ACI Worldwide and one of its subsidiaries, ACI Payments, agreed to pay a $25 million civil penalty for illegally processing $2.3 billion in unauthorized mortgage payments from nearly 500,000 homeowners serviced by Mr. Cooper two years ago.
The Consumer Financial Protection Bureau (CFPB) issued a consent order against the company on Tuesday for improperly initiating the transactions in April 2021, which opened homeowners to overdraft and insufficient funds fees from their financial institutions.
In response, ACI said it consented to the order “without admitting any wrongdoing to avoid the expense and distraction of litigation.”
Meanwhile, Mr. Cooper said it’s “aligned with the agency’s approach to identifying our prior vendor’s mishandling of our customers’ critical information and taking appropriate actions as a preventative measure against similar future events.”
The case began in 2021 when the CFPB said it was looking into a situation with Mr. Cooper for making unauthorized withdrawals from borrower accounts during a weekend. Mr. Cooper soon pointed the finger at its vendor ACI Worldwide.
“The CFPB’s investigation found that ACI perpetrated the 2021 Mr. Cooper mortgage fiasco that impacted homeowners across the country,” CFPB director Rohit Chopra said in a statement. “While borrower accounts have now been fixed, we are penalizing ACI for its unlawful actions that created headaches for hundreds of thousands of borrowers.”
According to the CFPB, ACI conducted tests of its platform in April 2021, but instead of using deidentified or dummy data, it used actual consumer data from Mr. Cooper’s clients, such as names and bank account details. In total, ACI initiated around 1.4 million ACH withdrawals.
On Saturday, April 24, 2021, homeowners noticed inaccuracies in their account balances. For example, around 7,300 borrowers had their available balances reduced by more than $10,000 overnight, the CFPB said.
In a statement, ACI said that the consent order is related to the “previously disclosed” inadvertent transmission of ACH files to its network during a test of the recently acquired Speedpay bill payment platform in April 2021.
“An internal review determined that ACI’s policies and procedures were not followed. ACI took swift action to reverse the ACH entries and prevent any consumer loss. At all times during and after the error, consumers’ money and personal information remained safe,” the company wrote in a statement.
ACI also settled a consumer class action arising from the error in May. The company expects most of the costs will be covered by third parties in both the consent order and the lawsuit.
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.”
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.”
I referenced in my last opinion piece in Housing Wire that the Urban Institute publishes a “monthly chart book” that is packed full of relevant data. This recent publication paints a clear picture as to why any Realtor or homebuilder should always include a nonbank lender in their referrals.
Before I open myself up to attacks here, I am using macro data from Urban Institute and there are certainly some banks who serve a broader swath of the market. But let’s start with the basics as to who really is expanding credit access in the market.
When looking at the nonbank share of all loans broken down by investor (Fannie, Freddie, and Ginnie Mae) the glaring data point that stands out is that nonbanks do well over 80% of all loans being made today. More importantly, when it comes to the Ginnie Mae programs, banks contribute only 7% of all the mortgages by the FHA, VA, and USDA. Seven percent is a glaring figure, especially when you look at the dynamics shaping the housing market.
The reason why this stands out is that the distribution of loans in the Ginnie Mae programs has the highest concentration of first-time homebuyers and the largest percentage of minorities. In the FHA program alone, 46.3% of all loans are to Hispanic and Black borrowers and with over 80% of all FHA’s purchase transactions going to first-time homebuyers, the fact that banks only do 7% of these loans is extraordinary.
Why does this all matter? Because the key regulators in Washington spend a lot of their time ingratiating themselves to the banking industry and lamenting about nonbanks. As Chris Whalen articulated in his recent op-ed, “Consumer Financial Protection Bureau head Rohit Chopra said in May that ‘a major disruption or failure of a large mortgage servicer really gives me a nightmare.’ He made these intemperate comments during CBA Live 2023, a conference hosted by the Consumer Bankers Association.”
The fact that regulators spend time “biting the hand that feeds them,” my reference to the fact that it is the nonbanks providing support for the constituency that this administration should care about and certainly not the audience at a CBA conference, is pretty alarming.
As Whalen goes on to highlight, “Chopra’s focus is political rather than on any real threat. But of course, progressive solutions require problems. Three large and mismanaged depositories failed in the first quarter of 2023, yet progressive partisans like Chopra, Treasury Secretary Janet Yellen, and Federal Housing Finance Agency head Sandra Thompson ignore the public record and continue to fret about nonexistent risk of contagion from mortgage servicers.”
I have taken a lot of negative feedback from many who are connected to the current administration about my criticism of things like LLPA fee changes. But in a similar context as Whalen, I am tiring of the politics of an administration and its regulators who focus their time on trying to reign in the independent mortgage banks (IMBs) — the very set of institutions that are responsible for ensuring that access to credit remains for American families who might otherwise be shut out of the market.
