InfoBytes Blog
Filter
Subscribe to our InfoBytes Blog weekly newsletter and other publications for news affecting the financial services industry.
HUD expands access to mortgages with ADUs
On October 16, HUD introduced a new policy that aims to make it easier for borrowers to finance Accessory Dwelling Units (ADUs) in their primary residences. ADUs are small living units built inside, attached to, or on the same property as, the main home. This policy change allows lenders to consider ADU rental income when assessing a borrower's eligibility for an FHA mortgage.
The new policies provide:
- Income Flexibility: Borrowers with limited incomes can use 75% of their estimated ADU rental income to qualify for an FHA-insured mortgage for properties with existing ADUs.
- New ADUs: For new ADUs that borrowers plan to attach to an existing structure, such as a garage or basement conversion, 50% of the estimated rental income can be used for qualification under FHA's Standard 203(k) Rehabilitation Mortgage Insurance Program.
- Appraisal Requirements: The policy includes ADU-specific appraisal guidelines to accurately assess the market value of properties with ADUs, making it easier for appraisers to report on ADU characteristics and expected rental generation.
- New Construction: The policy also allows FHA mortgages to finance new homes built with ADUs, expanding ADU production beyond the rehabilitation of existing structures.
The White House concurrently released a statement on the policy, noting that it is allowing rental income from ADUs to qualify for FHA-insured mortgages. HUD added that FHA-approved lenders can start offering borrowers mortgages on properties with ADUs under the new policies effective immediately.
CFPB releases 2022 HMDA data
On September 27, the CFPB released a data point report titled 2022 Mortgage Market Activity and Trends, which analyzes residential mortgage lending activity and trends for 2022. The 2022 HMDA data reflects the fifth year of data that incorporates amendments to HMDA made by Dodd-Frank.
The CFPB noted in its press release accompanying the report that “in 2022, mortgage applications and originations declined markedly from the prior year, while rates, fees, discount points, and other costs increased. Overall affordability declined significantly, with borrowers spending more of their income on mortgage payments and lenders more often denying applications for insufficient income.” They also noted that “as in years past, independent lenders continued to dominate home mortgage lending, with the exception of home equity lines of credit.” Specifically, Lenders previously reported a 2.4 percent increase in closed-end site-built single-family originations from 2020 to 2021. In 2022, lenders reported 6.7 million closed-end site-built single-family originations, a 50.9 percent decrease from 13.7 million in 2021. Other highlighted trends in mortgage applications and originations found in the 2021 HMDA data point include, among other things:
- The total number of applications dropped 38.6 percent, and originations decreased by 44.1 percent;
- Borrowers’ costs and fees for taking out mortgages rose 22 percent from 2021, and a higher percentage of borrowers paid discount points than any year since this type of data has been collected;
- Refinances were down by 73.2 percent from 2021, with most refinances being cash-out refinances, which the CFPB noted can increase the risk of foreclosure. The CFPB noted that “in a reversal of recent trends, the median credit score of refinance borrowers declined below the median credit score of purchase borrowers.” Home-equity refinances, however, rose in 2022, with depository institutions dominating the home-equity lines of credit;
- Black and Hispanic white borrowers, borrowers of low- or moderate-income, and borrowers taking out loans secured with properties in low- or moderate-income neighborhoods accounted for a large share of refinance loans;
- Due to a rise in mortgage interest rates, average monthly mortgage payments increased by more than 46 percent;
- Debt to income ratio became more likely to be reported as a denial reason for denied applications across racial/ethnic groups in 2022.
In CFPB Director Rohit Chopra’s statement regarding the results of the 2022 HMDA data, he stated, “The significant changes in the rate environment in 2022 are having considerable impacts on the mortgage market. I expect these trends will continue in 2023 given further increases in average mortgage interest rates.”
