The Community Home Lenders of America (CHLA) submitted a letter to the Consumer Financial Protection Bureau (CFPB) in support of changes to the loan originator compensation rule, telling CFPB Director Rohit Chopra that the current rule’s “inflexibility” in certain areas is a “detriment” to consumers.
The letter calls for increased flexibility in LO compensation restrictions, which would “[benefit] consumers without opening loopholes that would allow for anti-consumer practices,” according to the letter.
The CHLA is calling for “for flexibility from the strict prohibition against variations in LO compensation” in three areas, according to the letter: state housing finance agency (HFA) bond loans; “truly competitive situations” in order to enable a lender to match a price offer; and error on the part of the loan originator.
State HFA bond programs are more complex than other single-family loan options, which means that HFA loans are more expensive to manufacture.
Prior to the implementation of the CFPB LO comp rule, it was common for lenders to absorb the higher costs by reducing the fee to the originator. However, the CFPB rule does not currently allow for this.
“The inability to reduce loan originator compensation to offset HFA production costs under the current LO Comp rule harms consumers by discouraging lender participation in these vital programs,” the CHLA states in the letter. “Moreover, because HFA loans are generally more costly to underwrite and therefore less profitable, providing LO comp flexibility for such loans does not create financial incentives to steer borrowers to higher-priced loans.”
The CHLA also contends that “an overly restrictive limitation that compensation may not vary” interferes with the broader objective of increasing competition and consumer choice.
“Many lender groups have for some time argued for targeted flexibility for loan originators in this situation, typically asking for such flexibility when there is ‘demonstrable price competition,’” the letter states.
To address this while ensuring “demonstrable price competition,” the CHLA recommends five criteria to address concerns while also allowing for comp reductions: an agreed-upon compensation schedule between the lender and originator; facilitating borrower comparison shopping after the current lender has provided “substantial assistance” with finding the right loan option; the original lender matching the offer of the competitor; a lender not making regular use of this flexibility; and logging that all preceding requirements have been met.
In regard to comp reduction for LO mistakes, the CHLA says that a lender should have the authority to reduce compensation based on the cost incurred by the mistake.
“This is based on the simple principle that loan originators should take financial responsibility for their errors,” the letter states.
The CFPB issued an official request for comment in March as it conducts a review of Regulation Z’s mortgage loan originator rules. The goal for the CFPB is to understand the economic impact the rules have on smaller businesses in the mortgage space.
Consumers in the Southern region of the nation tend to face increased difficulties with accessing credit and pay higher interest rates compared to other regions, according to new reports from the Consumer Financial Protection Bureau (CFPB). This also applies to mortgage financing, despite Southern residents applying for mortgage loans at the same rate as the rest of the nation.
In the “Consumer Finances in Rural Areas of the Southern Region” report, the CFPB compares consumer financial experiences and outcomes in rural communities in the Southern region to other regions. In the “Banking and Credit Access in the Southern Region of the U.S.” report, the data focuses on banking and credit access, and mortgage lending in particular, for both rural and non-rural areas of the region.
Key mortgage findings in the second report highlight the difficult road to mortgage financing for Southern consumers.
“While Southern rural consumers apply for mortgages at the same rate as consumers nationwide (19 per 1,000 residents), they are much more likely to have their applications denied (27% of mortgage applications are denied in the rural South compared to 11% nationally),” the CFPB states in the report. “Additionally, rural Southerners who obtain credit tend to pay higher interest rates on average, 3.51% compared to 3.13% nationally.”
The reports also notes that credit scores alone cannot account for the differences among regions. Both race and rural area residency appear to weigh more in terms of a consumer’s access to credit.
“People of color are more likely to be denied credit, compared to similarly-situated white borrowers, and rural Southerners are denied at higher rates than their non-rural counterparts,” the report states. “These trends hold true among applicants with both low and high credit scores.”
While there have been some recent gains in terms of consumers who are “unbanked” in the Southern region, these rates remain high in the certain states.
“Two states in the region, Mississippi and Louisiana, have the highest unbanked rates in the country, at 11.1% and 8.1% respectively,” the report notes. “The highest unbanked rates in the region are in rural communities and communities of color; for example, in Mississippi and Georgia, the rural unbanked rate is almost double the unbanked rate in metro areas.”
There are also auto lending challenges for Southern residents, as the region has higher delinquency rates related to auto loan borrowers when compared to rural borrowers in other regions.
“In rural Southern [persistent poverty counties], 20% of consumers are delinquent on an auto loan,” the CFPB states in the report. “Rural Southerners remain highly dependent on personal vehicles for transportation due to longer commutes and a lack of alternative transit infrastructure and may therefore be particularly impacted by difficulty obtaining an auto loan.”
“The rural South faces distinct challenges when it comes to fair access to banking,” CFPB Director Rohit Chopra said. “Understanding regional differences across the country will help us determine where financial marketplaces can work better for all.”
