    [House Hearing, 107 Congress]
    [From the U.S. Government Publishing Office]

                           REFORMING THE REAL ESTATE
                          SETTLEMENT PROCEDURE: REVIEW
                          OF HUD'S PROPOSED RESPA RULE
    =======================================================================

                                    HEARING

                                   BEFORE THE

                        COMMITTEE ON FINANCIAL SERVICES

                         U.S. HOUSE OF REPRESENTATIVES

                          ONE HUNDRED SEVENTH CONGRESS

                                 SECOND SESSION

                                   __________

                                OCTOBER 3, 2002

                                   __________

           Printed for the use of the Committee on Financial Services

                               Serial No. 107-85

                               U.S. GOVERNMENT PRINTING OFFICE
    84-631                         WASHINGTON : 2002
    ___________________________________________________________________________
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                     HOUSE COMMITTEE ON FINANCIAL SERVICES

                        MICHAEL G. OXLEY, Ohio, Chairman
    JAMES A. LEACH, Iowa                 JOHN J. LaFALCE, New York
    MARGE ROUKEMA, New Jersey, Vice      BARNEY FRANK, Massachusetts
        Chair                            PAUL E. KANJORSKI, Pennsylvania
    DOUG BEREUTER, Nebraska              MAXINE WATERS, California
    RICHARD H. BAKER, Louisiana          CAROLYN B. MALONEY, New York
    SPENCER BACHUS, Alabama              LUIS V. GUTIERREZ, Illinois
    MICHAEL N. CASTLE, Delaware          NYDIA M. VELAZQUEZ, New York
    PETER T. KING, New York              MELVIN L. WATT, North Carolina
    EDWARD R. ROYCE, California          GARY L. ACKERMAN, New York
    FRANK D. LUCAS, Oklahoma             KEN BENTSEN, Texas
    ROBERT W. NEY, Ohio                  JAMES H. MALONEY, Connecticut
    BOB BARR, Georgia                    DARLENE HOOLEY, Oregon
    SUE W. KELLY, New York               JULIA CARSON, Indiana
    RON PAUL, Texas                      BRAD SHERMAN, California
    PAUL E. GILLMOR, Ohio                MAX SANDLIN, Texas
    CHRISTOPHER COX, California          GREGORY W. MEEKS, New York
    DAVE WELDON, Florida                 BARBARA LEE, California
    JIM RYUN, Kansas                     FRANK MASCARA, Pennsylvania
    BOB RILEY, Alabama                   JAY INSLEE, Washington
    STEVEN C. LaTOURETTE, Ohio           JANICE D. SCHAKOWSKY, Illinois
    DONALD A. MANZULLO, Illinois         DENNIS MOORE, Kansas
    WALTER B. JONES, North Carolina      CHARLES A. GONZALEZ, Texas
    DOUG OSE, California                 STEPHANIE TUBBS JONES, Ohio
    JUDY BIGGERT, Illinois               MICHAEL E. CAPUANO, Massachusetts
    MARK GREEN, Wisconsin                HAROLD E. FORD Jr., Tennessee
    PATRICK J. TOOMEY, Pennsylvania      RUBEN HINOJOSA, Texas
    CHRISTOPHER SHAYS, Connecticut       KEN LUCAS, Kentucky
    JOHN B. SHADEGG, Arizona             RONNIE SHOWS, Mississippi
    VITO FOSSELLA, New York              JOSEPH CROWLEY, New York
    GARY G. MILLER, California           WILLIAM LACY CLAY, Missouri
    ERIC CANTOR, Virginia                STEVE ISRAEL, New York
    FELIX J. GRUCCI, Jr., New York       MIKE ROSS, Arizona
    MELISSA A. HART, Pennsylvania
    SHELLEY MOORE CAPITO, West Virginia  BERNARD SANDERS, Vermont
    MIKE FERGUSON, New Jersey
    MIKE ROGERS, Michigan
    PATRICK J. TIBERI, Ohio
                 Terry Haines, Chief Counsel and Staff Director

                                C O N T E N T S

                                  ----------
                                                                       Page
    Hearing held on:
        October 3, 2002..............................................     1
    Appendix
        October 3, 2002..............................................    29

