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Friday, December 15, 2017

Rationale for Anti-Steering Prohibition

QUESTION
We are a wholesale lender with offices throughout the United States. Our third-party originators, all mortgage brokers, are required to meet the non-steering guidelines to prevent steering. But our debate is about what is in the interest of the borrower. Some brokers are telling us that the anti-steering rules may not be in their borrowers’ interest. We need a rationale to respond to them. What does it mean when a loan is in the interest of the borrower?

ANSWER
In order to determine whether a transaction is in the consumer’s interest, it must be compared to other possible loan offers available through the originator, if any, for which the consumer was likely to qualify at the time that the transaction was offered to the consumer. In effect, the applicable regulation clearly requires that the originator must have a good faith belief that the options presented to the consumer are loans for which the consumer likely qualifies. [75 FR 58509, 58537 (codified at 12 CFR Supplement I to Part 226, Official Staff Commentary § 226.36I(e)(1)-2.i)]

The steering prohibition 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 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 steering prohibition are deemed to be satisfied. [75 FR 58509, 58537 (codified at 12 CFR Supplement I to Part 226, Official Staff Commentary § 226.36(e)(1)-2.ii)]

For instance, when an originator determines that a consumer likely qualifies for a loan from Creditor A that has a fixed rate of 4%, but the originator instead directs the consumer to a loan from Creditor B that has a fixed rate of 4.5%, if the originator receives more in compensation from Creditor B than the amount that would have been paid by Creditor A, the steering prohibition is violated unless the higher rate loan is in the consumer’s interest. 

What constitutes the determination of being in the consumer’s interest is a dispositive factor. For example, a higher rate 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. [75 FR 58509, 58537 (codified at 12 CFR Supplement I to Part 226, Official Staff Commentary § 226.36(e)(1)-3)]

Jonathan Foxx
Managing Director
Lenders Compliance Group