The CFPB Takes On Mortgages

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Since the Consumer Financial Protection Bureau was signed into existence in July 2010 as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, it has launched a crusade to improve mortgage lending procedures and address consumers’ complaints. One of its very first initiatives, “Know Before You Owe,” sought to combine two federally required mortgage disclosures into one simple, single document with costs and risks highlighted, making it easy for consumers to comparison shop.

With 8 million Americans facing foreclosure since the housing bubble burst in late 2006, mortgage concerns are high on the CFPB’s list of priorities, and it has begun a major overhaul of the mortgage lending system. In fact, the CFPB has started so many mortgage initiatives, it’s downright difficult to keep them all straight.

Lucky for you, the nerds are here to explain exactly what the CFPB has been up to lately, and what that might mean for mortgage regulation and legislation in the future. Read on to learn about the four main mortgage projects the CFPB has been working on lately.

1. Putting the Service Back in Mortgage Servicing

The basics: In April, the CFPB announced its plans to reform mortgage servicing by tackling two of homeowners’ major complaints: expensive errors and the “runaround” many have experienced when trying to avoid foreclosure. Mortgage servicers, who collect payments from the borrower on behalf of a loan’s owner, are usually in charge of customer service, escrow accounts, collections, loan modifications and foreclosures. Yet because most borrowers do not choose their mortgage servicers, and because the loan’s owner is not the original lender, servicers have been accused of insensitivity to consumers’ needs. Even before the financial crisis, some consumers complained about servicers’ bad practices and messy, disorganized recordkeeping. The CFPB says it aims to resolve many of these problems with some new rules. Specifically, the rules under consideration include:

  • Clear monthly mortgage statements
  • Warning before interest rate adjustments
  • Options for avoiding costly “force-placed” insurance (hazard insurance bought by the servicer to protect the property)
  • Early information and options for avoiding foreclosure
  • Payments immediately credited
  • Records kept up-to-date and accessible
  • Errors corrected quickly
  • Direct and ongoing access to servicer foreclosure prevention team

The controversy: Some consumer advocates have criticized the CFPB’s proposed reforms, insisting that they are not tough enough. “There is a limit to what the CFPB can do if it doesn’t make firm rules,” said Diane Thompson, an attorney at the National Consumer Law Center, who has written a lot about mortgage servicing problems. She called the CFPB’s proposals “disappointing,” particularly the rule regarding force-placed home insurance, which is often imposed with little or zero notice and can send homeowners into default or foreclosure.

Force-placed insurance is a real problem—it’s extremely costly and it’s tough to remove in a timely manner, even when the consumer presents proof of having the right insurance policy. American Banker found that bank-imposed policies could cost 10 times the normal market rates, and that many of the largest financial institutions own force-placed insurance subsidies. So, some believe that the CFPB’s proposal fails to address the high cost of the force-placed insurance policies, or the conflict of interest that arises when a bank contracts with itself to purchase a costly insurance policy.

Under the CFPB’s proposed rule, banks and loan servicers would give homeowners two chances to prove that they have insurance before they would resort to force-placed insurance. Servicers would also be required to provide the homeowner with a good-faith estimate of how much the force-placed insurance policy would cost. But, Thompson argues, the proposal does not go nearly far enough and “appears completely inadequate in addressing kickback or profit-sharing arrangements with affiliates or others.”

2. Making Sure Mortgages Can Be Repaid

The basics: The CFPB’s proposed ability-to-repay and qualified mortgage (QM) rules would raise the bar on borrowers seeking to prove that they can repay their loans, so that the deceptive, convoluted “liar loans” that contributed to the 2008 financial crisis can be avoided in the future. The ability-to-repay legislation requires lenders to make a reasonable, good-faith assessment of the borrower’s ability to repay the loan, and the QM rule defines “qualified mortgages,” which are structurally safer and would conform to standards that make it reasonable to expect that the borrower would be able to repay the loan.

The rules, which were proposed last year in May, gave rise to some 1,800 comments before the feedback period ended. The CFPB recently announced that it is once again accepting comments to gather additional data about loans and litigation costs for lenders, though it is required under federal law to have finalized the rule by January 2013. It will continue to accept comments until July 9, 2012.

The controversy: While proponents believe the rules will ensure that lenders will make safer loans, critics are concerned that they will also make lenders more wary, thereby hindering responsible borrowers from obtaining mortgages. Banking and consumer groups have also been worried about the narrow limitations the QM rule would impose on borrowers, which would possibly set a standard based on borrowers’ income to determine how much borrowers could take out, without taking into account regional housing price variations. Both groups have vigorously lobbied the CFPB to alter the proposal and make it less limiting.

