New rules intended to discourage lenders from steering borrowers
into riskier and more expensive mortgages than they would otherwise
qualify for have been put forward by the Consumer Financial
Protection Bureau (CFPB).
Among other things, the new rules would prohibit loan officers
and brokers from getting paid more for selling a borrower into a
more costly loan and would set qualification an screening standards
for loan originators.
"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 Richard Cordray, CFPB
director. "These rules will hold loan originators more accountable
by banning the incentives that led so many of them to direct
consumers toward disaster."
Link between compensation, loan type severed
A key provision is a rule that prohibits compensation for loan
officers and brokers from being based on the terms of the loans
they sell to borrowers. This means a loan originator won't be able
to make more money by encouraging a borrower to choose a loan
product with a higher interest rate or fees, or a prepayment
During the runup to the housing crash, many borrowers who could
have qualified for lower-risk, fixed-rate mortgages were sold on
more expensive, higher risk loans in which the additional costs or
risks were disguised. These included adjustable-rate mortgages with
low initial rates, called teasers, that later reset to much higher
rates or loans with seemingly low rates that had excessive fees
loaded on to the back end.
The new rules also prohibit the payment of additional
compensation to a loan originator if a borrower purchases mortgage
insurance from an agency affiliated with the lender.
Dual payments banned
They also prohibit a practice called "dual compensation," in
which the loan officer is paid by both the borrower and a second
party such as the lender. This is to help ensure that when
borrowers are paying a loan officer that person is looking out for
their best interests and does not have divided loyalties.
The rules also set qualification and screening standards for
loan originators that provide more uniform standards regardless of
whether the originator works for a bank, thrift, mortgage
brokerage, or nonprofit. These in include character and fitness
requirements, criminal background checks and training
The new guidelines are the latest in a flurry of new mortgage
rules released by the CFPB and other federal agencies to implement
reforms established by the Dodd-Frank Wall Street Reform and
Consumer Protection Act of 2010.
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