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

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URL: https://www.frixlaw.com/law-library/documents/fr%3A2013-01503

## Record

- **Collection:** Federal Register
- **Document type:** Rule
- **Published:** February 15, 2013
- **Citation:** 78 FR 11280

## Text

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

AGENCY:

Bureau of Consumer Financial Protection.

ACTION:

Final rule; official interpretations.

SUMMARY:

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

DATES:

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

FOR FURTHER INFORMATION CONTACT:

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

SUPPLEMENTARY INFORMATION:

I. Summary of the Final Rule

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

The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) expanded on previous efforts by lawmakers and regulators to strengthen loan originator qualification requirements and regulate industry compensation practices. The Bureau of Consumer Financial Protection (Bureau) is issuing new rules to implement the Dodd-Frank Act requirements, as well as to revise and clarify existing regulations and commentary on loan originator compensation. The rules also implement Dodd-Frank Act provisions that prohibit certain arbitration agreements and the financing of certain credit insurance in connection with a mortgage loan.

The final rule revises Regulation Z to implement amendments to the Truth in Lending Act (TILA). It contains the following key elements:

Prohibition Against Compensation Based on a Term of a Transaction or Proxy for a Term of a Transaction.
Regulation Z already prohibits basing a loan originator's compensation on “any of the transaction's terms or conditions.” The Dodd-Frank Act codifies this prohibition. The final rule implements the Dodd-Frank Act and clarifies the scope of the rule as follows:

• The final rule defines “a term of a transaction” as “any right or obligation of the parties to a credit transaction.” This means, for example, that a mortgage broker cannot receive compensation based on the interest rate of a loan or on the fact that the loan officer steered a consumer to purchase required title insurance from an affiliate of the broker, since the consumer is obligated to pay interest and the required title insurance in connection with the loan.

• To prevent evasion, the final rule prohibits compensation based on a “proxy” for a term of a transaction. The rule also further clarifies the definition of a proxy to focus on whether: (1) The factor consistently varies with a transaction term over a significant number of transactions; and (2) the loan originator has the ability, directly or indirectly, to add, drop, or change the factor in originating the transaction.

• To prevent evasion, the final rule generally prohibits loan originator compensation from being reduced to offset the cost of a change in transaction terms (often called a “pricing concession”). However, the final rule allows loan originators to reduce their compensation to defray certain unexpected increases in estimated settlement costs.

• To prevent incentives to “up-charge” consumers on their loans, the final rule generally prohibits loan originator compensation based upon the profitability of a transaction or a pool of transactions. However, subject to certain restrictions, the final rule permits certain bonuses and retirement and profit-sharing plans to be based on the terms of multiple loan originators' transactions. Specifically, the funds can be used for: (1) Contributions to or benefits under certain designated tax-advantaged retirement plans, such as 401(k) plans and certain pension plans; (2) bonuses and other types of non-deferred profits-based compensation if the individual loan originator originated ten or fewer mortgage transactions during the preceding 12 months; and (3) bonuses and other types of non-deferred profits-based compensation that does not exceed 10 percent of the individual loan originator's total compensation.

Prohibition Against Dual Compensation.
Regulation Z already provides that where a loan originator receives compensation directly from a consumer in connection with a mortgage loan, no loan originator may receive compensation from another person in connection with the same transaction. The Dodd-Frank Act codifies this prohibition, which was designed to address consumer confusion over mortgage broker loyalties where the brokers were receiving payments both from the consumer and the creditor. The final rule implements this restriction but provides an exception to allow mortgage brokers to pay their employees or contractors commissions, although the commissions cannot be based on the terms of the loans that they originate.

No Prohibition on Consumer Payment of Upfront Points and Fees.
Section 1403 of the Dodd-Frank Act contains a section that would generally have prohibited consumers from paying upfront points or fees on transactions in which the loan originator compensation is paid by a person other than the consumer (either to the creditor's own employee or to a mortgage broker). However, the Dodd-Frank Act also authorizes the Bureau to waive or create exemptions from the prohibition on upfront points and fees if the Bureau determines that doing so would be in the interest of consumers and in the public interest.

The Bureau had proposed to waive the ban so that creditors could charge upfront points and fees in connection with a mortgage loan, so long as they made available to consumers an alternative loan that did not include upfront points and fees. The proposal was designed to facilitate consumer shopping, enhance consumer decision-making, and preserve consumer choice and access to credit. The Bureau has decided not to finalize this part of the proposal at this time, however, because of concerns that it would have created consumer confusion and other negative outcomes. The Bureau has decided instead to issue a complete exemption to the prohibition on upfront points and fees pursuant to its exemption authority under section 1403 and other authority while it scrutinizes several crucial issues relating to the proposal's design, operation, and possible effects in a mortgage market undergoing regulatory overhaul. The Bureau is planning consumer testing and other research to understand how new Dodd-Frank Act requirements affect consumers' understanding of and choices with respect to points and fees, so that the Bureau can determine whether further regulation is appropriate to facilitate consumer shopping and enhanced decision-making while protecting access to credit.

Loan Originator Qualifications and Identifier Requirements.
The Dodd-Frank Act imposes a duty on individual loan officers, mortgage brokers, and creditors to be “qualified” and, when applicable, registered or licensed to the extent required under State and Federal law. The final rule imposes duties on loan originator organizations to make sure that their individual loan originators are licensed or registered as applicable under the Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (SAFE Act) and other applicable law. For loan originator employers whose employees are not required to be licensed, including depository institutions and bona fide nonprofits, the rule requires them to: (1) Ensure that their loan originator employees meet character, fitness, and criminal background standards similar to existing SAFE Act licensing standards; and (2) provide training to their loan originator employees that is appropriate and consistent with those loan originators' origination activities. The final rule contains special provisions with respect to criminal background checks and the circumstances in which a criminal conviction is disqualifying, and with respect to situations in which a credit check on a loan originator is required.

The final rule also implements a Dodd-Frank Act requirement that loan originators provided their unique identifiers under the Nationwide Mortgage Licensing System and Registry (NMLSR) on loan documents. Accordingly, mortgage brokers, creditors, and individual loan originators that are primarily responsible for a particular origination will be required to list on enumerated loan documents their NMLSR unique identifiers (NMLSR IDs), if any, along with their names.

Prohibition on Mandatory Arbitration Clauses and Single Premium Credit Insurance.
The final rule also contains language implementing two other Dodd-Frank Act provisions concerning mortgage loan originations. The first prohibits the inclusion of clauses requiring the consumer to submit disputes concerning a residential mortgage loan or home equity line of credit to binding arbitration. It also prohibits the application or interpretation of provisions of such loans or related agreements so as to bar a consumer from bringing a claim in court in connection with any alleged violation of Federal law. The second provision prohibits the financing of any premiums or fees for credit insurance (such as credit life insurance) in connection with a consumer credit transaction secured by a dwelling, but allows credit insurance to be paid for on a monthly basis.

Other Provisions.
The final rule also extends existing recordkeeping requirements concerning loan originator compensation so that they apply to both creditors and mortgage brokers for three years. The rule also clarifies the definition of “loan originator” for purposes of the compensation and qualification rules, including exclusions for certain employees of manufactured home retailers, servicers, seller financers, and real estate brokers; management, clerical, and administrative staff; and loan processors, underwriters, and closers.

II. Background

A. The Mortgage Market

Overview of the Market and the Mortgage Crisis

The mortgage market is the single largest market for consumer financial products and services in the United States, with approximately $9.9 trillion in mortgage loans outstanding.
1

During the last decade, the market went through an unprecedented cycle of expansion and contraction that was fueled in part by the securitization of mortgages and creation of increasingly sophisticated derivative products. So many other parts of the American financial system were drawn into mortgage-related activities that, when the housing market collapsed in 2008, it sparked the most severe recession in the United States since the Great Depression.
2

1
Fed. Reserve Sys.,
Flow of Funds Accounts of the United States,
at 67 tbl.L.10 (2012),
available at

http://www.federalreserve.gov/releases/z1/Current/z1.pdf
(as of the end of the third quarter of 2012).

2

See
Thomas F. Siems,
Branding the Great Recession,
Fin. Insights (Fed. Reserve Bank of Dall.) May 13, 2012, at 3,
available at

http://www.dallasfed.org/assets/documents/banking/firm/fi/fi1201.pdf
(stating that the great recession “was the longest and deepest economic contraction, as measured by the drop in real GDP, since the Great Depression.”).

The expansion in this market is commonly attributed to both particular economic conditions (including an era of low interest rates and rising housing prices) and to changes within the industry. Interest rates dropped significantly—by more than 20 percent—from 2000 through 2003.
3

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

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

3

See
U.S. Dep't of Hous. & Urban Dev.,
An Analysis of Mortgage Refinancing, 2001-2003,
at 2 (2004) (“An Analysis of Mortgage Refinancing, 2001-2003”),
available at

www.huduser.org/Publications/pdf/MortgageRefinance03.pdf
; Souphala Chomsisengphet & Anthony Pennington-Cross,
The Evolution of the Subprime Mortgage Market,
88 Fed. Res. Bank of St. Louis Rev. 31, 48 (2006),
available at

http://research.stlouisfed.org/publications/review/article/5019
.

