The Consumer Financial Protection Bureau (CFPB) announced Friday a final rule that addresses compensation paid to loan originators and mortgage brokers.
The rules prohibit steering incentives, dual compensation and also establishes new qualification and screening standards for originators.
“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.”
Under the rules, brokers or loan officers cannot receive additional payment if the consumer chooses a loan with a higher interest rate, a prepayment penalty or higher fees. Originators also cannot get paid more if consumers agree to buy title insurance from the lender’s affiliate.
The rule also prohibits originators from receiving dual compensation, meaning getting paid by both borrower and the creditor. CFPB’s rationale being that during the run-up to the crisis, originators steered consumers into products that would yield greater payment.
The new rule is also meant to level the playing field by ensuring all mortgage originators meet certain sets of qualifications.
While non-bank originators are already required to meet the Secure and Fair Enforcement for Mortgage Licensing (SAFE) Act licensing requirements, the CFPB’s rule provides additional guidance for other loan officers.
Originators who work for depository institutions and nonprofits must meet character, fitness and criminal standards similar to existing SAFE Act licensing standards and provide training to their employees.
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.
View a summary of the rule here.
Written by Jason Oliva