Still, the reports show signs of progress in certain areas, particularly in terms of mortgage access and rates of unbanked consumers.
“Some mortgage lenders have strong records of reaching historically underserved markets within the region, such as rural communities, low-income borrowers and borrowers of color,” the report states. “Government lending programs and lenders’ access to the secondary market may also play an important role in increasing credit access in underserved communities.”
“Last month, ProPublica reported about a real estate flipping company that is targeting vulnerable homeowners, and using deception [and] coercion to close sales,” Smith told Chopra during the hearing. “You [previously indicated] that the CFPB does have a role to play in preventing such issues from going nationwide.”
When asked about what he is seeing and what the Bureau is doing to stay on top of such things, Chopra responded that there is something new that the CFPB has been hearing related to these recent stories.
“I actually met with some Minnesota community leaders about contract-for-deed targeting certain immigrant groups across the country,” Chopra said. “And I think what we want to make sure is even where we might not have jurisdiction to go after a scam, we want to tell the Justice Department and the state [attorney general].”
Chopra worries, he said, that because of the housing shortage and affordability issues playing out across the country, people are turning their attention in greater numbers to older homeowners sitting on a lot of equity who may be widowed, or who have limited English proficiency, and targeting them for scams.
“You mentioned that ProPublica article that obviously had some very troubling allegations, I don’t want to comment on that in too much detail,” Chopra said.
Chopra did say, however, that CFPB is relying on data including through consumer complaints and discussions with consumers in different regions to determine its potential action on different issues.
“One of the big mistakes in the lead-up to the Financial Crisis is federal regulators ignored stories from the ground,” Chopra said. “And that proved to be a pivotal mistake.”
The day after the Senate hearing, Sens. Smith and Cynthia Lummis (R-Wyoming) sent a letter to the National Association of Attorneys General recommending that state attorneys general “take steps to protect homeowners from predatory home-buying practices.”
“Senators Lummis and Smith were concerned by recently reported allegations that some franchises of HomeVestors of America, commonly recognized by their advertising catchline, ‘We Buy Ugly Houses,’ were targeting elderly and ill homeowners,” the senators said in a joint statement. “The letter details alarming and misleading practices wherein some franchisees allegedly targeted vulnerable homeowners and communities, using deception and coercion to close sales, and employing complex legal maneuvers to prevent their victims from backing out of sales despite unfair conditions.”
Within the original report, HomeVestors representatives told ProPublica that its reporting “represent[ed] a tiny fraction of the company’s overall transactions, which have totaled more than 71,400 since 2016,” according to the report. A spokesperson “denied the company had targeted the elderly and pointed to a 96% approval rating among homeowners who sell to HomeVestors, which was calculated internally from what the company says was ‘over 500’ customer reviews.”
The company added that it had “already taken action in some of the cases” highlighted by the report, and is “investigating others in light of the reporting.”
Shortly after the report’s publication, HomeVestors CEO David Hicks posted a response to the story.
“While we regret any transaction in which we fall short of our high standards, we must view these instances within the larger context of the nearly 150,000 seller experiences we have provided during our nearly 30-year history,” the response said in part. “We have thousands of encouraging stories of franchises going beyond expectations to help sellers and their communities.”
HousingWire reached out to HomeVestors for comment but did not hear back before this article was published.
A potentially scary, or intriguing thought, depending on your worldview: Whether you are approved for a mortgage could hinge upon the type of yogurt you purchase.
Buying the more daring and worldly Siggi’s — a fancy imported Icelandic brand — could mean you achieve the American Dream while enjoying the more pedestrian choice of Yoplait’s whipped strawberry flavor could lead to another year of living in your parents’ basement.
Consumer habits and preferences can be used by machine learning or artificial intelligence-powered systems to build a financial profile of an applicant. In this evolving field, the data used to determine a person’s creditworthiness could include anything from subscriptions to certain streaming services to applying for a mortgage in an area with a higher rate of defaults to even a penchant for purchasing luxury products — the Siggi’s brand of yogurt, for instance.
Unlike the recent craze with AI-powered bots, such as ChatGPT, machine learning technology involved in the lending process has been around for at least half a decade. But a greater awareness of this technology in the cultural zeitgeist, and fresh scrutiny from regulators have many weighing both its potential benefits and the possible unintended — and negative — consequences.
AI-driven decision-making is advertised as a more holistic way of assessing a borrower than solely relying on traditional methods, such as credit reports, which can be disadvantageous for some socio-economic groups and result in more denials of loan applications or in higher interest rates being charged.
Companies in the financial services sector, including Churchill Mortgage, Planet Home Lending, Discover and Citibank, have started experimenting with using this technology during the underwriting process.
The AI tools could offer a fairer risk assessment of a borrower, according to Sean Kamar, vice president of data science at Zest AI, a technology company that builds software for lending.
