The Consumer Financial Protection Bureau (CFPB) has been on a rulemaking roll lately, and one of its most recent announcements concerns loan originators and their key role in the mortgage industry. In accordance with the Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010, the CFPB has issued new rules that essentially restrict the actions of mortgage loan officers in an effort to protect borrowers.
The new rules are part of a major overhaul of Regulation Z and the Truth in Lending Act (Reg Z and TILA); they will go into effect in early 2014, with the exception of a new borrower arbitration provision and the prohibition of extending products such as credit life insurance in connection with mortgage lending, which will go into effect in June 2013. The following highlights from the CFPB specifically address mortgage loan originators:
No More Steering or Increased Compensation
Mortgage loan officers are often recruited by lenders with promises of unlimited compensation, but they will no longer be able to make more money based on the features of the loans they offer to applicants. This means no more bonus payments for loan originators who sell balloon mortgages, prepayment penalties, higher interest rates, etc. This also means that loan officers can no longer be compensated for talking borrowers into purchasing title or homeowners’ insurance from specific companies affiliated with their lenders.
No More Compensation from Multiple Sources
Under the new rules, mortgage originators will only be paid by one source, which can be the applicant or the lender. Dual compensation schemes are now prohibited, and this includes compensation from third parties like real estate or insurance agents. The CFPB believes that this issue alone was instrumental in the collapse of the housing and mortgage markets circa 2007-2008.
No Requirement on Offering No Upfront Discount Points or Fees
The mortgage lending landscape in the U.S. is radically changing, and savvier applicants will certainly ask their lenders about home loans without upfront points and origination fees starting this year, but loan officers are not required to directly offer them.
Loan Officer Licensing and Good Character
Not all loan originators must be licensed per the new rules. Those who work for retail mortgage lenders that double as banks, like Citi and Wells Fargo, are exempt from licensing under certain circumstances. All loan officers, however, must meet certain criminal background and credit check requirements. They will also be expected to attend regular training sessions provided by their employers.