The Biden administration is expanding its crackdown on junk fees, this time setting its sights on the mortgage industry.
The Consumer Financial Protection Bureau (CFPB) cites particular concern about the rising costs of home purchase loans, which surged nearly 22% from 2021 to 2022. In other words, closing costs rose nearly $1,000 to an average $5,954, the largest annual increase dating back to 2018.
At the same time, closing costs for a refinance skyrocketed 49% and reached an average $4,979. Closing costs were found to have an outsized impact on first-time homebuyers — as well as lower-income borrowers — with nearly 15% of them paying closing costs which exceeded their down payment, the CFPB revealed.
Closings costs typically include origination fees, appraisal, credit report fees, title insurance, discount points and other fees.
“Costs for homeowners are driven up if companies in the mortgage industry can pad their profits with illegal junk fees,” the agency said. “The CFPB is working to combat the proliferation of junk fees in consumer financial markets and to ensure that mortgage companies don’t tack on unlawful fees.”
The figures underscored what we know to be true: Mortgage fees and costs have risen significantly in recent years.
Though most of the uptick is due to rising home prices and mortgage rates, it raised concerns that some of the increase could be driven by misleading junk fees. Specifically, the consumer watchdog pointed to discount points and title insurance as possible havens of unfair or excessive charges.
The statement has drawn mixed reactions from housing experts.
“I would never include points in the grouping of junk fees,” Jason Sharon, owner of Home Loans Inc. in South Carolina, told Yahoo Finance. “But historically, I have not recommended discount points in a year or so because in so many cases they are a waste of money.”
Are discount points junk fees? The suggestion is ‘baffling,’ said some experts
Over the past year, more and more homebuyers have turned to discount points to bring down their mortgage rate.
Nearly 59% of purchase mortgage borrowers paid discount points last year, according to a separate analysis by Freddie Mac. That’s up from 31% in 2021 and 54% in 2022.
The trend was even more pronounced among people refinancing their mortgage, with more than 82% of cash-out refinancers and almost 60% of non-cash-out refinancers opting to buy down their rate.
Discount points are fees paid upfront at closing to get a small percentage knocked off the interest rate, and yes — they’ve been climbing. But that’s mainly due to the significant jump in interest rates over recent years, as they’ve vaulted from ultra lows of 3% to 23-year highs of 7%.
But ultimately, buying discount points made only a negligible difference for many buyers. Through November, Freddie Mac found that the average rate for purchase borrowers paying discount points was 6.61%, versus 6.69% for those who didn’t pay points.
“The result seems to suggest that paying discount points may not be worth it from the consumers’ point of view,” Freddie Mac researchers wrote.
That being said, are discount points junk fees as the CFPB suggests?
Not according to the Mortgage Bankers Association (MBA) — as buyers are knowingly paying for points at closing.
“The CFPB’s blog post is baffling and reveals little understanding of how the mortgage market works or awareness of its own regulations that provide for full fee transparency and limits on what can be charged,” MBA’s president and CEO Bob Broeksmit, said in a statement. “The fees mentioned are clearly disclosed to borrowers.”
“The illogical use of the term ‘junk fee’ contradicts even the White House’s own definition, which cites the lack of disclosure of the fee being charged,” he added.
While discount points are not hidden fees, and are required to be disclosed, buyers should be fully informed on whether purchasing them is worth it in the long-term — especially when builders are promoting rate-buydowns as a selling point to lure in rate-sensitive buyers.
“Discount points are not a junk fee, but it’s not always in the interest of the client,” said Jason Anderson, founder of VeteranPCS. “We need to give clients additional options, not steer them or provoke them into [buying points]. Rather give them several options and educate them on the risks and benefits.”
“Interest rates are a sensitive subject right now,” he added. “It’s what prices people out.”
Mortgage borrowers allegedly charged ‘illegal’ convenience fees
The CFPB recently stepped into a lawsuit pending in federal court that it points to as other evidence of junk fees embedded in closing costs.
In Glover and Booze v. Ocwen Loan Servicing, LLC, two borrowers sued over “convenience fees” their mortgage company charged for making payments online or by phone. The CFPB says Ocwen Loan Servicing charged fees ranging from $7.50 to $12 on dozens of occasions — fees the borrowers didn’t agree to when they took out their loan.
Per the Fair Debt Collection Practices Act, borrowers can only be charged for fees agreed to when they took out the loan or those affirmatively permitted by law.
“Ocwen is wrong,” the CFPB wrote in its brief siding with the borrowers. “The agency will continue to do everything we can under law to ensure that illegal junk fees don’t drive prices up in the consumer marketplace.”
‘Interest rates could increase’
If you’re looking for any junk fees tacked onto your closing costs, look at Section A of your loan estimate.
“I like to call this the price tag of the mortgage,” said Sharon. “In that section, a lender places fees that the client cannot shop for, hence forcing them to accept fees that they may not have with another lender. This is revenue for a lender.”
He added: “I have seen zero fees [in Section A], as that is how I run my company, and I have seen tens of thousands of dollars there. Examples of those fees will typically be points, admin fees, underwriting fees, processing fees, and various other fees with similarly innocuous names.”
If you’re curious about any fees you’re asked to pay at closing, ask your lender to discuss these with you before entering an agreement. This should be part of your considerations when shopping for lenders.
Looking forward, should the CFPB take aim at reducing these fees, industry experts predict some lenders may opt to find those lost profits in other ways — mainly by hiking your interest rate.
“If the government attempted to limit those fees, the lenders would increase the interest rates to make more money from that revenue center on the loan,” Sharon said.
Anderson agreed: “The money is coming from somewhere.”
Gabriella Cruz-Martinez is a personal finance and housing reporter at Yahoo Finance. Follow her on X @__gabriellacruz.