“A more accurate risk score allows lenders to be more confident about the decision that they’re making,” he said. “This is also a solution that mitigates any kind of biases that are present.”
But despite the promise of more equitable outcomes, additional transparency about how these tools learn and make choices may be needed before broad adoption is seen across the mortgage industry. This is partially due to ongoing concerns about a proclivity for discriminatory lending practices.
AI-powered systems have been under the watchful eye of agencies responsible for enforcing consumer protection laws, such as the Consumer Financial Protection Bureau.
“Companies must take responsibility for the use of these tools,” Rohit Chopra, the CFPB’s director, warned during a recent interagency press briefing about automated systems. “Unchecked AI poses threats to fairness and our civil rights,” he added.
Stakeholders in the AI industry expect standards to be rolled out by regulators in the near future, which could require companies to disclose their secret sauce — what variables they use to make decisions.
Companies involved in building this type of technology welcome guardrails, seeing them as a necessary burden that can result in greater clarity and more future customers.
The world of automated systems
In the analog world, a handful of data points provided by one of the credit reporting agencies, such as Equifax, Experian or TransUnion, help to determine whether a borrower qualifies for a mortgage.
A summary report is issued by these agencies that outlines a borrower’s credit history, the number of credit accounts they’ve had, payment history and bankruptcies. From this information, a credit score is calculated and used in the lending decision.
Credit scores are “a two-edged sword,” explained David Dworkin, CEO of the National Housing Conference.
“On the one hand, the score is highly predictive of the likelihood of [default],” he said. “And, on the other hand, the scoring algorithm clearly skews in favor of a white traditional, upper middle class borrower.”
This pattern begins as early as young adulthood for borrowers. A report published by the Urban Institute in 2022 found that young minority groups experience “deteriorating credit scores” compared to white borrowers. From 2010 to 2021, almost 33% of Black 18-to-29-year-olds and about 26% of Hispanic people in that age group saw their credit score drop, compared with 21% of young adults in majority-white communities.
That points to “decades of systemic racism” when it comes to traditional credit scoring, the nonprofit’s analysis argues. The selling point of underwriting systems powered by machine learning is that they rely on a much broader swath of data and can analyze it in a more nuanced, nonlinear way, which can potentially minimize bias, industry stakeholders said.
“The old way of underwriting loans is relying on FICO calculations,” said Subodha Kumar, data science professor at Temple University in Philadelphia. “But the newer technologies can look at [e-commerce and purchase data], such as the yogurt you buy to help in predicting whether you’ll pay your loan or not. These algorithms can give us the optimal value of each individual so you don’t put people in a bucket anymore and the decision becomes more personalized, which is supposedly much better.”
An example of how a consumer’s purchase decisions may be used by automated systems to determine creditworthiness are displayed in a research paper published in 2021 by the University of Pennsylvania, which found a correlation between products consumers buy at a grocery store and the financial habits that shape credit behaviors.
The paper concluded that applicants who buy things such as fresh yogurt or imported snacks fall into the category of low-risk applicants. In contrast, those who add canned food and deli meats and sausages to their carts land in the more likely to default category because their purchases are “less time-intensive…to transform into consumption.”
Though technology companies interviewed denied using such data points, most do rely on a more creative approach to determine whether a borrower qualifies for a loan. According to Kamar, Zest AI’s underwriting system can distinguish between a “safe borrower” who has high utilization and a consumer whose spending habits pose risk.
“[If you have a high utilization, but you are consistently paying off your debt] you’re probably a much safer borrower than somebody who has very high utilization and is constantly opening up new lines of credit,” Kamar said. “Those are two very different borrowers, but that difference is not seen by more simpler, linear models.”
Meanwhile, TurnKey Lender, a technology company that also has an automated underwriting system that pulls standard data, such as personal information, property information and employment, but can also analyze more “out-of-the-box” data to determine a borrower’s creditworthiness. Their web platform, which handles origination, underwriting, and credit reporting, can look at algorithms that predict the future behavior of the client, according to Vit Arnautov, chief product officer at TurnKey.
The company’s technology can analyze “spending transactions on an account and what the usual balance is,” added Arnautov. This helps to analyze income and potential liabilities for lending institutions. Additionally, TurnKey’s system can create a heatmap “to see how many delinquencies and how many bad loans are in an area where a borrower lives or is trying to buy a house.”
Bias concerns
Automated systems that pull alternative information could make lending more fair, or, some worry, they could do the exact opposite.
“The challenges that typically happen in systems like these [are] from the data used to train the system,” said Jayendran GS, CEO of Prudent AI, a lending decision platform built for non-qualified mortgage lenders. “The biases typically come from the data.
“If I need to teach you how to make a cup of coffee, I will give you a set of instructions and a recipe, but if I need to teach you how to ride a bicycle, I’m going to let you try it and eventually you’ll learn,” he added. “AI systems tend to work like the bicycle model.”
