Extracted from Law360
The Consumer Financial Protection Bureau's initiative to reduce fees charged by banks and other companies under its jurisdiction is not only continuing, but gathering momentum.
Fees charged by mortgage lenders and servicers are top of mind. The CFPB recently announced that it is considering how to reduce mortgage closing fees. We should expect proposed amendments to CFPB's servicing rules this spring.
Closing Fees
Immediately following President Joe Biden's State of the Union address announcing plans to lower homebuyer and refinancing costs, the CFPB issued a March 8 blog post seeking public input on how mortgage closing costs affect consumers.[1] The CFPB also announced that it will work to monitor closing costs and, "as necessary, issue rules and guidance to improve competition, choice, and affordability."
Simply stated, the CFPB is putting companies on notice that it will be taking a close look at the total loans costs for originating a residential mortgage loan, including origination fees, appraisal fees, credit report fees, title insurance and discount points.
In particular, the CFPB is paying "particular attention to the recent rise in discount points" and seems concerned with the lack of competition for certain fees, such as those for the lender's title insurance and credit reports.
In the blog post, the CFPB also expressed concerns with how companies may charge lender credits and fees that are financed into the loan amount through higher interest rates or mortgage insurance payments. Significantly, the CFPB has signaled that it will continue to use its supervision and enforcement tools for companies that fail to comply with the law.
While the CFPB's blog post does not identify any specific laws, it does provide some clues.
For one, the bureau is concerned that some closing costs are high and increasing due to lack of competition, stating "borrowers are required to pay for many of the costs associated with closing a home loan but cannot pick the provider and do not benefit from the service." The CFPB noted that taking unreasonable advantage of the inability of a consumer to protect their interests in selecting or using a consumer financial product or service could be construed as abusive under the Dodd-Frank Act's unfair, deceptive or abusive acts or practices, or UDAAP, statute.
Given that certain fees are fixed and do not fluctuate with the loan size or interest rate, the bureau is concerned that such fees could disproportionately affect borrowers with smaller loans, such as low-income borrowers, first-time borrowers, or Black or Hispanic borrowers. This could present a fair lending problem under the Equal Credit Opportunity Act. The CFPB already has announced that, under its authority to prevent UDAAPs, it will begin examining institutions for alleged discriminatory conduct it deems unfair.
Of course, Congress passed the Dodd-Frank Act to address many of the above concerns, and the Truth in Lending Act and Real Estate Settlement Procedures Act integrated disclosure rule, or the "know before you owe" rule, already attempts to ensure that consumers are provided with greater and more timely information on the nature and costs of the residential real estate settlement process and are protected from unnecessarily high settlement charges.
Reading the Tea Leaves
While the CFPB's recent post focused only on origination fees, the bureau is also closely scrutinizing servicing fees.
In January 2022, the CFPB launched an initiative to reduce certain fees charged by banks and other companies under its jurisdiction. The CFPB focused on so-called junk fees, which it boldly characterized in its request for information as "fees that far exceed the marginal cost of the service they purport to cover, implying that companies are not just shifting costs to consumers, but rather, taking advantage of a captive relationship with the consumer to drive excess profits."
In addition to calling out general fees such as late fees and nonsufficient funds fees, the CFPB explicitly referenced mortgage delinquency fees, such as monthly property inspections fees, appraisal and valuation fees, force-placed insurance, legal fees, foreclosure fees, new title insurance, and corporate advances.
The CFPB then released a steady stream of guidance on fees.
Convenience Fees
In June 2022, the CFPB issued an advisory opinion on convenience fees, concluding that the Fair Debt Collection Practices Act and its implementing Regulation F prohibit debt collectors from charging convenience fees unless those fees are expressly authorized by the underlying agreement or are affirmatively permitted by law.
Mortgage Junk Fees
In March 2023, the CFPB issued a special edition of its "Supervisory Highlights" publication highlighting junk fees. It found that mortgage servicers charged consumers late fees over the amount permitted under the loan agreement; late fees despite periodic statements listing a $0 late fee; fees for unnecessary property inspection visits; and private mortgage insurance charges that should have been billed to the lender.
The examiners also found that servicers failed to waive certain charges when consumers entered permanent loss mitigation options and failed to fund private mortgage insurance premiums.
Financial Account Information Fees
In October 2023, the CFPB issued an advisory opinion regarding the requirement in Section 1034(c) of the Dodd-Frank Act that banks and credit unions with over $10 billion in assets "comply with a consumer request for information in the control or possession of such covered person concerning the consumer financial product or service that the consumer obtained from such covered person, including supporting written documentation, concerning the account of the consumer."
