of a single, comprehensive undertaking; each of them affects aspects of the mortgage industry and its regulation that intersect with one or more of the others. Accordingly, the Bureau is coordinating carefully the development of the proposals and final rules identified above. Each rulemaking will adopt new regulatory provisions to implement the various Dodd-Frank Act mandates described above. In addition, each of them may include other provisions the Bureau considers necessary or appropriate to ensure that the overall undertaking is accomplished efficiently and that it ultimately yields a comprehensive regulatory scheme for mortgage credit that achieves the statutory purposes set forth by Congress, while avoiding unnecessary burdens on industry.

Thus, the Bureau intends that the rulemakings listed above function collectively as a whole. In this context, each rulemaking may raise concerns that might appear unaddressed if that rulemaking were viewed in isolation. The Bureau intends, however, to address issues raised by its mortgage rulemakings through whichever rulemaking is most appropriate, in the Bureau's judgment, for addressing each specific issue. In some cases, the Bureau expects that one rulemaking may raise an issue and yet may not be the rulemaking that is most appropriate for

addressing that issue. For example, the proposed requirement to include NMLS IDs on loan documents, discussed in Part V under § 1026.36(g), below, also is proposed to be addressed in part by the TILA-RESPA Integration Proposal.

III. Outreach Conducted for This Rulemaking

A. Early Stakeholder Outreach & Feedback on Existing Rules

The Bureau conducted extensive outreach in developing the provisions in this proposed rule. Bureau staff met with and held in-depth conference calls with large and small bank and non-bank mortgage creditors, mortgage brokers, trade associations, secondary market participants, consumer groups, non-profit organizations, and State regulators. Discussions covered existing business models and compensation practices and the impact of the existing Loan Originator Rule. They also covered the Dodd-Frank Act provisions and the impact on consumers, loan originators, lenders, and secondary market participants of various options for implementing the statutory provisions. The Bureau developed several of the proposed clarifications of existing regulatory requirements in response to compliance inquiries and with input from industry participants.

B. Small Business Review Panel

In May 2012, the Bureau convened a Small Business Review Panel with the Chief Counsel for Advocacy of the Small Business Administration (SBA) and the Administrator of the Office of Information and Regulatory Affairs (OIRA) within the Office of Management and Budget (OMB).
34

As part of this process, the Bureau prepared an outline of the proposals then under consideration and the alternatives considered (Small Business Review Panel Outline), which the Bureau posted on its Web site for review by the general public as well as the small entities participating in the panel process.
35

The Small Business Review Panel gathered information from representatives of small creditors, mortgage brokers, and not-for-profit organizations and made findings and recommendations regarding the potential compliance costs and other impacts of the proposed rule on those entities. These findings and recommendations are set forth in the Small Business Review Panel Report, which will be made part of the administrative record in this rulemaking.
36

The Bureau has carefully considered these findings and recommendations in preparing this proposal and has addressed certain specific ones below.

34
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)).

35
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
.

36
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
.

.

In addition, the Bureau held roundtable meetings with other Federal banking and housing regulators, consumer advocacy groups, and industry representatives regarding the Small Business Review Panel Outline. At the Bureau's request, many of the participants provided feedback, which the Bureau has considered in preparing this proposal.

IV. Legal Authority

The Bureau is issuing this proposed rule pursuant to its authority under TILA and the Dodd-Frank Act. On July 21, 2011, section 1061 of the 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 and title X of the Dodd-Frank Act are Federal consumer financial laws. Dodd-Frank Act section 1002(14), 12 U.S.C. 5481(14) (defining “Federal consumer financial law” to include the “enumerated consumer laws” and the provisions of title X of the Dodd-Frank Act); 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, as well as title X of the Dodd-Frank Act.

A. The Truth in Lending Act

TILA Section 105(a)

As amended by the Dodd-Frank Act, TILA section 105(a), 15 U.S.C. 1604(a), directs the Bureau to prescribe regulations to carry out the purposes of TILA, and provides that such regulations may contain additional requirements, classifications, differentiations, or other provisions, and may provide for such adjustments and exceptions for all or any class of transactions, that the Bureau judges are necessary or proper to effectuate the purposes of TILA, to prevent circumvention or evasion thereof, or to facilitate compliance. The purpose of TILA is “to assure a meaningful disclosure of credit terms so that the consumer will be able to compare more readily the various credit terms available to him and avoid the uninformed use of credit.” TILA section 102(a); 15 U.S.C. 1601(a). These stated purposes are tied to Congress's finding that “economic stabilization would be enhanced and the competition among the various financial institutions and other firms engaged in the extension of consumer credit would be strengthened by the informed use of credit.” TILA section 102(a). Thus, strengthened competition among financial institutions is a goal of TILA, achieved through the effectuation of TILA's purposes. In addition, TILA section 129B(a)(2) establishes a purpose of TILA sections 129B and 129C to “assure consumers are offered and receive residential mortgage loans on terms that reasonably reflect their ability to repay the loans and that are understandable and not unfair, deceptive or abusive.” 15 U.S.C. 1639b(a)(2).

Historically, TILA section 105(a) has served as a broad source of authority for rules that promote the informed use of credit through required disclosures and substantive regulation of certain practices. However, Dodd-Frank Act section 1100A clarified the Bureau's section 105(a) authority by amending that section to provide express authority to prescribe regulations that contain “additional requirements” that the Bureau finds are necessary or proper to effectuate the purposes of TILA, to prevent circumvention or evasion thereof, or to facilitate compliance. This amendment clarified the authority to exercise TILA section 105(a) to prescribe requirements beyond those specifically listed in the statute that meet the standards outlined in section 105(a). The Dodd-Frank Act also clarified the Bureau's rulemaking authority over certain high-cost mortgages pursuant to section 105(a). As

amended by the Dodd-Frank Act, the Bureau's TILA section 105(a) authority to make adjustments and exceptions to the requirements of TILA applies to all transactions subject to TILA, except with respect to the substantive protections of TILA section 129, 15 U.S.C. 1639,
37

which apply to the high-cost mortgages referred to in TILA section 103(bb), 15 U.S.C. 1602(bb).

37
TILA section 129 contains requirements for certain high-cost mortgages, established by the Home Ownership and Equity Protection Act (HOEPA), which are commonly called HOEPA loans.

