Section 10: Unit 1

Question 1

Violations of the Gramm-Leach-Bliley Act

Answer 1

The Gramm-Leach-Bliley Act (GLBA) was passed to implement financial industry reforms, involving finance-related regulations and required disclosures to consumers. One reform was requiring standards for safeguarding consumers’ nonpublic personal information (NPI).

Question 2

Violations of the GLBA

Answer 2

NPI, such as sharing it with a nonaffiliated third party without first giving the consumer the required notice and opportunity to exercise the nondisclosure option by opting out of nonaffiliated third-party sharing. Such violations are costly: $100,000 per violation, imprisoned for up to five years, or both.

Question 3

kickbacks

Answer 3

MLO is taking illegal kickbacks or fees (which we’ll review soon), when MLOs give referrals, their incentive is that they believe they’re helping their borrower clients.

Question 4

Redlining: A Lending Violation

Answer 4

The name stems from mortgage lenders using maps with a red line drawn around certain geographical regions deemed a default risk and refusing to do any lending business in those areas

Question 5

Assumptions Are a Danger Zone

Answer 5

on’t judge a book by its cover” means don’t make assumptions about anyone based on appearance or other identity-related characteristics. An MLO must avoid ever making assumptions about an applicant’s ability to qualify for a loan or to make mortgage payments based on the applicant’s protected class. Fairness involves using the same qualifying criteria for everyone—regardless of race, national origin, etc.

Question 6

RESPA Prohibitions: Kickbacks, Compensation, and Fee Splitting

Answer 6

he Real Estate Settlement and Procedures Act (RESPA) is a consumer protection law that protects borrowers from overcharges by requiring disclosure and prohibiting kickbacks. RESPA’s Section 8 outlines the prohibitions on abusive practices, including kickbacks and compensation that inflate settlement costs for borrowers. MLOs must recognize what’s allowed and what’s not under RESPA.

Question 7

Kickbacks

Answer 7

kickback is any item of value (not counting a thank you card!), regardless of the amount, given in exchange for a business referral. RESPA also prohibits fees being split with a settlement service provider who hasn’t performed an actual service related to the transaction. For example, a lender can’t tell a title attorney, “If you refer borrowers to us, we’ll split our fee with you,” if the title attorney hasn’t rendered any title-related services for any of the transactions. With the fee-splitting prohibition, the fee split is based on the referral, not on actual services performed.

Question 8

Regulation X:

Answer 8

Real Estate Settlement Procedures Act (RESPA)

Question 9

Requesting Personal Information

Answer 9

Loan applications involve information—a lot of information. When taking the loan application and in follow-up communications, an MLO must request additional information. When doing so, the MLO must be wary of crossing legal and ethical lines.

Question 10

enders may not ask the applicant’s marital status unless:

Answer 10

The applicant’s collateral secures the credit.
The applicant resides in or lists assets located in a community property state.**

Question 11

Can MLO Ask windowed or divorced?

Answer 11

For applicants applying for joint credit, lenders may ask about the applicants’ marital status. The three acceptable terms are married, unmarried, or separated. An “unmarried” individual includes someone who’s widowed or divorced.

That was a challenge, but you aced it! If loan applicants state that they’re unmarried, an MLO may not ask, “Are you divorced?” Angela meant well and was on the right track. What could she have done that was ethical and legal? She might have said, “I wanted to share with you that if you’re divorced, the underwriter may ask for a copy of the divorce decree.” An MLO may give information about marital status-related underwriting requirements.

Question 12

Loan Processors

Answer 12

Unlicensed loan processors may perform certain duties related to borrowers and their loan applications and are prohibited from performing others. An individual must be licensed to take a loan application and quote interest rates. A loan processor may take a completed loan application from a borrower.

