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CFPB Proposes Rules to Bring Greater Accountability to Mortgage Market

Rules Would Help Consumers Understand Mortgage Costs and Comparison Shop

WASHINGTON, D.C. — Today, the Consumer Financial Protection Bureau (CFPB) proposed rules that would bring greater accountability to the mortgage loan origination market. These rules, which the CFPB is seeking comment on and will finalize by January 2013, would make it easier for consumers to understand mortgage costs and compare loans so they can choose the best deal.

“Consumers have a hard time comparing loans when they are dealing with a bewildering array of points and fees,” said CFPB Director Richard Cordray. “We want to provide consumers with clearer options and enable them to choose the loan that they believe is right for them.”

The Dodd-Frank Wall Street Reform and Consumer Protection Act places certain restrictions on the points and fees offered with most mortgages and the qualification and compensation of loan originators. Most notably, without this rulemaking, the Dodd-Frank Act would prohibit payment of upfront points and fees for most mortgages even where a consumer prefers a loan with a lower interest rate and some upfront costs. The CFPB is seeking public comment on a proposal that would:

  • Require Lenders to Make a No-Point, No-Fee Loan Option Available: It is often difficult for consumers to compare loans that have different combinations of points, fees, and interest rates. Under the proposed rule, creditors would have to make available to consumers a loan without discount points or origination points or fees, unless the consumers are unlikely to qualify for such a loan. These options would enable a consumer buying or refinancing a home to better compare competing offers from different creditors, better able to compare loan offers from a particular creditor, and decide whether they would receive an adequate reduction in monthly loan payments in exchange for the choice of making upfront payments.
  • Require an Interest-Rate Reduction When Consumers Elect to Pay Upfront Points or Fees: Consumers can pay points, which are expressed as a percentage of the loan amount, and fees to covers costs associated with origination or prepaid interest charges. While these points and fees come in many different names and combinations, they all should function similarly to reduce the interest rate and thus a consumer’s monthly loan payments. The CFPB is seeking comment on proposals to require that any upfront payment, whether it is a point or a fee, must be “bona fide,” which means that consumers must receive at least a certain minimum reduction of the interest rate in return for paying the point or fee.

In addition to regulating upfront points and fees, the CFPB is proposing changes to existing rules governing mortgage loan originators’ qualifications and compensation. Mortgage loan originators, who take mortgage loan applications from consumers seeking to buy a home or refinance a mortgage, include mortgage brokers and loan officers. The rules the CFPB is proposing would:

  • Set Qualification and Screening Standards: Under state law and the federal Secure and Fair Enforcement for Mortgage Licensing Act, loan originators currently have to meet different sets of standards, depending on whether they work for a bank, thrift, mortgage brokerage, or nonprofit organization. The CFPB is proposing rules to implement Dodd-Frank Act requirements that all loan originators be qualified. The proposal would help level the playing field for different types of loan originators so consumers could be confident that originators are ethical and knowledgeable. The proposed rule includes:
    • Character and Fitness Requirements: All loan originators would be subject to the same standards for character, fitness, and financial responsibility;
    • Criminal Background Checks: Loan originators would be screened for felony convictions; and
    • Training Requirements: Loan originators would be required to undertake training to ensure they have the knowledge necessary for the types of loans they originate.
  • Prohibit Payment of Steering Incentives to Mortgage Loan Originators: In 2010, the Federal Reserve Board issued a rule that was designed to curtail the practice of loan originators directing consumers into higher priced loans based not on the consumer’s interest, but on the possibility that the loan originator could earn more money. The Dodd-Frank Act included a similar provision banning the practice of varying loan originator compensation based on interest rates or other loan terms. The CFPB’s rule would implement the Dodd-Frank Act provision and clarify certain issues in the existing rule that have created industry confusion.
  • Place Restrictions on Arbitration Clauses and Financing of Credit Insurance: The proposal implements Dodd-Frank Act provisions that, for both mortgage and home equity loans, prohibit including mandatory arbitration clauses in loan documents and increasing loan amounts to cover credit insurance premiums.

The CFPB has engaged with consumers and industry, including through a Small Business Review Panel, and used this feedback in developing the proposed rules. The Bureau believes that today’s proposal, if adopted, would promote stability in the mortgage market, which would otherwise face radical restructuring of the current pricing structure in order to comply with Dodd-Frank.

The public will have 60 days, until October 16, 2012, to review and provide comments on the proposed rules. The CFPB will review and analyze the comments before issuing final rules in January 2013.

An overview of the proposal is available at: http://files.consumerfinance.gov/f/201208_cfpb_detailed_summary_of_proposed_loan_originator_rules.pdf

The proposed rules are available at: http://www.gpo.gov/fdsys/pkg/FR-2012-09-07/pdf/2012-20808.pdf

The SBREFA Panel report on the outreach with small servicers is available at: http://files.consumerfinance.gov/f/201208_cfpb_LO_comp_SBREFA.pdf

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