In the past several months, the federal Consumer Financial Protection Bureau (CFPB) has been active in proposing rules that would regulate the consumer mortgage industry. Some areas targeted for regulation by the CFPB include mortgage origination, mortgage servicing, and reverse mortgages. Most of the potential rules are at varying stages of the public comment and review process, and are to be finalized by January 2013. With these proposals, the CFPB is seeking to curtail lender overreach, educate consumers, and generally simplify the complex and confusing aspects of obtaining and managing a mortgage.
CFPB and the Mortgage Industry
In response to the deficiencies in financial market regulation that contributed to the recent financial crisis, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. The act established the CFPB to consolidate consumer financial protection authority in a single entity. CFPB, Creating the Consumer Bureau.
The stated goal of the CFPB is to “make markets for consumer financial products and services work for Americans.” CFPB, Learn about the Bureau. It is no secret that questionable lending practices in the consumer mortgage industry were a substantial contributor to the economic disruptions witnessed over the past several years. As a result, the CFPB has been active in the consumer mortgage market since assuming “rulemaking and interpretive authority” for consumer mortgages in the summer of 2011.
This article explores some of the recent CFPB efforts to protect consumers who are attempting to obtain, refinance, or otherwise manage a mortgage.
Proposed Rules Regarding Mortgage Origination
On September 7, 2012, the CFPB proposed a number of rules relating to mortgage origination to amend the Truth in Lending Act. 77 Fed. Reg. 55, 271 (Sept. 7, 2012). The period for public comment, which closed on October 16, 2012, generated 706 public comments. Discussed below are some of the key provisions of the CFPB proposals.
Clarity Regarding Mortgage Points and Fees
When comparing mortgages in anticipation of a home purchase, consumers often have difficulty sorting out the various “points” and “fees” associated with the loan. These pricing devices influence up-front expenses, the interest rate for the mortgage, and the overall cost of the home. Potential homebuyers seeking to reduce the interest rate of their mortgage may elect to pay points or fees at the time they enter into the mortgage agreement. Most lenders use a different mix of points and fees when making a loan offering, which can confuse consumers, make it difficult for consumers to compare the various options, and cause consumers to be less certain that they are choosing the best mortgage for their purposes.
To address the confusion over points and fees, the CFPB has proposed a rule that would require lenders to offer a loan with no points or fees that is comparable to loans that incorporate the point/fee structure (assuming the consumer is likely to qualify for such a loan). This would allow consumers to compare loans from different lenders without being confused or overwhelmed by the detail inherent in the various point and fee offerings.
Another aspect of the proposal would impose a “bona fide” requirement on lenders that would “ensure that consumers receive value in return for paying upfront points and/or fees.” 77 Fed. Reg. at 55, 273. It is often the case that a consumer pays some type of up-front point or fee, but no interest-rate reduction or comparable economic benefit follows. The proposed rule would require that some type of comparable economic value flow to the customer if any type of up-front payment is made when executing the mortgage agreement.
If the proposed rules are adopted, their implementation in a manner that actually benefits consumers is critical. With respect to the no-point, no-fee mortgage, there is a danger that lenders could make the offering so economically unattractive that consumers may feel compelled to continue battling the point/fee system. Another potential pitfall would involve lenders who did not inform consumers of the availability of a no-point or no-fee mortgage. Last, there is always the potential that lenders would devise another method of introducing complexity in the mortgage process.
The “bona fide” requirement is superficially persuasive, but determining the details of such a plan could be difficult. Should all up-front points and fees be covered? If not, who is the arbiter of which points and fees should create an economic benefit to the consumer? Increased cost to consumers is also a potential risk with the “bona fide” requirement. If lenders are required to provide economic value where it was not previously required, the “bona fide” requirement could result in higher cost points and fees.
The appeal and benefit of these proposals is intuitive. Nevertheless, if the rules are adopted, the CFPB will be required to clearly articulate standards and monitor behavior to ensure that the best interests of consumers are actually served by the proposals. Otherwise, there will be little tangible benefit to consumers.
