The Consumer Financial Protection Bureau (CFPB) will be closely scrutinizing what it described as “junk fees” imposed on borrowers when closing a mortgage. Its new priority has provoked strong criticism from the mortgage industry.
President Joe Biden announced a housing plan during his 2024 State of the Union address on Thursday night, which included a statement that the CFPB will pursue “rulemaking and guidance to address anticompetitive closing costs imposed by lenders on homebuyers and homeowners,” according to a White House announcement.
“These charges – which benefit the lender but not the borrower – can add thousands to the upfront costs of a mortgage,” the White House said in a prepared statement. “Those upfront costs cut into the amount of homebuyers’ down payments and reduce homeowners’ available equity.”
Biden’s plan also included a $10,000 tax credit for first-time homebuyers and people who sell their “starter home,” and a pilot program that waives the requirement for lender’s title insurance on certain refinance transactions.
While the proposed tax credit appears unlikely to get through a Republican-controlled Congress, Biden has the ability to use the CFPB to push his housing policy agenda.
An ‘unwelcome surprise’
A CFPB blog post on Friday states that families closing a mortgage “often get an unwelcome surprise: closing costs that all too often are full of junk fees.”
According to the CFPB, one measure of closing costs is total loan costs, which includes title insurance, credit report, appraisal, and origination. These costs increased by 21.8% from 2021 to 2022, reaching nearly $6,000, per the CFPB post. And, as they are fixed, they have an “outsized impact on borrowers with smaller mortgages,” it added.
The post provoked a strong reaction from the Mortgage Bankers Association (MBA). Its president and CEO, Bob Broeksmit, stated that the use of the term junk fees is “illogical” and contradicts the White House’s definition, which is “lack of disclosure of the fee being charged.”
“The fees mentioned are clearly disclosed to borrowers well before a home purchase on forms developed and prescribed by the Dodd-Frank Act and the CFPB itself,” Broeksmit said in a prepared statement.
Broeksmit added that the Bureau’s “TRID” rule in 2015 and other rules imposed in 2020 reformed mortgage disclosures and customers’ ability to read these documents.
What’s the CFPB monitoring?
The CFPB said it will closely examine three topics: discount points, lenders’ title insurance, and credit reports.
Discount points have surged in recent years as mortgage rates have risen and competition has gotten more fierce. They were used by 50.2% of home purchase borrowers in 2022, compared to 32.1% in 2021. And, despite lenders selling points to reduce rates, it “may not always save borrowers money, however, and may indeed add to borrowers’ costs,” the CFPB said.
In another criticism of housing finance practices, the CFPB said lenders force borrowers pay for their title insurance, and the amount “is often much greater than the risk.”
Regarding credit reports, HousingWire reported in December that lenders’ prices would jump in 2024. The CFPB said that the “credit reporting industry is highly concentrated” and that “these steep increases in a market that lacks competition and choice warrant further scrutiny.”
“In the coming months, the CFPB will continue working to analyze mortgage closing costs, seek public input, and, as necessary, issue rules and guidance to improve competition, choice, and affordability,” the blog post reads. “We will also continue using our supervision and enforcement tools to make it safer for people to purchase homes and to hold companies accountable.”
Broeksmit has argued for years that it’s the CFPB that has made mortgage lending more expensive for consumers. The agency announces “new legal obligations without formal process or deliberation, enforcing novel and untested legal theories, and making it very difficult for firms to understand their legal obligations,” he said in 2022. A year later he described housing policy coming from Washington, D.C. as “extreme overregulation.”
In response to the CFPB’s latest “baffling” blog post, he noted that the agency has already imposed limits on lenders’ fees. The services covered, such as appraisals and flood hazard certifications, bring efficiency to the mortgage market and benefit consumers. The Federal Housing Administration (FHA), Department of Veterans Affairs (VA), Fannie Mae, and Freddie Mac also require these services.
The MBA, according to him, is also concerned “regarding rising costs of the tri-merge credit reports” and shares the “desire to help more Americans become homeowners.”
“MBA is eager to continue working with the Biden administration in these efforts but will vigorously oppose politically motivated proposals that only increase regulatory costs, reduce competition, or otherwise make it more difficult for Americans to get the credit necessary to achieve homeownership,” Broeksmit said.
There are 2 reasons why discount points have surged. First, the Fed with its steep rate increases up-ended the bond market and now I can lower a borrower’s rate by at least .375% and often 1/2% by charging 1 discount point upfront. Second, the LLPA changes a year ago by Fannie and Freddie have forced many borrowers with awesome credit to pay more points for their loan so that FTHBs mainly get a better rate.