SIMPLIFYING THE HOME BUYING PROCESS:

HUD’S PROPOSAL TO REFORM RESPA

HEARING

BEFORE THE

SUBCOMMITTEE ON

HOUSING AND COMMUNITY OPPORTUNITY

OF THE

COMMITTEE ON FINANCIAL SERVICES

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED EIGHTH CONGRESS

FIRST SESSION

FEBRUARY 25, 2003

Printed for the use of the Committee on Financial Services

Serial No. 108–3

(

SIMPLIFYING THE HOME BUYING PROCESS: HUD’S PROPOSAL TO REFORM RESPA

U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

For sale by the Superintendent of Documents, U.S. Government Printing Office

Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800

Fax: (202) 512–2250 Mail: Stop SSOP, Washington, DC 20402–0001

87–794 PDF 2003

SIMPLIFYING THE HOME BUYING PROCESS:

HUD’S PROPOSAL TO REFORM RESPA

HEARING

BEFORE THE

SUBCOMMITTEE ON

HOUSING AND COMMUNITY OPPORTUNITY

OF THE

COMMITTEE ON FINANCIAL SERVICES

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED EIGHTH CONGRESS

FIRST SESSION

FEBRUARY 25, 2003

Printed for the use of the Committee on Financial Services

Serial No. 108–3

(

(II)

HOUSE COMMITTEE ON FINANCIAL SERVICES

MICHAEL G. OXLEY, Ohio, Chairman

JAMES A. LEACH, Iowa

DOUG BEREUTER, Nebraska

RICHARD H. BAKER, Louisiana

SPENCER BACHUS, Alabama

MICHAEL N. CASTLE, Delaware

PETER T. KING, New York

EDWARD R. ROYCE, California

FRANK D. LUCAS, Oklahoma

ROBERT W. NEY, Ohio

SUE W. KELLY, New York, Vice Chairman

RON PAUL, Texas

PAUL E. GILLMOR, Ohio

JIM RYUN, Kansas

STEVEN C. LATOURETTE, Ohio

DONALD A. MANZULLO, Illinois

WALTER B. JONES, JR., North Carolina

DOUG OSE, California

JUDY BIGGERT, Illinois

MARK GREEN, Wisconsin

PATRICK J. TOOMEY, Pennsylvania

CHRISTOPHER SHAYS, Connecticut

JOHN B. SHADEGG, Arizona

VITO FOSELLA, New York

GARY G. MILLER, California

MELISSA A. HART, Pennsylvania

SHELLEY MOORE CAPITO, West Virginia

PATRICK J. TIBERI, Ohio

MARK R. KENNEDY, Minnesota

TOM FEENEY, Florida

JEB HENSARLING, Texas

SCOTT GARRETT, New Jersey

TIM MURPHY, Pennsylvania

GINNY BROWN-WAITE, Florida

J. GRESHAM BARRETT, South Carolina

KATHERINE HARRIS, Florida

RICK RENZI, Arizona

BARNEY FRANK, Massachusetts

PAUL E. KANJORSKI, Pennsylvania

MAXINE WATERS, California

CAROLYN B. MALONEY, New York

LUIS V. GUTIERREZ, Illinois

NYDIA M. VELA ́ ZQUEZ, New York

MELVIN L. WATT, North Carolina

GARY L. ACKERMAN, New York

DARLENE HOOLEY, Oregon

JULIA CARSON, Indiana

BRAD SHERMAN, California

GREGORY W. MEEKS, New York

BARBARA LEE, California

JAY INSLEE, Washington

DENNIS MOORE, Kansas

CHARLES A. GONZALEZ, Texas

MICHAEL E. CAPUANO, Massachusetts

HAROLD E. FORD, JR., Tennessee

RUBE ́ N HINOJOSA, Texas

KEN LUCAS, Kentucky

JOSEPH CROWLEY, New York

WM. LACY CLAY, Missouri

STEVE ISRAEL, New York

MIKE ROSS, Arkansas

CAROLYN MCCARTHY, New York

JOE BACA, California

JIM MATHESON, Utah

STEPHEN F. LYNCH, Massachusetts

BRAD MILLER, North Carolina

RAHM EMANUEL, Illinois

DAVID SCOTT, Georgia

ARTUR DAVIS, Alabama

BERNARD SANDERS, Vermont

Robert U. Foster, III, Staff Director

(III)

SUBCOMMITTEE ON HOUSING AND COMMUNITY OPPORTUNITY

ROBERT W. NEY, Ohio, Chairman

MARK GREEN, Wisconsin, Vice Chairman

DOUG BEREUTER, Nebraska

RICHARD H. BAKER, Louisiana

PETER T. KING, New York

WALTER B. JONES, Jr., North Carolina

DOUG OSE, California

PATRICK J. TOOMEY, Pennsylvania

CHRISTOPHER SHAYS, Connecticut

GARY G. MILLER, California

MELISSA A. HART, Pennsylvania

PATRICK J. TIBERI, Ohio

KATHERINE HARRIS, Florida

RICK RENZI, Arizona

MAXINE WATERS, California

NYDIA M. VELA ́ ZQUEZ, New York

JULIA CARSON, Indiana

BARBARA LEE, California

MICHAEL E. CAPUANO, Massachusetts

BERNARD SANDERS, Vermont

MELVIN L. WATT, North Carolina

WM. LACY CLAY, Missouri

STEPHEN F. LYNCH, Massachusetts

BRAD MILLER, North Carolina

DAVID SCOTT, Georgia

ARTUR DAVIS, Alabama

(V)

C O N T E N T S

Page

Hearing held on:

February 25, 2003 ............................................................................................ 1

Appendix:

February 25, 2003 ............................................................................................ 57

WITNESSES

TUESDAY, FEBRUARY 25, 2003

Birnbaum, Peter J., President, Attorneys’ Title Guaranty Fund, Champaign,

IL, on behalf of National Association of Bar Related Title Insurers ............... 39

Canfield, Anne C., Executive Director, Consumer Mortgage Coalition, Washington, D.C. ........................................................................................................... 12

Courson, John A., Chairman, Mortgage Bankers Association of America,

Washington, D.C. ................................................................................................. 7

Fendly, Neill, Chair, Government Affairs Committee, National Association

of Mortgage Brokers, Washington, D.C. ............................................................. 15

Friedlander, Stanley B., President, American Land Title Association, Washington, D.C. ........................................................................................................... 10

Garczynski, F. Gary, Past President, National Association of Home Builders,

Washington, D.C. ................................................................................................. 18

Mendoza, Charles J., Member, Board of Directors, American Association of

Retired Persons, Washington, D.C. .................................................................... 41

Rheingold, Ira, Executive Director, National Association of Consumer Advocates, Washington, D.C. ....................................................................................... 45

Rovick, Arne, Vice-Chair & General Counsel, Edina Realty Home Services,

Edina, MN, on behalf of the Real Estate Services Providers Council, Inc.,

(RESPRO) ............................................................................................................. 42

Saunders, Margot, Managing Attorney, National Consumer Law Center,

Washington, D.C. ................................................................................................. 9

Taylor, D. Russell, Chairman, America’s Community Bankers, Washington,

D.C. ........................................................................................................................ 17

APPENDIX

Prepared statements:

Oxley, Hon. Michael G. .................................................................................... 58

Clay, Hon. Wm. Lacy ....................................................................................... 60

Manzullo, Hon. Donald A. ................................................................................ 61

Birnbaum, Peter J. ........................................................................................... 63

Canfield, Anne C. ............................................................................................. 69

Courson, John A. .............................................................................................. 158

Fendly, Neill ..................................................................................................... 168

Friedlander, Stanley B. (with attachments) ................................................... 239

Garczynski, F. Gary ......................................................................................... 325

Mendoza, Charles J. (with attachments) ........................................................ 329

Rheingold, Ira ................................................................................................... 375

Rovick, Arne ...................................................................................................... 381

Saunders, Margot ............................................................................................. 400

Taylor, D. Russell ............................................................................................. 418

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Tiberi, Hon. Patrick J.:

Uniform Mortgage Costs Disclosure Form ..................................................... 450

Page

VI

Friedlander, Stanley B.:

Response to an inquiry from Hon. Mark Green ............................................. 452

American Bankers Association, prepared statement ............................................ 458

Appraisal Institute and American Society of Appraisers, prepared statement .. 476

Consumer Bankers Association, prepared statement ........................................... 485

Independent Community Bankers of America, prepared statement ................... 506

National Association of Realtors, prepared statement ......................................... 512

‘‘Take Home Pay’’ The Wall Street Journal February 24, 2003 ........................... 519

(1)

SIMPLIFYING THE HOME BUYING PROCESS:

HUD’S PROPOSAL TO REFORM RESPA

Tuesday, February 25, 2003

U.S. HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON HOUSING AND

COMMUNITY OPPORTUNITY, COMMITTEE ON FINANCIAL SERVICES, Washington, D.C.

The subcommittee met, pursuant to call, at 2:07 p.m., in Room

2128, Rayburn House Office Building, Hon. Bob Ney [chairman of

the subcommittee] presiding.

Present: Representatives Ney, Green, Bereuter, Baker, Shays,

Hart, Tiberi, Harris, Waters, Lee, Watt, Miller of North Carolina,

and Davis. Also present was Mr. Manzullo.

Chairman NEY. [Presiding.] Good afternoon. The subcommittee

on Housing Community Opportunity will come to order. And without objection, all members opening statements will be made part

of the record. Hearing no objection they are part of the record. I

would remind subcommittee chairs and ranking minority members

are recognized for five minutes each. All other members are recognized for three minutes each. And we will alternate, of course, between the majority and minority. I would also want to note due to

the length of the time we are going to have to spend and the

amount of witnesses, we will try to keep fairly strict on the opening

statements to the time so that we can have the opportunity to hear

from the witnesses.

This is the first housing subcommittee hearing since I was selected as Chairman. It is my hope that the hearings we conduct in

the 108th Congress will be informative and of an invaluable assistance to the members as we contemplate legislation that provides

housing opportunities for all Americans. I intend for all the hearings to be fair and balanced, and I pledge to work with Ms. Waters,

the ranking member, and all the members to see that this is a very

productive subcommittee. And I would note, Ms. Waters and I had

a conversation just this past week on communicating with each

other throughout this process.

Today’s hearing is about the Department of Housing Urban Development’s July 28, 2002 proposed rule that attempts to reform

the Real Estate Settlement Procedures Act, as we all know as

RESPA, which will be the first major reform attempt since 1974.

On October 5, 2002, the Financial Services Committee heard testimony from Secretary Martinez. Chairman Oxley and the members

have expressed a desire to hear other perspectives on this proposal

before it became final. This hearing is a continuation of that procVerDate 11-MAY-2000 14:36 Jul 29, 2003 Jkt 000000 PO 00000 Frm 00011 Fmt 6633 Sfmt 6633 C:\DOCS\87794.TXT HBANK1 PsN: HBANK1
2

ess in reviewing the proposed rule by hearing from the many different groups that will be affected by this proposed regulation.

The Committee has invited a broad cross-section of the real estate and mortgage finance industry as well as consumer advocates

in an attempt to fully understand this impact of RESPA reform. I

think that everyone here shares the intent of HUD in crafting this

regulation which is making real estate settlements easier and more

transparent for consumers.

Buying a home has become simply too complex and needs to be

simplified so there is more transparency in the pricing of settlement services. While we all may agree on that goal, of course, there

are a lot of differences on how we are going to achieve that goal.

Our witnesses today are here to offer their views on whether or not

the proposed rule will achieve that transparency and simplify the

home buying process, and if not, what can be done to improve the

proposal.

I do look forward to hearing from our witnesses. And I want to

take a moment to recognize that because of the size and complexity

of the real estate settlement industry, we are unable to accommodate, of course, every group that wanted to come to testify today.

We also have some material for the record that we will submit. I

know that such groups as the Independent Community Bankers of

America and the Appraisal Institute have statements that reflect

important segments of the real estate settlement process, and with

objection, their statements, as well as those of the Consumers

Bankers Association, American Bankers Association, and the National Association of Realtors, will be entered in the record. Hearing no objection, they are entered into the record. Also, without objection, the members will be allowed to submit again their written

statements for the record.

At this time I would yield to Mr. Watt.

Mr. WATT. Thank you, Mr. Chairman. I will be very brief. If our

ranking member was here and—or if we had other members who

had not been here previously to discuss this issue, I probably would

just pass, but—actually I will defer to my ranking member since

she just walked in. And then I can pass.

You want me to continue or you——

I think I agree with the Chairman that we all think that some

procedures that make the buyers more aware of what is happening,

and speed up the process, and less complex are desirable, but that

the devil is always in the details. And how you get there from here

is a very complex issue that, I guess I have probably been dealing

with longer than most people on this committee because I practiced

law for 22 years doing real estate work before I came to Congress.

So that is 22 years plus the 10 years that we have been talking

about this on the committee. Thirty-two years I have been working

on this issue, and some things that appear to be logical are not necessarily the most logical way to proceed. And some ways that appear to be illogical may be the only way that you can achieve the

necessary objectives.

So I will be anxious to listen to all of the people who have input

to make on this issue. I think our objectives are all the same, to

simplify and make the process more transparent and more visible.

3

How we get there from here can be a very difficult issue, and I will

be looking forward to your suggestions about how you do that.

I did submit a letter to HUD on this issue on the proposed regs

and they did not much care for what I had to say, but maybe you

all can have some influence, and maybe we can have some influence in this process. So I look forward to it and I will yield back

the balance of my time.

Chairman NEY. I thank the gentleman for his statement. And

the chair will yield to the ranking member.

Ms. Waters?

Ms. WATERS. Thank you very much, Mr. Chairman. I would first

like to thank you for making this such a top priority for the work

of the subcommittee. We could not have a more timely or important

attempt at reforming and simplifying the home buying process.

I would like to commend HUD for the work that they have done.

I know the length of time that HUD has been involved in trying

to deal with this reform, and it is not easy. We had a lot of vested

interest here from the mortgage brokers to the lenders themselves,

and everybody who does loan origination, the real estate interest,

insurance interest. And I have noted in the information that I have

been given that everybody has got something to say about what is

good and what is bad about the proposed reform. And so we are

all going to have to work together to see if we can do the best possible job for the citizens of this country.

I need not say to anyone in this room that home ownership is

perhaps one of the most important efforts that any citizen can be

involved with. This business of home ownership has been referred

to as like motherhood and apple pie. We are all told that we should

aspire to own a home and we all do want to own a home and

should be able to own a home.

And so most people do not pay cash for their home, they have

to get involved in a very complicated and sometimes scary system

and procedures in order to do that. And we have got to help our

citizens be able to have access not only to mortgages, but to be able

to feel comfortable that they can sit down with loan originators and

others and not be frightened or have the procedure so complicated

that they do not understand what is going on.

In all that we do, I think someone mentioned it in their proposed

statement here, we must not do anything that will exacerbate the

problems that we are trying to straighten out in this committee.

Whether it is on the Republican side of the aisle or the Democratic

side of the aisle, we are all focused on doing something about predatory lending. And we do not intend to allow anything to happen

in this reform process that will make that job more difficult or

more complicated.

So I am delighted that you are all here today. I look forward to

hearing your testimony. And I am hopeful that we can have a bipartisan effort that will move forth from this committee at the appropriate time, based on all of the information that we have gathered and all that we have come to understand about the process

so that in the final analysis, we will be able to serve our constituents and protect our consumers.

So I would like for everybody to make some money, but not at

the expense, necessarily, of our consumers.

4

So, with that, Mr. Chairman, I will turn this hearing back over

to you.

Chairman NEY. I thank the ranking member for her statement.

And the gentleman from Wisconsin, Mr. Green?

Mr. GREEN. I thank you, Mr. Chairman, I have no opening statement. I look forward to the testimony.

Chairman NEY. The gentleman from Alabama, Mr. Davis?

Mr. DAVIS. Thank you, Mr. Chairman.

The up side, I guess, of these kinds of hearings is that junior

members, like myself, get to question relatively near the beginning.

The down side is having to follow Mel Watt and Maxine Waters.

So I hope you will take that into account.

I want to welcome all of you today. I have the advantage, I suppose, of being a new member of this committee. I do not have a lot

of preconceptions about what took place before I got here.

What I can tell you is as I look at RESPA, first of all, I share

Ms. Waters’ comment that this is a serious problem and I think

that HUD ought to be complimented for trying to get its hands

around it.

I would also echo Mr. Watt’s comments and the Chairman’s comment that all of us, I think, want to see consumers have as much

information as possible—no less than that. What none of us want

to see is a system that at the end of the day purports to offer a

certain level of predictability, but then to see that predictability undone by various definitional ambiguities.

At the same time, none of us want to see a world where the burden is put on consumers—on people that were trying to buy a home

for the first time to unravel the process that is already frighteningly complex.

I have a third concern, that I suspect Mr. Watt may have, too—

a lot of solo practitioners—a lot of small practice lawyers in this

country of ours depend on real estate closings and they depend on

the real estate closing business to earn a livelihood. I have a natural predisposition against a system that does not give people a

chance to select their own lawyer—that may be the old criminal defense lawyer in me talking, to some extent. But what troubles me

about these reforms—and my questions may well be along these

lines—deal with the lack of flexibility with individual borrowers—

potential homeowners would have in a system which does not necessarily allow them to select their own counsel.

I would agree, as a general proposition, that the interests of people trying to buy a home and people trying to sell it is often an antagonistic one. Certainly a lot of the people who are engaged in the

process believe it is an antagonistic one. So I favor a regime, if we

can find a way to serve our predictability interests—I favor a regime that would give people more flexibility in selecting counsel of

their choice.

But I am eager to learn from you. I am eager to listen to you.

And I suspect since not that many of us are here, it will not take

that long to do either one of those.

I yield back the balance of my time, Mr. Chairman.

Chairman NEY. I want to thank the gentleman.

Next is the gentleman from Nebraska—Mr. Bereuter?

5

Mr. BEREUTER. Thank you, Mr. Chairman—no opening statement.

Chairman NEY. Thank you.

The gentleman from North Carolina, Mr. Miller?