4
U.S. Fin. Crisis Inquiry Comm'n,
The Financial Crisis Inquiry Report: Final Report of the National Commission on the Causes of the Financial and Economic Crisis in the United States
156 (Official Gov't ed. 2011) (“FCIC Report”),
available at http://www.gpo.gov/fdsys/pkg/GPO-FCIC/pdf/GPO-FCIC.pdf
.

5
An Analysis of Mortgage Refinancing, 2001-2003, at 1.

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 some borrowers who would have qualified for “prime” loans were steered into subprime loans instead.
6

The Alt-A category of loans permitted borrowers to take out mortgage loans while providing little or no documentation of income or other evidence of repayment ability. Because these loans involved additional risk, they were typically more expensive to borrowers than “prime” mortgages, although many of them had very low introductory interest rates. In 2003, subprime and Alt-A origination volume was almost $400 billion; in 2006, it had reached $1 trillion.
7

6
For example, the Federal Reserve Board on July 20, 2011, issued a consent cease and desist order and assessed an $85 million civil money penalty against Wells Fargo & Company of San Francisco, a registered bank holding company, and Wells Fargo Financial, Inc., of Des Moines. The order addresses allegations that Wells Fargo Financial employees steered potential prime borrowers into more costly subprime loans and separately falsified income information in mortgage applications. In addition to the civil money penalty, the order requires that Wells Fargo compensate affected borrowers.
See

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

7
Inside Mortg. Fin.,
Mortgage Originations by Product, in
1 The 2011 Mortgage Market Statistical Annual 20 (2011).

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

More and more consumers, especially those with subprime and Alt-A loans, were unable or unwilling to make their mortgage payments. An early sign of the mortgage crisis was an upswing in early payment defaults—generally defined as borrowers being 60 or more days delinquent within the first year. Prior to 2006, 1.1 percent of mortgages would end up 60 or more days delinquent within the first year.
9

Taking a more expansive definition of early payment default to include 60 days delinquent within the first two years, this figure was double the historic average during 2006, 2007, and 2008.
10

In 2006, 2007, and 2008, 2.3 percent, 2.1 percent, and 2.3 percent of mortgages ended up 60 or more days delinquent within the first two years, respectively. In addition, as the economy worsened, the rates of serious delinquency (90 or more days past due or in foreclosure) for the subprime and Alt-A products began a steep increase from approximately 10 percent in 2006, to 20 percent in 2007, to more than 40 percent in 2010.
11

8
FCIC Report at 215-217.

9
CoreLogic's TrueStandings Servicing (reflects first-lien mortgage loans) (data service accessible only through paid subscription).

10

Id.

11

Id.
at 217.

The impact of this level of delinquencies was severe on creditors who held loans on their books and on private investors who purchased loans directly or through securitized vehicles. Prior to and during the housing bubble, the evolution of the securitization of mortgages attracted increasing involvement from financial institutions that were not directly involved in the extension of credit to consumers and from investors worldwide. Securitization of mortgages allows originating creditors to sell off their loans (and reinvest the funds earned in making new ones) to investors who want an income stream over time. Securitization had been pioneered by what are now called government-sponsored enterprises (GSEs), including the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). But by the early 2000s, large numbers of private financial institutions were deeply involved in creating increasingly complex mortgage-related investment vehicles through securities and derivative products. The private securitization-backed subprime and Alt-A mortgage market ground to a halt in 2007 in the face of the rising delinquencies on subprime and Alt-A products.
12

12

Id.
at 124.

Six years later, the United States continues to grapple with the fallout. The fall in housing prices is estimated to have resulted in about $7 trillion in household wealth losses.
13

In addition, distressed homeownership and foreclosure rates remain at unprecedented levels.
14

13

The U.S. Housing Market: Current Conditions and Policy Considerations,
3 (Fed. Reserve Bd., White Paper, 2012),
available at

http://www.federalreserve.gov/publications/other-reports/files/housing-white-paper-20120104.pdf
.

14
Lender Processing Servs., PowerPoint Presentation,
LPS Mortgage Monitor: December 2012 Mortgage Performance Observations, Data as of November 2012 Month End,
3, 11 (December 2012),
available at

http://www.lpsvcs.com/LPSCorporateInformation/CommunicationCenter/DataReports/Pages/Mortgage-Monitor.aspx
.

Response and Government Programs

In light of these conditions, the Federal Government began providing support to the mortgage markets in 2008 and continues to do so at extraordinary levels today. The Housing and Economic Recovery Act of 2008 (HERA), which became effective on October 1, 2008, provided both new safeguards and increased regulation for Fannie Mae and Freddie Mac, as well as provisions to assist troubled borrowers and the hardest hit communities. Fannie Mae and Freddie Mac, which supported the mainstream mortgage market, experienced heavy losses and were placed in conservatorship by the Federal government in 2008 to support the collapsing mortgage market.
15

Because private investors have withdrawn from the mortgage securitization market and there are no other effective secondary market mechanisms in place, the GSEs' continued operations help ensure that the secondary mortgage market continues to function and to assist consumers in obtaining new mortgages or refinancing existing mortgages. The Troubled Asset Relief Program (TARP), created to implement programs to stabilize the financial system during the financial crisis, was authorized through the Emergency Economic Stabilization Act of 2008 (EESA), as amended by the American Recovery and Reinvestment Act of 2009, and includes programs to help struggling homeowners avoid foreclosure.
16

Since 2008, several other

Federal government efforts have endeavored to keep the country's housing finance system functioning, including the Treasury Department's and the Federal Reserve System's mortgage-backed securities (MBS) purchase programs to help keep interest rates low and the Federal Housing Administration's (FHA's) increased market presence. As a result, mortgage credit has remained available, albeit with more restrictive underwriting terms that limit or preclude some consumers' access to credit. These same government agencies together with the GSEs and other market participants have also undertaken a series of efforts to help families avoid foreclosure through loan-modification programs, loan-refinance programs and foreclosure alternatives.
17

15
HERA, which created the Federal Housing Finance Agency (FHFA), granted the Director of FHFA discretionary authority to appoint FHFA conservator or receiver of the Enterprises “for the purpose of reorganizing, rehabilitating, or winding up the affairs of a regulated entity.” Housing and Economic Recovery Act of 2008, section 1367(a)(2), amending the Federal Housing Enterprises Financial Safety and Soundness Act of 1992, 12 U.S.C. 4617(a)(2). On September 6, 2008, FHFA exercised that authority, placing Fannie Mae and Freddie Mac into conservatorships. The two GSEs have since received more than $180 billion in support from the Department of the Treasury. Through the second quarter of 2012, Fannie Mae has drawn $116.1 billion and Freddie Mac has drawn $71.3 billion, for an aggregate draw of $187.5 billion from the Department of the Treasury. Fed. Hous. Fin. Agency,
Conservator's Report on the Enterprises' Financial Performance,
at 17 (Second Quarter 2012),
available at

http://www.fhfa.gov/webfiles/24549/ConservatorsReport2Q2012.pdf
.

16
The Making Home Affordable Program (MHA) is the umbrella program for Treasury's homeowner assistance and foreclosure mitigation efforts. The main MHA components are the Home Affordable Modification Program (HAMP), a Treasury program that uses TARP funds to provide incentives for mortgage servicers to modify eligible first-lien mortgages, and two initiatives at the GSEs that use non-TARP funds. Incentive payments for modifications to loans owned or guaranteed by the GSEs are paid by the GSEs, not TARP. Treasury over time expanded MHA to include sub-programs designed to overcome obstacles to sustainable HAMP modifications. Treasury also allocated TARP funds to support two additional housing support efforts: an FHA refinancing program and TARP funding for 19 state housing finance agencies, called the Housing Finance Agency Hardest Hit Fund. In the first half of 2012, Treasury extended the application period for HAMP by a year to December 31, 2013, and opened HAMP to non-owner-occupied rental properties and to consumers with a wider range of debt-to-income ratios under “HAMP Tier 2.”

17
The Home Affordable Refinance Program (HARP) is designed to help eligible homeowners refinance their mortgage. HARP is designed for those homeowners who are current on their mortgage payments but have been unable to get traditional refinancing because the value of their homes has declined. For a mortgage to be considered for a HARP refinance, it
must
be owned or guaranteed by the GSEs. HARP ends on December 31, 2013.

Size and Volume of the Current Mortgage Origination Market

Even with the economic downturn and tightening of credit standards, approximately $1.28 trillion in mortgage loans were originated in 2011.
18

In exchange for an extension of mortgage credit, consumers promise to make regular mortgage payments and provide their home or real property as collateral. The overwhelming majority of homebuyers continue to use mortgage loans to finance at least some of the purchase price of their property. In 2011, 93 percent of all home purchases were financed with a mortgage credit transaction.
19

18
Moody's Analytics,
Credit Forecast 2012
(2012) (“Credit Forecast 2012”),
available at http://www.economy.com/default.asp
(reflects first-lien mortgage loans) (data service accessible only through paid subscription).

