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CFPB Issues New Rules for Risky Mortgages

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In an effort to help prevent mortgage issuers from directing potential homeowners toward taking mortgages they may not be able to afford, the federal consumer financial watchdog agency recently announced new rules for the lending industry.

The Consumer Financial Protection Bureau’s new rules for mortgage originators, which includes both loan officers and brokers, are designed to give professionals more options for extending would-be borrowers the best possible terms so they can avoid high-cost financing, according to a report from the agency. These types of generally unaffordable loans, signed with little consideration to whether a borrower would default on them, were common practice in the first half of the 2000s, but have since gained considerable scrutiny following the recent recession.

“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.”

The first of the rules prohibits lenders from introducing steering incentives for their employees, the report said. Consequently, loan officers or brokers cannot be paid more for consumers who take loans with higher interest rates, penalties or fees, and there can be no additional payments for purchases of title insurance through affiliates. Further, loan originators cannot receive “dual compensation,” which are payments from both consumers and creditors.

Finally, the rules also put forth qualification and screening standards for the entire country, the report said. Previously, varying state and federal laws allowed loan originators to operate under different sets of standards depending upon what type of financial institution they worked for, and the new rules try to create more uniform standards nationwide so consumers know exactly what they’re dealing with. These new standards mandate that originators must meet character and fitness requirements, go through criminal background checks and undergo training to verify they understand the rules under which they are now operating.

These rules will take effect at different points in the near future. One prohibiting mandatory arbitration and financing of credit insurance goes into effect in June, while the rest will be final in January 2014.

The CFPB has been making huge strides in protecting mortgage borrowers in recent months, after first focusing on credit cards and other types of consumer debt.

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