If the quality of the data is “not good,” the autonomous system could make biased, or discriminatory decisions. And the opportunities to ingest potentially biased data are ample, because “your input is the entire internet and there’s a lot of crazy stuff out there,” noted Dworkin.
“I think that when we look at the whole issue, it’s if we do it right, we could really remove bias from the system completely, but we can’t do that unless we have a lot of intentionality behind it,” Dworkin added. Fear of bias is why government agencies, specifically the CFPB, have been wary of AI-powered platforms making lending decisions without proper guardrails. The government watchdog has expressed skepticism about the use of predictive analytics, algorithms, and machine learning in underwriting, warning that it can also reinforce “historical biases that have excluded too many Americans from opportunities.”
Most recently, the CFPB along with the Civil Rights Division of the Department of Justice, Federal Trade Commission, and the Equal Employment Opportunity Commission warned that automated systems may perpetuate discrimination by relying on nonrepresentative datasets. They also criticized the lack of transparency around what variables are actually used to make a lending determination.
Though no guidelines have been set in stone, stakeholders in the AI space expect regulations to be implemented soon. Future rules could require companies to disclose exactly what data is being used and explain why they are using said variables to regulators and customers, said Kumar, the Temple professor.
“Going forward maybe these systems use 17 variables instead of the 20 they were relying on because they are not sure how these other three are playing a role,” said Kumar. “We may need to have a trade-off in accuracy for fairness and explainability.”
This notion is welcomed by players in the AI space who see regulations as something that could broaden adoption.
“We’ve had very large customers that have gotten very close to a partnership deal [with us] but at the end of the day it got canceled because they didn’t want to stick their neck out because they were concerned with what might happen, not knowing how future rulings may impact this space,” said Zest AI’s Kamar. “We appreciate and invite government regulators to make even stronger positions with regard to how much is absolutely critical for credit underwriting decisioning systems to be fully transparent and fair.”
Some technology companies, such as Prudent AI, have also been cautious about including alternative data because of a lack of regulatory guidance. But once guidelines are developed around AI in lending, GS noted that he would consider expanding the capabilities of Prudent AI’s underwriting system.
“The lending decision is a complicated decision and bank statements are only a part of the decision,” said GS. “We are happy to look at extending our capabilities to solve problems, with other documents as well, but there has to be a level of data quality and we feel that until you have reliable data quality, autonomy is dangerous.”
As potential developments surrounding AI-lending evolve, one point is clear: it is better to live with these systems than without them.
“Automated underwriting, for all of its faults, is almost always going to be better than the manual underwriting of the old days when you had Betty in the back room, with her calculator and whatever biases Betty might have had,” said Dworkin, the head of NHC. “I think at the end of the day, common sense really dictates a lot of how [the future landscape of automated systems will play out] but anybody who thinks they’re going to be successful in defeating the Moore’s Law of technology is fooling themselves.”
The Department of Housing and Urban Development’s Office of Inspector General found that Mr. Cooper failed to provide proper retention options to more than 80% of borrowers with delinquent FHA-insured loans after their COVID-19 forbearance came to an end.
The Dallas-based servicer, which still in some cases uses the Nationstar name, incorrectly calculated loss mitigation options for some borrowers with delinquent loans, did not reinstate arrearages properly and declined loss mitigation in error between November 2021 and February 2022. The OIG report projects that this impacted close to 3,572 FHA-insured loans out of a statistical sample of 4,288 mortgages, totaling $767 million.
As such, Mr. Cooper’s practices and “inadequate policies and system” may have contributed to borrowers facing “additional hardships from improper loss mitigation,” the department’s watchdog claims.
The company, which is the largest nonbank servicer in the nation with an $853 billion portfolio as of March 31, was chosen for the audit because it had a notable number of delinquent loans and was also based on complaints made against it to the Consumer Financial Protection Bureau and the HUD OIG hotline.
During the four months that were audited, over 50% of borrowers in the statistical sample received improper loss mitigation options from Mr. Cooper, while for 35% of loans, the servicer did not follow HUD’s guidance regarding notifying borrowers about the Homeowner Assistance Fund and loss mitigation waterfall use.
A spokeswoman for the servicer acknowledged that “some limited, technical exceptions and differences in interpretation existed within the audit report sample population,” but said the company “satisfied the program’s objectives and took the necessary steps to help our customers remain in their homes.”
“Mr. Cooper helped thousands of FHA customers with timely solutions, and we are deeply disappointed that the HUD OIG Report did not accurately reflect our commitment to those customers,” the company’s spokeswoman said in a written statement. “None of the homes in the sample population were foreclosed upon, and there was no harm to any of the customers.”
