New US mortgage broker rules target risky loans

WASHINGTON Fri Jan 18, 2013 3:33pm EST

WASHINGTON Jan 18 (Reuters) - New rules that aim to eliminate incentives for mortgage brokers to push unsafe loans were announced on Friday by U.S. consumer regulators, but they backed away from a rule that would have required lenders to offer borrowers a loan option without extra fees.

Mortgages carry different combinations of points and fees that borrowers can pay to reduce the interest rate on a loan.

The U.S. Consumer Financial Protection Bureau had proposed to permit mortgages to carry such upfront charges as long as lenders also gave consumers the option of a loan with no points or fees.

Instead of finalizing that plan, the bureau will study how the raft of new rules it has put forth in recent weeks affects the mortgage market before issuing any new regulations for upfront points and fees, CFPB officials said on Friday.

"Once our new mortgage rules take effect, we will study how they are affecting consumer understanding and decision-making about upfront origination charges, and we will consider further how to protect consumers in this area," CFPB director Richard Cordray told reporters on Friday.

The 2010 Dodd-Frank financial oversight law, which created the consumer bureau, would have banned lenders from attaching points and fees to most loans, but it gave the CFPB leeway on the issue.

Under the CFPB's original proposal, mortgage brokers that offered loans that allowed borrowers to lower their interest rates by paying points and fees would also have to offer a loan with no such extra payments.

But bank groups said the plan could cause headaches for lenders. The CFPB decided not to put it in place after determining there could also be problems for consumers.

For example, officials said offering both options side-by-side could lead borrowers to believe they should choose the mortgage with no upfront charges, even though paying fees in exchange for a lower interest rate could be the better choice for some borrowers.

Under the current rules, lenders will be able to continue offering loans with such upfront charges while the bureau studies the issue, CFPB officials said.

The CFPB did announce final regulations for how loan officers and mortgage brokers are paid, which it also proposed last August.

During the years leading up to the 2007-2009 U.S. financial crisis, loan officers and brokers often had financial incentives to lead consumers to loans with unfavorable terms, the consumer bureau said.

Under the rules announced on Friday, mortgage brokers and loan officers would be prohibited from being paid more when consumers take on loans with higher interest rates or fees.

The rules also block loan originators from being paid by both the consumer and the creditor, and they require brokers and loan officers to pass character reviews and meet training requirements.

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