Mr. BRAD MILLER. No opening statement—I am struck by how

diverse the perspectives are with the witnesses and I look forward

to hearing the testimony.

Chairman NEY. The gentlelady from Florida?

Ms. HARRIS. No opening statement, Mr. Chairman. Thank you.

Chairman NEY. What an easy committee.

The gentleman from Connecticut?

Mr. SHAYS. Mr. Chairman, just to thank you for holding these

hearings and thank our witnesses—no statement.

Chairman NEY. And the gentleman from Pennsylvania?

Oh, the gentleman from Illinois, Mr. Manzullo?

Mr. MANZULLO. Thank you, Mr. Chairman, for the opportunity to

provide a statement at today’s hearing. I am a member of the Financial Services Committee, but not of this subcommittee.

Without a doubt, the residential real estate market is a bright

spot in our otherwise uneven economy. HUD’s proposal to revise

the regulations governing the residential real estate settlement

process is ambitious, it is complex and it is rushed.

While I support simplifying the process so that more first-time

home buyers could enter the market, I believe that HUD’s rush to

finalize its proposal jeopardizes our real estate market in the short

term. In addition, if adopted, it will make fundamental and perhaps irreversible changes to the process that may undermine the

long-term goals of providing affordable housing and consumer benefits within a residential real estate market.

I believe that HUD has not—N-O-T—HUD has not fully analyzed and carefully deliberated all the critical issues from this proposal. Specifically, HUD has not thoroughly considered the economic effects of the proposal on small businesses, a very important

segment of our community—of our economy.

Pursuant to the Regulatory Flexibility Act and Executive Order

12866, HUD attempted to undertake an economic analysis of the

proposal and its effect on small businesses. While the 98-page document summarizes and highlights many elements of the proposal,

HUD has failed to adequately determine the economic effect on segments of the small business community. HUD readily admits the

small business community may lose anywhere from $3.5 billion to

$6.3 billion annually. However, HUD does not break down the costs

to each segment of the industry. HUD does not even include all the

industries impacted.

There is no detailed economic analysis for the community banks,

small real estate agents, small title agencies—just to name a few,

along with the other small businesses.

As chairman of the Small Business Committee, I am going to be

holding a hearing on HUD’s regulatory flexibility analysis to determine why this organization cannot simply follow the law.

Ms. Velazquez, who is my ranking member on the Small Business Committee, is opposed to this proposal. The Small Business

Administration, through Tom Sullivan, chief counsel for advocacy,

6

is opposed to this proposal because HUD has not, Mr. Chairman,

followed the law.

In fact, if you take a look at their proposal, they attempt to do

in 88 pages a $6 billion economic analysis. And HUD should hang

its head in shame over having all the resources and not being able

to simply determine the groups that are involved.

As a practitioner of law for 22 years—the same as Mr. Watt—

and someone who has been through over a thousand real estate

transactions, this is not a new area to me. But I can assure you

of this—if this goes through, Mr. Chairman, you could find this entire industry will be tied up by five or six major lenders across the

country, creating one of the largest monopolies and smoking all the

small businesses in the country.

I would call your attention to page 63 of the report that says,

‘‘Summary of Small Businesses Impacted and Alternatives Considered’’—all they had to say is that because you have third party providers out there they could participate and be a part of these large

conglomerates. I mean, it is such a naivete that they will get

smoked simply because they are not big.

Chairman NEY. I want to thank the gentleman. The time of the

gentleman has expired.

An opening statement, if Mr. Baker wishes, from Louisiana?

Mr. BAKER. Thank you, Mr. Chairman. I have no statement at

this time.

Chairman NEY. I want to thank the gentleman.

We will move on to introduction, quickly, of the witnesses and

then we will move on to the panel.

I want to thank all of the witnesses for being here today.

First is John Courson. Mr. Courson currently serves as Chairman of the Mortgage Bankers Association of America. The Mortgage Bankers have a membership of approximately 2,600 companies, including all elements of real estate finance, mortgage companies, mortgage brokers, commercial banks, thrifts, life insurance

companies, as well as others in the mortgage lending field.

Mr. Courson also serves as the CEO of Central Pacific Mortgage

Company, which is headquartered in Folsom, California.

Margot Saunders—Ms. Saunders serves as the managing attorney of the National Consumer Law Center, NCLC; provides support training and technical assistance for legal professionals in the

areas of consumer fraud, debt collection, finance law and home

ownership programs. Ms. Saunders duties include representing

low-income clients on financial credit issues and analysis of water

and energy issues as they affect low-income people.

She has recently completed terms on the Federal Reserve Board’s

Consumer Advisory Council and the American Waterworks Association Public Advisory Forum.

Stanley Friedlander—Mr. Friedlander is the President of the

American Land Title Association and the past President of the

Ohio Land Title Association. He is the Co-founder and President of

the Continental Title Agency Corporation, headquartered in Cleveland, Ohio.

It is a little warmer in D.C.—not much—than Cleveland this

morning.

7

Anne Canfield—Anne Canfield is Executive Director of the Consumer Mortgage Coalition, known as CMC, a trade association representing national mortgage lenders, servers—servicers and service

providers. Ms. Canfield is also President of Canfield and Associates, Incorporated.

Neill Fendly—Mr. Fendly currently works with Camelot Mortgage, Incorporated, an Arizona-based mortgage company, and has

been involved with the National Association of Mortgage Brokers

as a member of the board of directors before serving as Vice President elect and President of NAMB.

He is currently the Government Affairs Chair for NAMB and was

a member of the federally mandated mortgage reform working

group.

D. Russell Taylor—Mr. Taylor is the first Vice Chairman of

America’s Community Bankers. He has been a member of ACB’s

board of directors since 1998. Members of ACB originate more than

25 percent of all mortgages in the United States and significantly

more than half of all mortgages originated by depository institutions.

Mr. Taylor also serves as a member of the New Jersey League

Community and Savings Bankers and is a member of the Government Affairs Counsel on Legislative and Regulatory Committee. He

is currently the President and CEO of Rahway Savings Institution

in Rahway, New Jersey.

And F. Gary Garczynski—Mr. Garczynski is the immediate past

President of the National Association of Home Builders. He is testifying today for C. Kent Conine, NAHB’s current president, whose

flight to Washington from Dallas was canceled.

Mr. Garczynski is President of the National Capital Land and

Development Company in Woodbridge, Virginia. In the past 30

years, he has built over 4,000 homes in the greater Washington

metropolitan area. He has served on the executive committee of

NAHB since 1993 and on the Virginia Housing Study Commission

since 1995. He was also an appointee to Virginia’s Commission on

Population and Growth.

I want to thank all of the witnesses for your important testimony

today.

And without objection your written statements will be made part

of the record. You will each be recognized for a five-minute summary of your testimony.

And we will begin with Mr. Courson.

STATEMENT OF JOHN A. COURSON, CHAIRMAN, MORTGAGE

BANKERS ASSOCIATION OF AMERICA, WASHINGTON, DC

Mr. COURSON. Good afternoon. Thank you for inviting the Mortgage Bankers Association to participate in these hearings.

Mr. Chairman, I would like to just state up front that the Mortgage Bankers Association does stand behind Secretary Martinez’

bold and far-reaching proposal to reform the mortgage disclosure

system.

I have been in this business—many would say too long, but over

40 years. And throughout those 40 years, the one consistent thing

that I have seen is the growing amount of paperwork, numbers,

calculations and confusion that has built up and seems to build

8

every year as we move through the genesis and development of the

mortgage lending process, a process that, through those numbers

and that myriad of paperwork has tended only to fool and mislead

borrowers and certainly add confusion to an already confusing

transaction.

So we, at the Mortgage Bankers Association, commend and applaud Secretary Martinez for really stepping up to the plate and

putting forth a proposal—a far-reaching proposal that would, in

fact, address the complexity and confusion in the mortgage lending

process.

Through the introduction and the concept of a guaranteed fee

package, the proposal has put forth a rule that would, in fact, simplify—would, in fact, take some of the mystery, some of the detail

and some of the confusion out of this existing disclosure system.

As you know, the Guaranteed Package, obviously, is a package

that contains two components—a lump sum of the cost to close the

loan and an interest rate. We, at MBA, are very confident that

HUD’s package has three very important objectives to it. The first,

it simplifies the process of mortgage—of the mortgage disclosure

systems. Secondly, it certainly provides consumer certainty. And it

will foster and does foster competition.

And, Mr. Chairman, just let me say, again, simplification, certainty and competition—let me just talk for a minute, if I may,

about simplification. I have talked about the complexity of the process not only from the consumer standpoint, but those of us who are

practitioners who originate loans. Through the guarantee fee package arrangement, we are able to give the consumer a single price

and an interest rate that is more clear and clearly more simple

than trying to pour through a list of charges that are very confusing and, frankly, the purposes of which are unknown to many

consumers.

Secondly, the certainty—the consumer now will have, with certainty, a price that he or she can shop effectively to determine that

they are getting the best deal for them.

And, of course, lastly, fostering competition because with this

process, we will be able—and they will be able to negotiate and go

to lenders—go to originators and shop for the best transaction and

create competition in a marketplace that, today, really is forestalled by virtue of the fact of the complexity.

Obviously, we have submitted our comments to the department

for some areas where we think there can be improvement and

modifications. But let me say that we do believe that the Secretary—and I applaud the Secretary for being on the right track.

Before I close, Mr. Chairman, though, I would like to say one

other thing. There has been a lot of conversation in past weeks and

months about the negative impact of this rule on small businesses

and the fact that small lenders will, in fact, be disadvantaged and

large lenders will replace them as effectively being able to compete.

MBA dissents from that view and we can speak, frankly, with

some certainty in that more than 50 percent of our members are

small, midsize lenders. We compete today. There are large lenders

out there that are better capitalized, have lower cost of funds, have

affiliated a business arrangement and have the wherewithal, clearly, that many of us who are small and midsize lenders do not have,

9

but yet I will tell you that we compete effectively in this marketplace.

Actually I look at it and say that this proposal gives us a better

opportunity to compete. We now can enter into co-ops, affiliations,

alliances that allow us to become part of groups that we assemble

services to provide to the consumer to more effectively compete in

the marketplace. So I would tell you—I would say to you that our

members are competing today against the same lenders that will

be there after this rule is passed. And we think, in fact, we can effectively compete.

So I thank you and I appreciate the opportunity to testify before

this committee.

[The prepared statement of John A. Courson can be found on

page 158 in the appendix.]

Chairman NEY. Well, I thank the gentleman for his testimony.

Ms. Saunders?

STATEMENT OF MARGOT SAUNDERS, MANAGING ATTORNEY,

NATIONAL CONSUMER LAW CENTER, WASHINGTON, DC

Ms. SAUNDERS. Thank you, Mr. Chairman. I appreciate the opportunity to be here today. I testify on behalf of the low-income clients of the National Consumer Law Center, as well as the Consumer Federation of America, Consumers Union and U.S. PIRG.

We wish, also, to commend Secretary Martinez for the dramatic

approach to RESPA reform advocated in these proposed rules. The

stated goals of the rules and the orientation are wonderful to protect consumers. We credit the hard work and the creativity of the

HUD staff in the conception of the rule and we think that many

of the ideas in the rules are constructive.

There are several overarching concerns and a myriad of important details that we believe must be worked through to ensure that

the rules do, in fact, protect consumers. And we have provided 47

pages of comprehensive comments to HUD to facilitate that.

However, we want to make absolutely clear that our most important concern is that this rule not be allowed to facilitate predatory

lending. And we have that concern because the Guaranteed Mortgage Package, which is the subject of so much of the debate, will

have the effect of hiding the Truth in Lending Disclosures that are

required in most mortgages today. The impact of that cannot be

understated for agency and consumer enforcement of the single

most effective and important consumer protection law that we have

on the books affecting consumer mortgages.

As a result we—and, now, this is a broad coalition of consumer

and legal services programs across the country—have strongly advocated to the Secretary that if he moves forward with the Guaranteed Mortgage Package that he exclude from it all subprime loans.

They have proposed excluding all HOEPA loans. That is not a

broad enough category because the impact of the Guaranteed Mortgage Package would be to allow many loans which would otherwise

be counted as HOEPA loans to be included in the guarantee and

we would have no way of determining if, in fact, it was a HOEPA

loan. By HOEPA, I mean the Homeownership Equity Protection

Act, which is the federal law designed to protect against predatory

lending.

10

There are three main aspects to the rule. One is the Guaranteed

Mortgage Package. The second is the change in the disclosures of

the yield-spread premiums charged by brokers. And the third is the

rule’s proposal on how to deal with Good Faith Estimate disclosures.

The Guaranteed Mortgage Package, we think, has a lot of good

ideas and we support it, so long as it, in fact, is a guarantee of both

closing costs and points and interest rate. That is crucial. If you

allow someone to buy a package of services without also buying the

interest rate, it is like buying the wheels on a car without buying

the car. And those wheels are only going to go on certain cars. In

fact, you are tied into certain loans without knowing what the price

for the rest of the loan package will be.

The yield spread premium proposal that HUD has made is very

good. Essentially for the first time, HUD is actually requiring that

consumers be given the benefit of the fee that the lender is paying

to the broker. And since the fee the lender is paying to the broker

is reflected in the interest rate that the consumer pays, the consumer should have control over how that fee is applied.

In the amount of time I have now, I cannot go into the complexities here, but while we do support the proposal, we must point out

that to make this proposal effective, it must be included in those

parts of the regulations that deal with yield spreads, which are enforceable. It cannot just be included in those parts of the regulation

which deal with disclosures, which are not privately enforceable.

Thirdly, HUD has proposed that the information that consumers

received on the Good Faith Estimate when they first apply for a

loan actually be true information and that there be small tolerances between the amount of money that the lender says is going

to be charged and the amount of money that is actually charged

for closing costs when the consumer gets to closing. We support

these proposals and think they are very, very good.

And, in sum, I am happy to answer any questions. We have

worked extensively with HUD in the hopes that they will continue

with some parts of this rule and guard against facilitating predatory lending in other parts.

Thank you.

[The prepared statement of Margot Saunders can be found on

page 400 in the appendix.]

Chairman NEY. Thank you for your testimony.

Mr. Friedlander?

STATEMENT OF STANLEY B. FRIEDLANDER, PRESIDENT,

AMERICAN LAND TITLE ASSOCIATION, WASHINGTON, DC

Mr. FRIEDLANDER. My name is Stanley Friedlander. I am the

President of Continental Title Agency located in Cleveland, Ohio.

I am appearing today as President of the American Land Title Association, which represents both title insurance companies and over

1,750 title insurance agents, most of which are small businesses

like mine.

ALTA, and I, personally, would like to thank you for holding

these hearings. We understand the concerns—that many have

prompted the HUD proposed regulations and believe that the SecVerDate 11-MAY-2000 14:36 Jul 29, 2003 Jkt 000000 PO 00000 Frm 00020 Fmt 6633 Sfmt 6633 C:\DOCS\87794.TXT HBANK1 PsN: HBANK1
11

retary and the Department deserve credit for the boldness of their

initiative.

However, the HUD proposed rules could have a very negative impact on our residential real estate market. We believe the rules

proposed by HUD do not serve the interests of the consumers of

our products and services; would adversely affect competition in

our business; and will particularly hurt the small businesses that

are the cornerstone of our industry.

HUD is proposing to replace the current regime with two alternatives. The first is a revision of the current Good Faith Estimate

regime. The second regime HUD proposes would encourage mortgage lenders to offer what HUD refers to as a Guaranteed Mortgage Package, which would contain essentially all of the loan and

other real estate-related settlement charges at a single guaranteed

price, together with a loan at a guaranteed interest rate.

We have serious concerns about these proposals and I will highlight an alternative we have recommended to HUD that would

achieve many of the agency’s objectives, while minimizing consumer and industry problems. We urge the committee to ask HUD

to seriously consider this alternative.

The HUD-proposed regimes would pose particular problems for

consumers in purchase sale transactions, as opposed to refinance

transactions. In those transactions, the buyer and the seller have

separate interests from the lender in the nature and the quality of

the title services required. Under the HUD blind package proposal,

the consumer will not know the services that they are obtaining or

the individual costs. And, therefore, will not be able to compare

packages.

In addition, in a home purchase, the buyer and the seller may

already have agreed on the selection of the provider of the title or

closing services before the buyer has even begun to shop for a

mortgage.

As the price of the Guaranteed Mortgage Package might also include these services, the borrower could end up paying twice for the

same service. Further, in most areas of the country, as in Ohio, the

seller generally pays half the costs of closing or a significant portion of the title insurance charges and government transfer and

deed recordation charges. The HUD proposals tilt heavily in favor

of the packaging alternative, because packagers are provided an exemption from the Section 8 of RESPA.

As a mortgage loan at a guaranteed interest rate must be a part

of the Guaranteed Mortgage Package, therefore only lenders will

effectively be able to offer packages. This will have a particularly

adverse consequence for our small businesses.

HUD has structured its GMP proposal in a way that mortgage

lenders are in a position to realize greater profits on the Guaranteed Mortgage Package prices by negotiating lower prices from the

providers of the service packages and will, themselves, pick up a

packaging fee. Smaller abstractors and title agencies will not have

the resources to be able to offer the kinds of prices that the larger

company can provide and still be able to provide the quality of

services required. Accordingly, these smaller businesses will have

a difficulty competing for the consumers’ business and surviving.

12

We believe the two-package approach will allow lenders and others to package on a local level. It will take into account local costs,

local needs and allocations that allow customization. We suggest

that the HUD proposal be modified to adopt a Guaranteed Mortgage Package which would consist of a loan at a guaranteed interest rate and then all lender-related services as one charge and, in

addition, a guaranteed settlement package. That could be offered

by any party—by title insurers, agents, real estate brokers, lenders,

escrow companies or attorneys. That would guarantee a single

price for the settlement charges and they would include title and

related charges, government recording and transfer charges and

charges required for closing purposes.

We believe this two-package approach would better achieve

HUD’s goals of ensuring price certainty in the settlement process

for the customers and injecting significant shopability—price competition in both the lending and the settlement industries.

Please also note that irrespective of whether one believes that

HUD’s proposals are good or bad, or workable or unworkable, this

Committee and the Congress should be concerned about HUD’s implementing such a change without clear legal authority.