However, HUD OIG claimed Mr. Cooper dropped the ball with the following: some borrowers received additional months of future payments in their partial claim, the servicer didn’t include all arrearages needed to bring the borrower current, incorrect interest rates were used in the calculation of loss mitigation options and late fees were included in the partial claim that should have been waived.
Mr. Cooper also did not inform a notable chunk of borrowers about HAF during loss mitigation and only started doing so when the audit began in March 2022, the watchdog said. Earlier last year, the CFPB made it a point to encourage servicer participation in the program, pointing out that it was one of the best ways to ensure borrowers stay in their homes.
Going forward, the OIG recommends for Mr. Cooper to implement controls and provide employee training to prevent noncompliance in loss mitigation, as well as identify loans that were affected by improper application and update said accounts.
In March, Mr. Cooper settled a COVID loss mitigation lawsuit from a pair of Ohio borrowers that alleged the servicer steered them away from a pandemic-related modification plan.
Concurrently, HUD’s OIG released a report which looked at overall servicer compliance during the pandemic. The same problems that were noted in Mr. Cooper’s audit were found across a large number of mortgage servicers.
Based on a sample of 231,362 FHA-insured forward loans totaling $41 billion, servicers did not meet HUD requirements for providing loss mitigation assistance to 155,297 borrowers, the report said.
Nearly half of the borrowers in the sample did not receive the correct loss mitigation assistance, while approximately one-quarter of the borrowers received the proper option, but servicers did not follow COVID-19 loss mitigation guidance to help borrowers with payments that were missed during forbearance, the report said.
“It goes without saying that the COVID-19 pandemic was unprecedented in the ways in which it impacted Americans, including those with FHA-insured loans,” said Inspector General Rae Oliver Davis, in a written statement. “HUD’s efforts to address the crisis necessarily evolved over time and mortgage servicers struggled to adapt to those changes.”
Servicers were “unprepared for the pace in which FHA changed loss mitigation requirements” and “confused with the new requirements,” which resulted in borrowers receiving conflicting information on eligibility requirements, the report said. The watchdog urged HUD to develop a plan for how to mitigate noncompliance.
A HUD spokeswoman said the department takes “very seriously” instances of non-compliance with servicing policies, particularly those that are designed to help borrowers retain their home.”
“We continue to work with individual servicers on the appropriate remedies for non-compliance with our policies, and with all FHA servicers on education and training that will facilitate effective implementation of our requirements now and in the future,” she added.
Bob Broeksmit, president of the Mortgage Bankers Association, dubbed the implementation of COVID-19 relief a major success story for servicers.
“A number of the technical faults that the report identifies were made by servicers in the spirit of helping COVID-affected borrowers exit forbearance and remain in their homes in the fastest, most efficient way possible,” he wrote. ” Others were the unfortunate outcome of confusing or conflicting program requirements and the inherent difficulties of quickly scaling such a massive borrower assistance effort.”
Some of the consumer protection regulations that govern how mortgage companies offer borrowers home-retention options will be simplified in line with responses to a proposal issued last September.
“The CFPB will be using this input from commenters to propose ways to simplify and streamline mortgage servicing rules,” Rohit Chopra, director of the Consumer Financial Protection Bureau, said in a blog published Thursday.
Feedback Chopra found compelling centered on frustration with the complexity of the process.
“Many commenters noted that borrowers seeking help on their mortgages can face a paperwork treadmill,” he said.
Extra costs and damage to credit records resulting from delays were a particular gripe, Chopra noted.
“Commenters also expressed concern that borrowers often incur servicing fees and experience negative credit reporting while waiting for their mortgage servicers to review their options,” he said.
Chopra did not confirm the extent to which the CFPB would take up its earlier proposal but said the bureau would be shaping its revisions with consideration for both the mortgage industry and consumers.
“When homeowners who struggle to make payments get the help they need without unnecessary delay or hurdles, it is better for borrowers, servicers and the economy,” he said.
Concepts in the CFPB’s proposal included potentially extending temporary forbearance options allowed during the pandemic for permanent use and making refinance options simpler to access.
Chopra also said there would be certain guardrails around what the bureau would be willing to do.
“We will propose streamlining only if it would promote greater agility on the part of mortgage servicers in responding to future economic shocks while also continuing to ensure they meet their obligations for assisting borrowers promptly and fairly,” he said.
The Consumer Financial Protection Bureau (CFPB) will look for ways to streamline and simplify mortgage servicing rules in the months ahead following public comment on how to reduce risks for borrowers having trouble with their mortgage payments, according to a blog post from CFPB Director Rohit Chopra.
Chopra noted in the post the importance of mortgage servicing rules to the ability for borrowers to keep up with their loans — despite servicers being chosen by the lender and not the borrower, he said.