One might ask, why do IMBs do so much better here in advancing credit availability? I think it comes down to a core principal: IMBs only do mortgages. Unlike banks, they don’t do auto loans, credit cards, student loans, business lending, lines of credit and more. Banks don’t need to expand their mortgage lending businesses. In fact, the trend has been to retreat from mortgages, not embrace this segment further.
Just look at the data. When it comes to credit (FICO) scores, IMBs are significantly more aggressive. And since credit scores are lower for first-time homebuyers and trend lower in most minority segments, the IMBs naturally prevail as the best option for the homebuyer.
Or look at this data on DTI (debt to income ratio). The spread between median bank DTIs versus nonbanks in the Ginnie Mae program is significant and, frankly, will affect those on the margin of access to homeownership in a significant way.
The fact that banks are only 7% of all Ginnie Mae lending is not by accident. The reality is that they have systematically walked away from any element of mortgage lending that seems to be of greater risk. It’s frankly why companies like Wells Fargo today are a shadow of the mega-market dominators that they once were.
Whalen perhaps said it best stating, “More than any real-world problem posed by IMBs, it is the government in all of its manifestations that poses a significant risk to the world of mortgage finance and the housing sector more generally. Washington regulatory agencies seek to stifle the markets, limit liquidity and impose additional capital rules, strictures that must inevitably reduce economic growth and access to affordable housing.”
We have a labyrinth of federal regulators who failed to see how the significant rise in banks’ cost of funds, driven by the actions of the Federal Reserve, might push some banks into negative basis territory. This scenario, where they were paying depositors more than they were earning on their unhedged assets, put them out of business. And the regulators missed all of this. In all of their angst and speech-making about the risks of nonbanks, they simply overlooked three of the most expensive failures in banking history.
As I write this, I know that I too was once part of the arrogance of an administration that lectured and directed more than it listened at times. But today we face too many risks. Whalen clearly articulates how the GSEs are being directed down a path that will only decrease their relevance over time if left unchecked.
But perhaps the core message here is this: If I were a Realtor or homebuilder, I would make sure that my potential buyers, especially my first-time homebuyers, were in conversation with an IMB (or mortgage broker). If that simple step isn’t being done, then the access to credit challenges will likely only loom larger.
Remember, IMBs are not risk taking entities. They pass through the credit risk into government-backed lending institutions and they get paid a fee to service the loans for these government entities. We need regulators to stop speechmaking at banking conferences about risk here and instead applaud the critical role these companies perform.
More importantly, regulators should spend more time bolstering forms of liquidity to these entities. There are solutions that can help.
But really, the more time they spend politicizing the nonbank story, we risk more bank failures, which are truly the greater risk in the sector. Let’s applaud the IMBs for keeping the doors to homeownership open. And let’s demand that our regulators stop using political platforms to distort others’ views while not focusing on their primary responsibilities.
Accountability will only exist when stakeholders demand it.
David Stevens has held various positions in real estate finance, including serving as senior vice president of single family at Freddie Mac, executive vice president at Wells Fargo Home Mortgage, assistant secretary of Housing and FHA Commissioner, and CEO of the Mortgage Bankers Association.
This column does not necessarily reflect the opinion of HousingWire’s editorial department and its owners.
To contact the author of this story: Dave Stevens at [email protected]
To contact the editor responsible for this story: Sarah Wheeler at [email protected]
More than any time since before the Great Financial Crisis, the disconnect between Washington policy makers and the actual reality in the mortgage markets is widening. The lack of real-world knowledge and comprehension by key agency heads in the Biden Administration begs the question whether Washington is a help or a hindrance as the industry grapples with rising interest rates and mounting credit loss expenses.
For example, Consumer Financial Protection Bureau head Rohit Chopra said in May that “a major disruption or failure of a large mortgage servicer really gives me a nightmare.” He made these intemperate comments during CBA Live 2023, a conference hosted by the Consumer Bankers Association.
Like his predecessor Richard Cordray, Chopra’s focus is political rather than on any real threat. But of course, progressive solutions require problems. Three large and mismanaged depositories failed in the first quarter of 2023, yet progressive partisans like Chopra, Treasury Secretary Janet Yellen, and Federal Housing Finance Agency head Sandra Thompson ignore the public record and continue to fret about nonexistent risk of contagion from mortgage servicers. Really?
The big risk posed by mortgage servicers, of course, is to shareholders and creditors, not to consumers. Witness the abortive auction for Specialized Loan Servicing by Computershare of Australia. The offering of private label servicer Select Portfolio Servicing byCredit Suisse and now UBS AG is another example of shareholder value destruction. Homepoint was basically a liquidation from the 2021 IPO.