19
Inside Mortg. Fin.,
New Homes Sold by Financing, in
1 The 2012 Mortgage Market Statistical Annual 12 (2012).

Consumers may obtain mortgage credit to purchase a home, to refinance an existing mortgage, to access home equity, or to finance home improvement. Purchase loans and refinancings together produced 6.3 million new first-lien mortgage loan originations in 2011.
20

The proportion of loans that are for purchases as opposed to refinances varies with the interest rate environment and other market factors. In 2011, 65 percent of the market was refinance transactions and 35 percent was purchase loans, by volume.
21

Historically the distribution has been more even. In 2000, refinances accounted for 44 percent of the market while purchase loans comprised 56 percent; in 2005, the two products were split evenly.
22

20
Credit Forecast 2012.

21
Inside Mortg. Fin.,
Mortgage Originations by Product, in
1 The 2012 Mortgage Market Statistical Annual 17 (2012).

22

Id.
These percentages are based on the dollar amount of the loans.

With a home equity transaction, a homeowner uses his or her equity as collateral to secure consumer credit. The credit proceeds can be used, for example, to pay for home improvements. Home equity credit transactions and home equity lines of credit resulted in an additional 1.3 million mortgage loan originations in 2011.
23

23
Credit Forecast 2012 (reflects open-end and closed-end home equity loans).

GSE-eligible loans, together with the other federally insured or guaranteed loans, cover the majority of the current mortgage market. Since entering conservatorship in September 2008, the GSEs have bought or guaranteed roughly three of every four mortgages originated in the country. Mortgages guaranteed by FHA make up most of the rest.
24

Outside of the securitization available through the Government National Mortgage Association (Ginnie Mae) for loans primarily backed by FHA, there are very few alternatives in place today to assume the secondary market functions served by the GSEs.
25

24
Fed. Hous. Fin. Agency,
A Strategic Plan for Enterprise Conservatorships: The Next Chapter in a Story that Needs an Ending,
at 14 (2012) (“FHFA Report”),
available at http://www.fhfa.gov/webfiles/23344/StrategicPlanConservatorshipsFINAL.pdf.

25
FHFA Report at 8-9. Secondary market issuance remains heavily reliant upon the explicitly government guaranteed securities of Fannie Mae, Freddie Mac, and Ginnie Mae. Through the first three quarters of 2012, approximately $1.2 trillion of the $1.33 trillion in mortgage originations have been securitized, less than $10 billion of the $1.2 trillion were non-agency mortgage backed securities. Inside Mortg. Fin. (Nov. 2, 2012) at 4.

Continued Fragility of the Mortgage Market

The current mortgage market is especially fragile as a result of the recent mortgage crisis. Tight credit remains an important factor in the contraction in mortgage lending seen over the past few years. Mortgage loan terms and credit standards have tightened most for consumers with lower credit scores and with less money available for a down payment. According to CoreLogic's TrueStandings Servicing, a proprietary data service that covers about two-thirds of the mortgage market, average underwriting standards have tightened considerably since 2007. Through the first nine months of 2012, for consumers that have received closed-end first-lien mortgages, the weighted average FICO
26

score was 750, the loan-to-value (LTV) ratio was 78 percent, and the debt-to-income (DTI) ratio was 34.5 percent.
27

In comparison, in the peak of the housing bubble in 2007, the weighted average FICO score was 706, the LTV was 80 percent, and the DTI was 39.8 percent.
28

26
FICO is a type of credit score that makes up a substantial portion of the credit report that lenders use to assess an applicant's credit risk and whether to extend a loan.

27
CoreLogic, TrueStandings Servicing Database,
available at http://www.truestandings.com
(data reflects first-lien mortgage loans) (data service accessible only through paid subscription). According to CoreLogic's TrueStandings Servicing, FICO reports that in 2011, approximately 38 percent of consumers receiving first-lien mortgage credit had a FICO score of 750 or greater.

28

Id.

In this tight credit environment, the data suggest that creditors are not willing to take significant risks. In terms of the distribution of origination characteristics, for 90 percent of all the Fannie Mae and Freddie Mac mortgage loans originated in 2011, consumers had a FICO score over 700 and a DTI less than 44 percent.
29

According to the Federal Reserve's Senior Loan Officer Opinion Survey on Bank Lending Practices, in April, 2012 nearly 60 percent of creditors reported that they would be much less likely, relative to 2006, to originate a conforming home-purchase mortgage
30

to a consumer with a 10 percent down payment and a credit score of 620—a traditional marker for those consumers with weaker credit histories.
31

The Federal Reserve Board calculates that the share of mortgage borrowers with credit scores below 620 has fallen from about 17 percent of consumers at the end of 2006 to about 5 percent more recently.
32

Creditors also appear to have pulled back on offering these consumers loans insured by the FHA, which provides mortgage insurance on loans made by FHA-approved creditors throughout the United States and its territories and is

especially structured to help promote affordability.
33

29

Id.

30
A conforming mortgage is one that is eligible for purchase or credit guarantee by Fannie Mae or Freddie Mac.

31
Fed. Reserve Bd.,
Senior Loan Officer Opinion Survey on Bank Lending Practices, available at http://www.federalreserve.gov/boarddocs/SnLoanSurvey/default.htm.

32
Federal Reserve Board staff calculations based on the Federal Reserve Bank of New York Consumer Credit Panel. The 10th percentile of credit scores on mortgage originations rose from 585 in 2006 to 635 at the end of 2011.

33
FHA insures mortgages on single family and multifamily homes including manufactured homes and hospitals. It is the largest insurer of mortgages in the world, insuring over 34 million properties since its inception in 1934.

The Bureau is acutely aware of the high levels of anxiety in the mortgage market today. These concerns include the continued slow pace of recovery, the confluence of multiple major regulatory and capital initiatives, and the compliance burdens of the various Dodd-Frank Act rulemakings (including uncertainty on what constitutes a qualified residential mortgage (QRM), which relates to the Dodd-Frank Act's credit risk retention requirements and mortgage securitizations). The Bureau acknowledges that it will likely take some time for the mortgage market to stabilize and that creditors will need to adjust their operations to account for several major regulatory and capital regime changes.

The Mortgage Origination Process and Origination Channels

As discussed above, the mortgage market crisis focused attention on the critical role that loan officers and mortgage brokers play in guiding consumers through the loan origination process. Consumers must go through a mortgage origination process to obtain a mortgage loan. There are many actors involved in a mortgage origination. In addition to the creditor and the consumer, a transaction may involve a loan officer employed by a creditor, a mortgage broker, settlement agent, appraiser, multiple insurance providers, local government clerks and tax offices, and others. Purchase money loans involve additional parties such as sellers and real estate agents. These third parties typically charge fees or commissions for the services they provide which may be paid directly by the consumer or from loan proceeds, or indirectly through a creditor or broker.

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

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

•
Wholesale:
The consumer deals with an independent mortgage broker, which may be an individual or a mortgage brokerage firm. The broker may seek offers from many different creditors, and then acts as a liaison between the consumer and whichever creditor ultimately closes the loan. At closing, the loan is consummated by using the creditor's funds, and the mortgage note is written in the creditor's name.
34

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

34
In some cases, mortgage brokers use a process called “table funding,” in which the transaction is closed using the wholesale creditor's funds at the settlement table, but the loan is closed in the broker's name. The broker simultaneously assigns the closed loan to the creditor. These types of transactions generally require the use of approved title companies or title attorneys of the creditor to assure strict adherence to the creditor's closing instructions. Such transactions are only valid in those states that allow “wet closings.” These types of closings are not as common today.

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

Both loan officers and mortgage brokers generally provide information to consumers about different types of loans and advise consumers on choosing a loan. Consumers rely on loan officers and mortgage brokers to determine what kind of loan best suits the consumers' needs. Loan officers and mortgage brokers also take a consumers' completed loan application for submission to the creditor's loan underwriter. The applications include consumers' credit and income information, along with information about the home to be purchased. Consumers can work with multiple loan originators to compare the loan offers that loan originators may obtain on their behalf from creditors. Once the consumers have decided to move forward with a loan, the loan originator may request additional information or documents from the consumers to support the information in the application and obtain an appraisal of the property.

Underwriting.
Historically, the creditor's loan underwriter used the application and additional information to confirm initial information provided by the consumer. The underwriter assessed whether the creditor should take on the risk of making the mortgage loan. To make this decision, the underwriter considered whether the consumer could repay the loan and whether the home was worth enough to serve as collateral for the loan. If the underwriter found that the consumer and the home qualified, the underwriter would approve the consumer's mortgage application.

During the years preceding the mortgage crisis, much of this process broke down as previously discussed. Underwriting today appears to have largely returned to these historical norms. The Bureau's 2013 Ability To Repay (ATR) Final Rule is designed, in substantial part, to assure that as credit continues improve, creditors do not return to the problematic practices of the last decade.

