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Federal Register / Vol. 75, No. 185 / Friday, September 24, 2010 / Rules and Regulations
FEDERAL RESERVE SYSTEM
12 CFR Part 226
Regulation Z; Docket No. R–1366

Truth in Lending
Board of Governors of the
Federal Reserve System.
ACTION: Final rule; official staff
commentary.
AGENCY:

The Board is publishing final
rules amending Regulation Z, which
implements the Truth in Lending Act
and Home Ownership and Equity
Protection Act. The purpose of the final
rule is to protect consumers in the
mortgage market from unfair or abusive
lending practices that can arise from
certain loan originator compensation
practices, while preserving responsible
lending and sustainable
homeownership. The final rule
prohibits payments to loan originators,
which includes mortgage brokers and
loan officers, based on the terms or
conditions of the transaction other than
the amount of credit extended. The final
rule further prohibits any person other
than the consumer from paying
compensation to a loan originator in a
transaction where the consumer pays
the loan originator directly. The Board
is also finalizing the rule that prohibits
loan originators from steering
consumers to consummate a loan not in
their interest based on the fact that the
loan originator will receive greater
compensation for such loan. The final
rules apply to closed-end transactions
secured by a dwelling where the
creditor receives a loan application on
or after April 1, 2011.
DATES: The final rule is effective on
April 1, 2011.
FOR FURTHER INFORMATION CONTACT:
Catherine Henderson or Nikita M.
Pastor, Attorneys; Brent Lattin or Paul
Mondor, Senior Attorneys; Division of
Consumer and Community Affairs,
Board of Governors of the Federal
Reserve System, Washington, DC 20551,
at (202) 452–3667 or (202) 452–2412; for
users of Telecommunications Device for
the Deaf (TDD) only, contact (202) 263–
4869.
SUPPLEMENTARY INFORMATION:
SUMMARY:

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I. Background and Implementation of
the Reform Act
A. Background: TILA and Regulation Z
Congress enacted the Truth in
Lending Act (TILA), 15 U.S.C. 1601 et
seq., based on findings that economic
stability would be enhanced and
competition among consumer credit
providers would be strengthened by the

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informed use of credit resulting from
consumers’ awareness of the cost of
credit. TILA directs the Board to
prescribe regulations to carry out its
purposes and specifically authorizes the
Board, among other things, to issue
regulations that contain such
classifications, differentiations, or other
provisions, or that provide for such
adjustments and exceptions for any
class of transactions, that in the Board’s
judgment are necessary or proper to
effectuate the purposes of TILA,
facilitate compliance with TILA, or
prevent circumvention or evasion of
TILA. 15 U.S.C. 1604(a).
In 1995, the Board revised Regulation
Z to implement changes to TILA made
by the Home Ownership and Equity Act
(HOEPA). 60 FR 15463; Mar. 24, 1995.
HOEPA requires special disclosures and
substantive protections for home-equity
loans and refinancings with annual
percentage rates (APRs) or points and
fees above certain statutory thresholds.
HOEPA also directs the Board to
prohibit unfair and deceptive acts and
practices in connection with mortgages.
15 U.S.C. 1639(l)(2).
On August 26, 2009, the Board
published a proposed rule in the
Federal Register pertaining to closedend credit (August 2009 Closed-End
Proposal). As part of that proposal, the
Board proposed to prohibit certain
compensation payments to loan
originators, and to prohibit steering
consumers to loans not in their interest
because the loans would result in
greater compensation for the loan
originator. As stated in the Federal
Register, this proposal was intended to
protect consumers against the
unfairness, deception, and abuse that
can arise with certain loan origination
compensation practices while
preserving responsible lending and
sustainable homeownership. See 74 FR
43232; Aug. 26, 2009. The comment
period on the August 2009 Closed-End
Proposal ended December 24, 2009. The
Board received approximately 6000
comments in response to the proposed
rule, including comments from
creditors, mortgage brokers, trade
associations, consumer groups, Federal
agencies, state regulators, state attorneys
general, individual consumers, and
members of Congress. As discussed in
more detail elsewhere in this
SUPPLEMENTARY INFORMATION, the Board
has considered comments received on
the August 2009 Closed-End Proposal in
adopting this final rule.
B. The Reform Act
On July 21, 2010, the Dodd-Frank
Wall Street Reform and Consumer
Protection Act (Reform Act) was enacted

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into law.1 Among other provisions, Title
XIV of the Reform Act amends TILA to
establish certain mortgage loan
origination standards. In particular,
Section 1403 of the Reform Act creates
new TILA Section 129B(c), which
imposes restrictions on loan originator
compensation and on steering by loan
originators. The Board intends to
implement Section 129B(c) in a future
rulemaking after notice and opportunity
for further public comment.
Many of the provisions in TILA
Section 129B(c) are similar to the
Board’s proposed rules concerning loan
originator compensation. However,
Section 129B(c) also has some
provisions not addressed by the Board’s
August 2009 Closed-End Proposal.
Implementation of those provisions of
the Reform Act will be addressed in a
future rulemaking with opportunity for
public comment.
The Board has decided to issue this
final rule on loan originator
compensation and steering, even though
a subsequent rulemaking will be
necessary to implement Section 129B(c).
The Board believes that Congress was
aware of the Board’s proposal and that
in enacting TILA Section 129B(c),
Congress sought to codify the Board’s
proposed prohibitions while expanding
them in some respects and making other
adjustments. The Board further believes
that it can best effectuate the legislative
purpose of the Reform Act by finalizing
its proposal relating to loan origination
compensation and steering at this time.
Allowing enactment of TILA Section
129B(c) to delay final action on the
Board’s prior regulatory proposal would
have the opposite effect intended by the
legislation by allowing the continuation
of the practices that Congress sought to
prohibit.
In issuing this final rule, the Board is
relying on its authority in TILA Sections
129(l)(2)(A) and (B) to prohibit acts or
practices relating to mortgage loans that
are unfair and to refinancings of
mortgage loans that are abusive and not
in the interest of the borrower. However,
this final rule is also consistent with the
Reform Act for the following reasons:
Section 226.36(d)(1) of the final rule is
consistent with TILA Section
129B(c)(1), which prohibits payments to
a mortgage loan originator that vary
based on the terms of the loan, other
than the amount of the credit extended.
Likewise, the Board finds that
§ 226.36(d)(2) of the final rule is
consistent with TILA Section
129B(c)(2), which allows mortgage loan
originators to receive payment from a
person other than the consumer (such as
1 Public

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a yield spread premium paid by the
creditor) only if the originator does not
receive any compensation directly from
the consumer. TILA Section 129B(c)(2)
also imposes a second restriction when
an originator receives compensation
from someone other than the consumer:
The consumer also must not make any
upfront payment to the lender for points
or fees on the loan other than certain
bona fide third-party charges. This
restriction was not contained in the
proposed rule, and therefore is not
included in this final rule and will be
addressed in a subsequent rulemaking.
TILA Section 129B(c)(3) directs the
Board to prescribe regulations that
prohibit loan originators from steering
consumers to certain types of loans, and
prohibits other specified practices.
These provisions will be also be
implemented in a subsequent
rulemaking. TILA Section 129B(c)(3)
does not expressly include an antisteering provision similar to proposed
§ 226.36(e). Nevertheless, the Board
continues to believe that the prohibition
in § 226.36(e) is necessary and proper to
effectuate and prevent circumvention of
the prohibition contained in
§ 226.36(d)(1), and, as explained further
below, § 226.33(e) prohibits acts and
practices that are unfair, abusive, and
not in the interest of the borrower. Thus,
the Board is adopting proposed
§ 226.36(e) in the final rule with some
modifications in response to the public
comments.
The Board’s proposed prohibitions
related to mortgage originator
compensation and steering applied to
closed-end consumer loans secured by
real property or a dwelling, but
comment was solicited on whether the
prohibitions also should be applied to
home-equity lines of credit (HELOCs).
However, the provisions of the Reform
Act relating to originator compensation
and steering apply to ‘‘residential
mortgage loans,’’ which include closedend loans secured by a dwelling or real
property that includes a dwelling, but
exclude HELOCs extended under openend credit plans and timeshare plans (as
described in the bankruptcy code, 11
U.S.C. 101(53D)). See TILA Section
103(cc)(5), as enacted in Section 1401 of
the Reform Act.
The Board is adopting this final rule
consistent with the definition of
‘‘residential mortgage loan’’ in the
Reform Act. Accordingly, the final rule
does not apply to HELOCs or time-share
transactions. It also does not apply to
loans secured by real property if such
property does not include a dwelling.
The Board intends to evaluate these
issues in connection with future

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rulemakings and assess whether broader
coverage is appropriate or necessary.
The definition of ‘‘loan originator’’
used in the proposal and the final rule
is consistent with the Reform Act’s
definition of ‘‘mortgage originators’’ in
TILA Section 103(cc)(2). Specifically,
TILA Section 103(cc)(2)(E) excludes
certain persons and entities that
originate loans but are also creditors
that provide seller financing for
properties that the originator owns.
Because such persons would be
‘‘creditors’’ and are not loan originators
using table funding, they are not
covered by final rules that are
applicable to loan originators.
The definition of ‘‘loan originator’’ in
the Board’s final rule is consistent with
the exception in Section 1401 of the
Reform Act that applies to persons and
entities that perform only real estate
brokerage activities. See TILA Section
103(cc)(2)(D).2 This final rule only
applies to parties who arrange,
negotiate, or obtain an extension of
mortgage credit for a consumer in return
for compensation or other monetary
gain. Thus, persons covered by the final
rule would not be engaged only in real
estate brokerage activities, and would
not be covered by the statutory
exception.
TILA Section 103(cc)(2)(G) contains
an exception for loan servicers. The
final rule only applies to extensions of
consumer credit. The Board’s final rule
does not apply to a loan servicer when
the servicer modifies an existing loan on
behalf of the current owner of the loan.
This final rule does not apply if a
modification of an existing obligation’s
terms does not constitute a refinancing
under § 226.20(a). The Board believes
that TILA Section 103(cc)(2)(G) was
intended to ensure that servicers could
continue to modify existing loans on
behalf of current loan holders. The
Board will consider whether additional
provisions are needed to implement
TILA Section 103(cc)(2)(G) in a future
rulemaking.
II. Consumer Protection Concerns With
Loan Origination Compensation
A. HOEPA Hearings
In the summer of 2006, the Board held
public hearings on consumer protection
issues in the mortgage market in four
cities. During the hearings, consumer
advocates urged the Board to ban ‘‘yield
spread premiums,’’ payments that
2 The statutory exception applies to persons or
entities that are licensed or registered to engage in
real estate brokerage activities in accordance with
applicable State law, and who do not receive
compensation from a creditor, mortgage broker, or
other mortgage originator, or their agents.

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mortgage brokers receive from the
creditor at closing for delivering a loan
with an interest rate that is higher than
the creditor’s ‘‘buy rate.’’ Consumer
advocates asserted that yield spread
premiums provide brokers an incentive
to increase consumers’ interest rates
unnecessarily. They argued that a
prohibition would align reality with
consumers’ perception that brokers
serve consumers’ best interests.
In light of the information received at
the 2006 hearings and the rise in
defaults that began soon after, the Board
held an additional hearing in June of
2007 to explore how it could use its
authority under HOEPA to prevent
abusive lending practices in the
subprime mortgage market while still
preserving responsible lending.
Although the Board did not expressly
solicit comment on mortgage broker
compensation in its notice of the June
2007 hearing, a number of commenters
and hearing panelists raised the topic.
Consumer and creditor representatives
alike raised concerns about the fairness
and transparency of creditors’ payment
of yield spread premiums to brokers.
Several commenters and panelists stated
that consumers are not aware of the
payments creditors make to brokers, or
that such payments increase consumers’
interest rates. They also stated that
consumers may mistakenly believe that
a broker seeks to obtain the best interest
rate available for consumers. Consumer
groups have expressed particular
concern about increased payments to
brokers for delivering loans both with
higher interest rates and prepayment
penalties.3 Several creditors and
creditor trade associations advocated
requiring brokers to disclose whether
the broker represents the consumer’s
interests, and how and by whom the
broker is compensated. Some of these
commenters recommended that brokers
be required to disclose their total
compensation to the consumer and that
creditors be prohibited from paying
brokers more than the disclosed
amount.
B. The Board’s 2008 HOEPA Proposal
To address concerns raised through
the series of HOEPA hearings, the
Board’s 2008 HOEPA Proposed Rule
would have prohibited a creditor from
paying a mortgage broker any
compensation greater than the amount
the consumer had previously agreed in
writing that the broker would receive.
73 FR 1672, 1698–1700; Jan. 9, 2008. In
3 See Home Equity Lending Market; Notice of
Hearings, 72 FR 30380; May 31, 2007; Home Equity
Lending Market; Notice of Public Hearings, 71 FR
26513; May 5, 2006.

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Federal Register / Vol. 75, No. 185 / Friday, September 24, 2010 / Rules and Regulations
support of the rule, the Board explained
its concerns about yield spread
premiums, which are summarized
below.
A yield spread premium is the present
dollar value of the difference between
the lowest interest rate the wholesale
lender would have accepted on a
particular transaction and the interest
rate the broker actually obtained for the
lender. This dollar amount is usually
paid to the mortgage broker, though it
may also be applied to reduce the
consumer’s upfront closing costs. The
creditor’s payment to the broker based
on the interest rate is an alternative to
the consumer paying the broker directly
from the consumer’s preexisting
resources or out of loan proceeds. Thus,
consumers potentially benefit from
having an option to pay brokers for their
services indirectly by accepting a higher
interest rate.
The Board shares concerns, however,
that creditors’ payments to mortgage
brokers are not transparent to
consumers and are potentially unfair to
them. Creditor payments to brokers
based on the interest rate give brokers
an incentive to provide consumers loans
with higher interest rates. Large
numbers of consumers are simply not
aware this incentive exists. Many
consumers do not know that creditors
pay brokers based on the interest rate,
and the current legally required
disclosures seem to have only a limited
effect. Some consumers may not even
know that creditors pay brokers: a
common broker practice of charging a
small part of its compensation directly
to the consumer, to be paid out of the
consumer’s existing resources or loan
proceeds, may lead consumers
incorrectly to believe that this amount is
all the consumer will pay or the broker
will receive. Consumers who do
understand that the creditor pays the
broker based on the interest rate may
not fully understand the implications of
the practice. They may not appreciate
the full extent of the incentive the
practice gives the broker to increase the
rate because they do not know the dollar
amount of the creditor’s payment.
Moreover, consumers often wrongly
believe that brokers have agreed or are
required to obtain the best interest rate
available. Several commenters in
connection with the 2006 hearings
suggested that mortgage broker
marketing cultivates an image of the
broker as a ‘‘trusted advisor’’ to the
consumer. Consumers who have this
perception may rely heavily on a
broker’s advice, and there is some
evidence that such reliance is common.
In a 2003 survey of older borrowers who
had obtained prime or subprime

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refinancings, majorities of respondents
with refinance loans obtained through
both brokers and creditors’ employees
reported that they had relied ‘‘a lot’’ on
their loan originators to find the best
mortgage for them.4 The Board’s recent
consumer testing also suggests that
many consumers shop little for
mortgages and often rely on one broker
or lender because of their trust in the
relationship. In addition, a common
perception among consumer testing
participants was that brokers and
lenders have no discretion over their
loan terms, and, therefore, shopping
actively would likely have no effect on
the terms consumers receive.
If consumers believe that brokers
protect consumers’ interests by
shopping for the lowest rates available,
consumers may be less likely to take
steps to protect their interests when
dealing with brokers. For example, they
may be less likely to shop rates across
retail and wholesale channels
simultaneously to assure themselves
that the broker is providing a
competitive rate. They may also be less
likely to shop and negotiate brokers’
services, obligations, or compensation
upfront, or at all. They may, for
instance, be less likely to seek out
brokers who will promise in writing to
obtain the lowest rate available.
In response to these concerns, the
2008 HOEPA Proposed Rule would have
prohibited a creditor from paying a
broker more than the consumer agreed
in writing to pay. Under the proposal,
the consumer and mortgage broker
would have had to enter into a written
agreement before the broker accepted
the consumer’s loan application and
before the consumer paid any fee in
connection with the transaction (other
than a fee for obtaining a credit report).
The agreement also would have
disclosed (i) that the consumer
ultimately would bear the cost of the
entire compensation even if the creditor
paid part of it directly; and (ii) that a
creditor’s payment to a broker could
influence the broker to offer the
consumer loan terms or products that
would not be in the consumer’s interest
or the most favorable the consumer
could obtain.
Based on the Board’s analysis of
comments received on the 2008 HOEPA
Proposed Rule, the results of consumer
testing, and other information, the
Board withdrew the proposed
provisions relating to broker

compensation. 73 FR 44522, 44563–65;
July 30, 2008. The Board’s withdrawal
of those provisions was based on its
concern that the proposed agreement
and disclosures could confuse
consumers and undermine their
decision making rather than improve it.
The risks of consumer confusion arose
from two sources. First, an institution
can act as a creditor or broker
depending on the transaction. At the
time the agreement and disclosures
would have been required, an
institution could be uncertain as to
which role it ultimately would play.
This could render the proposed
disclosures inaccurate and misleading
in some and possibly many cases.
Second, the Board was concerned by the
reactions of consumers who participated
in one-on-one interviews about the
proposed agreement and disclosures as
part of the Board’s consumer testing.
These consumers often concluded, not
necessarily correctly, that brokers are
more expensive than creditors. Many
also believed that brokers would serve
their best interests notwithstanding the
conflict resulting from the relationship
between interest rates and brokers’
compensation.5 The proposed
disclosures presented a significant risk
of misleading consumers regarding both
the relative costs of brokers and lenders,
and the role of brokers in their
transactions.
In withdrawing the broker
compensation provisions of the 2008
HOEPA Proposed Rule, the Board stated
that it would continue to explore
options to address potential unfairness
associated with loan originator
compensation arrangements, such as
yield spread premiums. The Board
indicated that it would consider
whether disclosures or other approaches
could effectively remedy this potential
unfairness without imposing
unintended consequences.
In the August 2009 Closed-End
proposal discussed below, the Board
proposed a more substantive approach
to loan originator compensation. That
proposal is the basis for this final rule.

4 See Kellie K. Kim-Sung & Sharon Hermanson,
Experiences of Older Refinance Mortgage Loan
Borrowers: Broker- and Lender-Originated Loans,
Data Digest No. 83, 3 (AARP Public Policy Inst., Jan.
2003), available at http://assets.aarp.org/rgcenter/
post-import/dd83_loans.pdf.

5 For more details on the consumer testing, see
the report of the Board’s contractor, Macro
International, Inc., Consumer Testing of Mortgage
Broker Disclosures (July 10, 2008), available at
http://www.federalreserve.gov/newsevents/press/
bcreg/20080714regzconstest.pdf.

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III. The Board’s August 2009 ClosedEnd Proposal
A. Summary of August 2009 Closed-End
Proposal on Loan Originator
Compensation
On August 26, 2009, the Board
proposed regulations under TILA

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Section 129(l)(2), 15 U.S.C. 1639(l)(2), to
prohibit certain compensation payments
to loan originators and steering to
protect consumers against the
unfairness, deception, and abuse that
can arise with certain loan origination
compensation practices while
preserving responsible lending and
sustainable homeownership. See 74 FR
43232; Aug. 26, 2009.
Specifically, the Board proposed to
prohibit a creditor or any other person
from paying compensation to a loan
originator based on the terms or
conditions of the transaction, or from
paying a loan originator any
compensation if the consumer paid the
loan originator directly. The Board
solicited comment, however, on an
alternative that would permit
compensation based on the loan
amount. Under the proposal, ‘‘loan
originator’’ would include both mortgage
brokers and employees of creditors who
perform loan origination functions. In
addition, the Board proposed to apply
the prohibition to all mortgage loans
secured by real property or a dwelling,
and solicited comment on whether the
prohibition should apply to HELOCs.
The Board also proposed to prohibit
a loan originator from steering a
consumer to a transaction that would
yield the most compensation for the
loan originator, unless the transaction
was in the consumer’s interest. To
facilitate compliance with this proposed
prohibition, the Board proposed a safe
harbor. A loan originator would be
deemed in compliance with the antisteering prohibition if the consumer
chose a transaction from a choice of
loans with (1) the lowest interest rate,
(2) the second lowest interest rate, and
(3) the lowest settlement costs. The
Board solicited comment on whether
the steering prohibition would be
effective in achieving its stated purpose,
as well as on the feasibility and
practicality of such a rule, its
enforceability, and any unintended
adverse effects it might have.
B. Overview of Comments Received
The Board received approximately
6,000 comment letters on the proposal
from various interested parties,
including approximately 1,500 form
letters. Individual mortgage brokers
submitted the vast majority of
comments. The remaining commenters
included mortgage lenders, banks,
community banks, credit unions,
secondary market participants, industry
trade groups, consumer advocates,
Federal banking agencies, members of
Congress, state regulators, state
attorneys general, academics, and
individual consumers.

