CFPB’s New Rules Ban Incentives for Risky Mortgages

CFPB’s New Rules Ban Incentives for Risky Mortgages


While the foreclosure crisis has more than one culprit, the Center for Responsible Lending (CRL) pointed to the significant role of predatory lending practices in a report on the state of lending.

According to data from CRL, among hybrid or ARM option loans originated between 2004 and 2008, 24.7 percent are either seriously delinquent or have become completed foreclosures as of February 2012. On the other hand, only 11.3 percent of fixed rate or standard ARMs originated during the same time period have gone into foreclosure or are seriously delinquent.

To prevent loan originators from directing borrowers toward risky mortgages with features such as higher rates and prepayment penalties, the Consumer Financial Protection Bureau (CFPB) issued new rules Friday to ban incentives for selling risky mortgages.

“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 CFPBdirector

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.”

One of the rules prohibits higher compensation according to loan terms. With the new rule, brokers and loan officers are prevented from receiving higher pay if a borrower takes out a loan with a higher interest rate, a prepayment penalty, or higher fees. In addition, originators are no longer able to receive more money if a borrower decides to purchase title insurance from the lender’s affiliate.

The bureau also established a rule to place a ban on dual compensation, which occurs if a loan originator gets paid by both the borrower 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,” the CFPB stated.

Higher qualification standards were also established for loan originators. Qualification standards may differ depending on whether the originator works for a bank, thrift, mortgage brokerage, or nonprofit, but the bureau outlined a few general rules.

The rules require originators to be screened for felony convictions, to receive training on rules governing the types of loans they originate, and to meet character, fitness, and financial responsibility reviews.

The rules will take effect in January 2014.

The CFPB also established a rule for mortgage and home equity loans that generally prohibits mandatory arbitration of disputes and the practice of increasing loan amounts to cover credit insurance premiums. Those rules will take effect in June 2013.

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