Credit Union Regulatory Guidance Including: NCUA, CFPB, FDIC, OCC, FFIEC

Samantha: Hello, this is Samantha Shares.

This episode covers the Prepared
Remarks of CFPB Director Rohit Chopra

at the National Housing Conference

SEPTEMBER 9, 2024

The following is an audio
version of those remarks.

This podcast is educational
and is not legal advice.

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And now the remarks.

Prepared Remarks of CFPB Director Rohit
Chopra at the National Housing Conference

SEPTEMBER 9, 2024

Interest rates are a major driver
of decision-making in our economy.

In board rooms and at kitchen tables,
many are wondering how much today’s

high interest rates will fall.

For families, interest rates
are often what makes or breaks

the math on their mortgage.

Today, I want to discuss mortgage
refinancing, and whether falling

interest rates will actually translate
into tens of billions of dollars

of savings for existing homeowners.

First, I’ll discuss the state of
play and the outlook for the mortgage

refinancing market, including the stakes
of refinancing in the coming months

for both homeowners and the economy.

Then, I’ll discuss some of the obstacles
and complexities that homeowners and

lenders face, like high closing costs.

I’ll close with some steps that
the CFPB and the marketplace

should take to ensure that families
don’t miss out on falling rates.

My remarks today do not
constitute legal interpretation,

guidance, or advice of the CFPB.

Any opinions or views stated are my
own and may not represent the views

of the CFPB or Federal Reserve.

Today’s Mortgage Refinancing Market and
the Expectation of Lower Rates Ahead

While we often focus on homeownership
as a vehicle for accumulating

wealth, a well-timed mortgage
refinance can make a major difference

in a family’s financial life.

During the pandemic, mortgage interest
rates fell to new lows in 2021.

Many families buying a home were able
to lock in rates below 3 percent and,

unsurprisingly, the mortgage industry
generated massive volumes of refinancing

savings for homeowners who had the credit
profile, the income, and the home equity

to take advantage of the opportunity.

Researchers at the Federal Reserve Bank
of Boston found that total consumer

savings from mortgage refinancing from
January 2020 to October 2020, during

the refinancing boom, was $5.3 billion
annually, with the typical household

saving $279 a month, which adds up
to thousands of dollars per year.

But after a series of rate increases
by the Federal Reserve, mortgage

interest rates in October 2023
hit highs not seen since 2000.

Rates have risen over five percentage
points since bottoming out in

January 2021 at 2.65 percent, peaking
at 7.79 percent in October 2023.

Since then, rates have eased to
6.35 percent as of last year.

A mortgage payment on a
$400,000 loan is $877 higher

today compared to January 2021.

A homebuyer who took out a $400,000
mortgage in January 2021 paid roughly

$1,600 a month in principal and interest.

That same mortgage would cost
nearly $2,500 a month today.

Unsurprisingly, the refinance
volume for the first half of 2024

was the lowest in nearly 30 years.

Currently, more than a fifth
of all mortgages have interest

rates above 5 percent.

Of these 12.2 million mortgages,
7 million are above 6 percent and

approximately 60 percent of those
were originated in the last two years.

That means that as interest rates
decline, millions of borrowers

could benefit from refinancing.

One analysis suggests that about 2.5
million borrowers could refinance

at today’s rates and see their
interest rates decrease by at

least three quarters of a percent.

If interest rates fell another point
to 5.5 percent, more than 7 million

borrowers could potentially benefit.

Further reductions would increase
the addressable market even further.

Using predicted interest rates
derived from futures markets, I

expect that mortgage refinancing
will increase modestly in the

near-term and then more rapidly.

The potential for refinancing
has significant implications

for economic growth as well
as for individual homeowners.

Refinancing frees up homeowners’ finances
to engage in other types of spending.

As a result, a meaningful increase
in refinance activity could

represent billions of dollars
in additional economic activity.

However, the CFPB is concerned
that many homeowners will not

benefit from the lower rates.

According to some analyses, in past
refinancing cycles, minority homeowners

were less likely to benefit, even when
considering differences in income,

home equity, and credit profiles.

We also know that incentives in the market
tend to favor refinancing higher balance

mortgages, leaving out many homeowners
from less affluent neighborhoods.

Consider that while millions of homeowners
locked in historically low rates in 2021,

millions of other borrowers did not,
either by choice or by circumstance.

For some, that missed opportunity
represents thousands of dollars each year.

Ensuring that a broad swath
of homeowners can benefit this

time around will be critical.

Obstacles to Refinancing

Since the mortgage crisis, the CFPB,
our colleagues across the Federal

Reserve System, and other agencies
have closely looked at borrower

behavior in the mortgage market.

As many of you know, the decision
to refinance can often feel fraught.

There are many questions homeowners
might mull over before refinancing,

like whether rates will fall further,
whether to take out cash, or how changes

in their income will affect their rate.

But there are two main factors
that make this decision so

difficult: cost and complexity.

The expense and burden of the
refinancing process makes the decision

far more consequential for homeowners,
and serve as a barrier to robust

refinancing in a lower rate environment.

The CFPB is concerned that
closing costs can prove to be a

significant obstacle to refinancing.

Closing costs are the set of fees
that are charged to the borrower

when a mortgage is finalized.