Mortgage Originator Qualifications and Standards
In the same September 7, 2012, rule proposal, the CFPB addressed the qualifications and compensation for mortgage loan originators.
Under the current regulations, the standards for a loan originator to become “qualified” depend on whether the originator works for a bank, mortgage company, or nonprofit organization. The proposed rule would mandate a standard qualification for all loan originators, regardless of place of employment. To become qualified, a loan originator would be required to meet certain minimum standards relating to character and fitness, pass a background check, and meet certain training requirements. The goal is to give consumers confidence that the loan originators they work with meet a baseline threshold of knowledge, character, and competence.
In addition, the proposed rule addresses regulation of loan originator compensation. The proposals would help to clarify current rules that have confused those in the consumer mortgage industry. There is much financial detail in the proposal, but the general purpose of the rules is to discourage certain practices that increase compensation of the loan originator to the detriment of the consumer. The CFPB wishes to curb the practice of compensation being tied to certain terms of the transaction (not including the loan amount) and the loan originator receiving compensation not only from the consumer/purchaser but also from other parties, such as sellers, home builders, and contractors.
Establishing baseline qualifications for loan originators is sensible. However, the CFPB must be careful in establishing standard qualifications because this may not be a “one-size-fits-all” scenario. There may be some justification for using standards tailored to the particular institution in which the loan originator works. With respect to loan originator compensation, the CFPB is on the right track. The rules would give consumers confidence that they are receiving a fair deal, while eliminating the incentive for loan originators to suggest a higher priced loan based on their own self-interest.
Proposed Rules Regarding Mortgage Servicing
On September 17, 2012, the CFPB proposed a number of rules relating to mortgage servicing in two separate notices of proposed rules. 77 Fed. Reg. 57,317 (Sept. 17, 2012).The period for public comment, which closed October 9, 2012, generated 159 public comments. The CFPB considers these rules essential because many mortgage servicers were not, and still are not, equipped to handle large amounts of delinquent loans. Particularly under the economic conditions of the past several years, proper servicing of consumer mortgages is much needed. Discussed below are some of the key portions of the proposed rules.
The proposed rules would improve the information the consumer receives from the mortgage servicer, the type of notice that must be given to the consumer before a change to the consumer’s mortgage terms, and how the consumer’s account is serviced.
One sensible rule would require that the monthly mortgage statements sent to consumers be understandable to consumers. In addition, the mortgage servicer would be required to maintain and provide to the consumer documents relevant to the consumer’s mortgage. The mortgage servicer would also be required to be available to delinquent consumers to assist in evaluating alternatives to foreclosure.
Another proposed rule would require that payment made by the consumer be promptly credited to the consumer’s account by the mortgage servicer. On a related note, if a consumer claims there is an error with respect to the mortgage, the mortgage servicer would be required to acknowledge the claim and promptly address the situation.
The overall focus of these rules is to improve the service provided to the consumer, in terms of timeliness of service, access to information, and general assistance throughout the mortgage process. The critical question must be: at what cost?
Although top-flight customer service in the mortgage servicing industry is a desirable goal, a mortgage servicing business required to implement the above changes would likely need to hire additional staff to contend with the administrative burdens created by the rules. These create substantial costs that are often passed to consumers. In addition, at least in the early stages of rule implementation, it will be difficult for mortgage servicers to anticipate what type of costs and manpower are necessary to comply with the rules.
It remains to be seen how significantly the concerns of the mortgage servicing industry will influence the rules to be finalized in early 2013, but the CFPB should take note of industry opinions, because increased cost to consumers or reduced loan availability could negate the benefits of enhanced customer service.
