CFPB Announces Rules to Reform Originator Compensation

Hours after issuing ""guidelines"":https://themreport.com/articles/regulators-unveil-appraisal-rules-for-lenders-2013-01-18 to govern appraisal disclosures, the ""Consumer Financial Protection Bureau"":http://www.consumerfinance.gov/ announced more new rules designed to shape up origination practices.

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The new regulations prohibit what the bureau calls ""steering incentives,"" such as compensating originators based on loan terms. Under the rules, brokers and loan officers cannot get paid more if the consumer takes a loan with a higher interest rate, a prepayment penalty, or higher fees.

Furthermore, the originator cannot be paid more if the consumer agrees to buy additional services (such as title insurance) for the lender or one of its affiliates.

The rules also say that loan originators cannot get paid by both the consumer and another party (such as the creditor), a practice that may lead to a conflict of interests.

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""These rules recognize that people tend to do what they get paid to do,"" said CFPB director Richard Cordray in prepared remarks. ""By removing financial incentives for originators to push borrowers toward risky loans, we are ensuring that the mortgage market will be more stable and sustainable, and consumers will be better protected.""

In addition, the final rule implements Dodd-Frank provisions that prohibit mandatory arbitration agreements and the increasing of loan amounts to cover credit insurance premiums.

The new rules also establish screening and qualification standards for different types of loan originators, including character and fitness requirements, financial responsibility reviews, and criminal background checks. There is also a requirement for periodic training to ensure originators are knowledgeable about the rules governing the types of loans they originate.

Absent from the set of rules is a proposal from August that would require originators to offer loans without upfront origination fees (assuming they also offer a loan that does feature upfront fees). CFPB scrapped the proposal based on comments from industry groups and will evaluate the issue once all the other rules are put into place.

Most of the rules will take effect January 2014. The prohibition on mandatory arbitration and on the financing of credit insurance take effect June 2013, the bureau announced.

The final rules will be available January 20 on CFPB's website.