Mortgage Banking Update - September 29, 2022
In This Issue:
- CFPB Issues RFI on Mortgage Refinances and Forbearances
- Republican Senators Send Letter to Director Chopra Calling for Change in CFPB Tactics
- Podcast: CFPB Director Chopra Speaks to the Media - A Look at the Takeaways, With Special Guest Jon Hill of Law360
- Utah Federal Court Rejects Constitutional Challenge to CFPB’s Funding Mechanism
- CFPB Expresses Concern About the Potential Credit Impact of High Vehicle Costs for Consumers
- Businesses Beware: CFPB Reviewing ‘All Sorts’ of Consumer Contract Clauses
- Did You Know? State Work From Home Update
- Arizona Mortgage Broker Certificate of Exemption
For the latest updates on the COVID-19 pandemic visit the Ballard Spahr COVID-19 Resource Center
The CFPB recently issued a Request for Information Regarding Mortgage Refinances and Forbearances (RFI) Comments on the RFI will be due on November 28, 2022.
In the release announcing the RFI, the CFPB states that the RFI “is an example of the CFPB’s new approach to promoting competition and new products.” “Rather than providing special regulatory treatment of individual firms, the CFPB will seek to identify stumbling blocks for those seeking to challenge the status quo with new products or services.”
With refinances, the CFPB is focusing on whether it can take steps to facilitate beneficial refinances to take advantage of market rate decreases. The CFPB is concerned that the refinance opportunities for borrowers with smaller balance loans may be more limited as the cost to refinance may not outweigh the resulting benefits. The CFPB notes that if there are more limited opportunities to refinance smaller balance loans, Black and Hispanic borrowers and borrowers with low-to-moderate incomes would be disproportionately affected, as they are more likely to own lower value homes. The CFPB observes that “these patterns may have contributed to the much lower rate of refinancing by Black and Hispanic consumers during recent periods of low interest rates.” The CFPB also is concerned about the relative availability of refinance opportunities for consumers in rural areas, whose property might have lower market values than in higher-priced geographic areas.
While refinancing can provide benefits to borrowers, the CFPB observes that “refinancing also can pose risks to consumers. Serial refinancing can be costly and reduce borrowers’ equity in their property. Many targeted and streamlined refinance programs include protections against potential harms associated with refinances, such as requirements that the new loan reduce the consumer’s monthly payment and interest rate by certain threshold amounts and seasoning requirements.”
The CFPB notes that as part of its monitoring of the mortgage market, “some stakeholders suggested that changes to the Bureau’s ability-to-repay/qualified mortgage rule (ATR-QM rule) could play a role in facilitating beneficial refinances through targeted and streamlined programs, citing the current rule as contributing to some existing frictions to refinancing.” Pursuant to the general ATR requirements, a creditor must consider and verify eight underwriting factors, including the consumer’s current or reasonably expected income or assets and current employment status. Pursuant to QM requirements, a creditor must consider and verify the consumer’s income or assets relied on in making the loan. The ATR-QM rule does not provide for relaxed requirements in connection with a streamlined refinance loan that simply reduces the interest rate and monthly payment.
According to the CFPB, “research has suggested that frictions in the refinance process, including potentially documentation requirements under the ATR-QM rule, may limit some refinancing opportunities that could benefit consumers. In the course of the Bureau’s market monitoring, some stakeholders have asserted that it may be appropriate to address those frictions in some circumstances in which borrowers would receive a demonstrated benefit from refinancing, such as lower interest rates or lower monthly payments, and where other protections are in place, such as protections against serial refinances.”
In the release announcing the RFI, the CFPB stated “refinancing volume has dropped dramatically, down almost 70% from , as interest rates have risen. New streamlined and automatic refinancing mortgage products could make sure that those buying a home now, or refinancing to cover other needs, are able to benefit from the next interest rate drop.”
The CFPB notes that some creditors have introduced new mortgage loan products to promote beneficial refinances, such as offering reduced closing costs for future refinances with the same lender. The CFPB raises the potential of two additional loan products. One is an “auto-refi” mortgage, which the CFPB describes as “a mortgage loan that provides for automatic or streamlined refinancing in the future when certain market conditions are met, with little or no affirmative action by the consumer.” The other is a “one-way adjustable rate mortgage” or “one-way ARM.” The CFPB states that a one-way ARM could provide for automatic interest rate decreases when market rates decrease, but would not provide for rate increases. A variation of this product would provide for an interest rate that automatically fluctuates with market rate changes, but the rate would never exceed the original rate.