Meanwhile, the National Association of Federal Credit Unions (NAFCU) recently sent a letter asking the CFPB to define a qualified mortgage as a safe harbor against litigation, which would be “the only means of ensuring that the largest number of borrowers possible will enjoy the safest and most affordable options for sustainable credit available through the QM.”

And then several industry groups—including the American Bankers Association, Independent Community Banks of America, Mortgage Bankers Association, and the National Association of Realtors—asked the CFPB to host a panel to discuss how the new mortgage lending standers would affect small businesses, which they said would conform with regulatory best practices.

So much drama! It’ll probably die down soon, though, since all comments will need to be in by July 9. After that, the CFPB can get cracking on drafting finalized legislation before January.

3. Ensuring That Points and Fees Systems Are Transparent

The basics: The CFPB is also working on updating the loan originator compensation rules issued by the Federal Reserve Board last year.

Borrowers can pay points, expressed as a percentage of a loan amount, in return for a lower interest rate. (For example, a borrower could pay 1 point, or $1,000, on a $100,000 loan, and receive a rate of 3.5 percent instead of 4 percent.) The new rules would require lenders to actually reduce the interest rate if the points are paid, as well as offer a no-point loan so borrowers could compare other offers. The CFPB would also ban origination fees, known as “origination points,” which vary with the size of the loan and are too easily confused with discount points.

The CFPB said that it is still considering granting one exemption to the points and fees provision, which would allow consumers to pay certain upfront points and fees in retail and wholesale loan transactions when the creditor compensates a loan originator (LO), as long as the origination fees do not vary with the size of the loan.

The controversy:  During a day-long meeting in May, representatives from the CFPB and the National Association of Mortgage Brokers (NAMB) sat down to discuss LO compensation. The CFPB warned that it must make changes to current compensation plans by January 2013, or there would be no fees allowed at all for mortgage originations—as mandated by the Dodd-Frank Act.

“When [the CFPB was] asked if they were doing studies regarding LO [loan origination] comp, they said all of their studies predated LO comp,” said Valerie Saunders of RE Financial Services. “Why are they doing it now? Because we have a ticking time bomb. Something has to happen by January 21 of 2013 or the ability to charge points, fees and discount points is going to go away.”

The CFPB has said that it is gathering information on the issue and will listen to the mortgage industry’s feedback. But mortgage representatives continue to grumble about its authority. A recent memo from the law firm K&L Gates outlined the LO compensation situation and warned that the CFPB’s changes may “create seismic shocks” in the industry.

“While the CFPB appears willing to try to avoid a ‘significant restructuring’ of mortgage loan pricing, its proposed restrictions on discount points and origination fees in creditor-paid transactions as described above are still severe, and would if adopted create their own uncertainties – including whether consumers can choose how to pay for their mortgage loan,” wrote K&L Gates’s Kris Kully.

4. Combining the TILA/RESPA Documents (Or, Causing A Lot of Fuss Over Forms)

The basics: Consolidating two key federal mortgage disclosures, the two-page Truth in Lending Act (TILA) disclosure and the three-page Real Estate Settlement Procedures Act disclosure (also known as the HUD-1 Settlement Statement), was the first part of the CFPB’s “Know Before You Owe” campaign. In January, the CFPB tested two different prototypes for the newly consolidated closing disclosure form, which were nicknamed Butternut and Hemlock. Both were designed to clearly and simply state the terms of the purchased loan, the cost for services needed to close the loan, and any conditions and requirements, making it easier for consumers to find and understand the mortgage information they need.

The controversy: The TILA and RESPA disclosures detail two related, but different, steps in the mortgage process: mortgage lending and home purchasing. NAFCU’s president and CEO, Fred Becker, has pointed out that the consolidated form would require credit unions to fill out the RESPA part of the document, which would pose challenges.

“Most credit unions do not have the existing expertise on staff to carry out this task,” he said. “Further, given the complexity and legal liabilities, this is not the type of job for which an existing employee might be easily trained.”

Becker added that NAFCU was also concerned with the conflicting mandate holding lenders to stricter standards while allowing borrowers to provide less information up front. “NAFCU questions whether it is wise or fair for the CFPB to hold lenders to even tighter standards (regarding third party providers, no less) while simultaneously reducing the amount of information and the amount of time the lender has to perform due diligence and review the application.”

The CFPB seems to be mulling over the comments it has received, and it has said it aims to release a proposal draft by July 21.

First steps toward better consumer protection for mortgages

These four initiatives illustrate how the CFPB’s has doggedly begun to overhaul the mortgage process, even in the face of opposition. In the future, we can expect to see more proposed regulation for the mortgage industry, and even some finalized legislation in January of 2013—though not without vigorous lobbying and protest every step of the way from consumer advocates, banks, and mortgage industry representatives. It’s a process that involves a lot of listening, revising, and proposing, but here’s hoping that there will also be some real steps forward with new policies starting next year.