Recent releases from the Consumer Financial Protection Bureau (CFPB) show that the mortgage industry is in the crosshairs of the CFPB's campaign against so-called junk fees. Earlier this year, the CFPB indicated its interest in mortgage servicing fees when it, along with the Federal Trade Commission, filed an amicus brief in a case concerning whether payment convenience fees, what the Bureau calls "pay-to-pay" fees, are permissible when collecting mortgage loan payments. The CFPB argued that, unless the payment convenience fee was explicitly authorized by the mortgage agreements, payment convenience fees may not be charged by a mortgage servicer acting as a debt collector under the Fair Debt Collection Practices Act.
Now, the CFPB is releasing guidance, in the form of a Supervisory Highlights and a blog post, regarding the imposition of "junk fees" during the life cycle of a mortgage loan transaction. Each signals the CFPB's further attention on junk fees and a return of focus on mortgage originators and servicers after the COVID-19 pandemic.
CFPB Supervisory Highlights – Spring 2024 – Mortgage Servicing Edition
Last month, the CFPB released an issue of its Supervisory Highlights focused on mortgage servicing and, in particular, loss mitigation and fee practices. The CFPB also noted that it is currently reviewing Regulation X's existing framework to "simplify and streamline" the mortgage servicing rules.
The Supervisory Highlights focused on the following acts and practices, among others, that the CFPB states amount to unfair, deceptive, or abusive acts or practices (UDAAPs) and violations of mortgage servicing law and regulations, such as Regulation X and Regulation Z:
- Unfair Charges for Property Inspections Prohibited by Investor Guidelines
- Examiners found that servicers charged property inspection fees on government backed loans that were impermissible.
- Unfair Late Fee Overcharges
- Examiners found that servicers were unfairly charging late fees when the fees were not authorized by the loan agreement or when the consumer had entered a loss mitigation solution that should have prevented the imposition of late fees.
- Failing to Waive Existing Fees Following Acceptance of COVID-19 Loan Modifications
- Examiners found that servicers failed to waive existing fees when a borrower accepted a COVID-19 loss mitigation option, in violation of Regulation X.
- Failing to Provide Adequate Descriptions of Fees in Periodic Statements
- Examiners found that servicers did not adequately provide a "brief description of the transaction" for fees on periodic statements, as required by Regulation Z. For example, servicers used the label "service fee" for 18 different fee types, without including additional descriptive information.
- Deceptive Loss Mitigation Eligibility Notices
- Examiners found that servicers engaged in deceptive acts or practices when sending loss mitigation notices to consumers stating that the consumer had been approved for a loss mitigation option when, in fact, the servicer had not yet considered the consumer for a loss mitigation option.
- Loss Mitigation Violations
- Examiners found that servicers did not comply with Regulation X during the loss mitigation process. First, when servicers sent borrowers an acknowledgment of receiving a loss mitigation application, the servicers failed to specify whether a borrower's loss mitigation application was incomplete or complete. Second, when servicers sent borrowers a notice about their eligibility for certain loss mitigation options, the notices failed to state the deadline for accepting or rejecting those options; additionally, some notices were sent outside the time frame required by Regulation X.
The CFPB's Supervisory Highlights are an important source of insight into the CFPB's supervisory efforts and offer guidance to covered persons on the practices the CFPB is currently scrutinizing. That said, Supervisory Highlights do not provide detail concerning how many covered persons were engaged in the conduct cited or the effects of the finding on the institution. They can be best used as a guidepost or benchmark to ensure that current practices are compliant with current law and, if a servicer is engaging in a practice cited in the Supervisory Highlights, as a notice to modify current practices and procedures.
Scrutiny of Mortgage Origination Fees
Mortgage origination fees are also under the microscope. In an earlier blog, the CFPB asked the public whether junk fees were driving up housing costs and specifically pointed to title insurance fees, credit reports and appraisal fees, and origination fees. The CFPB also said it was paying particular attention to discount points. According to the Bureau, a greater percentage of home purchase borrowers paid discount points in 2022, compared with 2021, and the amount that borrowers are paying had also increased in the same period. It said, "These points may not always save borrowers money, however, and may indeed add to borrowers' costs." The Bureau seems concerned that borrowers might not fully understand how discount points work and whether purchasing them is advantageous for borrowers. Perhaps the CFPB is viewing the sale of discount points as a potential UDAAP.
The CFPB speculated that some closing costs are high and increasing because there is little competition. It said that, although borrowers are required to pay for many of the costs associated with a closing, borrowers are unable to pick the provider for a particular service and do not benefit from the service. For example, lenders' title insurance and fees for credit reports are fees borrowers face at closing where borrowers have no control over costs, according to the Bureau.
The CFPB did not acknowledge, however, that lenders must disclose estimated closing costs, which would include costs for lenders' title insurance and credit report fees, in a loan estimate no later than three days after the consumer applies for a mortgage loan. In fact, the purpose of these disclosures is to allow consumers to compare loan terms and costs between lenders, allowing the borrower to choose a lender (and the service providers that the lender uses) with the lowest costs. The estimated costs are subject to tolerances, meaning that the actual costs at closing cannot exceed the estimated costs disclosed in the loan estimate by a certain threshold (except for very narrow situations, like unforeseen circumstances). If a service is something that the borrower may not shop for, such as lenders' title insurance or credit reports, then there is zero tolerance; the actual costs at closing may not exceed the estimated cost disclosed by any amount. If the CFPB blames lack of consumer choice and competition for the rise in mortgage costs, the CFPB should probably explain whether the loan estimate is failing to perform its intended function of allowing consumers to compare loan terms and costs among various lenders and their service providers.
Conclusion
The CFPB has announced its interest in charges associated with mortgages, during both origination and servicing. Mortgage companies that either originate or service mortgage loans may want to review their fees and make sure that they are permissible—both under the law and under the agreements governing the loan (e.g., note, mortgage, investor guidelines); justifiable—that is, the charge to consumers is in line with the company's own expenses and the service associated with the charge provides a benefit to the consumer; and adequately disclosed to the consumer.