New regulations were introduced today by the Consumer Financial Protection Bureau (CFPB) intended to bring greater accountability to the mortgage loan origination market. The new rules are now available for public comment and will be finalized by January 2013.

The new regulations are being proposed by CFPB in accordance with restrictions on points and fees charged for most mortgages by the Dodd-Frank Wall Street Reform and Consumer Protection Act which set requirements for the qualification and compensation of loan originators.  CFPB said that, without this rulemaking, the Act would prohibit payment of upfront points and fees for most mortgages even where a consumer prefers a loan with a lower interest rate and some upfront costs.

The proposed rules will require lenders to make an option available to borrowers without discount points, origination points, or fees.  Unless the customer is unlikely to qualify for such a loan, the lender would have to propose that option so that the consumer has a standard against which to compare competing offers from that creditor and among different creditors.  The Bureau says it is often difficult for consumers to compare loans that have different combinations of points, fees, and interest rates and, in addition to comparison shopping, this information will help them decide whether they would receive an adequate reduction in monthly loan payments in exchange for the choice of making upfront payments.

The new rules will also require that lenders give consumers an interest rate reduction when they elect to pay upfront points or fees.  Points and fees are given many different names and combinations, CFPB says, but they should all function similarly to reduce the interest and thus a consumer's monthly loan payments. The CFPB is seeking comment on proposals to require that any upfront payment, whether it is a point or a fee, 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 or fee.

The proposed regulations also include changes to existing rules about mortgage loan originators' qualifications and compensation.   CFPB proposes to implement the Dodd-Frank Act requirements for qualifications for all loan originators, replacing the different standards that now prevail for originators depending on whether they work for banks, thrifts, mortgage brokers, or non-profit organizations.   This would help level the playing field for different types of loan originators so consumers could be confident that originators are ethical and knowledgeable.

CFPB proposes that all loan originators be subject to the same standards for character, fitness, and financial responsibility.  They would be screened for felony convictions and required to undertake training to ensure they have the knowledge necessary for the types of loans they originate.

The Federal Reserve and the Dodd Frank Act have similar but not identical provisions designed to curtail the practice of loan originators steering consumers into higher priced loans solely to increase their own compensation.  The new CFPB rule would implement the Dodd-Frank Act version which banned the practice of varying loan originator compensation based on interest rates or other loan terms.  This will eliminate certain issues in existing rules that have created confusion.

Finally, the proposed rules place restrictions that prohibit both the inclusion of mandatory arbitration clauses in loan documents and increasing loan amounts to cover credit insurance premiums.  These restrictions will apply to both first mortgage and home equity loans.

CFPB said it has engaged with consumers and industry, including through a Small Business Review Panel, and used this feedback in developing the proposed rules which it believes will promote stability in the mortgage market.  Without these rules the industry would face radical restructuring of the current pricing structure in order to comply with Dodd-Frank.   Public comments will be accepted until October 16, 2012.