The Consumer Financial Protection Bureau (CFPB) has issued a request for information (RFI) on mortgage closing costs, seeking input on how closing costs “may be inflated and constraining” the mortgage lending market.
“The CFPB wants to understand why closing costs are increasing, who is benefiting, and how costs for borrowers and lenders could be lowered,” the bureau stated in its release. “According to a CFPB analysis, the closing costs borrowers pay in connection with a mortgage have risen steeply in recent years. From 2021 to 2023, median total loan costs for home mortgages increased by over 36 percent. The unavoidable fees borrowers must pay at closing can strain household budgets and families’ ability to afford a down payment. The fees may also limit the ability of lenders to offer competitive mortgages because they have to absorb the higher costs or pass them on to borrowers.”
The bureau cited examples of closing costs that impact lenders’ cost per loan, including credit scores, credit reports, and employment verification. The CFPB asserted that dominant market players have driven up the costs of these and other products through annual price increases that have significantly outpaced inflation, forcing lenders to pay these higher rates. These increases are then passed on to the consumer or eat into a lender’s bottom line in an already tight market.
“It appears that the CFPB is looking to support an argument that mortgage closing costs, and it specifically calls out title insurance and credit reporting, are not subject to competition and so they’re a potential UDAAP violation,” Garris Horn LLP Managing Partner Richard Horn, formerly CFPB senior counsel, told Dodd Frank Update in an email. “This RFI appears to also be attempting to set up a record that disclosure as a tool, especially as a means to enable shopping, is insufficient to protect consumers from these closing costs.
“Once the idea that disclosure is insufficient is solidified at the CFPB, it can be a problem with respect to other areas of the mortgage market, and for other products, as well,” he added. “Disclosure is the consumer protection tool that is the least disruptive to the marketplace and allows for consumer choice. Industry will need to comment on this RFI.”
Husch Blackwell Partner Mike G. Silver, who also previously worked at the CFPB, responded to a Dodd Frank Update request for comment in an email explaining his view that the nine sets of questions contained in the RFI raise many more questions about the CFPB’s premise and the agency’s intentions going forward.
“On the one hand, the framing of the RFI is not a surprise,” Silver contended. “The CFPB has strongly signaled a focus on credit report fees, title insurance, and discount points through a blog post several months ago announcing the new initiative, and Director Chopra’s recent speech to the Mortgage Bankers Association that dove deep on credit report fees in the mortgage process. While the RFI asks about other fees, those three buckets seem to be the hot buttons for the CFPB.
“On the other hand, as I noted previously when the blog post was released, the premise for intervention remains uncertain, if not a thin reed. The CFPB makes little effort in the RFI to substantiate its claims that consumers are not shopping, or that barriers exist to them shopping, which are driving up costs. Nor is there acknowledgment that the CFPB’s required five-year ‘look back’ in 2020 found that the TRID (TILA-RESPA Integrated Disclosure) rule on net had positive outcomes for consumers.”
In Silver’s view, Chopra’s speech and the RFI correctly acknowledge that, when it comes to credit report fees, “it’s complicated.”
“That is, the problem seems to be consumers are paying a fee that is inflated because of pricing dynamics way up the chain of the credit reporting ecosystem, beyond the lenders and the resellers and even the Big 3 itself, all the way to FICO,” he explained.
Additionally, Silver observed that the CFPB “does not seem to grapple with its own prior policy choices,” noting, for example, how the bureau considered tighter limits on the changes between the Loan Estimate and Closing Disclosure (“tolerance” limits) when TRID was developed. He also pointed out that the Loan Originator Compensation Rule expressly deviated from the Congress’s ban on upfront points and fees, using TILA exception authority to move away from it.
“In fact, the CFPB considered, but did not finalize, a compromise where consumers would have been offered a ‘zero, zero alternative,’” Silver said. “In each case, there were sound rationales for these policy choices. Any deviation now would have to overcome not just an evidentiary issue, i.e., the need to prove the policy problem – but also overcome rationales for why the Bureau didn’t intervene differently before.”
Lastly, Silver said the CFPB seems to be signaling it will use its UDAAP authority to address the competition and pricing issue.
