CFPB is Coming After Lender’s Title Insurance and Other Mortgage Fees: Did They Forget About Their Own Extensive Consumer Testing on the TRID Forms?
It was reported in the news today, April 10, 2024, that the CFPB is considering a plan to ban mortgage lenders from charging borrowers for lender’s title insurance policies. The reporting stated that the CFPB is planning to issue a request for information (“RFI”) on mortgage closing costs this month, setting a foundation for a proposed rule with such a ban that may come out next year. The CFPB currently plans to apply the proposal to purchase and refinance loans. A ban on these or any other closing costs would represent a cosmic event in the industry. This is very surprising, because there is nothing like this on the CFPB’s regulatory agenda for this year or for its long-term actions. It will be interesting to see if the CFPB rushes the rulemaking before a change in administration, should it appear that President Biden will lose the upcoming election as November gets closer.
Significantly, the legal authority of the CFPB to ban any charges is highly suspect, especially in a post-Chevron world. In addition, the CFPB’s own consumer testing that supports the TILA-RESPA Integrated Disclosure (TRID) rule, which I led while at the CFPB (I led the design of the TRID forms, the consumer testing, and the TRID final rule), shows that consumers can readily understand their closing costs, can use the forms to compare different loan offers, and can identify changes before closing. This was also the most extensive consumer testing the CFPB has ever done. I’ll discuss these issues, as well as some of the lead-up to this reported RFI and proposal more below.
The Lead Up
This upcoming RFI looks like it has been in the works for a while (yet it is not on their regulatory agenda). Remember that in September 2022, the CFPB posted a request for information regarding mortgage refinances, in which the CFPB asked for ways to facilitate mortgage refinances for consumers who would benefit from refinancing. In that request for information, the CFPB lamented the decreasing share of smaller-loan balance refinances, stating that limited opportunity to refinance smaller loans disproportionately affects Black and Hispanic consumers, and that the “large fixed costs of mortgage origination may limit the availability of mortgages for consumers with smaller loan balances, including beneficial refinances.”
This follows up on an April 5, 2024 “Data Spotlight” report issued by the CFPB’s Office of Mortgage Markets that found that, as interest rates rose in 2022 and 2023, borrowers paid more in discount points. Connecting several of the CFPB’s points together in the report (excuse my pun), the report seems to indicate that the CFPB believes lenders may be using discount points to lower borrowers’ monthly payments to qualify them, but that consumers may not understand how discount points work and that discount points only become useful if the borrower holds the loan longer than the “break even” point. The CFPB insinuated that the TRID disclosures may not be enough to protect borrowers, stating that, “although discount points and APR are disclosed in advertisements and later in the Loan Estimate and Closing Disclosure, consumers who don’t understand the mechanics of discounts points could mistakenly believe a lender’s interest rate is a better deal than it is.”
In addition, the previous month, on March 8, 2024, the CFPB issued a blog post that presaged the reported forthcoming RFI, titled “Junk fees are driving up housing costs. The CFPB wants to hear from you.” The blog post attacked mortgage closing costs, stating that Loan Costs (a group of closing costs on the TRID forms) rose by 21.8% between 2021 and 2022, that closing costs “have an outsized impact on borrowers with smaller mortgages, such as lower income borrowers, first-time homebuyers, and borrowers living in Black and Hispanic communities,” and that the CFPB is paying particular attention to discount points. The blog post also stated that “it appears that some closing costs are high and increasing because there is little competition,” and that “borrowers are required to pay for many of the costs associated with closing a home loan but cannot pick the provider and do not benefit from the service.”
The blog post calls out lender’s title insurance policies and credit report fees as two examples. With respect to lender’s title insurance, the CFPB stated that the borrower “has no control over the cost,” and that “the amount that borrowers pay for lender's title insurance is often much greater than the risk.” I think the CFPB may not understand the “Services You Can Shop For” category under TRID? With respect to credit report fees, the CFPB stated that there are “just a handful of dominant players dictating the price of credit reports and scores,” and that the rising costs “warrant further scrutiny.”
My Thoughts
Based on these reports and CFPB statements, it appears that the CFPB is going to come after lender’s title insurance, discount points, and credit report fees. There could be other fees that are on the CFPB’s chopping block. As I stated above, a ban on these or any other costs would represent a cosmic event in the industry. It would also be highly questionable under consumer financial services law. TILA and RESPA, the two main statutes that govern mortgage loans are primarily disclosure statutes. Although they prohibit certain terms for certain types of loans (e.g., qualified mortgages), the CFPB would be stretching its authority to use these statutes to ban certain fees across the board. Congress has not mandated such a ban under these statutes, so would the CFPB rely on its general rulemaking authority? Of course, the CFPB could always take the approach of regulating these charges so heavily that it is too burdensome to charge them, which they have done to some extent with affiliate charges. Or the CFPB could seek other authority, such as UDAAP, to support such a ban (the CFPB’s own consumer testing on the forms, which I led while at the CFPB, would appear to make a UDAAP claim difficult). But in an expected post-Chevron era (for more discussion on this, please check out this webinar that I co-presented for Women in Housing and Finance on the upcoming Supreme Court decisions in Loper Bright and Relentless that may overturn or restrict Chevron), or where the Major Questions Doctrine sees greater attention and use from the courts, such a ban may be ripe for challenge by the industry.
In addition, mortgage closing costs, including these specific fees, are clearly disclosed to consumers on the CFPB’s TRID forms. I led the design and the consumer testing of the TRID forms. The consumer testing for TRID was the most extensive consumer testing the CFPB has ever conducted, including over 10 rounds of qualitative testing over the country, and an extensive, almost 1,000-person quantitative test of the forms before the final rule was published. For the CFPB to ignore the extremely positive results from its own consumer testing and allege that consumers cannot use the forms to understand their costs, or shop between lenders, would also be highly suspect, and could lead to further bases for a legal challenge under the Administrative Procedures Act.
In sum, the mortgage industry needs to pay a lot of attention to this forthcoming RFI and submit extremely thorough and strong comments letters. The comment letters should, to the greatest extent possible, use the CFPB’s own extensive consumer testing on the TRID forms to show how such a proposal banning closing costs is unnecessary, as well as address the legal infirmities with such a proposal.
If you would like to discuss any of the issues in this blog post, or would like assistance drafting a comment letter after the RFI is published, please email me at rich@garrishorn.com.
