WEBVTT NOTE This file was generated by Descript 00:00:00.470 --> 00:00:02.400 Samantha: Hello, this is Samantha Shares. 00:00:03.050 --> 00:00:07.400 This episode covers the Prepared Remarks of CFPB Director Rohit Chopra 00:00:07.400 --> 00:00:09.230 at the National Housing Conference 00:00:09.875 --> 00:00:11.655 SEPTEMBER 9, 2024 00:00:12.424 --> 00:00:15.094 The following is an audio version of those remarks. 00:00:15.604 --> 00:00:18.824 This podcast is educational and is not legal advice. 00:00:19.294 --> 00:00:23.264 We are sponsored by Credit Union Exam Solutions Incorporated, whose 00:00:23.264 --> 00:00:26.314 team has over two hundred and Forty years of National Credit 00:00:26.314 --> 00:00:28.214 Union Administration experience. 00:00:28.694 --> 00:00:32.304 We assist our clients with N C U A so they save time and money. 00:00:32.804 --> 00:00:36.774 If you are worried about a recent, upcoming or in process N C U A 00:00:36.774 --> 00:00:41.094 examination, reach out to learn how they can assist at Mark Treichel DOT COM. 00:00:41.524 --> 00:00:45.884 Also check out our other podcast called With Flying Colors where we provide tips 00:00:45.884 --> 00:00:48.454 on how to achieve success with N C U A. 00:00:49.178 --> 00:00:50.348 And now the remarks. 00:00:50.978 --> 00:00:55.858 Prepared Remarks of CFPB Director Rohit Chopra at the National Housing Conference 00:00:56.456 --> 00:00:58.256 SEPTEMBER 9, 2024 00:00:59.015 --> 00:01:02.675 Interest rates are a major driver of decision-making in our economy. 00:01:03.235 --> 00:01:07.175 In board rooms and at kitchen tables, many are wondering how much today’s 00:01:07.175 --> 00:01:08.825 high interest rates will fall. 00:01:09.315 --> 00:01:12.405 For families, interest rates are often what makes or breaks 00:01:12.405 --> 00:01:13.745 the math on their mortgage. 00:01:14.500 --> 00:01:18.260 Today, I want to discuss mortgage refinancing, and whether falling 00:01:18.260 --> 00:01:21.840 interest rates will actually translate into tens of billions of dollars 00:01:21.840 --> 00:01:23.810 of savings for existing homeowners. 00:01:24.290 --> 00:01:27.610 First, I’ll discuss the state of play and the outlook for the mortgage 00:01:27.610 --> 00:01:31.790 refinancing market, including the stakes of refinancing in the coming months 00:01:31.790 --> 00:01:33.750 for both homeowners and the economy. 00:01:34.420 --> 00:01:38.240 Then, I’ll discuss some of the obstacles and complexities that homeowners and 00:01:38.240 --> 00:01:40.660 lenders face, like high closing costs. 00:01:41.130 --> 00:01:44.400 I’ll close with some steps that the CFPB and the marketplace 00:01:44.400 --> 00:01:47.760 should take to ensure that families don’t miss out on falling rates. 00:01:48.406 --> 00:01:51.706 My remarks today do not constitute legal interpretation, 00:01:51.746 --> 00:01:54.046 guidance, or advice of the CFPB. 00:01:54.586 --> 00:01:58.666 Any opinions or views stated are my own and may not represent the views 00:01:58.666 --> 00:02:00.836 of the CFPB or Federal Reserve. 00:02:01.626 --> 00:02:05.876 Today’s Mortgage Refinancing Market and the Expectation of Lower Rates Ahead 00:02:06.650 --> 00:02:10.160 While we often focus on homeownership as a vehicle for accumulating 00:02:10.160 --> 00:02:13.970 wealth, a well-timed mortgage refinance can make a major difference 00:02:13.970 --> 00:02:15.540 in a family’s financial life. 00:02:16.130 --> 00:02:20.300 During the pandemic, mortgage interest rates fell to new lows in 2021. 00:02:20.840 --> 00:02:24.930 Many families buying a home were able to lock in rates below 3 percent and, 00:02:25.060 --> 00:02:29.520 unsurprisingly, the mortgage industry generated massive volumes of refinancing 00:02:29.520 --> 00:02:34.280 savings for homeowners who had the credit profile, the income, and the home equity 00:02:34.280 --> 00:02:36.100 to take advantage of the opportunity. 