Industry representatives say they welcome the Consumer Financial Protection Bureau’s efforts to simplify mortgage lending for borrowers, but worry that the bureau is unwittingly causing future problems rather than erasing them.
Some even feel their feedback at recent panel discussions with the agency was ignored.
The CFPB proposed a rule Monday on high-cost mortgages that would limit fees, generally ban balloon payments and completely prohibit prepayment penalties on such mortgages. It also proposed its rule for mortgage disclosure forms.
An industry take
Mark Calabria, director of financial studies at the Cato Institute, says that eliminating prepayment risk would increase interest rate risk, the consequence of which harms the lender most of the time and eventually the borrower.
Calabria argues that when a certain segment of subprime, or higher-cost borrowers decide to improve their credit score and prepay out of a pool of mortgages, it worsens the quality of mortgages in the pool and results in a decline in the value of assets.
“There are all sorts of legitimate pro-consumer reasons to have prepayment penalties as options,” Calabria says. “Consumers are better off when they have more choices rather than less.”
Rob Chrisman, an associate at the Stratmor Group, a mortgage consulting firm, said the problem with banning balloon payments and prepayment penalties for high-cost mortgages is that “every type of loan has a place, and fit borrowers at particular times in their lives. and prepayment penalties actually lessened the cost of a mortgage to many borrowers.”
The government or the lending industry will pass through any additional expenses to borrowers and taxpayers, Chrisman said.
Meeting the bureau
The CFPB also proposed a ban on fees for modifying loans, a cap on late fees and restrictions on fees when consumers request a payoff statement. It would also require housing counseling for borrowers who take out qualifying high-cost mortgages.
The agency held panel discussions with representatives from the lending industry on several occasions to get their input on how the new rules should be shaped. Many organizations filed comment letters to the agency.
New loan estimate and closing disclosure forms were designed to present the costs and risks of loans in clearer terms and benefit lenders by reducing redundancy.
The Independent Community Bankers of America, one of the groups that met with the CFPB, said it is still reading through the 1,099-page proposed rule on the mortgage disclosure forms, but is “surprised that none of the comments and feedback — at least at this point — from the industry have been considered in the proposed rulemaking.”
In response to the rule that lenders must provide closing disclosures to the consumer three business days prior to closing the loan, Ron Haynie, ICBA vice president of mortgage finance policy, said “it was fairly unanimous that none of the industry representatives (at the panel discussions) thought that was a good idea. And that it would lead to higher costs and probably higher levels of consumer dissatisfaction because people in general want to close on their loan sooner rather than later and this will extend it.”
Haynie also cited the lack of tolerance on changes to loan estimates that lenders cannot control, resulting from, for example, third-party appraisal fees. “Many times appraisals come back and the fees are higher than what was originally quoted,” he said. “This issue was raised with the CFPB and they basically chose to ignore it. Those things are troubling.”
Benjamin Olson, the CFPB's project leader for the mortgage-disclosure rulemaking, disagrees with Haynie's claims and said the bureau is committed to helping consumers avoid surprises at the closing table by making sure they get key information three days beforehand.
"However, we understand that some things can change during those three days so we are proposing reasonable exceptions based on feedback from industry," Olson continued. "We did consider and respond to industry concerns about the proposed rule on final closing disclosures. For example, we created exceptions that cover recording fees, negotiations between buyers and sellers, and set a $100 de minimus threshold for changes in closing costs. In addition, we are seeking public comment about whether there are other possible exceptions that we should consider and this comment period closes in November 2012."
A change awaits
David Stevens, president of the Mortgage Bankers Association, said he welcomes the CFPB’s efforts to simplify mortgage disclosures to give borrowers a clear picture of the terms and costs of the mortgage they are signing.
“Changing the disclosures will impose massive change on the industry, who will need to implement the new forms, rules and processes into their mortgage processing, so we will be working with the CFPB to make sure the forms, and the rules surrounding them, are best for borrowers and lenders alike,” Stevens said in an email.
“I think the direction the CFPB is proposing in simplifying the forms is a positive,” he said. “For the most part, having simpler disclosures is a step in the right direction that will allow consumers to better understand the choices they’re making and be able to shop.”
In June, regulators said finalized federal mortgage disclosure forms mandated by the Dodd-Frank Act won’t won't arrive until 2013, after the qualified mortgage rule is finalized.