CFPB Reverse Mortgages Report and Request for Information
As required by the Dodd-Frank Act, the CFPB released a report to Congress regarding reverse mortgages on June 28, 2012. CFPB, Reverse Mortgages: Report to Congress (June 28, 2012). The CFPB was charged with reporting to Congress on whether the public was in need of education regarding reverse mortgages and whether it was incumbent upon Congress and the CFPB to increase regulation of reverse mortgages. A request for information was also submitted to the public. The period for public comment, which closed on August 31, 2012, generated 478 public comments.
A reverse mortgage is a type of home equity loan for seniors that does not require monthly mortgage payments. U.S. Dep’t of Hous. & Urban Dev., “Frequently Asked Questions about HUD’s Reverse Mortgages.” Such mortgages “allow seniors to access the equity they have built up in their homes now, and defer payment of the loan until they die, sell, or move out of the home.” The loan balance increases over time and the interest is added to the mortgage each month. The extensive report issued by the CFPB resulted in five “key findings”:
- Reverse mortgages are complex products and difficult for consumers to understand.
- Reverse mortgage borrowers are using the loans in different ways than in the past, which increase risks to consumers.
- Product features, market dynamics, and industry practices also create risks for consumers.
- Counseling, while designed to help consumers understand the risks associated with reverse mortgages, needs improvement in order to be able to meet those challenges.
- Some risks to consumers appear to have been adequately addressed by regulation, but remain a matter for supervision and enforcement, while other risks still require regulatory attention.
Megan Thibos, “Understanding Reverse Mortgages,” CFPB (June 28, 2012).
The basic message is that consumers are in need of help with respect to reverse mortgages, especially because such mortgages are available only to seniors, a group particularly susceptible to fraud and unfair practices. Potential CFPB regulation would target misleading practices, demand enhanced disclosures for reverse mortgages, and educate consumers on the pros and cons of a reverse mortgage.
Consumer education efforts undertaken by the CFPB would appear to be reasonable. A more informed pool of potential reverse mortgage customers could curtail potential abuse and increase the likelihood of a satisfied customer. However, efforts requiring enhanced disclosures and targeting misleading practices would likely increase cost. In addition, those lenders that act with the intent and purpose of deceiving their customers would likely find a way around any regulations, which would both defeat the purpose of the regulation and impose an undue burden on the lenders not engaged in predatory practices.
It will be interesting to see what steps the CFPB takes next, especially after digesting the numerous public comments. A mix of proposed rules and consumer education regarding reverse mortgages efforts appears almost certain. What type of response the CFPB receives from representatives of the reverse mortgage industry remains to be seen.
The proposals, requests for information, and reports discussed above are a small portion of CFPB activity in the consumer mortgage industry. As stated in the reverse mortgage report discussed above, the mission of the CFPB is fulfilled by the following:
First, consumers need the best possible information—in a form that they can readily understand—to enable them to make the best possible decisions for their specific situation. Second, when there are incentives in the marketplace or predatory practices that create the potential for exploitation of consumers, these practices need to be addressed. Third, when consumer decisions, market dynamics, or product designs create unintended consequences that contribute to bad outcomes for consumers, these factors also need to be addressed.
CFPB, Reverse Mortgages: Report to Congress 147–48.
The consumer mortgage market is certainly an industry that demands implementation of the three goals described above.
In pursuing these goals, however, the CFPB has the difficult task of achieving the delicate balance between consumer protection and the risk of overregulation resulting in increased costs to consumers. Deterring bad actors is exceedingly difficult because enforcement of the proposed rules and regulations would likely shift the efforts of bad actors to alternative schemes. Therefore, the CFBP must be vigilant in acting in the consumers’ best interest to avoid detrimental overregulation.
The next several months will provide a clearer picture of consumer mortgage industry regulation. Consumers and industry representatives will be watching.
Keywords: real estate litigation, CFPB, mortgage, reverse mortgage, origination, servicing, Dodd-Frank, consumer protection
Paul M. Gales is an associate in the Phoenix, Arizona, office of Greenberg Traurig, LLP.