                                   WITNESSES
                           Thursday, October 3, 2002

    Martinez, Hon. Mel, Secretary, Department of Housing and Urban
      Development accompanied by the Honorable John C. Weicher,
      Assistant Secretary for Housing-FHA Commissioner...............     7

                                    APPENDIX

    Prepared statements:
        Oxley, Hon. Michael G........................................    30
        Royce, Hon. Ed...............................................    33
        Gillmor, Hon. Paul E.........................................    35
        Grucci, Hon. Felix J.........................................    36
        Israel, Hon. Steve...........................................    37
        Maloney, Hon. Carolyn B......................................    38
        Martinez, Hon. Mel (with attachments)........................    39

                  Additional Material Submitted for the Record

    Tiberi, Hon. Patrick J.:
        Letter to Hon. Mel Martinez, Secretary, Department of Housing
          and Urban Development, October 30, 2002....................    89
    Martinez, Hon. Mel:
        Written response to questions from Hon. Mark Green...........    92
        Written response to questions from Hon. John J. LaFalce......    95
        Written response to questions from Hon. Jan D. Schakowsky....    98

                           REFORMING THE REAL ESTATE
                          SETTLEMENT PROCEDURE: REVIEW
                          OF HUD'S PROPOSED RESPA RULE

                                  ----------

                           Thursday, October 3, 2002

                 U.S. House of Representatives,
                       Committee on Financial Services,
                                               Washington, D.C.
        The committee met, pursuant to call, at 10:34 a.m., in Room
    2128, Rayburn House Office Building, Hon. Michael Oxley
    [chairman of the committee] presiding.
        Present: Representatives Oxley, Royce, Lucas of Oklahoma,
    Ney, Kelly, Gillmor, Manzullo, Jones, Biggert, Green, Miller,
    Cantor, Grucci, Hart, Capito, Rogers, Tiberi, LaFalce, Waters,
    Maloney of New York, Velazquez, Watt, Bentsen, Maloney, Inslee,
    Scakowsky, Jones of Ohio, Hinojosa, Lucas of Kentucky and Clay.
        The Chairman. [Presiding.] This hearing of the Committee on
    Financial Services will come to order. Today's hearing is
    entitled Reforming the Real Estate Settlement Procedure, Review
    of HUD's Proposed RESPA Rule. Our only witness today will be
    the Honorable Mel Martinez, Secretary of Housing and Urban
    Development.
        Pursuant to the chair's announcement and rule 3(f)(2) of
    the rules of the Committee on Financial Services for the 107th
    Congress, the chair announces he will limit recognition for
    opening statements to the designees of the chair and ranking
    minority member of the full committee, and the chair and
    ranking minority member of the Subcommittee on Housing and
    Community Opportunity, to a period not to exceed 16 minutes,
    evenly divided between the majority and minority. Prepared
    statements of all members will be included in the record, and
    it is so ordered. The chair now recognizes himself for five
    minutes for an opening statement.
        Today, the Financial Services Committee holds its first
    hearing on the administration's proposal to reform the mortgage
    disclosure and settlement process. For the average American,
    that process is called a real estate closing or settlement. For
    policy wonks and mortgage finance technicians, that process is
    called the Real Estate Settlement Procedures Act of 1974 or
    RESPA. In 1998, the former Banking and Financial Services
    Committee held two hearings on this very issue. In those
    hearings, the committee looked at recommendations from HUD and
    the Federal Reserve. The issues four years ago included whether
    the recommendations made more mortgage disclosures easier for
    consumers to understand and less onerous for the industry to
    implement, improve the timing of the disclosures such that they
    can serve as an effective shopping tool, provided consumers
    with more certainty about the money that will be needed at the
    closing table, and provided for a competitive marketplace
    without sacrificing the quality of services provided or
    creating conflicts of interest.
        Not much has changed in four years, and those issues
    resonate today as the committee looks at another proposal to
    simplify the closing process. The Secretary of Housing and
    Urban Development, the Honorable Mel Martinez, has provided the
    leadership necessary to move the debate forward on how best to
    meet the twin objectives of providing a meaningful disclosure
    process for the potential homebuyer, keeping closing costs
    down, and prohibiting unfair fees, and at the same time meeting
    the market and technology needs of the mortgage finance system,
    which are far different than envisioned in RESPA's creation
    back in 1974.
        In 1974, the mortgage lending and home buying experience
    was simpler. The homebuyer approached the local lending
    institution for a mortgage and that entity managed the process
    from application to funding. The funded loan was then held in
    the lender's portfolio and the lender collected and applied the
    monthly payments. Today, however, the market is much different.
    Different parties may originate, hold and service the funded
    mortgage, and intermediaries have come about to join the
