Today, May 30, 2024, the CFPB issued a Request for Information (“RFI”) regarding mortgage closing costs.  The top line summary is that the CFPB expressed concerns regarding the increase in closing costs over the past few years and asked the public to weigh in on “the impact closing costs have on borrowers and the mortgage market, including the degree to which they add overall costs or otherwise cause borrower harm, and any impact such fees may have on the ability to purchase a home, anticipate and afford monthly payments, or refinance an existing mortgage.”  The RFI should concern the industry, because it appears to be an attempt to create an administrative record for a future rulemaking that substantively restricts closing costs in some way, as was recently reported in the news to be the CFPB’s plan (which I wrote about here). 

I summarize the RFI and provide my initial thoughts below.   

I.               The CFPB’s Concerns about Closing Costs

The RFI begins by noting that closing costs have increased over the past few years, highlighting some data points, including that “from 2021 to 2023, median total loan costs increased by over 36% on home purchase loans” (inflation anyone?).  The RFI then notes that the TRID rule (I led the TRID final rule and the design and consumer testing of the TRID forms when I was a senior counsel and special advisor at the CFPB) requires disclosure of these closing costs on the Loan Estimate and Closing Disclosure.  The CFPB’s TRID rule discloses these costs to consumers up front at application.  Sounds good right?  Well, apparently not to the CFPB.  The RFI then discusses the CFPB’s concerns about potential harm from closing costs generally and certain specific fees.  The CFPB appears to believe that the TRID disclosures are insufficient to protect consumers from harm from closing costs. 

Itemization or Bundling.  The CFPB appears to be concerned about the itemization of many different fees on the TRID forms (or perhaps the existence of different separate services that are charged to consumers as separate line items).  The RFI states that consumers see “dozens of different fees” on the disclosures and alleges that “this complex set of fees may result in borrowers paying more.”  But to support this point, the CFPB cites only two studies: its own laboratory study (not based on actual market data) that “suggests that consumers pay more when prices are separated into multiple fees,” and a study from the Bank of England that uses “data on issued and offered mortgages in the UK.”[1] 

Credit Report Fees.  The RFI also highlights credit report fees as an example of costs that have risen over the last two years.  The CFPB describes the credit reporting market as “highly concentrated,” and stating the “lenders have few options due to a lack of competition.” 

Origination Fees/Discount Points.  The RFI discusses “origination fees” and states that, “lenders can vary in which costs they include in the interest rate or origination charge and which they charge borrowers separately, further complicating borrowers’ ability to compare costs across loan products.”  The CFPB cited its own recent study on discount points, stating that “advertisements and initial price quotes often include discount points in the fine print, which can make interest rates appear more competitive.” 

Settlement Services/Title Insurance.  The CFPB then discusses “settlement services” as the “next largest component of loan costs,” and specifically highlights title insurance fees as “one of the costliest settlement services at closing.”  The RFI then states that “consumers are forced to pay for the lender’s insurance premiums in a one-time payment at closing.”

II.              The Questions

The RFI generally asks the public for input “on the impact closing costs have on borrowers and the mortgage market, including the degree to which they add overall costs or otherwise cause borrower harm, and any impact such fees may have on the ability to purchase a home, anticipate and afford monthly payments, or refinance an existing mortgage.”  The RFI then posts nine specific questions:

1.     Are there particular fees that are concerning or cause hardships for consumers?

2.     Are there any fees charged that are not or should not be necessary to close the loan?

3.     Provide data or evidence on the degree to which consumers compare closing costs across lenders.

4.     Provide data or evidence on the degree to which consumers shop for closing costs across settlement providers.

5.     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?

6.     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.

7.     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?

8.     Would lenders be more effective at negotiating closing costs than consumers? Are there reports or evidence that are relevant to the topic?

9.     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?

Also, specifically regarding credit report fees, the RFI stated that the CFPB is “interested in learning more about what is driving the increase and variability in the fees lenders pay for credit reports and the extent to which these costs are passed on to consumers.”

III.            My Initial Thoughts

It appears to me that the CFPB is looking to create an administrative record to support a future proposed rule that may be based on the argument that certain mortgage closing costs (or the ways in which they are itemized and disclosed) are a UDAAP violation because they are not subject to competition and cannot be readily understood or avoided by consumers.  This is also supported by the quote from the CFPB’s press release for the RFI that stated, “even if disclosed, borrowers are compelled to pay the fees and may have no control over cost.”  In addition, the questions #3 and #4 above appear geared towards showing that consumers are not using the TRID disclosures to shop and/or compare closing costs between lenders.  The point of this may be to defend against arguments from the industry that the disclosures are sufficient to protect consumers. 

The idea that disclosure is insufficient to protect consumers from certain closing costs is becoming solidified at the CFPB, and this can be a problem with respect to other areas of the mortgage market, and for other products as well.  Disclosure is the consumer protection tool that is the least disruptive to the marketplace, and importantly, it allows for consumer choice.  A consumer can decide whether to shop between lenders or not, or to shop for service providers or not, or to take out the loan or not.  And the marketplace can work out the competitive prices for such services.  There may be valid points regarding how the existing disclosures can be improved (the CFPB could also, as an alternative, bolster the usefulness of the TRID disclosure with more consumer education about the disclosures or the benefits of shopping with the Loan Estimate, which it has never really done with great effect).  But once the government steps in and decides to place caps on certain fees, or how certain fees may be charged (whether as separate or bundled services), it is disrupting the marketplace, and the impacts may impose more costs and not benefit consumers. 

The CFPB will need more studies than its own unrealistic laboratory study and a study on the UK mortgage market to support any regulatory moves on closing costs that require lump sum charges (are we going to go back to the old revised GFE?) or bundling of services.  Also, an important question will be whether the CFPB’s use of UDAAP or another legal authority in a future proposed rule (there are a lot of vague grants of legal authority to the CFPB in the Dodd-Frank Act regarding disclosures and costs to consumers), and any other evidence about the competitiveness of the marketplace, will provide adequate legal basis for entirely new substantive restrictions, such as caps on fees.  The CFPB will have to contend with a judicial trend towards reigning in the administrative state, including a potential post-Chevron world in which it does not receive deference from the courts for its interpretation of ambiguous statutory provisions, and the Major Questions Doctrine. 

One other thing the CFPB will need to address before issuing any such proposed rule is the substantial amount of consumer testing that went into the TRID forms, which supports the determination (on which the CFPB issued the TRID rule) that consumers can understand and make decisions about their costs using the TRID forms.  The consumer testing on the TRID forms was the most extensive consumer testing the CFPB has performed to date, having been conducted across the country with over 1,000 consumers and industry participants in both qualitative and quantitative form.  

In addition, the RFI does not mention the Real Estate Settlement Procedures Act (“RESPA”), which could be implicated by a future proposed rule if it were to address bundled settlement services. 

I strongly encourage industry to comment on the RFI.  Comments must be received on or before August 2, 2024.  Please email me at rich@garrishorn.com if you would like to discuss.

[1] https://www.bankofengland.co.uk/-/media/boe/files/working-paper/2019/non-salient-fees-in-the-mortgage-market.pdf.