Anti-Steering Provisions

Updated 2024-07-29

Anti-steering provisions, established under the Dodd-Frank Act and implemented in Regulation Z at 12 CFR 1026.36, prohibit Mortgage Loan Originator (MLO)s from directing consumers to loans that pay the originator more compensation unless the loan is in the consumer's interest. The rules align originator incentives with consumer outcomes and include a safe harbor when the borrower can choose among specified loan options.

Core Prohibition

MLOs are prohibited from steering a Borrower (Consumer) to a loan that provides the MLO with greater compensation, as compared to other transactions the MLO offered or could have offered, unless the loan is in the consumer's interest. This prohibition is designed to align the MLO's incentives with the consumer's financial well-being.

Anti-Steering Safe Harbor

To provide clarity and facilitate compliance, a "safe harbor" provision exists. An MLO is deemed to comply with the anti-steering prohibition if the Borrower (Consumer) is presented with, and able to choose from, loan options that provide:

1. The lowest interest rate.
2. No risky features, such as a Closing Costs, negative amortization, or a balloon payment in the first seven years.
3. The lowest total dollar amount for origination points or Closing Costs and discount points.

By offering at least one option from each of these categories, MLOs can demonstrate compliance with anti-steering rules.

Challenges and Criticisms

Despite the intent, the anti-steering provisions of the Mortgage Reform Act have been criticized for being "extraordinarily vague" and failing to offer sufficiently specific guidance, potentially creating compliance challenges for mortgage brokers. The safe harbor aims to mitigate this vagueness by providing clear criteria for compliance.

What MLOs must know for the SAFE exam

• MLOs may not steer a borrower to a higher-compensation loan unless that loan is in the consumer's interest (12 CFR 1026.36).
• Safe harbor: present options that include (1) the lowest interest rate, (2) no risky features such as negative amortization or a balloon in the first seven years (and related fee/points comparisons on the page), and (3) the lowest total dollar amount for origination points/fees and discount points.
• Offering at least one option from each safe-harbor category supports compliance demonstration.
• These rules are part of Dodd-Frank Title XIV loan-originator standards and sit alongside LO compensation restrictions.

References

1. [PDF] Final rule: Loan Originator Compensation Requirements under the ... — files.consumerfinance.gov
2. LII Wex Dodd-Frank: Title XIV - Mortgage Reform and Anti-Predatory ... — law.cornell.edu
3. [PDF] Anti-Predatory Lending: Title XIV of the Dodd-Frank Act — bu.edu
4. Federal Register :: Regulation Z's Mortgage Loan Originator Rules Review Pursuant to the Regulatory Flexibility Act — federalregister.gov
5. Final Rules On Mortgage Loan Originator Compensation ... — butlersnow.com
6. § 1026.36 Prohibited acts or practices and certain requirements for ... — consumerfinance.gov
7. 12 CFR § 1026.36 - Prohibited acts or practices and certain requirements for credit secured by a dwelling. | Electronic Code of Federal Regulations (e-CFR) | US Law | LII / Legal Information Institute — law.cornell.edu
8. eCFR :: 12 CFR 1026.36 -- Prohibited acts or practices and certain requirements for credit secured by a dwelling. — ecfr.gov
9. [PDF] Final loan originator compensation rule - interpretations — files.consumerfinance.gov
10. [PDF] Truth in Lending Act Origination Claims Pre- and Post-Dodd Frank — empirejustice.org
11. MORTGAGE LOAN ORIGINATOR COMPENSATION REQUIREMENTS - REGULATION Z — web.nebankers.org
12. [PDF] Loan Originator Compensation and Anti-Steering Rules — mcfunding.com
13. Regulation Z: Loan Originator Compensation and Steering — federalreserve.gov