Kicked in the gut by a "flat fee" proposal, the already winded mortgage industry seems to be barely able to catch its breath from the CFPB's recent lurching toward yet another vaguely expected and somewhat ill-defined nostrum.*
The pattern replays itself time and again: first the news, followed by the rulemaking proposal, which is then given a brief period for public acquiescence or remonstrance; and then inevitably the final rule, which is much like the initial proposal. Early on, industry associations issue a Call to Action!
Alas, when the Federal Register publishes the effective compliance date, everybody falls in line and scrambles to adjust. Sometimes, a few organizations even threaten litigation, though, when tried, litigating has not thus far brought about much satisfaction.
Exactly what is this Flat Fee debacle?
Let's take a peek at this flatland mystery.
IN THIS ARTICLE
DAY OF RECKONING
YET ANOTHER COMMITTEE
OVERVIEW AND QUESTIONNAIRE
BEFORE AND AFTER
CREDITOR-PAID COMPENSATION - BEFORE AND AFTER
CONSUMER-PAID COMPENSATION - BEFORE AND AFTER
BROKERAGE-PAID COMPENSATION - BEFORE AND AFTER
DAY OF RECKONING
On the day that the CFPB announced the Flat Fee - along with a wish list of other proposals - the New York Times explained the CFPB's position in this way:
"Bureau officials said that the rules, which were released Wednesday ahead of formal introduction this summer, would ban mortgage companies from charging origination fees that vary with the amount of the loan.
Those fees are sometimes referred to as origination points and are disclosed in a blizzard of documents and fees that most home buyers face at closing. But they can easily be confused with the upfront discount points that borrowers often pay to secure a lower interest rate."
The May 9, 2012 article came accoutered with Richard Cordray's observation that "Mortgages today often come with so many different types of fees and points that it can be hard to compare offers ... We want to bring greater transparency to the market so consumers can clearly see their options and choose the loan that is right for them."
It is not as if we did not see this coming. We did! At least those of us compliance nerds, wonkishly spending time around our own wonkish types, rubbing elbows with regulators, lobbyists, agencies officials, congressional staff, industry associations, and everything in between.
Still, keeping it real, even when we know that something unpleasant is coming, nevertheless a sense of disbelief is often provoked when the day of reckoning finally arrives.
The Flat Fee, which I shall henceforth call the Flatland Fee, has now emerged from its gestational limbo.
In its announcement of May 9, 2012, wearisomely titled in the manner of a 17th century dogmatic text "CONSUMER FINANCIAL PROTECTION BUREAU CONSIDERS RULES TO SIMPLIFY MORTGAGE POINTS AND FEES - Rules Would Bring Greater Transparency to the Mortgage Market" (caps in the original), the CFPB stated that its recipe for "transparency" is to:
"Ban Origination Charges that Vary with the Size of the Loan:
Brokerage firms and creditors would no longer be allowed to charge origination fees that vary with the size of the loan. These 'origination points' are easily confused with discount points. Instead, under the rules the CFPB is considering, brokerage firms and creditors would be allowed to charge only flat origination fees."
Let me broaden this statement out for you:
The CFPB will allow the consumer a choice of paying discount points in creditor-paid transactions only if: (1) the points actually result in a "minimum reduction" in the interest rate for each point paid; and (2) the lender also offers the option of a no discount point loan. (At this time, the CFPB actually provides no details for the correlation between "minimum reduction" and the interest rate.)
The CFPB would allow a consumer to pay up-front origination fees in creditor-paid transactions only if it is a flat amount that does not vary with the size of the loan (and if it is not compensation to the individual loan originator).
According to the CFPB, this proposal is supposed to "preserve consumers' choices while increasing transparency."
YET ANOTHER COMMITTEE
Pursuant to Dodd-Frank the CFPB must convene a small business panel, consisting of consumers and industry representatives, the purpose of which is to determine the effects of new regulations on financial institutions subject to the new requirements.
The CFPB will be sharing with these small businesses an overview of the proposals under consideration and a list of questions for input. After its review, the panel's participants are supposed to provide feedback to the panel on the proposals the CFPB is considering and suggest alternatives. At the conclusion of its review, the panel will issue a report to the CFPB that summarizes this feedback. And, from that point on, the CFPB is expected to consider the panels findings when formulating the proposed rule.
The CFPB will publish a Notice of Proposed Rulemaking in the next few months, followed by a formal public comment period.
The rule will be finalized by January 21, 2013.
Seems simple enough. What could go wrong?