A Closer Look At Closing Costs

Which is why the CFPB is asking mortgage market stakeholders to weigh in on what might be done to ease the closing cost burden. And what a burden the package of fees and charges buyers must pay at settlement — in addition to their down payments — has become. According to the CFPB’s request for information, between 2021 and 2023, median total loan costs increased by some 36 percent. The median amount paid by borrowers in costs and fees in 2022 was nearly $6,000. Worse, at least in the government’s mind, anyway, many of the charges do not change based on the size of the loan, resulting in an outsized impact on lower-income borrowers.

In its RFI, the bureau went to great lengths to point out that lenders also are impacted by rising closing costs, especially in a “market where mortgage originators are already facing financial challenges.”

“The cost for credit scores, credit reports and employment verification, for example, have all increased markedly over the last few years,” it admitted. “Dominant market players have driven up costs through annual price increases that significantly outpace inflation, leaving lenders with little choice but to pay these higher rates.”

Profit Motive

But, the CFPB also noted, these higher costs are passed on to the consumer or eat into lenders’ bottom lines. Perhaps that’s why the Mortgage Bankers Association, along with the American Bankers Association and the Housing Policy Council, almost immediately drew a line in the sand.

“A rule-making process governed by the Administrative Procedure Act — and supported by a robust cost-benefit analysis — is the only appropriate vehicle to initiate [this] work,” the organizations maintained. “Such a rule-making process would allow for the proper level of engagement to produce changes that benefit consumers and do not add compliance costs and lead to negative unintended consequences.”

Whatever the outcome of this potential mortgage market Mexican Standoff, a deeper look into the seemingly unfettered rise in closing costs is warranted. Generally, the CFPB, among other things, is looking into what fees may be unnecessary to close a loan, how much consumers shop closing costs, how fees are set and the leverage lenders have on those charges, which charges have increased the most and what is driving those increases, and would lenders be more effective in negotiating costs than borrowers.

Fees Targets

The CFPB has its regulatory eye on several specific areas. And since it has been in the news lately, let’s start with title insurance, which the CFPB notes is “one of the costliest settlement services.”

Here, the bureau points out, lenders require that borrowers pay for their lenders’ coverage against any possible claims. And the amounts they pay, it adds, “is often much greater than the risk” lenders’ policies cover. According to the industry’s own numbers, insurers took in $3.35 billion in premiums in the first quarter while paying out just $161.1 million in claims.

Also, an early responder to the CFPB’s RFI, the American Land Title Association was quick to point out that the cost of title insurance has actually fallen by 5 percent over the last five years. And in the course of curing title defects companies catch in their searches, they collect $3 billion annually in delinquent federal income taxes, $600 million in delinquent property taxes, and $55 million in unpaid child support.

Another problematic area, at least in the bureau’s eyes, are the fees paid for credit reports. A $1.3 billion business, the agency notes that credit reporting is highly concentrated with just a handful of dominant players dictating the price of credit reports and scores. Moreover, it says it “has heard” of instances in which costs have spiked by as much as 400 percent. “Steep increases in a market that lacks competition and choice warrant further scrutiny,” the bureau says.

Noncompetitive Players

Here, the Community Home Lenders of America weighed in earlier this year on the high cost of electronic verifications of employment, singling out Equifax as a key driver in the rising costs of VOE. With two and sometimes three verification pulls required per loan, the cost can easily reach $280. And without any real competition, the giant credit repository owns roughly 60 percent of the market, locking out smaller, more nimble players who can work cheaper and save consumers money.

At the same time, First Financial Lending of New Jersey and Greystone Mortgage of Pennsylvania have filed a class action suit against Equifax, charging it has “a stranglehold” over the market for electronic verification of income and employment reports.

Although Equifax is more widely known for offering credit report services, the suit alleges that income and employment verification is driving more revenue. Now closing in on $2 billion annually, VOIE services make up about 40 percent of the company’s annual profit, the suit charges. By entering into exclusive contracts and buying up competitors, the plaintiffs maintain, Equifax controls 40 percent of all payroll data and “almost the entire market” for VOIE services.

The CFPB also is taking a hard look at — “monitoring” is the word the agency used — discount points, the up-front fees lenders charge borrowers to lower their mortgage rates. These charges are hardly junk fees; they are the cost of obtaining a lower rate and a choice borrowers make. But the bureau has labeled the fees questionable in that they don’t always save borrowers money.

In an effort to lower their mortgage costs, the percentage of buyers opting to pay discount points nearly doubled from 2021 to 2023, from 32.1 percent in ‘21 to 50.2 percent in ‘23. Borrowers also are paying more in discount points. And the increase was even greater among borrowers with lower credit scores.

But points, the bureau argues, have no fixed value in terms of the change in interest rate. “Most borrowers only benefit from discount points if they keep their mortgage long enough that the cumulative monthly savings from the reduced interest rate outweigh the upfront costs,” it says.

Fannie Found Bias In Closing Charges

Transaction costs related to obtaining financing to purchase a house are highly discriminatory, according to a long-forgotten research paper from Fannie Mae.

The late 2021 paper found that closing fees are regressive in that median costs are 13 percent higher for low-income first-time buyers. If the median closing costs paid by Black and Hispanic low-income rookie buyers had been the same as those of their White counterparts, the report also said, their total costs would have been as much as $379 lower.

In addition, Fannie Mae found that the closing cost burden varied from state to state. Depending on the state, closing costs relative to the purchase price can deviate by almost 400 percent, the government sponsored enterprise discovered. And it noted that consumer disclosure forms were inconsistent among various jurisdictions.

But it was the discriminatory nature of the fees that is the most striking. For example, the costs incurred by 14 percent of the first-timers were equal to or more than their down payments. But if their closing costs as a percentage of the purchase prices had been equal to the median for all buyers in the one-plus million loan sample, the enterprise found, their costs would have been reduced by $3,580.

Two other findings in the 20-page study, which was dated December 2021, stand out:

• Even though closing costs for first-time buyers and low-income first timers are lower, the share of the total costs is more burdensome. And in that the rate at which the fees decrease for the two groups is slower than for the sample as a whole, closing costs tend to be “regressive in nature.”
• Although there is an extensive list of common closing costs terms, there is an even more extensive use of the term “other” on settlement sheets. In a small sample of the study group, a third had a fee designated as “other.” A further examination revealed that some were actually lender and origination charges, some were title and settlement fees and the remainder were really “other’ costs.

Among other things, Fannie Mae researchers recommended that closing costs be capped for “qualifying” first-time buyers on dollar-cost basis; that lenders, rather than borrowers, pay for services required to manage risk, and that the forms consumers receive be made more simple and more transparent.

– Lew Sichelman