    parties together.
        On July 29, 2002, HUD published a proposed rule that would
    significantly alter through regulation the mortgage financing
    process. This proposal, if finalized, will result in
    significant changes in how Americans purchase homes. My
    understanding is that the intent of the rule is to change the
    way lender payments to brokers are recorded and reported to
    consumers, improve HUD's good faith estimate settlement cost
    disclosure, and remove regulatory barriers to allow market
    forces and increase competition to promote greater choice for
    consumers by allowing guaranteed packages or bundling of
    settlement services and mortgage loans.
        The Secretary and the Administration are to be commended
    for taking this first step. We welcome the Secretary here today
    to allow him the opportunity to explain the rule, explain its
    rationale, and to answer our questions and respond to our
    concerns. Let's be clear. This is a very complex rule with
    significant impact on the American home buying experience. We
    have an extraordinary opportunity to remedy what many common
    Americans believe is a broken, convoluted and wasteful
    experience. Even the secretary himself when announcing reform
    talked about his home buying experience here in the
    metropolitan Washington area. He was the confirmed HUD
    Secretary and an attorney, yet he still did not understand all
    of the settlement documents and charges before him. Just like
    other Americans, he signed the papers and moved in. Mr.
    Secretary, I have had that experience at practicing law for
    almost 10 years in Ohio and it is indeed a frustrating
    experience for all of us.
        For most American families, buying a home is the single
    biggest investment they will ever make. It is unacceptable for
    the home buying process itself to be one of the most confusing
    ordeals that our citizens ever have to go through. As a public
    policy for the good of communities and families across the
    country, we want to encourage home ownership. We want to
    increase our home ownership rate beyond today's record 69
    percent, to reach the lower income, inner city, minority and
    single family households who traditionally lag behind the
    national average.
        Moreover, we want transparency in a process that all the
    participants can agree is fair and cost-efficient. This
    proposal I believe is the first step in the right direction in
    making that goal a reality.
        Mr. Secretary, welcome back to the Financial Services
    Committee. We look forward to your testimony. We also thank you
    and your staff, notably General Counsel Dick Hauser and Federal
    Housing Commissioner John Weicher for starting this process. I
    look forward to working with you to understand the complexities
    of this proposed rule and making adjustments where necessary so
    that we have a fair and workable product.
        I am now pleased to yield to the ranking member, the
    gentleman from New York, Mr. LaFalce.
        [The prepared statement of Hon. Michael G. Oxley can be
    found on page 30 in the appendix.]
        Mr. LaFalce. Thank you very much, Mr. Chairman, Secretary
    Martinez, and Commissioner Weicher.
        I want to start my testimony by congratulating HUD
    Secretary Martinez for taking the initiative to propose a very
    comprehensive reform of the mortgage loan process. Buyer
    complaints about confusing disclosures and last-minute cost and
    rate increases have led many, including myself, to call for
    reform of RESPA. I commend you for moving forward with
    proposals to rein in yield-spread premium abuses, impose good
    faith estimate tolerance limitations, and create an incentive
    for loan originators to offer up-front guaranteed loan rates
    and total closing costs.
        Now, most of my constituents come up to me and say, I agree
    with 95 percent of your votes, but let's talk about the 5
    percent. So I agree with most of what you are proposing, let's
    talk about some of the other areas.
        The specifics of any final rule that HUD ends up
    promulgating are critical to ensure that reform works. As you
    review public comments, as you move toward a final rule, I
    exhort you to resist calls to delete or weaken some of your key
    pro-consumer provisions, and instead actually make changes to
    strengthen the provisions to enhance their implementation and
    enforcement.
        So to that end, I am giving you a comment letter today
    regarding your proposal. It is to lay out what I consider to be
    important markers for your final rule. I think there are four
    critical benchmarks, and let me just mention them and then go
    into each of them briefly. First, predatory lending protections
    must not be diminished. Secondly, a guarantee must be a real
    guarantee. Third, yield-spread premium abuses must end. And
    fourth, the enforcement of violations must be effective.
        Let me go into them. With respect to predatory lending
    protections, I do not mean this as a criticism, but I will
    point out that your rule does not include critically needed
    measures to rein in the growing problem. With the exception of
    the YSP reforms, the rule would not address the most common
    predatory and abusive mortgage loan practices. That includes
    exorbitant fees and rates, high pre-payment penalties, the
    requirement of up-front credit insurance, and pushing loans on
    borrowers with inadequate repayment means, and some others.