I thank the committee for the opportunity to participate in this

process. And we encourage HUD to move slowly and carefully on

this proposal.

[The prepared statement of Stanley B. Friedlander can be found

on page 239 in the appendix.]

Chairman NEY. I thank the gentleman for his testimony.

Ms. Canfield?

STATEMENT OF ANNE C. CANFIELD, EXECUTIVE DIRECTOR,

CONSUMER MORTGAGE COALITION, WASHINGTON, DC

Ms. CANFIELD. Thank you, Mr. Chairman for the opportunity to

testify. The Consumer Mortgage Coalition is pleased to be here

today.

We would like to submit a copy of our full statement and comment letter that we submitted to HUD for the committee record if

that is possible.

Chairman NEY. Yes, without objection.

Ms. CANFIELD. Thank you.

The CMC believes HUD’s proposal represents a major step toward improving the process by which consumers obtain mortgage

loans in this country. Significantly, it gives loan originators and

other settlement service providers the option of guaranteeing closing costs to consumers. And if such a guarantee is provided, it allows packagers to use their purchasing leverage to lower these

costs—something which RESPA, to date, has prohibited.

With this guarantee, consumers will have a better understanding

of closing costs and be better able to shop for the best loan that

suits their needs. We also believe that this guarantee, which the

proposal calls a ‘‘Guaranteed Mortgage Package’’ or a ‘‘GMP,’’ if

structured properly, will help reduce predatory practices.

The CMC has developed a comprehensive set of proposals to address predatory lending, which are in Tab 1 of our comment letter

to HUD. The GMP is an important element of those proposals for

two reasons. First, the proposal will ensure that consumers receive

13

relevant information about a loan’s costs early in the process,

which promotes comparison-shopping. Second, by simplifying the

comparisons, it will increase consumer understanding and make

more difficult the deception that characterizes abusive loans.

I would like to focus today on five key aspects of HUD’s proposal

that we believe are crucial to this rule becoming a reality—not just

the reality of becoming a final rule, but the reality of millions of

borrowers obtaining lower cost loans as a result of receiving offers

of guaranteed mortgage packages.

First, the structure of the Guaranteed Mortgage Package—HUD

has included in the GMP the guaranteed settlement costs and an

interest rate component. Although the proposal calls this an ‘‘interest rate guarantee,’’ the interest rate is not, and cannot be, a guaranteed rate, unless the borrower locks in the rate and qualifies for

the loan. The costs to the consumer and the industry of actually

offering every applicant a guaranteed rate would be staggering.

HUD understands this.

Because they are not guaranteed, we have urged that the interest rate and any discount points which together constitute the interest price of the loan be separated from the guaranteed closing

costs package. Consumers need to receive, and shop with, offers of

guaranteed settlement costs. These costs, far more than the interest rate, are misunderstood and are not subject to comparisonshopping and come as unwelcome surprises to borrowers at the

closing table.

Also, if the interest price were removed from the package, nonloan originators will be more readily able to assemble and offer a

guaranteed package because they would not have to offer the actual loan, an act that requires special licensing authority.

If HUD determines to include an interest rate component in the

GMP, it must be a conditional rate, subject to underwriting. HUD

also wants borrowers who have either not yet accepted a GMP

offer, or have accepted but not locked in the rate, to be able to

track the rate using some verifiable index. This is a problem, however, because there is no universal index that can be used to track

lenders’ rates.

Because loan pricing is highly company-specific and is driven by

numerous internal and external factors, the only way for this to

work is to require that loan originators make their rates available

to these applicants on a daily basis, by phone, on a Web site or via

some other medium. This will assure that similarly situated borrowers will be treated alike.

A few trade associations, as my colleague just mentioned, have

urged HUD to adopt a two-package approach to the rule. One package would be the loan package, including the interest rate and any

separate settlement charges imposed by the lender, such as loan

origination or loan processing or underwriting fees. The second

package would be a settlement package, which presumably would

include the remaining settlement costs, such as title insurance,

closing attorney, survey, et cetera. It is not clear where the costs

for the appraisal or credit report would go. In some proposals, there

would be a Section 8 exemption for the services within each package, but not across the packages.

14

After looking closely at this approach, we cannot support it because it significantly complicates the origination process and raises

more questions than it answers. Consumers want simplified shopping. They understand and shop for the interest rate, and they understand that they can raise or lower the rate with discount points.

They now need a simple way to compare and shop for closing costs.

Having certain closing costs in one package and other closing costs

in another package makes it harder, not easier, to shop for these

costs.

The structure we see working best is one in which lenders and

other settlement service providers may assemble and offer packages of guaranteed settlement costs.

Second, the treatment of HOEPA loans—this proposal excludes

from the exemption for packaging loans subject to the federal

HOEPA, which applies to loans whose rate and points exceed specific thresholds. We strongly disagree with this exclusion. We think

it is wrong to withhold from subprime borrowers the clear shopping

and cost-saving advantages of obtaining GMP offers. It has been

argued that many HOEPA borrowers today do not shop effectively

for loans. That is all the more reason to include them under this

rule. We need to give them every tool and motivation to shop. In

fact, HOEPA borrowers are likely those most in need of GMP offers. Armed with guaranteed settlement cost offers, HOEPA borrowers can focus on obtaining the best loan price for the loan available to them in the market—price being the interest rate and the

points.

Third, federal preemption—many state laws conflict with or frustrate the purpose of the HUD proposal. There are state laws that

require the disclosure and itemization of all closing charges. There

are other state laws, like Section 8, that—like Section 8 prohibit

referral fees, or that require a direct pass-through of all third party

closing charges to providers—of settlement—third party charges to

consumers. An exemption from Section 8’s federal prohibitions and

the express federal authority to bundle and guarantee settlement

costs, will have——

Chairman NEY. I am sorry to interrupt—I would have to note

that the time has expired if you want to——

Ms. CANFIELD. Okay.

Well, I was going to say that preemption is important—HUD has

the authority to issue the rule with preemption. We would encourage them to do so, so that the Guaranteed Mortgage Package can

actually work.

And finally, as noted by some—by my colleagues here to my

right, there are significant changes in the Good Faith Estimate. We

have encouraged HUD to delay those changes in our proposed comment letter for two reasons. One is that if it became a requirement,

all of our lenders would have to focus on implementing those mandatory changes, which would take up to 18 months, and delay

doing the Guaranteed Mortgage Package.

The second is that HUD’s legal authority in this area is a little

bit questionable. And it would delay—it might—pending lawsuits

might delay the whole rule for years.

[The prepared statement of Anne C. Canfield can be found on

page 69 in the appendix.]

15

Chairman NEY. Thank you for your testimony.

Ms. CANFIELD. Thank you.

Chairman NEY. Mr. Fendly?

STATEMENT OF NEILL FENDLY, CHAIR, GOVERNMENT AFFAIRS COMMITTEE, NATIONAL ASSOCIATION OF MORTGAGE

BROKERS, WASHINGTON, DC

Mr. FENDLY. Chairman Ney, Ranking Member Waters, members

of this subcommittee, I am pleased to be here and appreciate the

opportunity to discuss HUD’s proposal to reform RESPA.

Today, mortgage brokers originate more than 60 percent of all

residential mortgages and are the key to bridging the gap in minority home ownership, based on a recent study. A mortgage broker

does not simply press keys and provide the customer with a loan,

but instead, serves the role of adviser, credit counselor, underwriter and personal contact to the consumer. Brokers also provide

lenders a nationwide distribution channel that is less expensive

than traditional lender branch operations.

We support the administration’s goal to increase home ownership

and HUD’s stated goals of simplifying the mortgage process, but

this rule achieves just the opposite. The proposed rule is unworkable in the real world for both industry and consumers, will harm

small businesses and the mortgage broker industry, in particular.

In our comment letter, NAMB provided HUD with a sample

Good Faith Estimate form. Our proposal will strengthen, simplify

and clarify the disclosure of costs provided to consumers in advance

of settlement and give consumers a true comparison of the costs of

a mortgage loan.

NAMB has many concerns with HUD’s proposed rule, but the

single most important issue is HUD’s re-characterization of yield

spread premiums. The characterization of a yield spread premium

is a lender payment to the borrower for a higher interest rate

trades and ambiguity in the marketplace that will not only confuse

borrowers, it negates HUD’s own 1999 and 2001 statements of policy, which define a yield spread premium as a payment for goods,

facilities or services actually furnished or services actually performed for the lender, as well as the borrower.

Mortgage lenders save millions of dollars in facilities and employee costs by originating loans through mortgage brokers. Yield

spread premiums help pay the day-to-day broker operations. HUD’s

re-characterization of a yield spread premium ignores lender payments to the mortgage brokers for the facility that the broker provides to the lender.

In addition, this re-characterization will lead to a new round of

class action litigation, as borrowers will be confused as to the function of a yield spread premium and will ask at closing, ‘‘Where is

my check?’’ The class action plaintiffs bar will seek these consumers out, causing another wave of class action lawsuits for the

industry, which will only increase the costs to the consumer.

The proposed rule also creates an artificial and competitive disadvantage for the mortgage broker industry. By regulating that the

broker include the yield spread premium in the calculation of net

loan origination charge, but not including the same for all originators, HUD is complicating the real estate settlement prices—procVerDate 11-MAY-2000 14:36 Jul 29, 2003 Jkt 000000 PO 00000 Frm 00025 Fmt 6633 Sfmt 6633 C:\DOCS\87794.TXT HBANK1 PsN: HBANK1
16

ess. The consumer is unable to do a true apple-to-apple comparison

of the cost of the mortgage.

This proposed rule will also prohibit a mortgage brokers’ ability

to advertise a no-point loan, even though our competitors will be

allowed to do so. A broker and a lender might charge a consumer

the same rate and cost for a mortgage loan, but if both receive indirect compensation, only the broker must show this as direct compensation. Thus, for the very same loan to the consumer, a broker

cannot advertise this loan as a no-point loan and will appear less

competitive.

Under the proposed rule, many mortgage brokers will no longer

be able to originate FHA and VA insured mortgage loans. Direct

compensation is limited, by regulation, to 1 percent on these types

of loans.

In the proposed rule, indirect compensation is artificially transformed into direct compensation and subject to the cap. If brokers

cannot charge enough to cover their costs for these types of loans,

brokers will be forced out of the VA and FHA lending industry.

This is significant as approximately 31 percent of all FHA insured

mortgage loans are originated by mortgage brokers.

This proposed rule was not built on a solid foundation of market

realities, but, instead a fundamental misunderstanding of such realities due to its flawed economic analysis. Constructing the rule

based on inaccurate analysis will lead to a flawed rule that will

cause great harm to consumers and could have devastating repercussions in a $2 trillion housing market.

The SBA has requested that HUD issue a revised analysis that

takes into consideration the comments of affected small entities

and develops regulatory alternatives to achieve HUD’s objectives

while minimizing the impact on small business. Even the FPC said

the disclosure of both compensation contained in the proposal could

confuse consumers and lead them to misinterpret the overall costs

of a transaction and that it might inadvertently burden consumers

and competition.

NAMB believes HUD has significantly underestimated the regulatory burden of its proposed rule. HUD admits the proposed rule

would increase the regulatory burden by 2.5 million burden hours,

which is the equivalent of 289 years. Such a huge burden will increase the cost of credit to consumers.

NAMB sincerely appreciates the opportunity to share our concerns with you on HUD’s proposed rule to reform RESPA. We respectfully request that the subcommittee and the Financial Services Committee work with HUD to ensure that any finalized rule

actually achieves HUD’s stated goals of providing clarity and simplification to the consumer, while not providing further confusion

or complexity to the marketplace.

In achieving this goal, HUD must ensure that credit remains

available for consumers and is not compromised.

Thank you.

[The prepared statement of Neill Fendly can be found on page

168 in the appendix.]

Chairman NEY. Thank you.

Mr. Taylor?

17

STATEMENT OF D. RUSSELL TAYLOR, CHAIRMAN, AMERICA’S

COMMUNITY BANKERS, WASHINGTON, DC

Mr. TAYLOR. Thank you.

Chairman Ney, Ranking Member Waters, Members of the Subcommittee, thank you for this opportunity to be here today and testify on this important issue.

My name is Russ Taylor. I am the President and the CEO of The

Rahway Savings Institution, which is located in Rahway, New Jersey. We are a New Jersey state chartered mutual savings bank,

founded in 1851. We have $430 million in assets. And our primary

business is one to four family residential mortgage lending.

Today I have the honor and the privilege of testifying as Chairman of America’s Community Bankers. ACB member banks originate more 25 percent of all mortgages originated in the United

States and significantly more than half of all mortgages originated

by depository institutions. In our members operate a large number

of mortgage banking affiliates that originate a substantial part of

the business from the segment of the industry.

Thank you for this opportunity to testify today on RESPA reform.

Mortgage process mandates are extremely burdensome, costly

and confusing for consumers and lenders. Reform is long overdue.

ACB is pleased that Secretary Martinez has taken an important

step forward in this issue. But changes must be implemented with

careful deliberation and with a sufficient transition period consistent with the cost of compliance.

ACB generally supports the concept of the Guaranteed Mortgage

Package and the proposal to require mortgage broker disclosures.

However, we strongly urge HUD to reconsider making changes to

the Good Faith Estimate contemporaneously with introduction of

the Guaranteed Mortgage Package. We believe that making all of

these changes at the same time would unnecessarily disrupt the

mortgage market.

ACB strongly supports HUD’s efforts to require disclosure of

mortgage broker fees and believes this requirement should be implemented immediately. Mortgage broker disclosure is essential to

preventing possible abuse of yield spread premium payments. We

do not believe that potential delays in other elements of HUD’s proposal should delay this new requirement.

ACB supports the option of Guaranteed Mortgage Package, but

we strongly believe that the current Good Faith Estimate must remain a viable alternative for those lenders who do not wish to

package or who are unable to do so. It is simply too dangerous to

dramatically change Good Faith Estimate procedures while simultaneously launching the potentially revolutionary Guaranteed

Mortgage Package.

ACB believes that small to medium-sized lenders are an integral

part of the mortgage process and it is imperative that they be able

to use the packaging option to the extent that they wish. We believe that many community banks will be able to work with local

service providers to offer an attractive package. It may be that the

optimal way for smaller institutions to participate in the packaging

option may be to use larger third parties to coordinate or provide

the Guaranteed Mortgage Package. In this case, we support restricVerDate 11-MAY-2000 14:36 Jul 29, 2003 Jkt 000000 PO 00000 Frm 00027 Fmt 6633 Sfmt 6633 C:\DOCS\87794.TXT HBANK1 PsN: HBANK1
18

tions in the ability of GSEs to offer packages and regulation to prevent loan steering by third party packagers. Without such regulations, the full competitive benefits of RESPA reform are unlikely to

be realized.

The proposed Guaranteed Mortgage Package, arguably, would

provide customers an easy method of comparison-shopping. However, we are concerned that providing a so-called interest rate

guarantee that is held open for a minimum of 30 days as part of

the package would just not work. Problems arise because it is not

a true interest rate guarantee. And the length of commitment is beyond industry norms. We suggest that HUD work with lenders to

develop a methodology for establishing and adjusting rates.

Another concern is conflict with state law. There are approximately 40 states in which the Guaranteed Mortgage Package may

not be able to be implemented for a variety of reasons. ACB suggests that HUD look at the differences in how closings are conducted from state to state and at what different state laws may require.

In conclusion, ACB believes that—one, mortgage broker fee disclosures are an integral part of making mortgage fees comprehensible to consumers and should be implemented immediately. The

Guaranteed Mortgage Package, with revisions, should take priority

and be tested in the market as soon as practicable. And finally, revisions to the Good Faith Estimate should be postponed, re-examined and adjusted as the Guaranteed Mortgage Package is being

tested.

ACB members stand ready to work with the members of the committee and HUD to complete the RESPA reform process in an effective manner.

We thank you for the opportunity to testify on this issue today.

Thank you, Mr. Chairman.

[The prepared statement of D. Russell Taylor can be found on

page 418 in the appendix.]

Chairman NEY. Thank you.

Mr. Garczynski?

STATEMENT OF F. GARY GARCZYNSKI, PAST PRESIDENT,

NATIONAL ASSOCIATION OF HOME BUILDERS

Mr. GARCZYNSKI. Chairman Ney, Vice Chairman Green and

Members of the Committee, on behalf of the 212,000 member firms

of NAHB, I am pleased to have this opportunity to testify in support of HUD’s proposal to reform RESPA.

NAHB’s comments today will focus on two major components of

HUD’s proposal. First are the changes in the disclosure requirements of the cost of mortgage transactions to the consumer—the

Good Faith Estimate. Second, I want to comment on the addition

of an option for lenders to offer a package of settlement services at

a guaranteed cost—the Guaranteed Mortgage Package.

NAHB applauds HUD’s efforts to increase the transparency and

simplify mortgage transactions and loan closings by improving the

disclosure of mortgage fees and expenses to consumers. The proposed changes should also eventually lower mortgage transaction

costs and help minimize unexpected charges at the time of loan settlement.

19

My oral statement will be confined to those aspects of the proposed rule which deal with the circumstances involved in processing mortgages for newly built homes. Transactions for newly

built homes are different in that they typically involve a fairly

lengthy loan origination process that matches a sometimes lengthy

building process.

On the Good Faith Estimate, under the requirements for the estimate, the proposed rule does not specify when changes in the

transactions warrant a new disclosure. Re-disclosure could be burdensome to lenders in a new construction environment where the

loan origination period spans from housing start to home completion and may last anywhere from four months to nine months or

more. Many changes can, and normally do, take place during the

construction process. For example, the purchase price may fluctuate, depending on the buyer’s optional preferences. Also, the

attractiveness of different mortgage products may change, as could

the buyer’s financial situation.

Changes in the home purchase price directly impact the cost of

document stamps, transfer tax fees. And similarly, changes in the

loan amount affect the fee charge for the lender’s title insurance.

On the Guaranteed Mortgage Package—the concept of the Guaranteed Mortgage Package is appealing and could reduce consumer

costs primarily through originator’s negotiations with settlement

services that are provided.

