Following a recent call for consumer input, the Consumer Financial Protection Bureau (CFPB) announced it will launch a formal public inquiry into so-called “junk fees” that the Bureau claims may be increasing mortgage closing costs. The announcement is a continuation of the Biden administration’s multiyear push to restrict financial services providers and other companies, including ticket sellers, travel companies, and businesses in the entertainment and hospitality industries, from “dripping” fees incrementally during the transaction flow.

With this latest foray, the CFPB and Biden administration are setting their sights on the already heavily regulated mortgage industry.

BACKGROUND

Mortgage closing costs are a series of charges, separate from any down payment, that home buyers must pay prior to closing on a home. Closing costs often include fees such as for the application, appraisal, attorneys, credit report, employment verification, title search, title insurance, loan origination, recording, and other charges that vary from transaction to transaction.

The CFPB asserts that its research shows that closing costs have risen sharply in recent years, with median borrowers paying just under $6,000 in closing costs in 2022, up 21.8% from 2021. This observed increase in closing costs is even more acute in refinance transactions, jumping 49.3% from $3,336 to $4,979 over that same period. Recent data compiled by the CFPB also purportedly reflects a growing number of borrowers paying “discount points”—i.e., mortgage interest paid at closing in exchange for a lower APR on the mortgage loan that is paid overtime.

Accordingly, the CFPB has issued a Request for Information (RFI) seeking comment from the public, including consumers, industry participants, interest groups, and other stakeholders, on various closing costs, with comments due 60 days from the date of the RFI’s publication in the Federal Register.

FOCUS OF THE RFI

The RFI focuses on three broad areas:

• Competition: The Bureau is interested in the specific types of closing costs subject to competitive pressure, as part of its effort to understand any market factors limiting competition or contributing to observed fee growth.
• Fee Setting: The CFPB wishes to untangle the closing fees set by the lender and third parties, respectively, to understand better which entities principally profit from those fees and whether such fees are justified.
• Consumer Impact: As rising closing costs are supposedly a potentially significant obstacle to consumers contemplating a home purchase, the Bureau seeks information on the specific costs with the greatest impact on first-time home ownership, housing affordability, and home equity.

NEXT STEPS

While the CFPB presently seeks information only, this inquiry is a likely prelude to formal or informal rulemaking, enforcement activity, or supervisory activity by the Bureau. We observed a similar progression concerning credit card late fees, auto-finance sales, and other areas that the Bureau targeted under its authority to address unfair, deceptive, or abusive acts and practices (UDAAPs).

We expect future activity to focus on the following key types of closing fees:

• Credit reporting fees
• Origination fees
• Settlement services fees, including appraisal fees, fees for preparing and notarizing documents, and settlement processing fees
• Title insurance costs

Additionally, as discussed in previous publications, state lawmakers and regulators possess their own UDAP authority and may likewise set their sights on the above categories of closing fees. State legislatures also may create private rights of action, as California recently did with its Consumer Legal Remedies Act, to address what the regulators have pejoratively characterized as “junk fees.”

KEY TAKEAWAYS

In anticipation of further action by the CFPB and other state and federal authorities, mortgage lenders should

• review the costs they charge at closing to ensure they are accurately disclosed to borrowers, preferably as early in the mortgage lending process as possible;
• monitor third parties, including third-party vendors, to ensure that the costs that they pass on to consumers are legitimate;
• survey the industry to determine whether the fees they charge are typical and in line with industry practices; and
• analyze their practices concerning “discount points” to ensure there is a clear consumer benefit for paying those amounts at closing.

Additionally, third parties and vendors should

• consider submitting comments in response to the RFI, including potential policy or data-driven comments;
• examine the fees they charge to determine whether they are appropriate and reasonable for the service provided; and
• ensure that the mortgage lenders with whom they work properly disclose fees charged for their services to consumers.

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