If you truly believe in competitive markets and seek to lower mortgage costs, repeal the LO Comp Rule.
"Mr. Chopra, tear down this wall."
Empathy for the CFPB
I’ll get to that Berlin Wall reference soon enough, but first, as I travel to Washington DC for the MBA Compliance and Risk Management Conference, I need to set the table on my recent high-level observations of the CFPB. Maybe I’m going soft or something, but I find myself today in a place where I am actually feeling a bit sorry for the King Kong of mortgage regulationand its powerful Director, Rohit Chopra. Fundamentally, having to balance anti-poverty concerns and the housing equity needs and demands of the most vulnerable consumers (and their nouveau richely[1]powerfully influential advocates[2]) against CFPB’s broader market mission to “ensure that markets for consumer financial products are fair, transparent, and competitive”[3]is, admittedly, not easy.[4]
Institutional bias towards vulnerable consumers
While not entirely captive, historically, CFPB has had an institutional bias towards the consumer advocacy perspective of Elizabeth Warren: emphasizing how consumer finance can impoverish or harm consumers instead of elevating and enabling better lives. Or, putting that bias in the words used in the title of Warren’s seminal 2007 article, consumer lending is “Unsafe at any Rate”.[5] Even today, many current CFPB staffers are Warren acolytes or former poverty or consumer advocacy group lawyers and staffers with an underdog mentality schooled by a history of representing the vulnerable against the big bad lending industry.
But, CFPB is no underdog. It is the most powerful consumer regulator in history and those powers can and should be used to benefit every consumer. Unfortunately, unlike the 35 community, civil rights, and consumer advocacy organizations writing recently to eliminate junk fees,[6] there is scant[7] mobilization of consumers ready to march on Washington DC to complain to CFPB about the increased marginal costs of housing and consumer finance arising from growing regulatory burdens.[8] That is, there are few effective advocates for all consumers, but CFPB should be that advocate.[9]
CFPB is busy and maturing
Meanwhile, CFPB has been unbelievably busy, especially over the past 6 months or so, with an unprecedented number of proposed rules, community hearings, advisory statements, FAQs, enforcement actions, consent orders, and speeches among many other things.[10]In fact, the pace of new releases from the CFPB’s press office in calendar 2024 alone had to be 3 or 4 times what we saw the entire time since Director Chopra took office. Amidst this huge volume of new things to consider in financial service regulation and enforcement from the CFPB[11], I see signs of CFPB maturing as a regulator, focused more on real consumer harms[12]instead of using shifting and expansive interpretations to enable unfair “gotcha” enforcement actions.
Nevertheless, given Mr. Chopra’s market competition driven consumer protection philosophy, it is remarkable how much emphasis CFPB still places on the “fairness” prong of its mission statement focusing its help on certain consumers and how little the agency actually does to ensure market competition for all consumers. In that regard, I have wondered where Director Chopra’s market driven soul has gone.
Regulatory humility?
Against that backdrop I was somewhat encouraged by Director Chopra’s recent comments at ICE’s National Housing Conference. Chopra’s comments were a mixed bag with the CFPB’s anti-racial bias concerns still cited to limit the use of artificial intelligence to lower costs[13]. But the encouraging news for me was Chopra’s forecast that the CFPB was about to engage in some regulatory self-reflection to lower refinance costs. Specifically, he said, “We are especially interested in the costs and time taken to refinance a mortgage that are exclusively related to complying with federal mortgage law, rather than steps that are demanded by investors.“
I will take him at his word. CFPB humbly asks about the” costs and time taken to refinance a mortgage that are exclusively related to complying with federal mortgage law”? Yes, I have thoughts!!
ATR sure, but how about LO Comp?
Chopra most likely had TILA’s ability to repay rule (ATR) in mind[14]when he said that.[15] But if CFPB is really serious about looking at federal mortgage law and wants to do something meaningful for consumers to lower costs, nothing would be more impactful to the market as a whole than to simply repeal the Loan Originator Compensation Rule (LO Comp). This would benefit both refinance and purchase borrowers equally and would have an immediate (and measurable) impact on lowering mortgage costs for all consumers by facilitating negotiation of commissions.
I know I do not have to repeat for my readers all of the reasons why LO Comp is the competition ruining Berlin Wall of mortgage regulation. LO Comp makes it illegal for mortgage originators to negotiate their own commissions. In other words, LO Comp price fixes a cost that a consumer and lender could otherwise negotiate. Only a Marxist economist would think price fixing is the best way to lower costs and achieve consumer protection.[16] Meanwhile, LO Comp does virtually nothing to prevent steering because the “bad” loans were eliminated by ATR. Likewise, TRID and the internet have made shopping and cost negotiation vastly easier. So, why do we need a rule from the CFPB that prevents negotiation and cost reductions? We don’t.
Take a lesson from the Realtors
Perhaps CFPB is worried that removing fixed commissions for mortgage originators will result in higher commissions. Well, CFPB need only take a quick look at what is happening now with Realtor commissionsand their crumbling wall/dam following the recent antitrust lawsuits. Nothing could be more salient as a real-world example for CFPB’s data team to study: there's your proof that when consumers are enabled to negotiate commissions, it lowers costs. In fact, how is it even possible that Lina Khan’s FTC and Jonathan Kanter’s Justice Department’s antitrust police aren’t right now questioning Chopra and the CFPB for maintaining this anticompetitive commission price fixing scheme in the name of mortgage consumerism? Sorry, but there is no theoretical or practical argument that can be made for the LO Comp Rule enhancing market-based competition. It is simply an anticompetitive regulation that unnecessarily increases costs. So why do we have it?