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Many commenters supported the
Board’s proposal to protect consumers
from certain loan origination
compensation practices. Consumer
advocates supported the expanded
definition of ‘‘loan originators’’ to
include loan officers, because
employees of creditors face the same
incentives as mortgage brokers. They
also supported covering all closed-end
transactions regardless of loan price.
Many of these commenters supported
the Board’s proposed anti-steering rule,
but expressed some reservations on the
breadth of the proposed safe harbor.
In contrast, industry commenters
generally opposed the proposed
prohibition on loan originator
compensation based on the terms or
conditions of the transaction, as well as
the proposed anti-steering rule. Many of
these commenters expressed concerns
regarding the breadth of the definition
of ‘‘loan originator,’’ and urged the Board
to limit the scope of its definition to
individuals. Further, these commenters
urged the Board to limit the scope of the
proposal to higher-priced loans because
the abuses targeted by the prohibition
have historically been limited to the
subprime market. In addition, many
community banks, credit unions, and
mortgage brokers maintained that
prohibiting these types of origination
compensation practices would hurt
small businesses and reduce
competition in the mortgage market.
They argued that the proposal would
increase the cost of credit for
consumers.
These comments are discussed in
further detail below in part VI.
IV. Summary of Final Rule
The Board is issuing final rules
amending Regulation Z to prohibit
certain practices relating to payments
made to compensate mortgage brokers
and other loan originators. The goal of
the amendments is to protect consumers
in the mortgage market from unfair
practices involving compensation paid
to loan originators. The final rule
prohibits a creditor or any other person
from paying, directly or indirectly,
compensation to a mortgage broker or
any other loan originator that is based
on a mortgage transaction’s terms or
conditions, except the amount of credit
extended. The rule also prohibits any
person from paying compensation to a
loan originator for a particular
transaction if the consumer pays the
loan originator’s compensation directly.
The final rule adopts the proposal that
prohibits a loan originator from steering
a consumer to consummate a loan that
provides the loan originator with greater
compensation, as compared to other

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transactions the loan originator offered
or could have offered to the consumer,
unless the loan is in the consumer’s
interest. The rule provides a safe harbor
to facilitate compliance with the
prohibition on steering. A loan
originator is deemed to comply with the
anti-steering prohibition if the consumer
is presented with loan options that
provide (1) the lowest interest rate; (2)
no risky features, such as a prepayment
penalty, negative amortization, or a
balloon payment in the first seven years;
and (3) the lowest total dollar amount
for origination points or fees and
discount points.
The final rule applies to loan
originators, which are defined to
include mortgage brokers, including
mortgage broker companies that close
loans in their own names in tablefunded transactions, and employees of
creditors that originate loans (e.g., loan
officers). Thus, creditors are excluded
from the definition of a loan originator
when they do not use table funding,
whether they are a depository
institution or a non-depository mortgage
company, but employees of such
entities are loan originators. The final
rule covers all transactions secured by a
dwelling, but excludes HELOCs
extended under open-end credit plans
and timeshare transactions. The rule
requires creditors and other persons
who compensate loan originators to
retain records for at least two years after
a mortgage transaction is consummated.
As discussed further in part VII, the
Board has determined that compliance
with this final rule shall become
mandatory on April 1, 2011.
Accordingly, the final rule applies to
transactions for which the creditor
receives an application on or after April
1, 2011. The Board believes that this
date gives parties sufficient time to
develop new business models, train
employees, and makes system changes
to implement the rule’s requirements.
The Board has considered whether it
would be appropriate to delay the
effective date of this final rule so that
the rules related to mortgage loan
origination standards in the Reform Act
could be implemented at the same time.
Although such a delay might facilitate
compliance and result in some cost
savings, the Board finds that the benefits
to consumers of an earlier effective date
for rules pertaining to loan origination
compensation and steering greatly
outweigh any potential savings.
V. Legal Authority
A. General Rulemaking Authority
TILA Section 105 mandates that the
Board prescribe regulations to carry out

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the purposes of the Act. TILA also
specifically authorizes the Board, among
other things, to:
• Issue regulations that contain such
classifications, differentiations, or other
provisions, or that provide for such
adjustments and exceptions for any
class of transactions, that in the Board’s
judgment are necessary or proper to
effectuate the purposes of TILA,
facilitate compliance with the Act, or
prevent circumvention or evasion. 15
U.S.C. 1604(a).
• Exempt from all or part of TILA any
class of transactions if the Board
determines that TILA coverage does not
provide a meaningful benefit to
consumers in the form of useful
information or protection. The Board
must consider factors identified in the
Act and publish its rationale at the time
it proposes an exemption for comment.
15 U.S.C. 1604(f).
In the course of developing this final
rule, the Board has considered the views
of interested parties, its experience in
implementing and enforcing Regulation
Z, and the results obtained from testing
various disclosure options in controlled
consumer tests. For the reasons
discussed in this notice, the Board
believes this final rule is appropriate
pursuant to the authority under TILA
Section 105(a).
B. The Board’s Authority Under TILA
Section 129(l)(2)
TILA Section 129(l)(2) authorizes the
Board to prohibit acts or practices in
connection with:
• Mortgage loans that the Board finds
to be unfair, deceptive, or designed to
evade the provisions of HOEPA; and
• Refinancing of mortgage loans that
the Board finds to be associated with
abusive lending practices or that are
otherwise not in the interest of the
borrower.
15 U.S.C. 1639(l)(2). The authority
granted to the Board under TILA
Section 129(l)(2) is broad. It reaches
mortgage loans with rates and fees that
do not meet HOEPA’s rate or fee trigger
in TILA Section 103(aa), 15 U.S.C.
1602(aa), as well as mortgage loans not
covered under that Section, such as
home purchase loans. Moreover, while
HOEPA’s statutory restrictions apply
only to creditors and only to loan terms
or lending practices, TILA Section
129(l)(2) is not limited to acts or
practices by creditors, nor is it limited
to loan terms or lending practices. See
15 U.S.C. 1639(l)(2). It authorizes
protections against unfair or deceptive
practices ‘‘in connection with mortgage
loans,’’ and it authorizes protections
against abusive practices ‘‘in connection
with refinancing of mortgage loans.’’

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Thus, the Board’s authority is not
limited to regulating specific contractual
terms of mortgage loan agreements; it
extends to regulating loan-related
practices generally, within the standards
set forth in the statute.
HOEPA does not set forth a standard
for what is unfair or deceptive, but the
Congressional Conference Report for
HOEPA indicates that, in determining
whether a practice in connection with
mortgage loans is unfair or deceptive,
the Board should look to the standards
employed for interpreting state unfair
and deceptive trade practices statutes
and the Federal Trade Commission Act
(FTC Act), Section 5(a), 15 U.S.C. 45(a).6
Congress has codified standards
developed by the Federal Trade
Commission (FTC) for determining
whether acts or practices are unfair
under Section 5(a), 15 U.S.C. 45(a).7
Under the FTC Act, an act or practice
is unfair when it causes or is likely to
cause substantial injury to consumers,
which is not reasonably avoidable by
consumers themselves and not
outweighed by countervailing benefits
to consumers or to competition. In
addition, in determining whether an act
or practice is unfair, the FTC is
permitted to consider established public
policies, but public policy
considerations may not serve as the
primary basis for an unfairness
determination.8
The FTC has interpreted these
standards to mean that consumer injury
is the central focus of any inquiry
regarding unfairness.9 Consumer injury
may be substantial if it imposes a small
harm on a large number of consumers,
or if it raises a significant risk of
concrete harm.10 The FTC looks to
whether an act or practice is injurious
in its net effects.11 The FTC has also
observed that an unfair act or practice
will almost always reflect a market
failure or market imperfection that
prevents the forces of supply and
demand from maximizing benefits and
minimizing costs.12 In evaluating
unfairness, the FTC looks to whether
6 H.R.

Rep. 103–652, 162 (Aug. 1994) (Conf. Rep.).
7 See 15 U.S.C. 45(n); Letter from Commissioners
of the FTC to the Hon. Wendell H. Ford, Chairman,
and the Hon. John C. Danforth, Ranking Minority
Member, Consumer Subcomm. of the H. Comm. on
Commerce, Science, and Transp. (Dec. 17, 1980).
8 15 U.S.C. 45(n).
9 Statement of Basis and Purpose and Regulatory
Analysis, Credit Practices Rule, 42 FR 7740, 7743;
Mar. 1, 1984 (Credit Practices Rule).
10 Letter from Commissioners of the FTC to the
Hon. Wendell H. Ford, Chairman, and the Hon.
John C. Danforth, Ranking Minority Member,
Consumer Subcomm. of the H. Comm. on
Commerce, Science, and Transp., n.12 (Dec. 17,
1980).
11 Credit Practices Rule, 42 FR at 7744.
12 Id.

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consumers’ free market decisions are
unjustifiably hindered.13
The FTC has also adopted standards
for determining whether an act or
practice is deceptive (though these
standards, unlike unfairness standards,
have not been incorporated into the FTC
Act).14 First, there must be a
representation, omission, or practice
that is likely to mislead the consumer.
Second, the act or practice is examined
from the perspective of a consumer
acting reasonably in the circumstances.
Third, the representation, omission, or
practice must be material, that is, it
must be likely to affect the consumer’s
conduct or decision with regard to a
product or service.15
Many states also have adopted
statutes prohibiting unfair or deceptive
acts or practices, and these statutes
employ a variety of standards, many of
them different from the standards
currently applied under the FTC Act. A
number of states follow an unfairness
standard formerly used by the FTC.
Under this standard, an act or practice
is unfair where it offends public policy
or is immoral, unethical, oppressive, or
unscrupulous, and causes substantial
injury to consumers.16
In adopting this final rule under TILA
Section 129(l)(2)(A), 15 U.S.C.
1639(l)(2)(A), the Board has considered
the standards currently applied to the
FTC Act’s prohibition against unfair or
deceptive acts or practices, as well as
the standards applied in similar state
statutes.
VI. Section-by-Section Analysis of Final
Rules for Loan Origination
Compensation
A. Overview
This part VI discusses the
prohibitions on certain compensation
payments to loan originators and
steering. To address the unfairness that
arises with certain loan originator
compensation practices, the final rule
prohibits creditors or any other person
13 Id.
14 Letter from James C. Miller III, Chairman, FTC
to the Hon. John D. Dingell, Chairman, H. Comm.
on Energy and Commerce (Oct. 14, 1983) (Dingell
Letter).
15 Dingell Letter at 1–2.
16 See, e.g., Kenai Chrysler Ctr., Inc. v. Denison,
167 P.3d 1240, 1255 (Alaska 2007) (quoting FTC v.
Sperry & Hutchinson Co., 405 U.S. 233, 244–45 n.5
(1972)); State v. Moran, 151 N.H. 450, 452, 861 A.2d
763, 755–56 (N.H. 2004) (concurrently applying the
FTC’s former test and a test under which an act or
practice is unfair or deceptive if ‘‘the objectionable
conduct * * * attain[s] a level of rascality that
would raise an eyebrow of someone inured to the
rough and tumble of the world of commerce’’)
(citation omitted); Robinson v. Toyota Motor Credit
Corp., 201 Ill. 2d 403, 417–418, 775 N.E.2d 951,
961–62 (2002) (quoting FTC v. Sperry & Hutchinson
Co., 405 U.S. 233, 244–45 n.5 (1972)).

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from paying compensation to a loan
originator based on the terms or
conditions of the credit transaction,
other than the amount of credit
extended. This prohibition does not
apply to payments that consumers make
directly to a loan originator. However, if
the loan originator receives payments
directly from the consumer, the loan
originator is prohibited from also
receiving compensation from any other
party in connection with that
transaction. In addition, the final rule
prohibits a loan originator from steering
consumers to loans not in their interest
because the loans would result in
greater compensation for the loan
originator. Similar to the proposed rule,
the final rule provides a safe harbor to
facilitate compliance with the steering
prohibition, with some modifications.
As discussed in further detail below,
the Board finds that these prohibitions
on payments to loan originators and
steering are necessary and appropriate
to prevent practices that the Board
deems unfair in connection with
mortgage loans and that are associated
with abusive lending practices or are
otherwise not in the interest of the
consumer in connection with
refinancings. See TILA Section 129(l)(2),
15 U.S.C. 1639(l)(2), and the discussion
of this statutory authority in part IV
above.

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B. Public Comment
Industry commenters and their trade
groups generally, although not
uniformly, opposed the proposal to
prohibit loan originator compensation
based on the terms or conditions of the
transaction. These commenters stated
that such a prohibition would hurt
small businesses, especially mortgage
brokers, as well as community banks
and credit unions. They maintained that
adopting the proposed prohibition
would increase the cost of credit for all
creditors and consumers. Some industry
commenters also suggested alternatives
such as imposing a cap on originator
compensation and requiring improved
disclosures. They noted that the U.S.
Department of Housing and Urban
Development’s (HUD) recently revised
the disclosures required under the Real
Estate Settlement Procedures Act
(RESPA), including disclosures about
yield spread premiums. They stated that
the RESPA rules had only recently take
effect,17 and urged the Board to wait
until a determination could be made as
to whether the disclosures could resolve
concerns about originator
compensation.
17 See

73 FR 68204; Nov. 17, 2008.

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However, industry commenters
generally suggested that if the Board
chooses to finalize the proposed
prohibitions, the Board should permit
payments to loan originators based on
the principal loan amount. They
asserted that prohibiting payments
based on the loan amount would disrupt
the secondary market. Industry
commenters uniformly opposed
expanding the proposed prohibitions to
HELOCs, citing a lack of abuse in the
HELOC market as the principal reason.
In contrast, consumer groups, state
and Federal regulators, state attorneys
general, and several members of
Congress strongly supported the
proposed prohibition on loan originator
compensation based on the terms or
conditions of the transaction. They
stated that by removing reliance on loan
terms or conditions to set compensation
for loan originators, the rule seeks to
correct the misaligned incentives that
currently exist in the mortgage
marketplace between loan originators
and consumers. However, some of these
commenters did not support allowing
compensation based on the principal
loan amount. They argued that
permitting payments to loan originators
based on the loan amount may
encourage loan originators to ‘‘upsell’’
the loan amount and discourage others
from originating small balance loans.
Some commenters, especially consumer
advocates, sought additional
protections, such as disclosures and
prohibitions on creditors paying any
compensation to a loan originator unless
the creditor’s payment covered all fees
and charges associated with the loan,
not just the compensation paid to the
loan originator.
Many of these commenters supported
expanding the definition of ‘‘loan
originator’’ to include both mortgage
brokers and employees of creditors.
They stated that overages paid to retail
originators are equally harmful to
consumers as compensation paid to
mortgage brokers; both provide
incentives for the loan originator to steer
the consumer to a loan that will yield
the originator the greatest amount of
compensation. In addition, they urged
the Board to extend the scope of the
proposed prohibition to the entire
mortgage market, including HELOCs, to
prevent unfair compensation practices
from migrating from one market
segment to another.
In response to the proposed
prohibition on steering, consumer
advocates, other Federal banking
agencies, members of Congress, state
regulators, and state attorneys general
expressed support overall. Certain
consumer advocates and state officials

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argued, however, that the proposed safe
harbor for steering substantially
weakened the proposed prohibitions on
compensation practices. These
commenters urged the Board to replace
the safe harbor with a rebuttable
presumption if the transaction’s terms
or conditions met certain criteria, such
as a competitive interest rate and no
prepayment penalty.
In contrast, the vast majority of
industry commenters opposed the
steering prohibition. They argued that
the steering prohibition and proposed
safe harbor were too vague and would
increase litigation risk. They suggested
that, at a minimum, the Board provide
a broader safe harbor for the steering
prohibition to facilitate compliance and
lessen litigation risk.
These comments are discussed in
further detail throughout this part as
applicable.
C. Unfair and Deceptive Acts and
Practices Analysis
The Board proposed to use its HOEPA
authority to prohibit unfair
compensation practices in connection
with transactions secured by real
property or a dwelling. TILA Section
129(l)(2)(A), 15 U.S.C. 1639(l)(2)(A).
TILA Section 129(l)(2) authorizes the
Board to prohibit acts or practices in
connection with mortgage loans that the
Board finds to be unfair or deceptive. As
discussed above in part V, in
considering whether a practice is unfair
or deceptive under TILA Section
129(l)(2), the Board has generally relied
on the standards that have been adopted
for purposes of Section 5(a) of the FTC
Act, 15 U.S.C. 45(a), which also
prohibits unfair and deceptive acts and
practices. For purposes of the FTC Act,
an act or practice is considered unfair
when it causes or is likely to cause
substantial injury to consumers that is
not reasonably avoidable by consumers
themselves and not outweighed by
countervailing benefits to consumers or
to competition.
As explained in further detail below,
the Board finds that paying loan
originators based on the terms or
conditions of the loan, other than the
amount of credit extended, or steering
consumers to loans that are not in their
interest to maximize loan originator
compensation, are unfair practices.
Furthermore, based on its experience
with consumer testing, particularly in
connection with the 2008 HOEPA
Proposed Rule, the Board believes that
disclosure alone is insufficient for most
consumers to avoid the harm caused by
this practice. Thus, the Board is
adopting substantive regulations to
prohibit these unfair practices

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substantially as proposed. This section
discusses (1) the substantial injuries
caused to consumers by these unfair
compensation practices; (2) the reasons
consumers cannot reasonably avoid
these injuries; and (3) the basis for the
Board concluding that the injuries are
not outweighed by the countervailing
benefits to consumers or competition
when creditors engage in these unfair
compensation practices.

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Substantial Injury
When loan originators receive
compensation based on a transaction’s
terms and conditions, they have an
incentive to provide consumers loans
with higher interest rates or other less
favorable terms. Yield spread premiums,
therefore, present a significant risk of
economic injury to consumers.
Currently, this injury is common
because consumers typically are not
aware of the practice or do not
understand its implications, and thus
cannot effectively limit the practice.
Creditors’ payments to mortgage
brokers or their own employees that
originate loans (loan officers) generally
are not transparent to consumers.
Brokers may impose a direct fee on the
consumer, which may lead consumers
to believe that the direct fee is the sole
source of the broker’s compensation.
While consumers expect the creditor to
compensate its own loan officers, they
do not necessarily understand that the
loan originator may have the ability to
increase the creditor’s interest rate or
include certain loan terms for the
originator’s own gain.
Because consumers generally do not
understand the yield spread premium
mechanism, they are unable to engage in
effective negotiation. Instead they are
more likely to rely on the loan
originator’s advice, and, as a result, may
receive a higher rate or other
unfavorable terms solely because of
greater originator compensation. These
consumers suffer substantial injury by
incurring greater costs for mortgage
credit than they would otherwise be
required to pay.
Injury Not Reasonably Avoidable
Yield spread premiums create a
conflict of interest between the loan
originator and consumer. As noted
above, many consumers are not aware of
creditor payments to loan originators,
especially in the case of mortgage
brokers, because these arrangements
lack transparency. Although consumers
may reasonably expect creditors to
compensate their own employees,
consumers do not know how the loan
officer’s compensation is structured or
that loan officers can increase the

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creditor’s interest rate or offer certain
loan terms to increase their own
compensation. Without this
understanding, consumers cannot
reasonably be expected to appreciate or
avoid the risk of financial harm these
arrangements represent.
To guard against this practice, a
consumer would have to know the
lowest interest rate the creditor would
have accepted, and ascertain that the
offered interest rate includes a rate
increase by the loan originator. Most
consumers will not know the lowest rate
the creditor would be willing to accept.
The consumer also would need to
understand the dollar amount of the
yield spread premium that is generated
by the rate increase to determine what
portion, if any, is being applied to
reduce the consumer’s upfront loan
charges. HUD recently adopted
disclosures in Regulation X (24 CFR Part
3500), which implement RESPA and
that could enhance some consumers’
understanding of mortgage broker
compensation. But the details of the
compensation arrangements are
complex and the disclosures are limited.
Pursuant to Regulation X, a mortgage
broker or lender shows the yield spread
premium as a credit to the borrower that
is applied to cover upfront costs, but
also adds the amount of the yield spread
premium to the total origination charges
being disclosed. This disclosure would
not necessarily inform the consumer
that the rate has been increased by the
originator and that a lower rate with a
smaller origination charge may be
available. In addition, the Regulation X
disclosure concerning yield spread
premiums would not apply to
compensation paid to a loan originator
that is employed by the creditor. Thus,
the Regulation X disclosure, while
perhaps an improvement over previous
rules, is not likely by itself to prevent
consumers from incurring substantial
injury from the practice.
Yield spread premiums are complex
and may be counter-intuitive even to
well-informed consumers. Based on the
Board’s experience with consumer
testing, the Board believes that
disclosures are insufficient to overcome
the gap in consumer comprehension
regarding this critical aspect of the
transaction. Currently, the required
disclosures of originator compensation
under Federal and state laws seem to
have little, if any, effect on originators’
incentive to provide consumers with
increased interest rates or other
unfavorable loan terms to increase the
originators’ compensation.18 The
18 For example, some creditors may be willing to
offer a loan with a lower interest rate in return for

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Board’s consumer testing indicated that
disclosures about yield spread
premiums are ineffective. Consumers in
these tests did not understand yield
spread premiums and how they create
an incentive for loan originators to
increase consumers’ costs.
Consumers’ lack of comprehension of
yield spread premiums is compounded
where the originator imposes a direct
charge on the consumer. A mortgage
broker may charge the consumer a direct
fee for arranging the consumer’s
mortgage loan. This charge may lead the
consumer to infer that the broker
accepts the consumer-paid fee to
represent the consumer’s financial
interests. Consumers also may
reasonably believe that the fee they pay
is the originator’s sole compensation.
This may lead reasonable consumers
erroneously to believe that loan
originators are working on their behalf,
and are under a legal or ethical
obligation to help them obtain the most
favorable loan terms and conditions.
Consumers may regard loan originators
as ‘‘trusted advisors’’ or ‘‘hired experts,’’
and consequently rely on originators’
advice. Consumers who regard loan
originators in this manner are far less
likely to shop or negotiate to assure
themselves that they are being offered
competitive mortgage terms. Even for
consumers who shop, the lack of
transparency in originator compensation
arrangements makes it unlikely that
consumers will avoid yield spread
premiums that unnecessarily increase
the cost of their loan.
Consumers generally lack expertise in
complex mortgage transactions because
they engage in such mortgage
transactions infrequently. Their reliance
on loan originators is reasonable in light
of originators’ greater experience and
professional training in the area, the
belief that originators are working on
their behalf, and the apparent
ineffectiveness of disclosures to dispel
that belief.
Injury Not Outweighed by Benefits to
Consumers or to Competition
Yield spread premiums may benefit
consumers in cases where the amount is
applied to reduce consumers’ upfront
closing costs, including originator
compensation. A creditor’s increase in
the interest rate (or the addition of other
loan terms) may be used to generate
additional income that the creditor uses
to compensate the originator, in lieu of
adding origination points or fees that
including a prepayment penalty. A loan originator
that offers a loan with a prepayment penalty may
not offer the lower rate, however, resulting in a
premium interest rate and the payment of a yield
spread premium.