“Of the authorities in its UDAAP toolchest, abusiveness seems like the only possibility – and more specifically, ‘taking unreasonable advantage’ of a consumer’s ‘inability to protect,’” Silver explained. “But there are many questions about whether this authority really can get at the problem identified by the CFPB – not the least of which is getting around the fact that the CFPB’s own well-tested disclosure forms are designed to protect consumers. And how can lenders be ‘taking unreasonable advantage’ if they are just passing along costs up the chain with minimal or no markup? Again, there are myriad questions.
“To the extent the CFPB moves forward with a rulemaking, there are a lot of issues to grapple with, including the interplay of various of the bureau’s own rules and prior policy decisions. To this point, it is not clear they have done that, and seem to be approaching these issues from a simplistic perspective,” he added.
A joint statement was issued by the American Bankers Association, Housing Policy Council, and Mortgage Bankers Association in reaction to the RFI: “Given the significant home-price appreciation and swift inflation that consumers have encountered in recent years, a discussion about policies that address affordability burdens while maintaining healthy and competitive mortgage markets makes good sense.
“Mortgage lenders fully and transparently disclose costs to every borrower on forms developed and prescribed by Congress in the Dodd-Frank Act and implemented by the CFPB,” they continued. “Many of those disclosed costs, such as title, appraisal and credit reports are required by federal statutes, safety and soundness guidelines, and the Federal Housing Administration (FHA), Department of Veterans Affairs (VA), and Fannie Mae and Freddie Mac as a condition of buying and insuring a mortgage. Moreover, the services these fees cover mitigate risk for taxpayers and borrowers alike.
“The CFPB recently concluded a formal review and evaluation of its mortgage disclosure rules and praised them for improving borrower understanding and facilitating the ability to shop among lenders. The industry invested considerable resources to implement these new rules just a decade ago. If the CFPB is now modifying its previous position and is considering changing this complex regulatory disclosure regime, a rule-making process governed by the Administrative Procedure Act – and supported by a robust cost-benefit analysis – is the only appropriate vehicle to initiate that work. Such a rule-making process would allow for the proper level of engagement to produce changes that benefit consumers and do not add compliance costs and lead to negative unintended consequences.”
Marx Sterbcow, managing attorney for the Sterbcow Law Group, said this RFI officially sets the stage for a “looming” RESPA reform rule.
“They are seeking to force lenders to bundle these legitimate charges into the cost of the borrower’s mortgage loan,” Sterbcow said. “In the end borrowers will have less transparency on why their mortgage rates have increased and higher borrower costs as creditors will just absorb these costs by increasing their mortgage rates. The CFPB is of the mindset that it’s not what you do – it’s what you get the public to think you do in this illusion of lower borrower costs in the residential mortgage market.”
Comments are due to the CFPB by Aug. 2. Specifically, the CFPB is seeking answers to the following questions:
- Are there particular fees that are concerning or cause hardships for consumers?
- Are there any fees charged that are not or should not be necessary to close the loan?
- Provide data or evidence on the degree to which consumers compare closing costs across lenders.
- Provide data or evidence on the degree to which consumers shop for closing costs across settlement providers.
- How are fees currently set? Who profits from the various fees? Who benefits from the service provided? What leverage or oversight do lenders have over third-party costs that are passed onto the consumer?
- Which closing costs have increased the most over the past several years? What is the cause of such increases? Do they differ for purchase or refinance? Please provide data to support if possible.
- What is driving the recent price increases of credit reports and credit scores? How are different parts of the credit report chain (credit score provider, national credit reporting agencies, reseller) contributing to this increase in costs? What competitive forces are or can be brought to bear on these costs? What are the impacts on consumers of the increased costs?
- Would lenders be more effective at negotiating closing costs than consumers? Are there reports or evidence that are relevant to the topic?
- What studies or data are available to measure the potential impact closing costs may have on overall costs, housing affordability, access to homeownership, or home equity?
This is a developing story. Please check back with Dodd Frank Update and our sister publications for continuing coverage and reactions from former CFPB counsel and industry leaders.