Among other matters, the CFPB seeks comment on:
- Barriers to refinancing, including the extent to which large fixed costs of refinancing and limited profitability for smaller loan balances limit beneficial refinances, and what policies could lower costs for such refinances.
- How the CFPB can support industry efforts to facilitate beneficial refinances through targeted and streamlined refinance programs.
- The protections that should be included in refinance programs to ensure consumer benefits, such as requirements for lower rates and payments, loan term limits, serial refinancing limits, and requirements to refinance a borrower into a more stable loan product.
- Whether the CFPB should amend its rules, including the ATR-QM rule, to encourage beneficial refinances while preserving important protections for consumers, and the risks and benefits of amending the ATR-QM rule requirement that a creditor must consider and verify a consumer’s income or assets.
- The products or programs that lenders have introduced to attempt to facilitate refinances.
- The benefits and drawbacks of loans that provide for automatic refinances under specified conditions, and “one-way ARMs” that provide for interest rate decreases under specified conditions, but do not provide for rate increases, or that provide for rate changes with market changes, but never above the original rate.
- Whether market factors or practical difficulties, including secondary market liquidity and mortgage-backed securities investor interests, preclude the development of auto-refi mortgages or one-way ARMs.
- Whether the CFPB should amend the ATR-QM rule or other rules to permit or encourage creditors to offer auto-refi mortgages or one-way ARMs.
- Whether there are other new products that creditors could feasibly develop to allow more borrowers to receive the benefits of reduced mortgage interest rates.
Forbearances and Loss Mitigation
With forbearances and loss mitigation, the CFPB notes the relative success of CARES Act forbearances and similar forbearances, along with the related long-term loss mitigation efforts that were implemented. The CFPB is focusing on whether it should take steps to spur automatic and streamlined short and long-term loss mitigation efforts for borrowers impacted by temporary financial hardship in general, and not just related to the pandemic. The CFPB “is particularly interested in receiving information about what features of these COVID-era short and long-term loss mitigation programs should be made more generally available to borrowers, and in particular, if there are ways to automate and streamline the offering of short and long-term loss mitigation solutions. The Bureau is interested in ensuring that homeowners who are economically affected by events such as natural disasters are able to receive timely payment relief that could help them avoid foreclosure.”
Among other matters, the CFPB seeks comment on:
- The benefits and drawbacks of automating and streamlining short and long-term loss mitigation efforts.
- If such automation and streamlining is incorporated into new loan products, the manner in which such products should be structured and the features that should be established, such as the note, contracts between investors and servicers, or CFPB or other federal regulations.
- The circumstances under which short or long-term loss mitigation solutions should be offered automatically.
- For example, whether forbearance should be offered automatically upon the declaration of a national emergency or presidentially declared disaster, when unemployment rates in the consumer’s locality reach a certain level, when a borrower loses their job, when a co-borrower on the loan dies, or under other circumstances.
- Whether any factors should be considered regarding these circumstances.
- Whether any documentation from the consumer should be required in any of these circumstances.
- With short-term loss mitigation options, whether there is a tension between the goal of offering temporary immediate payment relief and the goal of ensuring that the balance owed does not grow so large as to make long-term loss mitigation solutions difficult to achieve.
- Whether changes should be considered relating to the impact forbearances and other short-term loss mitigation solutions would have on a consumer’s credit reporting.
- Whether the CFPB mortgage servicing regulations, such as those relating to communications with delinquent borrowers, the CFPB’s regulatory definition of delinquency, and the loss mitigation process in general, would have any impact on automating and streamlining short and long-term loss mitigation offers.
- When considering the potential automation and streamlining of short and long-term loss mitigation efforts, whether there would be advantages or drawbacks if more creditors retained the servicing of the loan.
- Other than the mortgage products already mentioned in the RFI, whether there are there other mortgage products or features of mortgage products that could help borrowers weather various financial shocks.
A group of 12 Republican U.S. Senators sent a letter to CFPB Director Rohit Chopra urging him “to reverse course and stop using inappropriate tactics to harm financial institutions’ reputations and customer relationships in order to advance your liberal policy preferences.”