“In the mid-2000s, predatory mortgage practices spread throughout the country,” Chopra wrote. “Many large financial institutions with mortgage servicing operations experienced serious breakdowns. This resulted in a crisis where 10 million homes ended up in foreclosure between 2006 and 2014. The foreclosure crisis was an important catalyst for the creation of the Consumer Financial Protection Bureau.”
In addition to the founding of the CFPB and the implementation of the first mortgage rules in 2014, the pandemic has highlighted how certain servicing rules operate in adverse conditions — particularly in relation to a spike in the national unemployment rate.
“The CFPB observed that there were places where the rules could be revised to reduce unnecessary complexity,” Chopra said. “Last fall, the CFPB asked the public for input on ways to reduce risks for borrowers who experience disruptions in their ability to make mortgage payments, including input on the mortgage forbearance options available to borrowers. In particular, we sought input on the features of pandemic-related forbearance programs and whether there are ways to automate and streamline long-term loss mitigation assistance.”
Stakeholders, including housing organizations, homeowner advocates and mortgage servicers, noted that the borrowers requiring mortgage assistance regularly face complexity and paperwork that impacts both the borrowers and servicers.
“According to commenters, the temporary pandemic-related changes we made to the mortgage servicing rules helped alleviate this problem and get borrowers accommodations more quickly,” Chopra wrote. “Commenters also expressed concern that borrowers often incur servicing fees and experience negative credit reporting while waiting for their mortgage servicers to review their options.”
As a result, the CFPB will investigate and seek out input on ways that mortgage servicing rules can be streamlined and simplified, Chopra said.
“When homeowners who struggle to make payments get the help they need without unnecessary delay or hurdles, it is better for borrowers, servicers, and the economy as a whole,” Chopra wrote. “The CFPB will be using this input from commenters to propose ways to simplify and streamline mortgage servicing rules.”
The CFPB will propose to streamline certain rules “only if it would promote greater agility on the part of mortgage servicers in responding to future economic shocks while also continuing to ensure they meet their obligations for assisting borrowers promptly and fairly,” Chopra stated.
Republican lawmakers in the House Financial Services Committee turned the rhetorical screws on Consumer Financial Protection Bureau Director Rohit Chopra Wednesday, accusing him of pursuing regulatory objectives in order to help President Biden win reelection and failing to take industry concerns into account with his agency’s proposals.
At the outset of what was to be a four-hour hearing Wednesday, Rep. Andy Barr, R-Ky., set the tone of the hearing by calling the CFPB “an appendage of President Biden’s reelection campaign.”
Barr, who led the hearing in the absence of committee chairman Rep. Patrick McHenry, R-N.C., lambasted Chopra for labeling all fees “abusive,” and for targeting so-called junk fees. He launched into a tirade about Chopra evading the rulemaking process and engaging in what he called “McCarthyism.”
“You use compliance bulletin, circulars and advisory opinions to sow doubt and confusion in the marketplace,” said Barr. “You vilify an entire industry simply because they are politically unsavory in your opinion. The practice of name-and-shame first, verify later, isn’t consumer protection, it’s McCarthyism.”
Rep. Blaine Luetkemeyer, R-Mo., took up the same line of questioning, asking Chopra whether companies are required by law to abide by pronouncements made in blog posts and speeches.
“Since public statements are not rulemakings or official actions, and the guidance you issue is not legally binding, are financial institutions and firms within their rights if they do not adhere to your proclamations?” Luetkemeyer asked. “This is very concerning because you turn around and you threaten different entities all the time. You’ve become the greatest extortionist in the history of this country.”
The grandstanding became too much for Rep. Juan Vargas, D-Calif., who complained that the committee’s chair failed to intervene to stop the name-calling.
“The hyperbole today is actually rather remarkable,” said Vargas. “Are you the greatest extortionist? Is that true?”
“Obviously that’s not true,” Chopra replied.
“I wanted to give you the opportunity to react to that,” Vargas said. “Are you beating the stuffing out of the free enterprise system? The accusation was of McCarthyism. You heard it, I heard and it wasn’t defined. I hope that we’re a little more careful with our language around here when we accuse people of McCarthyism, extortionism and all these other things.”
CFPB hearings tend to devolve into unproductive partisan brinkmanship, in part, because of the hearing format, in which each lawmaker has five minutes to ask questions.
Many Democrats on the committee lobbed softball questions that allowed Chopra to take the floor. On credit card late fees, Chopra sought to explain that Congress, in passing the Credit Card Accountability Responsibility and Disclosure Act of 2009, known as the CARD Act, prohibited unreasonable and disproportionate penalty fees. Credit card issuers can charge more than the $8 late fee, known as a safe harbor, in order to recoup costs.
“Lenders should want their customers to pay back and pay on time,” Chopra said. “We don’t want a system where people are happy when someone doesn’t pay on time, or when they’ve missed it by a day.”
Rep. Bryan Steil, R-Wis., questioned the tradeoffs associated with lower late fees.
