The Consumer Financial Protection Bureau has issued a bundle of rules designed to protect consumers involved in everything from auto loans and money transfers to mortgages. Some of those protections will result in higher costs for the very people they're designed to protect. Behind the trend: financial institutions that are passing along the cost of complying with new regulatory burdens or are pulling out of certain markets altogether.
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Mortgage Market's QM/Ability to Repay Rule
Banks and mortgage lenders initially embraced the Qualified Mortgage rule, which requires them to consider borrowers' the ability to repay home loans. For a mortgage to quality under the rule, it must not burden a borrower with a debt-to-income ratio in excess of 43%. When the rule goes into effect next January, the cost of originating a loan that does not meet the QM definition is expected to rise dramatically. That will likely take the form of higher interest rates and fees charged by lenders to compensate for additional legal liabilities associated with non-QM mortgages. The QM rule also creates new quality control requirements that will add to lenders' costs and imposes severe penalties on those who fail to comply.
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Auto Lending Crackdown
The CFPB has said it will crack down on auto lenders after research found a disparity in interest rate markups for minorities. After the CFPB issued a warning in March, auto dealers fired back, saying they would have to pass along to customers in the guise of higher interest rates the cost of increased scrutiny compliance.
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Toughened Mortgage Servicing Rules
Mortgage servicers are required beginning in by January 2014 to comply with more than a dozen "common-sense" rules that they say will radically increase the cost of servicing defaulted loans. Servicers also face penalties for missing certain CFPB deadlines, such as a requirement to review and respond to any completed loss mitigation application within 30 days.
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Money Transfer Fees
The CFPB is drafting a new remittance rule that could result in far higher fees for workers sending money abroad. Bankers will be required to keep track of recipient bank fees and foreign taxes - a burden that small banks say could force them out of the business entirely. Banks also are concerned about being held liable for fraud and simple mistakes, such as instances when senders give incorrect information and funds are remitted go to the wrong foreign accounts.
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Mortgage Disclosures
The CFPB wants mortgage lenders to provide with written estimates of a loan's terms and closing costs to consumers, in part so they can shop around. That has not been the outcome of the uniform disclosures required by the Truth in Lending Act or the Real Estate Settlement Procedures Act. Because the CFPB's current proposal allows "zero tolerance" for lowball estimates of fees that will be charged by unaffiliated service providers, lenders have increased such fees to ensure they are in compliance and cover related costs.
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Jumbo and Interest-Only Mortgages
David Stevens, the head of the Mortgage Bankers' Association, estimates that 22% to 25% of jumbo loans have debt-to-income ratios above 43%, excluding them from the Qualified Mortgage rule's definition of an ultra-safe home loan. Interest-only loans are prohibited under QM. That means buyers of high-priced homes will face higher lending costs or may have to post much larger down payments. Borrowers with low-balance loans could also be hurt.
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Cost-Benefit Analysis
In its defense, the CFPB says that it is required by the Dodd-Frank Act to consider the "potential benefits and costs" of each rule it promulgates. It is required every five years to conduct a study of the effectiveness of each significant rule including whether higher costs are having an impact on consumers.
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