CFPB Issues Final Mortgage Rules That Limit Originator Compensation
The Consumer Financial Protection Bureau released final mortgage rules Friday that restrict compensation for loan originators, prohibiting pay that is based on loan terms. However, the CFPB said in a release the final rule does not include a proposed clause that would have required lenders to offer a no points and/or fees mortgage if they were offering a mortgage with points.
“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 new rules prohibit compensation based on loan terms, meaning that loan originators can’t be paid more if the consumer takes a loan with a higher interest rate, prepayment penalty, or higher fees.
Bonuses or higher pay for selling title insurance for a lender’s affiliate is also banned. Originators also are prohibited from “dual compensation” in which they are paid by both the consumer and the creditor.
The new rule also requires that all loan originators, regardless of employer, meet the same character and fitness requirements, be screened for criminal backgrounds and undertake ongoing training about mortgage regulations.
The final rule also prohibits mandatory arbitration of disputes related to mortgage loans and the practice of increasing loan amounts to cover credit insurance premiums. While most of the final rule takes effect in January 2014, these two parts will take effect June 2013.
One item in the proposed rule that was scrapped for the final rule was a requirement that originators 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.
Once the rules take effect in January 2014, the CFPB said it will evaluate how they affect consumers’ understanding of upfront charges and the decisions consumers make.
To help with compliance, the CFPB said it 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.