For example, if a borrower filled out a loan application at home, the unlicensed loan processor may accept it. However, if the borrower said, “I heard about interest rates on a commercial. Do you think I can get 3.5% interest today?” the loan processor may not quote that or any other rate. The loan processor also may not negotiate with borrowers, nor ask questions to help them fill out their loan application. These are license-required activities that only licensed MLOs may perform.

Question 13

What’s a Referral?

Answer 13

While it’s illegal and unethical for MLOs to accept or give referral fees, they’re permitted to develop relationships in the real estate industry to obtain non-compensated referrals. Ethical mortgage practices include ensuring consumers are informed about referrals. Per RESPA’s Regulation X, a referral is “any oral or written action directed to a person which has the effect of affirmatively influencing the selection by any person of a provider of a settlement service or business.” Referrals may also involve requiring a borrower to use a specific settlement service provider.

Question 14

Balancing Referrals and Consumer Protection

Answer 14

Referrals are the lifeblood of any service business, saving valuable time in finding new clients and becoming part of an MLO’s marketing repertoire. While referrals can make life a little easier for consumers—not everyone has a title company on their phone’s contact list—they may also present an ethical issue. For one, referral fees and kickbacks are prohibited. In addition to keeping down transaction costs, this protects the consumer in several ways:

The consumer’s right to shop around for a service provider is unimpeded.
A bad service provider isn’t referred to consumers just because the provider gives big fees.
Consumers receive full transparency related to what may be the largest financial transaction of their lives.

Question 15

What Prompted a Referral Incentive Clampdown

Answer 15

Before the 2008 financial crisis, referrals were being slung all over the mortgage industry. The incentive? Kickbacks, referral fees, gift cards, vacation condo weeks—MLOs were making money or getting other financial benefits. The rules changed, and that money dried up. Now when MLOs give referrals, they do so because they believe they’re helping borrower clients. There’s a fine line that MLOs must not cross when providing referrals.

Question 16

Affiliated Business Arrangements

Answer 16

a real estate company has an affiliated business relationship with a mortgage company because they’re both owned by the same corporate entity, and they swap referrals. If a real estate agent gives a referral to the mortgage company, it falls under the definition of an affiliated business arrangement.

Question 17

Per RESPA, referrals to consumers for settlement services

Answer 17

permitted for affiliated business arrangements if the arrangement is properly disclosed. Specifically, the Affiliated Business Arrangement (AfBA or ABA) Disclosure Statement (see example of the required notice format) must be provided to a consumer at the time of the referral. This disclosure form must be used when the creditor owns more than 1% interest in the referee service.

Question 18

Coercion

Answer 18

When you think of coercion, you may visualize someone twisting another person’s arm to force them to do something the person doesn’t want to do. Lenders and their affiliates may use coercion—a type of influencing—in their lending-related practices. To use coercion in a mortgage loan transaction is considered predatory lending. What does coercion look like in lending?

Question 19

Coercive Measures

Answer 19

Coercion can be the obvious arm-twisting variety, such as the MLO who targets seniors and tells them they will be a burden to their families if they don’t express interest in getting a reverse mortgage through him. Or, coercion can be more subtle, such as leading a loan applicant to believe that if she doesn’t take the loan the MLO is offering, she’s unlikely to qualify for any loan ever again. Or, that rates will only go up from today, so the applicant had better take the offered loan right now. Coercion is an unfair lending practice because it doesn’t allow a borrower to truly weigh pros and cons on her own—she’s being told what’s best for her, even while her choice has been limited in some way.

Question 20

Appraiser Conflict of Interest

Answer 20

Fairness in lending applies to appraisers, too. Appraisers may not conduct an appraisal in which they have a direct or indirect interest in the property or transaction. The interest may be financial, business, or personal. The same applies to an appraisal management company procuring or facilitating an appraisal for a mortgage loan. The conflict of interest may impact the appraiser’s independent judgment—or at minimum, raise ethical questions—that may sway the appraisal results.