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the consumer would be required to pay
directly from the consumer’s preexisting
funds or the loan proceeds. This can
benefit a consumer who lacks the
resources to pay closing costs in cash,
or who may have insufficient equity in
the property to increase the loan amount
to cover these costs.
Without a clear understanding of
yield spread premiums, the majority of
consumers are not equipped to police
the market to ensure that yield spread
premiums are in fact applied to reduce
their closing costs, especially in the case
of loan originator compensation. Such
policing would be particularly difficult
because consumers are not likely to
have any basis for determining a
‘‘typical’’ or ‘‘reasonable’’ amount for
originator compensation. Accordingly,
the Board is amending Regulation Z to
prohibit any person from basing a loan
originator’s compensation on the loan’s
terms or conditions, other than the
amount of credit extended. However,
the final rule still afford creditors the
flexibility to structure loan pricing to
preserve the potential consumer benefit
of compensating an originator, or
funding third-party closing costs,
through the interest rate.
D. Final Rules Prohibiting Certain
Payments to Loan Originators and
Steering
The Board proposed in § 226.36(d)(1)
to prohibit any person from
compensating a loan originator, directly
or indirectly, based on the terms or
conditions of a loan transaction secured
by real property or a dwelling. The
prohibition extends to all persons, not
just the creditor, to prevent evasion by
structuring payments to loan originators
through non-creditors, such as
secondary market investors. Under the
proposal, compensation based on the
loan amount would be prohibited as a
payment that is based on a term or
condition of the loan, but comment was
sought on an alternative proposal that
would permit such compensation.
The proposed prohibition did not
apply to consumers’ direct payments to
loan originators. However, where the
consumer compensated the loan
originator directly, proposed
§ 226.36(d)(2) prohibited the loan
originator from also receiving
compensation from the creditor or any
other person. The proposal applied to
all ‘‘loan originators,’’ which included
employees of the creditor in addition to
mortgage brokers, and to all closed-end
transactions secured by real property or
a dwelling.
The Board also proposed in
§ 226.36(e)(1) to prohibit a loan
originator from steering a consumer to

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consummate a loan that may not be in
the consumer’s interest to maximize the
loan originator’s compensation.
Proposed §§ 226.36(e)(2) and (3)
provided a safe harbor: No violation of
the steering prohibition would occur if,
under certain conditions, the consumer
was presented with at least three loan
options for each type of transaction
(fixed-rate or adjustable-rate loan) in
which the consumer expressed an
interest. Proposed commentary
provided additional guidance regarding
the prohibition on steering and the safe
harbor.
The Board is adopting the prohibition
on originator compensation that is based
on the terms or conditions of the loan,
substantially as proposed. The Board is
also adopting the alternative proposal
that permits compensation that is based
on the amount of credit extended. The
Board is revising the proposed
commentary to provide further
clarification regarding compensation
payments that do and do not violate the
prohibition, including clarifications
concerning the use of credit scores and
similar indicators of credit risk. The
Board is also adopting the final rule
prohibiting steering as proposed, with
modifications to the safe harbor and
corresponding commentary. These
provisions are discussed in further
detail below.
Section 226.36 Prohibited Acts or
Practices in Connection With Credit
Secured by a Dwelling
Definition of ‘‘Loan Originator’’
As discussed below in more detail,
the Board proposed to prohibit certain
payments to loan originators based on
transaction terms or conditions, and
also proposed to prohibit a loan
originator from ‘‘steering’’ consumers to
transactions that are not in their
interest, to increase the loan originator’s
compensation. Accordingly, the Board
proposed in § 226.36(a)(1) to define the
term ‘‘loan originator’’ to include
persons who are covered by the current
definition of ‘‘mortgage broker’’ in
§ 226.36(a) and employees of the
creditor who are not otherwise already
considered ‘‘mortgage brokers.’’ (Section
226.36(a) currently defines the term
‘‘mortgage broker’’ because a mortgage
broker is subject to the prohibition on
coercion of appraisers in existing
§ 226.36(b).) The Board further proposed
to clarify under the proposed definition
of ‘‘loan originator’’ that a creditor in a
‘‘table-funded transaction’’ that is not
funding the transaction at
consummation out of its own resources,
including drawing on a bona fide
warehouse line of credit or out of its

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deposits, is considered a ‘‘mortgage
broker.’’ No substantive change was
intended other than to adopt the
definition of ‘‘loan originator.’’ The
Board proposed to revise and
redesignate the existing definition of
‘‘mortgage broker’’ under § 226.36(a) as
new § 226.36(a)(2).
Public Comment. Industry
commenters and their trade groups
strongly opposed the proposed
definition of ‘‘loan originator’’ in
§ 226.36(a) because they opposed the
scope of coverage for the proposed
prohibitions on compensation in
§ 226.36(d). They argued that the rule
should not apply to compensation paid
by creditors to their employees because
creditors have greater capital
requirements, face significant oversight
and regulation, and are motivated by
concern for their reputation, and,
therefore, do not engage in unfair
compensation practices. Independent
mortgage companies and their trade
groups further argued that, unlike
mortgage brokers, they do not present
themselves to consumers as being able
to shop loans offered by different
creditors, but originate loans exclusively
for themselves using their own
resources. These commenters argued
that this distinction prevents employees
of independent mortgage banking
companies from engaging in the abuses
targeted by the rule, and, therefore, it is
unnecessary to extend the rule’s
prohibitions on compensation to them.
Community banks and their trade
groups contended that they should be
excluded from the definition of loan
originator because such banks and
employees have a vested interest in
their communities and consumers, and
therefore take more time to educate and
inform consumers. They noted that they
hold most of their loans in portfolio
rather than selling them to the
secondary market, and have not engaged
in the abusive practices targeted by the
rule. Similarly, a credit union trade
association argued that its members
should be excluded from the definition
of ‘‘loan originator.’’ This commenter
stated that loan originator compensation
encourages credit union employees to
ensure that consumers obtain the loan
best suited for them in order to
maximize customer satisfaction, because
credit union employees share in the
profit generated by high loan volumes.
Other industry commenters urged the
Board to exempt managers, supervisors,
and technical or administrative
employees from the definition of ‘‘loan
originator.’’ These commenters said that
such employees have little, if any,
impact on terms or conditions of
individual loans and their

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Federal Register / Vol. 75, No. 185 / Friday, September 24, 2010 / Rules and Regulations
compensation does not rely on
originated loans.
Some industry commenters urged the
Board to exclude companies and other
entities from the proposed definition of
‘‘loan originator’’ and instead adopt the
definition of ‘‘loan originator’’ provided
for by Congress in the Safe Mortgage
Licensing Act (SAFE Act), which covers
only natural persons and not entities.
Mortgage brokers, together with some
other commenters including the Small
Business Administration (the SBA),
argued that the proposed definition of
‘‘loan originator’’ in Regulation Z would
be broader than the SAFE Act
definition, without justification.
Specifically, the mortgage brokers and
the SBA argued the proposal would
disproportionately affect small
brokerage firms and create an unlevel
playing field. They stated that large
brokerage firms would be ‘‘creditors’’
who are not subject to the compensation
restrictions, because they can and
would fund loans out of their own
resources, such as by drawing on bona
fide warehouse lines of credit. They
claimed that the proposal would force
small brokerage firms who are unable to
fund loans out of their own resources
out of the marketplace.
Consumer advocates and state
attorneys general supported the
proposed definition of loan originator.
They noted that, like third-party
originators, employees of creditors
receive compensation based on loan
terms and conditions, a practice that
provides incentives to direct consumers
to costlier loans.
Discussion. The Board is adopting the
definition of loan originator in
§ 226.36(a)(1) as proposed, with some
clarifications. As discussed above, the
final rule is aimed at abuses associated
with creditors’ compensation payments
to loan originators for originating loans
with interest rates above the creditor’s
minimum or ‘‘par’’ interest rate or other
less favorable terms, such as a
prepayment penalty. The final rule
applies whether the creditor’s payment
is made to a natural person, including
an employee of the creditor, or a
business entity. The rule does not apply
to payments received by a creditor when
selling the loan to a secondary market
investor. When a mortgage brokerage
firm originates a loan, it is not exempt
under the final rule unless it is also a
creditor that funds the loan from its own
resources, such as its own line of credit.
Similar to mortgage brokers, creditors’
employees have significant discretion
over loan pricing, and therefore are able
to modify the loan’s terms or conditions
to increase their own compensation.
Ample anecdotal evidence indicates

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that creditors’ loan officers engage in
such pricing discretion that directly
harms consumers.19 The Board believes
that where loan originators have the
capacity to control their own
compensation based on the terms or
conditions offered to consumers, the
incentive to provide consumers with a
higher interest rate or other less
favorable terms exists. When this unfair
practice occurs, it results in direct
economic harm to consumers whether
the loan originator is a mortgage broker
or employed as a loan officer for a bank,
credit union, or community bank.
The final rule also defines loan
originator under § 226.36(a)(1) as
covering both natural persons and
mortgage broker companies, including
those companies that close loans in
their own names but use table funding
from a third party. The final rule
clarifies that a creditor that funds a
transaction is excluded from the rule’s
definition of a loan originator.
As noted above, a mortgage broker
trade group asserted that by treating
mortgage broker companies that use
table funding as ‘‘loan originators,’’
small brokerage firms that do not fund
their own loans would be forced out of
the marketplace. This commenter
argued that mortgage brokers benefit
consumers by increasing competition in
the mortgage market and lowering
mortgage costs, and cited studies for
support. One of the studies found that
loans obtained through mortgage
brokers were less costly to borrowers as
compared to loans obtained through
lenders.20 Another study noted that
mortgage brokers can simplify the loan
shopping experience for consumers and
enhance competition.21 On the other
19 For example, the FTC’s settlement with
Gateway Funding, Inc. in December 2008 illustrates
a case where a creditor’s loan officers created
‘‘overages,’’ although the primary legal theory
concerned disparate treatment by race in the
imposition of overages. The FTC’s complaint and
the court’s final judgment and order can be found
on the FTC’s Web site at http://www.ftc.gov/os/
caselist/0623063/index.shtm. The FTC has since
filed a complaint alleging similar patterns of
overages in violation of fair lending laws against
Golden Empire Mortgage, Inc. The May 2009
complaint can be found at http://www.ftc.gov/os/
caselist/0623061/090511gemcmpt.pdf. A similar
pattern of overages was alleged in legal actions
brought by the Department of Justice, which
resulted in settlement agreements with Huntington
Mortgage Company (1995), available at http://
www.justice.gov/crt/housing/documents/
huntingtonsettle.php, and Fleet Mortgage Corp
(1996), available at http://www.justice.gov/crt/
housing/documents/fleetsettle.php.
20 Amany El Anshasy, Gregory Elliehausen, &
Yoshiaki Shimazaki, The Pricing of Subprime
Mortgages by Mortgage Brokers and Lenders (July
2005).
21 Morris Kleiner & Richard Todd, Mortgage
Broker Regulations that Matter: Analyzing Earnings,
Employment, and Outcomes for Consumers,

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hand, a consumer group cited studies
showing that borrowers using mortgage
brokers incurred greater costs in
connection with their loans, such as
fees, interest, and other closing costs.22
This commenter also cited a study that
found that broker-originated loans, as
compared to loans originated by
creditors’ employees (loan officers), cost
subprime borrowers more in interest
over the life of the loan.23 Although
using a broker can help consumers shop
among different lenders and so enhance
competition, consumers do not benefit if
they are steered by a broker to a higher
cost loan to increase the broker’s
compensation.
The Board has considered these
comments and believes the studies are
not dispositive of the issues the rule
seeks to address. Brokerage entities that
do not fund loans out of their own
resources operate as retail networks for
creditors, particularly in markets where
creditors might not have a direct retail
presence. The brokers serve to expand
the lenders’ customer base by bringing
loans to creditors that would not be
originated by the creditors’ own
employees. In these cases, mortgage
brokers that do not fund loans do not
compete directly with creditor entities,
but rather with the loan officers of such
creditor entities. The final rule, as
proposed, applies to mortgage brokers,
as well as employees of creditors, that
meet the definition of ‘‘loan originator.’’
Moreover, as noted above, the rule is
intended to address uniformly unfair
compensation practices that result in
consumers being given loans with less
favorable terms, whether the practices
involve individual brokers and loan
officers or companies that operate as
loan originators. The Board believes that
providing exemptions for any set of loan
originators would facilitate
circumvention of the rule and
undermine its objective. A rule that
covered only natural persons and not
brokerage entities would permit
evasion, for example, by individual loan
originators incorporating as sole
proprietorships.
In addition, the Board does not
believe the final rule will require small
brokerage firms to go out of business.
National Bureau of Economic Research Working
Paper 13684 (Dec. 2007).
22 Michael LaCour-Little, The Pricing of
Mortgages by Brokers: An Agency Problem?, 31
Journal of Real Estate Research 235 (2009); Howell
E. Jackson & Jeremy Berry, Kickbacks or
Compensation: The Case of YSPs, 12 Stan. J. L. Bus.
& Fin. 298, 353 (2007); Patricia A. McCoy,
Rethinking Disclosure in a World of Risk-Based
Pricing, 44 Harvard J. on Leg. 123 (2006).
23 Center for Responsible Lending, Steered
Wrong: Brokers, Borrowers, and Subprime Loans
(Apr. 2008).

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Creditors rely upon mortgage brokers as
their retail origination network so that
they can operate in a greater number of
markets with less overhead expense
than if they operated direct retail
branches and employed loan officers. To
the extent that mortgage brokers provide
cost savings or other value to creditors
as an origination network, the final rule
does not prevent creditors from
compensating these entities in a manner
that reflects such value, so long as the
compensation is not based on a
transaction’s terms or conditions. The
Board has provided illustrative
examples of permissible compensation
for loan originators in the final rule. The
final rule prohibits a particular
compensation practice that the Board
finds to be unfair but does not set a cap
on the amount of compensation that a
loan originator may receive. This may
result in new business models, but the
Board does not believe mortgage
brokerage firms will no longer be able to
compete in the marketplace unless they
can continue to engage in compensation
practices the Board has found to be
unfair.
The Board recognizes, however, that
including mortgage brokerage firms in
the definition of ‘‘loan originator’’ will
capture a significant number of small
firms; such firms, on average, tend to be
small (e.g., 7 to 10 employees). In
addition, extending the definition of
‘‘loan originator’’ to entities that function
as mortgage brokers in particular
transactions may also cover community
banks and credit unions, many of which
are small entities. The Board notes that
these smaller entities may experience
relatively higher costs to implement the
final rule because the costs of
compliance are fixed and these entities
may not achieve similar economies of
scale with a smaller loan volume. The
Board recognizes the concerns of small
entities, but believes for the reasons
stated above that the benefits of the
prohibition to consumers outweigh the
associated compliance costs.
Furthermore, the definition of ‘‘loan
originator’’ in § 226.36(a)(1) is consistent
with new TILA Section 103(cc)(2), as
enacted in Section 1401 of the Reform
Act, which defines ‘‘mortgage
originator’’ to include employees of a
creditor, individual brokers and
mortgage brokerage firms, including
entities that close loans in their own
names that are table funded by a third
party. Consistent with Section 1401 of
the Reform Act, the Board does not
purport to address transactions that
occur between creditors and secondary
market purchasers, to which consumers
are not a direct party, and appropriately
does not extend the rule to

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compensation earned by entities on
those transactions.
Existing § 226.36(a) defining mortgage
broker is revised and redesignated as
new § 226.36(a)(2). Comments 36(a)–1
and –2 regarding the meaning of loan
originator and mortgage broker,
respectively, are adopted substantially
as proposed. However, comment 36(a)–
1 regarding the meaning of loan
originator is amended to clarify when
table funding occurs. For example, a
table-funded transaction does not occur
if a creditor provides the funds for the
transaction at consummation out of its
own resources, such as by drawing on
a bona fide warehouse line of credit, or
out of its deposits. In addition, comment
36(a)-1 is also amended to clarify that
the definition of ‘‘loan originator’’ does
not apply to a loan servicer when the
servicer modifies an existing loan on
behalf of the current owner of the loan.
This final rule only applies to
extensions of consumer credit and does
not apply if a modification of an
existing obligation’s terms does not
constitute a refinancing under
§ 226.20(a).
Under existing § 226.2(a)(17)(i)(B), a
person to whom the obligation is
initially payable on its face generally is
a ‘‘creditor.’’ However, as noted, the
definition of ‘‘loan originator’’ in
§ 226.36(a)(1) provides that if a creditor
closes a loan transaction in its own
name using table funding by a third
party, that creditor is also deemed a
‘‘loan originator’’ for purposes of
§ 226.36. Thus, new comment 36(a)–3
clarifies that for purposes of § 226.36(d)
and (e), the provisions that refer to a
‘‘creditor’’ excludes those creditors that
are also deemed ‘‘loan originators’’
under § 226.36(a)(1) because they table
fund the credit transaction (i.e., do not
provide the funds for the transaction at
consummation out of their own
resources). New comment 36(a)–4
clarifies that for purposes of § 226.36,
managers, administrative staff, and
similar individuals whose
compensation is not based on whether
a particular loan is originated are not
loan originators.
Covered Transactions
The Board proposed to apply the
prohibitions in §§ 226.36(d) and
226.36(e) to closed-end transactions
secured by real property or a dwelling
regardless of whether they were higherpriced loans under existing § 226.35(a).
The Board requested comment on the
relative costs and benefits of applying
the rule to all segments of the market,
whether the costs would outweigh the
benefits for loans below the higherpriced threshold, and whether the

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prohibitions should be extended to
HELOCs.
Public Comment. Many creditors and
their trade associations urged the Board
to limit the prohibitions in §§ 226.36(d)
and (e) to higher-priced loans. They
argued that unfair and abusive practices
relating to loan originator compensation
were historically concentrated in the
higher-priced loan market. A trade
association for independent mortgage
banking companies also suggested that
the rule protect only vulnerable
consumers that have loans with risky
features. In addition, most, if not all,
industry commenters and their trade
groups urged the Board to exclude
HELOCs from the proposal’s coverage.
They cited a lack of evidence that
unfairness is associated with loan
originator compensation for open-end
products.
In contrast, consumers, consumer
advocacy groups, and state attorneys
general supported extending the
prohibitions to the entire market,
including HELOCs. They stated that the
conflict of interest inherent in
rewarding loan originators for offering
less favorable loan terms exists
regardless of the loan price. They argued
that excluding HELOCS or loans below
the higher-priced threshold from the
rules would simply result in migration
of unfair compensation practices to
those market segments. Consumer
advocates and state attorneys general
also noted that failure to cover HELOCs
would encourage loan originators to
originate ‘‘piggyback’’ HELOCs
simultaneously with first-lien loans.
These commenters claimed that
creditors currently offer financial
incentives to loan originators to
originate split loan transactions to yield
greater return for the creditor, and stated
that excluding HELOCs from the
prohibitions would allow this unfair
practice to continue.
Discussion. The final rule applies to
all closed-end consumer credit
transactions secured by a dwelling,
regardless of price or lien position. See
§§ 226.1(c) and 226.3(a), and
corresponding commentary, regarding
extensions of consumer credit subject to
TILA. The Board believes covering only
transactions above the higher-priced
threshold in § 226.35(a) would fail to
protect consumers adequately. A
consumer can be harmed from a loan
originator delivering less favorable loan
terms or conditions to maximize
compensation whether the loan has an
APR that falls above or below the
threshold in § 226.35. The Board
recognizes that the risk of harm may be
lower in the prime segment of the
market where consumers historically

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Federal Register / Vol. 75, No. 185 / Friday, September 24, 2010 / Rules and Regulations
have more choices and ability to shop.
However, as noted above, the Board’s
consumer testing showed, and anecdotal
evidence demonstrates, that consumers
in all segments of the market fail to
appreciate the conflict of interest that
can arise from originators receiving
compensation based on the loan terms
or conditions offered. As a result, the
Board believes that consumers in all
segments of the market are equally
susceptible to these unfair
compensation practices, and, therefore,
equally benefit from the prohibition.
Moreover, the Reform Act provisions on
originator compensation are not limited
to higher-priced mortgage loans.
As discussed above, the Board is
adopting this final rule consistent with
the proposal, and with the definition of
‘‘residential mortgage loan’’ in the
Reform Act. Accordingly, consistent
with TILA Section 103(cc)(5), as enacted
in section 1401 of the Reform Act, the
final rule excludes HELOCs that are
subject to § 226.5b and timeshare plans,
as described in the Bankruptcy Code, 11
U.S.C. 101(53D). It also does not apply
to loans secured by real property that
does not include a dwelling. The Board
will reconsider these issues in
connection with future rulemakings to
implement the Reform Act and assess
whether broader coverage is necessary,
pursuant to its authority in TILA
Sections 129(l)(2)(A) and 129B(e).
Section 226.36(d) currently provides
that § 226.36 does not apply to HELOCs.
Section 226.36(d) is redesignated as
§ 226.36(f) and revised to clarify that all
of § 226.36 does not extend to HELOCs,
and § 226.36(d) and (e) do not extend to
a loan that is secured by a consumer’s
interest in a timeshare plan, as
described in the Bankruptcy Code, 11
U.S.C. 101(53D).24 The Board adds new
comment 36–1 to clarify that the final
rule on loan origination compensation
practices covers closed-end consumer
credit transactions secured by a
dwelling or real property that includes
a dwelling, including reverse mortgages
that are not HELOCs, and provides a
cross reference to additional restrictions
set forth in § 226.36(f). In technical
revisions, the heading to § 226.36 and
corresponding commentary is revised to
reflect the expanded scope of that
section, and current comment 36–1 is
redesignated as comment 36–3. Also in
technical revisions, §§ 226.36(d)(1) and
(e), which are discussed in detail below,
are revised to apply to consumer credit
24 In the August 2009 Closed-End Proposal, the
Board solicited comment on whether §§ 226.36(b)
and (c) should apply to HELOCs. The Board will
consider whether to extend §§ 226.36(b) and (c) to
HELOCs when it finalizes the August 2009 ClosedEnd Proposal.

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transactions secured by a dwelling. In
addition, § 226.1(b) is revised to reflect
that the final rule broadens the scope of
§ 226.36 from transactions secured by
the consumer’s principal dwelling to all
transactions secured by real property or
a dwelling. Section 226.1(d)(5) is also
revised to reflect the scope of § 226.36.
Payments Based on Transaction Terms
and Conditions
As proposed, § 226.36(d)(1) would
prohibit any person from compensating
a loan originator, directly or indirectly,
based on the terms or conditions of the
mortgage. Under the proposal,
compensation based on the loan amount
would have been prohibited as a
payment that is based on a term of the
loan. However, the Board sought
comment on an alternative that would
permit compensation to be based on the
amount of credit extended, which is a
common practice today.
The prohibition on origination
compensation in proposed
§ 226.36(d)(1) did not apply to
consumers’ direct payments to loan
originators. However, under proposed
§ 226.36(d)(2), if the consumer
compensated the loan originator
directly, the originator would be
prohibited from also receiving
compensation from the creditor or any
other person. Proposed § 226.36(d)(3)
provided that for purposes of the
prohibition on certain compensation
practices set forth in §§ 226.36(d)(1) and
(d)(2), affiliated entities would be
treated as a single ‘‘person.’’ See
§ 226.2(a)(22) defining the term
‘‘person.’’
The proposed commentary clarified
the types of arrangements considered to
be ‘‘compensation,’’ and provided
examples of compensation based on the
transaction’s terms or conditions such
as payments based on the interest rate,
and examples of permissible methods of
compensation to loan originators such
as payments based on loan volume. The
proposed commentary also provided
guidance regarding pricing flexibility
that creditors would retain and the
ability to adjust loan originator
compensation periodically to respond to
market changes. See comments
36(d)(1)–1 through –6.
Public Comment. Consumer
advocates, associations of state
regulators, state attorneys general, other
Federal banking agencies, and members
of Congress strongly supported the
Board’s proposed ban on loan originator
compensation that is based on the terms
or conditions of a transaction. They
stated that these compensation
arrangements lack transparency and are
unfair and deceptive. They cited various

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58519

examples of the harm caused to
consumers and the economy at large by
the practice of compensating loan
originators based on a transaction’s
terms or conditions. These commenters
asserted that these compensation
arrangements led to significant growth
of risky loans for non-prime consumers,
increased mortgage costs, and the
foreclosure crisis.
In contrast, industry commenters and
their trade associations almost
uniformly opposed prohibiting loan
originator compensation based on the
terms or conditions of a transaction.
They argued that loan originator
compensation provides consumers with
the option to cover upfront costs
through the interest rate, and generally
makes credit more widely available.
They further argued that research on the
impact of loan originator compensation
on consumers is inconclusive, and that
existing regulations under RESPA, the
SAFE Act, and the MDIA together with
market competition are sufficient to
protect consumers. Independent
mortgage companies and their trade
groups also asserted that the Board
should consider adopting less restrictive
rules as an alternative to the proposal.
They also argued that information and
views received by the Board during the
public comment period should be set
forth in a second proposal to permit
further public comment.
A mortgage broker trade association
argued that TILA does not authorize the
Board to regulate private compensation
arrangements between employers and
employees under TILA. It further
asserted that the Board did not
adequately demonstrate that the
proposed rule satisfied the FTC
standards for unfair or deceptive acts or
practices, or the rulemaking standards
set forth in the Administrative
Procedures Act (APA).
The SBA commented that the
proposal did not provide sufficient
information regarding the rule’s
economic impact on small entities. In
addition to listing the number and type
of affected entities, the SBA asserted
that the Board should have provided
more information about the costs of the
rule for small entities. The SBA
expressed concern that small entities
that originate loans for creditors would
be disadvantaged compared to larger
entities that are able to fund their own
loans, because larger entities would be
treated as creditors when selling loans
to secondary market investors. The SBA
argued that the proposal would require
smaller entities to alter their business
practices and that some small entities
might ultimately leave the marketplace,
making it more difficult for consumers

