CFPB Issues Rules to Prevent Loan Originators from Steering Consumers into Risky Mortgages

The title of the press release issued by CFPB is pretty straight forward, but because this is the internet, we’ve decided to break it down for you in our blog.

Before the financial crisis, how money actually worked was a bit of an arcane subject; you trusted that the person explaining the baffling process to you knew what they were talking about and was actually looking out for your (the consumer’s) best interest, because that was good business sense, right?  Sadly, the crash of the housing and mortgage markets of the U.S. made it apparent that not everyone was looking out for the consumer’s best interest.

“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.”

So what are the new rules?

  1. No steering incentives: Compensation to loan originators cannot vary with the terms of the loan. That means higher interest rates, fees and penalties will not benefit the originator.
  2. No dual compensation: The loan originator cannot get paid twice anymore, traditionally by both the consumer and the creditor. It’s sort of like declaring it illegal for elected officials to take bribes and hopefully much more effective.
  3. Qualification and Screening standards for loan originators: This is a good one.  These standards are meant to level the playing field so that consumers can be more confident that originators are ethical and knowledgeable.  This is more along the lines of criminal background checks and less whether originators went to an ivy league school.

These new rules will take effect in January of 2014.  Expect the loan officer pool to get a little tighter, though ideally that will be counterbalanced a bit by a little less worry in the wallets of American homeowners.

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