Closing.
After being approved for a mortgage loan, completing any closing requirements, and receiving necessary disclosures, the consumer can close on the loan. Multiple parties participate at closing, including the consumer, the creditor, and the settlement agent. In some instances, the loan originator also functions as the settlement agent. More commonly, a separate individual handles the settlement, although that individual may be an employee of the creditor or brokerage firm or of an affiliate of one of those.

Loan Pricing and Disposition of Closed Loans

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

•
Loan terms.
The loan terms affect consumer costs and how the loan is to be repaid, including the type of loan “product,” the method of calculating monthly payments and repayment (for example, whether the payments are fully amortizing) and the length of the loan term.
35

The most important single term in determining the price is, of course, the interest rate (and for adjustable rate mortgages the index and margin).

35
The meaning of loan “product” is not firmly established and varies with the person using the term, but it generally refers to various combinations of features such as the type of interest rate and the form of amortization. Feature distinctions often thought of as distinct “loan products” include, for example, fixed rate versus adjustable rate loans and fully amortizing versus interest-only or negatively amortizing loans.

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

offer consumers a cash rebate at closing which can help cover upfront closing costs in exchange for paying a higher rate over the life of the loan. Both discount points and creditor rebates involve an exchange of cash now (in the form of a payment or credit at closing) for cash over time (in the form of a reduced or increased interest rate). Consumers will also incur some third-party fees in connection with a mortgage application such as the fee for an appraisal or for a credit report. These may be paid at origination or, in some cases, at closing.

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

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

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

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

The creditor's assessment of pricing—and in particular what different combinations of points, fees, and interest rates it is willing to offer particular consumers—is also driven by the trade-off between upfront and long-term payments. Creditors in general would prefer to receive as much money as possible up front, because having to wait for payments to come in over the life of the loan increases the level of risk. If consumers ultimately pay off a loan earlier than expected or cannot pay off a loan due to financial distress, the creditors will not earn the overall expected return on the loan. However, for creditors, as for consumers, there is a break-even point where the present value of a reduction/increase to the rate just equals the corresponding upfront points/credits. If the creditor reduces the upfront costs in return for a higher interest rate and the consumer continues to make payments on the loan beyond the break-even points, the creditor will come out ahead.

The creditor's calculation of these tradeoffs is generally heavily influenced by the secondary market, which allows creditors to sell off their loans to investors, recoup the capital they have invested in the loans, and recycle that capital into new loans. The investors then benefit from the payment streams over time, as well as bearing the risk of early payment or default. As described above, the creditor can benefit from going on to make additional money from additional loans. Thus, although some banks
36

and credit unions hold some loans in portfolio over time, many creditors prefer not to hold loans until maturity.
37

36
As used throughout this document, the term “banks” also includes “savings associations.”

37
For companies that are affiliated with securitizers, the processing fees involved in creating investment vehicles on the secondary market can itself become a distinct revenue stream. Although the secondary market was originally created by government-sponsored enterprises Fannie Mae and Freddie Mac to provide liquidity for the mortgage market, over time, Wall Street companies began packaging mortgage loans into private-label mortgage-backed securities. Subprime and Alt-A loans, in particular, were often sold into private-label securities. During the boom, a number of large creditors started securitizing the loans themselves in-house, thereby capturing the final piece of the loan's value.

When a creditor sells a loan into the secondary market, the creditor is exchanging an asset (the loan) that produces regular cash flows (principal and interest) for an upfront cash payment from the buyer.
38

That upfront cash payment represents the buyer's present valuation of the loan's future cash flows, using assumptions about the rate of prepayments due to moves and refinancings, the rate of expected defaults, the rate of return relative to other investments, and other factors. Secondary market buyers assume considerable risk in determining the price they are willing to pay for a loan. If, for example, loans prepay faster than expected or default at higher rates than expected, the investor will receive a lower return than expected. Conversely, if loans prepay more slowly than expected, or default at lower rates than expected, the investor will earn a higher return over time than expected.
39

38
For simplicity, this discussion assumes that the secondary market buyer is a person other than the creditor, such as Fannie Mae, Freddie Mac, or a Wall Street investment bank. In practice, during the mortgage boom, some creditors securitized their own loans. In this case, the secondary market price for the loans was effectively determined by the price investors were willing to pay for the subsequent securities.

39
For simplicity, these examples do not take into account the use of various risk mitigation techniques, such as risk-sharing counterparties and loan level mortgage or other security credit enhancements.

Secondary market mortgage prices are typically quoted in relation to the principal loan amount and are specific to a given interest rate and other factors that are correlated with default risk. For illustrative purposes, at some point in time, a loan with an interest rate of 3.5 percent might earn 102.5 in the secondary market. This means that for every $100 in initial loan principal amount, the secondary market buyer will pay $102.50. Of that amount, $100 is to cover the principal amount and $2.50 is revenue to the creditor in exchange for the rights to the future interest payments on the loan.
40

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

secondary market price.
41

The same style of pricing is used when correspondent lenders sell loans to acquiring creditors.

40
The creditor's profit is equal to secondary market revenue plus origination fees collected by the creditor (if any) plus value of the mortgage servicing rights (MSRs) less origination expenses.

41
Susan E. Woodward, Urban Inst.,
A Study of Closing Costs for FHA Mortgages
10-11 (U.S. Dep't of Hous. & Urban Dev. 2008),
available at: http://www.huduser.org/publications/pdf/FHA_closing_cost.pdf.

In some cases, secondary market prices can actually be less than the principal amount of the loan. A price of 98.75, for example, means that for every $100 in principal, the selling creditor receives only $98.75. This represents a loss of $1.25 per $100 of principal just on the sale of the loan, before the creditor takes its expenses into account. This usually happens when the interest rate on the loan is below prevailing interest rates. But so long as discount points or other origination charges can cover the shortfall, the creditor will still make its expected return on the loan.

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

Loan Originator Compensation

Brokerage firms and loan officers are typically paid a commission that is a percentage of the loan amount. Prior to 2010, it was common for the percentage to vary based upon the interest rate of the loan: commissions on loans with higher interest rates were higher than commission on loans with lower interest rates (just as the premiums paid by the secondary market for loans vary with the interest rate). This was typically called a “yield spread premium.”
42

In the wholesale context, the loan originator might keep the entire yield spread premium as a commission, or he or she might provide some of the yield spread premium to the borrower as a credit against closing costs.
43

42
Some commenters use the term “yield spread premium” to refer to any payment from a creditor to a mortgage broker that is funded by increasing the interest rate that would otherwise be charged to the consumer in the absence of that payment. These commenters generally assume that any payment to the brokerage firm by the creditor is funded out of the interest rate, reasoning that had the consumer paid the brokerage firm directly, the creditor would have had lower expenses and would have been able to charge a lower rate. Other commenters use the term “yield spread premium” more narrowly to refer only to a payment from a creditor to a mortgage broker that is based on the interest rate, i.e., the mortgage broker receives a larger payment if the consumer agrees to a higher interest rate. To avoid confusion, the Bureau is limiting its use of the term and is instead more specifically describing the payment at issue.

43
Mortgage brokers, and some retail loan officers, were compensated in this fashion. Some retail loan officers may have been paid a salary with a bonus for loan volume, rather than yield spread premium-based commissions.

While this system was in place, it was common for loan originator commissions to mirror secondary market pricing closely. The “price” that the creditor offered to its brokers was somewhat lower than the price that the creditor expected to receive from the secondary market—the creditor kept the difference as corporate revenue. However, the underlying mechanics of the secondary market flowed through to the loan originator's compensation. The higher the interest rate on the loan or the more in upfront charges the consumer pays to the creditor (or both), the greater the compensation available to the loan originator. This created a situation in which the loan originator had a financial incentive to steer consumers into the highest interest rate possible or to impose on the consumer additional upfront charges payable to the creditor.

In a perfectly competitive and transparent market, competition would ensure that this incentive would be countered by the need to compete with other loan originators to offer attractive loan terms to consumers. However, the mortgage origination market is neither always perfectly competitive nor always transparent, and consumers (who take out a mortgage only a few times in their lives) may be uninformed about how prices work and what terms they can expect.
44

Moreover, prior to 2010, mortgage brokers were free to charge consumers directly for additional origination points or fees, which were generally described to the consumer as compensating for the time and expense of working with the consumer to submit the loan application. This compensation structure was problematic both because the loan originator had an incentive to steer borrowers into less favorable pricing terms while the consumer may have paid origination fees to the loan originator believing that the loan originator was working for the borrower, without knowing that the loan originator was receiving compensation from the creditor as well.

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

B. TILA and Regulation Z

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

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

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

Act (HOEPA) Final Rule.
46

73 FR 44522, 44564 (July 30, 2008).

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

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

75 FR 58509 (Sept. 24, 2010) (2010 Loan Originator Final Rule). The Board's 2010 Loan Originator Final Rule took effect in April 2011.

