In the years before the financial crisis, mortgage originators were rewarded with bonuses and higher pay for steering millions of Americans into risky and unsustainable home loans.
Starting next January, however, brokers’ and loan officers’ compensation will no longer be based on the terms of the mortgages they originate, according to new guidelines released Friday by the Consumer Financial Protection Bureau.
The rules are the latest effort by the consumer watchdog to improve the way homeowners interact with the mortgage industry at every step of the lending process. In the past eight days, the agency has handed down a series of guidelines that include requiring mortgage servicers to provide struggling homeowners with options to avoid foreclosure and curtailing harmful practices such as interest-only payments.
The agency issued another rule on Friday that requires lenders to automatically provide borrowers with a copy of the appraisal report used in the evaluation of their home-loan application.
The flurry of new rules codifies many conservative lending practices that have become commonplace in the aftermath of the financial crisis. They provide a framework that consumer groups say has been sorely missing in the housing market.
“These rules are about protecting people from predatory lending practices,” CFPB director Richard Cordray said in a conference call announcing the origination rules. “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.”
Still, some advocates worry that the rules will fall short of fully protecting consumers from unsavory practices. Banking groups, meanwhile, are concerned that implementing so many changes at once will drive up costs for lenders, and ultimately consumers.
For would-be homeowners, mortgage brokers and loan officers are there to help in obtaining a home loan. They can negotiate the terms of the loan and they are supposed to ensure that borrowers are placed in mortgages that they can afford.
But in the go-go days of the housing market, originators had incentives to push risky loans — such as those with interest-only payments —because they often came with the highest fees.
Under the CFPB’s new rules, mortgage brokers and loan officers can no longer be paid more if the borrower takes a loan with a higher interest rate, a prepayment penalty or higher fees — all features of subprime loans.
The agency also outlawed “dual compensation,” whereby brokers are paid by both the consumer and the lender for their services. Originators must be screened for felony convictions and undergo training to ensure they are knowledgeable about the rules governing the types of loans they originate.
Analysts say the origination rules coupled with restrictions on points — the upfront fees borrowers pay to brokers to reduce the interest rate on their loan — and other fees contained in the agency’s qualified mortgage rules issued last week will radically change the mortgage lending business.
For example, the qualified mortgage rule limits the total amount of fees that can be charged on a loan, while the origination rule prohibits compensation for steering consumers into title insurance provided by affiliates.
“The one-stop-shop model used by many in the mortgage industry in the run-up to the housing bubble is being placed under considerable regulatory pressure,” said Isaac Boltansky, a financial policy analyst at Compass Point. “There can be little doubt that the CFPB’s aim here is to incentivize shopping around.”
One key change to the draft of rules the CFPB proposed last August involves points. The agency decided to study how the mortgage rules impact consumers’ decisions about upfront origination charges before issuing a final decree.
“We recognize that even when the loan originator is working in the consumer’s interest, pricing is still an extremely complex process,” Cordray said. “It involves a series of trade-offs for both the consumer and the lender between upfront and long-term payments.”
The consumer bureau’s origination rules arrive on the heels of its appraisal rule, which amended a provision of the Equal Credit Opportunity Act.
The rule, which will take affect Jan. 18, 2014, requires lenders to notify home buyers of their right to get a copy of an appraisal within three business days of receiving an application. It also prohibits lenders from charging for the copy of appraisals and other written valuations, but allows lenders to charge for the cost of the services.
The agency wants to ensure that consumers do not pay more for a home than what it is actually worth and that banks use accurate information to value the property.
The CFPB’s guidelines dovetail with a final joint rule addressing appraisals for higher- priced loans also issued on Friday. The agency, alongside five other federal regulators, said lenders making loans with interest rates above a certain threshold will need a certified appraiser to inspect the interior of the property.
Debra W. Still, chairman of the Mortgage Bankers Association, said the appraisal rules “appear to be reasonable, common-sense solutions.” She said she anticipates the standards will increase transparency, “hopefully without unnecessarily increasing costs or reducing access for borrowers.”