What happens if the CFPB makes lenders pay title insurance?

News that the Consumer Financial Protection Bureau is considering making lenders pay for their portion of an origination's title insurance policy was met with skepticism from analysts and pushback from industry insiders.

Bloomberg first reported that CFPB is considering this in an April 10 article.

The CFPB declined to comment specifically on a specific proposal or plan. However, in a statement, a spokesperson added, "The CFPB is looking carefully at closing costs and fees consumers may encounter throughout the mortgage process. We are working with agencies across the government to foster greater competition in the mortgage market and help Americans save money when purchasing or refinancing a home."

The Bureau previously published a blog posting on mortgage junk fees that mentioned title insurance charges, particularly for owners' policies, which are optional.

Some form of lender protection, whether through title insurance or attorney opinion letter, is required by the secondary market, although one existing proposal to reduce costs, the Federal Housing Finance Agency's title waiver pilot, would cover a small portion of refinance transactions.

Such a move might result in lenders pricing these premiums directly into the mortgage, decreasing the transparency into loan closing costs that the Bureau desires, said Soham Bonsle, an analyst at BTIG.

The result would likely be similar to lender-paid mortgage insurance, a product for which the borrower ends up with a higher rate because the premium is rolled in. Most other cases, private mortgage insurance is paid directly by the borrower, either through the servicer every month or at the closing table for the life of the loan.

Furthermore, "if lenders are in fact going to carry the cost of title in the future for both purchase and refi loans (as per the article), this would stand in contrast to the FHFA's recent stance on waiving title on certain low-risk refi loans."

If anything, making the lender pay the premium "only further embeds title into the mortgage process," Bonsle said

Fitch Ratings "expects that any changes made to the ultimate payers of lender's title policy premiums would have little impact on title insurers but could put pressure on lender earnings if the costs can't be passed on to borrowers," said Christopher Grimes, senior director, insurance in an email.

From the perspective of investors in title underwriter stocks, "there is a concern that lenders could potentially negotiate down title premiums in a way that buyers currently do not," Bose George of Keefe, Bruyette & Woods wrote in his flash note on the article.

American Land Title Association CEO Diane Tomb says that while title insurance is among the most essential part of buying a home, it is also the least expensive.

The typical price of a title insurance premium is less than 0.5% of the total life-of-loan costs, the ALTA previously told National Mortgage News.

"We have real concerns about how this proposed framework would undermine the critical protections provided by title insurance," Tomb said in a statement. "We will continue our efforts to educate the CFPB as to how the title insurance market works and collaborate with policymakers on thoughtful approaches to housing affordability."

Even the Community Home Lenders of America, which has supported the CFPB in its look at junk fees as well as the use of AOLs and the FHFA title waiver pilot, is urging caution because of the issues Bonsle and George touched upon in their commentary.

"It is important that any proposal does not reduce transparency and protects smaller lenders and their borrowers against the emergence of exclusive deals between title companies and large lenders that results in even less competition," said Scott Olson, CHLA executive director, in a statement.

The Mortgage Bankers Association is seeing this possible proposal as part of a broader condemnation of the loan process.

"The CFPB's attack on the costs for the services required to successfully underwrite a home loan — title insurance, appraisals, credit reports, and flood hazard mapping — reveals a fundamental misunderstanding of how the mortgage market works and a disturbing lack of awareness of existing regulations, which the Bureau itself has promulgated and lauded, that provide full fee transparency and give consumers the ability to shop," Bob Broeksmit, president and CEO said in statement, harkening back to recent comments the trade group has made about the post-financial crisis regulations.

"Our members spent hundreds of millions of dollars complying with those rules when they were established less than a decade ago, and another massive and costly revamp is not an effective solution and only increases costs while creating a false appearance of addressing housing affordability," said Broeksmit.

In Iowa, it is illegal to sell title insurance, but there is a state-run agency that serves that purpose to meet the needs of the secondary market.

It is speculative at this time what any impact would be if the CFPB were to make this change, said Dillon Malone, director of Iowa Title Guaranty.

However, "any change in practices is likely to have some sort of affect," Malone said.

Like elsewhere, borrowers normally pay for the lender coverage. But the owners portion in Iowa is provided at no additional cost. The agency uses ALTA forms for its product.

The National Association of Insurance Commissioners, representing the state insurance regulators, said it does not have a comment at this time.