“Nobody likes paying late fees and you don’t want people to get into financial distress,” Steil said. “You don’t think that this will lead to more expensive credit?”
Chopra said he expects competition will lead some consumers to switch credit card providers.
“What I think will happen is that rather than a business model built on penalties, they’ll compete just like other banks and small banks do that offer credit cards, which is really an up front or an annual fee or interest rates and others, I think the competitive process will work better,” Chopra said.
Lawmakers also criticized Chopra for not doing more to promote financial literacy. Rep. Young Kim, R-Calif., said the CFPB should use the roughly $500 million in its civil money penalty fund to promote financial education while others suggested the money should also be used to prevent frauds and scams. Lawmakers on both sides of the aisle asked Chopra about privacy and data protection issues as the CFPB.
Rep. Stephen F. Lynch, D-Mass., said his constituents are complaining about chatbots and other forms of artificial intelligence used by banks and financial firms to resolve problems.
“I’m just wondering, are we meeting our obligations to consumers when we allow banks to put a chatbot interface between them?” Lynch asked.
Chopra said that the CFPB is reminding institutions that “they still have to adhere to important legal protections and make sure that they’re not violating privacy” laws.
Republican lawmakers also questioned Chopra about a data breach by a CFPB employee in February. Rep. Bill Huizenga, R-Mich., said the bureau’s staff did not answer questions about the breach.
“Your staff couldn’t give basic answers and sometimes there wasn’t any answer at all,” Huizenga said. “I’m sorry to be suspicious here, but I know how D.C. works and it makes me wonder, once again, your sort of dismissive attitude towards Congress that has come across in previous hearings and previous interactions.”
Several Republican lawmakers told Chopra that they consider the CFPB to be unconstitutional, even as Democrats defended the agency. The CFPB faces a challenge to its funding before the Supreme Court, which is expected to hear oral arguments in October in a lawsuit filed by two Texas trade groups.
Committee members asked Chopra about a wide range of consumer topics, from credit repair scams to complaints about cryptocurrencies, for-profit debt relief companies to tenant screening firms.
Rep. Ann Wagner, R-Missouri, took Chopra to task for not publicly disclosing his calendar on the CFPB’s website.
“Would you say that a six-month hiatus for public disclosure is your way of showing commitment to transparency?” she asked. “I’m seeing an extremely troublesome theme here.”
Some say a mortgage (homeownership) is a privilege, not a right. In other words, you have to display some financial responsibility in order to obtain one.
After all, a bank is willing to let you borrow several hundred thousand dollars or more for three decades, so they can’t just be given out willy nilly.
Fortunately, we returned to underwriting loans after the latest mortgage crisis, so the quality of loans is once again passable.
Unfortunately, this means some borrowers are being left out in the cold when it comes to getting approved.
But that doesn’t mean these folks have nowhere to turn – in most cases, it’s just matter of taking some steps to correct the issue.
Home Improvement Loans Denied the Most
In 2018, an astonishing 2.65 million home loans were denied, which equated to an equally shocking 24.7% denial rate, per CoreLogic, which recently parsed last year’s HMDA data.
As you can see, home improvement loans were most likely to be denied, with nearly half failing to cross the finish line in 2018.
Both rate and term refis and cash out refis also exhibited high denial rates, at 28.1% and 29.8%, respectively.
Meanwhile, home purchase loans were denied 14.6% of the time, which can be pretty devastating for someone missing out on their dream home.
DTI Is the Main Roadblock, Not Credit Scores or Down Payment
Interestingly, credit scores and down payments were not the culprit, as it often cited in the news and research reports.
Rather, it was debt-to-income ratios (DTIs) that led to the most denials by loan underwriters.
In short, your DTI is your monthly liabilities (bills) divided by your monthly gross income. The lower the number the better, as it means you have more cash available to make a housing payment.
Several years ago, the Consumer Financial Protection Bureau (CFPB) established a dividing line of 43%, with DTIs above that level now facing additional scrutiny.
Overall, a high DTI was the main reason for more than 36.8% of denied home-purchase applications, 34.3% of denied non-cash-out refinances, and 31.9% of denied cash-out refis.
Digging deeper into the HMDA data, CoreLogic discovered that 53.1% of denied home purchase applications had a DTI above 43%, while just 29.1% of approved purchase originations had a DTI above that key threshold.
Meanwhile, cash-out refinances had the highest percentage of DTI exceeding the 43% threshold in both denied applications (55.6%) and approved originations (35.1%).
It is still possible to get approved with a DTI greater than 43%, but the denial rates clearly increase as DTIs climb higher.
For example, just 7.9% of purchase originations had a DTI of 50% or greater, and a mere 0.6% had a DTI higher than 60%.
And 37.5% of denied purchase apps had a DTI equal to or higher than 50%, while 21.3% had a DTI greater than 60%.
