New Rules May Curtail Some Fees in Mortgage

May 9, 2012 By EDWARD WYATT

WASHINGTON – The Consumer Financial Protection Bureau said it planned to propose tighter mortgage lending regulations that would limit the ability of banks and mortgage brokers to charge certain transaction fees, possibly ending one of the most abusive costs levied on consumers when they buy a house.

Bureau officials said that the rules, which were released Wednesday ahead of formal introduction this summer, would ban mortgage companies from charging origination fees that vary with the amount of the loan.

Those fees are sometimes referred to as origination points and are disclosed in a blizzard of documents and fees that most home buyers face at closing. But they can easily be confused with the upfront discount points that borrowers often pay to secure a lower interest rate.

The consumer bureau also said it would require that lenders offer a reduced interest rate when a consumer opted to pay upfront discount points and would require lenders to offer a loan option without points. During the financial crisis, some lenders charged the points without lowering the interest rate.

Changing that rule, the bureau believes, will make it easier for consumers to weigh offers from multiple lenders.

“Mortgages today often come with so many different types of fees and points that it can be hard to compare offers,” Richard Cordray, the director of the consumer bureau, said. “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 proposals were intended to fulfill requirements of the Dodd-Frank Act, which was enacted in response to the financial crisis. They were not a surprise to banking groups, but those groups still expressed dismay, saying that they essentially repeat changes that the Federal Reserve put in place just two years ago to address some of the same problems.

“They are adding a whole new set of additional rules and regulations onto what we already have,” said Rod Alba, a vice president in the mortgage markets division of the American Bankers Association, an industry group. “It is this rapid succession of rule-making after rule-making that is so worrisome to banks.”

Consumer groups, however, said the proposals were necessary to protect borrowers from being taken advantage of in what is usually the largest single financial commitment in their lives.

“The provisions in Dodd-Frank were added in response to specific abuses that were well documented during the mortgage boom,” said Barry Zigas, housing director for the Consumer Federation of America. “Too often, home buyers found that the fees they were being charged were not as advertised.”

The proposals outlined Wednesday will be reviewed by the public and a small-business panel to be convened by the consumer bureau. The panel is required by Dodd-Frank as a way of trying to limit the effect of new regulations on small businesses.

After taking comments, the bureau will formally propose the rules this summer and, after another round of comments, hopes to make them permanent by January.

Consumer bureau officials said that unscrupulous mortgage lenders sometimes tried to disguise origination fees by calling them origination points. Expressed as a percentage, the origination fee paid then varied with the amount of the loan.

But bureau officials said that because the fees covered paperwork that was the same whether the loan was for $100,000 or $1 million, they were proposing that mortgage brokers and creditors be allowed to charge only flat origination fees. That in turn will promote competition among mortgage lenders and brokers and lower consumer charges, the officials said.

Mr. Alba of the bankers association said that whatever origination fees were charged, they were reflected in the loan’s annual percentage rate, which is disclosed on the mandated forms that a home buyer is given at closing. “To the extent that any of the fees are outrageous, they will be reflected in the pricing disclosures that are in place today,” he said.

Other provisions required by Dodd-Frank are also being proposed by the consumer bureau, including qualification and screening standards for loan originators. Those proposals are intended to make different types of originators – banks, thrifts, mortgage brokers and nonprofit organizations – subject to the same qualification requirements.

Dodd-Frank also prohibits the payment of incentives by mortgage lenders to the loan originators. and requires the consumer bureau to write a rule prohibiting it. The Federal Reserve issued a rule in 2010 to address the issue; the consumer bureau rule will incorporate the Fed’s guidance while trying to clarify some issues, the bureau said.