In their letter, the Senators asserted that “rather than operating as a tough, but fair and sensible regulator, the CFPB is again pursing a radical and highly-politicized agenda unbounded by statutory limits.” As examples of “uncontrolled and unwarranted” CFPB actions, the Senators point to the following:
- The CFPB’s use of “name-and-shame tactics to pressure companies into eliminating [overdraft fees].” The lawmakers’ point to the chart published by the CFPB in February 2022 that listed the top 20 banks by revenue from overdraft fees and statements made by Director Chopra in his July 2022 media interviews indicating that he was “gratified to see where the market has been shifting” while warning that the CFPB would be “increasing our supervisory scrutiny of the institutions that are most dependent on [overdraft fees] as part of their deposit account revenue.” The Senators state that “[i]t is hard to view [this] statement as anything other than a threat that banks who do not bow to the CFPB’s pressure campaign could expect the agency to target them for increased supervision.”
- The CFPB’s change in its risk-based supervision rule to allow the CFPB to publicly disclose a decision to subject a nonbank to risk-based supervision. The Senators observe that the rule change “did not give a nonbank the same discretion to defend itself and instead requires a nonbank to keep confidential information relating to the CFPB’s decision, including facts that could call into question the Director’s decision or raise procedural concerns with it.” The Senators state that since the CFPB has never used this authority, the rule change “appears to serve as a threat to nonbanks…whose practices are legal but not in line with your liberal policy views.”
- The CFPB’s change in its rule on adjudication proceedings to allow the Director, at any time, to direct that any matter be submitted to him or her for review. The Senators assert that this change allows Director Chopra to “authorize CFPB staff to bring an enforcement case based on a novel legal theory and then you can personally rule that it is a valid theory.”
- A mass email sent by the CFPB to the customers of a bank that is the subject of a CFPB enforcement action about accounts alleged to be opened without customers’ consent. The Senators assert that the mass email “was not a legitimate investigative or litigation tool, but rather a means to damage the bank’s customer relationships.”
We recently urged Director Chopra to discontinue the CFPB’s current practice of using a potpourri of methods that lack transparency and predictability to interpret federal consumer financial laws. In our open letter, we called on Director Chopra to instead restart use of the official staff commentaries that are subject to input from stakeholders and provide certainty that they will be binding.
We are surprised that in their letter, the Senators did not criticize the CFPB’s updates to its Supervision and Examination Manual that instruct examiners to consider discrimination in connection with non-credit products and services as an unfair act or practice. For the reasons we have discussed, we believe the CFPB’s UDAAP interpretation is legally flawed. Moreover, given the complexity of the questions the CFPB’s expansion of UDAAP raises, we believe this type of a drastic change should be done through a rulemaking and not through an amendment to an examination manual.
Jon Hill of Law360 was among a group of reporters to whom Director Chopra recently gave a series of interviews in which he provided significant insights into his views on a range of topics. We review recent CFPB and other agency developments that provide context for Mr. Chopra’s comments, discuss what his comments reveal about his approach to use of CFPB authorities, and highlight the important takeaways for banks and other companies. Topics covered include entry of big tech into financial services, Section 1033 rulemaking, application of UDAAP to discrimination, the Military Lending Act, bank/nonbank partnerships, buy-now-pay-later, payday lending, overdraft/NSF fees, and artificial intelligence/machine learning.
Alan Kaplinsky, Ballard Spahr Senior Counsel, hosts the conversation joined by Michael Gordon and Ronald Vaske, partners in the firm’s Consumer Financial Services Group, and Mindy Harris, Brian Turetsky, and Rinaldo Martinez, Of Counsel to the Group.
To listen to the episode, click here.
A Utah federal district court has rejected the attempt of The Center for Excellence in Higher Education (CEHE) to invalidate a civil investigative demand (CID) issued by the CFPB based on a challenge to the constitutionality of the CFPB’s funding mechanism.