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

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

C. The SAFE Act

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

D. The Dodd-Frank Act

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

III. Summary of Rulemaking Process

A. Pre-Proposal Outreach

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

In addition, the Bureau held roundtable meetings with other Federal banking and housing regulators, consumer groups, and industry

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

B. Small Business Review Panel

In May 2012, the Bureau convened a Small Business Review Panel with the Chief Counsel for Advocacy of the Small Business Administration (SBA Advocacy) and the Administrator of the Office of Information and Regulatory Affairs within the Office of Management and Budget (OMB).
48

As part of this process, the Bureau prepared an outline of the proposals then under consideration and the alternatives considered (Small Business Review Panel Outline), which the Bureau posted on its Web site for review by the general public as well as the small entities participating in the panel process.
49

The Small Business Review Panel gathered information from representatives of small creditors, mortgage brokers, and not-for-profit organizations and made findings and recommendations regarding the potential compliance costs and other impacts of the proposed rule on those entities. These findings and recommendations were set forth in the Small Business Review Panel Report, which was made part of the administrative record in this rulemaking.
50

The Bureau carefully considered these findings and recommendations in preparing the proposed rule.

48
The Small Business Regulatory Enforcement Fairness Act of 1996 (SBREFA) requires the Bureau to convene a Small Business Review Panel before proposing a rule that may have a substantial economic impact on a significant number of small entities.
See
Public Law 104-121, tit. II, 110 Stat. 847, 857 (1996) (as amended by Pub. L. 110-28, section 8302 (2007)).

49
U.S. Consumer Fin. Prot. Bureau,
Outline of Proposals under Consideration and Alternatives Considered
(May 9, 2012), available at:
http://files.consumerfinance.gov/f/201205_cfpb_MLO_SBREFA_Outline_of_Proposals.pdf
.

50
U.S. Consumer Fin. Prot. Bureau, U.S. Small Bus. Admin., and U.S. Office of Mgmt. and Budget,
Final Report of the Small Business Review Panel on CFPB's Proposals Under Consideration for Residential Mortgage Loan Origination Standards Rulemaking
(July 11, 2012) (Small Business Review Panel Final Report),
available at

http://files.consumerfinance.gov/f/201208_cfpb_LO_comp_SBREFA.pdf
.

C. Proposed Rule

On September 7, 2012, the Bureau published a proposed rule in the
Federal Register
to implement the Dodd-Frank Act requirements, as well as to revise and clarify existing regulations and commentary on loan originator compensation. 77 FR 55272 (Sept. 7, 2012) (the “2012 Loan Originator Compensation Proposal”). The proposal included the following main provisions:

1. Restrictions on Loan Originator Compensation

The proposal would have adjusted existing rules governing compensation to loan officers and mortgage brokers in connection with closed-end mortgage transactions to account for the Dodd-Frank Act and to provide greater clarity and flexibility. Specifically, the proposal would have continued the general ban on paying or receiving commissions or other loan originator compensation based on the terms of the transaction (other than loan amount), with some refinements.

Pricing Concessions:
The proposal would have allowed loan originators to reduce their compensation to cover unanticipated increases in closing costs from non-affiliated third parties under certain circumstances.

Proxies:
The proposal would have clarified when a factor used as a basis for compensation is prohibited as a “proxy” for a transaction term.

Profit-sharing:
The proposal would have clarified and revised restrictions on pooled compensation, profit-sharing, and bonus plans for loan originators by permitting contributions from general profits derived from mortgage activity to 401(k) plans, employee stock plans, and other “qualified plans” under tax and employment law. The proposal would have permitted payment of bonuses or contributions to non-qualified profit-sharing or retirement plans from general profits derived from mortgage activity if either: (1) The loan originator affected has originated five or fewer mortgage transactions during the last 12 months; or (2) the company's mortgage business revenues are a limited percentage of its total revenues. The proposal solicited comment on other alternatives to the measure based on company revenue, including an individual loan originator total compensation test.

Dual Compensation:
The proposal would have continued the general ban on loan originators being compensated by both consumers and other persons but would have allowed mortgage brokerage firms that are paid by the consumer to pay their individual brokers a commission, so long as the commission is not based on the terms of the transaction.

2. Restriction on Upfront Points and Fees

The Bureau proposed to use its exemption authority under the Dodd-Frank Act to allow creditors and loan originator organizations to continue making available loans with consumer-paid upfront points or fees, so long as they also make available a comparable, alternative loan without those points or fees. The proposal generally would have required that, before a creditor or loan originator organization may impose upfront points or fees on a consumer in a closed-end mortgage transaction, the creditor must make available to the consumer a comparable, alternative loan with no upfront discount points, origination points, or origination fees that are retained by the creditor, broker, or an affiliate of either (a “zero-zero alternative”). The requirement would not have applied where the consumer is unlikely to qualify for the zero-zero alternative. The Bureau solicited comments on variations and alternatives to this approach.

3. Loan Originator Qualification Requirements

The proposal would have implemented the Dodd-Frank Act provision requiring each loan originator both to be “qualified” and to include his or her NMLSR ID on certain specified loan documents. The proposal would have required loan originator organizations to ensure their loan originators not already required to be licensed under the SAFE Act meet character, fitness, and criminal background check standards that are similar to SAFE Act requirements and receive training commensurate with their duties. The loan originator organization and the individual loan originators that are primarily responsible for a particular transaction would have been required to list their NMLSR ID and names on certain key loan documents.

4. Other Provisions

The proposal would have banned both agreements requiring consumers to submit any disputes that may arise to mandatory arbitration rather than filing suit in court, and the financing of premiums for credit insurance.

D. Overview of Public Comments

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

some commenters provided comments on all of the major provisions of the 2012 Loan Originator Compensation Proposal, most commenters focused on specific aspects of the proposal, as discussed in greater detail in the section-by-section analysis below.

Many commenters addressed the proposed provisions regarding records that creditors and loan originator organizations would have been required to maintain to demonstrate compliance with the compensation-related provisions of the proposal. The majority of commenters agreed with the Bureau's belief that the proposed increase in the recordkeeping period from two years to three years would not significantly increase costs. Some commenters asked for clarification regarding what types of records would be required to be maintained.

Numerous commenters addressed the proposed definition of “loan originator,” which determines which persons would be subject to several of the provisions in the proposal. The topic that the largest number of commenters addressed was the exception from the definition of “loan originator” for certain persons who provide financing to consumers who purchase a dwelling from these persons (
i.e.,
“seller financing”). Individuals, industry professionals, and small business owners commented that the Bureau had overlooked the impact that the proposal would have on consumers, stating that it would reduce access to credit for some while eliminating a reliable retirement vehicle for others.

A large number of commenters addressed the Bureau's proposal to allow creditors to charge upfront origination points, discounts, and fees in transactions in which someone other than the consumer pays compensation to a loan originator, provided that the creditor make available to the consumer loan terms without upfront origination points, discount points, or fees (
i.e.,
the zero-zero alternative). One of the most common assertions from commenters relating to points and fees was that the zero-zero alternative restrictions were duplicative of other regulations, or that the restrictions being implemented in other rules were sufficient and more effective at protecting consumers.

Many banks, credit unions, and mortgage professionals expressed concern that prohibiting discount points would result in higher interest rates, could reduce access to credit for consumers, and would subject the creditors to higher-priced mortgage rules. Banks and credit unions opined that complying with the proposal would make lower-value loans unprofitable and banks and credit unions would no longer be able to profitably serve that segment of the market.

A significant number of commenters asserted that the proposal would have a negative impact on affiliated businesses, namely inconvenience, reduced pricing advantages, and duplicative processes. Other commenters advocated exempting fees for title services from the types of compensation treated as loan originator compensation when it is paid to an affiliate. Several commenters asserted that a restriction on title services would not benefit consumers and could detrimentally limit consumers' credit options.

There was no consensus among consumer groups on whether, or how, the Bureau should use its exemption authority regarding the statutory ban on consumers paying upfront points and fees. Some industry commenters advocated adjustments or alternatives to the zero-zero proposal, rather than a complete exemption, although the approaches varied by commenter.

A large number of comments addressed qualification standards for loan originators who are not subject to State licensing requirements. Representatives of banks stated that the proposed requirements were duplicative of existing requirements. Representatives of nonbank creditors and brokers argued that the proposal was too lenient, would allow for unqualified loan originators to work at depository institutions, and would create an unfair competitive advantage for these institutions.

E. Post-Proposal Outreach

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

F. Other Rulemakings

In addition to this final rule, the Bureau is adopting several other final rules and issuing one proposal, all relating to mortgage credit to implement requirements of title XIV of the Dodd-Frank Act. The Bureau is also issuing a final rule jointly with other Federal agencies to implement requirements for mortgage appraisals in title XIV. Each of the final rules follows a proposal issued in 2011 by the Board or in 2012 by the Bureau alone or jointly with other Federal agencies. Collectively, these proposed and final rules are referred to as the Title XIV Rulemakings.

