Junk fees are driving up housing costs. The CFPB wants to hear from you.
March 10, 2024 / Source: CFPB
Families who manage to save up for a down payment and get approved for a mortgage often get an unwelcome surprise: closing costs that all too often are full of junk fees. Closing costs are the fees you pay on the day you finalize the purchase of your home, and they include things like title insurance, credit report and appraisal fees, origination fees, and more. The Consumer Financial Protection Bureau (CFPB) is working to ensure that consumers can navigate the closing process more easily, shop around, and save money.
Closing costs have risen, putting pressure on borrowersâ budgets
While home prices and interest rates often command our attention, closing costs also contribute to borrowersâ monthly burdens. One measure of closing costs is total loan costs. Total loan costs include origination fees, appraisal and credit report fees, title insurance, discount points, and other fees. From 2021 to 2022, median total loan costs rose sharply, increasing by 21.8 percent on home purchase loans.
In 2022, the median amount paid by borrowers was nearly $6,000 in these costs and fees. Thatâs a substantial upfront cost on what is already a major financial undertaking. Homeowners can choose to pay closing costs out of pocket, but that can reduce their down payment amount. Lenders sometimes give borrowers a âcreditâ to cover closing costs, but then charge the borrower a higher interest rate on the mortgage. Sometimes sellers pay closing costs but increase the sale price on the home. Often, closing costs are simply rolled into the total loan amount, racking up interest for the life of the loan. Borrowers who can’t bring cash to the table often have to pay more, through higher interest rates or mortgage insurance payments.
Many of these costs are fixed and do not fluctuate with interest rates or change based on the size of the loan. As a result, they have an outsized impact on borrowers with smaller mortgages, such as lower income borrowers, first-time homebuyers, and borrowers living in Black and Hispanic communities. A 2021 study found that nearly 15 percent of lower income homebuyers had closing costs that exceeded the amount of their down payment.
We are paying particular attention to the recent rise in discount points. A higher percentage of borrowers reported paying discount points in 2022 than any other years since this data point was first reported in 2018. In 2022 about 50.2 percent of home purchase borrowers paid some discount points, up from 32.1 in 2021. Borrowers are also paying more in discount points. The median discount points paid for home purchase loans in 2022 was $2,370 in 2022, up from $1,225 in 2021. Lenders sell discount points to borrowers to reduce interest rates. These points may not always save borrowers money, however, and may indeed add to borrowers’ costs. The CFPB is continuing to monitor market trends in this area.
Lack of competition and choice may add to already rising housing costs
It appears that some closing costs are high and increasing because there is little competition. Borrowers are required to pay for many of the costs associated with closing a home loan but cannot pick the provider and do not benefit from the service. In many cases, the lender simply picks from a very small universe of providers, and the costs are then passed on to the borrower.
Lenderâs title insurance is one example of a fee borrowers face at closing where the borrower has no control over cost. Title insurance is meant to protect against someone else laying claim to a borrowerâs property. A lenderâs title insurance policy protects only the lender against these possible claims, not the borrower. Instead of paying this fee themselves, lenders make borrowers pay the cost. The amount that borrowers pay for lender’s title insurance is often much greater than the risk.
Fees for credit reports are another example. The credit reporting industry is highly concentrated, with just a handful of dominant players dictating the price of credit reports and scores. Borrowers pay the fee for lenders to pull credit reports for each loan applicant from three nationwide credit reporting companies. Mortgage lenders have recently reported steep increases in the price of the scores and reports used for mortgage underwriting. The CFPB has heard reports of recent costs spiking 25 percent to as much as 400 percent. At the same time, we estimate that nationwide credit reporting companies made over $1.3 billion annually. These steep increases in a market that lacks competition and choice warrant further scrutiny.
Tell the CFPB how mortgage closing costs affect you
The CFPB is tackling housing affordability using all our tools. We are working on:
- Improving the ability of homeowners to refinance their mortgage when interest rates are favorable.
- Reducing risks for borrowers who fall behind in their mortgage payments.
- Making it easier for consumers to submit debt collection complaints to us about rental housing so that we can address illegal fees and better identify emerging issues like rental payment platforms that target families with junk fees or the use of high-cost loans to pay rent.
In the coming months, the CFPB will continue working to analyze mortgage closing costs, seek public input and, as necessary, issue rules and guidance to improve competition, choice, and affordability. We will also continue using our supervision and enforcement tools to make it safer for people to purchase homes and to hold companies accountable when they violate the law. Our research findings and market insights guide our work, as well as information from consumers that helps us better understand how issues like mortgage closing costs affect households and families.
If you have problem with your mortgage or closing costs and need a response from a company, you can submit a complaint with the CFPB. If you don’t need a response from the company and want to share your experience with us, you can tell your story.