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to obtain mortgages. The SBA also said
the Board should more fully consider
alternatives that would be less
burdensome to small entities and reduce
or eliminate the economic impact on
small entities.
Discussion. The Board is adopting the
prohibition on certain compensation
practices under § 226.36(d) substantially
as proposed, except that the final rule
permits compensation based on the
amount of credit extended. In addition,
for clarity § 226.36(d)(1) is divided into
subparts § 226.36(d)(1)(i) through (iii);
no other substantive change is intended.
For the reasons explained in the
proposal, the Board finds that
compensating loan originators based on
a loan’s terms or conditions, other than
the amount of credit extended, is an
unfair practice that causes substantial
injury to consumers. The Board is taking
this action pursuant to its authority
under TILA Section 129(l)(2) to prohibit
acts or practices in connection with
mortgage loans that it finds to be unfair
or deceptive.
As discussed in greater detail above
under part VI.C, compensation
payments based on a loan’s terms or
conditions create incentives for loan
originators to provide consumers loans
with higher interest rates or other less
favorable terms, such as prepayment
penalties. There is substantial evidence
that compensation based on loan rate or
other terms is commonplace throughout
the mortgage industry, as reflected in
Federal agency settlement orders,
congressional hearings, studies, and
public proceedings.25 This evidence
25 See, e.g., affidavits on loan originator
compensation filed in Mayor and City Council of
Baltimore v. Wells Fargo Bank, N.A., Civil No. JFM
1:08 CV–00062, Second Amended Complaint
(2010); Iowa v. Ameriquest Mortgage Co., et al., Civ.
No. CE 53090, Consent Order (2006), available at
http://www.state.ia.us/government/ag/images/pdfs/
Ameriquest_CJ.pdf; Memorandum from Senator
Carl Levin and Senator Tom Coburn to Members of
the Permanent Subcommittee on Investigations re:
Wall Street and the Financial Crisis: The Role of
High Risk Home Loans, Exhibit 1a of the Senate
Permanent Subcommittee on Investigations Hearing
on Wall Street and the Financial Crisis: The Role
of High Risk Home Loans, 4–5 (Apr. 13, 2010),
available at http://hsgac.senate.gov/public/_files/
Financial_Crisis/041310Exhibits.pdf; Testimony of
Michael C. Calhoun, Center for Responsible
Lending, Before the U.S. House of Representatives
Committee on Financial Services, Perspectives on
the Consumer Financial Protection Agency, 21
(Sept. 30, 2009), available at http://
www.responsiblelending.org/mortgage-lending/
policy-legislation/congress/cfpa-calhountestimony.pdf ; Testimony of Patricia McCoy,
Professor of Law, University of Connecticut Law
School, Before the U.S. Senate Banking Committee,
Consumer Protections in Financial Services: Past
Problems, Future Solutions, 8, 10 (Mar. 3, 2009),
available at http://banking.senate.gov/public/
index.cfm?FuseAction=Files.View&File
Store_id=40666635-bc76-4d59-9c25-76daf0784239;
Susan E. Woodward & Robert E. Hall, Consumer

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demonstrates that market forces, such as
competition or liquidity, have not been
adequate to prevent the harm to
consumers caused by compensation
payments that are based on the loan’s
terms or conditions. Creditors’
payments to mortgage brokers or their
own employees are neither transparent
nor understood by consumers.
Accordingly, consumers do not
effectively shop or engage in
negotiation, and instead often rely on
the advice of loan originators. This
reliance further compounds the harmful
effect of these unfair compensation
practices because consumers do not
understand that loan originators may
have the ability to increase the creditor’s
interest rate or include costly terms or
features to increase their own
compensation. The Board’s consumer
testing conducted in connection with
the 2008 HOEPA Proposed Rule further
demonstrated consumers’ reliance on
loan originators and misunderstanding
of loan originator compensation.
Consequently, these unfair
compensation practices cause
consumers injuries they often cannot
reasonably avoid.
The Board has previously considered
other less restrictive alternatives to
address concerns about mortgage
originator compensation. Under the
2008 HOEPA Proposed Rule, the Board
published a disclosure-based approach
to the problems presented by yield
spread premiums. For the reasons stated
in the August 2009 Closed-End
Proposal, the Board determined such an
approach to be ineffective in redressing
the harm caused by these unfair
compensation practices.
The Board recognizes that the
prohibition on certain compensation
practices will require entities, both
small and large, to alter their business
practices, develop new business models,
re-train staff, and reprogram operational
systems to ensure compliance with the
Confusion in the Mortgage Market: Evidence of Less
than a Perfectly Transparent and Competitive
Market, American Econ. Rev.: Papers and
Proceedings (May 2010), available at http://
pubs.aeaweb.org/doi/pdfplus/10.1257/
aer.100.2.511; Susan Woodward, A Study of Closing
Costs for FHA Mortgages, HUD Office of Policy
Development and Research (May 2008); Howell E.
Jackson & Jeremy Berry, Kickbacks or
Compensation: The Case of Yield-Spread
Premiums, 12 Stan. J. L, Bus & Fin. 289 (2007),
available at http://www.law.harvard.edu/faculty/
hjackson/pdfs/january_draft.pdf. Most recently, in
March 2010 the Department of Justice and two
subsidiaries of American International Group
entered into a settlement agreement under which
wholesale residential mortgages lenders were
responsible for broker fee disparities. The
complaint is available at http://www.justice.gov/crt/
housing/documents/aigcomp.pdf, and the consent
order can be found at http://www.justice.gov/crt/
housing/documents/aigsettle.pdf.

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final rule. For the reasons discussed
above, the Board believes that the
benefits to consumers provided by the
prohibition on certain unfair
compensation practices outweigh these
associated costs.
Compensation based on the amount
of credit extended. As noted above, the
Board sought comment on an alternative
proposal that would permit loan
originator compensation to be based on
the amount of credit extended, which is
a common practice today. The Board
specifically requested comment on
whether prohibiting originator
compensation based on the amount of
credit extended to the consumer was
unduly restrictive and necessary to
achieve the purpose of the rule.
Consumer advocates and certain
Federal banking and state regulators and
elected officials opposed the alternative
proposal. They argued that it would
create an incentive for loan originators
to steer consumers to larger loans,
thereby increasing consumer risk. They
stated that creditors could find another
means to compensate brokers and loan
officers for additional time spent
originating larger loans, and suggested
that lenders be permitted to set a
minimum loan origination fee to
encourage the origination of small loans.
Industry commenters and their trade
groups strongly supported the
alternative and stated that payments
based on loan amount do not provide
harmful incentives or result in
consumer injury. They asserted that a
loan originator typically requires
compensation in an amount equal to 1
percent of the loan amount in order to
cover the costs of origination. Some
mortgage industry commenters also
recommended permitting originators to
receive a higher percentage
compensation for smaller loans to
ensure that loan originators receive
adequate compensation for originating
such loans.
The Board is adopting the alternative
as proposed with additional
clarifications. Under the final rule, the
amount of credit extended is deemed
not to be a transaction term or condition
for purposes of § 226.36(d)(1) provided
the compensation payments to loan
originators are based on a fixed
percentage of the amount of credit
extended; however, such compensation
may be subject to a minimum or
maximum dollar amount. The Board
believes that compensation based on the
amount of credit extended is less subject
to manipulation by the originator than
compensation based on terms such as
the interest rate or prepayment
penalties. For example, a consumer
purchasing a home would be unlikely to

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accept an offer for a larger loan amount.
Furthermore, a loan originator’s ability
to steer consumers to larger loans is
limited by underwriting criteria such as
maximum loan-to-value (LTV) and debtto-income (DTI) ratios. The Board notes
that transaction amount is commonly
used throughout the mortgage market to
determine the amounts paid to other
parties, such as real-estate brokers,
mortgage insurers, and various thirdparty service providers. The Reform Act
also specifically permits compensation
to loan originators based on the amount
of credit extended.26 For all of the
reasons discussed, the Board believes
prohibiting originator compensation
based on the amount of credit extended
would be unduly restrictive and is
unnecessary to achieve the purposes of
the final rule.
In response to commenters’ concerns
that the proposal would provide
originators with no incentive to
originate small loans, the final rule
explicitly permits creditors to establish
minimum or maximum dollar amounts
for loan originator compensation. To
prevent circumvention, the commentary
clarifies that the minimum or maximum
amount may not vary with each credit
transaction. Thus, a creditor could
choose to pay a loan originator 1 percent
of the amount of credit extended for
each loan, but no less than $1,000 and
no more than $5,000. In this case, the
originator is guaranteed payment of a
minimum amount for each loan,
regardless of the amount of credit
extended to the consumer. Using this
example, the creditor would pay a loan
originator $3,000 on a $300,000 loan
(i.e., 1 percent of the amount of credit
extended), $1,000 on a $50,000 loan,
and $5,000 on a $900,000 loan.
However, a creditor may not pay a loan
originator 1 percent of the amount of
credit extended for amounts greater than
$300,000, and 2 percent of the amount
of credit extended for amounts that fall
between $200,000 and $300,000. In
addition, the Board notes that creditors
are able to use other compensation
methods to provide adequate
compensation for smaller loans, such as
basing compensation on an hourly rate,
or on the number of loans originated in
a given time period.
The Board proposed comment
36(d)(1)–10 to clarify that a loan
originator may be paid the same fixed
percentage of the amount of credit
extended for all transactions, subject to
a minimum or maximum dollar amount.
The Board is adopting the comment,
redesignated as comment 36(d)(1)–9,
26 See TILA Section 129B(c)(1), as enacted in
section 1403 of the Reform Act.

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substantially as proposed with
additional clarifications. The revisions
clarify that a loan originator may be
paid compensation based on a fixed
percentage that does not vary with the
amount of credit extended. Thus, a
creditor may pay a loan originator, for
example, 1 percent of the amount of
credit extended for all loans the
originator arranges for the creditor.
However, under the final rule a creditor
may not pay a loan originator a fixed
percentage that varies with different
levels or tiers of amounts. The Board
believes that permitting compensation
to vary in this manner could enable
evasion of the rule. For example, some
creditors might create tiers and vary the
compensation for each tier so that the
tiers serve as proxies for other terms or
conditions of the transaction. Such a
rule might also permit creditors to
create tiers with minimal increments,
for instance every $10,000, and increase
or decrease the percentage of the loan
amount paid to the loan originator with
each tier. The creditor could pair loan
terms, such as prepayment penalties,
with some tiers and not others. In this
way, a creditor might evade the rule or
make enforcement of the prohibition
more difficult.
Unlike compensation based on a fixed
percentage of the loan amount,
underwriting criteria do not serve as a
meaningful constraint to the loan
originator’s ability to steer a consumer
from one tier to another where there are
minimal increments between loan tiers.
It is also unlikely that a consumer
would question relatively small
differences in loan amounts that might
move them from one tier to another tier.
Moreover, if compensation could vary
in relation to tiers of loan amounts, to
prevent potential evasion of the rule, the
Board would need to determine
reasonable increments between tiers and
whether the percentage paid in relation
to tiers could increase, decrease, or
both. Such an approach would result in
an unnecessarily complex rule that
would make compliance difficult.
Furthermore, to the extent that paying
compensation based on tiered loan
amounts is meant to ensure fair
compensation for some loans and
prevent unreasonable compensation for
others, the Board believes that
permitting loan originators to be paid a
minimum and/or maximum
compensation amount serves the same
purpose.
The meaning of the term
‘‘compensation.’’ Some commenters
were concerned that the proposed rule
would prevent consumers from
choosing a higher rate loan to fund
amounts that are paid to the originator

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to cover upfront closing costs. The final
rule clarifies that this is not the case.
Under the final rule, a consumer may
finance upfront costs, such as thirdparty settlement costs, by increasing or
‘‘buying up’’ the interest rate regardless
of whether the consumer pays the loan
originator directly or the creditor pays
the loan originator’s compensation.
Thus, the final rule does not prohibit
creditors or loan originators from using
the interest rate to cover upfront closing
costs, as long as any creditor-paid
compensation retained by the originator
does not vary based on the transaction’s
terms or conditions.
To address commenters’ concerns
regarding third-party charges, comment
36(d)(1)–1 is revised to clarify that for
purposes of §§ 226.36(d) and (e), the
term ‘‘compensation’’ includes amounts
retained by the loan originator, but does
not include amounts that the loan
originator receives as payment for bona
fide and reasonable third-party charges,
such as title insurance or appraisals.
Comment 36(d)(1)–1 provides further
clarification for certain circumstances
where amounts received by the loan
originator may exceed the third-party’s
actual charge imposed in connection
with the transaction but would not be
deemed compensation for purposes of
§§ 226.36(d) and (e). The Board
recognizes that, in some cases, loan
originators receive payment for thirdparty charges that may exceed the actual
charge because, for example, the loan
originator cannot determine with
accuracy what the actual charge for the
third-party service will be, and,
therefore, the originator retains the
difference. The difference in amount
retained by the originator is not deemed
compensation if the third-party charge
imposed on the consumer is bona fide
and reasonable. On the other hand, if
the originator marks up the third-party
charge (a practice known as
‘‘upcharging’’) and retains the difference
between the actual charge and the
marked-up charge, the amount retained
is compensation for purposes of
§§ 226.36(d) and (e).
Comment 36(d)(1)–1 provides the
following example: Assume a loan
originator charges the consumer a $400
application fee that includes $50 for a
credit report and $350 for an appraisal.
Assume that $50 is the amount the
creditor pays for the credit report. At the
time the originator imposes the
application fee on the consumer, the
originator does not know what the
actual cost for the appraisal will be,
because the originator may choose from
appraisers that charge between $300 to
$350 for an appraisal. Later, the cost for
the appraisal is determined to be $300

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for this consumer’s transaction. In this
case, the $50 difference between the
$400 application fee imposed on the
consumer and the actual $350 cost for
the credit report and appraisal is not
deemed compensation for purposes of
§§ 226.36(d) and (e), even though the
$50 is retained by the loan originator.
The $50 difference would be
compensation, however, if the
appraisers from whom the originator
chooses charge fees between $250 and
$300.
The commentary also states that any
third-party charge the loan originator
imposes on the consumer must comply
with state and other applicable law to be
deemed bona fide and reasonable. For
example, if a loan originator uses an
‘‘average charge,’’ to be deemed bona
fide and reasonable under § 226.36, it
must also comply with the provisions of
HUD’s Regulation X, which implements
RESPA and addresses the use of
‘‘average charges.’’ See 12 CFR 3500.8(b).
Comment 36(d)(1)–1 also provides
further clarification regarding ‘‘amounts
retained’’ by the loan originator that are
deemed compensation for purposes of
§§ 226.36(d) and (e). For example, if a
loan originator imposes a ‘‘processing
fee’’ on the consumer in connection with
the transaction and retains such fee, it
is deemed compensation for purposes of
§§ 226.36(d) and (e), whether the
originator expends the time to process
the consumer’s application or uses the
fee for other expenses, such as
overhead. The remainder of comment
36(d)(1)–1 is adopted as proposed, and
clarifies that the term ‘‘compensation’’
includes salaries, commissions, and any
financial or similar incentive that is tied
to the transaction’s terms or conditions,
including annual or periodic bonuses,
or awards of merchandise or other
prizes.
The Board notes that TILA Section
129B(c)(2), as enacted by Section 1403
of the Reform Act, further restricts a
loan originator’s ability to receive
originator compensation from a creditor
or other person where a consumer
makes any upfront payment to the
creditor for points or fees on the loan,
other than certain bona fide third-party
charges. This restriction was not part of
the Board’s August 2009 Closed-End
Proposal. The Board intends to evaluate
this issue and implement this provision
as part of a subsequent rulemaking after
giving the public notice and opportunity
to comment. See also § 226.36(d)(2)
prohibiting loan originator
compensation from dual sources, which
is discussed below.
Examples of prohibited
compensation. The Board is adopting
comment 36(d)(1)–2 substantially as

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proposed to provide examples of loan
originator compensation that are
deemed to be based on transaction terms
or conditions, such as compensation
that is based on the interest rate, annual
percentage rate, or the existence of a
prepayment penalty. The comment is
further revised to provide additional
clarification, however, regarding credit
scores and similar representations of
risk.
As proposed, comment 36(d)(1)–2
stated that a consumer’s credit score or
similar representation of credit risk is
not one of the transaction’s terms and
conditions. However, proposed
commentary also provided that ‘‘a
creditor does not necessarily avoid
having based a loan originator’s
compensation on the interest rate or the
annual percentage rate solely because
the originator compensation happens to
vary with the consumer’s credit score as
well.’’ A few commenters sought
clarification and some urged the Board
explicitly to state that compensation
could be based on credit scores. In
contrast, some other commenters urged
the Board expressly to prohibit basing
compensation on the credit score or
other similar factors of credit risk, such
as DTI, to prevent possible
circumvention of the rule.
The comment has been revised for
clarification. The Board believes credit
scores or similar indications of credit
risk, such as DTI, are not terms or
conditions of the transaction. At the
same time, the Board recognizes that
they can serve as proxies for a
transaction’s terms or conditions. For
example, credit scores are often used by
creditors to assess a consumer’s
likelihood of default on a loan. If a
creditor engages in risk-based pricing,
then a lower credit score would yield a
higher interest rate loan to reflect the
greater risk associated with extending
credit to that consumer, while a higher
credit score would yield a lower interest
rate loan. The Board is concerned that
permitting compensation to be based on
credit score or other similar factors that
serve as proxies for a transaction’s terms
or conditions would lead to
circumvention of the rule. As discussed
above, the Board believes that the
practice of basing compensation on a
transaction’s term or condition leads to
consumers being given loans with less
favorable terms, such as a higher
interest rate, which results in harm to
consumers that they cannot reasonably
avoid, and, therefore, constitutes an
unfair practice. Accordingly, the Board
believes that permitting compensation
based on factors that serve as proxies for
a transaction’s terms or conditions
would provide incentives to originators

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to place consumers in loans with less
favorable terms, which constitutes an
unfair practice. Thus, the Board is
revising comment 36(d)(1)–2 to address
these concerns.
Comment 36(d)(1)–2 clarifies that
credit scores or similar indications of
credit risk, such as DTI, are not terms
or conditions of the loan. The comment
further provides, however, that the rule
prohibits compensation based on a
factor that serves as a proxy for a
transaction’s terms or conditions and
provides the following example:
Assume consumer A and consumer B
receive loans from the same loan
originator and the same creditor.
Consumer A has a credit score of 650
and is given a loan with a 7 percent
interest rate, and consumer B has a
credit score of 800 and is given a loan
with a 61⁄2 percent interest rate because
of his or her different credit score. If the
loan originator compensation varies for
these transactions in whole or in part
based on the credit score so that, for
instance, the loan originator receives
$1,500 for the loan given to consumer A
and $1,000 for the loan given to
consumer B, compensation would be
based on a transaction’s terms or
conditions.
The clarification in comment
36(d)(1)–2 acknowledges that credit
scores or similar indications of credit
risk may, in some instances, serve as
proxies for a transaction’s terms or
conditions, such as the interest rate. The
Board believes that this clarification is
necessary to prevent evasion of the rule.
The Board emphasizes, however, that
the final rule does not prohibit riskbased pricing. Risk-based pricing is
permissible as long as the loan
originator’s compensation does not vary
based on the transaction’s terms or
conditions or factors that serve as
proxies for the transaction’s terms or
conditions.
Some industry commenters argued
that originators should receive more
compensation for loans to borrowers
with lower credit scores or blemished
credit histories, asserting that these
borrowers require more time and effort
of the originator. As discussed, under
the final rule originators may not
receive increased compensation based
on credit score or credit history, where
credit score and credit history serve as
proxies for loan terms and conditions.
The Board notes, however, that loan
originators may be compensated based
on the time actually spent on a
transaction, as discussed under
comment 36(d)–3 below.
Examples of permissible
compensation. Comment 36(d)(1)–3
proposed several examples of

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compensation arrangements that would
not be based on the transaction’s terms
or conditions, such as loan volume,
long-term performance of an originator’s
loans, and time spent. Several
commenters suggested, however, that
the Board provide additional guidance
and urged the Board to clarify that
compensation could be based, for
instance, on the percentage of
transactions successfully originated on
behalf of the creditor, file quality, and
customer satisfaction.
The Board is adopting comment
36(d)(1)–3 largely as proposed, with
additional examples of permissible
compensation. The comment provides
that a payment that is fixed in advance
for each originated loan and
compensation that accounts for a loan
originator’s fixed overhead costs are
permissible compensation methods. In
addition, the comment states that a
creditor may pay an originator based on
the percentage of loan applications that
result in consummated loans and the
quality of the loan originator’s loan files.
The comment also states that
compensation based on the amount of
credit extended is permissible under the
rule, and provides a cross-reference to
comment 36(d)(1)–9 for further
discussion. The Board believes
compensation based on the new
examples would not provide originators
with incentives that are harmful and
unfair to consumers. The comment
clarifies, however, that the examples
provided in it are illustrative and not
exhaustive, and thus a creditor may
identify and use other permissible
compensation methods.
Compensation that varies from one
originator to another. The Board further
notes creditors may compensate their
own loan officers differently than
mortgage brokers. For instance, to
account for the fact that mortgage
brokers relieve creditors of certain fixed
overhead costs associated with loan
originations, a creditor may pay
mortgage brokers more than its own
retail loan officers. For example, a
creditor may pay a mortgage broker
$2,000 for each loan and pay its loan
officers $1,500 for each loan.
Alternatively, a creditor may pay its
mortgage brokers an amount equal to 2
percent of the amount of credit
extended on each loan, and pay its loan
officers an amount equal to 1 percent of
the amount of credit extended on each
loan. Likewise, a creditor may pay one
loan officer more than it pays another
loan officer. For example, a creditor may
pay loan officer A an amount equal to
1 percent of the amount of credit
extended for each loan, and loan officer
B an amount equal to 1.25 percent of the

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amount of credit extended for each loan.
This is permissible, as long as each loan
originator receives compensation that is
not based on the terms or conditions of
the transactions he or she delivers to the
creditor.
Compensation based on loan volume.
The final rule does not prohibit a
creditor from basing compensation on
an originator’s loan volume, whether by
the total dollar amount of credit
extended or the total number of loans
originated over a given time period.
These arrangements, however, might
raise supervisory concerns about
whether the creditor has created
incentives for originators to deliver
loans without proper regard for the
credit risks involved. For example,
depository institutions and depository
institution holding companies (banking
organizations) are subject to supervisory
guidance that provides for incentive
compensation arrangements to take into
account credit and other risks in a
manner that is consistent with safety
and soundness practices.27 Consistent
with this guidance, banking
organizations should ensure that
incentive compensation arrangements
not only comply with the requirements
of TILA, but also do not encourage
employees to take imprudent risks that
are inconsistent with the safety and
soundness of the organization.
Compensation based on loan type or
program. Some commenters also urged
the Board to permit higher
compensation for certain loan types, for
example, small loans, loans under
special programs that assist first-time
home-buyers and low- or moderateincome consumers, and loans that
satisfy the creditor’s obligations under
the Community Reinvestment Act
(CRA). As discussed above, creditors
can encourage originators to make small
loans as well as large loans by setting a
minimum and maximum payment for
each loan if they compensate loan
originators a fixed percentage of the
amount of credit extended. See
comment 36(d)(1)–9. The Board
believes, however, that allowing
compensation to vary with loan type,
such as loans eligible for consideration
under the CRA, would permit unfair
compensation practices to persist in
loan programs offered to consumers
who may be more vulnerable to such
practices.
Compensation that differs based on
geography. Proposed comment 36(d)(1)–
4 clarified that payment of
compensation to a loan originator that
differed by geographical area was not
27 See Interagency Guidance on Sound Incentive
Compensation Policies, 75 FR 36395; June 25, 2010.

