New Rules Discourage Risky Loans


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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 penalty.

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 standards.

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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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Personal Finance , Banking and Loans

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