Question 21

Discrimination Against Applicants

Answer 21

The federal Fair Housing Act (FHA) prohibits discrimination in housing. Specifically, the law prohibits discrimination in any residential real estate transaction—whether it’s the sale, rental, or financing of residential property—based on a protected class. The law, which applies to most housing, includes actions and practices deemed discriminatory if based on one (or more) of the law’s protected classes.

Question 22

The federal FHA recognizes seven protected classes:

Answer 22

1. Race
2. Color
3. Religion
4. National origin
5. Sex (this covers gender, gender identity, and sexual orientation)
6. Familial status (this also covers pregnant women)
7. Disability/handicap

Question 23

Does FHA enforces 7 Protected classes?

Answer 23

he FHA is enforced by the Department of Housing and Urban Development’s (HUD) Office of Fair Housing and Equal Opportunity (FHEO).

Question 24

The Fair Housing Act and Lending Practices

Answer 24

he FHA applies to fair lending practices. The act prohibits discrimination in lending based on an individual’s protected class status in a residential real estate transaction. Lenders must employ fair practices when working with borrowers seeking to borrow money to purchase, construct, or improve a home. Fair practice requirements extend to other aspects of residential real estate transactions.

Question 25

Per HUD, discrimination is prohibited in any of the following residential mortgage process areas:

Answer 25

Loan approvals/denials
Loan terms
Advertising
MLO/broker services
Appraisals
Loan servicing
Loan modification assistance
Homeowners insurance

Question 26

Fairness for All

Answer 26

All applicants must be treated with the same level of fairness. An MLO must rely on numbers and loan product guidelines—not a property’s location or the customer’s personal characteristics. An MLO must be conscious of treating all loan applicants the same, regardless of where they’re purchasing a property or how tall they are or any other characteristic. The tech entrepreneur hunting for houses on Millionaire Row must be treated the same as the former typewriter salesperson buying property on Limited Means Row.

Question 27

Asset, Income, and Employment Fraud

Answer 27

Let’s begin with the types of fraud associated with mortgage loan applications, which may be used individually or in tandem. One type is asset fraud, in which the borrower obtains temporary use of assets in exchange for an asset “rental” fee. The asset is deposited into the loan applicant’s account for the short term, inflating the account so the applicant qualifies for a loan.

Two other fraud types are opposite sides of the same coin: income fraud and employment fraud. As you might have guessed, the loan applicant submits false income and employment details. The applicant might then pay a company to “verify” her bogus income and employment. Or maybe the applicant has a friend in her company’s human resources department who’s willing to fudge numbers and dates on her behalf when the lender calls to verify application details.

Question 28

Sales Contract and Application Red Flags

Answer 28

Have you ever heard the saying, “Trust, but verify?” Verifying loan application information is a major component of an MLO’s job.

Unfortunately, not all applicants are honest. Maybe an applicant believes his dream of homeownership won’t happen unless he does a little fudging of the facts on his loan application. Maybe two crooks are trying to secure a loan with fabricated employment, income, and real estate commissions with no intention that the “buyer” will make payments. Meanwhile, the seller has unloaded the property and is no longer on the hook for the mortgage.

In short, what a loan applicant reports in a loan application may not be taken at face value. A file review is required with some investigative digging to confirm and verify what’s reported, including any red flags. In such cases, MLOs request more documentation to support the claims in the loan application.

Question 29

Occupancy Fraud

Answer 29

Many mortgage loan programs require that a property be owner-occupied for a certain period of time. For example, a program that allows for a 0% down payment requires owner occupancy. If the property will be non-owner-occupied because the borrower plans to use it as a rental property, she won’t qualify for this program but must take another one that requires her to put a 20% minimum down payment.

