Friday, June 19, 2015

The CFPB's Mortgage Rate Tool

Jonathan Foxx
President & Managing Director
Lenders Compliance Group

I have always been a consumer advocate. Compliance and consumer advocacy are cemented together. We simply can’t have one without the other. However, sometimes a zealous regulator can go too far, even for the best of reasons.

Remember the Mortgage Rate Tool? It’s still up!

The rates used are derived from Informa Research Services. The Bureau has this explanation:

“The data is provided by Informa Research Services, Inc., Calabasas, CA. Informa collects the data directly from lenders and every effort is made to collect the most accurate data possible, but they cannot guarantee the data’s accuracy.”

Not sure about that last part, where “they cannot guarantee the data’s accuracy.” But I am certainly sure that accuracy is virtually guaranteed when it comes to disclosure of the Annual Percentage Rate, given the statutory redisclosure, curing requirements, and civil monetary penalties for violations.

Remember back in January, a year after the Consumer Financial Protection Bureau (Bureau) implemented many of its mortgage rules, when Director Richard Cordray said that “rash predictions” voiced during the rulemaking process didn’t happen?

He said that the Bureau had not seen “dramatic changes as some had feared. I recall seeing some rash predictions, such as that the price of mortgages would double and the volume of mortgages could be halved. But by the time these rules went into effect, lenders had already retreated from the worst sorts of lending that took us into the financial crisis.” (My emphasis.)

So, preying lenders “took us into the financial crisis?”

Cordray’s speech coincided with release of the Bureau’s survey that found almost half of consumers do not shop around for a mortgage when purchasing a home. The survey, which was jointly conducted by the Bureau and the Federal Housing Finance Agency (FHFA), also found that three out of four consumers only apply with one lender or broker, and most consumers get their information from lenders or brokers that have their own stake in the outcome.

Here are the Director’s words:

“By not shopping around, consumers often are throwing good money down the drain…”

“At the Consumer Bureau, we are working to reduce the information gap between lenders, who understand mortgage pricing inside out, and consumers, to whom the process can often feel like a mystery. It is time to start changing the culture of how people obtain their mortgages. We need to change the process from one of ‘getting a mortgage’ to one of ‘shopping for a mortgage.’ Consumers have much more power than they may realize. They can use that power to take control of their financial outcomes.”

I’m all for “shopping for a mortgage;’ indeed, the TILA-RESPA Integration Disclosure (TRID) requirements are designed to ensure, among other things, that the shopping process is protected – as it should be. The Bureau said the tool would make it easy to compare different interest rates and how much they will cost over the life of the loan. Who could argue with that well-meaning prospect?

But, if you recall, the Mortgage Rate Tool triggered huge opposition from the mortgage industry. Lots of people spoke up against this rate tool. Camden Fine, President and CEO of the Independent Community Bankers Association of America, wanted the tool removed.

Mr. Fine didn’t mince words in a January 14, 2015 letter to Director Cordray:

“While ICBA and its community bank members support providing robust information and guidance to all consumers regarding the mortgage process, we are very concerned that the Bureau’s ‘Unbiased Rate Tool’ does not adequately represent to consumers mortgage rates and products offered by community banks.”

Furthermore, Fine wrote, “based on the CFPB’s own comments, the source of the rate data does not even include community banks.”

Importantly, he observed, quite accurately, that the Bureau’s rate tool “creates the impression that all lenders should offer the same rates for the same loan, and if a higher rate is offered, as in the case of a non-conforming portfolio loan, it will be presumed that the lender is either overcharging the borrower or not providing the best lending option for that borrower.”

Director Cordray had said that while lenders and brokers could be valuable resources, it was “worth recognizing that they also have an important personal stake in selling the mortgage” and “what is best for them is not always going to be best for the consumer.” (My emphasis.)

To that remark, Mr. Fine called him out, stating that “this statement implies that because a bank may profit from making a loan that the banker doesn’t care about what might be best for the consumer.” Community bank portfolio loans, which are priced based upon the bank’s cost of funds, term, collateral, and payment characteristics and sometimes the higher risks associated with those loans, he said, “justify higher rates” than the rate tool or secondary market surveys might suggest.

Speaking about the inference embedded in Director Cordray’s remarks, Mr. Fine charged that “to insinuate that their intentions are less than honorable is offensive to the fine men and women who have dedicated their lives to the community banking industry for many generations.” Same could be said for most residential mortgage loan originators!

John Councilman, President of NAMB – The Association of Mortgage Professionals, had this to say:

“This tool will do nothing but confuse consumers in their shopping experience”

“These rates do not account for closing costs, APR, Loan Level Price Adjustments or other key factors. More important than rate, is quality of service and closing reputations of others involved in the transaction. If a private company released this exact product, the CFPB and state regulatory authorities would have a team sent in to shut the site down.”

Like his counterpart at the ICBA, Mr. Councilman had this to say:

“What is perhaps most egregious is Director Cordray’s statement that cautioned consumers that [mortgage lenders and brokers] have an ‘important stake in selling the mortgage’ … ‘what is best for them is not always best for the consumer.’ This statement is nothing but divisive, naive, or dishonest; or all three.”

Yet, the Mortgage Rate Tool is still up!