00:02:36.620 --> 00:02:40.560 Researchers at the Federal Reserve Bank of Boston found that total consumer 00:02:40.560 --> 00:02:45.560 savings from mortgage refinancing from January 2020 to October 2020, during 00:02:45.560 --> 00:02:51.030 the refinancing boom, was $5.3 billion annually, with the typical household 00:02:51.030 --> 00:02:56.170 saving $279 a month, which adds up to thousands of dollars per year. 00:02:56.888 --> 00:03:00.768 But after a series of rate increases by the Federal Reserve, mortgage 00:03:00.768 --> 00:03:05.108 interest rates in October 2023 hit highs not seen since 2000. 00:03:05.558 --> 00:03:08.808 Rates have risen over five percentage points since bottoming out in 00:03:08.808 --> 00:03:16.158 January 2021 at 2.65 percent, peaking at 7.79 percent in October 2023. 00:03:16.658 --> 00:03:20.868 Since then, rates have eased to 6.35 percent as of last year. 00:03:21.614 --> 00:03:26.784 A mortgage payment on a $400,000 loan is $877 higher 00:03:26.784 --> 00:03:29.274 today compared to January 2021. 00:03:29.834 --> 00:03:35.064 A homebuyer who took out a $400,000 mortgage in January 2021 paid roughly 00:03:35.064 --> 00:03:38.134 $1,600 a month in principal and interest. 00:03:38.664 --> 00:03:42.454 That same mortgage would cost nearly $2,500 a month today. 00:03:43.204 --> 00:03:47.254 Unsurprisingly, the refinance volume for the first half of 2024 00:03:47.384 --> 00:03:49.434 was the lowest in nearly 30 years. 00:03:50.183 --> 00:03:53.083 Currently, more than a fifth of all mortgages have interest 00:03:53.083 --> 00:03:54.543 rates above 5 percent. 00:03:55.143 --> 00:03:59.693 Of these 12.2 million mortgages, 7 million are above 6 percent and 00:03:59.693 --> 00:04:03.623 approximately 60 percent of those were originated in the last two years. 00:04:04.355 --> 00:04:07.665 That means that as interest rates decline, millions of borrowers 00:04:07.665 --> 00:04:09.345 could benefit from refinancing. 00:04:09.925 --> 00:04:14.305 One analysis suggests that about 2.5 million borrowers could refinance 00:04:14.305 --> 00:04:17.355 at today’s rates and see their interest rates decrease by at 00:04:17.355 --> 00:04:18.995 least three quarters of a percent. 00:04:19.585 --> 00:04:24.165 If interest rates fell another point to 5.5 percent, more than 7 million 00:04:24.165 --> 00:04:25.915 borrowers could potentially benefit. 00:04:26.595 --> 00:04:30.015 Further reductions would increase the addressable market even further. 00:04:30.345 --> 00:04:34.035 Using predicted interest rates derived from futures markets, I 00:04:34.035 --> 00:04:37.425 expect that mortgage refinancing will increase modestly in the 00:04:37.425 --> 00:04:39.335 near-term and then more rapidly. 00:04:40.044 --> 00:04:43.144 The potential for refinancing has significant implications 00:04:43.144 --> 00:04:46.474 for economic growth as well as for individual homeowners. 00:04:46.914 --> 00:04:51.384 Refinancing frees up homeowners’ finances to engage in other types of spending. 00:04:51.834 --> 00:04:55.304 As a result, a meaningful increase in refinance activity could 00:04:55.304 --> 00:04:58.834 represent billions of dollars in additional economic activity. 00:04:59.612 --> 00:05:03.142 However, the CFPB is concerned that many homeowners will not 00:05:03.142 --> 00:05:04.602 benefit from the lower rates. 00:05:05.182 --> 00:05:09.762 According to some analyses, in past refinancing cycles, minority homeowners 00:05:09.792 --> 00:05:13.832 were less likely to benefit, even when considering differences in income, 00:05:14.012 --> 00:05:16.072 home equity, and credit profiles. 00:05:16.652 --> 00:05:21.002 We also know that incentives in the market tend to favor refinancing higher balance 00:05:21.002 --> 00:05:25.002 mortgages, leaving out many homeowners from less affluent neighborhoods. 