BLOG VIEW: The congressional elections of November 2022 bucked the expectations of past mid-terms. While the Republican party did grab nine seats to gain the majority in the House of Representatives, the Senate remains under the control of the Democratic party. This new dynamic may have an impact on mortgage regulations, but it is too early to make any broad pronouncements yet.
However, based on the existing market conditions and regulatory changes that have been in the works for a while, lenders can still map out a plan to manage the year’s biggest compliance priorities. Understanding the Consumer Financial Protection Bureau’s (CFPB’s) leading priorities, upcoming regulatory changes, and market pressures can help lenders adjust their policies and workflow. Together this should help lenders maintain profitability in what is likely to be a challenging year in the housing market.
CFPB Priorities in 2023
When the U.S. Senate confirmed Rohit Chopra as the CFPB’s Director in 2021, experts expected him to take an aggressive approach to consumer protection. Since April 2022, the CFPB has announced 16 public enforcement actions. They estimate that this will result in approximately $300 million in monetary relief to harmed consumers.
One area that has been a top priority for enforcement is fair lending, which prohibits lenders from considering race, color, national origin, religion, sex, familial status, or disability when applying for residential mortgage loans. Since January 2021, the CFPB has filed six fair-lending public enforcement actions. We expect that the CFPB will continue to emphasize fair lending heavily in 2023.
In October 2022, President Biden and the CFPB announced they were going after “junk fees” charged by banks that largely target low-income residents and people of color. When it comes to mortgage fees, buyers are encouraged to look out for excessive processing and documentation fees in the following categories:
- Application fee
- Underwriting fee
- Mortgage rate lock fee
- Loan processing fee
- Broker rebate
These fees can’t be eliminated, but the heightened enforcement from the CFPB means that lenders will need to evaluate their fee structure to ensure that their fees are bona fide and they do not violate any federal, state, or local requirements, or expose them to Unfair, Deceptive, or Abusive Acts or Practices (UDAAP) claims.
New Document Requirements
On July 7, 2021, Fannie Mae and Freddie Mac (the Government-Sponsored Enterprises (GSEs)) announced they updated their uniform legal instruments (the 2021 instruments). These new documents must be used for loans delivered to the GSEs with note dates on or after January 1, 2023. These new instruments are replacing the previous instruments that have been utilized by the GSEs (with updates) since 2001. Most mortgage loan transactions in the United States utilize these uniform notes and security instruments, and even those that do not are often closed on forms based on these uniform instruments. Such is the case with notes and security instruments used to close FHA loans; FHA does not publish its own set of legal instruments to be used in transactions they insure, but they do provide guidance on modifications that should be made to the GSE uniform instruments to adapt them for FHA use. On January 20, 2023, FHA published Mortgagee Letter (ML) 2023-01 which explains use of the 2001 instruments is still acceptable for FHA and also gives instructions related to changes required to make the 2021 instruments eligible for FHA use.
At the direction of the Federal Housing Finance Agency, Fannie Mae and Freddie Mac will be requiring the Supplemental Consumer Information Form in the loan file for new conventional loans sold to the CSEs with application dates after March 1, 2023. The purpose of the new form is to collect information on homeownership education, housing counseling, and/or language preference to help lenders better understand the needs of borrowers during the home-buying process. This new requirement may intensify pressure on lenders to provide support resources for borrowers with limited English proficiency.
Form 4506-C is being modernized to streamline the electronic verification process and increase efficiency for industry transcript needs. Effective March 1, 2023, the newly published Form 4506-C will be the only form IVES Participants can use. Introduced as a fraud prevention measure, borrowers must sign this form to prove that their tax returns are authentic and properly filed.
Current Market Products to Keep an Eye On
ARMs are loans whose rates can vary over the life of the loan. Unlike fixed-rate mortgages, which carry the same interest rate over the full loan term, ARMs start with a rate that’s fixed for a short period and then adjust. ARMs often, though not always, carry lower interest rates than fixed-rate mortgages do. However, until last year, there have been essentially no cost savings in opting for an ARM due to interest rates being at rock-bottom levels. With the increase in interest rates ARMs have made a resurgence and lenders will continue to monitor their policies and procedure to ensure they are in compliance with additional requirements related to ARMS such as the ARM loan program disclosures and the Consumer Handbook on Adjustable Rate Mortgages (CHARM).
As rates continue to increase, buydowns help to reduce some of the financial pressures buyers are experiencing. Sellers are hoping to encourage buyers by paying for a temporary reduction to the buyer’s mortgage interest rate. While temporary rate buydowns have been around for a long time, they become increasingly popular in a market like we are experiencing now.
Interest in closed end home equity loans and home equity lines of credit will continue to increase in a higher rate environment. During 2022, home equity loans went from averaging six percent at the beginning of the year to just around eight percent by the end of the year. Home equity lines of credit followed a similar pattern, starting the year at 4.25 percent and ending 2022 at around eight percent. While HELOCs can be used for home improvement and other investments and home equity loans are an attractive option for debt consolidation, if interest rates stay high, demand for HELOC and home equity loans will remain strong and lenders will need to review their compliance programs to maintain support these products.
Fred Gooch serves as senior vice president of compliance and operations counsel for Docutech, a First American company.
