In a surprising reversal, the Consumer Financial Protection Bureau proposed rules on Friday that will allow lenders to continue offering discount points and fees rather than a flat fee when originating home loans.
The agency departed from its original proposal in May, which met stiff resistance from mortgage brokers and loan officers, largely because the CFPB found a benefit to some consumers who want to retain the option of paying discount points to "buy down" or reduce their interest rate.
The proposed rules, which are mandated by the Dodd-Frank Act, would still require that lenders offer a no-point, no-fee loan product as an option so consumers can compare various combinations of points, fees and interest rates. Lenders also would be required to reduce interest rates when customers pay discount points or fees.
"Consumers have a hard time comparing loans when they are dealing with a bewildering array of points and fees," said CFPB Director Richard Cordray said in a press release. "We want to provide consumers with clearer options and enable them to choose the loan that they believe is right for them."
Even though the Dodd-Frank Act specifically prohibits the payment of upfront points and fees for most mortgages, the CFPB dropped the controversial requirement of only allowing a flat origination fee after it heard from a panel of consumer experts.
"They backed off and we commend them for that," says Rod Alba, vice president and senior regulatory counsel at the American Bankers Association. "They listened to industry, consumers and the…panel, which said going forth with a flat fee would have limited consumer choice and would have affected borrowers with smaller loan amounts."
The CFPB also is proposing changes to existing rules governing mortgage loan originators' qualifications, though it fell short of imposing state licensing requirements on banks and thrifts. Instead the proposal would provide qualification standards to loan originators that currently are not subject to state licensing requirements.
Now depositories and nonprofit lenders would have to determine that loan originators meet character and fitness standards and can pass criminal background checks. Banks also would have to provide training to loan originators.
"Knowing that every loan officer has passed the same qualifications is probably a good thing," says David Stevens, head of the Mortgage Bankers Association. "Getting rules in place that eliminate bad actors is going to be really helpful."
The CFPB said in a press release that the proposals "would help level the playing field for different types of loan originators."
The rules also would build on a Federal Reserve rule that prohibits loan originators from directing consumers into higher-priced loans based not on the consumer's interest but on the possibility that the loan officer or broker could earn more money. The CFPB's proposed rules would also place restrictions on mandatory arbitration clauses in loan documents and prohibit increasing loan amounts to cover credit insurance premiums.
The agency plans to formally propose the rules this summer and finalize them by January 2013.