00:05:25.462 --> 00:05:30.352 Consider that while millions of homeowners locked in historically low rates in 2021, 00:05:30.492 --> 00:05:34.742 millions of other borrowers did not, either by choice or by circumstance. 00:05:35.032 --> 00:05:38.982 For some, that missed opportunity represents thousands of dollars each year. 00:05:39.372 --> 00:05:42.372 Ensuring that a broad swath of homeowners can benefit this 00:05:42.372 --> 00:05:43.812 time around will be critical. 00:05:44.572 --> 00:05:46.272 Obstacles to Refinancing 00:05:46.914 --> 00:05:51.094 Since the mortgage crisis, the CFPB, our colleagues across the Federal 00:05:51.094 --> 00:05:54.814 Reserve System, and other agencies have closely looked at borrower 00:05:54.814 --> 00:05:56.414 behavior in the mortgage market. 00:05:57.044 --> 00:06:00.564 As many of you know, the decision to refinance can often feel fraught. 00:06:01.312 --> 00:06:04.802 There are many questions homeowners might mull over before refinancing, 00:06:04.882 --> 00:06:09.022 like whether rates will fall further, whether to take out cash, or how changes 00:06:09.022 --> 00:06:10.782 in their income will affect their rate. 00:06:11.332 --> 00:06:14.032 But there are two main factors that make this decision so 00:06:14.032 --> 00:06:15.982 difficult: cost and complexity. 00:06:16.552 --> 00:06:20.082 The expense and burden of the refinancing process makes the decision 00:06:20.082 --> 00:06:24.352 far more consequential for homeowners, and serve as a barrier to robust 00:06:24.352 --> 00:06:26.612 refinancing in a lower rate environment. 00:06:27.299 --> 00:06:30.719 The CFPB is concerned that closing costs can prove to be a 00:06:30.719 --> 00:06:33.049 significant obstacle to refinancing. 00:06:33.509 --> 00:06:36.659 Closing costs are the set of fees that are charged to the borrower 00:06:36.659 --> 00:06:38.259 when a mortgage is finalized. 00:06:38.649 --> 00:06:41.459 For purchase mortgages, we know that excessive closing 00:06:41.459 --> 00:06:43.129 costs can drain a downpayment. 00:06:43.629 --> 00:06:47.309 For refinance mortgages, closing costs also have high stakes. 00:06:47.679 --> 00:06:51.019 Because they can add up to several percentage points of the total mortgage 00:06:51.019 --> 00:06:55.269 amount, this means that it won’t make sense for borrowers to refinance unless 00:06:55.269 --> 00:06:58.739 the offered interest rate is substantially lower than their current rate. 00:06:59.229 --> 00:07:02.819 In other words, these one-time charges can cancel out the savings from 00:07:02.819 --> 00:07:04.889 a small or modest rate reduction. 00:07:05.677 --> 00:07:08.947 Advocates for high closing costs defend the status quo on the 00:07:08.947 --> 00:07:10.807 basis that costs are disclosed. 00:07:11.377 --> 00:07:15.257 Federal law and regulations require closing costs to be disclosed, 00:07:15.557 --> 00:07:16.997 but this seems to miss the point. 00:07:17.597 --> 00:07:21.207 Disclosure helps consumers compare, but many of the fees are not 00:07:21.207 --> 00:07:22.997 subject to robust competition. 00:07:23.567 --> 00:07:26.257 While it is better to disclose a rip-off than to hide it, 00:07:26.567 --> 00:07:27.977 it may still be a rip-off. 00:07:28.537 --> 00:07:32.037 Indeed, we have found instances of monopolistic practices that 00:07:32.037 --> 00:07:36.137 drive up closing costs on items like credit reports, FICO scores, 00:07:36.237 --> 00:07:37.687 and employment verification. 00:07:38.390 --> 00:07:41.790 Many borrowers looking to refinance are particularly puzzled when it 00:07:41.790 --> 00:07:45.420 comes to purchasing a new title insurance policy for their lender that 00:07:45.420 --> 00:07:47.480 sometimes costs thousands of dollars. 