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