Question 30

General Red Flags That Could Represent Fraud

Answer 30

General red flags may represent fraud, or they could be due to an oversight on the applicant’s part. These include:

Consumer bank activity: As we saw earlier in the scenario, the deposit history of an applicant’s bank account may offer some red flags. A large recent deposit with no documentation? The MLO should ask questions. It could be a large bonus the applicant was waiting to receive from a job. Or it could be someone loaning money for the down payment, but the applicant hadn’t planned to mention this loan. Remember, this could also point to asset fraud, in which a chunk of money is rented long enough to qualify for a loan and is deposited into the applicant’s bank account.
Liability declaration: An applicant may decide not to declare child support and alimony payments for which the applicant is liable. However, the applicant’s tax return states the applicant claims two children. By not declaring such liabilities, the applicant is committing a type of fraud because such information is important to include when determining an applicant’s loan repayment ability. If the borrower doesn’t make required child support payments, for example, or owes back child support, the borrower’s wages may be garnished—impacting the borrower’s ability to keep up with the mortgage payments.

Question 31

Suspicious Banking and Other Activity

Answer 31

Alerts, notifications, or warnings from a consumer reporting agency
Suspicious documents
Suspicious personal identifying information
Unusual use of, or suspicious activity related to, the covered account
Notice from customers, identity theft victims, or law enforcement about possible identity theft

Question 32

Consumer Reporting Agency Alerts, Notifications, or Warnings

Answer 32

Consumer reporting agencies are a red-flag category that may share identity theft red flags through alerts, notifications, or warnings. For example:

A consumer report includes a fraud alert (active-duty alert for active military members).
A notice of a credit freeze is given when a consumer report is requested.
A notice of address discrepancy is given.
A consumer report indicates a pattern that isn’t consistent with the customer’s history

Question 33

Suspicious Documents

Answer 33

Documents are a red-flag category that may include identity theft red flags, such as:

The identification documents appear altered or forged.
The identification photo or physical description doesn’t match the customer.
The identification information is inconsistent with what the customer provided.
The identification information is inconsistent with on-file information, such as a signature card.
An application looks altered or forged or appears to have been destroyed and reassembled.

Question 34

Suspicious Personal Identifying Information

Answer 34

The provided information is inconsistent with external sources, such as what’s on the credit report.
The provided information is inconsistent with other information the customer provided.
The provided information is associated with known fraudulent activity.

Question 35

Unusual Use or Suspicious Account Activity and Notice from a Party

Answer 35

How a covered account is used may include identity theft red flags and is another of the five red-flag categories. Examples include:

A notice of an address change is soon followed by requests for new or additional credit cards or to add new account users.
A new revolving credit account is used in a manner inconsistent with regular account activity.
An account that has been inactive for a while is used.

Question 36

Customer, Victim, or Law Enforcement Notice of Identity Theft

Answer 36

Another red flag category is any notice received from customers, identity theft victims, or law enforcement about possible identity theft.

Question 37

Information Not Provided to Borrower

Answer 37

If potential identity theft is detected on a credit report, the MLO must notify the borrower. If an organization detects an identity theft red flag, it must respond “appropriately to any red flags that are detected … to prevent and mitigate identity theft.”* Appendix A to Part 681 of

Question 38

Verifying Application Information

Answer 38

MLOs must look for things that don’t seem accurate, such as alterations to documents and mismatched addresses on files. MLOs must ensure that all application information provided by a loan applicant is properly and thoroughly verified. Additionally, an MLO must obtain all required supporting documents and file appropriate suspicious activity reports (SARs)

Question 39

Advertisements and Federal Regulatio

Answer 39

If an advertisement targets consumers related to credit transactions, including mortgage services or products, it’s subject to federal regulations, particularly:

Regulation N – Mortgage Acts and Practices Advertising Rule (MAPs rule)
Regulation Z – Truth-in-Lending Act (TILA)

Question 40

Regulation N’s Examples for Guidance

Answer 40

Regulation N provides 19 examples that make up the most common misrepresentations that were the subject of enforcement actions before its adoption. These examples aren’t exhaustive: If a mortgage product advertisement includes a misrepresentation, the advertiser violates Regulation N. The regulation provides guidance. It doesn’t specify every conceivable type of advertisement, which closes any potential advertising loophole an advertiser may try to use. Misleading information leads a consumer to believe something that’s inaccurate. In the regulation, the prohibited misrepresentations section states:

