The Consumer Financial Protection Bureau (CFPB) has ended a busy week of issuing mortgage industry-related rules by announcing provosions to prevent mortgage lenders from steering borrowers into risky and high-cost loans. The CFPB's new rules will ban certain incentives that loan originators had to sell unsafe loans to consumers.
“Before the financial crisis, many mortgage borrowers were steered towards risky and high-cost loans because it meant more money for the loan originator,” said CFPB Director Richard Cordray. “These rules will hold loan originators more accountable by banning the incentives that led so many of them to direct consumers toward disaster.”
The rules apply to mortgage loan originators, loan officers and mortgage brokers.
The rules prohibit compensation that varies with the loan terms. A broker or loan officer cannot get paid more if the consumer takes a loan with a higher interest rate, a prepayment penalty, or higher fees. Moreover, the mortgage originator cannot get paid more if, for example, the consumer agrees to buy title insurance from the lender’s affiliate. Previously, LOs could make more money by getting the consumer to buy these services from the lender, broker, or one of their affiliates.
Under the CFPB’s rules, the loan originator cannot get paid by both the consumer and another person such as the creditor. In the run-up to the crisis, too often consumers incorrectly assumed that their loan originators were looking out for the consumer’s best interest.
Under state law and the federal Secure and Fair Enforcement for Mortgage Licensing (SAFE) Act, loan originators currently have to meet different sets of qualification standards, depending on whether they work for a bank, thrift, mortgage brokerage, or nonprofit organization. These rules implement Dodd-Frank Act requirements that require a more level playing field so consumers can be confident that originators are ethical and knowledgeable. The final rules generally include: Character and Fitness Requirements; Criminal Background Checks; and Training Requirements. Loan originators are required to undertake training to ensure they have the knowledge about the rules governing the types of loans they originate.
The final rule also implements Dodd-Frank provisions that, for mortgage and home equity loans, generally prohibit mandatory arbitration of disputes related to mortgage loans and the practice of increasing loan amounts to cover credit insurance premiums.
The CFPB had engaged with consumers and industry, including a Small Business Review Panel made up of representatives from the small financial services providers that would be directly affected by the rules in formulating these new compensation rules. The rules will take effect in January 2014, except that the prohibition on mandatory arbitration and on the financing of credit insurance will take effect in June 2013.
The CFPB plans to work with creditors and mortgage originators to ensure a smooth transition to implementation. To help with compliance, the CFPB will be publishing implementation guides, and, in coordination with other agencies, be releasing materials that help creditors and originators understand supervisory expectations.
This measure is the CFPB's latest mortgage industry-realted action this week, a week where the Bureau took action against mortgage servicers to protect consumers, issued final rules to strengthen consumer protections for high-cost mortgages and to provide consumers with information about homeownership counseling, and adopted a new rule that will protect consumers from irresponsible mortgage lending by requiring lenders to ensure prospective buyers have the ability-to-repay their mortgage.