00:07:47.950 --> 00:07:52.070 Even though these borrowers typically do not lose their owner’s title insurance if 00:07:52.070 --> 00:07:56.040 they purchased a policy when they bought their home, the policy does not carry 00:07:56.040 --> 00:07:58.180 over to a new lender when they refinance. 00:07:58.890 --> 00:08:02.750 The CFPB believes that this and other closing costs are harmful to both 00:08:02.750 --> 00:08:06.480 lenders and borrowers, given how they reduce the pool of mortgages 00:08:06.480 --> 00:08:08.320 that can benefit from refinancing. 00:08:09.072 --> 00:08:12.142 Lenders face other obstacles for refinancing, too. 00:08:12.732 --> 00:08:17.422 For example, under existing law and under certain investor requirements, lenders 00:08:17.422 --> 00:08:21.142 are required to redo some of the same steps that were completed by the borrower 00:08:21.142 --> 00:08:22.832 when they first purchased their home. 00:08:23.362 --> 00:08:26.272 While the cost of many of these steps may be falling with greater 00:08:26.272 --> 00:08:30.882 automation and artificial intelligence, the repeated steps add complexity 00:08:30.982 --> 00:08:32.482 and the potential for errors. 00:08:33.221 --> 00:08:36.361 There may be more pernicious barriers to refinancing as well. 00:08:36.941 --> 00:08:41.031 For example, disparities in refinance activity for Black homeowners raise 00:08:41.031 --> 00:08:44.631 a number of potential questions, including questions about the use of 00:08:44.691 --> 00:08:49.121 artificial intelligence in the marketing, appraisal, and underwriting processes. 00:08:49.781 --> 00:08:51.161 CFPB Actions 00:08:51.785 --> 00:08:56.405 To prepare for the easing of interest rates, the CFPB launched an effort to find 00:08:56.405 --> 00:08:58.775 ways to spur more mortgage refinancing. 00:08:59.305 --> 00:09:02.745 We also separately solicited public input on ways to reduce 00:09:02.745 --> 00:09:04.315 the burden of closing costs. 00:09:04.935 --> 00:09:08.995 We received a wide range of input, and we are pursuing a number of steps. 00:09:09.705 --> 00:09:10.865 Here are a few of them: 00:09:11.655 --> 00:09:15.775 First, the CFPB will be closely watching the implementation of new mortgage 00:09:15.775 --> 00:09:19.995 technology, including applications marketed as utilizing artificial 00:09:19.995 --> 00:09:25.005 intelligence.1 There are some novel uses of data, including generative AI, 00:09:25.095 --> 00:09:27.275 in many stages of the mortgage process. 00:09:27.775 --> 00:09:31.085 Advances in technology have the potential to help lenders lower 00:09:31.085 --> 00:09:34.955 costs and reach more individuals who could qualify for refinancing. 00:09:35.445 --> 00:09:39.135 We want to see this work in ways that benefit borrowers and the economy. 00:09:39.900 --> 00:09:44.150 However, if executed poorly, new mortgage technology could exacerbate 00:09:44.150 --> 00:09:46.250 disparities or make people worse off. 00:09:46.890 --> 00:09:50.780 We are on the lookout for how new mortgage tech can contribute to discrimination, 00:09:50.840 --> 00:09:53.080 collusion, or other illegal activity. 00:09:53.600 --> 00:09:57.910 We have repeatedly made clear that there is no “fancy technology” exception in our 00:09:57.910 --> 00:10:00.480 consumer protection and fair lending laws. 00:10:01.060 --> 00:10:04.700 In addition, we have finalized new rules on algorithmic appraisals. 00:10:05.230 --> 00:10:08.830 Importantly, the CFPB now has technologists embedded across 00:10:08.830 --> 00:10:12.460 our functions, and we are more prepared than ever to identify 00:10:12.460 --> 00:10:14.360 and prosecute violations of law. 00:10:15.022 --> 00:10:18.932 Second, the CFPB is exploring whether we should make certain changes to 00:10:18.932 --> 00:10:22.352 the existing mortgage regulations to streamline the refinancing 00:10:22.352 --> 00:10:24.872 process and to reduce closing costs. 