•
Ability to Repay:
The Bureau recently issued a rule, following a May 2011 proposal issued by the Board (the Board's 2011 ATR Proposal), 76 FR 27390 (May 11, 2011), to implement provisions of the Dodd-Frank Act (1) requiring creditors to determine that a consumer has a reasonable ability to repay covered mortgage loans and establishing standards for compliance, such as by making a “qualified mortgage,” and (2) establishing certain limitations on prepayment penalties, pursuant to TILA section 129C as established by Dodd-Frank Act sections 1411, 1412, and 1414. 15 U.S.C. 1639c. The Bureau's final rule is referred to as the 2013 ATR Final Rule. Simultaneously with the 2013 ATR Final Rule, the Bureau issued a proposal to amend the final rule implementing the ability-to-repay requirements, including by the addition of exemptions for certain nonprofit creditors and certain homeownership stabilization programs and a definition of a “qualified mortgage” for certain loans made and held in portfolio by small creditors (the 2013 ATR Concurrent Proposal). The Bureau expects to act on the 2013 ATR Concurrent Proposal on an expedited basis, so that any exceptions or adjustments to the 2013 ATR Final Rule can take effect simultaneously with that rule.

•
Escrows:
The Bureau recently issued a rule, following a March 2011 proposal issued by the Board (the Board's 2011 Escrows Proposal), 76 FR 11598 (Mar. 2, 2011), to implement certain provisions of the Dodd-Frank Act expanding on existing rules that require escrow accounts to be established for higher-priced mortgage loans and creating an exemption for certain loans held by creditors operating predominantly in rural or underserved areas, pursuant to TILA section 129D as established by Dodd-Frank Act sections 1461. 15 U.S.C. 1639d. The Bureau's final rule is referred to as the 2013 Escrows Final Rule.

•
HOEPA:
Following its July 2012 proposal (the 2012 HOEPA Proposal), 77 FR 49090 (Aug. 15, 2012), the Bureau recently issued a final rule to implement Dodd-Frank Act requirements expanding protections for “high-cost mortgages” under the Homeownership and Equity Protection Act (HOEPA), pursuant to TILA sections 103(bb) and 129, as amended by Dodd-Frank Act sections 1431 through 1433. 15 U.S.C. 1602(bb) and 1639. The Bureau recently issued rules to implement certain title XIV requirements concerning homeownership counseling, including a

requirement that lenders provide lists of homeownership counselors to applicants for federally related mortgage loans, pursuant to RESPA section 5(c), as amended by Dodd-Frank Act section 1450. 12 U.S.C. 2604(c). The Bureau's final rule is referred to as the 2013 HOEPA Final Rule.

•
Servicing:
Following its August 2012 proposals (the 2012 RESPA Servicing Proposal and 2012 TILA Servicing Proposal), 77 FR 57200 (Sept. 17, 2012) (RESPA); 77 FR 57318 (Sept. 17, 2012) (TILA), the Bureau recently issued final rules to implement Dodd-Frank Act requirements regarding force-placed insurance, error resolution, information requests, and payment crediting, as well as requirements for mortgage loan periodic statements and adjustable-rate mortgage reset disclosures, pursuant to section 6 of RESPA and sections 128, 128A, 129F, and 129G of TILA, as amended or established by Dodd-Frank Act sections 1418, 1420, 1463, and 1464. 12 U.S.C. 2605; 15 U.S.C. 1638, 1638a, 1639f, and 1639g. The Bureau also recently finalized rules on early intervention for troubled and delinquent borrowers, and loss mitigation procedures, pursuant to the Bureau's authority under section 6 of RESPA, as amended by Dodd-Frank Act section 1463, to establish obligations for mortgage servicers that it finds to be appropriate to carry out the consumer protection purposes of RESPA, and its authority under section 19(a) of RESPA to prescribe rules necessary to achieve the purposes of RESPA. The Bureau's final rule under RESPA with respect to mortgage servicing also establishes requirements for general servicing standards policies and procedures and continuity of contact pursuant to its authority under section 19(a) of RESPA. The Bureau's final rules are referred to as the 2013 RESPA Servicing Final Rule and the 2013 TILA Servicing Final Rule, respectively.

•
Appraisals:
The Bureau, jointly with other Federal agencies,
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is issuing a final rule implementing Dodd-Frank Act requirements concerning appraisals for higher-risk mortgages, pursuant to TILA section 129H as established by Dodd-Frank Act section 1471. 15 U.S.C. 1639h. This rule follows the agencies' August 2012 joint proposal (the 2012 Interagency Appraisals Proposal). 77 FR 54722 (Sept. 5, 2012). The agencies' joint final rule is referred to as the 2013 Interagency Appraisals Final Rule. In addition, following its August 2012 proposal (the 2012 ECOA Appraisals Proposal), 77 FR 50390 (Aug. 21, 2012), the Bureau is issuing a final rule to implement provisions of the Dodd-Frank Act requiring that creditors provide applicants with a free copy of written appraisals and valuations developed in connection with applications for loans secured by a first lien on a dwelling, pursuant to section 701(e) of the Equal Credit Opportunity Act (ECOA) as amended by Dodd-Frank Act section 1474. 15 U.S.C. 1691(e). The Bureau's final rule is referred to as the 2013 ECOA Appraisals Final Rule.

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Specifically, the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the National Credit Union Administration, and the Federal Housing Finance Agency.

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

G. Coordinated Implementation of Title XIV Rulemakings

As noted in all of its foregoing proposals, the Bureau regards each of the Title XIV Rulemakings as affecting aspects of the mortgage industry and its regulations. Accordingly, as noted in its proposals, the Bureau is coordinating carefully the Title XIV Rulemakings, particularly with respect to their effective dates. The Dodd-Frank Act requirements to be implemented by the Title XIV Rulemakings generally will take effect on January 21, 2013, unless final rules implementing those requirements are issued on or before that date and provide for a different effective date.
See
Dodd-Frank Act section 1400(c), 15 U.S.C. 1601 note. In addition, some of the Title XIV Rulemakings are to take effect no later than one year after they are issued.
Id.

The comments on the appropriate implementation date for this final rule are discussed in detail below in part VI of this notice. In general, however, consumer groups requested that the Bureau put the protections in the Title XIV Rulemakings into effect as soon as practicable. In contrast, the Bureau received some industry comments indicating that implementing so many new requirements at the same time would create a significant cumulative burden for creditors. In addition, many commenters also acknowledged the advantages of implementing multiple revisions to the regulations in a coordinated fashion.
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Thus, a tension exists between coordinating the adoption of the Title XIV Rulemakings and facilitating industry's implementation of such a large set of new requirements. Some have suggested that the Bureau resolve this tension by adopting a sequenced implementation, while others have requested that the Bureau simply provide a longer implementation period for all of the final rules.

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Of the several final rules being adopted under the Title XIV Rulemakings, six entail amendments to Regulation Z, with the only exceptions being the 2013 RESPA Servicing Final Rule (Regulation X) and the 2013 ECOA Appraisals Final Rule (Regulation B); the 2013 HOEPA Final Rule also amends Regulation X, in addition to Regulation Z. The six Regulation Z final rules involve numerous instances of intersecting provisions, either by cross-references to each other's provisions or by adopting parallel provisions. Thus, adopting some of those amendments without also adopting certain other, closely related provisions would create significant technical issues,
e.g.,
new provisions containing cross-references to other provisions that do not yet exist, which could undermine the ability of creditors and other parties subject to the rules to understand their obligations and implement appropriate systems changes in an integrated and efficient manner.

The Bureau recognizes that many of the new provisions will require creditors and loan originators to make changes to automated systems and, further, that most administrators of large systems are reluctant to make too many changes to their systems at once. At the same time, however, the Bureau notes that the Dodd-Frank Act established virtually all of these changes to institutions' compliance responsibilities, and contemplated that they be implemented in a relatively short period of time. And, as already noted, the extent of interaction among

many of the Title XIV Rulemakings necessitates that many of their provisions take effect together. Finally, notwithstanding commenters' expressed concerns for cumulative burden, the Bureau expects that creditors and loan originators actually may realize some efficiencies from adapting their systems for compliance with multiple new, closely related requirements at once, especially if given sufficient overall time to do so.

Accordingly, the Bureau is requiring that, as a general matter, creditors, loan originators, and other affected persons begin complying with the final rules on January 10, 2014. As noted above, section 1400(c) of the Dodd-Frank Act requires that some provisions of the Title XIV Rulemakings take effect no later than one year after the Bureau issues them. Accordingly, the Bureau is establishing January 10, 2014, one year after issuance of the Bureau's 2013 ATR, Escrows, and HOEPA Final Rules (
i.e.,
the earliest of the title XIV final rules), as the baseline effective date for most of the Title XIV Rulemakings. The Bureau believes that, on balance, this approach will facilitate the implementation of the rules' overlapping provisions, while also affording creditors sufficient time to implement the more complex or resource-intensive new requirements.

The Bureau has identified certain rulemakings or selected aspects thereof, however, that do not present significant implementation burdens for industry, including § 1026.36(h) and (i) of this final rule. Accordingly, the Bureau is setting earlier effective dates for these paragraphs and certain other final rules or aspects thereof, as applicable. The effective dates for this final rule are set forth and explained in part VI. The effective dates for the other final rules are discussed in the
Federal Register
notices for those rules.

