A creditor had $900 million in assets at each of the past two calendar year-ends. For consumer credit secured by a principal dwelling, its staff appraiser reports to the sales manager and receives a bonus whenever the appraised loan closes. How do Regulation Z’s employee safe harbor and compensation restriction apply?
Correct Answer
D) The reporting line fails the employee safe harbor; closing-contingent appraisal compensation is separately prohibited
D. Two different provisions address these defects. The creditor exceeds $250 million at both relevant December 31 dates, so the larger-creditor employee safe harbor applies. Reporting to the sales manager fails its requirement for reporting outside loan production. The bonus contingent on this transaction closing is separately prohibited by 1026.42(c)(1)(i)(E). Employee status itself is permitted; these stated reporting and compensation arrangements are the defects. Scope and exceptions: Failing the safe harbor alone does not automatically prove a conflict; assess all circumstances. Source: 1026.42(c)(1)(i)(E), (d)(2); interpretation 42(d)(2)-1 — https://www.consumerfinance.gov/rules-policy/regulations/1026/42/
Why This Is the Correct Answer
D. Two different provisions address these defects. The creditor exceeds $250 million at both relevant December 31 dates, so the larger-creditor employee safe harbor applies. Reporting to the sales manager fails its requirement for reporting outside loan production. The bonus contingent on this transaction closing is separately prohibited by 1026.42(c)(1)(i)(E). Employee status itself is permitted; these stated reporting and compensation arrangements are the defects. Scope and exceptions: Failing the safe harbor alone does not automatically prove a conflict; assess all circumstances.
Why the Other Options Are Wrong
Option A: Permitted, provided the borrower is told the appraiser works for the lender
Disclosure cures neither defect.
Option B: Not permitted: only a creditor under $250 million may use its own appraiser
The threshold does not ban larger creditors’ staff appraisers.
Option C: Permitted: an in-house appraiser is fine at a creditor of this size
Employment alone is not the issue.
Exam Tip
Separate safe-harbor conditions from independently prohibited conduct.
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