Pursuant to Dodd-Frank, the CFPB receives its funding through requests made by the CFPB Director to the Federal Reserve, subject to a cap equal to 12 percent of the Federal Reserve’s budget, rather than through the Congressional appropriations process. In a May 2022 decision, en banc Fifth Circuit ruled that the CFPB’s enforcement action against All American Check Cashing could proceed despite the unconstitutionality of the CFPB’s single-director-removable-only-for-cause-structure at the time the enforcement action was filed. However, in a scholarly concurring opinion in which four other Fifth Circuit judges joined, Judge Edith Jones agreed with All American Check Cashing’s argument that the CFPB’s funding mechanism is unconstitutional, writing that “[t]he CFPB’s budgetary independence makes it unaccountable to Congress and the people.” (The majority opinion did not consider the funding argument but indicated that the district court could consider other constitutional challenges on remand.)
The magistrate judge in the Utah case had issued a Report and Recommendation in which she recommended that the CFPB’s petition to enforce its CID should be granted as to certain information. In rejecting CEHE’s constitutional challenge, the district court found that CEHE had previously raised and subsequently waived the argument before the magistrate judge. Nevertheless, the district court discussed the merits of CEHE’s argument.
The district court stated that “after careful consideration,” it did not find the reasoning of the concurrence in All American Check Cashing to be persuasive. While agreeing with CEHE that Seila Law did not directly address the constitutionality of the Bureau’s funding mechanism, the district court found that comments made by the U.S. Supreme Court in Seila Law “taken together…suggest that the Bureau’s funding structure does not represent an unconstitutional delegation of power from Congress to the Executive Branch.” The district court first observed that that the Supreme Court “discussed the Bureau’s appropriations process, acknowledging that ‘[t]he director does not even depend on Congress for annual appropriations.’” It then observed that “[t]he Court nonetheless went on to make clear that the ‘only constitutional defect we have identified in the CFPB’s structure is the Director’s insulation from removal’ and described the Bureau’s funding structure merely as an aggravator of the ‘agency’s threat to Presidential control.’” It also observed that “[t]he Court went as far as saying the Bureau’s constitutional infirmity would ‘disappear’ if “the Director were removable at will by the President.’”
Finding that the CID was neither unreasonable nor unduly burdensome, the district court overruled CEHE’s objection to the magistrate judge’s report and recommendation and granted the CFPB’s petition to enforce the CID as to certain information.
The constitutionality of the CFPB’s funding mechanism could soon be ruled on by a Fifth Circuit panel. On May 9, 2022, a Fifth Circuit panel heard oral argument in Community Financial Services Association v. CFPB. CFSA’s lawsuit challenges the payment provisions in the CFPB’s 2017 final payday/auto title/high-rate installment loan rule. The trade groups’ primary argument on appeal continues to be that the 2017 Rule was void ab initio because the CFPA’s unconstitutional removal restriction means that the Bureau did not have the authority to promulgate the 2017 Rule. However, the trade groups submitted the concurring opinion in All American Check Cashing as supplemental authority to the Fifth Circuit panel hearing their appeal and have argued that the panel should adopt the reasoning of the concurring opinion and invalidate the 2017 Rule.
In a blog post, the CFPB advised that it is concerned about the impact of rising car prices on consumer’s financial health, particularly consumers with sub-prime or near prime credit scores. The most recent Quarterly Report on Household Debt and Credit from the Federal Reserve Bank of New York concluded that the total dollar value of outstanding auto loans rose to $1.5 trillion last quarter, an increase of $33 billion from Q1 to Q2 this year. Citing to a Q2 report from Experian on the State of the Automotive Finance Market, the CFPB reported the average price for new vehicles reached a record high of $48,182 this past July with the average used car sales price also hitting a near-record high of $28,219, approximately 15 percent and 35 percent higher than pre-pandemic levels, respectively.
While acknowledging that specific economic trends cannot be isolated from this data, the Bureau notes the correlation between the increase in auto prices and the increase in size of newly originated auto loans. Loan term lengths have also steadily increased, but not at the same rate as the total dollar amount of the average loan, resulting in higher average monthly payments across all credit tiers.
And while not controlling for other inflationary factors, the CFPB concludes that the increase in loan size and monthly payments are a factor in rising delinquency rates, which are especially high among consumers with sub-prime and deep sub-prime credit scores.
We can expect the CFPB to continue to actively monitor the auto finance market, as the new data reinforces concerns it has expressed in the past regarding rising loan-to-value ratios for auto purchases. In particular, rising delinquency rates could portend greater CFPB scrutiny of auto loan servicing and collections.