More Inclusive Finance Charge Proposal

As noted above, the Bureau proposed in the 2012 TILA-RESPA Proposal to make the definition of finance charge more inclusive, thus rendering the finance charge and annual percentage rate a more useful tool for consumers to compare the cost of credit across different alternatives. 77 FR 51116, 51143 (Aug. 23, 2012). Because the new definition would include additional costs that are not currently counted, it would cause the finance charges and APRs on many affected transactions to increase. This in turn could cause more such transactions to become subject to various compliance regimes under Regulation Z. Specifically, the finance charge is central to the calculation of a transaction's “points and fees,” which in turn has been (and remains) a coverage threshold for the special protections afforded “high-cost mortgages” under HOEPA. Points and fees also will be subject to a 3-percent limit for purposes of determining whether a transaction is a “qualified mortgage” under the 2013 ATR Final Rule. Meanwhile, the APR serves as a coverage threshold for HOEPA protections as well as for certain protections afforded “higher-priced mortgage loans” under § 1026.35, including the mandatory escrow account requirements being amended by the 2013 Escrows Final Rule. Finally, because the 2013 Interagency Appraisals Final Rule uses the same APR-based coverage test as is used for identifying higher-priced mortgage loans, the APR affects that rulemaking as well. Thus, the proposed more inclusive finance charge would have had the indirect effect of increasing coverage under HOEPA and the escrow and appraisal requirements for higher-priced mortgage loans, as well as decreasing the number of transactions that may be qualified mortgages—even holding actual loan terms constant—simply because of the increase in calculated finance charges, and consequently APRs, for closed-end mortgage transactions generally.

As noted above, these expanded coverage consequences were not the intent of the more inclusive finance charge proposal. Accordingly, as discussed more extensively in the Escrows Proposal, the HOEPA Proposal, the ATR Proposal, and the Interagency Appraisals Proposal, the Board and subsequently the Bureau (and other agencies) sought comment on certain adjustments to the affected regulatory thresholds to counteract this unintended effect. First, the Board and then the Bureau proposed to adopt a “transaction coverage rate” for use as the metric to determine coverage of these regimes in place of the APR. The transaction coverage rate would have been calculated solely for coverage determination purposes and would not have been disclosed to consumers, who still would have received only a disclosure of the expanded APR. The transaction coverage rate calculation would exclude from the prepaid finance charge all costs otherwise included for purposes of the APR calculation except charges retained by the creditor, any mortgage broker, or any affiliate of either. Similarly, the Board and Bureau proposed to reverse the effects of the more inclusive finance charge on the calculation of points and fees; the points and fees figure is calculated only as a HOEPA and qualified mortgage coverage metric and is not disclosed to consumers. The Bureau also sought comment on other potential mitigation measures, such as adjusting the numeric thresholds for particular compliance regimes to account for the general shift in affected transactions' APRs.

The Bureau's 2012 TILA-RESPA Proposal sought comment on whether to finalize the more inclusive finance charge proposal in conjunction with the Title XIV Rulemakings or with the rest of the TILA-RESPA Proposal concerning the integration of mortgage disclosure forms. 77 FR 51116, 51125 (Aug. 23, 2012). Upon additional consideration and review of comments received, the Bureau decided to defer a decision whether to adopt the more inclusive finance charge proposal and any related adjustments to regulatory thresholds until it later finalizes the TILA-RESPA Proposal. 77 FR 54843 (Sept. 6, 2012); 77 FR 54844 (Sept. 6, 2012).
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Accordingly, the 2013 Escrows, HOEPA, ATR, and Interagency Appraisals Final Rules all are deferring any action on their respective proposed adjustments to regulatory thresholds.

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

IV. Legal Authority

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

A. The Truth in Lending Act

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

As added by the Dodd-Frank Act, TILA section 103(cc)(2)(E)(v), 15 U.S.C. 1602(cc)(2)(E)(v) authorizes the Bureau to prescribe other criteria that seller financers need to meet, aside from those enumerated in the statute, to qualify for the seller financer exclusion from the definition of the term “mortgage originator. The Bureau's exercise of that authority is discussed in the section-by-section analysis of the seller financer exclusion.

TILA Section 105(a)

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

Historically, TILA section 105(a) has served as a broad source of authority for rules that promote the informed use of credit through required disclosures and substantive regulation of certain practices. However, Dodd-Frank Act section 1100A clarified the Bureau's section 105(a) authority by amending that section to provide express authority to prescribe regulations that contain “additional requirements” that the Bureau finds are necessary or proper to effectuate the purposes of TILA, to prevent circumvention or evasion thereof, or to facilitate compliance. This amendment clarified the authority to exercise TILA section 105(a) to prescribe requirements beyond those specifically listed in the statute that meet the standards outlined in section 105(a). The Dodd-Frank Act also clarified the Bureau's rulemaking authority over certain high-cost mortgages pursuant to section 105(a). As amended by the Dodd-Frank Act, the Bureau's TILA section 105(a) authority to make adjustments and exceptions to the requirements of TILA applies to all transactions subject to TILA, except with respect to the substantive protections of TILA section 129, 15 U.S.C. 1639,
54

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

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

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

TILA Section 129B(c)

Dodd-Frank Act section 1403 amended TILA section 129B by imposing two limitations on loan originator compensation to reduce or eliminate steering incentives for residential mortgage loans.
55

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

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Section 1403 of the Dodd-Frank Act also added new TILA section 129B(c)(3), which requires the Bureau to prescribe regulations to prohibit certain kinds of steering, abusive or unfair lending practices, mischaracterization of credit histories or appraisals, and discouraging consumers from shopping with other mortgage originators. 15 U.S.C. 1639b(c)(3). This final rule does not address those provisions. Because they are structured as a requirement that the Bureau prescribe regulations establishing the substantive prohibitions, notwithstanding Dodd-Frank Act section 1400(c)(3), 15 U.S.C. 1601 note, the Bureau believes that the substantive prohibitions cannot take effect until the regulations establishing them have been prescribed and taken effect. The Bureau intends to prescribe such regulations in a future rulemaking. Until such time, no obligations are imposed on mortgage originators or other persons under TILA section 129B(c)(3).

TILA Section 129(p)(2)

The Dodd-Frank Act amended TILA by adding, in new section 129, a broad mandate to prohibit certain acts and practices in the mortgage industry. In particular, TILA section 129(p)(2), as redesignated by Dodd-Frank Act section 1433(a) and amended by Dodd-Frank Act section 1100A, requires the Bureau to prohibit, by regulation or order, acts or practices in connection with mortgage loans that the Bureau finds to be unfair, deceptive, or designed to evade the provisions of HOEPA. 15 U.S.C. 1639(p)(2). Likewise, TILA requires the Bureau to prohibit, by regulation or order, acts or practices in connection with the refinancing of mortgage loans that the Bureau finds to be associated with abusive lending practices, or that are otherwise not in the interest of the consumer.
Id.

The authority granted to the Bureau under TILA section 129(p)(2) is broad.

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

TILA Section 129B(e)

Dodd-Frank Act section 1405(a) amended TILA to add new section 129B(e), 15 U.S.C. 1639b(e). That section, as amended by Dodd-Frank Act section 1100A, provides for the Bureau to prohibit or condition terms, acts, or practices relating to residential mortgage loans on a variety of bases, including when the Bureau finds the terms, acts, or practices are not in the interest of the consumer. In developing proposed rules under TILA section 129B(e), the Bureau has considered all of the bases for its authority set forth in that section.

TILA Section 129C(d)

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

TILA Section 129C(e)

Dodd-Frank Act section 1414(a) amended TILA to add new section 129C(e), 15 U.S.C. 1639c(e). That section restricts mandatory arbitration agreements in residential mortgage loans and extensions of open-end credit secured by the consumer's principal dwelling. It also prohibits provisions of these loans and related agreements from being applied or interpreted to bar a consumer from bringing a Federal claim in court. As discussed more fully in the section-by-section analysis below, the Bureau is proposing to implement these restrictions in new § 1026.36(h).

B. The Dodd-Frank Act

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

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

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

Section 1026.25 Record Retention

Existing § 1026.25 requires creditors to retain evidence of compliance with Regulation Z. The Bureau proposed adding § 1026.25(c)(2) to establish record retention requirements for compliance with the loan originator compensation restrictions in TILA section 129B as implemented by § 1026.36(d). Proposed section 1026.25(c)(2) would have: (1) Extended the time period for retention by creditors of compensation-related records from two years to three years; (2) required loan originator organizations (
i.e.,
generally, mortgage broker companies) to maintain certain compensation-related records for three years; and (3) clarified the types of compensation-related records that are required to be maintained under the rule. Proposed § 1026.25(c)(3) would have required creditors to maintain records evidencing compliance with the requirements related to discount points and origination points or fees set forth in proposed § 1026.36(d)(2)(ii).

