The CFPB recently issued a Request for Information Regarding Mortgage Refinances and Forbearances (RFI) Comments on the RFI will be due 60 days after publication in the Federal Register.
In the release announcing the RFI, the CFPB states that the RFI “is an example of the CFPB’s new approach to promoting competition and new products.” “Rather than providing special regulatory treatment of individual firms, the CFPB will seek to identify stumbling blocks for those seeking to challenge the status quo with new products or services.”
With refinances, the CFPB is focusing on whether it can take steps to facilitate beneficial refinances to take advantage of market rate decreases. The CFPB is concerned that the refinance opportunities for borrowers with smaller balance loans may be more limited as the cost to refinance may not outweigh the resulting benefits. The CFPB notes that if there are more limited opportunities to refinance smaller balance loans, Black and Hispanic borrowers and borrowers with low-to-moderate incomes would be disproportionately affected, as they are more likely to own lower value homes. The CFPB observes that “these patterns may have contributed to the much lower rate of refinancing by Black and Hispanic consumers during recent periods of low interest rates.” The CFPB also is concerned about the relative availability of refinance opportunities for consumers in rural areas, whose property might have lower market values than in higher-priced geographic areas.
While refinancing can provide benefits to borrowers, the CFPB observes that “refinancing also can pose risks to consumers. Serial refinancing can be costly and reduce borrowers’ equity in their property. Many targeted and streamlined refinance programs include protections against potential harms associated with refinances, such as requirements that the new loan reduce the consumer’s monthly payment and interest rate by certain threshold amounts and seasoning requirements.”
The CFPB notes that as part of its monitoring of the mortgage market, “some stakeholders suggested that changes to the Bureau’s ability-to-repay/qualified mortgage rule (ATR-QM rule) could play a role in facilitating beneficial refinances through targeted and streamlined programs, citing the current rule as contributing to some existing frictions to refinancing.” Pursuant to the general ATR requirements, a creditor must consider and verify eight underwriting factors, including the consumer’s current or reasonably expected income or assets and current employment status. Pursuant to QM requirements, a creditor must consider and verify the consumer’s income or assets relied on in making the loan. The ATR-QM rule does not provide for relaxed requirements in connection with a streamlined refinance loan that simply reduces the interest rate and monthly payment.
According to the CFPB, “research has suggested that frictions in the refinance process, including potentially documentation requirements under the ATR-QM rule, may limit some refinancing opportunities that could benefit consumers. In the course of the Bureau’s market monitoring, some stakeholders have asserted that it may be appropriate to address those frictions in some circumstances in which borrowers would receive a demonstrated benefit from refinancing, such as lower interest rates or lower monthly payments, and where other protections are in place, such as protections against serial refinances.”
In the release announcing the RFI, the CFPB stated “refinancing volume has dropped dramatically, down almost 70% from , as interest rates have risen. New streamlined and automatic refinancing mortgage products could make sure that those buying a home now, or refinancing to cover other needs, are able to benefit from the next interest rate drop.”
The CFPB notes that some creditors have introduced new mortgage loan products to promote beneficial refinances, such as offering reduced closing costs for future refinances with the same lender. The CFPB raises the potential of two additional loan products. One is an “auto-refi” mortgage, which the CFPB describes as “a mortgage loan that provides for automatic or streamlined refinancing in the future when certain market conditions are met, with little or no affirmative action by the consumer.” The other is a “one-way adjustable rate mortgage” or “one-way ARM.” The CFPB states that a one-way ARM could provide for automatic interest rate decreases when market rates decrease, but would not provide for rate increases. A variation of this product would provide for an interest rate that automatically fluctuates with market rate changes, but the rate would never exceed the original rate.
Among other matters, the CFPB seeks comment on:
• Barriers to refinancing, including the extent to which large fixed costs of refinancing and limited profitability for smaller loan balances limit beneficial refinances, and what policies could lower costs for such refinances.
• How the CFPB can support industry efforts to facilitate beneficial refinances through targeted and streamlined refinance programs.
•The protections that should be included in refinance programs to ensure consumer benefits, such as requirements for lower rates and payments, loan term limits, serial refinancing limits, and requirements to refinance a borrower into a more stable loan product.
• Whether the CFPB should amend its rules, including the ATR-QM rule, to encourage beneficial refinances while preserving important protections for consumers, and the risks and benefits of amending the ATR-QM rule requirement that a creditor must consider and verify a consumer’s income or assets.
• The products or programs that lenders have introduced to attempt to facilitate refinances.
• The benefits and drawbacks of loans that provide for automatic refinances under specified conditions, and “one-way ARMs” that provide for interest rate decreases under specified conditions, but do not provide for rate increases, or that provide for rate changes with market changes, but never above the original rate.
• Whether market factors or practical difficulties, including secondary market liquidity and mortgage-backed securities investor interests, preclude the development of auto-refi mortgages or one-way ARMs.
• Whether the CFPB should amend the ATR-QM rule or other rules to permit or encourage creditors to offer auto-refi mortgages or one-way ARMs.
• Whether there are other new products that creditors could feasibly develop to allow more borrowers to receive the benefits of reduced mortgage interest rates.
Forbearances and Loss Mitigation
With forbearances and loss mitigation, the CFPB notes the relative success of CARES Act forbearances and similar forbearances, along with the related long-term loss mitigation efforts that were implemented. The CFPB is focusing on whether it should take steps to spur automatic and streamlined short and long-term loss mitigation efforts for borrowers impacted by temporary financial hardship in general, and not just related to the pandemic. The CFPB “is particularly interested in receiving information about what features of these COVID-era short and long-term loss mitigation programs should be made more generally available to borrowers, and in particular, if there are ways to automate and streamline the offering of short and long-term loss mitigation solutions. The Bureau is interested in ensuring that homeowners who are economically affected by events such as natural disasters are able to receive timely payment relief that could help them avoid foreclosure.”
Among other matters, the CFPB seeks comment on:
• The benefits and drawbacks of automating and streamlining short and long-term loss mitigation efforts.
• If such automation and streamlining is incorporated into new loan products, the manner in which such products should be structured and the features that should be established, such as the note, contracts between investors and servicers, or CFPB or other federal regulations.
• The circumstances under which short or long-term loss mitigation solutions should be offered automatically.
• For example, whether forbearance should be offered automatically upon the declaration of a national emergency or presidentially declared disaster, when unemployment rates in the consumer’s locality reach a certain level, when a borrower loses their job, when a co-borrower on the loan dies, or under other circumstances.
• Whether any factors should be considered regarding these circumstances.
• Whether any documentation from the consumer should be required in any of these circumstances.
• With short-term loss mitigation options, whether there is a tension between the goal of offering temporary immediate payment relief and the goal of ensuring that the balance owed does not grow so large as to make long-term loss mitigation solutions difficult to achieve.
• Whether changes should be considered relating to the impact forbearances and other short-term loss mitigation solutions would have on a consumer’s credit reporting.
• Whether the CFPB mortgage servicing regulations, such as those relating to communications with delinquent borrowers, the CFPB’s regulatory definition of delinquency, and the loss mitigation process in general, would have any impact on automating and streamlining short and long-term loss mitigation offers.
• When considering the potential automation and streamlining of short and long-term loss mitigation efforts, whether there would be advantages or drawbacks if more creditors retained the servicing of the loan.
• Other than the mortgage products already mentioned in the RFI, whether there are there other mortgage products or features of mortgage products that could help borrowers weather various financial shocks.