For the reasons discussed in this notice, the Bureau is proposing regulations to carry out TILA's purposes and is proposing such additional requirements, adjustments, and exceptions as, in the Bureau's judgment, are necessary and proper to carry out the purposes of TILA, prevent circumvention or evasion thereof, or to facilitate compliance. In developing these aspects of the proposal pursuant to its authority under TILA section 105(a), the Bureau has considered the purposes of TILA, including ensuring meaningful disclosures, facilitating consumers' ability to compare credit terms, and helping consumers avoid the uninformed use of credit, as well as ensuring consumers are offered and receive residential mortgage loans on terms that reasonably reflect their ability to repay the loans and that are understandable and not unfair, deception or abusive. In developing this proposal and using its authority under TILA section 105(a), the Bureau also has considered the findings of TILA, including strengthening competition among financial institutions and promoting economic stabilization.

TILA Section 129B(c)

Dodd-Frank Act section 1403 amended TILA section 129B by imposing two limitations on loan originator compensation to reduce or eliminate steering incentives for residential mortgage loans.
38

15 U.S.C. 1639b(c). First, it generally prohibits loan originators from receiving compensation for any residential mortgage loan that varies based on the terms of the loan, other than the amount of the principal. Second, TILA section 129B generally allows only consumers to compensate loan originators, though an exception permits other persons to pay “an origination fee or charge” to a loan originator, but only if two conditions are met: (1) The loan originator does not receive any compensation directly from a consumer; and (2) the consumer does not make an upfront payment of discount points, origination points, or fees (other than bona fide third party fees that are not retained by the creditor, the loan originator, or the affiliates of either). The Bureau has authority to prescribe regulations to prohibit the above practices. In addition, TILA section 129B(c)(2)(B)(ii) authorizes the Bureau to create exemptions from the exception's second prerequisite, that the consumer must not make any upfront payments of points or fees, where the Bureau determines that doing so “is in the interest of consumers and in the public interest.”

38
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 proposed rule does not address those provisions. Because they are structured as a requirement that the Bureau prescribe regulations establishing the substantive prohibitions, notwithstanding Dodd-Frank Act section 1400(c)(3), 15 U.S.C. 1601 note, the Bureau believes that the substantive prohibitions cannot take effect until the regulations establishing them have been prescribed and taken effect. The Bureau intends to prescribe such regulations in a future rulemaking. Until such time, no obligations are imposed on mortgage originators or other persons under TILA section 129B(c)(3).

TILA Section 129(p)(2)

HOEPA amended TILA by adding, in new section 129, a broad mandate to prohibit certain acts and practices in the mortgage industry. In particular, TILA section 129(p)(2), as re-designated by Dodd-Frank Act section 1433(a), requires the Bureau to prohibit, by regulation or order, acts or practices in connection with mortgage loans that the Bureau finds to be unfair, deceptive, or designed to evade the provisions of HOEPA. 15 U.S.C. 1639(p)(2). Likewise, TILA requires the Bureau to prohibit, by regulation or order, acts or practices in connection with the refinancing of mortgage loans that the Bureau finds to be associated with abusive lending practices, or that are otherwise not in the interest of the consumer.
Id.

The authority granted to the Bureau under TILA section 129(p)(2) is broad. It reaches mortgage loans with rates and fees that do not meet HOEPA's rate or fee trigger in TILA section 103(bb), 15 U.S.C. 1602(bb), as well as mortgage loans not covered under that section. TILA section 129(p)(2) is not limited to acts or practices by creditors, or to loan terms or lending practices.

TILA Section 129B(e)

Dodd-Frank Act section 1405(a) amended TILA to add new section 129B(e), 15 U.S.C. 1639b(e). That section provides for the Bureau to prohibit or condition terms, acts, or practices relating to residential mortgage loans on a variety of bases, including when the Bureau finds the terms, acts, or practices are not in the interest of the consumer. In developing proposed rules under TILA section 129B(e), the Bureau has considered all of the bases for its authority set forth in that section.

TILA Section 129C(d)

Dodd-Frank Act section 1414(d) amended TILA to add new section 129C(d), 15 U.S.C. 1639c(d). That section prohibits the financing of certain single-premium credit insurance products. As discussed more fully in the section-by-section analysis below, the Bureau is proposing to implement this prohibition in new § 1026.36(i).

TILA Section 129C(e)

Dodd-Frank Act section 1414(e) amended TILA to add new section 129C(e), 15 U.S.C. 1639c(e). That section restricts mandatory arbitration agreements in residential mortgage loan transactions. As discussed more fully in the section-by-section analysis below, the Bureau is proposing to implement these restrictions in new § 1026.36(h).

B. The Dodd-Frank Act

Section 1022(b)(1) of the Dodd-Frank Act authorizes the Bureau to prescribe rules “as may be necessary or appropriate to enable the Bureau to administer and carry out the purposes and objectives of the Federal consumer financial laws, and to prevent evasions thereof[.]” 12 U.S.C. 5512(b)(1). Section 1022(b)(2) of the Dodd-Frank Act prescribes certain standards for rulemaking that the Bureau must follow in exercising its authority under section 1022(b)(1). 12 U.S.C. 5512(b)(2). As discussed above, TILA and title X of the Dodd-Frank Act are Federal consumer financial laws. Accordingly, the Bureau proposes to exercise its authority under Dodd-Frank Act section 1022(b) to prescribe rules under TILA that carry out the purposes and prevent evasion of TILA.
See
part VI for a discussion of the Bureau's analysis and consultation pursuant to the standards for rulemaking under Dodd-Frank Act section 1022(b)(2).

V. Section-by-Section Analysis

This proposal implements new TILA sections 129B(b)(1), (c)(1), and (c)(2) and 129C(d) and (e), as added by sections 1402, 1403, 1414(d) and (e) of the Dodd-Frank Act.
39

As discussed in more detail in the section-by-section analysis to proposed § 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 to proposed § 1026.36(d)(1) and (2), TILA section 129B(c)(1) and (2) prohibits “mortgage originators” in “residential mortgage loans” from receiving compensation that varies based on loan terms and from receiving origination charges or fees from persons other than the consumer except in certain circumstances. Additionally, as discussed in more detail in the section-by-section analysis to proposed § 1026.36(i), TILA section 129C(d) creates prohibitions on single-premium credit insurance. Finally, as discussed in the section-by-section analysis to proposed § 1026.36(h), TILA section 129C(e) provides restrictions on mandatory arbitration agreements.