It is a violation of this part for any person to make any material misrepresentation, expressly or by implication, in any commercial communication, regarding any term of any mortgage credit product, including but not limited to misrepresentations …

Question 41

Prohibited Misrepresentations, Part One

Answer 41

No express or implied misrepresentation may be made about:

Interest: The interest charged for the mortgage credit product must be clearly represented. This includes the monthly owed interest amount and whether the difference between what’s owed and paid is added to the total.
Annual percentage rate (APR): The annual percentage rate, simple annual rate, periodic rate, etc., must be clearly represented.
Costs or fees: Whether there are any costs or fees, the type, and the amount must be clearly represented.

Question 42

Prohibited Misrepresentations, Part Two
No express or implied misrepresentation may be made about:

Answer 42

No express or implied misrepresentation may be made about:

Additional product terms: The cost, payment, or other terms for a feature or product sold with the mortgage credit product, such as credit insurance, must be clearly represented.
Taxes and insurance: The terms, amounts, or payments for associated taxes or insurance, including whether separate payments are required or the extent to which payment is included in the loan, must be clearly represented.
Pre-payment penalty: Whether a pre-payment penalty exists, and if so, its amount and terms, must all be clearly represented.
Review the following advertisement. You’ll be asked to complete a related activity on the next slide.

Question 43

Prohibited Misrepresentations, Part Three

Answer 43

Variability: The interest, payments, or other terms must be clearly represented. Misrepresentation may occur if the term “fixed” is used to describe them.
Rate or payment comparisons: This includes a rate or payment available for a shorter period than the loan’s life and any actual or hypothetical rates or payments. All options must be clearly represented.
Mortgage product type: If the product is a fully amortizing loan, this must be clearly represented.
Amount of obligation, cash, or credit: Any available cash or credit the consumer will receive as part of the mortgage product transaction must be clearly represented.

Question 44

Prohibited Misrepresentations, Part Four

Answer 44

No express or implied misrepresentation may be made about:

Payments: The fact that the loan requires payments, including the number, amount, or timing of any minimum or required payments, must be clearly represented.
Default potential: Circumstances by which the consumer could default for nonpayment of other obligations, such as taxes and insurance, or failing to meet other obligations, such as occupying the dwelling as a principal residence, must be clearly represented. This is a factor especially common for reverse mortgage loans, which has terms attached to it such as these.
Debt resolution: The effectiveness of the product in helping resolve debt issues, such as reducing, eliminating, or restructuring of existing debt, must be clearly represented.
Review the following advertisement. You’ll be asked to complete a related activity on the next slide.

Question 45

Prohibited Misrepresentations, Part Five

Answer 45

Product association: It’s a misrepresentation to lead a consumer to believe the product or provider is affiliated with a government entity or organization, or that the product relates to a government benefit or is government-endorsed or -sponsored. Also, the use of logos or symbols that purposely resemble official ones is deceptive. The product and provider must be clearly represented.
Communication source: It’s a misrepresentation to imply or expressly state that the communication is from the consumer’s current mortgage lender when it’s not. The source must be clearly represented.
Right to reside: The right to stay in the dwelling, including for how long and under what conditions a consumer with a reverse mortgage may remain in the dwelling, must be clearly represented.
Ability to qualify: The consumer’s likelihood of getting or being guaranteed a mortgage credit product or term, including the consumer being pre-approved, must be clearly represented.
Ability to refinance or modify: The consumer’s likelihood of refinancing, being guaranteed refinancing, or modifying a mortgage credit product or term, including the consumer being pre-approved, must be clearly represented.
Counseling services or expert advice: Availability, type, or substance of such services, and the offeror’s qualifications to provide such service or advice, must be clearly represented.

