In debate over mortgage ‘junk’ fees, lenders and regulators disagree

As housing affordability challenges persist, the Biden administration has taken aim at what it characterizes as onerous mortgage fees. At the same time, the housing finance industry has pushed back, contending so-called “junk fees” don’t exist.

In March, the Consumer Financial Protection Bureau (CFPB) issued a call for borrower input on junk fees, noting borrowers are paying more for closing costs: The median amount had jumped 21.8 percent from 2021 to 2022, totaling nearly $6,000 on average.

The agency cited concerns that mortgage lenders are overcharging for three types of fees specifically: discount points, title insurance and credit checks.

The mortgage industry, however, disputes this notion.

“The fees mentioned are clearly disclosed to borrowers well before a home purchase on forms developed and prescribed by the Dodd-Frank Act and the CFPB itself,” said Bob Broeksmit, president and CEO of the Mortgage Bankers Association, in a March statement. “The illogical use of the term ‘junk fee’ contradicts even the White House’s own definition, which cites the lack of disclosure of the fee being charged.”

What are mortgage ‘junk’ fees?

When you take out a mortgage, you’re responsible for a variety of fees known as closing costs. These charges are in addition to any down payment you’re making and interest on the loan.

Some of these closing costs could be considered “junk” fees, which — while not illegal — can come as unexpected charges, or seem pricier than they should be.

Generally, closing costs equal 2 percent to 5 percent of the amount you’re borrowing. For a $300,000 loan, that comes to anywhere between $6,000 and $15,000.These fees can be broken down into the following:

• Origination and other lender fees, which can include an application fee, a credit check fee, an employment verification fee, underwriting fee, an administrative or document preparation fee, a processing fee and more
• Discount points, which are fees you pay to lower the interest rate on your loan
• Third-party fees, which include the cost of an appraisal, title insurance and other services
• Government recording fee
• Prepaid expenses, which typically includes an initial interest payment, homeowners insurance premium and property tax payment

While these fees are legitimate, they can vary widely from one lender to another, and not every lender charges every type of fee. That’s partly given rise to the “junk” label.

Which junk fees have increased?

The CFPB has zeroed in on discount points, title insurance and credit report checks:

1. Discount points

As mortgage rates climbed, more borrowers began paying discount points to lower borrowing costs. In 2022, half of borrowers paid points, up from a third in 2021, the CFPB reports. Borrowers are also paying more for points. On home purchase loans in 2022, the median cost of discount points was $2,370, up from $1,225 in 2021.“These points may not always save borrowers money, however, and may indeed add to borrowers’ costs,” according to the CFPB.

Typically, one discount point costs 1 percent of the amount you’re borrowing and reduces the interest rate by 0.25 percent. In theory, you’d need to stay in the home long enough to recoup the cost of the points and start reaping the savings. In practice, that doesn’t always happen — borrowers give up mortgages sooner for all kinds of reasons, including moving and refinancing.

2. Title insurance

When you get a mortgage, you’ll pay for a title search and title insurance. This policy protects the lender — not you — against the remote possibility that someone will emerge to say they’re the rightful owner of the property you’re buying.

While this type of coverage protects the lender, lenders pass on the cost to borrowers.

“The amount that borrowers pay for lender’s title insurance is often much greater than the risk,” according to the CFPB.

Title insurance has long been subject to scrutiny. In addition to the CFPB’s notice, the Federal Housing Finance Agency (FHFA) — which oversees mortgage giants Fannie Mae and Freddie Mac — rolled out a pilot program in March that waives the title insurance requirement on lower-risk refinances. The FHFA estimates this could save refinancers up to $1,500 on closing costs.

Title insurers disagree with the criticism. “Title insurance is one of the most essential but least expensive parts of the homebuying process,” says Diane Tomb, CEO of the America Land Title Association, a trade group. “We have real concerns about how this proposed framework would undermine the critical protections provided by title insurance.”

3. Fees for credit reports

Mortgage lenders have historically charged borrowers a fee to check their credit reports and scores, typically around $30.

Lenders most often pull this information from Fair Isaac Corp. (FICO), which adopted a new pricing model for 2024 that lenders say has translated to sharp increases in credit check fees for borrowers. The CFPB points to lack of competition in the credit reporting industry as a culprit.

How to check for mortgage junk fees

While it remains to be seen what truly constitutes a “junk” fee, you won’t know you’re potentially overpaying unless you compare closing costs between lenders. Here’s how:

• Read through the loan estimate, the document that breaks down the costs of the mortgage. You’ll receive a loan estimate within three business days of applying for a loan. As you compare estimates, look for the lowest “Total Loan Costs” on page two, part D, according to the CFPB. That’s because lenders sometimes break down fees in different ways. The costs might be listed as an application fee, origination fee, underwriting fee, processing fee, verification fee or a combination. You can save yourself the hassle of deciphering these individually and simply focus on the “Total Loan Costs.” This can help you determine whether an offer might contain inflated or marked-up fees.
• Pay attention to services you can and can’t shop for. Some of your loan costs are itemized in sections called “Services You Can Shop For” or “Services You Cannot Shop For.” The latter covers required services that the lender orders, and you don’t have control over how much they cost. However, you can still compare the complete cost of these services to other offers to find the most competitive. The services you can shop for are also required, but you’re allowed to shop around and choose the vendors you prefer at prices you’re most comfortable paying. Your lender might provide a list of approved providers for these services, but you can also find others through recommendations from friends or family or an online search.
• Review the closing disclosure. The costs on the loan estimate aren’t final. Some of the fees can change, and you might receive a revised loan estimate. Some costs can also creep up before the closing. Be sure to examine the closing disclosure for any fees that increased sharply without explanation. You’ll receive this document at least three business days prior to closing, so you’ll have time to ask your loan officer to clarify any changes.

In addition to comparing offers, you can try to negotiate some fees. If the fees are coming from a lender you like but are higher than others, ask the lender if it’d waive or reduce costs based on the competitor’s offer. This strategy doesn’t always work, but if it does, you could save on upfront costs.

Lastly, know the signs of predatory mortgage lending. This includes excessive fees and a scheme known as “loan packing,” in which a lender bundles other financial products with your mortgage without your knowledge or consent. This tactic could lead to higher, unwarranted charges.