39
As discussed in Part VI.B, below, the final rule under this proposal also may implement new TILA section 129B(b)(2).

Section 1026.25 Record Retention

Current § 1026.25 requires creditors to retain evidence of compliance with Regulation Z. The Bureau proposes to add § 1026.25(c)(2) and (3) to establish record retention requirements for compliance with § 1026.36(d). Proposed § 1026.25(c)(2): (1) Extends the time period for retention by creditors of compensation-related records from two years to three years; (2) requires loan originator organizations (
i.e.,
generally, mortgage broker companies) to maintain certain compensation-related records for three years; and (3) clarifies the types of compensation-related records that are required to be maintained under the rule. Proposed § 1026.25(c)(3) requires creditors to maintain records evidencing compliance with the requirements related to discount points and origination points or fees set forth in proposed § 1026.36(d)(2)(ii); it also extends the two-year requirement to three years.

25(a) General Rule

Current comment 25(a)-5 clarifies the nature of the record retention requirements under § 1026.25 as applied to Regulation Z's loan originator compensation provisions. The comment provides that for each transaction subject to the loan originator compensation provisions in § 1026.36(d)(1), a creditor should maintain records of the compensation it provided to the loan originator for the transaction as well as the compensation agreement in effect on the date the interest rate was set for the transaction. The comment also states that where a loan originator is a mortgage broker, a disclosure of compensation or other broker agreement required by applicable State law that complies with § 1026.25 would be presumed to be a record of the amount actually paid to the loan originator in connection with the transaction.

The Bureau is proposing new § 1026.25(c)(2), which sets forth certain new record retention requirements for loan originators as discussed below. New comments 25(c)(2)-1 and -2 are being proposed to accompany proposed § 1026.25(c)(2), and those comments incorporate substantially the same guidance as existing comment 25(a)-5. Therefore, the Bureau proposes to delete existing comment 25(a)-5.

25(c) Records Related to Certain Requirements for Mortgage Loans 25(c)(2) Records Related to Requirements for Loan Originator Compensation Retention of Records for Three Years

TILA does not contain requirements to retain specific records, but § 1026.25 requires creditors to retain evidence of compliance with TILA for two years after the date disclosures are required to be made or action is required to be taken. Section 1404 of the Dodd-Frank Act amended TILA section 129B to provide a cause of action against any mortgage originator for failure to comply with the requirements of TILA section 129B and any of its implementing regulations. 15 U.S.C. 1639b(d). Section 1416(b) of the Dodd-Frank Act amended section 130(e) of TILA to extend the statute of limitations for a civil action alleging a violation of TILA section 129B (along with sections 129 and 129C) to three years beginning on the date of the occurrence of the violation.
40

15 U.S.C. 1639b(d), 1640(e). In view of the statutory changes to TILA, the provisions of current § 1026.25, which require a two-year record retention period, do not reflect all applicable statutes of limitations for causes of action brought under TILA. Moreover, the record retention provisions in § 1026.25 currently are limited to creditors, whereas TILA section 129B(e), as added by the Dodd-Frank Act, covers all loan originators and not solely creditors.

40
Prior to the Dodd-Frank Act amendment, TILA section 130(e) provided for a one year statute of limitations for civil actions to enforce TILA provisions. A civil action to enforce certain TILA provisions (including section 129B) brought by a State attorney general has a three year statute of limitations.

Consequently, the Bureau proposes § 1026.25(c)(2), which makes two changes to the current record retention provisions. First, a creditor must maintain records sufficient to evidence the compensation it pays to a loan originator organization or the creditor's individual loan originators, and the governing compensation agreement, for three years after the date of payment. Second, a loan originator organization must maintain for three years records of the compensation (1) it receives from a creditor, a consumer, or another person, and (2) it pays to its individual loan originators. The loan originator organization must maintain records sufficient to evidence the compensation agreement that governs those receipts or payments, for three years after the date of the receipts or payments. The Bureau proposes these changes pursuant to its authority under section 105(a) of TILA to prevent circumvention or evasion of TILA by requiring records that can be used to establish compliance. The Bureau believes these proposed modifications will ensure records associated with loan originator compensation are retained for a time period commensurate with the statute of limitations for causes of action under TILA section 130 and are readily available for examination, which is necessary to prevent circumvention of and to facilitate compliance with TILA.

However, the Bureau invites public comment on whether a record retention period of five years, rather than three years, would be appropriate. The Bureau believes that relevant actions and compensation practices that must be evidenced in retained records may in some cases occur prior to the beginning of the three-year period of enforceability that applies to a particular transaction. In addition, the running of the three-year period may be tolled (
i.e.,
paused) under some circumstances, resulting in a period of enforceability that ends more than three years following an occurrence of a violation of applicable requirements. Accordingly, a record retention period that is longer than three years may help ensure that consumers are able to avail themselves of TILA protections while imposing minimal incremental burden on creditors and loan originators. The Bureau notes that many State and local laws related to transactions involving real property may require a record retention period, or may depend on the information being available, for five years. Additionally, a five-year record retention period is consistent with provisions in the Bureau's TILA-RESPA Integration Proposal.

The Bureau believes that it is necessary to extend the record retention requirements to loan originator organizations, thus requiring both creditors and loan originator organizations to retain evidence of compliance with the requirements of

§ 1026.36(d)(1) for three years. Although creditors may retain some of the records needed to demonstrate compliance with TILA section 129B and its implementing regulations, in some circumstances, the records may be available solely from the loan originator organization. For example, if a creditor pays a loan originator organization a fee for arranging a loan and the loan originator organization in turn allocates a portion of that fee to the individual loan originator as a commission, the creditor may not possess a copy of the commission agreement setting forth the arrangement between the loan originator organization and the individual loan originator or any record of the payment of the commission. The Bureau believes that applying this proposed requirement to both creditors and loan originator organizations will prevent circumvention of and facilitate compliance with TILA, as amended by the Dodd-Frank Act.