However, a guaranteed package that is determined at loan commitment and lasts until settlement on a new home transaction puts

the packager in a position of excessive risk. This may lead the

original packager to offer less competitive terms than packagers

who have an opportunity to offer a mortgage package closer to the

date of the projected loan closing. Wider tolerances in guarantees

would be needed for a new home transaction where the price and

loan amount often change dramatically during the construction period.

So NAHB recommends for financing quotes on newly constructed

homes that both the Good Faith Estimate and the Guaranteed

Mortgage Package have an alternative that is based upon a daysuntil-closing threshold for providing final quotes and guarantees.

For example, a lender would provide preliminary estimates at the

initial application and then issue final guaranteed estimates 30 or

60 days out from the proposed closing. This procedure would be

comparable to the timing of guarantees that would be made in financing an existing home purchase.

The solution would allow the customer sufficient time to shop

again if the final package was deemed to be less than competitive,

while providing the lender an opportunity to adjust those components of the package that actually changed.

In closing, NAHB recognizes the effort HUD has put into correcting some salient shortcomings in an otherwise effective housing

financing system. However, loans for new homes, which represent

more than a quarter of the annual purchase mortgage originations,

have unique characteristics and, thus, they must be specifically addressed in any RESPA reform package. We are confident that HUD

will address the concerns that have been expressed regarding this

proposal and can do so without sacrifice to mortgage services.

20

Thank you.

[The prepared statement of F. Gary Garczynski can be found on

page 325 in the appendix.]

Chairman NEY. I want to thank the panel for their testimony.

One question I have for anyone on the panel that would like to

answer it—under the proposal, loan originators offering loans

whose rate or points trigger the HOEPA protections may not benefit from the Section 8 exemption. Should the packaging proposal

be extended to HOEPA? And if not, what is the lender’s incentive

to offer a guaranteed package?

Would anybody like to comment on that?

Ms. CANFIELD. We believe, and stated in our testimony, that the

Guaranteed Mortgage Package proposal should be extended to

HOEPA loans and they should be included. Without it, there is—

HOEPA borrowers are not going to be able to get the benefit of the

Guaranteed Mortgage Package offer.

Chairman NEY. I assumed you would want to respond, Ms. Saunders.

Ms. SAUNDERS. That is right, Mr. Chairman. I appreciate the opportunity.

Because the effect of the package will be to hide Truth in Lending Disclosures and it will be impossible to determine whether a

lender has complied with Truth in Lending when a package is offered, we think that it is very important to preserve Truth in Lending Compliance for all loans which are not of the most competitive

nature. And there can be no debate, I think, that some subprime

loans are predatory. To avoid spreading the problem of predatory

loans, we need to at least maintain the current transparency, not

add to the murkiness of the situation.

So we think that, at least at the beginning part of the process,

the Guaranteed Packages should not be allowed not only to

HOEPA loans, but to all subprime loans.

Mr. COURSON. Mr. Chairman?

Chairman NEY. Thank you.

Mr. Courson?

Mr. COURSON. I am sorry—if I may——

Chairman NEY. Yes.

Mr. COURSON. In due respect, the system under the proposed

rule of the guaranteed fee package—Guaranteed Mortgage Package

does not obviate the need to still provide a Truth in Lending Disclosure at the time of the closing of the loan. So, in effect, the borrower will still receive a Truth in Lending Disclosure disclosing

those charges that are in the finance charges and the amount financed and an APR, in addition to the Guaranteed Mortgage Package disclosures.

There will be two disclosures. And the TILA, if you will—the

Truth in Lending—will still be provided as it is today.

Chairman NEY. Thank you.

One other question I would have, I think, for Ms. Canfield—there

is currently at least four national lenders offering one-fee loan

products—an example would be ABN AMRO. Since lenders are

doing this without a Section 8 exemption, why is there a need for

a regulatory change because they are doing it without Section 8 exemption?

21

Ms. CANFIELD. First, I would make the observation that there

are tens of thousands of loan originators out there and only four

that are offering any kind of product similar to what we are talking

about. But the difference here is a timing difference. Under the

HUD proposal, HUD is saying that you will get the Section 8 exemption if you guarantee closing costs at application and send out

the guarantee in writing to consumers within three days. For the

products that I have seen out there in the marketplace today, their

guarantee does not come until much later in the loan—in the loan

process—really almost near loan commitment, after the loan has

been underwritten and the property has been appraised. So the

HUD proposal would provide more certainty much sooner in the

process than what is allowed today under current law because

RESPA prevents it from happening.

Chairman NEY. One final question I have and, Mr. Fendly, I do

not know if you want to comment on this, but the ‘‘Wall Street

Journal’’ ran an article yesterday that stated that all mortgage brokers are making millions off of the refinance boom. And I just wondered if you wanted to give us your——

Mr. FENDLY. I did, Mr. Chairman. I would like to make a couple

comments about it.

First of all, the writer picks the top producer at one of the top

brokerage firms in the highest cost metropolitan areas in the country to stereotype our industry. And I think it is somewhat absurd

to criticize an industry and characterize them in this manner,

based on one individual.

But it also states that 5 percent of the brokers make over $1 million, but the average broker made $120,000. Statistically, if you

run the numbers, this means the other 95 percent make an average

of less than $74,000, working 10 to 12 hours a day, seven days a

week—meeting with loan applicants virtually any time day or

night.

And I think they have glossed over the good things about mortgage brokers. A wide yield spread premium was used to pay closing

costs and consequently, the borrower got a great rate and paid no

closing costs. The actual payment for the loan was slightly more

than 1 percent—$2,800 on $240,000. And I think this underlines

our assertions that yield spread premiums are used to help the borrower. And furthermore, 1 percent on a loan is a far cry from 6 percent realtors make on the purchase of a home.

Now, it is true, some loans are less labor intensive than others,

but just like the realtors, some homes sell faster than others, but

they still get their 6 percent and that is pretty much non-negotiable.

And last——

Chairman NEY. My time has run out.

[Laughter.]

Mr. FENDLY. All right.

Chairman NEY. Luckily, I think somebody else might want to respond to that, I would assume.

[Laughter.]

Thank you.

Ranking Member—Ms. Waters?

22

Ms. WATERS. Well, let me apologize for having to go out for a few

minutes. Let me pick upon some of the discussion that I heard

coming back in. For many years, there have been a lot of questions

about fees and charges for mortgage brokers. As was indicated in

testimony by our consumer advocate here, the concern about mock

displaying all of the charges is a concern that did not just start

today, but it has been there for a long time. And I do not have the

empirical data, but the reputation of brokers for charging exorbitant fees is a reputation that you have gained, whether or not you

are deserving.

If, in fact, there is a belief by consumers, and particularly by consumer advocates, that the charges have been exorbitant, what can

you do to convince us who are concerned about that, that we do not

need to continue to display every fee that is charged in a transaction?

Let me ask that question of Mr. Courson.

Mr. COURSON. Let me respond from the Mortgage Bankers Association standpoint. Obviously, I think that what you are getting,

Congresswoman, is, in fact, the certainty of a one—of a guarantee.

The issue today is one, frankly, of an opportunity of bait and

switch—of showing a consumer at the time of application a list of

charges on a Good Faith Estimate that has no important law to enforce that if by the time that consumer goes to the closing or the

funding those numbers change through the addition of fees or other

hidden charges and now the consumer is so far down the path they

are at the closing table—and under current law, there is no penalty

for that.

And so this system is one that says, ‘‘Tell the consumer up front,

give them a guarantee—a one number guarantee and when they

get to closing, that number does not change.’’

Ms. WATERS. How can I be assured, as a consumer that that one

number is not exorbitant? How do I know that you have not doubled what I would have had to pay had I known what the fees for

each of the items should have been—could have been?

Mr. COURSON. That is a very good question. If, today, you took

a Good Faith Estimate, which you are given, which is a laundry

list, if you will, of charges and tried to shop it, I would submit to

you that even some of us in the business would have difficulty

shopping that to try to match up different fees, different language,

different terminology, different charges. And, in fact, very honestly,

we talk about predatory lending, if—anything that has that much

confusion in it is, in fact, an opportunity to fool the consumer.

So now, what you do is with one number—that is a shopable

number. They now have one figure that they can shop with other

originators. You know, when a customer comes in to one of our

branch offices—consumer—they really, in all due respect, want to

know two things—maybe three. One, how much cash do I have to

bring to closing? What is it going to cost me? How much cash do

I have to have? And what are my payments and my interest rate?

And I will tell you that my experience in 40 years in the business—of people looking at Good Faith Estimates and trying to, if

you will, see if the pest inspection or the flood certification or the

whatever else we have certifications are marketable—in our market, it just does not happen.

23

So let us simplify it—give them one price and now they can call

any company and say, ‘‘I have been told my closing costs for this

transaction are not going to exceed X, what are yours?’’

Ms. WATERS. But does this make it very difficult for small businesses to be competitive where the big boys just wipe you out by

undercutting all those prices that you are getting?

Mr. COURSON. Well, in all due respect, if I thought that, I would

not be here testifying as part of this. I do not—I do not envision

being wiped out.

[Laughter.]

Actually, I think it proposes some opportunities. We do compete

against the big people now. The lenders are out there—they are

certainly much better capitalized—lower cost of funds. They have

affiliated business arrangements and they compete on closing costs,

too. I mean, we are out there trying to originate loans and close

loans and competing with rates and fees and closing costs.

Frankly, I think this gives the small business person such as myself an opportunity to come in and form co-ops, affiliations—you

read about groups that are forming—which allow us, frankly, to go

with others and, perhaps, negotiate better transactions to compete

more effectively than we do, really, head-to-head today.

Ms. WATERS. Thank you very much.

Chairman NEY. Thank you.

Mr. Green?

Mr. GREEN. Thank you, Mr. Chairman.

I have a few questions for Mr. Friedlander, if I could.

Mr. Friedlander, the assumption that HUD is apparently making

with its proposal is that title companies and other service providers

have a fee that is large enough that it needs to be, essentially, attacked or squeezed in the packaging. And then they assume that

that savings will be passed on to consumers. What is your reaction

to that assumption?

Mr. FRIEDLANDER. This has been one of our major concerns about

the packaging proposal. The squeezing of the title service fee is

going to hurt the small business. First of all, we have to give quality service and we have to give a quality product. We are highly

regulated by the state’s departments of insurance. And being able

to reduce the price of a insurance policy is absolutely wrong and

illegal in Ohio. So we would have to have some preemption, to start

with, in order to change the title insurance premium.

To reduce the cost to the point where we will no longer be able

to give the quality of service I think would be a detriment to the

consumer.

The packaging fee will be a fee and the packager will not disclose

what is actually in the package. So we may be reducing our costs,

but the package price may just result in additional profit to the

packager or to the lender if he is the packager.

Mr. GREEN. Well, I guess the question is if the proposal is—if,

in fact, it is going to lower costs to consumers, why should we care

if the packaging proposal favors big lenders or big title companies

over smaller ones? I mean, why should any of us up here care

about that?

Mr. FRIEDLANDER. If it was a matter of reducing costs because

of efficiencies, that would be one thing. But it is reducing costs by

24

squeezing the title company. And by squeezing the small agent, it

would virtually put them out of business so only the large title

companies would be able to compete and the playing field would

not be level.

Mr. GREEN. You said something a little earlier that caught my

attention. You said that in Ohio—did I understand you to say that

there are—that you are state regulated to the point where you do

not have flexibility—is it in the rates that you provide or the fees

that you charge?

Mr. FRIEDLANDER. There are—there are different ways of charging fees in different states. Some states have what is called a single

price that would include the title search, the premium and the closing costs. In Ohio, the premium is the only regulated part of the

fee so that the title search and the closing costs are work charges—

the title insurance premium is regulated by the state.

Mr. GREEN. And then something else that you said in your statement that I found interesting—you pointed out that in Ohio—I

think you said the custom is that title insurance is split half-andhalf between the buyer and the seller.

Mr. FRIEDLANDER. Yes, that is correct—in Ohio and in many

other states, that the seller and the buyer split the costs of the

title—in some places the seller pays all of it. For example, in Cleveland, the conveyance fee tax is generally paid by the seller. In

other parts, it is split half-and-half.

Mr. GREEN. So in other words, this proposal is going to have a

very different—a varied effect, I should say, state-by-state because

of the way that the transaction is treated now under current law.

Mr. FRIEDLANDER. In every state the regulations are a little bit

different. Some states are highly regulated. But in all states, the

state department of insurance controls the fees of the premium.

And I would say that there would be a—really an unfair situation

where we would be charging a lower premium to a purchaser who

is buying a property being financed by a large lender and charging

a different premium by a purchaser who is coming from a smaller

lender. I think that would be illegal. In fact, the NAIC—the National Association of Insurance Commissioners—have written a letter that—I will provide a copy of that to the committee.

Mr. GREEN. Thank you.

And just with the brief time I have left, Ms. Saunders, have you

had a chance to see the two package proposal that the title companies have talked about? And do you have any reaction to it?

Ms. SAUNDERS. Yes, I have seen it. And I do have a reaction to

it. I think that, unfortunately, it would not work. Let me make it

clear that we have no problem with anybody offering a package.

Our problem is the Section 8 exemption being provided in response

to a package. Our concern is that a consumer not be tied into a portion of the closing costs of the loan without knowing what the loan

interest rate is, itself.

Mr. GREEN. My time is up.

Chairman NEY. I would note that the time has expired.

Mr. Watt?

Mr. WATT. Thank you, Mr. Chairman.

If I have listened carefully to all of the people on this panel who

have testified, I have concluded that the only person who has

25

wholeheartedly endorsed this proposal is Mr. Courson, although

the gentleman on the end, whose name I cannot pronounce——

Mr. GARCZYNSKI. Garczynski.

[Laughter.]

Mr. WATT. ——Garczynski—said that he was endorsing it, then

he proceeded to say that he wanted several different changes made

to it for home builders.

So I take it the only person on this panel who actually endorses

this proposal as it is written is Mr. Courson. Am I correct in that?

Mr. COURSON. Congressman, I—let me characterize—I did say in

my testimony we have submitted a 60-page comment letter that we

did offer some suggested modifications. We certainly support——

Mr. WATT. So you do not endorse it either, then?

[Laughter.]

Mr. COURSON. I did not say that.

Mr. WATT. All right. Well, let me—let me get—I was going to

focus more on you because you were the—you were the person who

seemed to be endorsing it most. And you seemed to suggest that

this will increase competition. And it may well increase competition

between lenders. I think some of us are concerned at—about the

impact on competition below the level of the lender.

And let me just play this out for you because as I understand

this proposal, the Guaranteed Mortgage Package is a one number

figure. And if I get a one number figure from you, as a lender, I

do not know what is in that one number figure for attorney’s fees,

for title insurance, for deed preparation, for recording fees. I have

got one number. And so I do not find out, as I understand it, until

I get to the closing to a settlement sheet what the specific number

is for attorney’s fees and the various other components of that one

number.

How do I, under those circumstances, have the ability to go out

and shop, as you said, for a lower attorney’s fee, a lower mortgage—title insurance premium? You know, I do not know how—

and I think what you said is it might increase competition between

lenders, but what you are—what you have done is set up a system

where you control the whole system, as the lender, for title insurance, for attorney’s fees, for the whole range of other things that

are variable. Now, recording fees are controlled. Title insurance

premiums may be controlled. But there is a whole range of services

that I could go and shop if I had the numbers and if I were inclined

to shop.

Now, that is one concern I have about it. And maybe you have

an answer to that.

My second concern is that with this Section 8 exemption, which

is, in effect, I understand, a safe harbor, if I get down to the closing, I get my fees disclosed—if something is dramatically out of

line—suppose you have squeezed everybody—you have squeezed

the title insurance company—you have squeezed the title lawyer

and, in the process, what you have done is you have increased the

amount of fees that are paid to the lender. And now you are telling

me I cannot even—I do not even have any recourse against you for

doing that because you have got a Section 8 exemption there.

26

Now, those are the concerns I have about what you are saying.

And perhaps there are responses. I hope you will use the balance

of the time, maybe, to respond to it.

Mr. COURSON. I would be happy to, Congressman.

When a consumer comes to one of our offices, they want a loan.

They want a mortgage loan.

Mr. WATT. No, I want the best loan I can get. I mean, I—and

I want the best legal fees I can get. I want the—you know, I want

to have the option to choose to use a lawyer friend of mine, even

if—even if he charges me more. If you are not telling me how much

he is charging for that, I do not—you know, you are assuming the

only thing I am looking for is a loan. And that is just not the case

in my experience.

Mr. COURSON. May I finish? I will finish the rest of my answer

now.

And when that person comes, they obviously are concerned about

the amount of cash that it is going to take to close that loan and

the rates and the payment that they will have. And I will submit

to you today, Congressman, that people that come—the customers

that come to one of our retail branch offices—coming for a loan do

receive a piece of paper that has itemized costs on it. And——

Mr. WATT. But does—is that required under this?

Mr. COURSON. It—well, no, it——

Mr. WATT. I am saying required under this—under these regulations.

Mr. COURSON. That is correct.

Chairman NEY. I am sorry, the time has expired.

Mr. Shays?

Mr. SHAYS. Mr. Chairman, thank you.

I enter into these questions with some reluctance because I,

frankly, think that this is some of the most confusing stuff. I have

had about seven closings in three years. I have signed more things.

I do not pay any attention, frankly, to what I sign. I hire the best

lawyer I can hire to trust him. And I hire a broker—a real—a

broker who I can trust and then I just have them give me the one

page that summarizes. And then I go back and I figure out when

I refinanced if I am paying less each month than I was the last

time. And then kind of feel pretty good about it.

But I am saying to you that most of what I fill out I think it is

junk—I think it is stupid. And I know that somehow we are responsible for it right here—all of you and all of us.

[Laughter.]

And so, I am just curious as to have someone here, as clearly as

possible, without using words like ‘‘it will be a disaster,’’ tell me

why this is not good to have it be easier and less expensive.

Chairman NEY. Anybody want to offer?

[Laughter.]

Going once——

Mr. FRIEDLANDER. The issue that we are dealing with is a

change in a current regulation. We have all agreed——

Mr. SHAYS. Well, my philosophy is that anything that is going to

change what currently happens is 50 percent likely to be an improvement.