        Of equal concern, at least, is the bundling of loan fees
    under the guaranteed loan package agreement raises the
    possibility that important truth-in-lending consumer
    protections which are used to provide redress in case of
    violations which involve predatory loans could be diminished.
    Specifically, truth-in-lending act rights of rescission
    relating to violations such as whether fees are bona fide and
    reasonable, and whether exclusions are properly accounted for
    could be undermined.
        So HUD should not adopt a final rule incorporating
    packaging unless it also includes provisions which fully
    preserve existing predatory lending protections, and arguably
    the best way to meet this concern would be for Congress to
    enact comprehensive predatory lending legislation, on which
    this Congress regrettably has taken no action. In the last
    Congress and in this Congress, I introduced a bill that Senator
    Sarbanes introduced in the Senate. It is complex, I know, and
    it may not be the best product that the mind of man can come up
    with--I am very, very open on it--but I do think that we need
    some enhanced legislation in this area.
        But in the absence of that, HUD can ensure that loans of a
    predatory nature are not protected from legal redress because
    of their packaging status. I have got a number of
    recommendations in my letter to address this issue, most
    especially I do not think you should allow the use of a
    guaranteed mortgage package agreement if it includes a
    prepayment penalty. Prepayment penalties are an important
    element of predatory loans and they are commonly used to
    effectively lock borrowers into high interest rate loans.
        Let me go into the second marker, that a guarantee must be
    a guarantee. Any rule that takes away consumer protections by
    granting a section 8 RESPA exemption should condition such
    exemption on both an up-front guarantee of total closing costs
    and an interest rate guarantee. So I commend you because your
    mortgage package agreement does include both. But my question
    is in the nature of the guarantee. It is not a criticism, it is
    more a question. The guarantee could be meaningless or
    misleading if you cannot take it to the bank, so to speak. A
    meaningless guarantee would erode both the policy and the
    statutory basis for the exemption. The proposed rule states
    that under the GMPA, an interest rate guarantee would be
    subject to acceptable final underwriting and property
    appraisal.
        Well, it is a question of what that means and how it is
    interpreted. It is critical that the rule be strengthened to
    ensure that the subject to acceptable and final underwriting
    clause not be permitted to be used to increase rates at the
    whims of the loan originator without justification. I have
    given you some suggestions as to how to ensure that. So I just
    want your rule beefed up in that respect.
        Third, with respect to yield-spread premiums, again I
    applaud your treatment of yield-spread premiums. But I think we
    need to enhance the enforcement of broker compensation
    provisions by making it a presumptive violation of section 8
    for a broker to fail to fully credit yield-spread premiums to
    the borrower, and explicitly make such violations subject to
    class action status. I think that would be extremely important
    as a deterrent enforcement mechanism. I think it is also
    important to retain the proposed rule's requirement that
    brokers and all loan originators disclose their role in a loan
    transaction.
        My last point, the enforcement of the violations must be
    effective. With respect to the good faith estimate, zero and 10
    percent tolerance requirements. It is not clear how consumers
    could seek effective redress or how HUD could enforce
    violations of the newly imposed GFE tolerances. As HUD pointed
    out in its 1998 HUD-Fed RESPA Report, GFE violations are
    essentially unenforceable under current statute. Now, the
    simple solution would be to enact statutory enforcement
    provisions such as are included in my mortgage reform bill,
    H.R. 4818. But in the absence of such legislation, HUD should
    at least state that noncompliance with the GFE tolerance
    provisions would constitute an unfair and deceptive practice.
        Also, with regard to enforcement of violations of the GMPA,
    the rule states that packagers would lose their section 8
    exemption. However, it is unclear how consumers could pursue
    redress under section 8 in a bundled closing cost package where
    individual charges are not itemized. Section 8 enforcement of
    packaging violations should be more explicitly addressed in the
    final rule.
        And lastly, I would like to note that even if HUD moves
    forward to implement a final rule along the lines of your
    proposed rule, a number of legislative provisions from my
    mortgage loan consumer protection act, 4818, would nicely
    complement and enhance your rule. Specifically, I would ask for
    your support and Congress' consideration of provisions from my
    bill to statutorily prohibit markups and undisclosed lender
    fees, to require prompt return of escrow balances on loan
    payoffs, to improve the accuracy of the APR calculation on
    mortgage loans, and to establish enforcement provisions for
    disclosure violations.
        I thank you for your consideration. I thank the chair for