When progressive politicians in Washington yowl about risk in the financial markets, it is usually really about risk to the personalities in question and financing their careers. There is no appreciable risk to consumers or the taxpayer from mortgage servicers, which like Black Rock and UBS are basically asset managers working for a fee. Bureaucrats like Chopra simply raise operating costs.
More than any real world problem posed by IMBs, it is the government in all of its manifestations that poses a significant risk to the world of mortgage finance and the housing sector more generally. Washington regulatory agencies seek to stifle the markets, limit liquidity and impose additional capital rules, strictures that must inevitably reduce economic growth and access to affordable housing.
The good news, of course, is that many of the proposals from the FHFA, HUD and other agencies are effectively modified or rolled back entirely (such as the debt-to-income calculation for loan-level pricing adjustments) once the industry trades and large issuers engage.
In this case, Washington listened, but only after taking an inordinate amount of time and resources from private issuers, resources that are badly needed elsewhere. Would it be too much to ask for government agencies to vet ideas thoroughly before a public proposal?
In other cases, however, as with the risk based capital rules proposed by Ginnie Mae and the capital rules already approved for the GSEs, Washington is definitely not listening. But then again, the industry did a lousy job of pushing back on the capital rules for Fannie Mae and Freddie Mac, to our great disadvantage.
Despite the withdrawal of the LLPAs, personnel at the GSEs are still pressing issuers for “mission loans,” meaning loans to underserved and generally low-quality borrowers that are sought by the Biden Administration. Some issuers approaching the GSE cash windows have been told that they will not receive attractive pricing unless the pools include mission loans.
But sadly, there are few cases where a lender could or should advise a consumer to take out a conventional loan vs. FHA/VA. And the execution from the GSEs is hardly attractive.
The changes in GSE loan pricing and other policy changes reflect the FHFA’s focus on implementing the enterprise capital requirements put into place by Thompson, even while paying lip service to progressive goals. Garrett Hartzog, Principal of FundamentalAdvisory and Consulting notes in a comment in NMN:
“The Enterprise Regulatory Capital Framework is going to dramatically transform GSE pricing in ways the industry hasn’t begun to contemplate. Understanding the ERCF means being able to mentally reconcile increasing risk-based pricing (the DTI-based fee) and decreasing the level of risk-based pricing (the credit score/LTV matrices). What’s more, people need only read Fannie Mae and Freddie Mac’s comment letters during the rulemaking process to understand that g-fees will ultimately experience a dramatic increase as a result of the ERCF.”
If FHFA raises guarantee fees for the GSEs in line with the capital rule, then Fannie Mae and Freddie Mac will no longer be competitive for larger, high-FICO loans. But poor execution at the cash window and higher g-fees are just some of the issues facing the GSEs as defaults rise and loan put backs also increase.
A number of issuers complain about an increasing tide of loan repurchase requests coming from the GSEs, Fannie Mae and Freddie Mac. One prominent industry CEO known for his ability to “see around corners” laughs at the fuss so far and told NMN: “The GSEs are just practicing for the real push back. This is just a dress rehearsal.”
Meanwhile, the FHFA has just rolled out a new program whereby all large conventional issuers must have pre-funding quality control (QC) in place for all loans going through their systems by Labor Day. For larger correspondent shops, this could mean dozens of new hires and hundreds of thousands in new annual expenses. Apparently the QC personnel at the GSEs did not know about the change.
One angry issuer tells NMN: “If your volume is mostly FHA/VA, it does not matter to the FHFA. They want QC on all loans. If my volume is mostly delegated correspondent, it does not matter. I’m buying closed loans, but it does not matter.”
Most issuers contacted by NMN say they cannot comply with the new QC edict from FHFA. The lack of appreciation for market realities within the FHFA mirrors the situation in much of official Washington, with regulators working against the best interests of consumers and the entire private mortgage and housing industry by reducing volumes and liquidity.
Ironically, even as the FHFA is becoming the focus of increased industry concerns, Ginnie Mae President Alanna McCargo is now focused on problems faced by issuers. The new partial claim regime put in place by the FHA to help finance loss mitigation for Ginnie Mae servicers evidences this concern.
The CEO of one lender that focuses on underserved communities told NMN: “Ginnie Mae understands that they need to let us run our businesses as delinquency rates rise. Until interest rates fall and volumes improve, this is a war of attrition among lenders.”
Lenders hoping for lower rates in 2023 and that are dragging their feet on cost cutting will not survive in many cases. With the markets extending spreads on late vintage production, the MBS with 6% and 7% coupons, higher for longer seems to be the plan in residential mortgages in 2023. Hope is not a strategy.