Question 46

Pulling a Bait and Switch

Answer 46

Bait and switch advertising involves enticing consumers to respond to an advertisement by including rates and terms too good to be true. When the consumer responds, the special product and low rate evaporate, replaced by those that are costlier.

Question 47

Unfair, Deceptive, Abusive

Answer 47

The Telemarketing Sales Rule (TSR) includes types of conduct considered deceptive telemarketing acts or practices, as outlined in 16 CFR § 310.3. A deceptive telemarketing act or practice may include:

Failing to disclose truthfully, clearly, and conspicuously any material information, such as a service’s total costs. Compliance with TILA and Regulation Z is considered complying with this rule.

Misrepresenting any material information, either directly or by implication, such as an offer’s terms.

Submitting billing information for payment or collection or attempting to collect payment for goods or services without the consumer’s verifiable authorization (with some exceptions).

Making a false or misleading statement to persuade someone to pay for goods or services.

Question 48

Do Not Call Registry

Answer 48

As part of the Telemarketing and Consumer Fraud and Abuse Prevention (TCFAP) Act, the TSR included a provision to establish a Do Not Call Registry in its section on abusive telemarketing acts. Consumers who don’t want to receive telemarketing calls may place their phone number on a national registry.

A telemarketer who calls a number listed in the national registry is considered to have engaged in an abusive telemarketing act or practice and has violated the TSR. The Federal Trade Commission (FTC) maintains the national registry, sharing enforcement responsibility with the Federal Communications Commission (FCC) and state regulators. The TSR applies to interstate calls, and the FCC’s Do Not Call regulations apply to intrastate calls. Telemarketers who make interstate calls must check the national registry to ensure a number they’re calling isn’t listed.

Question 49

Consumer Privacy Protections and Abusive Acts and Practices

Answer 49

Telemarketing acts and practices may be considered abusive because they interfere with a consumer’s privacy, including the right not to have their phone ring as part of a telemarketing sales campaign.

Question 50

elemarketers and sellers are prohibited from a variety of abusive acts and practices, including:

Answer 50

Calling an individual on the Do Not Call Registry or who has asked a company not to call
Misusing a Do Not Call list
Denying or interfering with an individual’s right to be placed on the Do Not Call Registry
Calling a residence outside the hours of 8 a.m. to 9 p.m. of that individual’s time zone
Abandoning an outbound telephone call so when the recipient answers the call, the telemarketer doesn’t connect the call to a salesperson within two seconds
Using foul language, threats, or intimidation
Calling an individual repeatedly with the intent to annoy or harass
Making recorded sales calls unless an individual provided written permission to receive robocalls
Sellers and telemarketers who violate the Do Not Call provision may face a $43,792 civil penalty for each violation.

Question 51

Enforcement of Deceptive Advertising Prohibitions

Answer 52

Don’t use words like “cash” or use capital letters.
Due diligence reviews should be a step in the advertising process.
Advertise loan products that aren’t reverse mortgages instead.
Advertisements targeting certain demographics are prohibited.
You’ve got it! The most sensible approach would be to perform a due diligence review of all advertisements before they go out to ensure they’re compliant with the MAPs rule and all other regulations and laws.

Question 53

Truth in Marketing and Advertising

Answer 53

When advertising mortgage products and services, compliance relies on the guiding concept of truth in advertising. In addition, the CFPB gives mortgage advertisers guidance under Regulation Z. Examples of permissible statements in advertising include:

Available credit terms the lender is offering.
Disclosures that are clearly stated and conspicuous.
Use of the term “annual percentage rate” when stating a finance charge rate.
Additional credit terms shown with trigger terms requiring additional disclosure, including:
Down payment amount or percentage
Payment number or repayment period
Payment amount
Finance charge amount The main concern when developing advertising is ensuring that consumers aren’t given only part of the lending story, either led in a direction so that they make assumptions based on limited facts, or the necessary facts are glossed over so the loan will appear more favorable to consumers than the loan product really is.

