CFPB launches mortgage closing costs inquiry

In a largely anticipated move following weeks of criticism from its director, the Consumer Financial Protection Bureau issued an inquiry to examine the impact mortgage closing costs and fees have on borrowers.

In the past several months, CFPB Director Rohit Chopra has issued a stream of comments questioning the fairness of various housing related charges to consumers and other expenses he collectively deemed "junk fees." But the request potentially foreshadows future CFPB rulemaking that might impose limits on what can be charged, according to some legal experts. 

Among the items Chopra has criticized are interest rate buydowns, property inspections and title insurance. 

"Junk fees and excessive closing costs can drain down payments and push up monthly mortgage costs," said CFPB Director Rohit Chopra, in a press release. "The CFPB is looking for ways to reduce anticompetitive fees that harm both homebuyers and lenders."

During a May speech at a leading mortgage industry conference, Chopra directed criticism at the credit reporting industry for steep increases in fees for score data. In those same remarks, he called out prices for employment verification services, and said that many of the fees charged to consumers still amounted to unreasonable and unfair burdens on consumers warranting examination even when disclosed upfront. 

In its latest announcement, the bureau again singled out charges related to credit scores and title insurance. The request for information, or RFI, asked for public comment specifically addressing fees that are currently subject to competition, how they are set and if they have changed in recent years.   

"Even if disclosed, borrowers are compelled to pay the fees and may have no control over cost. In 2022, median closing costs were $6,000, and these fees can quickly erode home equity and undercut homeownership," the CFPB said.

Comments are open until Aug. 2 and can be made by email or through the federal government's eRulemaking portal.

Chopra finds himself regularly at odds with many in the mortgage industry, and the CFPB's inquiry quickly garnered a mix of reactions ranging from praise to disapproval among industry stakeholders. While trade groups have characterized the CFPB's actions as overregulation that display a lack of understanding about the way the mortgage process works, some lenders also appreciate the efforts to drive down costs that negatively impact their bottom line. 

The Community Home Lenders of America welcomed the inquiry "for highlighting third-party mortgage service provider junk fees, which can harm consumers and reduce access to homeownership," according to its executive director, Scott Olson 

"In particular, we are pleased the CFPB focused on two areas of concern to our members, credit scoring and title insurance," Olson also noted in a press release.

But a consortium of industry trade groups, including the Mortgage Bankers Association, Housing Policy Council and American Bankers Association pointed out many of the fees questioned by the CFPB were required by federal statutes and other regulators as a condition of buying and insuring loans. Many of the rules currently in place received the stamp of approval from the CFPB, they added. 

"The industry invested considerable resources to implement these new rules just a decade ago," a joint statement read.

"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," the trade groups said.

"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," they added.

Meanwhile, the American Land Title Association, which finds itself in the public eye after the announcement of a pilot program aimed at reducing borrower expenses that could offer alternatives or waivers to its products, also took issue with the "junk fee" label but said it appreciated the opportunity to educate federal agencies the value its members provided. 

"Fees for title insurance and other closing costs must be provided and disclosed to consumers under a federally mandated rule that the CFPB itself developed in 2015," ALTA said in a statement. "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."

But analyst Bose George of Keefe, Bruyette & Woods said any changes related to title insurance charges would only occur in the event of a second Biden presidential term and may not result in major changes, given the CFPB's role in creating current regulations.

"We think a change like this, which might just move the title cost into the mortgage rate and effectively be passed on to the borrower in that sense, might not warrant a wholesale change to the closing process," George said. 

Attorneys serving the mortgage industry took a harsher tone toward the CFPB, with Richard Horn, co-managing partner of Garris Horn raising a red flag for the home finance community in a blog post. 

"It appears to be an attempt to create an administrative record for a future rulemaking that substantively restricts closing costs in some way," he wrote.

Meanwhile, Peter Idziak, senior associate to Polunsky Beitel Green, claimed the CFPB was engaging in some "sleight of hand" in its announcement, particularly when it came to labeling rate discount points as junk fees.

"It's not surprising that more borrowers are choosing to pay points with interest rates more than double what they were in 2021, but it's misleading for the bureau to lump these voluntary costs in with fees that are truly unavoidable," Idziak said in a statement.

At the same time, Idziak said the CFPB deserved some of the blame for the current state of housing 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."