On September 13, 2022, Public Justice and other consumer advocacy groups sent a letter to CFPB Director Chopra urging the CFPB to limit the use of “forced” arbitration provisions by banks and other consumer finance companies. According to reports appearing in Law360 and BNA, at a virtual event organized by Public Justice and held the day after the letter was sent, Director Chopra expressed concerns about such provisions and is trying to “figure out what the path forward is.”
However, financial services companies need to be aware that the CFPB appears to have more than just arbitration provisions on its radar screen. The Law360 report quoted Director Chopra as stating: “We’re looking at all sorts of contractual clauses that are put in consumer contracts, often in ways that are not negotiated, are not subjected to normal competitive processes, and looking at how to promote fairness, transparency and competition on that front.”
Director Chopra seems to suggest that it is problematic that consumer contracts are “often” not individually negotiated. In fact, the days when consumer contracts were individually negotiated “are long past” (to quote the U.S. Supreme Court), and non-negotiated contracts are not inherently offensive. On the contrary, non-negotiated contracts can benefit both consumers and customers. As observed in the American Law Institute’s (ALI) recently- approved Restatement of the Law, Consumer Contracts:
There are many benefits to standard-form contracting …. The efficiencies of mass production and mass distribution of products and services would be hindered if the terms of each transaction with each consumer had to be individually negotiated. These market efficiencies can benefit all market participants ….” The Reporters Notes to the Restatement likewise state: “[T]he use of standardization in the production of contract terms is, like standardization in the production of goods and services, a source of potential benefits to consumers and businesses alike. Standardization supports efficient production and distribution, resulting in lower prices and lower transaction costs, and the introduction of new forms of products and services.”
The Restatement culminates an 11-year project by ALI to address how contractual terms are adopted, modified and enforced in contracts between business and consumers. It reflects the collective input of hundreds of professors, consumer advocates, industry lawyers and other interested persons who carefully considered what rules should apply to consumer contracts.
Financial services businesses that contract with consumers will need to watch closely for any further CFPB pronouncements on the subject of contract review. Other than arbitration clauses, Director Chopra has provided no clues as to what types of contract clauses he finds objectionable or the legal basis for his views. We will keep you updated.
Following up on our previous articles reporting on recent state developments regarding work from home:
On September 20, 2022, the Oregon Division of Financial Regulation amended its administrative rules pertaining to branch licensure to authorize remote work for licensed loan originators and employees.
Effective October 1, 2022, a licensed mortgage loan originator may originate loans from a location other than from a licensed branch office if the location is the licensed mortgage loan originator’s home, the licensed mortgage loan originator is an employee of a mortgage banker or mortgage broker, and the mortgage banker or mortgage broker complies with OAR 441-860-0040, as applicable. If a mortgage banker or mortgage broker intends to allow a licensed mortgage loan originator to originate loans from the licensed loan originator’s home, the mortgage banker or mortgage broker shall:
- Have appropriate policies and procedures in place to supervise the activities of loan originators and employees working from home including, but not limited to, data security measures to protect consumers' personal information and compliance with OAR 441-860-0040.
- Upload a copy of the policies and procedures required by subsection (a) of this section to the NMLS to Document Uploads under Company Staffing and Internal Policies.
- Ensure that all underlying origination records can be made available at a licensed location in the United States.
- Loan originators and employees who work from home are prohibited from keeping any physical business records at any location other than a licensed location.
- Loan originators and employees who work from home may engage with consumers for loan origination purposes at the home of the loan originator or employee by means of conference telephone or similar communications equipment that allows all persons participating in the visitation to hear each other, provided that participation is controlled and limited to those entitled to attend, and the identity of participants is determinable and reasonably verifiable.
- Loan originators and employees who work from home are prohibited from engaging in person with consumers for loan origination purposes at the home of the loan originator or employee, unless the home is licensed as a branch.
A copy of Oregon’s permanent administrative order is available here.
Effective September 24, 2022, an Arizona Mortgage Broker applicant may now seek a certificate of exemption through the NMLS from Arizona’s in-state requirement for a Responsible Individual (Arizona Mortgage Broker Responsible Individual – Certificate of Exemption). The checklist for the certificate of exemption is available here.
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