The Bureau recognizes that extending the record retention requirement for creditors from two years for specific information related to loan originator compensation, as currently provided in Regulation Z, to three years may result in some increase in costs for creditors. The Bureau believes, however, that creditors should be able to use existing recordkeeping systems to maintain the records for an additional year at minimal cost. Similarly, although loan originator organizations may incur some costs to establish and maintain recordkeeping systems, loan originator organizations may be able to use existing recordkeeping systems that they maintain for other purposes at minimal cost. During the Small Business Review Panel process, the small entity representatives were asked about their current record retention practices and the potential impact of the proposed enhanced record retention requirements. Of the few small entity representatives who gave feedback on the issue, one creditor small entity representative stated that it maintained detailed records of compensation paid to all of its employees and that a regulator already reviews its compensation plans regularly, and another creditor small entity representative reported that it did not believe the proposed record retention requirement would require it to change its current practices.

Applying the current two-year record retention period to information specified in proposed § 1026.25(c) could adversely affect the ability of consumers to bring actions under TILA. The extension also would serve to reduce litigation risk and maintain consistency between creditors and loan originator organizations. The Bureau therefore believes it is appropriate to expand the time period for record retention to effectuate the three-year statute of limitations period established by Congress for actions against loan originators under section 129B of TILA.

Exclusion of Individual Loan Originators

The proposed recordkeeping requirements do not apply to individual loan originators. Although section 129B(d) of TILA, as amended by the Dodd-Frank Act, permits consumers to bring actions against mortgage originators (which include individual loan originators), the Bureau believes that applying the proposed record retention requirements of § 1026.25 to individual loan originators is unnecessary. Under the proposed record retention requirements, loan originator organizations and creditors must retain certain records regarding all of their individual loan originator employees. Applying the same record retention requirements to the individual loan originator employees themselves would be duplicative. In addition, such a requirement may not be feasible in all cases, because individual loan originators may not have access to the types of records required to be retained under § 1026.25, particularly after they cease to be employed by the creditor or loan originator organization. An individual loan originator who is a sole proprietor, however, is responsible for compliance with provisions that apply to the proprietorship (which is a loan originator organization) and, as a result, is responsible for compliance with the proposed record retention requirements. Similarly, an individual who is a creditor is subject to the requirements that apply to creditors.

Substance of Record Retention Requirements

As discussed above, proposed § 1026.25(c)(2) makes two changes to the current record retention provisions. First, proposed § 1026.25(c)(2)(i) requires a creditor to maintain records sufficient to evidence all compensation it pays to a loan originator organization or the creditor's individual loan originators, and a copy of the governing compensation agreement. Second, proposed § 1026.25(c)(2)(ii) requires a loan originator organization to maintain records of all compensation that it receives from a creditor, a consumer, or another person or that it pays to its individual loan originators; it also requires the loan originator organization to maintain a copy of the compensation agreement that governs those receipts or payments.

Proposed comment 25(c)(2)-1.i clarifies that, under proposed § 1026.25(c)(2), records are sufficient to evidence that compensation was paid and received if they demonstrate facts enumerated in the comment. The comment gives examples of the types of records that, depending on the facts and circumstances, may be sufficient to evidence compliance. Proposed comment 25(c)(2)-1.ii clarifies that the compensation agreement, evidence of which must to be retained under 1026.25(c)(2), is any agreement, written or oral, or course of conduct that establishes a compensation arrangement between the parties. Proposed comment 25(c)(2)-1.iii provides an example where the expiration of the three-year retention period varies depending on when multiple payments of compensation are made. Proposed comment 25(c)(2)-2 provides an example of retention of records sufficient to evidence payment of compensation.

25(c)(3) Records Related to Requirements for Discount Points and Origination Points or Fees

Proposed § 1026.25(c)(3) requires creditors to retain records pertaining to compliance with the provisions of § 1026.36(d)(2)(ii), regarding the payment of discount points and origination points or fees (see the section-by-section analysis to proposed § 1026.36(d)(2)(ii), below, for further discussion of these proposed requirements). Specifically, it provides that, for each transaction subject to proposed § 1026.36(d)(2)(ii), the creditor must maintain records sufficient to evidence that the creditor has made available to the consumer the comparable, alternative loan that does not include discount points and origination points or fees as required by § 1026.36(d)(2)(ii)(A) or if such a loan was not made available to the consumer, a good-faith determination that the consumer was unlikely to qualify for such a loan. The creditor must also maintain records to evidence compliance with the “bona fide” requirements under proposed § 1026.36(d)(2)(ii)(C) (
e.g.,
that the payment of discount points and origination points or fees leads to a bona fide reduction in the interest rate). For the same reasons discussed above under § 1026.25(c)(2), the Bureau also proposes that creditors be required to retain records under § 1026.25(c)(3) for three years and also invites comment on whether the period of required record

retention for purposes of § 1026.25(c)(3) should be five years.

Section 36 Prohibited Acts or Practices and Certain Requirements for Credit Secured by a Dwelling

36(a) Loan Originator, Mortgage Broker, and Compensation Defined

As discussed above, this proposed rule would implement new TILA sections 129B(b)(1), (c)(1) and (c)(2) and 129C(d) and (e), as added by sections 1402, 1403, and 1414(d) and (e) of the Dodd-Frank Act. TILA section 103(cc), which was added by section 1401 of the Dodd-Frank Act, contains definitions for “mortgage originator” and “residential mortgage loan.” These definitions are relevant to the implementation of loan originator compensation restrictions, limitations on discount points and origination points or fees, and loan originator qualification provisions under this proposal. The statutory definitions largely parallel the existing regulation's coverage, in terms of both persons and transactions subject to its requirements. As discussed below, the Bureau is seeking to retain the existing regulatory terms, to maximize continuity, while adjusting as necessary to reflect statutory differences, to reflect the fact that they now relate to more than just loan originator compensation limitations, and to facilitate the additional interpretation and clarification being proposed under existing rules.

Current § 1026.36 uses the term “loan originator.” Dodd-Frank Act amendments to TILA being addressed in this proposed rulemaking use the term “mortgage originator” as defined in TILA section 103(cc)(2). The Bureau does not propose to change the existing terminology in § 1026.36, although the Bureau is proposing certain clarifying amendments to the definition and its commentary. As discussed in more detail below, the Bureau believes that the definition of “loan originator” set forth in existing § 1026.36(a)(1) is consistent with the definition of “mortgage originator” in TILA section 103(cc) as amended by the Dodd-Frank Act. The Bureau also believes that the term “loan originator” has been in wide use since first adopted by the Board in 2010. Any changes to the “loan originator” terminology could require stakeholders to make equivalent revisions in many aspects of their operations, including in policies and procedures, compliance materials, and software and training. In addition, for the reasons discussed below, the Bureau is proposing two new definitions, in proposed § 1026.36(a)(1)(ii) and (iii), to establish the terms “loan originator organization” and “individual loan originator.”

