The Consumer Financial Protection Bureau (CFPB) on May 9th outlined proposed rules it is considering aimed at simplifying mortgage points and fees in an effort to bring greater transparency to the mortgage loan origination market. These rules, which the CFPB expects to propose this summer and finalize by January 2013, are intended to make it easier for consumers to understand mortgage costs and compare loans so they can choose the best deal.
The 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) places certain restrictions on the points and fees offered with most mortgages. The CFPB is considering proposals that would:
- Require an Interest-Rate Reduction When Consumers Elect to Pay Discount Points: Discount points are a fee, expressed as a percentage of the loan amount, to be paid by the consumer to the creditor at the time of loan origination in return for a lower interest rate. Discount points can benefit consumers by allowing them to reduce their monthly loan payments. The CFPB is considering proposals to require that any discount point be “bona fide,” which means that consumers must receive at least a certain minimum reduction of the interest rate in return for paying the point.
- Require Lenders to Offer Consumers a No-Discount-Point Loan Option: It is sometimes confusing for consumers to compare loan offers that have different combinations of points, fees, and interest rates. Under the proposal under consideration, consumers must also be offered a no-discount-point loan that would enable the homebuyer to better compare competing offers from different lenders.
- Ban Origination Charges that Vary with the Size of the Loan: Brokerage firms and creditors would no longer be allowed to charge origination fees that vary with the size of the loan. These “origination points” are sometimes confused with discount points. Instead, under the rules the CFPB is considering, brokerage firms and creditors would be allowed to charge only flat origination fees.
In addition to regulating origination points and fees, the proposals the CFPB is considering would address mortgage loan originators’ qualifications and compensation. Mortgage loan originators, who take mortgage loan applications from consumers seeking to buy a home or refinance a mortgage, include mortgage brokers and loan officers. The rules the CFPB is considering would:
- Set Qualification and Screening Standards: Under state law and the Federal Secure and Fair Enforcement Act, loan originators currently have to meet different sets of standards, depending on whether they work for a bank, thrift, mortgage brokerage, or nonprofit organization. The CFPB is considering rules to implement Dodd-Frank requirements that all loan originators be qualified. The proposal is intended to help level the playing field for different types of loan originators so consumers could be confident that originators are ethical and knowledgeable.
- Prohibit Paying Steering Incentives to Mortgage Loan Originators: In 2010, the Federal Reserve Board issued a rule that prohibits loan originators from directing consumers into higher priced loans because they could earn more money. The Dodd-Frank Act requires the CFPB to issue rules as well. The proposals the CFPB is considering would reaffirm the Board’s rule, which bans the practice of varying loan originator compensation based on interest rates or certain other loan terms. The CFPB’s proposal would also clarify certain issues in the existing rule that have created some industry confusion.
In developing a formal proposal, the CFPB plans to engage with consumers and industry, including a Small Business Review Panel that will meet with a group of representatives of the small financial services providers that would be directly affected by the proposals under consideration. The documents that the CFPB will be sharing with these small providers include an overview of the proposals under consideration and a list of questions for input. The small provider representatives will provide feedback to the Panel on the proposals the CFPB is considering and suggest alternatives. The Panel will issue a report summarizing this feedback, which the CFPB will consider when formulating the proposed rules.