Summary of the final rule on mortgage loan originator

qualification and compensation practices

The mortgage market crisis focused attention on the critical role that loan officers and mortgage

brokers play in the loan origination process. Because consumers generally take out only a few

home loans over the course of their lives, they often rely heavily on loan officers and brokers to

guide them. But prior to the crisis, training and qualification standards for loan originators

varied widely, and compensation was frequently structured to give loan originators strong

incentives to steer consumers into more expensive loans. Often, consumers paid loan

originators an upfront fee without realizing that the creditors in the transactions also were

The rules also implement Dodd-Frank Act provisions that prohibit certain arbitration

agreements and the financing of certain credit insurance in connection with a mortgage loan.

The final rule revises Regulation Z to implement amendments to the Truth in Lending Act

(TILA). It contains the following key elements:

PROHIBITION AGAINST COMPENSATION BASED ON A TERM OF A TRANSACTION OR PROXY

Regulation Z already prohibits basing a loan originator’s compensation on “any of the

transaction’s terms or conditions.” The Dodd-Frank Act codifies this prohibition. The final rule

implements the Dodd-Frank Act and clarifies the scope of the rule as follows:

• The final rule defines “a term of a transaction” as “any right or obligation of the parties to

of a transaction. The rule also further clarifies the definition of a proxy to focus on

to add, drop, or change the factor in originating the transaction.

• To prevent evasion, the final rule generally prohibits loan originator compensation from

being reduced to offset the cost of a change in transaction terms (often called a “pricing

concession”). However, the final rule allows loan originators to reduce their

compensation to defray certain unexpected increases in estimated settlement costs.

• To prevent incentives to “up-charge” consumers on their loans, the final rule generally

prohibits loan originator compensation based upon the profitability of a transaction or a

Regulation Z already provides that where a loan originator receives compensation directly from

a consumer in connection with a mortgage loan, no loan originator may receive compensation

from another person in connection with the same transaction. The Dodd-Frank Act codifies this

prohibition, which was designed to address consumer confusion over mortgage broker loyalties

where the brokers were receiving payments both from the consumer and the creditor. The final

rule implements this restriction but provides an exception to allow mortgage brokers to pay

their employees or contractors commissions, although the commissions cannot be based on the

terms of the loans that they originate.

NO PROHIBITION ON CONSUMER PAYMENT OF UPFRONT POINTS AND FEES

Section 1403 of the Dodd-Frank Act contains a section that would generally have prohibited

fees in connection with a mortgage loan, so long as they made available to consumers an

alternative loan that did not include upfront points and fees. The proposal was designed to

facilitate consumer shopping, enhance consumer decision-making, and preserve consumer

choice and access to credit. The Bureau has decided not to finalize the proposal at this time,

however, because of concerns that it would have created consumer confusion and other negative

outcomes. The Bureau has decided instead to issue a complete exemption to the prohibition on

upfront points and fees pursuant to its exemption authority under section 1403 while it

scrutinizes several crucial issues relating to the proposal’s design, operation, and possible effects

in a mortgage market undergoing regulatory overhaul. The Bureau is planning consumer

testing and other research to understand how new Dodd-Frank Act requirements affect

and Federal law. The final rule imposes duties on loan originator organizations to make sure

that their individual loan originators are licensed or registered as applicable under the Secure

and Fair Enforcement for Mortgage Licensing Act of 2008 (SAFE Act) and other applicable law.

For employers whose employees are not required to be licensed, including depository

institutions and bona fide non-profits, the rule requires them to: (1) ensure that their loan

originator employees meet character, fitness, and criminal background standards similar to

existing SAFE Act licensing standards; and (2) provide training to their loan originator

employees that is appropriate and consistent with those employees’ origination activities. The

final rule contains special provisions with respect to criminal background checks and the

circumstances in which a criminal conviction is disqualifying, and with respect to situations in

along with their names.

PROHIBITION ON MANDATORY ARBITRATION CLAUSES AND SINGLE PREMIUM CREDIT

INSURANCE

The final rule also contains language implementing two other Dodd-Frank Act provisions

concerning mortgage loan originations. The first prohibits the inclusion of clauses requiring the

consumer to submit disputes concerning a residential mortgage loan or home equity line of

loans or related agreements so as to bar a consumer from bringing a claim in court in

connection with any alleged violation of Federal law. The second provision prohibits the

financing of any premiums or fees for credit insurance (such as credit life insurance) in

qualification rules, including exclusions for certain employees of manufactured home retailers,

servicers, seller financers, and real estate brokers; management, clerical, and administrative

staff; and loan processors, underwriters, and closers.