What does the Federal Reserve Loan Originator Compensation Rule prohibit?

The Federal Reserve Loan Originator Compensation Rule primarily aims to prevent unethical practices in the mortgage industry, particularly regarding how loan originators are compensated. By prohibiting steering consumers to lenders for greater compensation, the rule ensures that loan originators make recommendations based on the best interests of the borrowers rather than on personal financial gain. This helps to enhance consumer protection and promotes fair lending practices.

When originators are incentivized solely based on the amount of compensation they can receive from particular lenders, it can lead to conflicts of interest where they direct consumers to more expensive loans, potentially harming the financial well-being of the borrowers. The rule is designed to align the interests of loan originators with those of the consumers they serve, ultimately fostering a more transparent and equitable lending process.