Under new rules proposed by the Consumer Financial Protection Bureau (CFPB), mortgage lenders would have to start offering homeowners and potential buyers the option to obtain a no-fee refinance loan. According to the Richard Cordray, the CFPB’s director, comparing fees and points for an assortment of loan products presents a challenge for most borrowers.
"We want to provide consumers with clearer options and enable them to choose the loan that they believe is right for them," said Cordray. As a consequence of the financial collapse in 2008, the Dodd-Frank Act gave the U.S. Congress authority to create the Consumer Financial Protection Bureau -- a financial services watchdog, which has the mission of cleaning up the residential mortgage industry.
As its responsibilities relate to mortgages, CFPB wants to make the process more transparent and accountable for potential home buyers and homeowners to mortgage refinance.
Purpose of Mortgage Proposal
The CFPB’s reasoning behind requiring lenders to make no-fee refinance options available to borrowers who qualify for the loans is to “enable a consumer buying or refinancing a home to better compare competing offers from different creditors… and decide whether they would receive an adequate reduction in monthly loan payments in exchange for the choice of making upfront payments.”
In addition, the rules force lenders to reduce mortgage interest rates for borrowers who choose to pay the fees and points upfront. Regardless of the name chosen for the charges, each expense must have the intent of reducing the loan’s interest rate, which lowers the monthly payment.
Understanding No-Fee Refinance
A no-fee mortgage loans does not mean the borrower avoids the costs of obtaining a home loan or refinancing an existing mortgage. The mortgage lender pays the settlement charges for the borrower, including the mortgage broker’s fee.
Lenders have a limit on what costs they will pay, which usually includes the following items:
- Property tax and insurance escrow
- Real estate transfer taxes
- Owner’s title insurance
- Per diem interest
- Homeowners’ insurance
Borrowers who qualify and select a no-fee refinance product do not have to pay traditional settlement costs at the closing table, but they end up paying for the costs over the period of the mortgage, along with the interest lenders charge for financing loan expenses. The bank calculates the cost for making the loan based on the amount of the settlement cost. To calculate and compare mortgage points use our Mortgage Points Calculator.
Selecting the no-fee refinance makes comparing products simple because the borrower doesn’t’ have to bother with making comparisons for an array of costs. Nonetheless, paying a higher interest rate over a long term may not work to the borrower’s benefit. Borrowers who choose a 20-year or 30-year fixed-rate mortgage product should consider paying higher upfront costs and getting a mortgage with a lower interest rate.
One CFPB official compares the coming changes as a cross between an outright ban on fees and existing loan origination practices. Some housing advocates and mortgage industry professionals support consumers having a choice of paying more upfront charges to obtain a lower interest rate on their loans.
The mortgage proposal will also make the qualification and screening criteria for all mortgage originators uniform. The rules would prohibit incentive payments for steering borrowers and restrict credit insurance and arbitration clauses. The CFPB’s proposal has a 60-day comment period in which the public can respond. The agency plans to have final rules in place sometime in January 2013.
The mortgage proposal differs from a plan put forth by the CFPB in May that would have place and total prohibition on origination fees that were not flat.