Introduction
Steering in mortgage lending refers to the practice of guiding or directing borrowers towards specific loan products or terms, often based on the lender’s own interests rather than the borrower’s best interests. This controversial practice has been a subject of concern in the mortgage industry, as it can potentially lead to unfair treatment of borrowers and result in financial harm.
Understanding Steering in Mortgage Lending
Definition: Steering occurs when a lender or loan officer influences a borrower’s decision by providing biased information or recommendations. This can involve pushing borrowers towards loans with higher interest rates, unnecessary fees, or unfavorable terms, even if they qualify for better options.
Reasons for Steering: Lenders may engage in steering for various reasons, including maximizing their profits, meeting sales targets, or promoting certain loan products. By steering borrowers towards loans that benefit the lender, they can increase their revenue at the expense of the borrower’s financial well-being.
Impact on Borrowers: Steering can have significant negative consequences for borrowers. It may result in higher monthly payments, increased interest costs over the life of the loan, or even potential foreclosure if borrowers are unable to meet the financial obligations of the loan. Additionally, borrowers may be unaware that they have been steered towards less favorable loan options, leading to long-term financial repercussions.
Regulations and Prohibitions
Truth in Lending Act (TILA): The TILA, implemented by the Consumer Financial Protection Bureau (CFPB), requires lenders to provide borrowers with accurate and unbiased information about loan terms, costs, and risks. Lenders are prohibited from engaging in unfair or deceptive practices, including steering borrowers towards loans that are not in their best interest.
Loan Originator Compensation Rule: The Loan Originator Compensation Rule, also enforced by the CFPB, aims to prevent steering by regulating loan officer compensation. It prohibits loan officers from receiving compensation based on loan terms, such as interest rates or fees. This rule helps ensure that loan officers do not have a financial incentive to steer borrowers towards less favorable loans.
Preventing Steering
Comparison Shopping: Borrowers can protect themselves from steering by actively comparing loan offers from multiple lenders. By obtaining loan estimates and carefully reviewing the terms, borrowers can identify any discrepancies or potential steering attempts. Seeking advice from independent mortgage professionals can also provide valuable insights.
Financial Education: Educating oneself about mortgage lending, loan terms, and the overall homebuying process can empower borrowers to make informed decisions. Understanding the different types of loans, interest rates, and fees can help borrowers recognize and avoid potential steering attempts.
Conclusion
Steering in mortgage lending is a practice that borrowers should be aware of and actively guard against. By understanding the concept, recognizing potential warning signs, and taking proactive measures, borrowers can protect themselves from being steered towards less favorable loan options. It is crucial for borrowers to exercise due diligence, compare loan offers, and seek advice from trusted professionals to ensure they secure the most suitable mortgage for their financial needs.
References
1. consumerfinance.gov: Consumer Financial Protection Bureau – Truth in Lending Act
2. consumerfinance.gov: Consumer Financial Protection Bureau – Loan Originator Compensation Rule