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58523

prohibited under the proposal, provided
that such compensation arrangements
complied with other applicable laws
such as the Equal Credit Opportunity
Act (15 U.S.C. 1691–1691f) and Fair
Housing Act (42 U.S.C. 3601–3619). One
commenter noted that significant
differences exist in geographic areas that
can impact loan terms and conditions,
such as property value or ranges of
income. This commenter urged the
Board expressly to provide that
creditors can structure originator
compensation to account for
geographical differences. Other industry
commenters also generally suggested
that the Board permit compensation to
vary based on identified market and
geographical factors, in addition to other
factors such as charter type and
institution size.
The Board is not adopting comment
36(d)(1)–4, and is redesignating
36(d)(1)–5 through 36(d)(1)–10
accordingly. Comment 36(d)(1)–4 was
intended to clarify that compensation
may take account of differences in the
costs of loan origination, such as rent
and other overhead expenses. As
discussed above, however, the Board
has clarified under comment 36(d)(1)–2
that compensation paid to loan
originators may account for differences
in the costs of origination such as fixed
overhead costs, and believes this
example is sufficient to address the
matter. The Board notes that any
compensation arrangement must also
comply with all other applicable laws,
such as the Equal Credit Opportunity
Act and the Fair Housing Act.
Creditors’ pricing flexibility.
Consumer advocates argued that the
Board should only permit loan
originators to receive yield spread
premiums on ‘‘no-cost’’ loans, meaning
loans for which the interest rate is high
enough to eliminate all of the
consumer’s upfront costs including
points and third party closing costs.
Consumer advocates asserted that when
an originator receives a yield spread
premium and the consumer pays some
or all of the other closing costs upfront,
the consumer is more susceptible to
being over-charged because he or she
does not understand the trade-off
between upfront closing costs and
higher interest rates. Therefore, these
commenters argued that the rule should
prohibit a yield spread premium and
upfront charges on the same transaction.
The Board is not adopting the
recommendation to limit compensation
paid to loan originators through the rate
to no-cost loans. Accordingly, the Board
is adopting comment 36(d)(1)–5,
redesignated as comment 36(d)(1)–4, as
proposed to clarify that the rule does

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not affect creditors’ flexibility in setting
rates or other loan terms. The Board
recognizes that some research has
suggested that consumers who received
no-cost loans paid less for their loans
than consumers who received loans
where they paid some upfront charges
and a yield spread premium.28 The
Board’s proposal did not restrict yield
spread premiums to no-cost loans,
however, and therefore the
recommendation is outside the scope of
the proposed rule. Provisions of the
Reform Act address this issue, which
will be the subject of a future
rulemaking.
In addition, under the rule, creditors
may adjust the loan terms it offers to
consumers to finance transaction costs
the consumer would otherwise be
obligated to pay directly in cash or out
of the loan proceeds. For example, a
creditor could recoup some costs related
to the loan transaction by adding an
origination point to the loan terms
(calculated as one percentage point of
the loan amount). However, any
adjustment of loan terms must not affect
the amount a loan originator receives as
compensation for the transaction. Thus,
the final rule does not impact creditors’
ability to offer a full range of interest
rate and fee combinations, so long as the
exchange between the loan price and
transaction costs has no bearing on loan
originator compensation. For example, a
creditor could add a constant premium
of 1⁄4 of one percent to the interest rates
on all transactions to recoup loan
originator compensation. See comment
36(d)(1)–5.
Effect of modification of loan terms.
Under the proposed rule, a loan
originator’s compensation could neither
be increased nor decreased based on the
loan terms and conditions. Accordingly,
proposed comment 36(d)(1)–6 clarified
that if a consumer’s request for a lower
rate was accepted by the creditor, the
creditor would not be permitted to
reduce the amount it pays to the loan
originator based on the change in loan
terms. Similarly, any reduction in
origination points paid by the consumer
would be a cost borne by the creditor.
Industry commenters opposed
prohibiting creditors from reducing loan
originator compensation when the loan
originator offers a favorable loan term
change to a consumer. They argued that
28 See, e.g., Susan E. Woodward & Robert E. Hall,
Consumer Confusion in the Mortgage Market:
Evidence of Less than a Perfectly Transparent and
Competitive Market, 513–15, American Econ. Rev.:
Papers and Proceedings (May 2010), available at
http://pubs.aeaweb.org/doi/pdfplus/10.1257/
aer.100.2.511; Susan Woodward, A Study of Closing
Costs for FHA Mortgages, HUD Office of Policy
Development and Research (May 2008).

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unusual circumstances require
flexibility, and that loan term
concessions help consumers receive
better loans. They further stated that fair
lending laws adequately provide
protection from unlawful discrimination
in offering more favorable terms on a
prohibited basis.
For the reasons explained in the
proposal, the Board is adopting
comment 36(d)(1)–6, redesignated as
comment 36(d)(1)–5, as proposed. The
Board believes that permitting creditors
to decrease loan originator
compensation because of a change in
terms favorable to the consumer would
result in loopholes and permit evasions
of the final rule. For example, a creditor
could agree to set originators’
compensation at a high level generally,
and then subsequently lower the
compensation in selective cases based
on the actual loan terms, such as when
the consumer obtains another offer with
a lower interest rate. This would have
the same effect as increasing the
originator’s compensation for higher
rate loans. As noted above, the Board
believes such compensation practices
are harmful and unfair to consumers.
Thus, under the final rule, when the
creditor offers to extend a loan with
specified terms and conditions (such as
rate and points), the amount of the
originator’s compensation for that
transaction is not subject to change,
based on either an increase or a decrease
in the consumer’s loan cost or any other
change in the loan terms. The Board
recognizes that in some cases a creditor
may be unable to offer the consumer a
lower cost and more competitivelypriced loan without also reducing the
creditor’s own origination costs.
Creditors finding themselves in this
situation frequently, however, will be
able to adjust their pricing and
compensation arrangements to be more
competitive with other creditors in the
market.
Periodic changes in loan originator
compensation. The Board proposed
comment 36(d)(1)–7 to provide
guidance on how creditors may
periodically revise the compensation
they pay a loan originator without
violating the rule. The Board is adopting
the comment, redesignated as comment
36(d)(1)–6, as proposed. The revised
compensation arrangement must result
in payments to the loan originator that
are not based on the terms or conditions
of a transaction. Thus, a creditor may
periodically review factors such as loan
performance, loan volume, and current
market conditions for originator
compensation, and prospectively revise
the compensation it will pay the loan
originator for future transactions.

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Compensation received directly from
the consumer. The Board proposed
comment 36(d)(1)–8 to indicate that the
prohibition in § 226.36(d)(1) did not
apply to transactions in which the loan
originator received compensation
directly from the consumer, and to
clarify that in such cases no other
person could pay the loan originator in
connection with the particular
transaction pursuant to § 226.36(d)(2).
See § 226.36(d)(2) and corresponding
commentary below discussing the
prohibition on compensation from both
the consumer and another source.
Proposed comment 36(d)(1)–8 also
provided guidance regarding what
constitutes compensation received
directly from the consumer.
The Board is adopting the comment,
redesignated as comment 36(d)(1)–7,
substantially as proposed with
clarifications. Comment 36(d)(1)–7
provides that loan originator
compensation may be paid directly by
the consumer whether it is paid in cash
or out of the loan proceeds. However,
payments by the creditor to the loan
originator that are derived from an
increased interest rate are not
considered compensation received
directly from the consumer. Comment
36(d)(1)–7 further clarifies that
origination points charged by a creditor
are not compensation paid directly by a
consumer to a loan originator whether
they are paid in cash or out of loan
proceeds. If a creditor pays
compensation to the loan originator out
of points, the loan originator may not
also collect compensation directly from
the consumer. To facilitate compliance,
comment 36(d)(1)–7 provides a cross
reference to 36(d)(1)–1, which discusses
compensation.
Prohibition of Compensation From Both
the Consumer and Another Source
The Board proposed § 226.36(d)(2) to
provide that, if a loan originator is
compensated directly by the consumer
on a transaction, no other person may
pay any compensation to the originator
for that transaction. Direct
compensation paid by a consumer to a
loan originator is not limited to
‘‘origination fees,’’ ‘‘broker fees,’’ or
similarly labeled charges. Rather,
compensation for this purpose includes
any payment by the consumer that is
retained by the loan originator. Thus, a
creditor that is a loan originator by
virtue of making a table-funded
transaction is subject to this prohibition
if it imposes and retains any direct
charge on the consumer for the
transaction. See comment 36(d)(1)–1 for
further discussion of amounts retained
by a loan originator for bona fide third-

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party charges that are and are not
deemed compensation.
Industry commenters and their trade
associations opposed the proposed
restriction on loan originator
compensation from more than one
source. These commenters argued that
the proposed rule would give
consumers fewer options for paying
closing costs, including broker
compensation. Some commenters
recommended permitting loan
originators to receive payments from
both a creditor and a consumer if the
total compensation does not exceed an
agreed-upon amount and is reasonable.
For example, a trade association
suggested that reasonable compensation
would not exceed 2 percent of the loan
amount, subject to minimum of $500.
On the other hand, consumer
advocates and a Federal banking agency
urged the Board to adopt § 226.36(d)(2)
as proposed. Consumer advocates
asserted that allowing loan originators
to receive compensation from different
sources would enable loan originators to
evade the prohibition on loan originator
compensation based on the terms and
conditions of a transaction. Consumer
advocates concurred with the rationale
stated in the Board’s proposal, that
consumers may reasonably believe that
their direct payments are the only
compensation the loan originator
receives. They stated that consumers
generally are less able to keep track of
points paid on a loan and of the total
amount of originator compensation
paid, when loan originators receive
compensation from multiple sources.
The Board is adopting § 226.36(d)(2)
as proposed with some clarifications.
The Board believes this provision is
necessary to ensure that the protections
in § 226.36(d)(1) are effective and that
loan originators do not increase a
consumer’s interest rate or points to
increase the originator’s own
compensation. Allowing the originator
to receive compensation directly from
the consumer while also accepting
payment from the creditor in the form
of a yield spread premium would enable
the originator to evade the prohibition
in § 226.36(d)(1). An originator that
increases the consumer’s interest rate to
generate a larger yield spread premium
can apply the excess creditor payment
to third-party closing costs and thereby
reduce the amount of consumer funds
needed to cover upfront fees. Without
§ 226.36(d)(2), the originator could then
impose a direct fee on the consumer in
the same amount, to retain the benefit
of the larger yield spread premium.
For example, suppose that for a loan
with a 5 percent interest rate, the
originator will receive a payment of

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$1,000 from the creditor as
compensation, and for a loan with a 6
percent interest rate, a yield spread
premium of $3,000 will be generated.
Under § 226.36(d)(1), the originator
must apply the additional $2,000 to
cover the consumer’s other closing
costs. Without § 226.36(d)(2), instead of
reducing the consumer’s total upfront
payment, the originator could also
impose a $2,000 origination fee directly
on the consumer, essentially retaining
the benefit of the larger yield spread
premium.
As discussed above, consumers
generally are not aware of creditor
payments to originators and reasonably
may believe that when they pay a loan
originator directly, that amount is the
only compensation the loan originator
will receive. Even if a consumer were
aware of such creditor payments to loan
originators, the consumer could
reasonably expect that making a direct
payment to an originator would reduce
or eliminate the need for the creditor to
fund the originator’s compensation
through the consumer’s interest rate.
Because yield spread premiums are not
transparent to consumers, however,
consumers cannot effectively negotiate
the originator’s compensation. In fact, if
consumers pay loan originators directly
and creditors also pay originators
through higher rates, consumers may be
injured by unwittingly paying
originators more in total compensation
(directly and through the rate) than
consumers believe they agreed to pay.
The Board does not believe that
§ 226.36(d)(2) will significantly limit
consumer choice, as consumers may
still use a rate increase to cover upfront
closing costs that are charged by third
parties, as long as loan originators
receive their compensation from only
one party. Section 226.36(d)(2) will,
however, increase transparency for
consumers by reducing the total number
of loan pricing variables with which
consumers must contend. The increased
transparency is consistent with TILA’s
purpose of promoting the informed use
of consumer credit.29 See TILA Section
102(a), 15 U.S.C. 1601(a). Consistent
with TILA Section 129B(c)(2), as
enacted in section 1403 of the Reform
Act, the final rule permits loan
originators to receive payment from a
person other than the consumer only if
the originator does not also receive any
compensation directly from the
consumer. As noted above, TILA
29 See, e.g., Susan E. Woodward, A Study of
Closing Costs for FHA Mortgages 70–73, Urban
Institute and U.S. Department of Housing and
Urban Development (2008), available at http://
www.urban.org/UploadedPDF/411682_fha_
mortgages.pdf.

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Section 129B(c)(2) further restricts a
loan originator’s ability to receive
compensation from a person other than
a consumer where a consumer pays
upfront points or fees on the
transaction, other than certain bona fide
third-party charges. See comment
36(d)(1)–1 discussing the term
‘‘compensation.’’ The Board intends to
address this issue as part of a
subsequent rulemaking after giving the
public notice and opportunity to
comment.
The Board is also adopting comment
36(d)(2)–1 substantially as proposed
with some clarifications. Comment
36(d)(2)–1 clarifies circumstances when
a person is or is not deemed to provide
compensation to a loan originator in
connection with a particular credit
transaction. Comment 36(d)(2)–1
explains that payment of a salary or
hourly wage to a loan originator does
not violate the prohibition in
§ 226.36(d)(2) even if the loan originator
also receives direct compensation from
a consumer in connection with that
consumer’s transaction. However, the
final rule also clarifies that, in this
instance, if any loan originator receives
compensation directly from the
consumer in connection with a specific
credit transaction, no other loan
originator, such as the mortgage broker
company or another employee of the
mortgage broker company, can receive
compensation from the creditor in
connection with that particular credit
transaction.
The Board proposed in comment
36(d)(2)–2 to clarify that yield spread
premiums, even if disclosed as ‘‘credits’’
in accordance with HUD’s Regulation X,
which implements RESPA, are not
considered compensation received by
the loan originator directly from the
consumer for purposes of this rule.
Under Regulation X, a yield spread
premium paid by a creditor to the loan
originator may be characterized on the
RESPA disclosures as a ‘‘credit’’ that will
be applied to reduce the consumer’s
total settlement charges, including
origination fees. A mortgage broker
trade association opposed the
clarification in proposed comment
36(d)(2)–2 and urged the Board to treat
yield spread premiums as payments
made directly from the consumer to the
loan originator under Regulation Z. By
contrast, as discussed above, consumer
advocates and a Federal banking agency
urged the Board to adopt § 226.36(d)(2)
as proposed.
The Board is adopting comment
36(d)(2)–2, as proposed. If the rule were
to treat yield spread premiums as
payments made directly by the
consumer, loan originators could accept

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both a yield spread premium from the
creditor as well as a payment from the
consumer, which would undermine the
purpose of the rule. For the reasons
stated above, the Board believes that
permitting compensation from different
sources would enable originators to
evade the prohibition on receiving
compensation based on the loan terms
and conditions. Comment 36(d)(2)–2
clarifies that for purposes of this final
rule, payments made by creditors to
loan originators are not payments made
directly by the consumer, regardless of
how they might be disclosed under
HUD’s Regulation X.

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Affiliated Entities
The Board is adopting the definition
of ‘‘affiliates’’ under § 226.36(d)(3), as
proposed with some clarifications.
Section 226.36(d)(3) clarifies that
affiliates must be treated as a single
‘‘person’’ for purposes of § 226.36(d),
and comment 36(d)(3)–1 provides a
cross-reference to the definition of
‘‘affiliates’’ in § 226.32(b)(2).
Commenters did not address this aspect
of the proposed rule. The Board believes
that defining the term ‘‘affiliates’’ as a
single person for purposes of § 226.36(d)
is necessary to prevent circumvention of
the final rule. For example,
circumvention would occur if a parent
company with multiple subsidiaries
could structure its business to evade the
prohibition on certain compensation
practices. To illustrate, the rule would
be circumvented if a parent company
that has two mortgage lending
subsidiaries could arrange to pay a loan
originator greater compensation on
higher rate loans offered by subsidiary
‘‘A’’ than the compensation it would pay
the same originator for a lower rate loan
made by subsidiary ‘‘B.’’ To address this
issue, the Board treats such subsidiaries
of the parent company as a single
person, so that if a loan originator is
able to deliver loans to both
subsidiaries, they must compensate the
loan originator in the same manner.
Accordingly, if a loan originator delivers
a loan to subsidiary ‘‘B’’ and the interest
rate is 8 percent, the originator must
receive the same compensation that
would have been paid by subsidiary ‘‘A’’
for a loan with a rate of either 7 or 8
percent. The Board is also adopting
comment 36(d)(3)–1, as proposed.
Record Retention Requirements
Currently, creditors are required by
§ 226.25(a) to retain evidence of
compliance with Regulation Z for two
years. Under the proposal, comment
25(a)–5 clarified that a creditor must
retain at least two types of records to
demonstrate compliance with

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§ 226.36(d)(1): A record of the
compensation agreement with the loan
originator that was in effect on the date
the transaction’s rate was set, and a
record of the actual amount of
compensation it paid to a loan
originator in connection with each
covered transaction. The proposed
comment explained that for loans
involving mortgage brokers, the creditor
may retain the HUD–1 settlement
statement required under RESPA as a
record of the actual amount of loan
originator compensation paid. The
Board sought comment on whether
other records should be subject to the
retention requirements; whether some
time other than the date the transaction
rate is set would be more appropriate;
whether the two-year retention
requirement was adequate; and the
relative costs and benefits of requiring
persons, other than creditors, to retain
records concerning originator
compensation.
Industry commenters and their trade
associations opposed expanding the
record retention requirements to
persons other than creditors, citing cost
and burden as reasons. A credit union
trade association affirmed that systems
currently used by credit unions to track
loan originator compensation should be
deemed sufficient. This commenter also
stated that credit union compensation
records indicating that loan originator
compensation was provided in the form
of salary without being directly
attributable to a particular transaction
should satisfy the record retention
requirements.
Associations of state regulators urged
the Board to require the retention of
records for longer than two years.
Consumer advocates recommended that
the Board require retention of records by
all parties making payments to loan
originators for five years. They asserted
that detection of violations of the rule
would be unlikely within the two-year
period. These commenters also noted
that that the HUD–1 settlement
statement is often inaccurate, and so
should not be considered a record of the
actual amount of loan originator
compensation paid, but did not offer
other alternatives.
The Board is adopting comment
25(a)–5 substantially as proposed.
Accordingly, the final rule does not
extend the record retention requirement
to persons other than the creditor that
pays loan originator compensation. At
the time the Board issued this proposal
and comments were submitted, TILA
did not subject non-creditors to civil
liability. As a result, the comments did
not take into account such liability in
their analysis of the costs and benefits

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of recordkeeping by non-creditors. On
July 21, 2010, Congress enacted the
Reform Act, which amended TILA to
provide civil liability for loan
originators.30 The Board will request
additional comment on this matter in
connection with subsequent
rulemakings to implement provisions of
the Reform Act.
Under the final rule, any creditor who
pays loan originator compensation, and,
therefore, is subject to § 226.36(d), is
required to retain records pursuant to
§ 226.25(a). The Board believes record
retention requirements are necessary to
ensure that the loan originator
compensation rules in §§ 226.36(d) and
(e) are enforceable. Comment 25(a)–5 is
being revised to remove reference to the
HUD–1 settlement statement which
does not currently itemize loan
originator compensation. Comment
25(a)–5 is also revised to provide that
where a loan originator is a mortgage
broker, a disclosure or agreement
required by applicable state law that
complies with § 226.25 is presumed to
be a record of the amount actually paid
to the loan originator in connection with
the transaction.
The final rule does not extend the
record retention requirement for
origination compensation beyond two
years. This is the same time period that
applies for records of compliance with
other provisions of Regulation Z. The
Board weighed the potential benefits of
a longer timeframe against the increased
costs, and believes that the benefits of
a longer time period do not clearly
outweigh the costs. To facilitate
compliance, the Board adopts proposed
comment 36(d)(1)–9, redesignated as
comment 36(d)(1)–8, to provide a crossreference to the record retention
requirement.
Alternatives and Exemptions Not
Adopted
Disclosures. Industry commenters and
their trade associations urged the Board
to implement disclosure requirements to
address unfair compensation practices,
instead of directly prohibiting loan
originator compensation based on terms
or conditions of the transaction under
§ 226.36(d)(1). In particular, the SBA
and a mortgage broker trade association
recommended that the Board replace the
proposed prohibition on certain
compensation practices with a
requirement that creditors disclose the
lowest interest rate they would accept
for a given loan. A Federal banking
agency suggested that, in addition to
prohibiting loan originator
30 See TILA Section 129B(d), as enacted in
Section 1404 of the Reform Act.

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compensation based on the terms or
conditions of a transaction, the Board
develop and require uniform mortgage
broker disclosures that specify the
mortgage broker’s role and fees. This
commenter argued that such disclosures
would help consumers understand the
role of brokers, and would indirectly
reform loan originator compensation
practices.
For the reasons discussed in the
proposal, the Board is not adopting
disclosure requirements as an
alternative to the proposed prohibitions
on certain compensation practices. In
connection with its proposal of a
disclosure-based approach to originator
compensation, the Board conducted
consumer testing of the disclosures and
based on the results of such testing, and
other concerns, withdrew the rule in its
2008 HOEPA Final Rule. For the reasons
stated therein and reiterated in its
August 2009 Closed-End Proposal, the
Board believed that disclosure of loan
originator compensation would not
address the injury to consumers. The
Board was concerned that after reading
the disclosures consumers often
concluded, not necessarily correctly,
that mortgage brokers are more
expensive than creditors. Many
consumers also believed that mortgage
brokers would serve their best interests
notwithstanding disclosure of the
conflict of interest resulting from the
relationship between interest rates and
broker compensation.
The Board’s consumer testing also
suggests that few consumers shop for
mortgages, and often rely on one broker
or lender because of their trust in the
relationship, and because they do not
know that brokers and lenders have
discretion over the loan terms offered.
Moreover, even when originator
compensation is disclosed, consumers
typically do not understand its
complexities or how it relates to the
mechanics of loan pricing. Consumers
do not understand how a creditor
payment to a loan originator can result
in a higher interest rate for consumers.
Without that knowledge, consumers
cannot take steps to protect their own
interests, for example by negotiating for
a smaller direct payment, a lower rate,
or both.
Further, HUD and some states have
required certain disclosures of mortgage
broker fees for years. In spite of these
disclosures, concerns continue to be
raised about abuses associated with
yield spread premiums and similar
compensation for loan officers. For
these reasons, the Board believes that
disclosures are ineffective at addressing
unfair originator compensation.

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Caps. Some industry commenters and
trade associations recommended the
Board adopt a cap on loan originator
compensation, for example at two
percent of the loan amount, while
allowing compensation to vary from
transaction to transaction based on the
loan’s terms. The Board is not imposing
a cap on the amount of loan originator
compensation that can be paid in a
particular transaction. Although a cap
might prohibit the most egregious
compensation practices, it would not
adequately address the consumer injury
that the final rule is designed to address.
A cap would merely create an upper
limit on an originator’s compensation; it
would not prevent a loan originator
from increasing the consumer’s rate or
points to increase the originator’s own
compensation. In addition, a cap would
require the Board to determine an upper
limit that is appropriate for all loans. It
is unclear how, or on what basis, the
Board would determine the appropriate
cap for all loans, and, therefore, such a
cap might prove arbitrary. In some cases
originators might not be fully
compensated for their work, and in
other cases they might receive
compensation that exceeds the value of
their services. Some loan originators
would simply charge up to the cap in all
cases. For all of these reasons, the final
rule does not apply a cap to originator
compensation.
Prohibition on Steering
The Board requested comment on a
proposal under § 226.36(e)(1) that
would prohibit loan originators from
directing or ‘‘steering’’ consumers to
loans based on the fact that the
originator will receive additional
compensation, when that loan may not
be in the consumer’s interest. The
proposed rule was intended to prevent
circumvention of the prohibition in
§ 226.36(d)(1), which could occur if the
loan originator steered the consumer to
a loan with a higher interest rate or
higher points to increase the originator’s
compensation. To facilitate compliance
with this anti-steering rule, the Board
also proposed a safe harbor in
§§ 226.36(e)(2) and (3). Under the safe
harbor, a loan originator would be
deemed to comply with the anti-steering
rule if, under certain specified
conditions, the consumer is presented
with a choice of loan options that
include (1) the lowest interest rate, (2)
the second lowest interest rate, and (3)
the lowest total dollar amount for
origination points or fees and discount
points. Proposed commentary provided
additional guidance regarding the
prohibition on steering and the safe
harbor.