[Laughter.]

27

Mr. FRIEDLANDER. The RESPA rules have needed modification

and changes. It is very difficult to make these changes. And in

order to make the changes, we have a lot of people sitting at the

table with a lot of different interests.

Mr. SHAYS. A lot of vested interest—correct.

Mr. FRIEDLANDER. The consumer should be number one in this

process, but the disclosures that the consumer needs—and I will

speak from the title point of view—that in a refinance situation,

the consumers needs are not the same as in a purchase sale transaction. Certainly there is need to know ‘‘What am I getting?’’ And

this is part of the problem that we see in this proposal—it is blind.

The consumer does not know what is in the package—he does not

know if he is getting an appraisal. He does not know if he is getting an owners policy.

And this is why we are——

Mr. SHAYS. But, you know, the sad thing is even when you sign

the documents, you do not know.

Mr. FRIEDLANDER. I am sorry?

Mr. SHAYS. Even when you sign all of those documents, you do

not know what you are getting.

Mr. FRIEDLANDER. In this proposal——

Mr. SHAYS. No, under present circumstances.

Mr. FRIEDLANDER. You are probably right.

Mr. SHAYS. You are under this assumption that all of these papers tell me something. There is so much and it is—you know,

there is only about two pages in the entire document—the summary—that I find valuable. Everything else, I do not find valuable.

Ms. CANFIELD. Perhaps if I could say something, Congressman,

I think that is why the lender trade associations do support the

rule with some modifications to make it simpler, because the services that are going to be included in the Guaranteed Mortgage

Package are not for the benefit of the borrower, really—for the—

for the benefit of the lender so that the lender can make the loan.

And if the consumer is—if we get Section 8 relief, you will see

downward pressure in pricing on all sorts of services that go in

that package because packagers, not just lenders, will be able to

average cost price.

In addition, from a simplification perspective, the consumer will

get that one number at application. Now, what we have also suggested is that the changes in the GSE be postponed so that if the

consumer wants to, as under existing law, go choose the title—go

choose the closing attorney or a separate title policy or whatever,

they can—they can operate under existing law and continue to do

that.

But what we are talking about here is allowing for the option for

all the settlement services to be guaranteed at application to the

consumer.

Mr. SHAYS. The one tragedy in this business, as I see it, is I have

a lot of constituents who basically may have missed a month—have

kept current, but they are always one month or two months behind. They have not been able to refinance in the last four or five

years. The irony is they need these—refinancing more than anyone

else, and they are the ones that have the least likelihood of being

able to do it. And yet they have been constant in their payment,

28

they just were behind years ago. And I would love to find a way

that this committee can solve this problem. And I will tell you, that

is one reason why I chose to be on this committee.

Chairman NEY. I thank the gentleman.

Ms. CANFIELD. I will talk to you.

Chairman NEY. A response to that?

Mr. TAYLOR. Very quickly.

Chairman NEY. You were still yellow.

Mr. TAYLOR. I can tell you, as a lender and a local lender and

that is our main business, that why this guaranteed package becomes an interesting alternative is nobody looks at those numbers

which are itemized. Nobody understands them as a consumer. It is

not that they are good or bad or that the good intentions did not

bring them to the table. The fact is that nobody knows what they

are about, so nobody does look at them.

What the Guaranteed Mortgage Package allows to happen is one

number be given to that consumer when they walk in the door because there is two questions that they ask me: What is my rate?

And what is it going to cost to close? And that is all they need to

know, from their perspective. I am not suggesting that is all they

need to know—that is what they think they need to know. And

there is nothing else that you are going to tell them other than

‘‘Here is my rate, and here is the closing costs in this loan.’’

When you give them that itemized list, the fact of the matter is,

nobody looks at it. They say, ‘‘Where do I sign? You tell me.’’ So

they are relying on community institutions already to guide them

through the process and to tell them what is right and what is

wrong and where they should sign.

Chairman NEY. Thank the witness.

Mr. Davis?

Mr. DAVIS. Thank you, Mr. Chairman.

Let us assume for a minute all of the virtues of the Guaranteed

Mortgage Agreement in terms of consistency and predictability. As

I look at the regulations, one of the things that really strikes me

is kind of a catch-all exception that says that the price can be

modified, subject to—the language, I believe, is ‘‘acceptable final

underwriting and property appraisal.’’ Now, we struggle with reasonable doubt in this society. We struggle with preponderance of

evidence in the civil cases. That strikes me as being one of the

more untrammeled standards I have ever seen, frankly.

Can any of you explain to me why that exception and the reference to ‘‘acceptable, final underwriting and property appraisal’’

does frankly not constitute such a big potential exception that it

rips a hole through the whole—virtues of the mortgage agreement?

Yes, ma’am?

Ms. SAUNDERS. I would agree with part of what you said and try

to distinguish another part. We have expressed very deep concerns

about the meaning of ‘‘subject to final underwriting.’’ The idea behind the Guaranteed Mortgage Package, and we support this

idea—that the consumer gets to call up four or five different creditors and say, ‘‘Here is my Social Security number, here is my income, here is what I think the house is worth. Will you do an initial credit analysis and tell me what I qualify for, assuming that

the information that I gave you about the house value and the inVerDate 11-MAY-2000 14:36 Jul 29, 2003 Jkt 000000 PO 00000 Frm 00038 Fmt 6633 Sfmt 6633 C:\DOCS\87794.TXT HBANK1 PsN: HBANK1
29

come and any other questions that I am answering for you are

true?’’

The black box that we all do not understand of credit worthiness,

then, is resolved before the consumer pays anything. And that allows the consumer to shop between lenders about all those issues

which most consumers do not understand, which is what loans they

actually qualify for.

The issue of how much the house is worth is going to stay the

same. It will be resolved by an independent appraiser, regardless

of what lender that the consumer eventually chooses.

So the idea is that the consumer will get a commitment on

points, and on costs to close and interest rates, subject only to

verification of the information that the consumer has the ability to

determine himself—him or herself, up front. But HUD has not

been clear in the proposed regulations what ‘‘final underwriting’’

means. If it only means determining verification of those things,

that is fine. If it means something more, we have concern—great

concern.

Mr. DAVIS. Let me follow before anyone else answers—that there

is another item in the regulations that do not make a whole lot of

sense to me. Given the fact that this particular provision does not

require a disclosure of the itemized costs, how would a litigant or

how would a potential buyer have a clue what in the world would

potentially constitute ‘‘underwriting and property appraisal’’ if all

you get is a final number and you have no capacity to actually pull

out the itemized costs?

That strikes me as a major tension in the regulations.

Mr. COURSON. Congressman, there is, as part of the proposed disclosure in the HUD rule a disclosure where the lender does disclose

certain services whether they—yes or no answer they will or will

not obtain, appraisal being one, for example. So they will tell the

consumer—there is an addendum says I will or will not get an appraisal. And certainly in most states there are laws on the books

that the consumer is entitled to a copy of that appraisal or their

credit, if in fact it is—there is one that exists.

Mr. DAVIS. Ms. Saunders?

Ms. SAUNDERS. That is another problem with the rule, frankly.

If you get—if the lender gets an exemption from Section 8 for providing the package, then at closing it turns out that the lender has

not complied with the promise, all the consumer has is the ability

to bring a Section 8 case. But the consumer does not have any of

the information, as you have just identified, to enable him to bring

the Section 8 case. So losing the exemption means you now have

a right, which you have no ability to enforce.

So what we have proposed is that if HUD moves forward with

this, they have to say that if you do not keep your promise, you

have got—you have created a presumption that Section 8 has been

violated, otherwise, taking away and then giving back the Section

8 exemption is meaningless because the consumer would not have

the information.

Mr. DAVIS. One final question before my time runs out—given

the fact that these cases would be litigated in the state court, I

think almost all of you would agree that certain states might have

widely varying definitions of what fits this criteria. So, were any

30

of you proposing to possibly federalize this cause of action? And if

you are not proposing that, how do you deal with the inherent inconsistency that would result?

My time has expired, but, Mr. Chairman, if you would indulge

someone answering that?

Mr. COURSON. Under the two package agreement, our closing

package—we do not require a Section 8 exemption.

Ms. SAUNDERS. It is already a federal claim.

Mr. DAVIS. Okay.

Ms. SAUNDERS. So it would be a federal claim.

Mr. DAVIS. Thank you, Mr. Chairman.

Chairman NEY. Thank you, Mr. Davis.

The gentlelady from Florida?

Ms. HARRIS. Thank you, Mr. Chairman.

I came to this meeting today wondering what was good about

this package. And I did not like the idea that larger lenders might

have the—that we might have been creating an unfair competitive

advantage for large lenders over small and other small businesses.

But I cannot help but make the assumption that Secretary Martinez would only be doing this for good reasons. And by listening

to you, it sounds as though we are—he is trying to, of course, lower

costs and simplify the process.

I think it still comes down—that is really what I want to know—

is that going to happen? Are consumers really going to experience

lower costs? Or are lenders just going to experience larger profits?

Are we really going to create the kind of competition that, in essence, less—it would simplify in that the consumers would bear a

smaller share of the cost?

And then on a smaller—on the micro—the second part of the

question is—two more questions—why cannot we list out—even

though I know that it is complicated and they do not go to look at

each of the different—pricing of each service and they each come

in for different things, why not be more transparent? Why not list

them all out?

And then the second part of that is why cannot the borrower

choose if they have an attorney that they feel close to—if they have

a relative in the real estate business? Why cannot they opt to

choose those individuals or those businesses should those individuals be able to comply with the lenders’ specific price points?

Mr. FENDLY. Mr. Chairman, can I answer the last two first? And

then——

Ms. HARRIS. Yes.

Mr. FENDLY. I think the issue of listing them out, if you would—

remember, this is a guarantee now, that is given at the time of—

within three days of application. Today the system—we list them

out on a Good Faith Estimate. But, remember, there is no enforcement provision if you are right or wrong or have listed some or not

listed some or omitted some or put the wrong price. Now we are

putting a guarantee out, so in some respects, frankly, as an originator or lender, we are taking some risk in that we have missed

a cost or we have mis-estimated or mis-priced a cost, but yet we

are guaranteeing that. So there is a difference between listing

them as an estimate that has no enforceability or giving a guarantee as to what those costs will be.

31

Ms. HARRIS. If you were working with specific vendors, if you will

or specific service providers and they had committed to that cost,

then at least you would have that backup provision. But if others

would also be willing to work for that amount, then it would seem

that the transparency aspect would be important, just to be able

to show.

Mr. FENDLY. Some may or may not. You know, we focus very different—well, we focus on the package concept here. The basic tenet

of the proposed rule is that the customer has a guaranteed settlement fee disclosed to them. The idea of putting together packages,

if you will, is sort of an off-shoot of the basic tenet of the rule,

which is tell the customer up front and give them a guarantee of

what their settlement service costs are going to be.

And so, in many packages that will go forward, there may or

may not be discounting or packages, if you will. It may be that the

originator knows for that type of loan in their marketplace that the

closing costs will be this and they are willing to guarantee that and

have to compete because they are going to have to be competitive

as that—as that package does get shopped elsewhere.

And if the consumer asks—if any came in and asked for an

itemization, there is nothing that precludes an originator or lender

from giving him the list of the charges.

Mr. COURSON. If I may, this is exactly what we are talking about

in our two package proposal. What the lender needs in order to

make the loan is the lender’s concern. And that is—they know

what they have to do. But the second part of the package, the settlement part, we feel strongly that the consumer has the option to

choose what he wants in that package and whether he wants an

owner’s policy—whether he wants a survey.

These are items that he may choose to get for himself where you

have a buyer and a seller. So our proposal simplifies, itemizes and

allows choice. Every area is a little bit different—different needs in

different places. And I think that the two package proposal certainly would answer that issue.

Ms. CANFIELD. I guess, Congresswoman, I have a slightly different view. RESPA was created over 30 years ago and it was

based on the premise that consumers would shop for all these settlement services. Thirty-plus years later, they do not shop for those

services.

With regard to itemization, the fact is that in a Guaranteed

Mortgage Package there will be some loans where, you know, the

lender—or the packager and the lender will not feel it necessary

to make a full-blown appraisal. They might be able to do an automated evaluate—automated appraisal. They might decide that a

more simplified title insurance arrangement is appropriate for that

loan. So borrowers of the services on those loans are going to vary.

In addition, the pricing on them will vary.

And as these packages are going to be put together, packagers

will go out and negotiate volume discounts and they will say,

‘‘Okay, for the first $100,000—100,000 loans, we will give you a

price we will set at, say, $100 a loan. If you bring us 500,000 loans,

those appraisal prices are going to go down to $50 a loan.’’ So you

do not know, for the consumer, which loan is actually getting which

price appraisal or which price service.

32

The idea here is that competition in guaranteeing the consumer

a package price—one price up front at application that competition

will simply the process for the consumer, drive competition in the

cost of those services and ensure that the consumer understands

the transaction better than they do today.

Chairman NEY. Time is expired.

Thank you.

The gentlelady from California, Ms. Lee?

Ms. LEE. Thank you, Mr. Chairman.

Let me first say the more I listen, the more questions I have. But

I know I only have a few minutes. So let me see if I can move it

pretty quickly.

First of all, it seems to me that somehow—and I cannot get my

hand on it yet, but it seems like under this Guaranteed Mortgage

Package the consumer, the smaller institutions, the smaller law

firms—they are going to get the short end of the stick. And I cannot really figure out how they are going to get the short end of the

stick, it just sounds like it.

Let me ask you one question with regard to—and I am trying to

unravel this—in the bundled package, for example, you lock in an

interest rate. Does the consumer know that you pay a point or

whatever it is now to lock in this interest rate? Is that disclosed?

I believe now under Good Faith Estimate you are required to—if

you lock in an interest rate—to say, ‘‘Well, you are going to pay a

premium for this.’’

Mr. COURSON. The interest rate component that they receive

when they receive a good faith—or a Guaranteed Mortgage Package contains the cost and it contains an interest rate that is based

upon or tied to an observable or verifiable index. In other words,

some borrowers come in and do not want to lock their loan right

away. They want to float with the market. Some of them think

they are maybe smarter than we are, so they do not lock their loan

right away.

And what this says is if they do not lock, from the time they get

the Guaranteed Mortgage Package until the time they lock, their

loan—their interest rate they are quoted will not move by more

than the market index on which their loan has been based. So they

have—in effect, they have avoided the bait-and-switch where you

tell them one thing and then the market moves a half-a-point, but

you ratchet up the rate a full point. So they have that.

Now, any time they come—and for that—and for the issuance of

that Guaranteed Mortgage Package, there are no fees permissible

under the proposed rule.

If in—if sometime they come back and they want to lock their

loan later, or so—and then, as in today, that is an agreement and

whatever, you know, they agree to and the lender charges, it would

be an agreement to collect a lock-in fee, but only when they lock

in the loan and assure that that is going to be the absolute rate.

Ms. LEE. And the average consumer is supposed to understand

this and know this and be able to shop around and call three lenders within three days—and five lenders within three days and

make some kind of rational informed decision on which option they

would want?

33

Mr. COURSON. I would suggest that, as opposed to Congressman

Shays’ stacks of paper and what they go through today, this is a

far superior opportunity for the consumer to make sure that they

are getting the best deal.

Ms. LEE. Let me ask you, with regard to the subprime lenders—

that maybe I can get a clear answer on that—why are—and I—it

is my understanding subprime lenders are exempt from the RESPA

regulations. Are they—are they required to comply also?

They are? Okay. What about home equity loans? What about reverse mortgages? Are all mortgages—does RESPA cover all mortgages?

Ms. SAUNDERS. Yes.

Ms. LEE. All types of mortgages—subprime?

Ms. SAUNDERS. No. Currently RESPA covers all subprime mortgages, however it does not cover open-end lines of credit.

Ms. LEE. Does not? Okay.

Ms. SAUNDERS. No. The disclosures are not required for open-end

lines of credit. So those are—home equity lines, if you—if you mean

by that you get a $25,000 line of credit——

Ms. LEE. Yes.

Ms. SAUNDERS. ——and you would be able to draw down $1,000

and pay it back and draw down another $1,000, RESPA does not—

is not——

Ms. LEE. It does not cover that.

Ms. SAUNDERS. ——at this point. It could be——

Ms. LEE. Yes.

Ms. SAUNDERS. ——that is a matter of regulation. HUD could decide to cover it and we have, in fact, recommended that HUD do

cover home equity loans.

Ms. LEE. Okay. Good because I know senior citizens, oftentimes,

take home equity loans and they need, I think, to be covered under

this. And—you all have sent in a recommendation on that?

Ms. SAUNDERS. Yes, ma’am.

Ms. LEE. Okay. On the unforeseeable circumstances, can anyone

define what ‘‘unforeseeable circumstances’’ means? I mean, what is

that? Does anybody have an understanding or can define what that

means? I think it is—HUD provide for that, as it relates to a brokers obligation to live up to the terms that any—I think the language in it is ‘‘any emergency making it impossible or impractical

to perform.’’

Ms. CANFIELD. Are you referring to the changes on the Good

Faith Estimate, Congresswoman?

Ms. LEE. Yes, as it—yes, in terms of how you get out of the

loan—that is a clause that—it is sort of an out clause, as I understand it.

Ms. SAUNDERS. Another—may I address that?

Ms. LEE. Yes.

Ms. SAUNDERS. As I said in my testimony, there are three different proposals which HUD is making and they are each substantively different. The third one, which we have spent very little

time here discussing, would require that there be very little change

that lenders make on the third party charges from what is disclosed on the Good Faith Estimate, which you get three days after

34

application, to what you actually have to pay. We are not talking

any longer about the package.

Ms. LEE. Yes.

Ms. SAUNDERS. This is, essentially, the current method ramped

up. Right now, if you apply for a mortgage, you will get a good

faith estimate a few days later which will say, ‘‘Your title insurance

will be this much. Your appraisal will be this much. Your—’’ and

so on, but when you—when you go to closing, there is nothing in

the current law that requires that mortgage originator to have kept

those promises. The disclosures that are made in the Good Faith

Estimate are not privately enforceable.

