On May 9, 2012 the Consumer Financial Protection Bureau (CFPB) outlined rules it is considering that would simplify (or strangle) mortgage points and fees. These rules, which the CFPB expects to propose this summer and finalize by January 2013, would make it easier for consumers to understand mortgage costs and compare loans so they can choose the best deal.
The CFPB is considering proposals, required by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), which 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 must 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 often difficult for consumers to compare loan offers that have different combinations of points, fees, and interest rates. Under the proposal, consumers must also be offered a no-discount-point loan. This 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 easily 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.
- 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 would help level the playing field for different types of loan originators so consumers could be confident that originators are ethical and knowledgeable. All loan originators would be:
- Subject to the same standards for character, fitness, and financial responsibility;
- Screened for felony convictions; and
- Required to undertake training to ensure they have the knowledge necessary for the types of loans they originate.
- 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 industry confusion.
It is going to be a busy summer. If the CFPB issues the proposals, as discussed above, expenses will increase (training for MLOs for example) and revenue will be cut (points). We all need to watch for the proposals, study them diligently when they are released, and submit thoughtful comment letters in response. The industry is changing rapidly.
For more information click here to access a detailed 37-page review of the proposal. It’s the sixth link down titled “Small Business Review Panel for Residential Mortgage Loan Origination Standards Rulemaking.”