The Bureau also proposes to add new § 1026.36(a)(3) to define compensation. The proposal transfers guidance on the meaning of the term “compensation” in current comment 36(d)(1)- to § 1026.36(a)(3). Other guidance regarding the term “compensation” in comment 36(d)(1)-1 is proposed to be transferred to new comment 36(a)-5 and revised.

36(a)(1) Loan Originator

36(a)(1)(i)

The Bureau is proposing to re-designate § 1026.36(a)(1) as § 1026.36(a)(1)(i) and to make certain amendments to it and its commentary, as discussed below, to reflect new TILA section 103(cc)(2). TILA section 103(cc)(2)(A) defines “mortgage originator” to mean: “any person who, for direct or indirect compensation or gain, or in the expectation of direct or indirect compensation or gain—(i) takes a residential mortgage loan application; (ii) assists a consumer in obtaining or applying to obtain a residential mortgage loan; or (iii) offers or negotiates terms of a residential mortgage loan.” TILA section 103(cc)(2)(B) further defines a mortgage originator as including “any person who represents to the public, through advertising or other means of communicating or providing information (including the use of business cards, stationery, brochures, signs, rate lists, or other promotional items), that such person can or will provide any of the services or perform any of the activities described in subparagraph A.” TILA section 103(cc)(2)(C) through (G) provides certain exclusions from the general definition of mortgage originator, as discussed below.

In current § 1026.36(a)(1), the term “loan originator” means “with respect to a particular transaction, a person who for compensation or other monetary gain, or in expectation of compensation or other monetary gain, arranges, negotiates, or otherwise obtains an extension of consumer credit for another person.” The Bureau broadly interprets the phrase “arranges, negotiates, or otherwise obtains an extension of consumer credit for another person” in the definition of “loan originator.”
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The Bureau believes the phrase includes the specific activities set forth in TILA section 103(cc)(2)(A), including: (1) Takes a loan application; (2) assists a consumer in obtaining or applying to obtain a loan; or (3) offers or negotiates terms of a loan.

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This 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).

The meaning of the term “arranges” is very broad,
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and the Bureau believes that it includes any part of the process of originating a credit transaction, including advertising or communicating to the public that one can perform loan origination services and referrals of a consumer to another person who participates in the process of originating a transaction (subject to administrative, clerical and other applicable exclusions discussed in more detail below). That is, the definition includes persons who participate in arranging a credit transaction with others and persons who arrange the transaction entirely, including initial contact with the consumer, assisting the consumer to apply for a loan, taking the application, offering and negotiating loan terms, and consummation of the credit transaction.

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

These statutory refinements to the phrase, “assists a consumer in obtaining or applying to obtain a residential mortgage loan,” suggest that minor actions,
e.g.,
accepting a completed application form and delivering it to a loan officer, without assisting the consumer in completing it, processing or analyzing the information, or discussing loan terms, would not be included in the definition. In this situation, the person is not engaged in any action specific to actively aiding or further achieving a complete loan application or collecting information on behalf of the consumer specific to a mortgage loan. This interpretation is also consistent with the exclusion in TILA section 103(cc)(2)(C)(i) for certain administrative and clerical persons, which is discussed in more detail below.

Nevertheless, the Bureau proposes to add “takes an application” and “offers,” as used in the definition of “mortgage originator” in TILA section 103(cc)(2)(A), to the definition of “loan originator” in current § 1026.36(a). The Bureau believes that, even though the definition of “loan originator” in current § 1026.36(a) includes the meaning of these terms, expressly stating them clarifies that the definition

of “loan originator” in § 1026.36(a) includes the core elements of the definition of “mortgage originator” in TILA section 103(cc)(2)(A). Inclusion of the terms also facilitates compliance with TILA by removing any risk of uncertainty on this point.

Arranges, Negotiates, or Otherwise Obtains

TILA section 103(cc)(2) defines “mortgage originator” to include a person who “takes a residential mortgage loan application” and “assists a consumer in obtaining or applying to obtain a residential mortgage loan.” TILA section 103(cc)(4) provides that a person “assists a consumer in obtaining or applying to obtain a residential mortgage loan” by taking actions such as “advising on residential mortgage loan terms (including rates, fees, and other costs), preparing residential mortgage loan packages, or collecting information on behalf of the consumer with regard to a residential mortgage loan.” The Bureau proposes comment 36(a)-1.i.A to provide further guidance on the existing phrase “arranges, negotiates, or otherwise obtains,” as used in § 1026.36(a)(1), to clarify the phrase's applicability in light of these statutory provisions. Specifically, the Bureau proposes to clarify in comment 36(a)-1.i.A that “takes an application, arranges, offers, negotiates, or otherwise obtains an extension of consumer credit for another person” includes “assists a consumer in obtaining or applying for consumer credit by advising on credit terms (including rates, fees, and other costs), preparing application packages (such as a loan or pre-approval application or supporting documentation), or collecting information on behalf of the consumer to submit to a loan originator or creditor, and includes a person who advertises or communicates to the public that such person can or will provide any of these services or activities.”

Advising on Residential Mortgage Loan Terms

TILA section 103(cc)(2)(A)(ii) provides that a mortgage originator includes a person who “assists a consumer in obtaining or applying to obtain a residential mortgage loan.” TILA section 103(cc)(4) defines this phrase to include persons “advising on residential mortgage loan terms (including rates, fees, and other costs).” Thus, this section applies to persons advising on credit terms (including rates, fees, and other costs) advertised or offered by that person on its own behalf or for another person. The Bureau believes that the definition of “mortgage originator” does not include bona fide third-party advisors such as accountants, attorneys, registered financial advisors, certain housing counselors, or others who do not receive or are paid no compensation for originating consumer credit transactions. Should these persons receive payments or compensation from loan originators, creditors, or their affiliates in connection with a consumer credit transaction, however, they could be considered loan originators.

Advertises or Communicates

TILA section 103(cc)(2)(B) provides that a mortgage originator “includes any person who represents to the public, through advertising or other means of communicating or providing information (including the use of business cards, stationery, brochures, signs, rate lists, or other promotional items), that such person can or will provide any of the services or perform any of the activities described in subparagraph (A).” The Bureau believes the current definition of “loan originator” in § 1026.36(a) includes persons who in expectation of compensation or other monetary gain communicate or advertise loan origination activities or services to the public.

