Remember the Dodd-Frank financial reform law? Remember the Consumer Financial Protection Bureau it created?
Perhaps not, given all the sturm und drang over fiscal cliffs and ceilings. But the CFPB is up-and-running and doing good works, as in this case involving realigned housing finance incentives to protect borrowers and to be less bubble-inducing:
In the years before the financial crisis, mortgage originators were rewarded with bonuses and higher pay for steering millions of Americans into risky and unsustainable home loans.
Starting next January, however, brokers’ and loan officers’ compensation will no longer be based on the terms of the mortgages they originate, according to new guidelines released Friday by the Consumer Financial Protection Bureau.
Under the CFPB’s new rules, mortgage brokers and loan officers can no longer be paid more if the borrower takes a loan with a higher interest rate, a prepayment penalty or higher fees — all features of subprime loans.
The agency also outlawed “dual compensation,” whereby brokers are paid by both the consumer and the lender for their services. Originators must be screened for felony convictions and undergo training to ensure they are knowledgeable about the rules governing the types of loans they originate.
Decades ago, Hy Minsky recognized that as the business cycle progresses, financial markets begin to systematically underprice risk. Absent adequate oversight, over-leveraged borrowers will inflate an asset bubble with the potential for…well…look around.
The measures that will prevent that destructive cycle are not necessarily sweeping structural changes to the capitalist system. They are, as often as not, prosaic rules about how mortgage brokers get compensated. When it comes to ending the shampoo-cycle-economy—bubble, bust, repeat—the devil’s in the details, and we should be very glad the CFPB’s on the case. Had Romney won, its demise might have been imminent.