On mortgage reform: “One of the reasons for the collapse was that mortgage borrowers were steered towards high-cost and risky loans they had no real chance of paying back.”
The landmark overhaul of federal mortgage regulations includes protections to prevent loan originators and mortgage brokers from steering consumers to risky mortgages.
Mandated by the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act and deployed by the Consumer Financial Protection Bureau, a batch of seven new mortgage reform regulations is designed to protect consumers from irresponsible, abusive and predatory mortgage lending and servicing practices.
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The new mortgage reform rules, effective in January 2014, seek to avoid a repeat of practices that brought the economy to its knees.
“One of the reasons for the collapse was that mortgage borrowers were steered towards high-cost and risky loans they had no real chance of paying back. Lenders did that because it made them more money. The higher the interest rate on the loan or the more the consumer paid in upfront charges, the more the loan originator profited,” said Richard Cordray, CFPB director during a press conference.
The new rules are designed to hold loan originators’ feet to the fire so they don’t burn more consumers with abusive loans that cost more than the borrower needs to pay.
Mortgage reform targets loan steering for profit
The new rules:
Prohibit steering incentives – Mortgage reform 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, higher fees or buys title insurance or other financial services from the lender’s affiliate.
Prohibit “dual compensation” – The broker or originator cannot get paid by both the consumer and another person, say, 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 must meet different sets of qualification standards, depending on whether they work for a bank, thrift, mortgage brokerage, or nonprofit organization.
These rules level the 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 anti-steering mortgage reform 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.
“Fundamentally, these rules are about protecting people from predatory lending practices. By adopting the loan originator compensation rule, we are enhancing the efficiency of the mortgage market and working in the best interest of the American consumer,” Cordray said.
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