Partners for Rural Transformation Submits Comments to the Consumer Financial Protection Bureau on Mortgage Refinance and Forbearance

February 7th, 2023

November 21, 2022

The Partners for Rural Transformation (PRT) is made up of six regional Community Development Financial Institutions (CDFIs) located in and serving regions with a high prevalence of rural persistent poverty. CDFI members include HOPE, Come Dream | Come Build (CDCB) of Brownsville, Communities Unlimited, Fahe, First Nations Oweesta Corporation, and Rural Community Assistance Corporation. PRT advocates for policy solutions and investments in areas deep in poverty, which are often rural, communities of color. Of the 395 persistent poverty counties nationally, eight out of ten are rural, and the majority (60%) of people living in persistent poverty counties are people of color.[1]

A closer look at persistent poverty in America reveals how structural exclusion by place and race continues to induce racial and economic inequities, particularly among rural areas. Legacies of forced geographic and cultural displacement, enslavement, financial discrimination, residential segregation, and transitioning economies have left an indelible mark. PRT Partners are dedicated to providing critical financial services to areas that otherwise have none in order to reach communities where the racial wealth gap is at its widest.

Last fall the Consumer Financial Protection Bureau (CFPB) issued a request for information to seek comments from the public on: (1) ways to facilitate refinances for consumers that would benefit from refinances, especially consumers with smaller loan balances; and (2) ways to reduce risks for consumers that experience disruptions that could interfere with their ability to remain current on their mortgage payments. PRT’s full comment in response to the RFI can be found here.

Mortgage Refinance

After a home loan is closed, as the request for information contemplates, there are several further opportunities to address structural barriers to long-term homeownership. A recent study of the Urban Institute found that collectively borrowers leave tens of billions of dollars “on the table” by not refinancing after interest rate reductions and that borrowers’ ineligible to refinance under current practice are disproportionately low-income borrowers of color[2]. Addressing these disparities would lower the probability of default of foreclosure by lowering monthly payments.

PRT partners, including HOPE, have significant experience with home lending to Black borrowers and to borrowers with small loan amounts. Over the last five years, 115 (15%) of the 777 HOPE mortgage loans closed were for a loan refinance. Of those 115 refinances, 77% were to Black borrowers, and 57% were for loan amounts of less than $100,000. PRT Partners maintain low fees on refinancing small loan amounts by using the original home purchase appraisal when appropriate or by directly subsidizing a portion of the closing costs. Greater financial support for covering some or all of a borrower’s refinance closing costs would allow PRT partners to implement this on a greater scale.

Given our Partner’s extensive history and understanding of this industry, PRT suggests the following points be considered to unlock the full potential of homeowners in persistent poverty areas:

More proactive outreach should be done for borrowers who would benefit from a refinance. One PRT partner staff member said, “Lenders aggressively contact borrowers who miss a payment but do not reach out when something would benefit the borrower.” More advertising is needed for refinancing, as overwhelming amounts of advertising in the industry are focused on purchases.

PRT supports the recommendation of the Urban Institute that servicers be required to contact borrowers about the opportunity to refinance their loan in the case of a rate reduction that would lower a borrower’s payment by a certain amount (i.e. a 10% reduction) and, as state by Urban, “with thresholds ensuring the borrower unambiguously benefits from a refinance.”

PRT is concerned about wide-scale streamlining of the refinance process without strengthening consumer protections that would ensure the refinance puts the borrower in a better position for repayment and building wealth.

PRT is also concerned about a one-way ARM for a few reasons, including the difficulty for lenders, especially small, mission-based mortgage lenders, to plan for fluctuations in the income that support their work.

Forbearance

Prior to the COVID-19 pandemic, the Deep South was home to some of the highest rates of liquid asset poverty in the country, meaning the households did not have the resources to manage an unexpected income loss. The percentage of Deep South families without the cushion to weather a financial emergency is greater than the national average, and the racial disparities are striking. The most economically fragile households prior to the economic shock of COVID-19 were the ones most impacted by it. At one point during the first 18 months of the pandemic, more than 25% of HOPE’s mortgage borrowers were in an active forbearance[3].
For context, in June 2020, the national rate of mortgages in forbearance was 8.55%.[4]

Forbearance and streamlined loss mitigation are critical aspects to weathering economic disasters and maintaining gains in homeownership for people of color. Those efforts must be balanced with the long-term effects on the borrower’s home loan, i.e. extending the term or increasing the balance owed, as well as the sustainability of lenders, especially smaller, mission-based, and minority-owned lending institutions.

PRT’s recommendations on forbearance include:

PRT Partner mortgage teams expressed concern about implementing widespread “automatic” forbearances in the future without a near term, specified end date. The combined loss of regular income from missed payments and the administrative challenges of the loss mitigation process without increased operational support would be very difficult for smaller lenders, which include many minority-owned lending institutions.

In a future disaster, PRT would support a time-limited deferral in place of a forbearance, to simplify the loss mitigation process.

PRT sees the benefit to our members of having loss mitigation done in-house, even with a subservicer that handles other servicing activities. PRT Partner mortgage teams expressed that an in-house loss mitigation team can be more hands-on with members and use manual underwriting for modifications.

Eliminating barriers to maintaining homeownership is as critical to closing the racial wealth gap as access to credit and removing barriers to becoming a homeowner. All of these areas must be addressed to realize the kind of financial inclusion and generational wealth building that will close the racial wealth gap.

[1]Partners for Rural Transformation (2019). “Transforming Persistent Poverty in America: How Community Development Financial Institutions Drive Economic Opportunity.” https://fahe.org/wp-content/uploads/Policy-Paper-PRT-FINAL-11-14-19.pdf

[2] Alexei Alexandrov, Laurie Goodman, and Ted Tozer, The Urban Institute, “Streamlining Refinance to Expand Availability,” September 2022 available at https://www.urban.org/sites/default/files/2022- 09/Streamlining%20Refinances%20to%20Expand%20Availability.pdf

[3] Hope Policy Institute analysis of HOPE Mortgage Lending data

[4] Mortgage Bankers Association, “Share of Mortgage Loans in Forbearance Increases to 8.55%,” June 8, 2020, https://www.mba.org/2020-press-releases/june/share-of-mortgage-loans-in-forbearance-increases-to-853