CFPB Mortgage Highlights Fall ’15

Mike Licht

The Consumer Financial Protection Bureau released its Fall 2015 Supervisory Highlights. In the context of mortgage origination, the CFPB found that

supervised entities, in general, effectively implemented and demonstrated compliance with the rule changes, there were instances of non-compliance with certain [rules] . . .. There were also findings of violations of disclosure requirements pursuant to the Real Estate Settlement Procedures Act (RESPA), implemented by Regulation X; the Truth in Lending Act (TILA), implemented by Regulation Z; and consumer financial privacy rules, implemented by Regulation P. (9, footnotes and sources omitted).

Specifically, it found that one or more entities failed to

  • “fully comply with the requirement that charges at settlement not exceed amounts on the good faith estimate by more than specified tolerances.” (10)
  • comply with the regulations governing HUD-1 settlement statements because of fees on the HUD-1 did match those on invoices; improper calculations on the HUD-1; and fees charged for services that were not provided, among other things.
  • provide required disclosures.
  • reimburse borrowers for understated APRs and finance charges, as required by Regulation Z.

In the context of mortgage servicing, the CFPB found that while it

continues to be concerned about the range of legal violations identified at various mortgage servicers, it also recognizes efforts made by certain servicers to develop an adequate compliance position through increased resources devoted to compliance. . . . Supervision continues to see that the inadequacies of outdated or deficient systems pose considerable compliance risk for mortgage servicers, and that improvements and investments in these systems can be essential to achieving an adequate compliance position. (15)

This is all well and good, but as I have noted before, it is hard to estimate how much of a problem exists from such a report — one or more entities did this, we are concerned about a range of legal violations of that . . .. I understand that the CFPB’s primary audience for this report are CFPB-supervised entities concerned with the CFPB’s regulatory focus, but this approach barely rises to the level of anecdote for the rest of us.

Mortgage Market, Hiding in Plain Sight

David Jackmanson

I blogged about the Center for Responsible Lending’s take on the 2014 Home Mortgage Disclosure Act (HMDA) data yesterday.  The mere act of aggregating this data reveals so much about the state of the mortgage market. Today I am digging into it a bit on my own.

There is a lot of good stuff in the analysis of the HMDA data released by the Federal Financial Institutions Examination Council (FFIEC). I found the discussion of the effects of the Qualified Mortgage and Ability to Repay rules most interesting:

The HMDA data provide little indication that the new ATR and QM rules significantly curtailed mortgage credit availability in 2014 relative to 2013. For example, despite the QM rule that caps borrowers’ DTI ratio for many loans, the fraction of high-DTI loans does not appear to have declined in 2014 from 2013. However, as discussed in more detail later, there are significant challenges in determining the extent to which the new rules have influenced the mortgage market, and the results here do not necessarily rule out significant effects or the possibility that effects may arise in the future. (4)

This analysis is apparently reacting to those who have claimed that the new regulatory environment is restricting lending too much. The mortgage market is generally too complicated for simple assertions like “new regulations have restricted credit too heavily” or “not enough” There are so many relevant factors, such as changes in the interest rate environment, the unemployment rate and the change in the cost of housing, to be confident about the effect of the change in regulations, particularly over a short time span. But the FFIEC analysis seems to have it right that the new regs did not have such a great impact when they went into effect on January 1, 2014, given the similarities in the 2013 and 2014 data. This reflects well on the rule-writing process for the QM and ATR rules. Time will tell whether and how they will need to be tweaked.

While the discussion of the new rules was comforting, I found the discussion of FHA mortgages disturbing: “The higher-priced fraction of FHA home-purchase loans spiked from about 5 percent in early 2013 to about 40 percent after May 2013 and continued at monthly rates between 35 and 52 percent through 2014, for an annual average incidence of about 44 percent in 2014.” (15) Higher-priced first-lien loans are those with an APR that is at least one and a half percentage points higher than the average prime offer rate for loans of a similar type.

The FHA often provides the only route to homeownership for first-time, minority and lower-income homebuyers, but it must be monitored to make sure that it is insuring mortgages that homeowners can pay month in and month out. If FHA mortgages are not sustainable for the long run, they are likely to do homebuyers more harm than good.

Reiss on High Loan Fees

CRM Buyer quoted me in On-Premises Banks Stick It to Walmart Customers. It opens,

Walmart customers who use the banking services provided inside the chain’s stores are among the highest payers of fees — especially overdraft fees — in the U.S., a Wall Street Journal analysis of federal filings concluded.

The five banks with the most Walmart branches ranked among the top 10 U.S. banks in fee income as a percentage of deposits last year, the paper reported, compared to other U.S. banks that earn most of their income through lending.

It is a notable finding, especially given Walmart’s brand: First and foremost, the company has built a reputation for providing low-cost products at significant savings compared to other stores.

Walmart cannot be held completely responsible for the banks’ practices, of course. The financial sector is highly regulated, and no third-party retailer is in a position to set standards or make policies.

However, Walmart told the Journal that it has a thorough process for vetting banks to make sure they are in line with its philosophy.

Financial Reform? What Financial Reform?

Apart from the Walmart branding issue, the report highlights some other concerns. In spite of curbs on financial industry practices in the last few years, it still is possible for providers to levy high fees on consumers in the lowest economic brackets, making it more difficult for them to work their way out of debt. A new government agency, the Consumer Finance Protection Bureau, was established to curtail such activities. Why do they still occur?

The Wall Street Journal leads off its article with the story of a consumer who knowingly overdraws her checking account to pay for a needed car repair. The US$30 fee, which translated into an APR of more than 300 percent, was actually cheaper than a payday loan, the borrower said.

In the bank’s defense, there are certain financial, market, regulatory and business realities that cannot be ignored.

“While I am not going to defend high-cost fees for financial products, I would say that the lenders often have high fixed costs for each transaction that can work out to a higher percentage of the amount borrowed than they would be for larger transactions,” David Reiss, a professor at Brooklyn Law School, told CRM Buyer.

“So, I would say that there is some gouging going on in this market, but also some basic business reality,” he remarked.