    its indulgence. I know I have gone a bit over my five minutes.
    I thank the chair.
        The Chairman. The gentleman's time has expired.
        The gentlelady from New York, Ms. Kelly.
        Mrs. Kelly. Thank you, Mr. Chairman.
        The current laws surrounding real estate closings are far
    too complicated, and they have long deserved reform. For years,
    different groups have worked to build consensus on reforming
    the laws to no avail. So I think HUD should be commended for
    their effort to simplify the process and lower the closing cost
    because when you get involved in a real estate closing, if you
    do not know what you are doing, if you are a first-time
    homebuyer, it is very intricate and the costs of the closings
    have become a barrier, and the complication of the closings
    have become a barrier for many American families that look for
    the security of home ownership. So of course, it is important
    for us to do policy changes. With any policy change, Congress
    is probably going to have some questions, but I think we are
    all grateful that Secretary Martinez has taken the time to come
    to discuss the issues with us. Secretary Martinez, I thank you
    for being here. I think your presence today is a clear
    indication of the importance of this issue for all of America's
    consumers and first-time homebuyers. So thank you so much for
    being with us.
        I yield back.
        The Chairman. The gentlelady yields back.
        The gentlelady from New York, Ms. Maloney.
        Mrs. Maloney of New York. Thank you, Mr. Chairman, and
    thank you, Mr. Martinez, for testifying today.
        As observers of RESPA reform are well aware, this is a
    complicated subject with competing interests from all over the
    financial services industry. While reform efforts have stalled
    repeatedly over the last decade, technology and mortgage
    products themselves continue to move forward, making the need
    for simplification of the home buying process even more
    important.
        [Recess.]
        The Chairman. The committee will reconvene. You were
    saying, Ms. Maloney?
        Mrs. Maloney of New York. Yes, thank you very much, Mr.
    Chairman. In the interests of time, I would just like to put my
    comments in the record. But I would like to note that while the
    process is far too complicated, we do need to acknowledge that
    the American mortgage market is a model for the rest of the
    world. Any effort to reform the home buying process must not
    damage this success, a large part of which I attribute with the
    emphasis that we have in the process on consumer protection.
        I want to note a survey that I found tremendously important
    and interesting that Fannie Mae recently conducted on national
    housing. It showed that minority home ownership significantly
    trails the rest of the country. So it is an area where we do
    need an emphasis. While we know that the down payment mortgages
    are widely available, the survey found that 30 percent of
    Americans believe that you need to pay 20 percent of the cost
    of the home up front, including 39 percent of both African
    Americans and Hispanics. I brought out several other important
    points from this survey, but I just want to close and put my
    comments in the record in order to move forward quickly. I look
    forward very much to working with you, Mr. Chairman, as we move
    forward with this process.
        Thank you.
        [The prepared statement of Hon. Carolyn B. Maloney can be
    found on page 38 in the appendix.]
        The Chairman. I thank the gentlelady.
        I now have the honor of introducing the first Hispanic
    immigrant and first Cuban American ever appointed to serve in
    the President's Cabinet. The Secretary of the U.S. Department
    of Housing and Urban Development Mel Martinez is a strong
    leader. He is working hard to address the housing needs of
    families across America.
        The gentleman from North Carolina?
        Mr. Watt. Did you make a decision that nobody else was
    going to do opening statements?
        The Chairman. Yes.
        Mr. Watt. Okay. I am sorry. Thank you.
        The Chairman. You will have plenty of time for questions.
        Mr. Watt. I must not have been here when you made that
    announcement. I apologize.
        The Chairman. No problem.
        As a teenager, the secretary fled from Cuba to America as
    part of a Catholic humanitarian effort that eventually brought
    14,000 children to this country. He had to leave his family
    behind, spoke no English. But through the generosity of
    strangers and his own conviction that he could succeed in this
    land of possibility, he did. Secretary Martinez graduated from
    Florida State University College of Law, practiced law in
    Orlando for 25 years. During that time, he actively involved
    himself in giving back to the community.
        Now, as a member of the Administration, Secretary Martinez
    is working with many of us in Congress to help a record number
    of Americans find safe and affordable housing. He is pursuing a
    number of bold initiatives to increase home ownership among
    minorities, including the reform of the home buying process
    that we are going to be discussing today. He is also working to
    provide down payment assistance to families, boost the supply
    of affordable homes, and increase education to empower home
    buyers to make informed decisions.
        Secretary Martinez, welcome back to the Financial Services
    Committee. You are always welcome here.