For purchase mortgages, we
know that excessive closing

costs can drain a downpayment.

For refinance mortgages, closing
costs also have high stakes.

Because they can add up to several
percentage points of the total mortgage

amount, this means that it won’t make
sense for borrowers to refinance unless

the offered interest rate is substantially
lower than their current rate.

In other words, these one-time charges
can cancel out the savings from

a small or modest rate reduction.

Advocates for high closing costs
defend the status quo on the

basis that costs are disclosed.

Federal law and regulations require
closing costs to be disclosed,

but this seems to miss the point.

Disclosure helps consumers compare,
but many of the fees are not

subject to robust competition.

While it is better to disclose
a rip-off than to hide it,

it may still be a rip-off.

Indeed, we have found instances
of monopolistic practices that

drive up closing costs on items
like credit reports, FICO scores,

and employment verification.

Many borrowers looking to refinance
are particularly puzzled when it

comes to purchasing a new title
insurance policy for their lender that

sometimes costs thousands of dollars.

Even though these borrowers typically do
not lose their owner’s title insurance if

they purchased a policy when they bought
their home, the policy does not carry

over to a new lender when they refinance.

The CFPB believes that this and other
closing costs are harmful to both

lenders and borrowers, given how
they reduce the pool of mortgages

that can benefit from refinancing.

Lenders face other obstacles
for refinancing, too.

For example, under existing law and under
certain investor requirements, lenders

are required to redo some of the same
steps that were completed by the borrower

when they first purchased their home.

While the cost of many of these
steps may be falling with greater

automation and artificial intelligence,
the repeated steps add complexity

and the potential for errors.

There may be more pernicious
barriers to refinancing as well.

For example, disparities in refinance
activity for Black homeowners raise

a number of potential questions,
including questions about the use of

artificial intelligence in the marketing,
appraisal, and underwriting processes.

CFPB Actions

To prepare for the easing of interest
rates, the CFPB launched an effort to find

ways to spur more mortgage refinancing.

We also separately solicited
public input on ways to reduce

the burden of closing costs.

We received a wide range of input,
and we are pursuing a number of steps.

Here are a few of them:

First, the CFPB will be closely watching
the implementation of new mortgage

technology, including applications
marketed as utilizing artificial

intelligence.1 There are some novel
uses of data, including generative AI,

in many stages of the mortgage process.

Advances in technology have the
potential to help lenders lower

costs and reach more individuals
who could qualify for refinancing.

We want to see this work in ways that
benefit borrowers and the economy.

However, if executed poorly, new
mortgage technology could exacerbate

disparities or make people worse off.

We are on the lookout for how new mortgage
tech can contribute to discrimination,

collusion, or other illegal activity.

We have repeatedly made clear that there
is no “fancy technology” exception in our

consumer protection and fair lending laws.

In addition, we have finalized new
rules on algorithmic appraisals.

Importantly, the CFPB now has
technologists embedded across

our functions, and we are more
prepared than ever to identify

and prosecute violations of law.

Second, the CFPB is exploring whether
we should make certain changes to

the existing mortgage regulations
to streamline the refinancing

process and to reduce closing costs.

When an existing or competing lender is
seeking to refinance a loan with a much

lower rate for a substantially similar
mortgage, it may not be worthwhile for the

lender to repeat many of the steps that
were taken during the purchase process.

We are especially interested in the costs
and time taken to refinance a mortgage

that are exclusively related to complying
with federal mortgage law, rather than

steps that are demanded by investors.

We will also be identifying ways
to jumpstart competition in various

closing costs, which can also
help spur refinancing activity.

Third, the CFPB is pursuing rules
to accelerate the shift to “open

banking” with mortgages in mind.

Next month, I expect we will finalize
our initial rule on Personal Financial

Data Rights, under Section 1033 of
the Consumer Financial Protection Act.

This initial rule will empower people to
permission their personal financial data

to lenders in ways that will reduce the
costs of underwriting over the long term.

Mortgage lenders would also have greater
ability to use a family’s cash flow

in the underwriting process, since
borrowers could more easily share

data on their income and expenses.

After this initial rule, I expect
there to be additional rules to

cover more use cases for open
banking, including for mortgages.

I am especially interested in ways
consumers could more easily permission

other types of data, such as their
credit score, rather than making

every competing lender purchase it.

Of course, we are also putting greater
thought into and conducting analysis

on product features and practices
that could further reduce the friction

homeowners face when seeking to achieve
a lower mortgage rate or payment.

These actions will complement
other efforts across the

housing and regulatory agencies.

Conclusion

In closing, markets are predicting that
interest rates are headed downward.

With next week’s September meeting of
the Fed’s Federal Open Market Committee,

many in the housing industry are focused
on whether lower interest rates will

help to spur more construction of units
in markets facing supply shortages.

But there is a significant open
question about whether the benefit of

lower interest rates will alleviate
the high monthly costs of mortgages

for those with high rates, including
those taken out in recent years.

If we can collectively refinance millions
of mortgages in neighborhoods across

the country, it will be a huge boost for
those families and their local economies.

This concludes the prepared
remarks of the C F P B.

If your Credit union could use assistance
with your exam, reach out to Mark Treichel

on LinkedIn, or at mark Treichel dot com.

This is Samantha Shares and
we Thank you for listening.