CFPB Cracks Down on Mortgage Lenders' Compensation

WASHINGTON — The Consumer Financial Protection Bureau continued to release a series of rules overhauling the mortgage system this week, unveiling new regulations on Friday that restrict compensation for loan originators and establish specific qualifications for mortgage brokers and loan officers.

One rule largely bans compensation to mortgage originators based on loan terms, including a higher interest rate or generally a high-cost loan. The agency said the rule is meant to prevent originators from wrongfully placing borrowers into risky loans in order to get higher payouts.

"One of the reasons for the collapse was that mortgage borrowers were steered towards high-cost and risky loans they had no real chance of paying back," said CFPB Director Richard Cordray in a conference call Friday. "The higher the interest rate on the loan or the more the consumer paid in upfront charges, the more the loan originator profited."

Under the final rule, the CFPB will prohibit loan originators — including mortgage brokers and loan officers — from:

a.) Compensation that varies with the loan terms. "A broker or loan officer cannot get paid more if the consumer takes a loan with a higher interest rate, a prepayment penalty or higher fees," the CFPB said. This includes if the borrower agrees to buy title insurance from an affiliate of the lender's affiliate.

b.) Allowing "dual compensation." The loan originator cannot get paid by both the consumer and another party such as a creditor.

The rule also prohibits originators from including clauses that require the consumer to submit disputes on a mortgage or home equity line of credit to binding arbitration. Originators also cannot finance any premiums or fees for credit insurance, such as credit life insurance, in connection with a consumer loan tied to a dwelling. The credit insurance can, however, be paid for on a monthly basis.

"Our new rules close loopholes to help ensure that loan originator compensation may not be based on the terms of the mortgage transaction," Cordray said. "At the same time, they spell out compensation practices that are legitimate and permissible."

There was one piece of good news for the industry, however, as the CFPB said it is delaying consideration of certain restrictions on up-front fees it was considering last year. In August, the agency proposed a rule requiring originators to offer a loan with no up-front fees or discount points. Lenders charge such fees typically as a way for the borrower to buy down points on their interest rate and potentially lower their monthly payments.

But after receiving comments, Cordray said the bureau decided the up-front charges do fit in certain cases.

"If the consumer plans to stay in the home for many years without refinancing, then paying points to obtain a lower rate may make sense, if the consumer has the money available," he said.

CFPB senior officials said during a conference call Friday that the agency would continue to review the proposal after it sees the effects of other related rules such as "qualified mortgage" regulation released Jan. 10. That rule also includes a 3% cap on loan origination fees based on the total loan amount.

The agency also released a separate rule that establishes universal requirements for who qualifies as a loan originator, as there are currently different classifications under existing rules.

The CFPB said the rule creates a "level playing field" between those who are licensed or registered under the Secure and Fair Enforcement for Mortgage Licensing Act, or SAFE Act.

Those qualifications include a criminal background checks, detailing certain convictions that are disqualifying; periodic training in the types of loans they originate; and "character and fitness requirements" to the SAFE Act.

"Consumers deserve to have confidence that loan originators are ethical and knowledgeable," Cordray said.

The CFPB intends to publish the final rules online Jan. 20. The rules take effect throughout next year.