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The Board specifically sought
comment on whether the steering
prohibition would be effective in
achieving its stated purpose, as well as
the feasibility and practicality of such a
rule, its enforceability, and any
unintended adverse effects the rule
might have. As discussed in further
detail below, the Board is adopting the
anti-steering rule under § 226.36(e)(1) as
proposed, with a modification to the
safe harbor provided under
§§ 226.36(e)(2) and (3).
Public Comment. Industry
commenters and their trade associations
generally asserted that the anti-steering
prohibition, as well as the safe harbor,
were too vague and would increase
compliance costs and litigation risk.
They asserted that these costs would, in
turn, be passed on to consumers. Some
commenters argued that the antisteering rule would interfere with the
loan originator’s ability to communicate
with consumers. They claimed that the
prohibition would cause loan
originators not to advise their
consumers fully about possible loan
options. These commenters urged the
Board to provide a safe harbor for
various disclosures instead of the antisteering rule.31 A credit union trade
association suggested a safe harbor for
consumers who know what loan type
they want, and for smaller entities that
may offer only one or two types of
loans.
Consumer advocates, other Federal
banking agencies, members of Congress,
and state officials generally supported
the anti-steering proposal, although
some noted concerns with the safe
harbor and associated record-keeping
requirements. These commenters stated
that the practice of steering consumers
to loans with less favorable terms
increases consumers’ costs and risk,
increases the risk to the market as a
whole, and has the potential to result in
illegal discrimination. For example, one
commenter stated that originator
compensation led to many borrowers
who qualified for prime loans being
steered to subprime loans. This
commenter also asserted that the
compensation practices addressed by
the rule caused subprime borrowers to
have reduced access to loans with lower
interest rates and no risky features, and
contributed significantly to foreclosures
in minority neighborhoods.
With respect to the safe harbor,
consumer advocates, state officials, and
31 A mortgage broker trade association suggested
that the Board look to a House-passed bill that
preceded the Reform Act for guidance on its antisteering rule. For the reasons discussed above, the
Board’s rule is consistent with the Reform Act as
enacted.

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a Federal banking agency expressed
concern that the proposed safe harbor
would undermine the effectiveness of
the prohibition on certain compensation
payments under § 226.36(d). These
commenters stated that the safe harbor
was too broad and would permit
circumvention of the rule under
§ 226.36(d)(1). They argued that the safe
harbor would create incentives for ‘‘pro
forma’’ compliance, and weaken
consumers’ access to effective remedies.
These commenters urged the Board to
eliminate the safe harbor entirely so that
compliance with the steering
prohibition could be determined caseby-case, based on whether the loan
originator could have offered the
consumer a loan transaction with lower
costs. Alternatively, they recommended
that the Board replace the safe harbor
with a rebuttable presumption of
compliance that would only be available
in those instances where the loan
originator offered, and the consumer
chose, a ‘‘plain vanilla loan’’ (e.g., a loan
with a rate that is fixed for at least 5
years with a competitive interest rate,
points and fees equal to 2 points or less,
no prepayment penalty, fully amortizing
payments, and that is underwritten with
full documentation of the consumer’s
ability to repay).
Discussion. The Board is adopting the
anti-steering rule under § 226.36(e)(1) as
proposed, with some clarifications to
corresponding comments 36(e)(1)–1
through –3. The Board believes an antisteering rule is appropriate and
necessary to prevent the harm that
results if loan originators steer
consumers to a particular transaction
based on the amount of compensation
paid to the originator when that loan is
not in the consumer’s interest. In
addition, the Board believes the rule is
necessary to prevent circumvention of
the prohibition in § 226.36(d)(1).
Section 226.36(d)(1) does not prevent a
loan originator from directing a
consumer to transactions from a single
creditor that offer greater compensation
to the originator, while ignoring
possible transactions having lower
interest rates that are available from
other creditors. Consumers generally are
unaware of yield spread premiums and
are unable to appreciate the incentives
such compensation creates regarding the
loan options a loan originator may
choose to present to consumers.
Unaware of these financial incentives,
consumers are unable to engage in
effective negotiation with loan
originators. Rather, consumers are more
likely to rely on a loan originator’s
advice regarding which loan transaction
will be in their interest. Consequently,

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these consumers may pay more for
mortgage credit than they would
otherwise be required to pay. As
discussed above in part VI.C, the Board
finds such a practice to be unfair.
The final rule under § 226.36(e)(1)
prohibits loan originators from directing
or ‘‘steering’’ a consumer to consummate
a dwelling-secured loan based on the
fact that the originator will receive
greater compensation from the creditor
in that transaction than in other
transactions the originator offered or
could have offered to the consumer,
unless the consummated transaction is
in the consumer’s interest. The rule is
intended to preserve consumer choice
by ensuring that consumers have loan
options that reflect considerations other
than the maximum amount of
compensation that will be paid to the
originator. Thus, originators could
violate the anti-steering prohibition if,
for instance, they direct a consumer to
a fixed-rate loan option from a creditor
that maximizes the originator’s
compensation without providing the
consumer with an opportunity to choose
from other available loans that have
lower fixed interest rates with the
equivalent amount in origination and
discount points.
Commenters expressed concern that a
prohibition on steering could negatively
impact the relationship between loan
originators and consumers, for example
by causing loan originators not fully to
advise consumers on available loan
options. The Board believes, however,
that the anti-steering rule is sufficiently
flexible to allow the loan originator and
consumer to continue to discuss and
determine which terms and conditions
of the loan transaction, in addition to
other factors such as length of time until
closing, will serve the consumer’s
interest. For example, comment
36(e)(1)–2(ii) makes clear that the final
rule does not require a loan originator
to direct a consumer to consummate the
transaction that will result in the least
amount of compensation being paid to
the originator by the creditor. However,
if the loan originator reviews possible
loan offers available from a significant
number of the creditors with which the
originator regularly does business, and
the originator directs the consumer to
the transaction that will result in the
least amount of creditor-paid
compensation, the requirements of
§ 226.36(e) would be deemed to be
satisfied.
Comment 36(e)(1)–2 is also revised to
provide additional clarification that
where a loan originator directs a
consumer to a transaction that will
result in a greater amount of creditorpaid compensation for the loan

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originator, § 226.36(e)(1) is not violated
if the terms and conditions on that
transaction are the same as other
possible loan offers available through
the originator, and for which the
consumer likely qualifies. Comment
36(e)–1 is adopted as proposed to
provide guidance on compensation that
is subject to the anti-steering rule.
Comments 36(e)(1)–1 and –3 are
adopted as proposed to provide further
guidance regarding what it means to
‘‘direct’’ or ‘‘steer’’ a consumer, and
examples of conduct that is prohibited
under the anti-steering rule,
respectively.
As discussed above under the
definition of a ‘‘loan originator,’’
employees of a creditor are prohibited
under § 226.36(d)(1) from receiving
compensation that is based on the terms
or conditions of the loan. Thus, when
originating loans for the employercreditor, the originator may not steer the
consumer to a particular loan offered by
the employer to increase compensation.
Accordingly, in these cases, compliance
with § 226.36(d)(1) is deemed to satisfy
the requirements of § 226.36(e)(1). At
the same time, the Board recognizes that
a creditor’s employee may occasionally
act as a broker by forwarding a
consumer’s application to a creditor
other than the loan originator’s
employer, such as when the employer
does not offer any loan products for
which the consumer would qualify. If
the loan originator is compensated for
arranging the loan with the other
creditor, the originator is not an
employee of the creditor in that
transaction and is subject to
§ 226.36(e)(1). See comment 36(e)(1)–
2.ii.
Safe Harbor; Loan Options Presented
As noted above, to facilitate
compliance with the anti-steering rule,
the Board proposed to create a safe
harbor in §§ 226.36(e)(2) and (3). Under
the proposal, a loan originator would be
deemed to comply with the anti-steering
rule if, under certain conditions, the
consumer is presented with a choice of
loan options that include (1) the lowest
interest rate, (2) the second lowest
interest rate, and (3) the lowest total
dollar amount for origination points or
fees and discount points. For the
reasons discussed below, the Board is
adopting the proposed safe harbor, with
technical clarifications and a
modification to the set of loan options
that a loan originator must present to
the consumer to qualify for the safe
harbor.
Under the final rule, a loan originator
is deemed to have complied with the
anti-steering rule in § 226.36(e)(1) if it

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Federal Register / Vol. 75, No. 185 / Friday, September 24, 2010 / Rules and Regulations
satisfies each of three requirements: (1)
For each type of transaction in which
the consumer expressed an interest (i.e.,
a fixed-rate, adjustable-rate, or a reverse
mortgage), the consumer is presented
with and able to choose from loan
options that include a loan with the
lowest interest rate, a loan with the
lowest total dollar amount for
origination points or fees and discount
points, and a loan with the lowest rate
with no risky features, such as a
prepayment penalty or negative
amortization; (2) the loan options
presented to the consumer are obtained
by the loan originator from a significant
number of the creditors with whom the
loan originator regularly does business;
and (3) the loan originator believes in
good faith that the consumer likely
qualifies for the loan options presented
to the consumer. The loan originator
need only evaluate loan offers that are
available from creditors with whom the
loan originator regularly does business.
See §§ 226.36(e)(2)(i)–(iii),
226.36(e)(3)(i)(A)–(C), and
226.36(e)(3)(ii) and corresponding
commentary.
The safe harbor is intended to provide
loan originators with clear guidance to
ensure that they can comply with the
anti-steering rule in § 226.36(e). At the
same time, the Board believes the safe
harbor must be sufficiently flexible to
ensure consumers are not unduly
restricted from considering various loan
options. There is no uniform method
available for determining which loans
may be in the consumer’s interest.
Consumers and loan originators
generally consider various terms and
conditions in relation to other external
factors, such as how long the consumer
expects to hold the loan or the creditor’s
reputation for delivering loans within a
promised timeframe. Thus, some
consumers may reasonably determine
that the financial risk created by a
certain loan feature, for example shared
equity, is acceptable in light of the
loan’s lower interest rate, while other
consumers may prefer to accept a higher
rate to avoid the risk associated with a
shared equity feature (e.g., potential loss
of future equity). The Board believes
that consumer advocates’ suggestion for
narrowing the safe harbor to permit only
one type of loan option would unduly
restrict consumer choice and access to
credit.
The Board believes, however, that
there is merit in limiting the safe harbor
to circumstances where the loan
originator offers a loan option without
certain risk features. Such a requirement
may serve to deter loan originators from
steering consumers to loans with riskier
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choose simply to earn greater
compensation. In addition, requiring
loan originators to present a loan option
with the lowest rate and without certain
risky features to obtain the benefit of the
safe harbor should place consumers in
a better position to compare more
traditional loans to loans with riskier
features and might result in more
consumers opting for ‘‘traditional’’ loans.
To this end, such a requirement serves
TILA’s purpose of avoiding the
uninformed use of credit. See TILA
Section 102(a), 15 U.S.C. 1601(a).
For these reasons, the final rule
modifies the safe harbor to require that,
in addition to loan options with the
lowest rate and the lowest total dollar
amount for origination points or fees
and discount points, one of the loan
options presented to a consumer be a
loan with the lowest interest rate that is
without any of the following features:
Negative amortization; a prepayment
penalty; a balloon payment in the first
7 years; a demand feature; shared
equity; or shared appreciation. The final
rule also provides that if the consumer
expresses an interest in a reverse
mortgage, a loan without a prepayment
penalty, or a shared-equity or sharedappreciation feature must be presented.
See § 226.36(e)(3)(i)(B). This loan option
requirement replaces the requirement
under the proposal to offer the
consumer a loan option with the second
lowest rate. In technical revisions,
§§ 226.36(e)(2) and (e)(3)(i) are further
clarified that to obtain the safe harbor,
loan originators must present loan
options to the consumer that include the
loan options identified in
§ 226.36(e)(3)(i); no substantive change
is intended. In addition, comments
36(e)–1 through –4 are adopted as
proposed to provide guidance on the
application of the rule.
The Board believes that requiring loan
originators to present loan offers with
the lowest interest rate and the lowest
total dollar amount for origination
points or fees and discount points to
avail themselves of the safe harbor will
prevent the most egregious practices of
originators steering consumers to more
expensive loans. Such a requirement
may also help to ensure that consumers
are able to choose from low-cost
alternatives. The Board is not adopting
the recommendation by some
commenters to provide a rebuttable
presumption rather than a safe harbor.
As noted above, consumers may choose
loans for a variety of reasons, depending
on their individual circumstances and
preferences. The anti-steering rule is
intended to deter the most egregious
practices of steering consumers to more
expensive loans simply to earn greater

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58529

compensation, while at the same time
preserving consumers’ credit options.
The Board believes that a presumption
of compliance would not serve this
purpose as well as a safe harbor,
because creditors could incur greater
risk by offering more loan options to
consumers. See comment 36(e)(2)–1,
adopted as proposed, clarifying that
there is no presumption regarding the
loan originator’s compliance or
noncompliance with § 226.36(e)(1)
where a loan originator does not satisfy
§ 226.36(e)(2).
Comment 36(e)(1)–2.i, adopted
substantially as proposed, clarifies that
in determining whether a transaction is
in the consumer’s interest, the loan
originator must compare that
transaction to other possible loan offers
available through the originator, and for
which the loan originator in good faith
believes the consumer is likely to
qualify, at the time that transaction was
offered to the consumer. The loan
originator need only evaluate those loan
offers that are available from creditors
with whom the loan originator regularly
does business. That is, the final rule
does not require a loan originator to
establish a new business relationship
with any creditor.
The Board is also adopting
§ 226.36(e)(3)(iii), as proposed, which
provides that if a loan originator
presents more than three loans to the
consumer for each type of transaction in
which the consumer expresses an
interest, the loan originator must
highlight the three loans that satisfy the
criteria of the safe harbor, as discussed
above.
Some commenters expressed concern,
however, that the safe harbor would
unnecessarily require loan originators to
present consumers with a minimum of
three loan options where one or two
loan options satisfied the criteria set
forth in § 226.36(e)(3)(i). To address
these commenters’ concerns, the final
rule includes new § 226.36(e)(4) to
provide that if a single loan fulfills the
criteria of all loan options listed in
§ 226.36(e)(3)(i), loan originators satisfy
the requirements of the safe harbor by
presenting that loan to the consumer.
Thus, loan originators can present fewer
than three loans and satisfy
§§ 226.36(e)(2) and (e)(3)(i) if the loans
presented meet the criteria of the
options set forth in § 226.36(e)(3).
Furthermore, comment 36(e)(2)–2,
which is adopted substantially as
proposed, provides additional
clarification that presenting more than
four loans for each transaction type in
which the consumer expressed an
interest and for which the consumer
likely qualifies would not likely help

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consumers make a meaningful choice.
As noted above, if a loan originator
presents more than three loans to a
consumer, the loan originator must
highlight the three loans that satisfy the
criteria set out in the final rule.
Alternatives not adopted. A Federal
banking agency recommended offering a
safe harbor if the loan originator
completed a trade-off table in the
RESPA Good Faith Estimate (GFE). The
Board is not adopting the
recommendation to provide a safe
harbor for a completed trade-off table in
the RESPA GFE. The trade-off table is
designed to help consumers understand
the trade-off between interest rates and
points. While understanding this tradeoff is beneficial, it is not sufficient, by
itself, to protect consumers against
steering. For example, the trade-off table
would not highlight that a loan has a
prepayment penalty or other risky
feature. Moreover, for adjustable-rate
products, the trade-off table reflects only
the initial interest rate and not the rate
at first adjustment or the maximum
possible interest rate. In some cases, a
trade-off table might lead a consumer to
choose an adjustable rate mortgage
because of a low initial rate, without the
consumer realizing that the rate could
rapidly and significantly increase.
VII. Mandatory Compliance Dates;
Effective Dates
The Board requested comment on the
length of time necessary for creditors to
implement the proposed rule. Industry
commenters and their trade associations
requested an implementation period of
at least 18 to 24 months. The SBA
recommended that the Board delay
implementation for at least 18 months
for small entities. Many of these
commenters explained that the
proposed rule involved extensive
revisions to current business practices
regarding loan originator compensation.
In contrast, consumer advocates asked
that the proposed rule become effective
immediately or at least very quickly in
light of the substantial consumer injury
resulting from loan originator
compensation.
Under TILA Section 105(d), certain of
the Board’s disclosure regulations are to
have an effective date of that October 1
which follows by at least six months the
date of promulgation. 15 U.S.C. 1604(d).
However, the Board may at its
discretion lengthen the implementation
period for creditors to adjust their forms
to accommodate new requirements, or
shorten the period where the Board
finds that such action is necessary to
prevent unfair or deceptive disclosure
practices. No similar effective date
requirement exists for non-disclosure

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regulations. The Riegle Community
Development and Regulatory
Improvement Act of 1994, however,
requires that agency regulations which
impose additional reporting, disclosure
and other requirements on insured
depository institutions take effect on the
first day of a calendar quarter following
publication in final form. 12 U.S.C.
4802(b).
Compliance with the final rule will be
mandatory on April 1, 2011. See
comment 36–2. Thus, the final rule
applies to loan originator compensation
for transactions subject to § 226.36(d)
and (e), for which creditors receive
applications on or after April 1, 2011.
The Board believes that this will
provide sufficient time for creditors and
loan originators to make the necessary
adjustments to their compensation
agreements and practices to conform to
the final rule. A longer compliance time
such as the 18 to 24 months suggested
by creditors is not necessary, given that
the rule does not require changes to the
timing, content and format of mortgage
disclosure forms.
Compliance with the provisions of the
final rule is not required before the
effective date. Thus, the final rule and
the Board’s accompanying analysis
should have no bearing on whether the
acts and practices that are restricted or
prohibited under this final rule are
deemed to be unfair or deceptive if they
occur before the effective date of this
rule. Unfair acts or practices can be
addressed through case-by-case
enforcement actions against specific
institutions or individuals, through
regulations applying to all institutions
and individuals, or both. An
enforcement action concerns a specific
institution’s or individual’s conduct and
is based on all of the facts and
circumstances surrounding that
conduct. By contrast, a regulation is
prospective and applies to the market as
a whole, drawing bright lines that
distinguish broad categories of conduct.
Because broad regulations, such as
those in the final rule, can require large
numbers of institutions and individuals
to make major adjustments to their
practices, there could be more harm to
consumers than benefit if the
regulations were effective earlier than
the effective date. If institutions and
individuals were not provided a
reasonable time to make changes to their
operations and systems to comply with
the final rule, they would either incur
excessively large expenses, which
would be passed on to consumers, or
cease engaging in the regulated activity
altogether, to the detriment of
consumers. And because an act or
practice is unfair only when the harm

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outweighs the benefits to consumers or
to competition, the implementation
period preceding the effective date set
forth in the final rule is integral to the
Board’s decision to restrict or prohibit
certain acts or practices by regulation.
For these reasons, acts or practices
occurring before the effective date of
this final rule will be judged on the
totality of the circumstances under
applicable laws or regulations.
Similarly, acts or practices occurring
after this final rule’s effective date that
are not governed by these rules will
continue to be judged on the totality of
the circumstances under applicable
laws or regulations.
VIII. Paperwork Reduction Act
In accordance with the Paperwork
Reduction Act of 1995, 44 U.S.C. 3506;
5 CFR 1320 Appendix A.1, the Board
has reviewed the final rule under
authority delegated to the Board by the
Office of Management and Budget. The
final rule contains no new collections of
information and proposes no
substantive changes to existing
collections of information pursuant to
the Paperwork Reduction Act.
As discussed above, on August 26,
2009 the Board published in the Federal
Register a notice of proposed
rulemaking to amend Regulation Z. 74
FR 43232. The comment period for this
notice expired on December 24, 2009.
The Board is continuing to review all of
the comments and is in the process of
developing several final rules.
The Board has a continuing interest in
the public’s opinions of its collections
of information. At any time, comments
regarding the burden estimate or any
other information, including suggestions
for reducing the burden may be sent to:
Secretary, Board of Governors of the
Federal Reserve System, 20th and C
Streets, NW., Washington, DC 20551;
and to the Office of Management and
Budget, Paperwork Reduction Project
(7100–0199), Washington, DC 20503.
IX. Final Regulatory Flexibility
Analysis
In accordance with section 4(a) of the
Regulatory Flexibility Act (RFA), 5
U.S.C. §§ 601–612, the Board is
publishing a final regulatory flexibility
analysis for the amendments to
Regulation Z. The RFA requires an
agency either to provide a final
regulatory flexibility analysis with a
final rule or to certify that the final rule
will not have a significant economic
impact on a substantial number of small
entities. Under regulations issued by the
SBA, an entity is considered ‘‘small’’ if
it has $175 million or less in assets for
banks and other depository institutions;

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and $7 million or less in revenues for
non-bank mortgage lenders and
mortgage brokers.32
The Board received a large number of
comments contending that the proposed
rule would have a significant impact on
various businesses. Based on public
comment, the Board’s own analysis, and
for the reasons stated below, the Board
believes that this final rule will have a
significant economic impact on a
substantial number of small entities.

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A. Statement of Need for, and
Objectives of, the Final Rule
Congress enacted TILA based on
findings that economic stability would
be enhanced and competition among
consumer credit providers would be
strengthened by the informed use of
credit resulting from consumers’
awareness of the cost of credit. One of
the stated purposes of TILA is to
provide a meaningful disclosure of
credit terms to enable consumers to
compare credit terms available in the
marketplace more readily and avoid the
uninformed use of credit. TILA also
contains procedural and substantive
protections for consumers. TILA directs
the Board to prescribe regulations to
carry out the purposes of the statute.
The Board’s Regulation Z implements
TILA.
Congress enacted HOEPA in 1994 as
an amendment to TILA. HOEPA
imposed additional substantive
protections on certain high-cost
mortgage transactions. HOEPA also
charged the Board with prohibiting acts
or practices in connection with
mortgage loans that are unfair,
deceptive, or designed to evade the
purposes of HOEPA, and acts or
practices in connection with refinancing
of mortgage loans that are associated
with abusive lending practices or are
otherwise not in the interest of
borrowers.
The final rule restricts certain loan
originator compensation practices to
address problems that have been
observed in the mortgage market. These
restrictions are proposed pursuant to the
Board’s statutory responsibility to
prohibit unfair and deceptive acts and
practices in connection with mortgage
loans.
B. Summary of Issues Raised by
Comments in Response to the Initial
Regulatory Flexibility Analysis
In accordance with section 3(a) of the
RFA, 5 U.S.C 603(a), the Board prepared
an initial regulatory flexibility analysis
(IRFA) in connection with the proposed
rule, and acknowledged that the
32 13

CFR 121.201.

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projected reporting, recordkeeping, and
other compliance requirements of the
proposed rule would have a significant
economic impact on a substantial
number of small entities. In addition,
the Board recognized that the precise
compliance costs would be difficult to
ascertain because they would depend on
a number of unknown factors,
including, among other things, the
specifications of the current systems
used by small entities to administer and
maintain accounts, the complexity of
the terms of credit products that they
offer, and the range of such product
offerings. The Board sought information
and comment on any costs, compliance
requirements, or changes in operating
procedures arising from the application
of the proposed rule to small entities.
The Board reviewed comments
submitted by various entities in order to
ascertain the economic impact of the
proposed rule on small entities. A
number of financial institutions and
mortgage brokers expressed concern that
the Board had underestimated the costs
of compliance. In addition, the SBA
submitted a comment on the Board’s
IRFA. Executive Order 13272 directs
Federal agencies to respond in a final
rule to written comments submitted by
the SBA on a proposed rule, unless the
agency certifies that the public interest
is not served by doing so. The Board’s
response to the SBA’s comment letter is
below.33
Response to the SBA. The SBA
expressed concern that the Board’s IRFA
did not adequately assess the impact of
the proposed rule on small entities as
required by the RFA. The SBA urged the
Board to issue a new proposal
containing a revised IRFA. For the
reasons stated below, the Board believes
that its IRFA complied with the
requirements of the RFA and the Board
is proceeding with a final rule.
The SBA suggested that the Board
failed to provide sufficient information
about the economic impact of the
proposed rule and that the Board’s
request for public comment on the costs
to small entities of the proposed rule
was not appropriate. Section 3(a) of the
RFA requires agencies to publish for
comment an IRFA which shall describe
the impact of the proposed rule on small
entities. 5 U.S.C. 603(a). In addition,
section 3(b) requires the IRFA to contain
certain information including a
33 Advocacy commented on all of the provisions
in the Board’s August 2009 Closed-End Proposal.
The Board is responding in this final rule only to
Advocacy’s comments that relate to this final rule
regarding loan originator compensation. The Board
will respond to Advocacy’s comments on other
proposed provisions when any final rules on those
provisions are issued.

