The Consumer Financial Protection Bureau (CFPB) recently launched an inquiry into the steep escalation of mortgage closing costs, citing perceived junk fees like title insurance and credit reports. We believe that title insurance costs are too high and that the CFPB can do more to promote affordable and sustainable homeownership, but the evidence indicates that its efforts should be redirected to better solutions. Moreover, most of these closing costs are not junk fees; they are origination costs.

Rather than hopping on the closing cost bandwagon, the CFPB could put its limited resources toward two other activities that have more potential to save borrowers money. By streamlining refinancing and increasing rate transparency, the CFPB could reduce mortgage costs, reduce racial inequity, and stimulate the economy with minimal disruption.

The CFPB’s rationale for eliminating origination costs does not hold up

Based on the questions in its request for comment, the CFPB appears to be considering a requirement that lenders—not borrowers—pay for title insurance, credit scores, and other potential fees. Theoretically, this change could lower the cost to consumers in two ways: lenders might have incentives to use their bargaining power to negotiate lower fees, and borrowers could more easily compare fees across loan offers. But we do not believe either cost-saving avenue would come to fruition.

Take title insurance (the largest of the named fees) as an example. Typical title insurance directly benefits the lender (not the borrower), and claims are less than 5 percent of the typical premium, with most of the premium kept by the title agent. On a $1,900 title insurance premium, title insurers’ investor filings show that profits are about $200.

The CFPB is assuming that if the lender negotiates fee costs, it would pass any savings on to consumers. Title agents may be willing to cut into their commission or profit margin to entice a large lender’s business, but it is not clear whether they would do the same for a small lender, thus putting small lenders at a disadvantage. It’s also unclear why the larger lenders would pass any savings through to consumers instead of increasing their own profit margin. Lenders do have more bargaining power than borrowers (despite occasional specific and counterintuitive research), but the actual consumer savings as a result of lender negotiation for title insurance are likely to be limited.

Instead of having lenders take on title insurance costs, more consumer savings could be realized if lenders or the government-sponsored enterprises (GSEs) self-insure, as the expected losses are so small relative to the premium. Lenders cannot change requirements and restructure the market, but the GSEs and the Federal Housing Finance Agency can. These agencies could, for example, take insurance out of the equation and have title agents focus on their main work of search, examination, and curation. In fact, Fannie Mae and Freddie Mac’s title insurance pilot, while narrow, already works along these lines by cutting out the inefficient title insurance provision.

The CFPB also believes that borrowers could better compare fees if lenders absorb the costs. We are sympathetic to the intent but think that highlighting the difference in the total costs of a mortgage across lenders offers a better cost-saving mechanism for borrowers. Borrowers don’t shop for mortgage rates like they would a credit card. Instead, borrowers believe they will get the same rate regardless of the lender they select. And even when borrowers do compare mortgage costs, fees are not the only or even the main source of cost variability, as borrowers with the same characteristics still see a massive amount of rate dispersion across lenders.

Streamlined refinances and rate transparency offer the greatest savings to borrowers

The CFPB proceeding with junk fee regulations is unlikely to yield results for borrowers in the near term. But the CFPB does have other options that could offer broad relief to borrowers sooner:

1. Streamlined refinancing. Almost two years ago, the CFPB requested information from the public on streamlining refinances. The last refinancing wave during the COVID-19 pandemic reduced monthly payments for 18 million borrowers by an average of more than $3,000 a year. By focusing on streamlined refinances and completing the process started two years ago, the CFPB could garner broader support and provide borrowers cost savings as soon as possible.

   Currently, the CFPB’s ability-to-repay rule requires the lender to make a good-faith determination of a borrower’s ability to repay a loan. The CFPB could exempt (PDF) streamlined refinances with a clear borrower benefit from this requirement, as lowering the rate increases consumers’ ability to repay and reduces the risk already held in the system. Moreover, standard refinance programs, which require extensive documentation and nontrivial costs, tend to attract a more well-heeled, heavily white clientele. Adding this exemption would pave the way for the GSEs to add a streamlined refinance program that could reduce racial inequity and stimulate the economy with minimal disruption amid a high-rate environment.

2. Increased cost transparency. In the longer run, the CFPB could help borrowers save money by clearly showing how much borrowers could save per month by shopping for their mortgage. As the CFPB’s own research shows, most borrowers believe they would get exactly the same deal regardless of lender. In reality, more than half could save $1,200 a year by choosing a cheaper lender.

   The CFPB has taken some preliminary steps in this direction, with the improvements in their interest rate explorer. A rework of mortgage disclosures, possibly building on and expanding the interest rate explorer, would likely be a multiyear effort. Disclosure could resemble manufacturer’s suggested retail prices in other markets, such as books and cars, and could either use an expanded version of the data that the CFPB already use for its interest rate explorer or data that we and other researchers have used.

Ultimately, streamlined refinancing options and a disclosure mechanism comparing total mortgage costs across lenders each offers potential consumer savings that are far larger than any potential savings through reducing closing costs.