So it’s pretty clear that once your DTI exceeds 50%, it gets increasingly difficult to get approved for a mortgage.
Again, it’s not a guaranteed denial, but the odds start to stack against you.
The remedy here is to either find a lender willing to accept a high DTI (perhaps by enlisting a mortgage broker who can shop multiple lender partners), lower your monthly outlays, or simply buy a cheaper house.
Credit History Still a Major Dealbreaker
Now I mentioned a low credit score wasn’t the main problem, but it was still a significant one.
In fact, credit history was the second most common reason for loan denial, responsible for a sizable 33.9% of denied purchase apps, 37.1% of denied cash-out refi, 27.5% of denied non-cash-out refis, and nearly half (46.7%) of denied home improvement applications.
For the record, more than 70% of home improvement loans were second mortgages, such as home equity loans or HELOCs.
The solution here is simply to take better care of your credit. It’s one thing not to have enough income, but another to neglect your credit scores.
As I always say, credit is the one thing we have control of above all else. Pay your bills on time and you’ve accomplished more than half the battle.
Do you best to keep outstanding balances low and only apply for credit when necessary and you’ll be fine in this department.
Rounding out the top three reasons for mortgage denial was collateral, aka the appraisal coming in low and torpedoing the deal.
It was cited in 13.3% of home purchase denials, 19.1% of non-cash-out refinances, and 24.7% of home improvement loans.
To avoid such issues, make sure you’re buying a house that’s properly valued, or have a contingency plan in place if the value comes in low (more down payment money or ability to take out a higher-LTV loan).
Some 9% of purchase apps were also denied as a result of insufficient cash for down payment and/or closing costs.
Remember to set aside cash for down payment, closing costs, and reserves, not just for down payment.
Bank of Americais at the center of a new class-action lawsuit, which claims it unlawfully charged fees to mortgage servicing customers paying by telephone or online.
Attorneys for plaintiff Diana Higginbotham, a resident of Nitro, West Virginia, allege the banking giant illegally charged her $6 whenever making phone payments, a violation of the state’s consumer credit and protection act. The lawsuit, which was filed last month in U.S. District Court for the Southern District of West Virginia, also asserts so-called pay-to-pay fees represent a breach of contract and unjust enrichment by the Charlotte, North Carolina-based company through the creation of an “additional profit center for itself.”
“Neither the note nor deed of trust entitled defendant to assess fees for scheduled payments, electronic payments, online payments or telephone payments,” according to the lawsuit.
Typically, the cost to servicers to process online or phone transactions would be close to 30 cents, well below the $6 charged by Bank of America, Higginbotham’s attorneys claimed, adding the bank had no authorization to assess such a fee per any statute or agreement. Even if such charges were permitted in a lender agreement, pay-to-pay would still violate West Virginia regulations.
“Despite its uniform contractual obligations to charge only fees explicitly allowed under the mortgage and applicable law, defendant leverages its position of power over homeowners and demands exorbitant pay-to-pay fees,” the filing stated.
Higginbotham’s lawsuit also alleged that Bank of America included other charges in 2020 amounting to just over $47, which have yet to be explained on her monthly statements.
The plaintiff first took out the mortgage in 1998, with the loan and servicing rights later transferred to Bank of America. Higginbotham is suing the bank on behalf of herself and a proposed class of West Virginia consumers holding residential mortgages who incurred fees when making loan payments to the company. The law firm Bailey & Glasser is providing legal representation to Higginbotham in the case.
While the lawsuit requested a civil penalty be awarded to Higginbotham and all class members, no specific monetary amount was included in the filing.
Bank of America and Bailey & Glasser had not responded to inquiries at time of publication.
Bank of America is currently one of the country’s leading depository institutions with mortgage servicing operations based on the unpaid principal balance of loans involved. At the end of the first quarter, it held $735 billion worth of mortgages in its servicing portfolio, placing it in 10th place among banks. Wells Fargo topped the list with close to $9 trillion on its books, but it is in the process of downsizing its servicing portfolio.
The lawsuit arrives amid an ongoing dispute surrounding regulation of junk fees, with the Biden Administration, Consumer Financial Protection Bureau and several state governments all weighing in over the past 18 months. While the term can entail everything from ticketing surcharges to hotel fees, the financial services industry has been a regular target of criticism by the CFPB for proliferating and relying on them as a source of revenue.
Last year, several state regulators also called for an end of pay-to-pay within mortgage and other loan servicing, a practice the CFPB says falls under the definition of a junk fee, In a letter addressed to the CFPB, officials cited the frequency liens could be transferred in their life cycle, with borrowers having no say in who might service them as reason to eliminate them. No officials from West Virginia signed onto that letter.
Several trade groups, including the Mortgage Bankers Association, pushed back against calls for additional regulation in this area, saying the CFPB already provides a sufficient number of rules to ensure borrowers understand fee structure.