Per the CFPB's advisory opinion,
requiring a consumer to pay a fee or charge to request account information, through whichever channels the bank uses to provide information to consumers, is likely to unreasonably impede consumers' ability to exercise the right granted by section 1034(c), and thus to violate the provision.
Other Fees
The CFPB also called for prohibiting charges for responding to consumer inquiries seeking the amount necessary to pay a loan balance; responding to a request for a specific type of supporting document, such as a check image or an original account agreement; and spending time on consumer inquiries seeking information and supporting documents regarding an account.
The CFPB's Authority Over Unfair, Deceptive or Abusive Acts or Practices
Among the tools in the CFPB's toolbox, the CFPB appears to be focusing more recently on its abusiveness authority.
This January, the CFPB proposed a rule on fees for instantaneous declined transactions, which would prohibit financial institutions from imposing a nonsufficient funds fee, or NSF fee, on instantaneous or near-instantaneous transactions. While this proposed rule might not apply to mortgages per se, it nevertheless conveys the bureau's current thinking on the abusiveness standard in Section 1031(d) of the Consumer Financial Protection Act.
The proposed rule would prohibit a financial institution from charging an NSF fee to a consumer whose attempt to withdraw, debit, pay or transfer funds from their account is declined instantaneously or near-instantaneously by the financial institution.
While the scope of this proposed rule is narrow, the bureau's interpretation of "abusiveness" articulated in the proposal is not.
Section 1031 of the CFPA prohibits UDAAPs under federal law for any transaction with a consumer for a consumer financial product or service, or the offering of a consumer financial product or service. The proposed rule would provide that charging an NSF fee in instantaneously or near-instantaneously declined transactions violates the "lack of understanding" prong of the abusiveness standard.
Specifically, under the CFPB's April 2023 policy statement on abusive acts or practices, the "lack of understanding on the part of the consumer of the material risks, costs, or conditions of the product or service" relates to gaps in understanding affecting consumer decision making.
The proposed rule attempts to fine-tune the "lack of understanding" analysis by distinguishing prior comments the bureau made in its 2020 payday lending rule, clarifying that:
- Lack of understanding under the abusiveness standard of UDAAP "is not synonymous with reasonable avoidability under the unfairness standard";
- Magnitude and risk of harm are distinct and should have no bearing on a "lack of understanding" analysis; and
- A consumer's lack of understanding should not be characterized as general or specific, because such a framework is unhelpful in determining whether consumers understand the material risks, costs or conditions of a financial product or service.
According to the proposed rule, the bureau has preliminarily determined that the charging of an NSF fee is abusive under Section 1031(d) of the CFPA, because it would take "unreasonable advantage of consumers' lack of understanding … of the material risks, costs, or conditions associated with their deposit accounts," and that "covered financial institutions that charge NSF fees on covered transactions would be benefiting from negative consumer outcomes that result from … a consumer's lack of understanding."
What's more, the bureau summarily dismissed that such risks could be mitigated, because disclosure would be too costly, too unfeasible and unlikely to eliminate the risk.
Drawing on its experience and expertise regarding consumer behavior, the CFPB believes that if a transaction entails material risks or costs and consumers derive minimal or no benefit from the transaction, it is generally reasonable to conclude that consumers who nonetheless went ahead with the transaction did not understand the material risks, costs or the conditions giving rise to those risks or costs.
In other words, the CFPB appears to believe that no consumer would initiate a transaction knowing that they have insufficient funds and that a fee could be charged if their transaction is declined, even though the vast majority of consumers have readily available access to their bank account balances, such fees are generally disclosed to consumers and consumers contractually agree to pay such fees.
On a related note, the CFPB on March 11 lobbied New York Gov. Kathy Hochul and state legislators to add the prohibition on abusive conduct to the state's deceptive trade practice law, again on the grounds that consumers reasonably cannot understand the material risks of their transactions.
Speaking in the New York letter of the "reasonable reliance" prong of the abusiveness standard, the CFPB states this "component of the federal prohibition recognizes that people often reasonably expect that certain businesses will help them make difficult financial decisions, and there is a potential for betrayal or exploitation of that trust."
Conclusion
The CFPB is sending a strong message to the industry that it will scrutinize mortgage fees. Since the bureau has been on a hiring spree in its enforcement division, now is a good time to take a close look at the fees being charged from both a UDAAP and fair lending perspective.
[1] https://www.consumerfinance.gov/about-us/blog/junk-fees-are-driving-up-housing-costs-the-cfpb-wants-to-hear-from-you/.