So if, as happens all the time, you—the consumer goes to closing

and the charges are considerably higher than promised in the GFE,

there is nothing the consumer can do, except to walk away from

the loan, which is generally not an option.

Chairman NEY. Time.

Ms. SAUNDERS. So what HUD has proposed is that there be a

very small tolerance between what is proposed—what is disclosed

up front and what is actually charged at the end. And then HUD

said you can get out of that—the originator can change that for unforeseeable circumstances, such as the house is not a house, it is

a farm and the appraisal is far more complicated to do than just

reviewing a one-story house.

Chairman NEY. The time has expired. Thank you.

The gentleman from Ohio, Tiberi?

Mr. TIBERI. Thank you, Mr. Chairman.

I was a licensed realtor in Ohio and you all have succeeded to

confuse me today in your testimony.

Mr. Courson, if you could explain something to me—a comment

you made—and let me frame the issue. Mr. Fendly, I believe, said

that the proposed rule—the 1 percent cap on FHAs would essentially put brokers out of the FHA business.

Is that correct, Mr. Fendly?

Mr. FENDLY. Correct.

Mr. TIBERI. And you also said that 31 percent of the market right

now in FHAs is provided by mortgage brokers?

Mr. FENDLY. Also correct.

Mr. TIBERI. And, Mr. Courson, you said that the proposed rule

would increase competition in the lending area. How does 31 percent of the lending going away increase competition?

Mr. COURSON. Our comments also included the fact that there is

an inconsistency and have asked—have asked the department to

revise the 1 percent cap. There is an inconsistency there. It has

been there for a number of years. That regulation has been there

for a long time and is inconsistent with the current proposal. And

so we have—now, with the guarantee, we have also made the same

comment as the National Association of Mortgage Brokers.

Mr. TIBERI. Do you believe that HUD has the ability, Mr.

Courson, to raise the cap?

Mr. COURSON. I do not want to speak for what HUD can or cannot do, but it is—and it is—and I am not an attorney, but it is my

understanding it is a regulation, so it could be changed by a regulatory proposed rule or regulatory rule.

35

Mr. TIBERI. Mr. Fendly, do you believe that they have the ability

to raise the cap?

Mr. FENDLY. They do—whether they will do it or not remains to

be seen.

Mr. TIBERI. Mr. Taylor, do you have the—do you believe they

have the ability to raise the cap?

Mr. TAYLOR. We believe—excuse me—yes, we do and we do believe that his regulation could be, in part, brought to fruition

through HUD—that there needs to be no further regulatory or legislative action taken.

Mr. TIBERI. Mr. Fendly, why do you believe that the cap causes

your members to—how do I want to put this—not be able to make

the loan?

Mr. FENDLY. You are referring again to the FHA loan?

Mr. TIBERI. Yes.

Mr. FENDLY. Historically, a broker will receive compensation—

two forms on an FHA loan. The direct compensation would be the

one point cap on front. The indirect compensation is the yield

spread premium, which they will charge, generally speaking, an average of another point, in order to cover their costs.

By recasting that yield spread premium from indirect compensation to direct compensation, that violates the cap that is in current

existence right now because that would be two points. It limits us

to one point and there is absolutely no way we can cover our costs

with one point.

FHA loans, by their very nature, are more difficult and time consuming to consummate than a conforming loan.

Mr. TIBERI. And Mr. Taylor, you would agree with that?

Mr. TAYLOR. Yes, I would—yes, I would.

Mr. TIBERI. And Mr. Courson, you would agree with that, as

well?

Mr. COURSON. Yes. The 1 percent cap, Congressman, is years old

and it was always assumed that a FHA loan is a 1 percent origination fee—there is an interest rate and there is a discount. And as,

obviously, you well know, that marketplace changes and now we

are into providing closing costs through grades of trade-off, if you

will, of the teeter-totter. And all of that new innovation and new

financing tools that are available have really rendered that regulation antiquated and outdated.

Mr. TIBERI. Back to you, Mr. Fendly, you mentioned in your testimony about no-point loans and advertising. Explain to—explain

to us a little bit more why you believe that is a disadvantage to

brokers, as opposed to others in the lending field.

Mr. FENDLY. There is re-characterized in the yield spread premium, once again, from a direct compensation to direct compensation. As such, a retail mortgage lender and a mortgage broker offer

the same loan at the same terms and they are receiving the same

amount of indirect compensation. However, in order to advertise

that, by this proposed rule, we would have to show that as a one

point direct compensation fee—in it—in any——

Mr. TIBERI. A one-point direct compensation fee to—

Mr. FENDLY. To the broker—the retail mortgage lender would

show zero points. By definition, we would have to show one point

for the exact same loan with the exact same costs and the exact

36

same terms. I think it is reasonable to assume that the average

consumer looking at such an advertisement would think that a

mortgage broker was more expensive.

Mr. TIBERI. Why are not they, then, in your—in your mind?

Mr. FENDLY. I am sorry?

Mr. TIBERI. Why are not they more expensive, then, in your

mind, under that scenario?

Mr. FENDLY. Well, the biggest reason is because we are in the

communities themselves—we are actually in with the local people.

We work in their communities. we are strengthening home ownership in their communities. we are going out to their homes. We

make those house calls. We deal with these borrowers frequently,

for years and years and years and subsequently their children. We

provide better prices, better service and better product.

Mr. TIBERI. Under the FHA, you said that you—your industry

provides 31 percent of the loans. Do you know the breakdown for

the rest of the 69 percent?

Mr. FENDLY. I do not.

Mr. TIBERI. All right. Do you provide the largest bulk, do you

know?

Mr. FENDLY. I do not know the answer to that question, Congressman.

Mr. TIBERI. Mr. Taylor, do you know?

Mr. TAYLOR. No, I do not have any specific numbers, Congressman.

Mr. TIBERI. Okay.

Mr. Chairman, I know my time has expired. I would just like to

submit for the record the Uniform Mortgage Cost Disclosure that

was part of the comment period that was provided by the mortgage

brokers. it is a disclosure form. I would like to provide it into the

record.

[The following information can be found on page 450 in the appendix.]

Chairman NEY. Without objection, provide it for the record.

Thank the gentleman.

The gentlelady from Pennsylvania?

Ms. HART. Well, since Mr. Tiberi was a licensed real estate

broker, I was a licensed title agent and an attorney who handled

quite a bit of mortgage closings and used to—I will not admit it,

but giggle at some of the forms that I had to have people sign.

So when I heard that this was being reviewed—what was required—I was pretty happy about it. But, unfortunately, I have not

been completely happy with the result. But listening to all of you

today, I guess I am in good company.

My question, actually, has to do—back—and I hate to keep asking questions to create sort of a fuss between the brokers and the—

and the mortgage bankers, but I am going to do that.

The RESPA—actual preamble to the change in the—in the reg

stated that mortgage brokers originate more than 60 percent of the

residential mortgages. And I know it was also cited in some testimony today. That would lead me to believe, since the market usually works—it always works if we let it—but—because it usually

works, but if we interfere with it a lot—that would lead me to beVerDate 11-MAY-2000 14:36 Jul 29, 2003 Jkt 000000 PO 00000 Frm 00046 Fmt 6633 Sfmt 6633 C:\DOCS\87794.TXT HBANK1 PsN: HBANK1
37

lieve that mortgage brokers provide a product that the public

wants.

That having been said, I would like anybody who represents the

actual mortgage bankers themselves to tell me, in light of the fact

that we have heard that a number of mortgage brokers will be put

out of business by this, what are you going to do that is different

than what you do now to fill in the blank? What would you have

to do differently than you do now to fill in the blank if all of these

mortgage brokers are put out of business?

Ms. CANFIELD. I—John, do you want me to take this? Okay.

First, the brokers are a very valuable distribution system for the

lenders’ loans. And we think that they will—and want them to continue to remain a very valuable distribution system for our product.

With the changes that all of the lender organizations have recommended to HUD, we think that will be a reality.

The other thing is that with regard to the Guaranteed Mortgage

Package——

Ms. HART. Before you go on, you are suggesting then that they

will not go out of business as a result of this?

Ms. CANFIELD. We certainly hope not.

Ms. HART. Okay. Go on.

Ms. CANFIELD. Secondly, with regard to the Guaranteed Mortgage Package itself, what we see happening is that there will be

the manufacturers of the packagers—of the package and then the

distributors for the package. So the distributors will be not only

lenders and bank branches, et cetera, or mortgage bankers, community—thrift, savings and loans, et cetera, also be mortgage brokers, potentially real estate agents, potentially anybody that wants

to get out there and distribute packages to consumers, including

title insurance companies. We also think that they will have an opportunity to package—put together the packages.

So I think John mentioned earlier that he thought——

Ms. HART. You think that they will also be, as a result of the

package distribution——

Ms. CANFIELD. They will be manufacturing——

Ms. HART. ——originating loans—the mortgage—well, I mean,

the only people who can in that category would be the mortgage

brokers.

Ms. CANFIELD. Brokers and lenders—you have to be licensed in

order to——

Ms. HART. Right.

Ms. CANFIELD. ——originate a loan. So——

Ms. HART. But——

Ms. CANFIELD. ——they will continue to do that. Maybe I am

misunderstanding what——

Ms. HART. You are convinced that they will be.

Okay. Let us go back to the mortgage brokers, then. In light of

that statement, can you tell me, aside from the issue—or is the

main issue the low value—the low amount mortgages and the ones

that are government insured that you are not going to make any

money on so you are not going to bother with them anymore—is

that the issue? Or is there another issue that we are missing that

Ms. Canfield has missed?

38

Mr. FENDLY. I believe there are multiple issues. And certainly

the FHA-VA loan program is part of that issue. But to get back to

small business again, I think it is very, very important to understand, as the statement you made, my company has five employees.

I have been in the business industry for 20 years. You are never

going to convince me that I can compete in a packaging scenario

with a mega-lender. And quite frankly, our industry is composed

mostly of small brokers.

Contrary to what I have heard at this hearing, I believe the only

opportunity it provides for small mortgage brokers is to seek a new

career.

Mr. COURSON. Can I respond, Congresswoman? I am sorry.

Ms. HART. Well, sure.

Mr. COURSON. Well, you know, one of the—and that is one of the

reasons that in our comment letter to the department, we, frankly,

have encouraged them—there are two different proposals, if you

would, one talking about the Guaranteed Mortgage Package, the

other about the Good Faith with the tolerances.

We are saying to the department, ‘‘Let us take the package—let

us put it into play—let us see if the consumer, the originators, the

lenders will accept it.’’ Is the guarantee something that is acceptable in the marketplace? Is it good for the consumer? Is it good for

the industry? Does the packaging benefits benefit closure? Because

if they do, in a free marketplace it will get acceptance, it will get

traction and it will move forward. But do not change both at the

same time. Leave the current Good Faith, allow the marketplace

to work the way it is working today because if the package, in fact,

is viable, then in the—in the marketplace, it will gather that acceptance. And do not change both at the same time.

Chairman NEY. Thank you.

Time has expired.

Ms. HART. Thank you, Mr. Chairman.

Chairman NEY. I want to thank the panel for their testimony—

a very interesting testimony on an important subject today. I want

to thank you.

Also note—the chair would note that some members may have

additional questions for this panel which they may wish to submit

in writing to the panel. Without objection, the hearing record will

remain open for 30 days for members to submit written questions

to these witnesses and to place their responses in the record.

I want to thank you.

We can move on to the second panel, please.

I want to thank the second panel for being here.

The first witness is Peter Birnbaum. Mr. Birnbaum is the President and Chief Executive Officer of Attorneys’ Title Guaranty

Fund, Incorporated, which is headquartered in Champaign and

downtown Chicago, Illinois. Attorneys’ Title Guarantee Fund provides title insurance to home buyers and lenders through its network of 3,500 member lawyers.

Dr. Charles J. Mendoza—Dr. Mendoza is a member of the board

of the American Association of Retired Persons—AARP. As a

former criminal defense attorney, Dr. Mendoza is active in AARP’s

telemarketing fraud campaign. He has written numerous articles

on consumer fraud which have been published in national magaVerDate 11-MAY-2000 14:36 Jul 29, 2003 Jkt 000000 PO 00000 Frm 00048 Fmt 6633 Sfmt 6633 C:\DOCS\87794.TXT HBANK1 PsN: HBANK1
39

zines. He also plays a key role in working with AARP’s Hispanic

membership. AARP is a non-profit, of course, non-partisan membership organization for people aged 50 and over.

I will see you in a year.

AARP provides information and resources, advocates on legislative, consumer and legal issues, assists members to serve their

communities and offers a wide range of unique benefits, special

products and services for its members.

Arne M. Rovick—Arne M. Rovick is Vice Chairman General

Counsel for Edina Realty Home Services, a large regional broker

operating in Minnesota and Western Wisconsin. Edina Realty has

had an affiliated mortgage company and an affiliated title insurance and closing services company and an insurance agency that

was added.

Arne has been a Director of the Real Estate Services Provider

Counsel, Incorporated—RESPRO—and is a past chairman.

Ira Rheingold—Mr. Rheingold is the Executive Director and General Counsel of the National Association of Consumer Advocates—

NACA. And NACA is a nationwide association of more than 800 attorneys and consumer advocates who have a wide range of experience curbing abuse of the predatory business practices and promoting justice for consumers.

I want to welcome everyone here today on the panel. Thank you

for attending.

And we will start with Mr. Birnbaum.

STATEMENT OF PETER J. BIRNBAUM, PRESIDENT, ATTORNEYS’ TITLE GUARANTY FUND, CHAMPAIGN, IL, ON BEHALF

OF NATIONAL ASSOCIATION OF BAR RELATED TITLE INSURERS

Mr. BIRNBAUM. Mr. Chairman, thank you.

Members of the committee, I represent a constituency of about

20,000 law firms nationwide that represent the typical mom and

pop in their home closing. So I could certainly relate to many of

the comments by Congressman Manzullo, Congresswoman Hart,

Congressman Watt, Congressman Davis in terms of what it is like

to practice law in this area.

We are opposed to the packaging aspects of the proposed rule.

And I thought in articulating that we would look back and then

look to where we are today before making comments.

When Congress enacted this legislation in 1974, it is clear that

it wanted to accomplish four things—one is to give consumers better protection for the largest financial transaction of their lives;

two, to prohibit kickbacks because Congress found that the cost of

the kickbacks passed on to the consumer; three, to disclose the cost

of home sales and home purchasers to the seller and buyer; and finally, to give consumers the right to shop.

RESPA is not perfect, and we heard a lot of comments related

to that today. It needs a lot of work—lots of dumb stuff—these closings with hundreds of documents. I agree it is totally confusing.

But the concept works. And certainly the proposal does not address

some of those comments that were addressed today.

I think it is important to step back for a second and do look at

the fact that the closing business and the title business is a highly

40

competitive business. There are lots of competitors, lots of price

competition, lots of service competition.

The proposed rule, in my opinion, is going to overturn an important cornerstone in terms of consumer protection in the housing industry. We have got four serious problems with the proposed rule.

First, and foremost, we believe that the proposed rule has the effect, and I think it has been noted by members of the committee

today, of eliminating competition and, in effect, giving a monopoly

to big banks and mortgage banks. Effectively, small law firms,

small title agents are going to be out of business if this becomes

a reality.

Second, and startling to me—and I am surprised there has not

been more comment on this—is that it gives banks, and no one

else, pretty much safe harbor immunity from criminal and civil

prosecution for taking kickbacks. One, I question the statutory authority for that and two, when Congress found the need to make

this prohibition was specifically to protect the consumer.

Three, it allows lenders to sell these closing services as part of

a package with no disclosure to the consumer of what they are buying, from whom or what price.

And then finally, and it was addressed by one of the committee

members earlier, it seeks to set a national framework for real estate transactions. And as a result—and I think Congressman

Green raised this—it is going to have the practical effect of preempting state law. Before we do that—before we go down that

path, we have got to remember that closings are very parochial in

nature—who does closings—who pays for these closings—how the

services are allocated between the parties in terms of costs—very

parochial—a patchwork quilt, if you will. it has always been regulated at the state level and it is impractical, improper and probably

exceeds HUD’s authority to suggest otherwise.

My opinion if this rule passes—I think that four things are going

to happen. One, prices are going to rise. Kickbacks—there is no

question in my mind—are going to be passed on to the consumer

in the form of higher prices. Also, in terms of cost allocation in seller-pay states, those costs are going to be shifted to the buyer and

it is going to make prices rise.

Two, consumers, if they are bewildered today, they are going to

be even more bewildered by this process that hides virtually all the

costs.

Three, competition is going to be eliminated.

And then, four, all lawyers and all the other small folks that are

in there providing this kind of competition are going to be gone

from this business.

What do we think you should do? A couple of suggestions—one,

there is a lot of talent in this room today, alone. And there is a

lot of talent in this industry. And to my knowledge, HUD has not

worked with an advisory council on trying—there is a lot of disagreement about how to implement these rules. And I would love

to see HUD bring us in to try to work through some of the issues.

Two, I think you should study the costs. The Secretary says that

this is going to lower consumer prices. I do not see that. I do not

see that at all and I think we owe it to the consumers to study that

issue.

41

Three, I think that absolutely this should be done by legislative

process and not by rule. I do not believe that HUD has the authority to promulgate this regulation.

We ask that you not implement the rule as drafted. We think

that costs are going to skyrocket. We think that housing is going

to become less affordable. There is going to be no less paperwork

involved. And a complex process is going to become even more mystifying to the consumer.

Thank you.

[The prepared statement of Peter J. Birnbaum can be found on

page 63 in the appendix.]

Chairman NEY. The time has expired. Thank you.

I also would note, without objection, your written statements for

the entire panel will be made a part of the record. You will be each,

of course, recognized for your five minutes, but it can be made part

of the record without objection.

Dr. Mendoza?

STATEMENT OF CHARLES J. MENDOZA, MEMBER, BOARD OF

DIRECTORS, AMERICAN ASSOCIATION OF RETIRED PERSONS, WASHINGTON, DC

Mr. MENDOZA. Good afternoon, Chairman Ney and Ranking

Members Waters and Members of the Subcommittee on Housing

and Community Opportunity.

