New rules designed to protect borrowers from taking out risky mortgages

Cordray told reporters that the rule will provide a “more stable and sustainable” mortgage market and ensure that consumers are better protected from predatory loan practices. 

The rules, which are required under the Dodd-Frank financial law and will go into place in January 2014, prohibit a mortgage originator for getting paid more for loan terms, such as a higher interest rate, a prepayment penalty, higher fees or even if a consumer agrees to buy title insurance from the lender’s affiliate, as had previously happened. 

They are the final batch of rules that the CFPB will issue on mortgages. 

Under the rules, the loan originator also cannot get paid by the consumer and another person such as the creditor. 

“Congress also specified that loan originators should be motivated by proper incentives,” Cordray said. 

“Our new rules close loopholes to help ensure that loan originator compensation may not be based on the terms of the mortgage transaction. At the same time, they spell out compensation practices that are legitimate and permissible.”

The rules also require loan originators to meet a more consistent set of across-the-board guidelines such as character, fitness and financial responsibility reviews, screenings for felony convictions and training about the rules for the loans they originate. 

The ramped-up requirements build on the Secure and Fair Enforcement for Mortgage Licensing (SAFE) Act, which already ensures that loan originators meet certain standards, providing more assurance to consumers that their loan officers are qualified. 

After consideration since August, the CFPB opted against putting into place a provision that would require loan originators to make available a loan option with no upfront discount points or origination fees, if they were making available one that included those components.

Based on the comments received from a broad range of financial institutions, the agency determined that simply offering those two mortgage products didn’t mean the consumer would get a better deal on their loan, such as a lower monthly payment, and that it could inject more risk and uncertainty into consumers’ individual decisions based on their financial situation.

The rule might have hurt consumers and didn’t correspond to the way pricing works in the market, a senior CFPB official told reporters on Friday.

The agency intends to continue exploring options to implement a rule that provides better protections on that front. 

The final rule also implements Dodd-Frank provisions that, for mortgage and home equity loans, generally prohibit mandatory arbitration of disputes related to mortgage loans and the practice of increasing loan amounts to cover credit insurance premiums.

The rules on the prohibition on mandatory arbitration and on the financing of credit insurance will take effect in June.

The final rules will be available on Sunday here. A summary of the final rules is available here.