00:10:25.342 --> 00:10:29.482 When an existing or competing lender is seeking to refinance a loan with a much 00:10:29.482 --> 00:10:33.962 lower rate for a substantially similar mortgage, it may not be worthwhile for the 00:10:33.962 --> 00:10:37.912 lender to repeat many of the steps that were taken during the purchase process. 00:10:38.332 --> 00:10:42.542 We are especially interested in the costs and time taken to refinance a mortgage 00:10:42.542 --> 00:10:46.792 that are exclusively related to complying with federal mortgage law, rather than 00:10:46.792 --> 00:10:48.882 steps that are demanded by investors. 00:10:49.292 --> 00:10:53.122 We will also be identifying ways to jumpstart competition in various 00:10:53.122 --> 00:10:57.072 closing costs, which can also help spur refinancing activity. 00:10:57.791 --> 00:11:02.161 Third, the CFPB is pursuing rules to accelerate the shift to “open 00:11:02.161 --> 00:11:03.941 banking” with mortgages in mind. 00:11:04.591 --> 00:11:08.791 Next month, I expect we will finalize our initial rule on Personal Financial 00:11:08.791 --> 00:11:13.771 Data Rights, under Section 1033 of the Consumer Financial Protection Act. 00:11:14.531 --> 00:11:18.581 This initial rule will empower people to permission their personal financial data 00:11:18.611 --> 00:11:22.821 to lenders in ways that will reduce the costs of underwriting over the long term. 00:11:23.111 --> 00:11:27.141 Mortgage lenders would also have greater ability to use a family’s cash flow 00:11:27.141 --> 00:11:30.791 in the underwriting process, since borrowers could more easily share 00:11:30.791 --> 00:11:32.931 data on their income and expenses. 00:11:33.491 --> 00:11:36.761 After this initial rule, I expect there to be additional rules to 00:11:36.761 --> 00:11:40.481 cover more use cases for open banking, including for mortgages. 00:11:41.001 --> 00:11:44.741 I am especially interested in ways consumers could more easily permission 00:11:44.811 --> 00:11:48.601 other types of data, such as their credit score, rather than making 00:11:48.661 --> 00:11:50.381 every competing lender purchase it. 00:11:51.199 --> 00:11:55.149 Of course, we are also putting greater thought into and conducting analysis 00:11:55.149 --> 00:11:58.699 on product features and practices that could further reduce the friction 00:11:58.699 --> 00:12:02.769 homeowners face when seeking to achieve a lower mortgage rate or payment. 00:12:03.349 --> 00:12:05.999 These actions will complement other efforts across the 00:12:05.999 --> 00:12:08.039 housing and regulatory agencies. 00:12:08.803 --> 00:12:09.503 Conclusion 00:12:10.198 --> 00:12:13.898 In closing, markets are predicting that interest rates are headed downward. 00:12:14.488 --> 00:12:18.278 With next week’s September meeting of the Fed’s Federal Open Market Committee, 00:12:18.628 --> 00:12:22.358 many in the housing industry are focused on whether lower interest rates will 00:12:22.358 --> 00:12:26.628 help to spur more construction of units in markets facing supply shortages. 00:12:27.188 --> 00:12:30.378 But there is a significant open question about whether the benefit of 00:12:30.378 --> 00:12:34.258 lower interest rates will alleviate the high monthly costs of mortgages 00:12:34.298 --> 00:12:38.218 for those with high rates, including those taken out in recent years. 00:12:38.648 --> 00:12:42.508 If we can collectively refinance millions of mortgages in neighborhoods across 00:12:42.508 --> 00:12:47.208 the country, it will be a huge boost for those families and their local economies. 00:12:47.864 --> 00:12:50.964 This concludes the prepared remarks of the C F P B. 00:12:51.650 --> 00:12:55.930 If your Credit union could use assistance with your exam, reach out to Mark Treichel 00:12:55.930 --> 00:12:58.560 on LinkedIn, or at mark Treichel dot com. 00:12:59.130 --> 00:13:01.780 This is Samantha Shares and we Thank you for listening.