CFPB adjusts annual dollar amount thresholds under TILA, HMDA regulations
On September 18, the CFPB released a final rule revising the dollar amounts for provisions implementing TILA and its amendments that impact loans under the Home Ownership and Equity Protection Act of 1994 (HOEPA) and qualified mortgages (QM). The Bureau is required to make annual adjustments to dollar amounts in certain provisions in Regulation Z, and has based the adjustments on the annual percentage change reflected in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) in effect on June 1, 2023. The following thresholds are effective January 1, 2024:
- For HOEPA loans the adjusted total loan amount threshold for high-cost mortgages will be $26,092, and the adjusted points-and-fees dollar trigger for high-cost mortgages will be $1,305;
- For qualified mortgages under the General QM loan definition, the thresholds for the spread between the annual percentage rate and the average prime offer rate will be: “2.25 or more percentage points for a first-lien covered transaction with a loan amount greater than or equal to $130,461; 3.5 or more percentage points for a first-lien covered transaction with a loan amount greater than or equal to $78,277 but less than $130,461; 6.5 or more percentage points for a first-lien covered transaction with a loan amount less than $78,277; 6.5 or more percentage points for a first-lien covered transaction secured by a manufactured home with a loan amount less than $130,461; 3.5 or more percentage points for a subordinate-lien covered transaction with a loan amount greater than or equal to $78,277; or 6.5 or more percentage points for a subordinate-lien covered transaction with a loan amount less than $78,277”; and
- For all QM categories, the adjusted thresholds for total points and fees will be “3 percent of the total loan amount for a loan greater than or equal to $130,461; $3,914 for a loan amount greater than or equal to $78,277 but less than $130,461; 5 percent of the total loan amount for a loan greater than or equal to $26,092 but less than $78,277; $1,305 for a loan amount greater than or equal to $16,308 but less than $26,092; and 8 percent of the total loan amount for a loan amount less than $16,308.”
With respect to credit card annual adjustments, the Bureau noted that its 2024 annual adjustment analysis on the CPI-W in effect on June 1, did not result in an increase to the current minimum interest charge threshold (which requires “creditors to disclose any minimum interest charge exceeding $1.00 that could be imposed during a billing cycle”).
Ginnie Mae released the Social Impact and Sustainability Framework and supports broader access to mortgage financing
On September 14, Ginnie Mae announced the launch of its “Social Bond” label to indicate underlying collateral that is designed to support a positive social and affordable housing outcome, and released the Social Impact and Sustainability Framework.
The “Social Bonds” revision to Ginnie Mae’s standard forms of prospectus details attributes of Ginnie Mae MBS to provide transparency to investors. The insurance or guaranties extended under certain government programs reduce borrower credit risk, which promotes broader access to mortgage credit and/or less costly credit for borrowers, thereby expanding homeownership access and affordability among targeted populations (low-to-moderate income borrowers, veterans, senior citizens, rural communities, and/or tribal, Alaska Native, and Native Hawaiian communities).
The Social Impact and Sustainability Framework highlighted Ginnie Mae’s role in connecting the global capital markets to America’s housing financial system and providing liquidity to support access to affordable housing and lending for first first-time homebuyers, low-to-moderate income households, veterans, seniors, and members of urban, rural, and tribal communities from inception.
Chopra shares prepared remarks about the lessons from 2008
In his recent address at the Better Markets Conference and his address at the Mortgage Collaborative National Conference, CFPB Director Rohit Chopra reflected on lessons from the 2008 financial crisis, discussing the regulatory failures exemplified by mortgage entities’ risky practices and emphasized the post-crisis reforms, including the creation of the CFPB. Chopra highlighted the CFPB's role in implementing crucial mortgage industry standards and its positive impact on borrower protections. He also mentioned the challenges facing the mortgage market today and the legal battles over CFPB rules, touching upon an upcoming Supreme Court case challenging the CFPB's constitutionality and its potential consequences for financial stability, underlining the importance of regulatory rules for financial markets and household finances. Chopra highlighted the CFPB's role in implementing standards for ensuring borrowers' ability to repay through the qualified mortgage and ability-to-repay rule, which granted legal immunity to compliant lenders. As a result of the financial crisis, Congress set requirements related to mortgage data, mortgage servicing, and mortgage lender compensation. Much of the authority that had been held by the OCC, the Fed, and the Office of Thrift Supervision were transferred to the nascent CFPB. In his remarks, Chopra also outlined areas where further action is needed, including open banking, financial data rights, bank mergers, the effectiveness of "living wills" for large financial firms, and the regulation of shadow banks.
