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The Consumer Financial Protection Bureau (CFPB) has continued to reshape the mortgage banking industry with the introduction of two new rules.

On Friday afternoon, the CFPB announced rules to prevent mortgage lenders from steering borrowers into risky and high-cost loans. The rules ban certain incentives that loan originators had to sell unsafe loans to consumers in the run-up to the financial crisis.

"Before the financial crisis, many mortgage borrowers were steered towards risky and high-cost loans because it meant more money for the loan originator," says 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 new rules prohibit steering incentives, as well as dual compensation systems that enabled loan originators to get paid by both the consumer and another person such as the creditor. The CFPB also issued qualification and screening standards for loan originators that include character and fitness requirements, criminal background checks and training requirements. All of the new rules go into effect in January 2014.
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However, the CFPB decided not to pursue a proposed rule requiring mortgage loan originators to make available a loan option with no up-front discount points or origination fees, if they were making available one with up-front discount points or origination fees. This decision was based on comments received last year when the proposed rule was announced for consideration.

Separately, the CFPB made a rare Sunday news announcement that it was amending Regulation Z to implement amendments to the Truth in Lending Act. According to the agency, the final rule "implements requirements and restrictions imposed by the Dodd-Frank Act concerning loan originator compensation; qualifications of, and registration or licensing of, loan originators; compliance procedures for depository institutions; mandatory arbitration; and the financing of single-premium credit insurance."

The new rule also establishes tests for when loan originators can be compensated through certain profit-based compensation arrangements.

"At this time, the bureau is not prohibiting payments to and receipt of payments by loan originators when a consumer pays up-front points or fees in the mortgage transaction," says the CFPB in a press statement. "Instead, the bureau will first study how points and fees function in the market and the impact of this and other mortgage-related rulemakings on consumers' understanding of and choices with respect to points and fees. This final rule is designed primarily to protect consumers by reducing incentives for loan originators to steer consumers into loans with particular terms and by ensuring that loan originators are adequately qualified."


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