    STATEMENT OF HONORABLE MEL MARTINEZ, SECRETARY, U.S. DEPARTMENT
                    OF HOUSING AND URBAN DEVELOPMENT

        Secretary Martinez. Thank you, Mr. Chairman. Thank you very
    much, and Ranking Member LaFalce and members of the committee.
    It is great to be back with you.
        I appreciate the opportunity to discuss with you this
    morning a major initiative of the Bush administration which is
    to try to increase the number of minorities particularly, but
    the number of home owners throughout America.
        Mr. Chairman, in order to reserve some of my time, I will
    submit all of my comments for the record, but would like to
    just summarize them for you at this time.
        The Chairman. Without objection.
        Secretary Martinez. The Bush Administration is committed to
    eliminating the homeownership gap that exists today between
    minority populations and the rest of the country. In
    challenging the real estate and mortgage finance industries to
    work with us to boost homeownership among minorities, the
    president has set a goal to increase minority homeownership by
    5.5 million new minority homeowners by the end of the decade.
    The mortgage finance process and the cost of closing are major
    impediments to homeownership. Every day, Americans enter into a
    mortgage loan, the largest financial obligation most families
    will ever undertake, without the clear and useful information
    they receive with most any other major purchase.
        After agreeing to the price of a house, too many families
    sit down at the settlement table and discover unexpected fees
    that can add hundreds, if not thousands of dollars to the cost
    of their loan. As a result, many home buyers find the
    settlement process to be filled with mystery and frustration.
    This administration is committed to streamlining the mortgage
    finance process so consumers can shop for mortgages and better
    understand what will happen at the closing table.
        For these reasons, HUD has proposed major overhaul of the
    regulations governing the Real Estate Settlements and
    Procedures Act. RESPA has been a priority of mine since I came
    to HUD. Shortly after taking office, I was faced with a major
    RESPA issue, the legality of yield-spread premiums. In order to
    preserve yield-spread premiums as a tool to defer part of the
    settlement cost, we clarified our policy statement, repeating
    our view that as long as a broker's compensation is for goods,
    facilities or services, and the total compensation was
    reasonable, yields for premiums to the mortgage broker are
    legal under RESPA.
        At the same time, we recognized that there were serious
    disclosure problems involving yield-spread premiums. We noted
    that a small, but seemingly significant number of brokers,
    often use yield-spread premiums to generate additional profits,
    placing unsuspected barriers and higher rate loans without a
    corresponding benefit to the buyer. And so in the process of
    issuing the policy statement, I committed HUD to establishing
    clear disclosure rules for mortgage broker fees and to
    simplifying and improving the mortgage origination process for
    everyone involved.
        This was long overdue, and while some may disagree on some
    specifics--according to the ranking member, 95 percent to 5
    percent, that is good--all agree that it was time for a
    thorough review of RESPA. Beginning last year, we undertook a
    major reform of RESPA's regulatory requirements. After months
    of meetings with industry groups, consumer advocates and other
    interested parties, HUD published its reform proposal for
    public comment on July 29, 2002. The comment period is open
    until October 28.
        In addition to adding transparency and certainty to the
    settlement process, we believe that our proposal can reduce
    closing costs by an average of $700 per closing. That kind of
    savings will allow many Americans currently priced out of the
    home buying market to buy a home. Overall, the annual savings
    to consumers could be as much as $8 billion. We also expect our
    proposal to promote innovation in the marketplace, create more
    competition as consumers can make better-informed decisions,
    and inspire greater public confidence in the mortgage lending
    industry.
        The proposed rule addresses the inadequacies of the
    existing RESPA regulations in three ways. The rule
    fundamentally changes the way in which compensation to mortgage
    brokers is disclosed to borrowers, while preserving the use of
    yield-spread premiums to help pay closing costs. The rule
    lessens the chance that brokers would use these payments to
    increase their income without the borrower's knowledge. The
    rule significantly improves HUD's good faith estimate
    settlement cost disclosure. This holds great promise for