DOJ, Oklahoma bank agree to consent order over redlining
On August 28, the DOJ announced a settlement agreement to resolve allegations of redlining by an Oklahoma-based bank. According to the complaint, defendant allegedly engaged in redlining by refraining from providing home loans and other mortgage-related services, and also engaged in biased behavior, to deter individuals residing in or seeking credit within predominantly Black and Hispanic neighborhoods in Tulsa from pursuing mortgage opportunities. According to the proposed consent order, without admitting or denying the allegations, defendant agreed to (i) invest $1.15 million to increase credit opportunities in neighborhoods of color; (ii) invest at least $950,000 in a loan subsidy fund for predominantly Black and Hispanic neighborhoods in Tulsa; (iii) invest $100,000 for advertising, outreach and consumer education; (iv) invest $100,000 for community partnerships to improve access to residential mortgage credit services; (v) “open a new community-oriented loan production office in the historically Black area of Tulsa”; and (vi) assign at least two mortgage loan officers to solicit mortgage applications in predominantly Black and Hispanic neighborhoods in Tulsa, among other things.
The DOJ press release makes reference to the 1921 Tulsa Race Massacre. The bank's press release announcing the settlement responded by stating that “[a]s Oklahomans, we carry a profound sense of sorrow for the tragic events of the Tulsa Race Massacre over a century ago. It is with deep concern that we note the Justice Department’s decision to reference this distressing historical event in its complaint against our bank, established a mere 25 years ago.”
Key Takeaways from the CFPB’s First Public Enforcement Action Alleging Violations of RESPA Section 8 Since 2017
The Consumer Financial Protection Bureau (CFPB) has issued a consent order to a residential mortgage loan originator to resolve allegations that it provided illegal incentives to real estate brokers and agents in exchange for mortgage loan referrals. This is the CFPB’s first public enforcement action alleging violations of RESPA Section 8 since 2017.
The CFPB issued a parallel consent order against a real estate brokerage firm for accepting the incentives in exchange for referrals.
Allegations Against the Lender
The consent order against the lender alleges that the lender paid for several subscription services – for example, to a service that provided information concerning property reports, comparable sales and foreclosure data – and then provided free access to such services to real estate agents and brokers, which the CFPB determined to be a thing of value. According to the consent order, the agents and brokers who received access to the subscription services also referred mortgage business to the lender, which the CFPB alleges was in exchange for the free services and therefore violated RESPA Section 8(a).
The consent order also alleges that the lender hosted and subsidized events, including paying for food, beverages and entertainment, for the benefit of real estate agents and brokers. The consent order further alleges that the lender gave real estate agents and brokers free tickets to sporting events, charity galas and other events where the real estate agents and brokers would have otherwise needed to pay for their own admission, food, and alcohol. The CFPB alleges that these events frequently cost the lender several thousand dollars or more. The CFPB asserts that the lender’s contributions to these events constituted a thing of value to the real estate agents and brokers and were given to create, maintain and strengthen mortgage referral relationships, in violation of RESPA Section 8(a).
Finally, the CFPB alleges that the lender had marketing services agreements (“MSAs”) with numerous real estate brokerages, and that many of the compensable services were either performed by the lender itself rather than the brokerages or, based on the Bureau’s allegations against the broker, were not performed by the brokerages.
Also, the consent order noted that the MSAs required the real estate brokers to promote the lender to the broker’s own agents rather than to consumers. The lender also encouraged its MSA partners to use a third-party smartphone app. The real estate agents shared the app with their clients. The app featured a photo of the lender’s loan officer and the lender’s logo and included buttons where consumers could contact the lender’s loan officer for assistance. As a result, the CFPB alleges that the payments the lender made to the brokerages were structured and implemented to generate referrals, rather than to compensate the brokerages for any marketing services they actually performed.
Allegations Against the Real Estate Broker
The consent order against the broker alleges that the broker’s real estate agents and brokers accepted the subscription services and subsidized events. It also alleges that the broker received payments in connection with an MSA that was primarily focused on the lender getting referrals from the broker’s brokers and agents rather than the broker marketing the lender to the public, and that the broker failed to perform many of the marketing tasks required by the MSA but received payments anyway. For example, the consent order alleges that the MSA required the broker to send 15,000 marketing emails a month while allocating 50% of the content to the lender, display video advertisements for the lender at its physical locations and create a number of property websites displaying the lender’s content. However, the broker allegedly failed to perform any of these marketing services.
Takeaways
We note several key takeaways from these consent orders:
- Taken at face value, none of the conduct alleged to violate RESPA Section 8(a) is novel or particularly notable. The crux of the alleged violations involved paying for obvious things of value in exchange for referrals and entering into MSAs where the contemplated marketing services were either not provided or directed to potential referral sources and not consumers. The consent orders, therefore, are largely consistent with prior RESPA enforcement actions involving lenders and real estate brokers.