The Bureau therefore proposes to amend comment 36(a)-1.i.A to clarify that a loan originator “includes a person who in expectation of compensation or other monetary gain advertises or communicates to the public that such person can or will provide any of these [loan origination] services or activities.” The Bureau notes that the phrase “advertises or communicates to the public” is very broad and includes, but is not limited to, the use of business cards, stationery, brochures, signs, rate lists, or other promotional items listed in TILA section 103(cc)(2)(B) if these items advertise or communicate to the public that a person can or will provide loan origination services or activities. The Bureau believes this clarification furthers TILA's goal in section 129B(a)(2) of ensuring that responsible, affordable credit remains available to consumers. The Bureau also invites comment on this clarification to the definition of loan originator.

Manufactured Home Retailers

The definition of “mortgage originator” in TILA section 103(cc)(2)(C)(ii) also expressly excludes certain employees of manufactured home retailers. The definition of “loan originator” in current § 1026.36(a)(1) does not address such employees. The Bureau proposes to implement the new statutory exclusion by revising the definition of “loan originator” in § 1026.36(a)(1) to exclude employees of a manufactured home retailer who assist a consumer in obtaining or applying to obtain consumer credit, provided such employees do not take a consumer credit application, offer or negotiate terms of a consumer credit transaction, or advise a consumer on credit terms (including rates, fees, and other costs).

Creditors

Current § 1026.36(a) includes in the definition of loan originator only creditors that do not finance the transaction at consummation out of the creditor's own resources, including, for example, drawing on a bona fide warehouse line of credit, or out of deposits held by the creditor (table-funded creditors). TILA section 129B(b), as added by section 1402 of the Dodd-Frank Act, imposes new qualification and loan document unique identifier requirements that apply under certain circumstances to all creditors, including non-table-funded creditors, which are not loan originators for other purposes. Section 1401 of the Dodd-Frank Act amended TILA to add section 103(cc)(2)(F), which provides that the definition of “mortgage originator” expressly excludes creditors (other than creditors in table-funded transactions) for purposes of section 129B(c)(1), (2), and (4). Those provisions contain restrictions on steering activities and rules of construction for the statute. Thus, the term “mortgage originator” includes creditors for purposes of other TILA provisions that use the term, such as section 129B(b), as added by section 1402 of the Dodd-Frank Act. Section 129B(b) imposes on mortgage originators new qualification and loan document unique identifier requirements, discussed below under § 1026.36(f) and (g). The Bureau therefore proposes to amend the definition of loan originator in § 1026.36(a)(1)(i) to include creditors (other than creditors in table-funded transactions) for purposes of those provisions only.

The Bureau also proposes to make technical amendments to comment 36(a)-1.ii on table funding to clarify the applicability of TILA section 129B(b)'s new requirements to all creditors. Non-table-funded creditors are included in the definition of loan originator only for the purposes of § 1026.36(f) and (g). The proposed revisions additionally clarify the applicability of § 1026.36 to table-funded creditors.

Servicers

TILA section 103(cc)(2)(G) defines “mortgage originator” not to include “a servicer or servicer employees, agents and contractors, including but not limited to those who offer or negotiate terms of a residential mortgage loan for purposes of renegotiating, modifying, replacing or subordinating principal of existing mortgages where borrowers are behind in their payments, in default or have a reasonable likelihood of being in default or falling behind.” The term “servicer” is defined by TILA section 103(cc)(7) as having the same meaning as “servicer” “in section 6(i)(2) of the Real Estate Settlement Procedures Act of 1974 [RESPA] (12 U.S.C. 2605(i)(2)).”

RESPA defines the term “servicer” as “the person responsible for servicing of a loan (including the person who makes or holds a loan if such person also services the loan).”
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The term “servicing” is defined to mean “receiving any scheduled periodic payments from a borrower pursuant to the terms of any loan, including amounts for escrow accounts described in section 2609 of this title [Title 12], and making the payments of principal and interest and such other payments with respect to the amounts received from the borrower as may be required pursuant to the terms of the loan.” 12 U.S.C. 2605(i)(3).

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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).

Current comment 36(a)-1.iii provides that the definition of “loan originator” does not “apply to a loan servicer when the servicer modifies an existing loan on behalf of the current owner of the loan. The rule only applies to extensions of consumer credit and does not apply if a modification of an existing obligation's terms does not constitute a refinancing under § 1026.20(a).” The Bureau proposes to amend comment 36(a)-1.iii to clarify how the definition of loan originator applies to servicers and to implement the Dodd-Frank Act's definition of mortgage originator.

The Bureau believes the exception in TILA section 103(cc)(2)(G) narrowly applies to servicers, servicer employees, agents and contractors only when engaging in limited servicing activities with respect to a particular transaction after consummation, including loan modifications that do not constitute a refinancing. The Bureau does not believe, however, that the statutory exclusion was intended to shield from coverage companies that intend to act as servicers on loans when they engage in loan origination activities prior to consummation or servicers of existing loans that refinance such loans. The Bureau believes that exempting such companies merely because of the general status of “servicer” with respect to some loans would not reflect Congress's intended statutory scheme.

The Bureau's interpretation rests on analyzing the two distinct parts of the statute. Under TILA section 103(cc)(2)(G), the definition of “mortgage originator” does not include: (1) “a servicer” or (2) “servicer employees, agents and contractors, including but not limited to those who offer or negotiate terms of a residential mortgage loan for purposes of renegotiating, modifying, replacing and subordinating principal of existing mortgages where borrowers are behind in their payments, in default or have a reasonable likelihood of being in default or falling behind.” Under a textual analysis of this provision in combination with the definition of “servicer” under RESPA in 12 U.S.C. 2605(i)(2), which is referenced by TILA section 103(cc)(7), a servicer that is responsible for servicing a loan or that makes a loan
and
services it is excluded from the definition of “mortgage originator” for that particular loan after the loan is consummated and the servicer becomes responsible for servicing it. “Servicing” is defined under RESPA as “receiving and making payments according to the terms of the loan.” Thus, a servicer cannot be responsible for servicing a loan that does not exist. A loan exists only after consummation. Therefore, for purposes of TILA section 103(cc)(2)(G), a person is a servicer with respect to a particular transaction only after it is consummated and that person retains or obtains its servicing rights.