Question 54

Advertising Due Diligence

Answer 54

e most sensible approach would be to review all advertisements to ensure they’re compliant with the MAPs rule and all other laws.

Question 55

Advertising Compliance

Answer 55

All licensee advertisements and solicitations must include the licensee’s unique identifier (UI), which is assigned by the Nationwide Multistate Licensing System (NMLS). The UI must be displayed conspicuously. What qualifies as an “advertisement?”

Print advertisements
Broadcast advertisements
Electronically transmitted advertisements
Business cards
Electronically transmitted ads include the internet, social media, email, and even a banner ad on a website promoting a product or service.

Question 56

Advertising That Misleads

Answer 56

Mortgage broker B advertised mortgage refinance loans, such as a “3.5% fixed payment 30-year loan.” The FTC sued the broker, alleging that the advertising misrepresented the loan terms because the broker offered ARMs with various payment options. Consumers were misled about the type of loan they were getting. Some options included paying only part of the total interest. The unpaid interest was tacked onto the loan’s principal amount, resulting in negative amortization.

The advertisements implied payments were on a fully amortizing mortgage, but they were non-amortizing loans with payment increases after the first year. The broker also misstated the APR on the TILA disclosures and made no mention that the loan had a variable rate. [This case occurred before TILA was amended in 2008 to prohibit deceptive advertising practices, such as misrepresentation about fixed rates and payments.]

Question 57

Rules Surrounding Contact

Answer 57

An MLO may reach out to a consumer with whom he has an already established business relationship to solicit additional business for up to 18 months after the consumer’s most recent purchase or payment.

If a consumer who only made an inquiry about a loan or submitted a loan application is listed on the national registry but didn’t make a purchase, an MLO may contact the consumer for up to three months after the inquiry.

Question 58

The Four Ps Test

Answer 58

Is the statement prominent enough for the consumer to notice?
Is the information presented in an easy-to-understand format that does not contradict other information in the package and at a time when the consumer’s attention is not distracted elsewhere?
Is the placement of the information in a location where consumers can be expected to look or hear?
Is the information in close proximity to the claim it qualifies?

Prominent
Presented
Placement
Proximity

Question 59

Steering Wrong

Answer 59

An ethical foundation of the real estate and mortgage industries is a consumer’s freedom of choice. Of course, the choice is subject to market conditions and what matches the consumer’s financial means. In terms of mortgage loans, MLOs are prohibited from steering a borrower to a loan that the borrower won’t be able to repay or has predatory aspects.

Once upon a (recent) time, MLOs were financially incentivized to steer borrowers toward high-cost loans. However, the implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act (known as the Dodd-Frank Act) led to amendments to TILA’s Regulation Z to protect consumers from predatory lending practices. In terms of steering, Regulation Z defines steering as “directing or ‘steering’ a consumer to consummate a particular credit transaction means advising, counseling, or otherwise influencing a consumer to accept that transaction.”

Additionally, Regulation Z states the following prohibition on steering:

In connection with a consumer credit transaction secured by a dwelling, 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.

Question 60

The Compensation Rule

Answer 60

As part of the Dodd-Frank Act’s amendments to Regulation Z, the Loan Originator Compensation Rule (Compensation Rule) was implemented. This rule prohibits incentivizing MLOs to steer borrowers to more costly mortgage loans by making compensation based on a transaction’s term. Examples of loan terms include:

Interest rate
Annual percentage rate
Collateral type (e.g., single-family home, condominium unit)
Pre-payment penalty
For example, an MLO may not receive a year-end bonus based on closing transactions with the highest average interest rate. The rule’s goal was to ensure that MLOs don’t steer a borrower to a loan that’s not to the borrower’s advantage when the borrower qualifies for another more beneficial loan. In fact, the rule supports consumer choice: MLOs must provide to a borrower at least three loan options.