The CFPB has issued rules to prevent mortgage lenders from steering borrowers into risky and high-cost loans. According to the CFPB, the rules ban certain incentives that loan originators had to sell unsafe loans to consumers in the run-up to the financial crisis.
Prohibit steering incentives: 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.
Prohibit “dual compensation”: Under the CFPB’s rules, the loan originator cannot get paid by both the consumer and another person such as the creditor.
Set Qualification and Screening Standards: 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: Loan originators must meet character, fitness, and financial responsibility reviews;
Criminal Background Checks: Loan originators must be screened for felony convictions; 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.
In August, the CFPB issued a proposed rule requiring mortgage loan originators to make available a loan option with no upfront discount points or origination fees, if they were making available one with upfront discount points or origination fees. Based on the comments received, the CFPB has decided not to finalize this part of the proposal.
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.
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