The Bureau believes this interpretation of the statute is the most consistent with the definition of “mortgage originator” in TILA section 103(cc)(2). A person cannot be a servicer until after consummation of a transaction. A person taking an application, assisting a consumer in obtaining or applying to obtain a loan, or offering or negotiating terms of a loan, or funding the transaction prior to and through the time of consummation, is a mortgage originator or creditor (depending upon the person's role). Thus, a person that funds a loan from the person's own resources or a table-funded creditor is subject to the appropriate provisions in TILA section 103(cc)(2)(F) for creditors until the person becomes responsible for servicing the loan after consummation. The Bureau believes this interpretation is also consistent with the definition of “loan originator” in current § 1026.36(a) and comment 36(a)-1.iii. If a loan modification by the servicer constitutes a refinancing under § 1026.20(a), the servicer is considered a creditor until after consummation of the refinancing when responsibility for servicing the refinanced loan arises.

The Bureau believes the second part of the statutory provision applies to individuals (
i.e.,
natural persons) who are employees, agents or contractors of the servicer, “including but not limited to those who offer or negotiate terms of a residential mortgage loan for purposes of renegotiating, modifying, replacing and subordinating principal of existing mortgages where borrowers are behind in their payments, in default or have a reasonable likelihood of being in default or falling behind.” The Bureau further believes that, to be considered employees, agents or contractors of the servicer for the purposes of TILA section 103(cc)(2)(G), the person for whom the employees, agent or contractors are working first must be a servicer. Thus, as discussed above, the particular loan must have already been consummated before such employees, agents, or contractors can be excluded from the statutory term, “mortgage originator” under TILA section 103(cc)(2)(G).

The Bureau interprets the phrase “including but not limited to those who offer or negotiate terms of a residential mortgage loan for purposes of renegotiating, modifying, replacing and subordinating principal of existing mortgages where borrowers are behind in their payments, in default or have a reasonable likelihood of being in default or falling behind” to be an example of the types of activities the individuals are permitted to engage in that satisfy the purposes of TILA section 103(cc)(2)(G). However, the Bureau believes that “renegotiating, modifying, replacing and subordinating principal of existing mortgages” or any other related activities that occur must not be a refinancing, as defined in § 1026.20(a), for the purposes of TILA section 103(cc)(2)(G). Under the Bureau's view, a servicer may modify an existing loan in several ways without being considered a loan originator. A formal satisfaction of the existing obligation and replacement by a new obligation is a refinancing. But, short of that, a

servicer may modify a loan without being considered a loan originator.

The Bureau interprets the term “replacing” in TILA section 103(cc)(2)(G) not to include refinancings of consumer credit. The term “replacing” is not defined in TILA or Regulation Z, but the Bureau believes the term “replacing” in this context means replacing existing debt without also satisfying the original obligation. For example, a first- and second-lien loan may be “replaced” by a single, new loan with a reduced interest rate and principal amount, the proceeds of which do not satisfy the full obligation of the prior loans. In such a situation, the agreement for the new loan may stipulate that the consumer is responsible for the remaining outstanding balances of the prior loans if the consumer refinances or defaults on the replacement loan within a stated period of time. This is conceptually distinct from a refinancing as described in § 1026.20(a), which refers to situations where an existing “obligation
is satisfied and replaced
by a new obligation.”
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(Emphasis added.)

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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 ability to repay provisions of TILA section 129C, which were added by section 1411 of the Dodd-Frank Act, make numerous references to certain “refinancings” for exemptions from the income verification requirement of section 129C. TILA section 128A, as added by section 1419 of the Dodd-Frank Act, contains a disclosure requirement that includes a “refinancing” as an alternative for consumers of hybrid adjustable rate mortgages to pursue before the interest rate adjustment or reset after the fixed introductory period ends. Moreover, TILA's text prior to Dodd-Frank Act amendments contained the term “refinancing” in numerous provisions. For example, TILA section 106(f)(2)(B) provides finance charge tolerance requirements specific to a “refinancing,” TILA section 125(e)(2) exempts certain “refinancings” from right of rescission disclosure requirements, and TILA section 128(a)(11) requires disclosure of whether the borrower is entitled to a rebate upon “refinancing” an obligation in full that involves a precomputed finance charge. For these reasons the Bureau believes that, if Congress intended for “replacing” to include or mean a “refinancing” of consumer credit, Congress would have used the existing term, “refinancing,” as Congress did for sections 1411 and 1419 of the Dodd-Frank Act and in prior TILA legislation. Instead, without any additional guidance from Congress, the Bureau defers to the current definition of “refinancing” in § 1026.20(a), where part of the definition of “refinancing” requires both replacement and satisfaction of the original obligation as separate and distinct elements of the defined term.

Furthermore, the above interpretation of “replacing” better accords with the surrounding statutory text, which provides that servicers include persons offering or negotiating a residential mortgage loan for the purposes of “renegotiating, modifying, replacing or subordinating principal of existing mortgages where borrowers are behind in their payments, in default or have a reasonable likelihood of being in default or falling behind.” Taken as a whole, this text applies to distressed consumers for whom replacing and fully satisfying the existing obligation(s) is not an option. The situation covered by the text is distinct from a refinancing in which a consumer would simply use the proceeds from the refinancing to satisfy an existing loan or existing loans.

The Bureau believes this interpretation gives full effect to the exclusionary language as Congress intended, to avoid undesirable impacts on servicers' willingness to modify existing loans to benefit distressed consumers, without undermining the new protections generally afforded by TILA section 129B. A broader interpretation that excludes servicers and their employees, agents, and contractors from those protections solely by virtue of their coincidental status as servicers is not the best reading of the statute as a whole and likely would frustrate rather than further congressional intent.

Indeed, if persons are not included in the definition of mortgage originator when making but prior to servicing a loan or based on a person's status as a servicer under the definition of “servicer,” at least two-thirds of mortgage lenders (and their originator employees) nationwide could be excluded from the definition of “mortgage originator” in TILA section 103(cc)(2)(G). Many, if not all, of the top ten mortgage lenders by volume either hold and service loans they originated in portfolio or retain servicing rights for the loans they originate and sell into the secondary market.
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Under an interpretation that would categorically exclude a person who makes and services a loan or whose general “status” is a “servicer,” these lenders would be excluded as “servicers” from the definition of “mortgage originator.” Thus, their employees and agents would also be excluded from the definition under this interpretation.