    eliminating duplicative or unnecessary charges which will lead
    to lower settlements costs. Consumers will get the GFE before
    they have to make commitment to the lender, giving them time to
    shop for the best loan to meet their needs.
        Finally, the rule permits loan providers to offer
    guaranteed packages of settlement services and mortgage loans
    to borrowers. While packaging of services may be desirable and
    drive down costs, we simply believe that there is no reason to
    preclude it from happening through regulation. Because they
    ensure greater transparency, we believe that our proposed
    reforms will make it more difficult for unscrupulous lenders to
    abuse borrowers.
        I want to be very clear that we do not consider RESPA
    reform to be a cure-all for many problems associated with
    predatory lending. More must be done to address predatory
    lending, while preserving a source of credit in the sub-prime
    market for those with less than perfect credit histories. We
    have issued the proposed rule and the comment period is open
    until October 28, 2002. We have asked all segments of the
    industry, as well as consumer groups, to comment on the
    possible impact of our proposal. We look forward to improving
    the proposed rule through these comments. We are encouraged by
    the broad support the rule has received. HUD is committed to
    creating a home buying and mortgage finance process grounded in
    transparency and simplicity. By reforming the rules governing
    the purchase and financing of a home, we will create new
    opportunities for first-time home buyers, keep the American
    dream of homeownership alive for more families, and inspire
    greater public confidence in the mortgage lending industry.
        I would again like to thank the committee for the
    opportunity to meet with you today. We look forward to your
    comments. We look forward to the other comments that we are
    receiving, and we look forward to improving this rule for the
    benefit of all American families.
        [The prepared statement of Mel Martinez can be found on
    page 39 in the appendix.]
        Thank you, sir.
        The Chairman. Thank you, Mr. Secretary. You will indeed get
    some comments today, I can assure you, and some questions, as
    would be expected.
        You mentioned that you thought that the average closing
    could save $700. How did HUD arrive at that number?
        Secretary Martinez. Well, it is an imprecise number, to be
    sure, but we believe that by creating greater competition,
    allowing consumers to shop for services, that it will drive
    down costs; that it will encourage all of the participants in
    the closing process to create efficiencies and in creating
    those efficiencies, we believe we will see a reduction in the
    closing costs and all of the numerous fees that are apparent.
    We believe that there are a number of fees that often get
    tacked on in the closing process that frankly are not grounded
    in anything significant of benefit to the consumer. So we
    believe that through all of that and the efficiencies generated
    by it, that it will drive down costs.
        The Chairman. You mentioned, of course, that the comment
    period ends on October 28, this month. What time line do you
    envision for review of comments, revision of the proposed rule,
    and approval of the final rule?
        Secretary Martinez. We do not have a precise time line. We
    are receiving a lot of comment, but we know that a lot of
    significant comments will be coming after this hearing. We will
    digest all of those comments, and then continue the
    consultation process with the members of this committee, and
    then arrive at a final rule.
        In terms of a time line, I am not wedded to a specific time
    line. Whatever time it takes to digest and sufficiently absorb
    all of the comments that will be received, we will take. I am
    not interested in a rule that is out quickly. I am interested
    in a rule that comes as close to getting it right as we
    possibly can.
        The Chairman. Does that also include, then, the deadline
    for comments?
        Secretary Martinez. Well, the deadline for comments I think
    needs to be fixed, because frankly I think one of the enemies
    of reform would be to drag out this process ad infinitum. In
    fact, I think it already by some observations would have been
    dragged out for many years. So I would like to stick to that
    time of comment. If, as we got to that date, it was apparent
    that for fairness and in order to be inclusive in comments we
    needed to extend it, it would seem to me that that would be the
    right thing to do. But it would also be my hope that those who
    are going to comment will have ample opportunity in what is now
    another month to comment on the rule.
        The Chairman. We want to work with you towards that goal.