I am Charlie Mendoza and I am a member of AARP’s board of

directors. And I really appreciate this opportunity to offer AARP’s

assessment of the U.S. Department of Housing and Urban Development’s proposal to reform the Real Estate Settlement Procedures

Act.

We believe, at AARP, that there is a clear need to simplify and

improve the process of shopping for and obtaining home mortgages.

And AARP strongly supports the thrust of HUD’s approach for reforming today’s confusing settlement process.

For nearly a decade, AARP has been actively advocating for the

reform of RESPA, with these same objectives in mind. Many homebuyers are mid-life Americans buying a long awaited first home, or

those who are trading up, or older

Americans who are restructuring their households as they approach their retirement years. Unfortunately, the existing

RESPA disclosure requirements have turned a virtue into a vice

by inhibiting, rather than facilitating, competition for loan products

and comparative shopping by homebuyers.

Chairman Ney, because of the importance and complexity of the

issues being raised, I have attached to my statement a copy of

AARP’s detailed agency comments regarding the proposed RESPA

reform rule. If space permits, I would like to request that our comment letter be made a part of today’s hearing record.

[The following information can be found on page 336 in the appendix.]

Chairman NEY. Without objection.

Mr. MENDOZA. Thank you.

HUD’s proposal contains three major provisions—enhanced disclosures of mortgage broker or loan originator compensation; revisions to the Good Faith Estimate system, often referred to as GFE

42

Disclosure; and the availability of guaranteed mortgage packages

that include guaranteed settlement costs and interest rates. This

loan package is often referred to as the GMP option.

In the limited time that I have to address the subcommittee, I

would like to suggest or highlight several key features of AARP’s

comment letter as they refer to these provisions.

First, AARP supports HUD’s proposal to streamline and improve

the Good Faith Estimate and to create a new disclosure form to

permit the offering of a Guaranteed Mortgage Package. The GMP

package carries with it guaranteed loan terms and settlement

costs.

Second, we support HUD’s proposal to streamline and improve

the accuracy of the GFE option. The proposed changes will offer

significant advantages to borrowers over the current system by creating greater certainty. The revised GFE will be especially beneficial for subprime borrowers who will receive firmer cost information without the risk of losing important consumer protection

rights.

Third, we favor the GMP as a novel concept to promote true comparison shopping by providing certainty for consumers at an early

shopping stage.

Fourth, we strongly recommend, however, limiting the GMP

package to the competitive prime market until knowledge regarding subprime market behavior becomes more standardized and reliable. Our concern is that the subprime market has not yet developed the required market information that is necessary for creating

competitive pricing standards.

Fifth, in our comments to the department, we detail the need for

greater enforcement mechanisms for the GFE and the GMP.

And lastly, we suggest revising the proposed GFE and GMP disclosure forms to improve their clarity and comprehensibility.

Arcane as the language of RESPA may be, the substance of

RESPA is tied directly to a central component of the American

dream, the expectation that most of us, as Americans, will be able

to afford to own our home.

We really appreciate the purpose served by this hearing in focusing public attention on an important rule-making proposal and

process. And let me close by saying that while a number of important and useful modifications can and should be made to the proposed RESPA rule before final promulgation by HUD, we strongly

support the department’s efforts to move this rule forward. And we,

at AARP, would be happy to answer any questions that you have

regarding our proposal.

Thank you.

[The prepared statement of Charles J. Mendoza can be found on

page 329 in the appendix.]

Chairman NEY. I would thank the witness for his testimony.

Mr. Rovick?

STATEMENT OF ARNE ROVICK, VICE-CHAIR AND GENERAL

COUNSEL, EDINA REALTY HOME SERVICES, EDINA, MN, ON

BEHALF OF THE REAL ESTATE PROVIDERS’ COUNCIL, INC.,

(RESPRO)

Mr. ROVICK. Mr. Chairman, good afternoon.

43

My name is Arne Rovick and I am Vice Chairman and General

Counsel of Edina Realty Home Services, a full service real estate

brokerage company headquartered in Edina, Minnesota. Edina Realty Home Services is the parent company of Edina Realty, which

participated in over 33,000 residential real estate transactions in

the year 2002 in Minnesota and Western Wisconsin. Edina is also

the joint venture partner in Edina Realty Mortgage, which originated over 6,300 residential mortgages; and the parent Edina Realty Title, which issued over 16,000 title policies and performed

20,000 closings during the same period.

Today, I represent the Real Estate Services Providers Council,

known by the acronym RESPRO, of which I have served as past

chairman and currently serve as a member of the board of directors. RESPRO is a national non-profit trade association of approximately 220 companies from a cross-section of the home buying and

financing industry, including real estate brokerage companies,

mortgage companies, title and other settlement service providers.

Mr. Chairman, RESPRO supports the goals of providing consumers early, simple and firm information about their mortgage

costs. However, RESPRO believes that HUD’s proposed singlepackage approach to RESPA reform would not accomplish these

goals.

First, HUD’s single-package approach contains a 30-day interest

rate guarantee requirement that will prevent virtually all mortgage

lenders from guaranteeing a loan package. This is explained further in my written testimony.

Second, even if it was possible for mortgage lenders to guarantee

the interest rate, HUD’s single-package approach, as a practical

matter, would bar non-lenders such as title underwriters and

agents, vender management companies and other settlement service providers from competing with lenders in the packaging marketplace because they do not offer, and therefore could not guarantee, the interest rate or the loan origination services that HUD

requires to be included in the package. Instead, they would be

forced to partner rather than compete with a mortgage lender if

they want to offer a guaranteed settlement service package.

And as a result, we believe the competition that is supposed to

pass on cost savings to consumers will be diminished and not promoted.

Let me give you an example from the perspective of Edina Realty

Home Services. Our title company currently issues title policies

and performs closings on behalf of our mortgage company and over

100 other mortgage originators operating in our marketplace.

Edina Realty Title would like to offer guaranteed settlement service packages directly to our real estate customers that could be

used not only for mortgages provided by our company, but by any

of the more than 100 mortgage originators in our marketplace.

Not only would this allow us to offer more of our real estate customers the potential benefits of packaging, but it would also provide small local mortgage originators in our marketplace a means

to compete against the large national lenders.

HUD’s proposal, however, would prevent us from offering these

packages for these local mortgage originators because we would not

guarantee the interest rate and points, even though we could and

44

would offer superior service and pricing with respect to all of the

services needed to close a transaction.

Edina is not alone in their willingness to compete and do packaging in the marketplace. A significant number of the nation’s residential real estate brokerage companies and home builders offer

title services to their customers through wholly owned subsidiaries

with joint ventures.

In addition, many title and vendor management companies

would like to be able to offer settlement service packages directly

to customers that could be used with the loan they eventually select. By excluding such a substantial base of potential competitors

from the packaging marketplace, HUD’s single-package proposal

would effectively put control over the distribution and marketing of

settlement service packages in the hands of mortgage lenders. We

believe this would diminish competition and will increase prices of

loan packages over what they would be in a more competitive environment.

To correct these deficiencies, RESPRO has proposed to HUD a

two package concept. Under our proposal, a consumer would shop

among mortgage lenders for a loan with a guaranteed price for

lender services and among both lenders and non-lenders for a guaranteed price for the closing services needed to close the loan.

Finally, RESPRO believes that the proposed binding Good Faith

Estimate—the alternative to packaging—would significantly disrupt the marketplace by increasing liability risks for lenders, creating consumer confusion and increasing administrative burdens

for providers in all industries.

In the opening statement of its proposed RESPA rule, HUD stated, ‘‘The American mortgage finance system is justifiably the envy

of the world. It has offered unparalleled financing opportunities

under virtually all economic conditions to a very wide range of borrowers that, in no small part, have led to the highest home ownership rate in the nation’s history. Clearly, our residential mortgage

industry is not broken. It has functioned well. The residential real

estate industry has been one of the strongest sectors of our nation’s

economy for the past three years. This is not to say it cannot be

improved.’’

We welcome the opportunity to——

Chairman NEY. Mr. Rovick, if you could summarize your testimony.

Mr. ROVICK. Yes. We welcome the opportunity to test the theories of the packaging system and believe that the GFE system

should stay in place until the theories of that packaging system are

tested in the marketplace.

Thank you.

[The prepared statement of Arne Rovick can be found on page

381 in the appendix.]

Chairman NEY. Thank you, Mr. Rovick.

Mr. Rheingold?

45

STATEMENT OF IRA RHEINGOLD, EXECUTIVE DIRECTOR, NATIONAL ASSOCIATION OF CONSUMER ADVOCATES, WASHINGTON, DC

Mr. RHEINGOLD. Thank you, Mr. Chairman, and members of the

committee for inviting us to testify today.

As I hear people comment about being involved in the real estate

process and being involved in the closing process, I also am an attorney who has been involved in the real estate process, although

my background is a little different. I spent the last six years, prior

to coming to Washington, working in Chicago running a foreclosure

prevention project, representing seniors and low-income people in

the poorest communities of Chicago who were victimized by bad

loans and were facing foreclosures.

So the perspective that I bring and the membership that I—

that—of National Association of Consumer Advocates are from people who are representing folks who have been damaged by the

mortgage lending process. And the eye we bring toward HUD reforms is that eye. And we look toward it to see whether it is going

to help those consumers, as well as other consumers who are confused by the real estate mortgage process.

When we look at the HUD proposal, we have three positive comments. We think that its intention is extremely good. We particularly like the part of the Guaranteed Mortgage Package, which provides an interest rate and closing cost guarantee when a Guaranteed Mortgage Package agreement is offered. The mortgage—the

interest rate and closing cost guarantee is essential to help in the

shopping process. A package that does not include both closing

costs and interest rates would be meaningless because a closing—

interest rates can be changed to maximize the benefit for people—

to maximize lending industry—I am sorry, let me start again.

If the closing costs are brought down to get somebody to buy that

loan, that cost will be made up in the interest rates. We think that

unless the package includes both the closing cost guarantee and an

interest rate guarantee, the—it simply cannot work.

A second point of the proposal, which is very important and very

good is HUD’s attempt to re-characterize yield spread premiums as

a payment from the lender to the borrower. During the last several

years, no issue has been more contentious than the use of the yield

spread premiums in the home mortgage lending process. Time and

again, consumers have unknowingly received a mortgage with a

higher interest rate than they had otherwise qualified for because

of inappropriate and illegal kickbacks paid by lenders to brokers in

the form of yield spread premiums.

HUD’s proposal to change the way yield spread premiums are

disclosed is an important first step in allowing consumers to have

greater control in choosing the type and structure of their loans

and the methods—and in the methods they choose to compensate

their mortgage broker.

Finally, in terms of the proposal, we like HUD’s bright line rule

that attempts to make the Good Faith Estimate a meaningful binding document that provides real information to consumers. it is a

game right now and I—as some of the great works of fiction, as clients walked into my office with the original Good Faith Estimate,

as I compared that to their closing document. There was no correlaVerDate 11-MAY-2000 14:36 Jul 29, 2003 Jkt 000000 PO 00000 Frm 00055 Fmt 6633 Sfmt 6633 C:\DOCS\87794.TXT HBANK1 PsN: HBANK1
46

tion—there was no reality in what we looked at from the beginning

of the process to the end of the process.

Making that binding becomes very important for a consumer so

that at the end game, when they are trying to close, they are not

surprised by costs that have just changed enormously. I think that

is an extremely important proposal and a very good thing that

HUD has done.

With that as background, we do have some problems with it—

with the HUD’s proposed rules.

The major problem—maybe not a problem, but a major concern

is we think that their proposal does nothing about predatory lending. And if it is not looked at carefully, can, in fact, enable predatory lending.

One of the assumptions that the proposal creates is that people

shop for loans. And I think in the prime marketplace, you and I—

members of this committee—people here—we may shop. In the

subprime marketplace, people are not shopping.

Creating a Guaranteed Mortgage Package with the assumption

that people are going to just take that information in poor communities and unsophisticated communities are going to take that information and shop is simply false. And it does not help them. And,

in fact, it will hurt them because it eliminates the single biggest

tool people will have to defend themselves in foreclosure, which is

Truth in Lending defenses. They will be unable—people will be unable to determine whether or not the loan they have violates Truth

in Lending with the Guaranteed Mortgage Package as it is currently structured.

And it is crucial that HUD, if they go forward on this, talk with

the Federal Reserve—coordinate with the Federal Reserve to determine how those costs function along with Truth in Lending.

I am about out of time, so I am going to stop here. I have additional remarks in my written commentary.

I think overall, the direction that HUD is taking in this proposal

is a good one. I think there are specific concerns that we have that

they need to amend the proposal so that it really does help people

and it does not do anything to extend the predatory lending problem that we see in the country today.

[The prepared statement of Ira Rheingold can be found on page

375 in the appendix.]

Chairman NEY. Thank you for your testimony.

Questions—Mr. Rovick, you talk about a two-package proposal—

have you seen the two-package proposal being put forward by the

title industry?

Mr. ROVICK. Yes, I have—yes, I have.

Chairman NEY. How does it compare?

Mr. ROVICK. Our proposal differs on two points—one, our proposal does not call for the guaranteed interest rate in the lenders’

package for the reasons that the lenders have said—that it is difficult to lock an interest rate for 30 days.

And the second point escapes me at the moment. I am sorry.

Chairman NEY. You can get back to me on it.

Mr. ROVICK. Yes.

47

Chairman NEY. Mr. Birnbaum, would the two-package proposal—first, have you seen the two-package proposal put forward

by the title industry?

Mr. BIRNBAUM. I have.

Chairman NEY. And does that address some of the concerns that

you have raised?

Mr. BIRNBAUM. Not completely, but we are talking with ALTA

about that issue right now.

Chairman NEY. So you at least see some selling points—some

positive effects that you are looking at?

Mr. BIRNBAUM. I do. I am still concerned about who is in control

of the process in either package approach. It seems to me that

when we look at the packages, a lot of independence is lost in

terms of who is choosing and whether the consumer really has a

say in that process.

Having said that, though, I have been working with the ALTA

folks and they—we are hoping to come up with a agreement.

Chairman NEY. Mr. Mendoza or Mr. Rheingold, I do not know if

you have opinions on the two-package proposal?

Mr. RHEINGOLD. I received it this afternoon, so I—

Chairman NEY. Fair enough. Obviously, you can supply comments at a later date.

Mr. ROVICK. Congressman, Mr. Ney, the second point I wanted

to make is that in our two-package proposal, RESPRO provides for

a Section 8 exemption in the settlement services package, which

the ALTA package did not. And we believe that is important so

that the vendors participating in that package can freely negotiate

the prices among themselves.

Chairman NEY. Okay. Thank you, that is helpful.

One question I had, I guess, for all of you, if you can comment

on it. we have had different people, Mr. Birnbaum, for example,

make reference to the inconsistencies in some ways of this proposal

with some of the state laws. Do you have suggestions on how we

might be able to have some sort of reconciliation of these state inconsistencies with the federal proposal?

Mr. Birnbaum, I will begin with you.

Mr. BIRNBAUM. Well, you could start with the—one of the things,

I guess, that troubles me the most is this whole Section 8 issue.

You know, what we are talking about—it is unprecedented, really,

in my experience to allow immunity from prosecution to a class of

people while still leaving the rest of the industry exposed to prosecution. And I question whether HUD has the authority to do that

independently of Congress. It certainly seems like that would be

your province.

If there is a feeling that you want to delegate that back, I suppose being admittedly somewhat myopic on it, if you were to give—

leave that up to the states to make that decision—that is something, if I had to live with it, I probably could live with it.

Chairman NEY. How about some of the other inconsistencies?

Mr. BIRNBAUM. Well, again, you know, the packaging idea seems

to gut all of the—I am from Chicago and—Illinois, it would seem

to be inconsistent with our consumer fraud act. So, again, if you

allow the states—and, again, you know, Carl Sandburg called my

town the patchwork quilt of cultures. And that is—I think you

48

heard that today in terms of this industry. If you—if you leave it

up to the states to govern these kinds of issues—and if HUD wants

to make broad policy statements about this, fine. But ultimately,

in the trenches, doing—and 90 percent of what we do are mom and

pop’s bungalow on the north side of Chicago—let our marketplace

decide and let our state decide. And that certainly seems consistent

with the approach that Congress has taken on this issue.

Chairman NEY. Well, if other members—Mr. Rheingold?

Mr. RHEINGOLD. There is one other matter—one inconsistency

and area that I have addressed in my written comments, but I

think it is very important that HUD stay out of—in the Good Faith

Estimate proposal, there is language in it that I think is extremely

dangerous and really would offend state law. And the language

gives mortgage brokers a tremendous benefit that we think is extremely dangerous. And I will read a little bit. ‘‘We do not offer

loans from all funding sources and we cannot guarantee the lowest

price or the best terms available in the market.’’

This is a written document—you have heard all this testimony

about people who read that—who do not read any of the documents, yet one of the HUD forms that people are going to be handed is a document that basically says, ‘‘I am your mortgage broker,

but I am not going to get the best loan for you or I am not going

to be obligated to get the best loan for you.’’

Well, that is fine, except for the fact that in a lot of mortgage

transactions, particularly with mortgage brokers, they are telling

people, orally, ‘‘I am going to get you the best loan. I am going to

get you the best deal.’’ And I think it is really dangerous. And

there are lots of state law out there that defines when a fiduciary

exists and protects people when, in fact, they have been misled or

have been told that there is a relationship there that somebody is—

a relationship of trust. And I think that language in that federal

statute is extremely dangerous. And we deserve some important

state protections for the consumers.

Chairman NEY. Thank you.

Thanks to all of you.

Ms. Waters—questions?

Ms. WATERS. Well, I think a lot of my concerns have been addressed. But I guess I want to ask anyone who would like to respond on the panel whether or not you believe HUD has the authority to propose the reforms that are being proposed. I hear a lot

about—several people saying they do—they do not.

If you do not believe that they have the authority, tell me why.

Mr. ROVICK. Congresswoman, we believe that there is very questionable authority on the ability to provide for the firm GFE. The

legislative history of the statute shows that the prior provision that

called for a firm GFE was repealed and in its place the Good Faith

Estimate as we know it today was put in there. So we think that

the GFE that they have proposed here would not be sustained by

the courts. And that is why we have recommended that the GFE

program stay in place while we test the packaging.

