January 22, 2013
Distorted mortgage broker incentives were one of the big problems during the Subprime Boom. Indeed, many lenders have since stopped outsourcing loan originator to mortgage brokers because a lot of the terrible loans they were stuck with had been originated by them. Homeowners were also frequently burned by mortgage brokers who placed them in inappropriate products.
The CFPB has just issued new rules (summary here) relating to the compensation of mortgage brokers. One of the key elements of the rule is that broker compensation cannot be based on a term of the transaction such as the interest rate. This is intended to keep brokers from steering borrowers into more expensive mortgages solely to increase their own compensation. This is a major consumer protection initiative because a large number of homeowners with subprime loans were eligible for prime loans with lower interest rates. Because brokers had been financially incentivized to place them in subprime loans, that is what they did.
The new rule seeks to prevent the mortgage industry from doing an end run around the rule by attempting to identify proxies for the terms of the transaction. Time will tell whether the proxies work as intended.| Permalink