• The CFPB Goes After the Mortgage Industry: New Proposed Mortgage Loan Origination (MLO) Standards
  • May 14, 2012 | Authors: David N. Anthony; Paige S. Fitzgerald; Virginia Bell Flynn; John C. Lynch
  • Law Firms: Troutman Sanders LLP - Richmond Office ; Troutman Sanders LLP - Washington Office
  • On March 9, 2012, the Consumer Financial Protection Bureau announced that it will propose residential mortgage loan origination (MLO) rules this summer, with a goal of adopting final rules by January 2013. According to the CFPB, these rules will make it easier for consumers to understand mortgage costs and compare loans in order to get the best deal.

    Director Richard Cordray stated that “mortgages today often come with so many different types of fees and points that it can be hard to compare offers. We want to bring greater transparency to the market so consumers can clearly see their options and choose the loan that is right for them.” The CFPB is considering proposals that would:

    • Require an interest-rate reduction when consumers elect to pay discount points;
    • Require lenders to offer consumers a no-discount-point loan option;
    • Ban origination charges that vary with the size of the loan;
    • Implement federal standards for qualification of loan originators; and
    • Reconfirm the prohibition on paying steering incentives to mortgage loan originators.

    The CFPB also plans to convene a Small Business Review Panel that will meet with a group of representatives of the small financial services providers that would be directly affected by the proposals under consideration.

    Nuts and Bolts

    The most concerning proposals put forth by the CFPB are the complete ban on dual compensation of loan origination, the potential flat charge per loan originated, regardless of size, and the limitations on upfront payments of discount points, origination points, or fees. While the CFPB may create exemptions related to the points and fees provision if it finds that such an exemption would be “in the interest of consumers and in the public interest,” the Bureau believes generally that points and fees present the possibility of consumer confusion. Thus, by providing no exemptions, lenders would be forced to offer no-point, no-fee loans and to recover their administrative costs through the rate over time, rather than through upfront payments.

    The CFPB’s lack of foresight as to the actual effect these types of bans will have on the availability of consumer credit and the mortgage industry as a whole is worrisome. Similarly, with regard to the licensing requirements, the CFPB’s suggestion of one size fits all, namely, that licensing requirements will be the same for all originators (e.g., banks, thrifts, mortgage brokers, nonprofit organizations), will likely increase problems in implementation and effectiveness. These types of ultimatums, invariably, will cause small businesses to struggle, given the increased regulatory burdens and limitations. Further, the availability of consumer credit to borrowers seeking smaller mortgages may decrease if banks are not able to seek some sort of guaranteed compensation for the risk they incur to offer credit to many of their customers.