CFPB Issuing Rules to Prevent Loan Originators from Steering Consumers into Risky Mortgages

WASHINGTON, D.C. — The Consumer Financial Protection Bureau (CFPB) is issuing rules to prevent mortgage lenders from steering borrowers into risky and high-cost loans. The rules ban certain incentives that loan originators had to sell unsafe loans to consumers in the run-up to the financial crisis.

“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.”

Mortgage loan originators – loan officers and mortgage brokers – generally present different kinds of loans to consumers depending on the consumer’s needs. Consumers can work with multiple loan originators to compare the offers that the loan originators obtain from creditors.

In the run-up to the housing crisis, unscrupulous mortgage loan originators too often led prospective homebuyers into risky and high-priced loan terms because they would generate higher compensation for themselves. The Federal Reserve Board, and then Congress through the Dodd-Frank Wall Street Reform and Consumer Protection Act, took important steps to limit these unscrupulous loan origination practices. The CFPB is finalizing the regulations governing how loan originators are compensated.

The rules:

• 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. Previously, loan originators could make more money by getting the consumer to buy these services from the lender, broker, or one of their affiliates.
• 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. 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.
• 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. Once the new set of Dodd-Frank rules that the Bureau is implementing take effect, the Bureau will evaluate how those rules are affecting consumers’ understanding of upfront charges and the decisions consumers make.

To develop these mortgage origination rules, the CFPB 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.

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, among other things, be publishing implementation guides, and, in coordination with other agencies, be releasing materials that help creditors and originators understand supervisory expectations. As the effective dates approach, the CFPB will give consumers information about their new rights under these rules.

The final rules will be available on Sunday, January 20, at: https://www.consumerfinance.gov/regulations

A summary of the final rules is available at: https://files.consumerfinance.gov/f/201301_cfpb_loan-originator-compensation-rule_summary.pdf