At its heart, the Dodd-Frank Wall Street Reform and Consumer Protection Act, often referred to as Dodd-Frank, was written to protect consumers from being cheated out of what may be the largest asset they will ever acquire: their homes.
Unfortunately, during the foreclosure crisis, millions of Americans lost their homes, many because they were ultimately unable to meet their obligations under the loans they were sold to finance them. For some, the homes they chose were simply beyond their means. But for others, the loan products themselves caused the problem.
Adjustable rate mortgage loans (ARMs) with extremely low down payments were attractive to many home buyers. Unfortunately, those low rates disguised a future risk. When these ARMs adjust upward, the monthly loan payments may suddenly be too much for homeowners to afford. In some cases, the borrower may have qualified for a fixed-rate loan with a monthly payment they could afford for years into the future, but they were sold other products that made the loan originators more money. The rest is history.
If the federal government has its way, history will not repeat itself. We’ve already spoken in another post about the new Ability to Repay rule that requires lenders to take great care to ensure that the loans they sell consumers will not cause them future financial harm. But there is another rule that benefits consumers that you should know about.
The Dodd-Frank Act prohibits mortgage loan originators from getting paid based on the terms or conditions of the loans they sell. This is important because it means a loan officer can’t make more money by steering you toward a loan that costs you more.
The loan officer cannot receive from any person, nor can any person pay the mortgage originator, directly or indirectly, any compensation that varies based on terms of loan (other than amount of principal). This means that your mortgage loan officer will be less like the salesperson who sold you your last car and more like the checkout clerk at your grocery store.
While this removes a significant source of risk to homeowners, there are a couple of things you should bear in mind when working with your next loan officer.
First, there is a safe harbor provision in Dodd-Frank in regard to this regulation. The loan officer may present you with loan offers for each type of transaction in which you express interest (such as a fixed rate loan, adjustable rate loan, or a reverse mortgage) and the loan options presented to the consumer may include:
- The loan with the lowest interest rate for which you qualify.
- The loan with the lowest total dollar amount for origination points or fees and discount points.
- The loan with the lowest rate loan you qualify for, without negative amortization, a prepayment penalty, interest-only payments, a balloon payment in the first 7 years of the life of the loan, a demand feature, shared equity, or shared appreciation.
So, if the loan officer gives you a great deal of information, you may have to dig through it to find the best deal.
Secondly, you may have to look harder to find a loan officer who really knows what best fits your needs. When a salesperson can earn more money by knowing about all of their products, they tend to know a great deal about them. When they make the same amount regardless of what they sell, it’s likely they’ll become more like the grocery store clerk, just moving products from the belt past the scanner.
There are plenty of qualified, professional loan officers out there. Seek one out, but first make sure you know as much as you can about the loan products that are mostly likely to meet your financing needs.