CFPB Guidelines to Discourage Predatory Lending, Improve Lending Transparency

By Stevie Duffin Updated on 9/25/2013

Prior to the disappearance of the sub-prime mortgage market, originators had many incentives in aggressively pushing riskier loan products onto American borrowers, ultimately resulting in a collapse of the mortgage market. These loans often included disadvantageous characteristics, including prepayment penalties, balloon payments, and higher fees in general, which resulted in an unsustainable mortgage market while these lenders receive higher fees.

Beginning next January, however, brokers and loan officers will no longer be rewarded for these more predatory practices as a result of the new guidelines that were disclosed Friday by the Consumer Financial Protection Bureau (CFPB), the consumer watchdog that regulates the practices of the mortgage industry.

Within the past eight days, this organization has imposed several safeguards to protect struggling homeowners in avoiding foreclosure, as well as providing protection from predatory lending practices including interest-only payments.

Essentially, loan officers and mortgage brokers should be helping homebuyers to obtain mortgage for a home purchase that they will be able to afford, rather than pushing borrowers into unfair or disadvantageous terms. The new guidelines attempt to make borrowing safer for these buyers, with regulations that require felony screenings for originators and mandatory training on their offered mortgage products. Furthermore, these guidelines will provide more incentive for these safer, more honest loan practices to discourage the type of lending that resulted in the mortgage market decline at the turn of the last decade.

With the new guidelines in place, homebuying will be much less risky and borrowers can put more trust in their mortgage lenders. For instance, one rule, issued on Friday, mandates that lenders automatically give borrowers a copy of the appraisal used in underwriting and assessment of the home mortgage application. This allows borrowers to get a better sense of the value of their property to avoid paying much more than it’s worth in the purchase.

In addition, these mortgage rules also impose a cap on the total allowable fees that can be levied onto borrowers, making mortgages more affordable in general and protecting borrowers against excessive junk fees. These rules also restrict the maximum amount borrowers can pay in up-front fees in order to reduce their mortgage rates, and these changes are expected to radically reshape the mortgage lending industry, with the CFPB providing more reason for borrowers to shop around, thus increasing competition and applying pressure for fairer terms and lower mortgage rates.

Furthermore, the CFPB also will enforce a final joint rule that requires more thorough appraisals for higher value mortgages and for lenders issuing loans with interest rates that exceed a predetermined threshold.

Chairman of the Mortgage Bankers Association (MBA), Debra W. Still, stated that the appraisal guidelines seem to be common-sense fixes to previous issues that will improve the transparency of the lending process without affecting mortgage affordability or accessibility.