25(a) General Rule

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

The Bureau proposed new § 1026.25(c)(2), which sets forth certain new record retention requirements for compensation paid to loan originators, as discussed below. The Bureau also proposed new comments 25(c)(2)-1 and -2, which incorporate substantially the same interpretations as existing comment 25(a)-5. For the sake of improved organization of the commentary and to prevent duplication, the Bureau proposed to remove existing comment 25(a)-5. No substantive change was intended by this proposal. The Bureau received no public comments on the proposal to remove comment 25(a)-5. Therefore, this final rule is removing comment 25(a)-5 as unnecessary, consistent with the proposed rule.

25(c) Records Related to Certain Requirements for Mortgage Loans

25(c)(2) Records Related to Requirements for Loan Originator Compensation

Three-Year Record Retention

TILA does not contain requirements to retain specific records, but § 1026.25 requires creditors to retain evidence of compliance with Regulation Z for two years after the date disclosures are required to be made or action is required to be taken. Section 1404 of the

Dodd-Frank Act amended TILA section 129B, which imposes substantive restrictions on loan originator compensation and provides civil liability for any mortgage originator for failure to comply with the requirements of TILA section 129B and any of its implementing regulations. 15 U.S.C. 1639b(d). Section 1416(b) of the Dodd-Frank Act amended section 130(e) of TILA to provide a three-year limitations period for civil actions alleging a violation of certain sections of TILA, including section 129B concerning loan originator compensation, beginning on the date of the occurrence of the violation. 15 U.S.C. 1640(e). Prior to amendment by the Dodd-Frank Act, the limitations period for individual actions alleging violations of TILA was generally one year. 15 U.S.C. 1640(e) (2008). In view of the statutory changes to TILA, the provisions of existing § 1026.25, which impose a two-year record retention period, do not reflect the applicable limitations period for causes of action that may be brought under TILA section 129B. Moreover, the record retention provisions in § 1026.25 currently are limited to creditors, whereas the compensation restrictions in TILA section 129B, as added by the Dodd-Frank Act, cover all mortgage originators and not solely creditors.

To reflect these statutory changes, the Bureau proposed § 1026.25(c)(2), which would have made two changes to the existing record retention provisions. First, the proposed rule would have required that a creditor maintain records sufficient to evidence the compensation it pays to a loan originator and the governing compensation agreement, for three years after the date of payment. Second, the proposed rule would have required a loan originator organization to maintain for three years records of the compensation: (1) It receives from a creditor, a consumer, or another person; and (2) it pays to any individual loan originators. The loan originator organization also must maintain the compensation agreement that governs those receipts or payments for three years after the date of the receipts or payments. The Bureau proposed these changes pursuant to its authority under section 105(a) of TILA to prevent circumvention or evasion of TILA by requiring records that can be used to establish compliance. The Bureau stated its belief that these proposed modifications would ensure records associated with loan originator compensation are retained for a time period commensurate with the statute of limitations for causes of action under TILA section 130 and are readily available for examination. In addition, the Bureau stated its belief that the modifications are necessary to prevent circumvention of and to facilitate compliance with TILA.

The Bureau recognized that increasing the period a creditor must retain records for specific information related to loan originator compensation from two years, as currently provided in Regulation Z, to three years may impose some marginal increase in the creditor's compliance burden in the form of incremental cost of storage. The Bureau stated its belief, however, that creditors should be able to use existing recordkeeping systems to maintain the records for an additional year at minimal cost. Similarly, although loan originator organizations would incur some costs to establish and maintain recordkeeping systems, the Bureau expected that loan originator organizations would be able to adopt at minimal cost their existing recordkeeping systems to serve these newly required purposes. During the Small Business Review Panel, the Small Entity Representatives were asked about their current record retention practices and the potential impact of the proposed enhanced record retention requirements. Of the few Small Entity Representatives that provided feedback on the issue, one creditor Small Entity Representative stated that it maintained detailed records of compensation paid to all of its employees and that a regulator already reviews its compensation plans regularly. Another creditor Small Entity Representative reported that it did not believe that the proposed record retention requirement would require it to change its current practices.

In addition, the Bureau recognized that applying the existing two-year record retention period to information specified in § 1026.25(c)(2) could adversely affect the ability of consumers to bring actions under TILA. As the Bureau stated in the proposal, the extension also would serve to reduce litigation risk and maintain consistency between creditors and loan originator organizations. The Bureau therefore believed that it was appropriate to expand the time period for record retention to effectuate the three-year statute of limitations period established by Congress for actions against loan originators under section 129B of TILA.

Most commenters agreed that extending the retention period from two years to three years would not significantly increase the cost of compliance. Though some commenters opined that the changes in § 1026.25(c) would significantly increase their compliance burden, those comments appeared to be directed to the proposed record retention provisions related to proposed restrictions on discount points and origination points or fees in proposed § 1026.36(d)(2)(ii). Because the Bureau is not finalizing in this rule the points and fees proposal (or the attendant record retention requirement), the additional record retention requirement imposed by this final rule is minimal.

The Bureau invited public comment on whether a record retention period of five years, rather than three years, would be appropriate. The Bureau explained that relevant actions and compensation practices that must be evidenced in retained records may in some cases occur prior to the beginning of the three-year period of enforceability that applies to a particular transaction. In addition, the running of the three-year period may be tolled under some circumstances, resulting in a period of enforceability that ends more than three years following an occurrence of a violation of applicable requirements. Accordingly, the proposal stated that a record retention period that is longer than three years may help ensure that consumers are able to avail themselves of TILA protections while imposing minimal incremental burden on creditors and loan originators. The Bureau noted that many State and local laws related to transactions involving real property may set a record retention period, or may depend on the information being available, for five years. Additionally, a five-year record retention period would be consistent with proposed provisions in the Bureau's 2012 TILA-RESPA Proposal.

Most commenters objected to a five-year record retention period as overly burdensome. In addition, the implementing regulations of the Paperwork Reduction Act (PRA) require that there be a showing of “substantial need” to impose a record retention requirement of longer than three years. 5 CFR 1320.5(d)(2)(iv). Given the PRA's preference for retention periods of three years or less, the Bureau is adopting § 1026.25(c)(2)'s three-year retention period as proposed, notwithstanding some of the noted advantages of a longer retention period.
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The language of § 1025(c)(2)(i) is revised slightly from the proposal for the sake of simplicity. The proposal would have required a creditor to maintain records reflecting compensation paid to “a loan originator organization or the creditor's individual loan originators.” The final rule requires a creditor to maintain records reflecting compensation paid “to a loan originator, as defined in § 1026.36(a)(1).” No substantive change is intended.

Application to Loan Originator Organizations

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

The Bureau did not receive any comments regarding the extension of the record retention requirements to loan originator organizations. Because the Bureau continues to believe that requiring loan originator organizations to retain records related to compensation will facilitate compliance with TILA, the Bureau is adopting § 1026.25(c)(2)'s applicability to loan originator organizations as proposed.

Exclusion of Individual Loan Originators

Proposed § 1026.25(c)(2) would not have applied Regulation Z recordkeeping requirements to individual loan originators. Although section 129B(d) of TILA, as added by the Dodd-Frank Act, permits consumers to bring actions against mortgage originators (which include individual loan originators), the Bureau stated its belief that applying the record retention requirements of § 1026.25 to individual loan originators is unnecessary. Under § 1026.25 as proposed, loan originator organizations and creditors would have been required to retain certain records regarding all of their individual loan originators. The preamble stated that applying the same record retention requirements to the individual loan originator employees themselves would be duplicative. In addition, such a requirement might not be feasible in all cases, because individual loan originators might not have access to the types of records required to be retained under § 1026.25, particularly after they cease to be employed by the creditor or loan originator organization. Under the proposal, an individual loan originator who is a sole proprietor, however, would have been responsible for compliance with provisions that apply to the proprietorship (which is a loan originator organization) and, as a result, is responsible for compliance with the record retention requirements. Similarly, a natural person who is a creditor would have been subject to the requirements that apply to creditors.

The Bureau did not receive comments on the exclusion of individual loan originators. For the reasons discussed above, the Bureau is adopting § 1026.25(c)(2) without making it applicable to individual loan originators, as proposed. The Bureau notes that while the preamble to the proposal discussed individual loan originator employees, the exclusion applies to all individual loan originators, as that term is defined in § 1026.36(a)(1), whether or not employees.

Substance of Record Retention Requirements

As discussed above, proposed § 1026.25(c)(2) would have made two changes to the existing record retention provisions. First, § 1026.25(c)(2)(i) would have required a creditor to maintain for three years records sufficient to evidence all compensation it pays to a loan originator and a copy of the governing compensation agreement. Second, § 1026.25(c)(2)(ii) would have required a loan originator organization to maintain for three years records of all compensation that it receives from a creditor, a consumer, or another person or that it pays to its individual loan originators and a copy of the compensation agreement that governs those receipts or payments.

Proposed comment 25(c)(2)-1.i would have clarified that, under § 1026.25(c)(2), records are sufficient to evidence that compensation was paid and received if they demonstrate facts

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A2013-01503. Public record. Not legal advice.