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

The Bureau believes this result would be not only contrary to the statutory text but also contrary to Congress's stated intent in section 1402 of the Dodd-Frank Act to ensure that responsible, affordable mortgage credit remains available to consumers by regulating practices related to residential mortgage loan origination. For example, based on the top ten mortgage lenders by origination and servicing volume alone, as much as 61 percent of the nation's loan originators could not only be excluded from prohibitions on dual compensation and compensation based on loan terms but also from the new qualification requirements added by the Dodd-Frank Act.

The Bureau proposes to amend comment 36(a)-1.iii to reflect the Bureau's interpretation of the statutory text, to facilitate compliance, and to prevent circumvention. The Bureau interprets the statement in existing comment 36(a)-1.iii that the “definition of `loan originator' does not apply to a loan servicer when the servicer modifies an existing loan on behalf of the current owner of the loan” as consistent with the definition of mortgage originator as it relates to servicers in TILA section 103(cc)(2)(G). Proposed comment 36(a)-1.iii thus clarifies that the TILA section 103(cc)(2)(G) definition of “loan originator” includes a servicer or a servicer's employees, agents, and contractors when offering or negotiating terms of a particular existing loan obligation on behalf of the current owner for purposes of renegotiating, modifying, replacing, or subordinating principal of such a debt where the borrower(s) is not current, in default, or has a reasonable likelihood of becoming in default or not current. The Bureau proposes to amend comment 36(a)-1.iii to clarify that § 1026.36 “only applies to

extensions of consumer credit that constitute a refinancing under § 1026.20(a). Thus, the rule does not apply if a renegotiation, modification, replacement, or subordination of an existing obligation's terms occurs, unless it is a refinancing under § 1026.20(a).”

Real Estate Brokers

TILA section 103(cc)(2)(D) states that the definition of “mortgage originator” does not “include a person or entity that only performs real estate brokerage activities and is licensed or registered in accordance with applicable State law, unless such person or entity is compensated by a lender, a mortgage broker, or other mortgage originator or by any agent of such lender, mortgage broker, or other mortgage originator.” Thus, the statute provides that real estate brokers are not included in the definition of “mortgage originator” if they: (1) Only perform real estate brokerage activities, (2) are licensed or registered under applicable State law to perform such activities, and (3) do not receive compensation from loan originators, creditors, or their agents. Therefore, a real estate broker that performs loan originator activities or services as defined by proposed § 1026.36(a) is a loan originator for the purposes of § 1026.36.
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The Bureau proposes to add comment 36(a)-1.iv to clarify that the term loan originator does not include certain real estate brokers.

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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 believes the text of TILA section 103(cc)(2)(D) related to payments to a real estate broker “by a lender, a mortgage broker, or other mortgage originator or by any agent of such lender, mortgage broker, or other mortgage originator” is directed at payments by such persons in connection with the origination of a particular consumer credit transaction secured by a dwelling. Each of the three core elements in the definition of mortgage originator in TILA section 103(cc)(2)(A) describes activities related to a residential mortgage loan.
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Moreover, if real estate brokers are deemed mortgage originators simply by receiving compensation from a creditor, then a real estate broker would be considered a mortgage originator if the real estate broker received compensation from a creditor for reasons wholly unrelated to loan origination (
e.g.,
if the real estate broker found new office space for the creditor). The Bureau does not believe that either the definition of “mortgage originator” in TILA section 103(cc)(2) or the statutory purpose of TILA section 129B(a)(2) to “assure consumers are offered and receive residential mortgage loans on terms that reasonably reflect their ability to repay the loans and that are understandable and not unfair, deception or abusive,” demonstrate that Congress intended for TILA section 129B to cover this type of real estate brokerage activity. Thus, for a real estate broker to be included in the definition of “mortgage originator,” the real estate broker must receive compensation in connection with performing one or more of the three core “mortgage originator” activities for a particular consumer credit transaction secured by a dwelling.

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The three core elements in the definition of mortgage originator in TILA section 103(cc)(2)(A) are: “(i) Takes
a residential mortgage loan
application; (ii) assists a consumer in obtaining or applying to obtain
a residential mortgage loan;
or (iii) offers or negotiates terms of
a residential mortgage loan.”
(Emphasis added).

For example, assume XYZ Bank pays a real estate broker for a broker price opinion in connection with a pending modification or default of a mortgage loan for consumer A. In an unrelated transaction, consumer B compensates the same real estate broker for assisting consumer B with finding and negotiating the purchase of a home. Consumer B also obtains credit from XYZ Bank to purchase the home. This real estate broker is not a loan originator under these facts. Proposed comment 36(a)-1.iv clarifies this point. The proposed comment also clarifies that a payment is not from a creditor, a mortgage broker, other mortgage originator, or an agent of such persons if the payment is made on behalf of the consumer to pay the real estate broker for real estate brokerage activities performed for the consumer.

The Bureau notes that the definition of “mortgage originator” in the statute does not “include a person or entity that only performs real estate brokerage activities and is licensed or registered in accordance with applicable State law.” The Bureau believes that, if applicable State law defines real estate brokerage activities to include activities that fall within the definition of loan originator in § 1026.36(a), the real estate broker is a loan originator when engaged in such activities subject to § 1026.36 and is not a real estate broker under TILA section 103(cc)(2)(D). The Bureau invites comment on this proposed clarification of the meaning of “loan originator” for real estate brokers.

Seller Financing

TILA section 103(cc)(2)(E) provides that the term “mortgage originator” does not include:

with respect to a residential mortgage loan, a person, estate, or trust that provides mortgage financing for the sale of 3 properties in any 12-month period to purchasers of such properties, each of which is owned by such person, estate, or trust and serves as security for the loan, provided that such loan—(i) is not made by a person, estate, or trust that has constructed, or acted as a contractor for the construction of, a residence on the property in the ordinary course of business of such person, estate, or trust; (ii) is fully amortizing; (iii) is with respect to a sale for which the seller determines in good faith and documents that the buyer has a reasonable ability to repay the loan; (iv) has a fixed rate or an adjustable rate that is adjustable after 5 or more years, subject to reasonable annual and lifetime limitations on interest rate increases; and (v) meets any other criteria the Bureau may prescribe.

This provision must be read in conjunction with the existing exceptions i

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A2012-20808. Public record. Not legal advice.