The packaging issue, I think, is a close call. There are arguments

either way as to whether that is supported by the statute or not.

And I am not sure which way a court would come out on that decision.

49

Mr. BIRNBAUM. Congresswoman?

Ms. WATERS. Yes?

Mr. BIRNBAUM. When you enacted RESPA in 1974, I think the

direction from Congress to HUD was to implement regulations that

were supportive of the goals that were articulated by Congress.

Now, by regulation—I mean, frankly, in my market, one of the

most important provisions is this anti-kickback provision—Section

8 of RESPA. It keeps people aware—on their toes—keeps the marketplace in check and I think it keeps costs down.

How a federal agency can now, by regulation, grant immunity to

a certain class of parties from criminal prosecution is beyond me.

The other issue is state preemption. I think that the policy statement was clear when the statute was enacted as that to the extent

that the states offered greater consumer protection that the state

statute would control. Here, the packaging proposal, at least my

opinion and the way that I think our legislature would look at it,

would say that this is taking away important consumer protection,

particularly in this area of disclosure and who is paying what for—

at what price and from whom.

You know, rather than this being transparent, which is the goal,

I would suggest that the closing services part—the pricing is totally

invisible to the consumer. And I think that is up for the states to

decide.

Ms. WATERS. So you think that any local statues—state or city

statues—that create disclosure in a particular way would be preempted—could be preempted if, in fact, we adopted the——

Mr. BIRNBAUM. That is absolutely the way I read this. And that

terrifies me. I just do not think it is appropriate.

Ms. WATERS. Any other opinions on authority or preemption?

Mr. RHEINGOLD. I actually do not know the answer to that because, in fact, the way the courts—I did not think HUD had the

authority to issue its 2001 letter, which damaged consumers incredibly when they redefined how yield spread premium should be

utilized. Yet, courts had deferred to HUD in what they have done.

So I am not sure I have an answer to that.

I think that there are much bigger preemption issues that is

face—that Congress is facing besides RESPA right now. I think you

have a national—you have OCC doing preemption of state laws and

city laws. you have got OTS doing preemption. I am not sure that

that—this is as big a concern as what we have got elsewhere involving mortgage lending.

Ms. WATERS. Yield back.

Chairman NEY. I thank the ranking member.

The question I wanted to ask you was asked of the last panel by

the gentlelady from Florida, Katherine Harris, will this make

things better for the consumer in the mortgage market?

Mr. ROVICK. We support the premise underlying the concept of

packaging. The one price, all-encompassing package may make it

easier for the consumers to comparison shop. But what we disagree

with is the single-package approach. But we think giving the consumer a single price for each of our proposed two packages and giving them the ability to compare that with other packages could,

conceivably, result in competition.

50

Chairman NEY. Okay. On that point, just to narrow it down a

little bit, then, overall, when you weigh them, what you have said,

is the answer no or is the answer yes?

Mr. ROVICK. Packaging has never been tested in the marketplace

and, therefore, we would like to see it tested in the marketplace

and prove itself out, leaving the current GFE in place as an alternative until the theories of packaging are proved out. But I think

packaging may lead to easier comparison shopping.

Mr. BIRNBAUM. Come on, you know, how can it be? I mean, if you

have fewer competitors and you have got a scheme where the folks,

which are mainly going to be large institutions can control the payments that are flowing to them, which are really, today, are a federal crime—it can be prosecuted for giving and receiving kickbacks.

If they are controlling that process and they are receiving that

dough, that money is not going to, you know, be passed on to the

consumer, it is going to come in the form of higher prices. So if you

have fewer competitors and higher prices, how does the consumer

win?

Mr. RHEINGOLD. I guess I would disagree with my fellow

Chicagoan a little bit here. I think there is a finite class of consumers who can be benefited by this proposal. I think the GMP

works for sophisticated consumers who will understand how to

shop around. I think it does absolutely nothing and may do damage

to people in the subprime market who are sold to and who are not

shopped to.

I also think that there is something that seems to be missing

here—is that there is nothing in this HUD package that—HUD

proposal that requires lenders to use the GMP. it is simply an option if they are seeking Section 8 exemption.

The GFE will still be alive and well and people can make loans

under that—on that criteria, as well. So I think it simply opens another opportunity for lenders to offer a different lending package to

people.

So I think that, if done right, I think it will help consumers,

even—particularly sophisticated consumers in the prime marketplace.

Chairman NEY. AARP have any pains, Doctor?

Mr. MENDOZA. Well, I am an unlicensed consumer. We can talk

about sophisticated consumers but, obviously, I am not one of

them.

I think what we need is for the language to be a lot simpler. I

looked at one thing there and it said, ‘‘Origination charges.’’ And

as I looked, I am thinking—‘‘What are we talking about?’’ We are

talking about what we are going to be charged by the broker and

by the lender. I think that—and we put it in our package, as I

looked at it, some things that I think we really need to do to make

it simpler for the consumer to understand what they are looking

at so then they can go ahead and make comparisons. But until the

consumer can look at the sheet and understand it, I think we are

repeating history all over again. And I am not an expert in this

area, obviously.

Chairman NEY. I will yield to the gentlelady.

Ms. WATERS. Let me be clear—as I remember your testimony,

you supported this proposed reform for the GMP in offering one

51

price, without having to delineate all of these charges. Is that correct?

Mr. MENDOZA. Yes, because I think that in there is another option. What we are also saying is that you have got to make this

cover sheet a lot simpler so the person can understand when they

start doing their comparison shopping what it is we are comparing—what price is this versus what——

Ms. WATERS. ——comparing two things now under this reform.

Mr. MENDOZA. Right.

Ms. WATERS. And that is the bottom line consolidated price of all

those fees that you used to see that you will not see any more and

the interest rate. Is that right?

Mr. MENDOZA. Yes.

Ms. WATERS. So do you think that is simplifying it? Or do you

think that is hiding or confusing?

Mr. MENDOZA. Well, we think that this form here simplifies it

much more than it is—I was just handed this form here. And we

have made some suggestions to this form. We think the form is a

good start and you can see in our package, once you get it, that

we have added some suggestions, I think, that will make this form

a little better for the consumer.

Ms. WATERS. And let me be clear about what Mr. Rheingold is

saying.

Are you saying the same thing—that you think that this

proposed——

Mr. RHEINGOLD. I think it is a good idea. I think that the concept

is a very good one. I think it simplifies the process. I think there

are a lot of risks involved in it and I think it has to be done well.

I think that when you do the GMP and you give Section 8 exemption that you need to be very—and that is basically an exemption

from liability—you need to be very clear about what happens when

that gets violated.

I think it can benefit consumers. I think it would make shopping

easier for consumers, yes, I do, but I think there are things in that

proposal that need to be put in place so that when a lender does

not follow the rules that lay—are laid out under the HUD proposal,

there is enforcement mechanisms to make them comply. And that

is something that is in my written proposal, but I think it is also—

it is very important to make it work.

Ms. WATERS. Okay. Just to make sure that I am understanding

you correctly—you believe that there are things that can be done

to make the proposal beneficial to the consumers without identifying all of the fees and charges?

Mr. RHEINGOLD. Absolutely. I mean, I have to tell you, I have

gone over more closing documents with consumers who were faced

with foreclosure who had no clue as to what all of those charges

were. Simplifying the process, saying, ‘‘Here is your closing costs,

here is your interest rate,’’ would eliminate a lot of confusion. I

think that is a good idea in concept—yes, I do.

Ms. WATERS. Thank you.

Mr. ROVICK. Congressman, I would just like to amplify—the complaint in today’s market is that there is 30 to 40 itemized items on

a HUD one settlement sheet. So I think by having two packages

with two prices simplifies all of those line items.

52

We disagree with HUD—we do believe that the services which

are provided within each of RESPRO’s proposed two packages

should be itemized so the consumer knows what services are being

provided. But we think that there is some merit to the single price

on each of the two packages in enabling the consumer to comparison shop with other providers.

Ms. WATERS. So you think—what you are telling me is you think

you should list out lawyer’s fees, pest control fees, et cetera, without putting a price beside each of them and just say, ‘‘These are

the services we are getting you and this is the bottom line price?’’

Mr. ROVICK. Yes, Congresswoman.

Mr. RHEINGOLD. If I can add one important point here about the

GMP?

Ms. WATERS. Yes.

Mr. RHEINGOLD. it is fine to do—I mean, I think it is fine to do

one cost. I think the problem runs into in the subprime market the

fact that there is a real interplay between the RESPA and the

breakdown of costs and determining whether a loan violates Truth

in Lending or HOEPA.

And if you have that one cost without any breakdown, it becomes

impossible for consumer advocates and consumers to determine

whether Truth in Lending has been violated. And that is an oversight in this proposal.

For instance, when someone came to my office and I was representing them—they were being faced with a foreclosure in Chicago. They would come to me and the first thing I would do is look

at all of their loan documents. And I would say, ‘‘Okay, this fee

looks kind of funky.’’ But under current law, particularly Truth in

Lending, which—that breakdown of fees was extremely important

for me to look at because if a fee was overblown—may not have

been a RESPA violation, but, in fact, it may have led to a Truth

in Lending violation.

Ms. WATERS. Yes, but you are here—you are saying it is okay to

eliminate that.

Mr. RHEINGOLD. No, what I am saying it is okay in a finite market—in a subset of the marketplace. I think it is okay in the prime

marketplace where you are not going to find Truth in Lending violations—where you are not going to find predatory loans. I think

it is very important that the GMP proposal does not remotely

sink—work its way into the subprime marketplace.

Ms. WATERS. I agree. And as a matter of fact, if I am—if I have

read this correctly, HUD may be suggesting that also—that it not

be used in the subprime market.

Mr. RHEINGOLD. They are—they—what they said was that it

should not be used for loans that are HOEPA loans. We think that

the subprime market and the predatory marketplace is far below

where HOEPA is and we would suggest—I know AARP has suggested—my friends at NCLCS suggested different ways to measure

what a subprime loan is because it—HUD goes there, but they do

not go close to far enough in making that——

Ms. WATERS. Well, is this not a good compromise to others on the

panel?

Mr. BIRNBAUM. I think that if it is important to give consumers

the opportunity to know what is going on that that opportunity

53

should be available whether they are prime or subprime. And I

think that the same theory applies. I mean, the typical consumer

buying their house, whether they are rich or poor, is relatively a

babe in the woods. And even the lawyers that are on this committee talk about how confusing these closing are.

So, to me, if this is all done behind closed doors and the lender’s

picking the lawyer and the title company and all these other providers, what is the check and balance? You know, maybe Ira is

right, maybe in a lot of cases they do not really pay attention, but

is not it at least a governor on the process to say, ‘‘well, at least

you can hire your own lawyer. At least you can hire your own title

company.’’ And you do not have it done behind a curtain where the

party that is picked is the one that is going to pay the most dough

to get the business. It just does not make sense to me.

Ms. WATERS. Well, I do not want to jump to any early conclusions about any of this. I think we have got a lot more to learn.

But I have to tell you that as we fight through this and we attempt

to get some reforms that may be beneficial to the people who need

them the most, I would lean on the side of making sure we protect

those in the subprime market, because these are the people, for

whatever reasons, are least able to do the competitive shopping

and to raise questions and to do a lot of other things.

You are right, you know, the preference would be that everyone

would have equal protection under the law, but if we have got to

do somebody, we do the ones at the high end.

Mr. BIRNBAUM. Yes, but Congresswoman, let me respectfully suggest that in close—and we do—my company does 40,00 to 50,000

closings a year, so we see a lot of stuff from A to Z—soup to nuts

kind of stuff. And the typical mom and pop—middle class, you

know, qualified buyer—lots and lots of abuses go on at that level,

too. So this is the American dream. And lots of people are paying

too much dough because of bad lending practices. And I think that

this proposed rule only exacerbates that problem.

Ms. WATERS. You are absolutely right.

And it can be, if I may, Mr. Chairman, it can be sometimes confusing. But what is interesting about a lot of the people that I try

to protect is they are thrown into subprime no matter how much

money they make, no matter how good they pay their bills. And so

we would be able to help some people a little bit, in a different

way, perhaps, get some disclosure. Because unfortunately, a whole

set of people are placed into subprime lending that could be in

prime lending.

So those are the kinds of considerations we have to give to this.

Mr. BIRNBAUM. And that is a good point and Ira sees it more

than me, but absolutely.

Ms. WATERS. Thank you.

Chairman NEY. The point is they did not know they could have

been in prime. And how do you get to that point?

I think Mr. Rheingold mentioned about sophisticated and unsophisticated and somebody else mentioned about simplification. And

you can simplify, but what do you do with the unsophisticated

buyer, even if it is simplified if—who is the protector or the gatekeeper or the person that works with them. I think that is a—you

know, I mean simplification is great and disclosure, of course, is

54

important, but who also helps the unsophisticated buyer? Or is it

buyer beware? I mean, you——

Mr. RHEINGOLD. Well, I think part of it—part of the piece that

has to sit in here is that there has got to be some teeth to the regulation, which I do not think exists in the current proposal. If, in

fact, you are going to allow this guaranteed mortgage price—and

I actually think that it may lower prices—if, in fact, a lender does

not do—they do not comply with the Guaranteed Mortgage—they—

in other words, they come up, they say, ‘‘is is what your rate—interest rate is going to be. This is what your closing cost is going

to be.’’ And at closing it changes, then there has got to be some

teeth there so that there is some real enforcement—so there is an

incentive for lenders not to do that.

Chairman NEY. So what is the suggestion?

Mr. RHEINGOLD. The suggestion is that if, in fact, they do not

comply with the Guaranteed Mortgage Pack—if they do not comply

with their promise—that initial promise, it becomes a presumption

that they have violated Section 8 of RESPA. So you create a violation, because the consumer cannot prove it any other way.

I think the GFE thing—the GFE proposal is a good one because

it impacts the unsophisticated consumer. Like I said, the bait-andswitch is alive and well. That Good Faith Estimate bears almost

no resemblance to what you see in the end product. Making that

Good Faith Estimate binding becomes very important because people, up front, know what the cost they are getting, within some limited tolerances. I think that is a good suggestion.

I think that HUD does not—but, unfortunately, as far as that

proposal—this stuff gets just so complicated—the problem with

that is there is no enforcement mechanism if, in fact, the end product does not match the Good Faith Estimate. It just says, ‘‘Oh, we

have to give you another Good Faith Estimate.’’ Or you have to

give them something that matches.

One thing HUD can do, which is in our—in our suggestion, is

simply say that if a lender gives you a final closing document that

is not within the tolerances that the Good Faith Estimate is supposed to give you, then that would be considered an unfair and deceptive practice. And then you could be able to use state law to

prove that they violated the law. That would be—that would be a

suggestion to give it more teeth, as well.

Chairman NEY. Mr. Birnbaum, did you a——

Mr. BIRNBAUM. My experience—and, again, this is based on my

own bias of where I am at and where I practice—but a good gatekeeper in our market is the lawyer that represents the client from

contract to closing. I think that having an advocate for the largest

financial transaction of your life is a great one. it is not true in all

states, though.

And Congresswoman Waters talked about seniors—at least, you

know, in California lawyers do not do closings, but at least with reverse mortgages you have to go through that counseling period.

And perhaps setting a mechanism in place where, particularly in

predatory lending, where people get advocacy and counseling before

they get into these rip-off deals would ameliorate the problem.

Chairman NEY. I want to thank the panel.

55

And also the Chair notices some members may have additional

questions for this panel. They may want to submit them in writing.

Without objection, the hearing record will remain open for 30 days

for members to submit written questions of the witnesses and place

their responses in the record.

I want to thank the panel.

And I also want to thank the ranking member, the gentlelady

from California, and the other members for their participation in

today’s hearing.

[Whereupon, at 4:56 p.m., the subcommittee was adjourned.]

(57)

A P P E N D I X

February 25, 2003

58

59

60

61

62

63

64

65

66

67

68

69

70

71

72

73

74

75

76

77

78

79

80

81

82

83

84

85

86

87

88

89

90

91

92

93

94

95

96

97

98

99

100

101

102

103

104

105

106

107

108

109

110

111

112

113

114

115

116

117

118

119

120

121

122

123

124

125

126

127

128

129

130

131

132

133

134

135

136

137

138

139

140

141

142

143

144

145

146

147

148

149

150

151

152

153

154

155

156

157

158

159

160

161

162

163

164

165

166

167

168

169

170

171

172

173

174

175

176

177

178

179

180

181

182

183

184

185

186

187

188

189

190

191

192

193

194

195

196

197

198

199

200

201

202

203

204

205

206

207

208

209

210

211

212

213

214

215

216

217

218

219

220

221

222

223

224

225

226

227

228

229

230

231

232

233

234

235

236

237

238

239

240

241

242

243

244

245

246

247

248

249

250

251

252

253

254

255

256

257

258

259

260

261

262

263

264

265

266

267

268

269

270

271

272

273

274

275

276

277

278

279

280

281

282

283

284

285

286

287

288

289

290

291

292

293

294

295

296

297

298

299

300

301

302

303

304

305

306

307

308

309

310

311

312

313

314

315

316

317

318

319

320

321

322

323

324

325

326

327

328

329

330

331

332

333

334

335

336

337

338

339

340

341

342

343

344

345

346

347

348

349

350

351

352

353

354

355

356

357

358

359

360

361

362

363

364

365

366

367

368

369

370

371

372

373

374

375

376

377

378

379

380

381

382

383

384

385

386

387

388

389

390

391

392

393

394

395

396

397

398

399

400

401

402

403

404

405

406

407

408

409

410

411

412

413

414

415

416

417

418

419

420

421

422

423

424

425

426

427

428

429

430

431

432

433

434

435

436

437

438

439

440

441

442

443

444

445

446

447

448

449

450

451

452

453

454

455

456

457

458

459

460

461

462

463

464

465

466

467

468

469

470

471

472

473

474

475

476

477

478

479

480

481

482

483

484

485

486

487

488

489

490

491

492

493

494

495

496

497

498

499

500

501

502

503

504

505

506

507

508

509

510

511

512

513

514

515

516

517

518

519

520

521

522

523