- This is the first public CFPB enforcement action alleging violations of RESPA Section 8 since 2017, which makes clear that although the CFPB’s focus on RESPA Section 8 may have waned somewhat from the Cordray era, it is still monitoring for RESPA Section 8 violations and will bring public enforcement actions when violations are discovered. Coupled with February’s Advisory Opinion on Digital Mortgage Comparison Shopping Platforms, the CFPB is clearly still engaged in RESPA compliance.
- The reference to the mobile app with a loan officer’s photo and the lender’s logo, and the ability for the consumer to reach out to the lender directly, is in accord with longstanding CFPB and HUD guidance that exclusivity is indicative of a referral to the extent that it “affirmatively influences” a consumer to select a particular provider of settlement services. This viewpoint was recently espoused in the CFPB’s Advisory Opinion on Digital Mortgage Comparison Shopping Platforms, and it appears that the CFPB views this principle as generally applicable.
Penalties
In addition to agreeing to cease engaging in the conduct alleged, the lender was ordered to pay a civil monetary penalty of $1.75 million and also agreed to implement a compliance program designed to prevent any future violations should the lender resume retail mortgage operations. The lender also agreed to meet certain recordkeeping and reporting requirements.
In addition to agreeing to cease engaging in the conduct alleged, the broker was ordered to pay a civil monetary penalty of $200,000 and meet certain recordkeeping and reporting requirements.
In agreeing to enter into the consent orders, the lender and broker did not admit or deny any findings of fact or conclusions of law related to the violations alleged by the CFPB.
Read the lender’s consent order.
Read the broker’s consent order.
Read the CFPB’s press release.
Want to learn more? Contact John Kromer or Steve vonBerg.
Fannie Mae, Freddie Mac annual stress tests results
On August 10, FHFA published the Dodd-Frank Act Stress Tests Results – Severely Adverse Scenario containing the results of the ninth annual stress tests conducted by Fannie Mae and Freddie Mac (GSEs) as required by the Dodd-Frank Act. Last year, FHFA published orders for the GSEs to conduct a stress test with specific scenarios to determine whether companies have the capital necessary to absorb losses as a result of severely adverse economic conditions (covered by InfoBytes here). According to the report, the total comprehensive income loss is between $8.4 billion and $9.9 billion depending on how deferred tax assets are treated. Notably, compared to last year, the severely adverse scenario includes a larger increase in the unemployment rate due to the lower unemployment rate at the beginning of the planning horizon. FHFA also expanded the scope of entities considered within the primary counterparty default component of the worldwide market shock. This expansion encompasses mortgage insurers, unsecured overnight deposits, providers of multifamily credit enhancements, nonbank servicers, and credit risk transfer reinsurance counterparties.
CFPB sues auto-loan servicer for double-billing practices
On August 2 CFPB filed a complaint in the U.S. District Court for the Northern District of Georgia against an auto-loan servicer alleging a host of illegal practices that harmed individuals with auto loans. The Bureau alleged that the auto-loan servicer engaged in unfair acts and practices in violation of the CFPA, including (i) wrongfully activating nearly 80,000 times starter-interruption devices, which are devices that warn consumers with beeps or disable their car altogether when they are late with a loan payment; (ii) failing to ensure refunds of over millions of dollars of GAP insurance premiums after consumers paid off their loan early or their car was repossessed by the auto-loan servicer; (iii) erroneously billing 34,000 consumers for collateral-protection insurance (CPI) by charging consumers twice each billing cycle, totaling around $1.9 million; (iv) wrongfully applying extra consumer payments first to late fees or CPI instead of accrued interest; and (v) wrongfully repossessing consumers’ cars dozens of times due to errors by the auto-loan servicer or its vendor.
The Bureau seeks, among other things, redress to consumers, civil money penalties, and injunctions to prevent future violations.
HUD and NAREB to educate consumers on appraisal bias
On August 2, HUD announced a partnership with the National Association of Real Estate Brokers to address appraisal bias and discrimination in the housing market. The collaboration, launching in October 2023, will include online training, roundtable discussions, and distribution of educational material designed to promote fairness in the housing market. HUD also referenced its involvement in the PAVE task force (covered by InfoBytes here), which is dedicated to ending bias in home valuation and has made critical progress since its launch in 2022.