Who's really to blame?
The Consumer Financial Protection Bureau is playing the blame game and ignoring its own role in driving up “junk fees” through over-regulation, according to mortgage law firm Polunsky Beitel Green.
The CFPB has stirred controversy with its effort to investigate escalating “junk fees” associated with mortgage closings, aiming to pinpoint the causes and potential solutions to lower costs for borrowers and lenders alike.
“Junk fees and excessive closing costs can drain down payments and push up monthly mortgage costs,” CFPB director Rohit Chopra said in its announcement Thursday. “The CFPB is looking for ways to reduce anti-competitive fees that harm both homebuyers and lenders.”
Consequences of CFPB’s actions
However, Peter Idziak, a senior associate at mortgage law firm Polunsky Beitel Green, argued the probe ignores the role of increasing government regulations in driving up costs.
“A more accurate title of the CFPB’s press release could be, ‘Well, well, well, if it isn’t the consequences of my own actions.’ Completely absent from the Bureau’s request for information is any acknowledgment that increasing and overburdensome government regulations and actions by FHFA, as conservator of Fannie and Freddie, have increased costs of doing business substantially for lenders, which are in turn passed on to consumers through higher origination fees,” Idziak said. “Any inquiry into increasing closing costs that fails to consider the regulatory burden lenders face will fail to fully address the issue.”
The agency has launched a public inquiry that aims to determine who benefits from rising closing costs and how they could potentially be lowered. According to the CFPB, median closing costs reached $6,000 in 2022 and can quickly erode home equity and undercut homeownership goals. Lenders also pay a price through higher expenses like credit report fees.
But Idziak insisted lenders have little incentive to arbitrarily inflate charges in today’s highly competitive mortgage market.
“We don’t see unnecessary fees being charged to borrowers in the origination space,” he said. “The market is extremely competitive right now, with lots of lenders chasing fewer eligible borrowers.
“There’s simply no incentive for lenders to inflate their fees and price themselves out of the market. Lenders are also prohibited from inflating or upcharging borrowers for the costs of a third-party service, so any increases in third-party fees are driven by the vendors themselves.”
Idziak argued the CFPB is misrepresenting discount points as “unavoidable” costs when they are voluntary fees borrowers choose to lower their mortgage rate. He also claimed the agency is contradicting its own rules by suggesting itemized fee disclosures contribute to higher consumer costs.
Read next: Mortgage industry pushes back on CFPB’s ‘junk fee’ claims
“The CFPB neglects to mention that lenders are required by the CFPB to disclose fees in this manner under TRID,” Idziak said, referring to the TILA-RESPA Integrated Disclosure rule. “Lenders would welcome a simplified disclosure regime that results in lower costs.
“The CFPB request for information also suggests that the itemized disclosure of each fee may result in consumers paying more, implying that lenders are choosing to disclose fees this way to take advantage of borrowers. However, the bureau neglects to mention that lenders are required to disclose fees in this manner under TRID. Lenders would welcome a simplified disclosure regime that results in lower costs to borrowers because it should also lead to lower origination costs for lenders and fewer closing delays.”
How title insurance works
The CFPB also highlighted title insurance as a significant fee paid at closing. Lender’s title insurance, which protects the lender against property issues, is typically paid by the borrower, who has limited options to shop around.
The American Land Title Association (ALTA), the national trade association for the land title insurance industry, responded to the probe.
ALTA saw the investigation as an “opportunity to educate federal agencies as to how the title insurance market works.”
The association said title insurance costs have decreased by 5% over the past five years, despite inflation, thanks to industry innovation. They also noted that fees for title insurance and other closing costs are federally mandated to be disclosed to consumers, a rule developed by the CFPB in 2015.
“Lumping title insurance and settlement services into the category of ‘junk fees’ conflicts with the White House’s own definition, which cites the lack of disclosure of the fee being charged,” ALTA said in a statement. “CFPB’s own research, from as recently as 2020, shows these disclosures are working to educate consumers about closing costs. The CFPB report praised its own rule for improving consumers’ ability to locate key information, compare terms and costs between initial disclosures and final disclosures, and compare terms and costs across mortgage offers.”
ALTA emphasized that title insurance and settlement services are essential yet relatively inexpensive components of the homebuying process, and their costs are transparently disclosed to consumers.
“The title industry does more than just issue an insurance policy, performing vital work to cure defects in the chain of title, including unpaid taxes, child support and other liens, as well as combating fraud schemes like wire and deed fraud to protect consumers,” ALTA said.
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