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description of the projected reporting,
recordkeeping and other compliance
requirements of the proposed rule,
including an estimate of the classes of
small entities which will be subject to
the requirement and the type of
professional skills necessary for
preparation of the report or record. 5
U.S.C. 603(b).
The Board’s IRFA complied with the
requirements of the RFA. The IRFA
procedure is ‘‘intended to evoke
commentary from small businesses
about the effect of the rule on their
activities, and to require agencies to
consider the effect of a regulation on
those entities.’’ Cement Kiln Recycling
Coalition v. EPA, 255 F.3d 855, 868
(D.C. Cir. 2001). The RFA does not
require that the Board be able to project
the specific dollar amount that a rule
will cost small entities in order to
implement the rule; rather it requires a
description of the projected impact of
the rule on small entities and of
reporting, recordkeeping, or compliance
requirements. 5 U.S.C. 603(a), 603(b)(4).
Accordingly, the Board described the
projected impact of the proposed rule
and sought comments from small
entities themselves on the effect the
proposed rule would have on their
activities. First, the Board described the
impact of the proposed rule on small
entities by describing the rule’s
proposed requirements in detail
throughout the supplementary
information for the proposed rule.
Second, the Board described the
projected compliance requirements of
the rule in its IRFA, noting the need for
small entities to comply with
recordkeeping requirements, and update
systems and loan origination
practices.34
The SBA also commented that the
Board failed to provide sufficient
information about the number of small
mortgage brokers that may be impacted
by the rule. Section 3(b)(3) of the RFA
requires the IRFA to contain a
description of and, where feasible, an
estimate of the number of small entities
to which the proposed rule will apply.
5 U.S.C. 603(b)(3) (emphasis added).
The Board provided a description of the
small entities to which the proposed
rule would apply and provided an
estimate of the number of small
depository institutions to which the
proposed rule would apply.35 The
Board also provided an estimate of the
total number of mortgage broker entities
and estimated that most of these were
34 74
35 Id.

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small entities.36 The Board stated that it
was not aware of a reliable source for
the total number of small entities likely
to be affected by the proposal.37 Thus,
the Board did not find it feasible to
estimate their number. The Board has
previously requested information on the
number of small entities, including
small mortgage broker entities, in its
2008 proposed rule under HOEPA.38
Comment letters received by the Board
on both the current and the 2008
proposals, including the SBA’s
comment letters, have not provided
additional sources of information about
the number of small entities affected.
The SBA also suggested that the
Board’s IRFA did not sufficiently
address alternatives to the proposed
rule, especially as they relate to small
entities. Section 3(c) of the RFA requires
that an IRFA contain a description of
any significant alternatives to the
proposed rule which accomplish the
stated objectives of applicable statutes
and which minimize any significant
economic impact of the proposed rule
on small entities. 5 U.S.C. 603(c)
(emphasis added). However, the Board’s
IRFA discusses the alternative of
improved disclosures and requests
comment on other alternatives.39
The SBA’s comment letter
recommended that the Board replace the
proposed substantive rule restricting
originator practices with a requirement
that creditors disclose the lowest
interest rate they would accept for a
given loan. However, the Board’s IRFA
discussion of the disclosure alternative
indicates why the Board does not
believe that such a disclosure
alternative would accomplish the stated
objectives of applicable statutes.40 The
Board has extensively considered
whether additional disclosures,
including disclosing the loan
originator’s compensation, would
achieve the statutory objectives of
HOEPA, and even proposed such a
disclosure requirement in the 2008
HOEPA Proposed Rule.41 However,
public comment on that proposal, and
consumer testing conducted for the
Board, provided strong evidence that
additional disclosures would not
accomplish the goal of HOEPA and the
36 Id.

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37 Id.

at 43319.
FR 1672, 1720; Jan. 9, 2008.
39 Section 5(a) of the RFA permits an agency to
perform the IRFA analysis (among others) in
conjunction with or as part of any other analysis
required by any other law if such other analysis
satisfies the provisions of the RFA. 5 U.S.C. 605(a).
Other alternatives were discussed throughout the
supplementary information to the Board’s proposal.
40 74 FR 43232, 43320; Aug. 26, 2009.
41 73 FR 1672; Jan. 9, 2008.
38 73

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Board’s proposal to prevent unfair or
deceptive origination practices, which
led the Board to withdraw the
proposal.42 The SBA’s comment letter
asserts that the disclosure alternative
should be sufficient to accomplish the
Board’s regulatory goals, yet it fails to
mention the public comment or
consumer testing findings relating to the
Board’s withdrawn 2008 proposal.
The SBA also suggested that,
according to a mortgage broker industry
trade group, the proposed definition of
‘‘loan originator’’ would limit the
flexibility and loan pricing and product
options that small business entities can
offer. The SBA urged the Board to give
full consideration to the trade group’s
comments. As discussed in the
SUPPLEMENTARY INFORMATION above, the
Board has carefully considered these
comments. The final rule is intended to
uniformly address the harm that can
result from unfair compensation
practices, and the Board believes that
providing exemptions for any set of loan
originators would facilitate
circumvention of the rule and
undermine its objective. Furthermore, as
discussed in the SUPPLEMENTARY
INFORMATION above, the final rule still
affords creditors the flexibility to
structure loan pricing to preserve the
potential consumer benefit of
compensating an originator, or funding
third-party closing costs, through the
interest rate.
As the SBA notes, the Board
requested comment in the
supplementary information to the
proposal on an alternative that would
permit compensation based on loan
amount. The Board is adopting this
alternative in the final rule.
Other comments. In addition to the
SBA’s comment letter, a number of
industry commenters expressed
concerns that the rule, as proposed,
would be costly to implement, would
not provide enough flexibility, and
would not adequately respond to the
needs or nature of their business.
Mortgage brokers argued that the Board
should consider alternatives that would
exempt small entities from the proposed
rule or mitigate the application of the
proposed rule on small entities. As
discussed above, the Board concluded
that these suggestions do not represent
significant alternatives to the proposed
rule because they would not meet the
objectives of the rule. Many of the issues
raised by commenters do not apply
uniquely to small entities and are
addressed above in other parts of the
SUPPLEMENTARY INFORMATION.
42 73

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FR 44522; July 30, 2008.

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C. Description of Small Entities to
Which the Final Rule Will Apply
The final rule will apply to all
institutions and entities that engage in
originating or extending closed-end,
home-secured credit. The Board is not
aware of a reliable source for the total
number of small entities likely to be
affected by the final rule, and the credit
provisions of TILA and Regulation Z
have broad applicability to individuals
and businesses that originate, extend
and service even small numbers of
home-secured credit. See § 226.1(c)(1).43
All small entities that originate or
extend closed-end loans secured by real
property or a dwelling potentially could
be subject to at least some aspects of the
final rule.
The Board can, however, identify
through data from Reports of Condition
and Income (call reports) approximate
numbers of small depository institutions
that will be subject to the final rule.
According to March 2010 Call Report
data, approximately 8,848 small
depository institutions will be subject to
the rule. Approximately 15,899
depository institutions in the United
States filed Call Report data,
approximately 11,218 of which had total
domestic assets of $175 million or less
and thus were considered small entities
for purposes of the RFA. Of the 3,898
banks, 523 thrifts, 6,727 credit unions,
and 70 branches of foreign banks that
filed Call Report data and were
considered small entities, 3,776 banks,
496 thrifts, 4,573 credit unions, and 3
branches of foreign banks, totaling 8,848
institutions, extended mortgage credit.
For purposes of this Call Report
analysis, thrifts include savings banks,
savings and loan entities, co-operative
banks and industrial banks.
The Board cannot identify with
certainty the number of small nondepository institutions that will be
subject to the final rule. Home Mortgage
Disclosure Act (HMDA) data indicate
that 1,507 non-depository institutions
(independent mortgage companies,
subsidiaries of a depository institution,
or affiliates of a bank holding company)
filed HMDA reports in 2009 for 2008
lending activities. Based on the small
volume of lending activity reported by
these institutions, most are likely to be
small.
43 Regulation Z generally applies to ‘‘each
individual or business that offers or extends credit
when four conditions are met: (i) The credit is
offered or extended to consumers; (ii) the offering
or extension of credit is done regularly; (iii) the
credit is subject to a finance charge or is payable
by a written agreement in more than four
installments, and (iv) the credit is primarily for
personal, family, or household purposes.’’
§ 226.1(c)(1).

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Federal Register / Vol. 75, No. 185 / Friday, September 24, 2010 / Rules and Regulations
The final rule will apply to mortgage
brokers. Loan originators other than
mortgage brokers that will be affected by
the final rule are employees of creditors
(or of brokers) and, as such, are not
business entities in their own right. In
its 2008 proposed rule under HOEPA,
73 FR 1672, 1720; Jan. 9, 2008, the
Board noted that, according to the
National Association of Mortgage
Brokers (NAMB), there were 53,000
mortgage brokerage companies in 2004
that employed an estimated 418,700
people.44 The Board estimated that most
of these companies are small entities.
On the other hand, the U.S. Census
Bureau’s 2002 Economic Census
indicates that there were only 17,041
‘‘mortgage and nonmortgage loan
brokers’’ in the United States at that
time.45

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D. Reporting, Recordkeeping, and Other
Compliance Requirements
The compliance requirements of the
final rule are described in the
SUPPLEMENTARY INFORMATION. Some
small entities will be required, among
other things, to alter certain business
practices, develop new business models,
re-train staff, and reprogram operational
systems to ensure compliance with the
final rule. In addition, Regulation Z
currently requires creditors to retain
evidence of compliance with Regulation
Z for two years. As described in the
SUPPLEMENTARY INFORMATION, the final
rule clarifies the types of records that
creditors must retain to demonstrate
compliance with the rule. The effect of
the final rule on small entities is
unknown. The final rule could affect
how loan originators are compensated
and will impose certain related
recordkeeping requirements on
creditors. The precise costs that the final
rule will impose on mortgage creditors
and loan originators are difficult to
ascertain. As discussed above, the Board
has requested information about the
impact of the rule on small entities but
has not received additional sources of
information about the number of small
entities affected or the costs to small
entities. Nevertheless, the Board
believes that these costs will have a
significant economic effect on small
entities, including small mortgage
creditors and brokers.
44 http://www.namb.org/namb/

Industry_Facts.asp?SnID=719224934. This page of
the NAMB Web site, however, no longer provides
an estimate of the number of mortgage brokerage
companies.
45 http://www.census.gov/prod/ec02/
ec0252a1us.pdf (NAICS code 522310).

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E. Steps Taken To Minimize the
Economic Impact on Small Entities
The steps the Board has taken to
minimize the economic impact and
compliance burden on small entities,
including the factual, policy, and legal
reasons for selecting the alternatives
adopted and why each one of the other
significant alternatives was not
accepted, are described above in the
SUPPLEMENTARY INFORMATION and in the
summary of issues raised by the public
comments in response to the proposal’s
IRFA. For example, the Board has
adopted an alternative that permits loan
originator compensation to be based on
loan amount. The SBA and small entity
commenters stated that this alternative
would be less burdensome and would
provide more flexibility to small entity
loan originators. In addition, the final
rule does not apply to open-end credit
or timeshare plans, and the final rule
does not extend the record retention
requirement to persons other than the
creditor who pays loan originator
compensation. The Board believes that
these provisions minimize the
significant economic impact on small
entities while still meeting the stated
objectives of HOEPA and TILA.
List of Subjects in 12 CFR Part 226
Advertising, Consumer protection,
Federal Reserve System, Mortgages,
Reporting and recordkeeping
requirements, Truth in lending.
Authority and Issuance
For the reasons set forth in the
preamble, the Board amends Regulation
Z, 12 CFR part 226, as set forth below:

■

PART 226—TRUTH IN LENDING
(REGULATION Z)
1. The authority citation for part 226
continues to read as follows:

■

Authority: 12 U.S.C. 3806; 15 U.S.C. 1604,
1637(c)(5), and 1639(l); Pub L. 111–24 § 2,
123 Stat. 1734.

Subpart A—General
2. Section 226.1 is amended by
revising paragraphs (b) and (d)(5) to
read as follows:

■

§ 226.1 Authority, purpose, coverage,
organization, enforcement, and liability.

*

*
*
*
*
(b) Purpose. The purpose of this
regulation is to promote the informed
use of consumer credit by requiring
disclosures about its terms and cost. The
regulation also includes substantive
protections. It gives consumers the right
to cancel certain credit transactions that
involve a lien on a consumer’s principal

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58533

dwelling, regulates certain credit card
practices, and provides a means for fair
and timely resolution of credit billing
disputes. The regulation does not
generally govern charges for consumer
credit, except that several provisions in
Subpart G set forth special rules
addressing certain charges applicable to
credit card accounts under an open-end
(not home-secured) consumer credit
plan. The regulation requires a
maximum interest rate to be stated in
variable-rate contracts secured by the
consumer’s dwelling. It also imposes
limitations on home-equity plans that
are subject to the requirements of
§ 226.5b and mortgages that are subject
to the requirements of § 226.32. The
regulation prohibits certain acts or
practices in connection with credit
secured by a dwelling in § 226.36, and
credit secured by a consumer’s principal
dwelling in § 226.35. The regulation
also regulates certain practices of
creditors who extend private education
loans as defined in § 226.46(b)(5).
*
*
*
*
*
(d) * * *
(5) Subpart E contains special rules
for mortgage transactions. Section
226.32 requires certain disclosures and
provides limitations for closed-end
loans that have rates or fees above
specified amounts. Section 226.33
requires special disclosures, including
the total annual loan cost rate, for
reverse mortgage transactions. Section
226.34 prohibits specific acts and
practices in connection with closed-end
mortgage transactions that are subject to
§ 226.32. Section 226.35 prohibits
specific acts and practices in connection
with closed-end higher-priced mortgage
loans, as defined in § 226.35(a). Section
226.36 prohibits specific acts and
practices in connection with an
extension of credit secured by a
dwelling.
*
*
*
*
*
Subpart E—Special Rules for Certain
Home Mortgage Transactions
3. Section 226.36 is amended by:
A. Revising the section heading;
B. Revising paragraph (a);
C. Redesignating paragraph (d) as
paragraph (f) and revising it; and
■ D. Adding new paragraphs (d) and (e).
The additions and revisions read as
follows:
■
■
■
■

§ 226.36 Prohibited acts or practices in
connection with credit secured by a
dwelling.

(a) Loan originator and mortgage
broker defined. (1) Loan originator. For
purposes of this section, the term ‘‘loan
originator’’ means with respect to a

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

particular transaction, a person who for
compensation or other monetary gain, or
in expectation of compensation or other
monetary gain, arranges, negotiates, or
otherwise obtains an extension of
consumer credit for another person. The
term ‘‘loan originator’’ includes an
employee of the creditor if the employee
meets this definition. The term ‘‘loan
originator’’ includes the creditor only if
the creditor does not provide the funds
for the transaction at consummation out
of the creditor’s own resources,
including drawing on a bona fide
warehouse line of credit, or out of
deposits held by the creditor.
(2) Mortgage broker. For purposes of
this section, a mortgage broker with
respect to a particular transaction is any
loan originator that is not an employee
of the creditor.
*
*
*
*
*
(d) Prohibited payments to loan
originators. (1) Payments based on
transaction terms or conditions. (i) In
connection with a consumer credit
transaction secured by a dwelling, no
loan originator shall receive and no
person shall pay to a loan originator,
directly or indirectly, compensation in
an amount that is based on any of the
transaction’s terms or conditions.
(ii) For purposes of this paragraph
(d)(1), the amount of credit extended is
not deemed to be a transaction term or
condition, provided compensation
received by or paid to a loan originator,
directly or indirectly, is based on a fixed
percentage of the amount of credit
extended; however, such compensation
may be subject to a minimum or
maximum dollar amount.
(iii) This paragraph (d)(1) shall not
apply to any transaction in which
paragraph (d)(2) of this section applies.
(2) Payments by persons other than
consumer. If any loan originator
receives compensation directly from a
consumer in a consumer credit
transaction secured by a dwelling:
(i) No loan originator shall receive
compensation, directly or indirectly,
from any person other than the
consumer in connection with the
transaction; and
(ii) No person who knows or has
reason to know of the consumer-paid
compensation to the loan originator
(other than the consumer) shall pay any
compensation to a loan originator,
directly or indirectly, in connection
with the transaction.
(3) Affiliates. For purposes of this
paragraph (d), affiliates shall be treated
as a single ‘‘person.’’
(e) Prohibition on steering. (1)
General. In connection with a consumer
credit transaction secured by a dwelling,

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a loan originator shall not direct or
‘‘steer’’ a consumer to consummate a
transaction based on the fact that the
originator will receive greater
compensation from the creditor in that
transaction than in other transactions
the originator offered or could have
offered to the consumer, unless the
consummated transaction is in the
consumer’s interest.
(2) Permissible transactions. A
transaction does not violate paragraph
(e)(1) of this section if the consumer is
presented with loan options that meet
the conditions in paragraph (e)(3) of this
section for each type of transaction in
which the consumer expressed an
interest. For purposes of paragraph (e) of
this section, the term ‘‘type of
transaction’’ refers to whether:
(i) A loan has an annual percentage
rate that cannot increase after
consummation;
(ii) A loan has an annual percentage
rate that may increase after
consummation; or
(iii) A loan is a reverse mortgage.
(3) Loan options presented. A
transaction satisfies paragraph (e)(2) of
this section only if the loan originator
presents the loan options required by
that paragraph and all of the following
conditions are met:
(i) The loan originator must obtain
loan options from a significant number
of the creditors with which the
originator regularly does business and,
for each type of transaction in which the
consumer expressed an interest, must
present the consumer with loan options
that include:
(A) The loan with the lowest interest
rate;
(B) The loan with the lowest interest
rate without negative amortization, a
prepayment penalty, interest-only
payments, a balloon payment in the first
7 years of the life of the loan, a demand
feature, shared equity, or shared
appreciation; or, in the case of a reverse
mortgage, a loan without a prepayment
penalty, or shared equity or shared
appreciation; and
(C) The loan with the lowest total
dollar amount for origination points or
fees and discount points.
(ii) The loan originator must have a
good faith belief that the options
presented to the consumer pursuant to
paragraph (e)(3)(i) of this section are
loans for which the consumer likely
qualifies.
(iii) For each type of transaction, if the
originator presents to the consumer
more than three loans, the originator
must highlight the loans that satisfy the
criteria specified in paragraph (e)(3)(i) of
this section.

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(4) Number of loan options presented.
The loan originator can present fewer
than three loans and satisfy paragraphs
(e)(2) and (e)(3)(i) of this section if the
loan(s) presented to the consumer
satisfy the criteria of the options in
paragraph (e)(3)(i) of this section and
the provisions of paragraph (e)(3) of this
section are otherwise met.
(f) This section does not apply to a
home-equity line of credit subject to
§ 226.5b. Section 226.36(d) and (e) do
not apply to a loan that is secured by a
consumer’s interest in a timeshare plan
described in 11 U.S.C. 101(53D).
■ 4. In Supplement I to Part 226:
■ A. Under Section 226.25—Record
Retention, 25(a) General rule, new
paragraph 5 is added.
■ B. Under Section 226.36—Prohibited
Acts or Practices in Connection With
Credit Secured by a Dwelling ,
■ 1. Revise the heading;
■ 2. Redesignate paragraph 1 as
paragraph 3;
■ 3. Add paragraphs 1 and 2;
■ 4. Under 36(a) Mortgage broker
defined, revise the heading, revise
paragraph 1, and add paragraphs 2, 3,
and 4; and
■ 5. Add entries for 36(d) Prohibited
payments to loan originators and 36(e)
Prohibition on steering.
The additions and revisions read as
follows:
Supplement I To Part 226—Official
Staff Interpretations
*

*

*

*

*

Subpart D—Miscellaneous
*

*

*

*

*

Section 226.25—Record Retention
25(a) General rule.

*

*

*

*

*

5. Prohibited payments to loan originators.
For each transaction subject to the loan
originator compensation provisions in
§ 226.36(d)(1), a creditor should maintain
records of the compensation it provided to
the loan originator for the transaction as well
as the compensation agreement in effect on
the date the interest rate was set for the
transaction. See § 226.35(a) and comment
35(a)(2)(iii)–3 for additional guidance on
when a transaction’s rate is set. For example,
where a loan originator is a mortgage broker,
a disclosure of compensation or other broker
agreement required by applicable state law
that complies with § 226.25 would be
presumed to be a record of the amount
actually paid to the loan originator in
connection with the transaction.

*

*

*

*

*

Subpart E—Special Rules for Certain
Home Mortgage Transactions
*

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Federal Register / Vol. 75, No. 185 / Friday, September 24, 2010 / Rules and Regulations
Section 226.36—Prohibited Acts or
Practices in Connection with Credit
Secured by a Dwelling
1. Scope of coverage. Sections 226.36(b)
and (c) apply to closed-end consumer credit
transactions secured by a consumer’s
principal dwelling. Sections 226.36(d) and
(e) apply to closed-end consumer credit
transactions secured by a dwelling. Sections
226.36(d) and (e) apply to closed-end loans
secured by first or subordinate liens, and
reverse mortgages that are not home-equity
lines of credit under § 226.5b. See § 226.36(f)
for additional restrictions on the scope of this
section, and §§ 226.1(c) and 226.3(a) and
corresponding commentary for further
discussion of extensions of credit subject to
Regulation Z.
2. Mandatory compliance date for
§§ 226.36(d) and (e). The final rules on loan
originator compensation in § 226.36 apply to
transactions for which the creditor receives
an application on or after April 1, 2011. For
example, assume a mortgage broker takes an
application on March 10, 2011, which the
creditor receives on March 25, 2011. This
transaction is not covered. If, however, the
creditor does not receive the application
until April 5, 2011, the transaction is
covered.