What’s really at stake?
Many people will say that LO Comp wasn’t really about avoiding steering incentives to bad loans (bad for consumers, but more profitable). Those loans were basically eliminated by ATR. Rather, LO Comp was a way to prevent originators from charging more to minorities (preventing discounting for only white borrowers). So maybe LO Comp is just about fair lending in pricing. As a practical matter, however, all LO Comp did was make it much harder for everyone to negotiate a discount. Besides, we already have fair lending laws that prohibit illegal discrimination in pricing and enhanced HMDA data to see it if that is happening.
What is holding Mr. Chopra back from recognizing this price fixing market impediment? His agency hasn’t had an LO Comp related enforcement action in almost a decade, yet the mortgage industry is spending countless dollars either trying to make sure they comply or to try to get around LO Comp to find ways to lower commission expense. If the lack of enforcement is any indication, CFPB doesn’t see much consumer harm in LO Comp violations. But if there’s no harm in violations, why have the rule?
My challenge to Chopra and CFPB
So, today I’m going to issue a challenge to Director Chopra and CFPB: if you truly believe that transparent competitive markets result in the best consumer outcomes, you need to set aside the well-intentioned but parochial interests confusing consumerism with equity and fairness. Repeal LO Comp to enable competition to reduce costs for all consumers.
Mr. Chopra, tear down thiswall.
[1]These are French words I used to make up an adverb. I know richely is not a word, but you know what I mean. There's more French in footnote #8.
[2] When you go from fighting “the man”, to being “the man”, it can be hard to keep your priors in check.
[3]CFPB describes itself in 2024 as follows:” The Consumer Financial Protection Bureau is a 21st century agency that implements and enforces Federal consumer financial law and ensures that markets for consumer financial products are fair, transparent, and competitive.” In prior years that mission statement claimed CFPB was “data driven”. Should we assume that all 21st century agencies are data driven or is CFPB just no longer data driven?
[4]While fairness in consumer finance is a laudable goal, it is worth noting that there’s nothing in that CFPB mission statement above about focusing on only the most vulnerable consumers or relieving poverty.
[5]For an insightful discussion about the CFPB’s continued interest in poverty see Prepared Remarks of Seth Frotman at the Poverty Law Conference | Consumer Financial Protection Bureau (consumerfinance.gov).
[6]Apparently, one University of San Diego law professor, who was the only individual to sign that letter, thinks of herself as an advocacy organization. I can totally relate.
[7]Sort of like the “scant authority” for the “name and shame” registry that Ballard’s Rich Andreano calls out.
[8] Recently, respected affordable housing and equity advocate, Laurie Goodman of the Urban Institute criticized the CFPB’s junk fee initiative in mortgage lending. Goodman asked CFPB to instead look at areas of regulation (or GSE requirements) that interfere with market competition and efficiency for everyone. In addition to enhancing market shopping through increased cost transparency, Goodman’s blog post focused on streamlining refinances and the Ability to Repay Rule (ATR). Of course, as de rigueur, Goodman’s post also emphasized the potential impact to marginalized communities. But, making refinancing easier is flat out good for all consumers (maybe not so much for the secondary market and servicing values though, which could adversely impact consumer pricing for new loans).
[9]Maybe that’s beginning to change. “..our policymakers have been too focused on affordable housing, and not housing affordability.”
[10]Moreover, Mark McArdle, CFPB’s Director of Mortgage Markets has been extremely generous with his time to reach out to many industry forums with open lines of communication.
[11]Full employment work for regulatory compliance and legal professionals.
[12] I have previously praised the CFPB’s enforcement actions under Chopra which have largely focused on actors causing the most consumer harm engaging in clearly deceptive or abusive practices. Recent consent orders such as the action against Horizon Card Services and Credit Repair Cloud highlight the exact kind of enforcement I think CFPB should be doing and applauded for.
[13]CFPB’s General Counsel was particularly dismissive of the possible benefits of Fintech in his speech to the Poverty Law Conference referenced in footnote 5 above. Alan Kaplinsky and his Ballard colleagues said that CFPB’s “negative attitude toward technological innovation is stifling the Fintech industry”.
[14] No doubt Chopra took to heart the Goodman/Urban Institute’s criticism and ATR suggestion noted in footnote 6 above. That said, I am a full-throated ATR supporter for all but rate and term refinances that lower costs.
[15] To comply with the ATR law, borrowers need to demonstrate they have the ability to repay a refinanced loan even if the only change is a lower interest rate and payment.
[16]Mr. Chopra is not a Marxist and I am sure that he, like every capitalist economist, opposes price fixing in competitive markets.
Brian Levy is an attorney with Katten & Temple, LLP licensed in Illinois and Wisconsin who writes the free Levy’s Mortgage Musings blog available at www.mortgagemusings.com. Mr. Levy can be reached by email at blevy@kattentemple.com. Mr. Levy’s blog is copyrighted and presented by Chrisman Commentary with permission. All rights are reserved.