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*

*

*

*

*

36(a) Loan originator and mortgage broker
defined.
1. Meaning of loan originator. i. General.
Section 226.36(a) provides that a loan
originator is any person who for
compensation or other monetary gain
arranges, negotiates, or otherwise obtains an
extension of consumer credit for another
person. Thus, the term ‘‘loan originator’’
includes employees of a creditor as well as
employees of a mortgage broker that satisfy
this definition. In addition, the definition of
loan originator expressly includes any
creditor that satisfies the definition of loan
originator but makes use of ‘‘table funding’’
by a third party. See comment 36(a)–1.ii
below discussing table funding. Although
consumers may sometimes arrange, negotiate,
or otherwise obtain extensions of consumer
credit on their own behalf, in such cases they
do not do so for another person or for
compensation or other monetary gain, and
therefore are not loan originators under this
section. (Under § 226.2(a)(22), the term
‘‘person’’ means a natural person or an
organization.)
ii. Table funding. Table funding occurs
when the creditor does not provide the funds
for the transaction at consummation out of
the creditor’s own resources, including
drawing on a bona fide warehouse line of
credit, or out of deposits held by the creditor.
Accordingly, a table-funded transaction is
consummated with the debt obligation
initially payable by its terms to one person,
but another person provides the funds for the
transaction at consummation and receives an
immediate assignment of the note, loan
contract, or other evidence of the debt
obligation. Although § 226.2(a)(17)(i)(B)
provides that a person to whom a debt
obligation is initially payable on its face
generally is a creditor, § 226.36(a)(1) provides
that, solely for the purposes of § 226.36, such

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a person is also considered a loan originator.
The creditor is not considered a loan
originator unless table funding occurs. For
example, if a person closes a loan in its own
name but does not fund the loan from its own
resources or deposits held by it because it
assigns the loan at consummation, it is
considered a creditor for purposes of
Regulation Z and also a loan originator for
purposes of § 226.36. However, if a person
closes a loan in its own name and draws on
a bona fide warehouse line of credit to make
the loan at consummation, it is considered a
creditor, not a loan originator, for purposes
of Regulation Z, including § 226.36.
iii. Servicing. The definition of ‘‘loan
originator’’ does not apply to a loan servicer
when the servicer modifies an existing loan
on behalf of the current owner of the loan.
The rule only applies to extensions of
consumer credit and does not apply if a
modification of an existing obligation’s terms
does not constitute a refinancing under
§ 226.20(a).
2. Meaning of mortgage broker. For
purposes of § 226.36, with respect to a
particular transaction, the term ‘‘mortgage
broker’’ refers to a loan originator who is not
an employee of the creditor. Accordingly, the
term ‘‘mortgage broker’’ includes companies
that engage in the activities described in
§ 226.36(a) and also includes employees of
such companies that engage in these
activities. Section 226.36(d) prohibits certain
payments to a loan originator. These
prohibitions apply to payments made to all
loan originators, including payments made to
mortgage brokers, and payments made by a
company acting as a mortgage broker to its
employees who are loan originators.
3. Meaning of creditor. For purposes of
§ 226.36(d) and (e), a creditor means a
creditor that is not deemed to be a loan
originator on the transaction under this
section. Thus, a person that closes a loan in
its own name (but another person provides
the funds for the transaction at
consummation and receives an immediate
assignment of the note, loan contract, or
other evidence of the debt obligation) is
deemed a loan originator, not a creditor, for
purposes of § 226.36. However, that person is
still a creditor for all other purposes of
Regulation Z.
4. Managers and administrative staff. For
purposes of § 226.36, managers,
administrative staff, and similar individuals
who are employed by a creditor or loan
originator but do not arrange, negotiate, or
otherwise obtain an extension of credit for a
consumer, and whose compensation is not
based on whether any particular loan is
originated, are not loan originators.

*

*

*

*

*

36(d) Prohibited payments to loan
originators.
1. Persons covered. Section 226.36(d)
prohibits any person (including the creditor)
from paying compensation to a loan
originator in connection with a covered
credit transaction, if the amount of the
payment is based on any of the transaction’s
terms or conditions. For example, a person
that purchases a loan from the creditor may
not compensate the loan originator in a
manner that violates § 226.36(d).

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58535

2. Mortgage brokers. The payments made
by a company acting as a mortgage broker to
its employees who are loan originators are
subject to the section’s prohibitions. For
example, a mortgage broker may not pay its
employee more for a transaction with a 7
percent interest rate than for a transaction
with a 6 percent interest rate.
36(d)(1) Payments based on transaction
terms and conditions.
1. Compensation. i. General. For purposes
of § 226.36(d) and (e), the term
‘‘compensation’’ includes salaries,
commissions, and any financial or similar
incentive provided to a loan originator that
is based on any of the terms or conditions of
the loan originator’s transactions. See
comment 36(d)(1)–3 for examples of types of
compensation that are not covered by
§ 226.36(d) and (e). For example, the term
‘‘compensation’’ includes:
A. An annual or other periodic bonus; or
B. Awards of merchandise, services, trips,
or similar prizes.
ii. Name of fee. Compensation includes
amounts the loan originator retains and is not
dependent on the label or name of any fee
imposed in connection with the transaction.
For example, if a loan originator imposes a
‘‘processing fee’’ in connection with the
transaction and retains such fee, it is deemed
compensation for purposes of § 226.36(d) and
(e), whether the originator expends the time
to process the consumer’s application or uses
the fee for other expenses, such as overhead.
iii. Amounts for third-party charges.
Compensation includes amounts the loan
originator retains, but does not include
amounts the originator receives as payment
for bona fide and reasonable third-party
charges, such as title insurance or appraisals.
In some cases, amounts received for payment
for third-party charges may exceed the actual
charge because, for example, the originator
cannot determine with accuracy what the
actual charge will be before consummation.
In such a case, the difference retained by the
originator is not deemed compensation if the
third-party charge imposed on the consumer
was bona fide and reasonable, and also
complies with state and other applicable law.
On the other hand, if the originator marks up
a third-party charge (a practice known as
‘‘upcharging’’), and the originator retains the
difference between the actual charge and the
marked-up charge, the amount retained is
compensation for purposes of § 226.36(d) and
(e). For example:
A. Assume a loan originator charges the
consumer a $400 application fee that
includes $50 for a credit report and $350 for
an appraisal. Assume that $50 is the amount
the creditor pays for the credit report. At the
time the loan originator imposes the
application fee on the consumer, the loan
originator is uncertain of the cost of the
appraisal because the originator may choose
from appraisers that charge between $300 to
$350 for appraisals. Later, the cost for the
appraisal is determined to be $300 for this
consumer’s transaction. In this case, the $50
difference between the $400 application fee
imposed on the consumer and the actual
$350 cost for the credit report and appraisal
is not deemed compensation for purposes of
§ 226.36(d) and (e), even though the $50 is
retained by the loan originator.

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B. Using the same example in comment
36(d)(1)–1.iii.A above, the $50 difference
would be compensation for purposes of
§ 226.36(d) and (e) if the appraisers from
whom the originator chooses charge fees
between $250 and $300.
2. Examples of compensation that is based
on transaction terms or conditions. Section
226.36(d)(1) prohibits loan originator
compensation that is based on the terms or
conditions of the loan originator’s
transactions. For example, the rule prohibits
compensation to a loan originator for a
transaction based on that transaction’s
interest rate, annual percentage rate, loan-tovalue ratio, or the existence of a prepayment
penalty. The rule also prohibits
compensation based on a factor that is a
proxy for a transaction’s terms or conditions.
For example, a consumer’s credit score or
similar representation of credit risk, such as
the consumer’s debt-to-income ratio, is not
one of the transaction’s terms or conditions.
However, if a loan originator’s compensation
varies in whole or in part with a factor that
serves as a proxy for loan terms or
conditions, then the originator’s
compensation is based on a transaction’s
terms or conditions. To illustrate, assume
that consumer A and consumer B receive
loans from the same loan originator and the
same creditor. Consumer A has a credit score
of 650, and consumer B has a credit score of
800. Consumer A’s loan has a 7 percent
interest rate, and consumer B’s loan has a 61⁄2
percent interest rate because of the
consumers’ different credit scores. If the
creditor pays the loan originator $1,500 in
compensation for consumer A’s loan and
$1,000 in compensation for consumer B’s
loan because the creditor varies
compensation payments in whole or in part
with a consumer’s credit score, the
originator’s compensation would be based on
the transactions’ terms or conditions.
3. Examples of compensation not based on
transaction terms or conditions. The
following are only illustrative examples of
compensation methods that are permissible
(unless otherwise prohibited by applicable
law), and not an exhaustive list.
Compensation is not based on the
transaction’s terms or conditions if it is based
on, for example:
i. The loan originator’s overall loan volume
(i.e., total dollar amount of credit extended or
total number of loans originated), delivered
to the creditor.
ii. The long-term performance of the
originator’s loans.
iii. An hourly rate of pay to compensate the
originator for the actual number of hours
worked.
iv. Whether the consumer is an existing
customer of the creditor or a new customer.
v. A payment that is fixed in advance for
every loan the originator arranges for the
creditor (e.g., $600 for every loan arranged for
the creditor, or $1,000 for the first 1,000
loans arranged and $500 for each additional
loan arranged).
vi. The percentage of applications
submitted by the loan originator to the
creditor that result in consummated
transactions.
vii. The quality of the loan originator’s loan
files (e.g., accuracy and completeness of the

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loan documentation) submitted to the
creditor.
viii. A legitimate business expense, such as
fixed overhead costs.
ix. Compensation that is based on the
amount of credit extended, as permitted by
§ 226.36(d)(1)(ii). See comment 36(d)(1)–9
discussing compensation based on the
amount of credit extended.
4. Creditor’s flexibility in setting loan
terms. Section 226.36(d)(1) does not limit a
creditor’s ability to offer a higher interest rate
in a transaction as a means for the consumer
to finance the payment of the loan
originator’s compensation or other costs that
the consumer would otherwise be required to
pay directly (either in cash or out of the loan
proceeds). Thus, a creditor may charge a
higher interest rate to a consumer who will
pay fewer of the costs of the transaction
directly, or it may offer the consumer a lower
rate if the consumer pays more of the costs
directly. For example, if the consumer pays
half of the transaction costs directly, a
creditor may charge an interest rate of 6
percent but, if the consumer pays none of the
transaction costs directly, the creditor may
charge an interest rate of 6.5 percent. Section
226.36(d)(1) also does not limit a creditor
from offering or providing different loan
terms to the consumer based on the creditor’s
assessment of the credit and other
transactional risks involved. A creditor could
also offer different consumers varying
interest rates that include a constant interest
rate premium to recoup the loan originator’s
compensation through increased interest
paid by the consumer (such as by adding a
constant 0.25 percent to the interest rate on
each loan).
5. Effect of modification of loan terms.
Under § 226.36(d)(1), a loan originator’s
compensation may not vary based on any of
a credit transaction’s terms or conditions.
Thus, a creditor and originator may not agree
to set the originator’s compensation at a
certain level and then subsequently lower it
in selective cases (such as where the
consumer is able to obtain a lower rate from
another creditor). When the creditor offers to
extend a loan with specified terms and
conditions (such as the rate and points), the
amount of the originator’s compensation for
that transaction is not subject to change
(increase or decrease) based on whether
different loan terms are negotiated. For
example, if the creditor agrees to lower the
rate that was initially offered, the new offer
may not be accompanied by a reduction in
the loan originator’s compensation.
6. Periodic changes in loan originator
compensation and transactions’ terms and
conditions. This section does not limit a
creditor or other person from periodically
revising the compensation it agrees to pay a
loan originator. However, the revised
compensation arrangement must result in
payments to the loan originator that do not
vary based on the terms or conditions of a
credit transaction. A creditor or other person
might periodically review factors such as
loan performance, transaction volume, as
well as current market conditions for
originator compensation, and prospectively
revise the compensation it agrees to pay to
a loan originator. For example, assume that

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during the first 6 months of the year, a
creditor pays $3,000 to a particular loan
originator for each loan delivered, regardless
of the loan terms or conditions. After
considering the volume of business produced
by that originator, the creditor could decide
that as of July 1, it will pay $3,250 for each
loan delivered by that particular originator,
regardless of the loan terms or conditions. No
violation occurs even if the loans made by
the creditor after July 1 generally carry a
higher interest rate than loans made before
that date, to reflect the higher compensation.
7. Compensation received directly from the
consumer. The prohibition in § 226.36(d)(1)
does not apply to transactions in which any
loan originator receives compensation
directly from the consumer, in which case no
other person may provide any compensation
to a loan originator, directly or indirectly, in
connection with that particular transaction
pursuant to § 226.36(d)(2). Payments to a
loan originator made out of loan proceeds are
considered compensation received directly
from the consumer, while payments derived
from an increased interest rate are not
considered compensation received directly
from the consumer. However, points paid on
the loan by the consumer to the creditor are
not considered payments received directly
from the consumer whether they are paid in
cash or out of the loan proceeds. That is, if
the consumer pays origination points to the
creditor and the creditor compensates the
loan originator, the loan originator may not
also receive compensation directly from the
consumer. Compensation includes amounts
retained by the loan originator, but does not
include amounts the loan originator receives
as payment for bona fide and reasonable
third-party charges, such as title insurance or
appraisals. See comment 36(d)(1)–1.
8. Record retention. See comment 25(a)–5
for guidance on complying with the record
retention requirements of § 226.25(a) as they
apply to § 226.36(d)(1).
9. Amount of credit extended. A loan
originator’s compensation may be based on
the amount of credit extended, subject to
certain conditions. Section 226.36(d)(1) does
not prohibit an arrangement under which a
loan originator is paid compensation based
on a percentage of the amount of credit
extended, provided the percentage is fixed
and does not vary with the amount of credit
extended. However, compensation that is
based on a fixed percentage of the amount of
credit extended may be subject to a minimum
and/or maximum dollar amount, as long as
the minimum and maximum dollar amounts
do not vary with each credit transaction. For
example:
i. A creditor may offer a loan originator 1
percent of the amount of credit extended for
all loans the originator arranges for the
creditor, but not less than $1,000 or greater
than $5,000 for each loan.
ii. A creditor may not offer a loan
originator 1 percent of the amount of credit
extended for loans of $300,000 or more, 2
percent of the amount of credit extended for
loans between $200,000 and $300,000, and 3
percent of the amount of credit extended for
loans of $200,000 or less.
36(d)(2) Payments by persons other than
consumer.

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1. Compensation in connection with a
particular transaction. Under § 226.36(d)(2),
if any loan originator receives compensation
directly from a consumer in a transaction, no
other person may provide any compensation
to a loan originator, directly or indirectly, in
connection with that particular credit
transaction. See comment 36(d)(1)–7
discussing compensation received directly
from the consumer. The restrictions imposed
under § 226.36(d)(2) relate only to payments,
such as commissions, that are specific to, and
paid solely in connection with, the
transaction in which the consumer has paid
compensation directly to a loan originator.
Thus, payments by a mortgage broker
company to an employee in the form of a
salary or hourly wage, which is not tied to
a specific transaction, do not violate
§ 226.36(d)(2) even if the consumer directly
pays a loan originator a fee in connection
with a specific credit transaction. However,
if any loan originator receives compensation
directly from the consumer in connection
with a specific credit transaction, neither the
mortgage broker company nor an employee of
the mortgage broker company can receive
compensation from the creditor in
connection with that particular credit
transaction.
2. Compensation received directly from a
consumer. Under Regulation X, which
implements the Real Estate Settlement
Procedures Act (RESPA), a yield spread
premium paid by a creditor to the loan
originator may be characterized on the
RESPA disclosures as a ‘‘credit’’ that will be
applied to reduce the consumer’s settlement
charges, including origination fees. A yield
spread premium disclosed in this manner is
not considered to be received by the loan
originator directly from the consumer for
purposes of § 226.36(d)(2).
36(d)(3) Affiliates.
1. For purposes of § 226.36(d), affiliates are
treated as a single ‘‘person.’’ The term
‘‘affiliate’’ is defined in § 226.32(b)(2). For
example, assume a parent company has two
mortgage lending subsidiaries. Under
§ 226.36(d)(1), subsidiary ‘‘A’’ could not pay
a loan originator greater compensation for a
loan with an interest rate of 8 percent than
it would pay for a loan with an interest rate
of 7 percent. If the loan originator may
deliver loans to both subsidiaries, they must
compensate the loan originator in the same
manner. Accordingly, if the loan originator
delivers the loan to subsidiary ‘‘B’’ and the
interest rate is 8 percent, the originator must
receive the same compensation that would
have been paid by subsidiary A for a loan
with a rate of either 7 or 8 percent.
36(e) Prohibition on steering.
1. Compensation. See comment 36(d)(1)–1
for guidance on compensation that is subject
to § 226.36(e).
Paragraph 36(e)(1).
1. Steering. For purposes of § 226.36(e),
directing or ‘‘steering’’ a consumer to
consummate a particular credit transaction
means advising, counseling, or otherwise
influencing a consumer to accept that
transaction. For such actions to constitute
steering, the consumer must actually
consummate the transaction in question.
Thus, § 226.36(e)(1) does not address the

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actions of a loan originator if the consumer
does not actually obtain a loan through that
loan originator.
2. Prohibited conduct. Under
§ 226.36(e)(1), a loan originator may not
direct or steer a consumer to consummate a
transaction based on the fact that the loan
originator would increase the amount of
compensation that the loan originator would
receive for that transaction compared to other
transactions, unless the consummated
transaction is in the consumer’s interest.
i. In determining whether a consummated
transaction is in the consumer’s interest, that
transaction must be compared to other
possible loan offers available through the
originator, if any, and for which the
consumer was likely to qualify, at the time
that transaction was offered to the consumer.
Possible loan offers are available through the
loan originator if they could be obtained from
a creditor with which the loan originator
regularly does business. Section 226.36(e)(1)
does not require a loan originator to establish
a business relationship with any creditor
with which the loan originator does not
already do business. To be considered a
possible loan offer available through the loan
originator, an offer need not be extended by
the creditor; it need only be an offer that the
creditor likely would extend upon receiving
an application from the applicant, based on
the creditor’s current credit standards and its
current rate sheets or other similar means of
communicating its current credit terms to the
loan originator. An originator need not
inform the consumer about a potential
transaction if the originator makes a good
faith determination that the consumer is not
likely to qualify for it.
ii. Section 226.36(e)(1) does not require a
loan originator to direct a consumer to the
transaction that will result in a creditor
paying the least amount of compensation to
the originator. However, if the loan originator
reviews possible loan offers available from a
significant number of the creditors with
which the originator regularly does business,
and the originator directs the consumer to the
transaction that will result in the least
amount of creditor-paid compensation for the
loan originator, the requirements of
§ 226.36(e)(1) are deemed to be satisfied. In
the case where a loan originator directs the
consumer to the transaction that will result
in a greater amount of creditor-paid
compensation for the loan originator,
§ 226.36(e)(1) is not violated if the terms and
conditions on that transaction compared to
the other possible loan offers available
through the originator, and for which the
consumer likely qualifies, are the same. A
loan originator who is an employee of the
creditor on a transaction may not obtain
compensation that is based on the
transaction’s terms or conditions pursuant to
§ 226.36(d)(1), and compliance with that
provision by such a loan originator also
satisfies the requirements of § 226.36(e)(1) for
that transaction with the creditor. However,
if a creditor’s employee acts as a broker by
forwarding a consumer’s application to a
creditor other than the loan originator’s
employer, such as when the employer does
not offer any loan products for which the
consumer would qualify, the loan originator

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58537

is not an employee of the creditor in that
transaction and is subject to § 226.36(e)(1) if
the originator is compensated for arranging
the loan with the other creditor.
iii. See the commentary under
§ 226.36(e)(3) for additional guidance on
what constitutes a ‘‘significant number of
creditors with which a loan originator
regularly does business’’ and guidance on the
determination about transactions for which
‘‘the consumer likely qualifies.’’
3. Examples. Assume a loan originator
determines that a consumer likely qualifies
for a loan from Creditor A that has a fixed
interest rate of 7 percent, but the loan
originator directs the consumer to a loan
from Creditor B having a rate of 7.5 percent.
If the loan originator receives more in
compensation from Creditor B than the
amount that would have been paid by
Creditor A, the prohibition in § 226.36(e) is
violated unless the higher-rate loan is in the
consumer’s interest. For example, a higherrate loan might be in the consumer’s interest
if the lower-rate loan has a prepayment
penalty, or if the lower-rate loan requires the
consumer to pay more in up-front charges
that the consumer is unable or unwilling to
pay or finance as part of the loan amount.
36(e)(2) Permissible transactions.
1. Safe harbors. A loan originator that
satisfies § 226.36(e)(2) is deemed to comply
with § 226.36(e)(1). A loan originator that
does not satisfy § 226.36(e)(2) is not subject
to any presumption regarding the originator’s
compliance or noncompliance with
§ 226.36(e)(1).
2. Minimum number of loan options. To
obtain the safe harbor, § 226.36(e)(2) requires
that the loan originator present loan options
that meet the criteria in § 226.36(e)(3)(i) for
each type of transaction in which the
consumer expressed an interest. As required
by § 226.36(e)(3)(ii), the loan originator must
have a good faith belief that the options
presented are loans for which the consumer
likely qualifies. If the loan originator is not
able to form such a good faith belief for loan
options that meet the criteria in
§ 226.36(e)(3)(i) for a given type of
transaction, the loan originator may satisfy
§ 226.36(e)(2) by presenting all loans for
which the consumer likely qualifies and that
meet the other requirements in § 226.36(e)(3)
for that given type of transaction. A loan
originator may present to the consumer any
number of loan options, but presenting a
consumer more than four loan options for
each type of transaction in which the
consumer expressed an interest and for
which the consumer likely qualifies would
not likely help the consumer make a
meaningful choice.
36(e)(3) Loan options presented.
1. Significant number of creditors. A
significant number of the creditors with
which a loan originator regularly does
business is three or more of those creditors.
If the loan originator regularly does business
with fewer than three creditors, the originator
is deemed to comply by obtaining loan
options from all the creditors with which it
regularly does business. Under
§ 226.36(e)(3)(i), the loan originator must
obtain loan options from a significant
number of creditors with which the loan

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originator regularly does business, but the
loan originator need not present loan options
from all such creditors to the consumer. For
example, if three loans available from one of
the creditors with which the loan originator
regularly does business satisfy the criteria in
§ 226.36(e)(3)(i), presenting those and no
options from any other creditor satisfies that
section.
2. Creditors with which loan originator
regularly does business. To qualify for the
safe harbor in § 226.36(e)(2), the loan
originator must obtain and review loan
options from a significant number of the
creditors with which the loan originator
regularly does business. For this purpose, a
loan originator regularly does business with
a creditor if:
i. There is a written agreement between the
originator and the creditor governing the
originator’s submission of mortgage loan
applications to the creditor;
ii. The creditor has extended credit secured
by a dwelling to one or more consumers
during the current or previous calendar
month based on an application submitted by
the loan originator; or
iii. The creditor has extended credit
secured by a dwelling twenty-five or more
times during the previous twelve calendar
months based on applications submitted by
the loan originator. For this purpose, the
previous twelve calendar months begin with
the calendar month that precedes the month

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in which the loan originator accepted the
consumer’s application.
3. Lowest interest rate. To qualify under the
safe harbor in § 226.36(e)(2), for each type of
transaction in which the consumer has
expressed an interest, the loan originator
must present the consumer with loan options
that meet the criteria in § 226.36(e)(3)(i). The
criteria are: The loan with the lowest interest
rate; the loan with the lowest total dollar
amount for discount points and origination
points or fees; and a loan with the lowest
interest rate without negative amortization, a
prepayment penalty, a balloon payment in
the first seven years of the loan term, shared
equity, or shared appreciation, or, in the case
of a reverse mortgage, a loan without a
prepayment penalty, shared equity, or shared
appreciation. To identify the loan with the
lowest interest rate, for any loan that has an
initial rate that is fixed for at least five years,
the loan originator shall use the initial rate
that would be in effect at consummation. For
a loan with an initial rate that is not fixed
for at least five years:
i. If the interest rate varies based on
changes to an index, the originator shall use
the fully-indexed rate that would be in effect
at consummation without regard to any
initial discount or premium.
ii. For a step-rate loan, the originator shall
use the highest rate that would apply during
the first five years.

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4. Transactions for which the consumer
likely qualifies. To qualify under the safe
harbor in § 226.36(e)(2), the loan originator
must have a good faith belief that the loan
options presented to the consumer pursuant
to § 226.36(e)(3) are transactions for which
the consumer likely qualifies. The loan
originator’s belief that the consumer likely
qualifies should be based on information
reasonably available to the loan originator at
the time the loan options are presented. In
making this determination, the loan
originator may rely on information provided
by the consumer, even if it subsequently is
determined to be inaccurate. For purposes of
§ 226.36(e)(3), a loan originator is not
expected to know all aspects of each
creditor’s underwriting criteria. But pricing
or other information that is routinely
communicated by creditors to loan
originators is considered to be reasonably
available to the loan originator, for example,
rate sheets showing creditors’ current pricing
and the required minimum credit score or
other eligibility criteria.

*

*

*

*

*

By order of the Board of Governors of the
Federal Reserve System, September 1, 2010.
Jennifer J. Johnson,
Secretary of the Board.
[FR Doc. 2010–22161 Filed 9–23–10; 8:45 am]
BILLING CODE 6210–01–P

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