    We have obviously some issues in terms of when the Congress
    adjourns for the year. I understand there is an election coming
    up, and so as a result we want to work with you, but also make
    certain that that deadline is not necessarily an artificial one
    that would preclude all of the members, as well as the public
    to provide information.
        Secretary Martinez. Mr. Chairman, we will work with you on
    that, and be sure that--we need to take the comments. We have
    asked, in fact, for over 30 questions of specific issues where
    we want the industry, the consumers to comment on. There are
    many issues about this proposed rule that still need to be
    shaped by the comments that we will get.
        The Chairman. Thank you.
        The housing industry more than any other industry has
    supported and propped up our economy, as you have indicated in
    the past. Mortgage rates are an all-time low. The homeownership
    rate is on the rise. Other countries look at our system as a
    model to be emulated. How will the new RESPA proposal affect
    our housing and mortgage markets? How can we be assured it will
    not hinder the ready access to mortgage credit that our system
    now provides?
        Secretary Martinez. Mr. Chairman, I am convinced that it is
    going to enhance our housing market. I think it will open the
    doors to home buyers that currently are priced out of the
    marketplace. While $700 does not seem like a large sum of
    money, when you can reduce that from the number of dollars that
    we are going to be impacting of the dollars needed at closing,
    I think that could be very dramatic indeed. So as we increase
    the numbers of the pool of potential home buyers, I think that
    will be good for the housing market. In addition to that, from
    the early comments that I have heard from the mortgage banking
    industry and the very supportive comments, I believe that it
    will not have any detrimental effect on the availability of
    mortgage money.
        The Chairman. My time has almost expired. I just want to
    ask you one other issue. It seems to me that the number of
    closings that I have participated in private practice, one of
    the most intimidating things for anybody buying particularly
    their first home is to be confronted with these reams of forms
    and warnings and all of the paperwork that just seems to never
    end, and the role of the closing attorney to explain all of
    these to these people, their heads swimming around, they are
    making the biggest purchase of their life. They see their life
    passing before them. One of the factors that always frustrated
    me was that at the end of the day, I did not feel my client
    really understood a whole lot anyway. All they knew was that
    they were buying a house, that they had to sign a bunch of
    papers, and that just by the sheer volume of those papers drove
    up the cost of the closing process.
        I know we share that same frustration and we have discussed
    it before. And part of it, frankly, is legislated. That is,
    some of the basic RESPA changes that were made in the original
    RESPA Act of 1974, but it just seems to have grown
    exponentially. Obviously, I think anything that we can do to
    simplify that process to make it more functional, to make it
    more understandable, not to intimidate these folks, would be a
    great service to the country. We salute you for your
    willingness to roll up your sleeves and deal with this very
    difficult issue.
        The gentleman from Texas, Mr. Bentsen.
        Mr. Bentsen. Thank you, Mr. Chairman and Mr. Secretary.
        I have a couple of questions for you. The proposed rule
    seems to be, as it relates to broker compensation, seems to be
    a pretty dramatic change from HUD's position over the last
    several years with respect to yield-spread premiums. I and
    other members of this panel were engaged with HUD over the last
    several years as they were trying to propose disclosure
    language of yield-spread premiums and how best to inform the
    borrower whether or not there was compensation between the
    wholesale lender and the retail lender. And in fact, there had
    been some court cases, as you are well aware, affecting this.
    But it seems to me in your rule, HUD now has really come about-
    face and taken the position that as it relates to retail
    lenders or brokers, there can be no yield-spread premium. That
    is not the case for the wholesale market, but is that correct?
        Secretary Martinez. That is not correct, sir. I think we
    preserve yield-spread premium. It is just in the way it is
    disclosed. We believe that the broker compensation as such is
    part of the origination fees that are charged by the lender and
    the broker and whoever all participates in that process. The
    yields premium per se is provided as a vehicle for the borrower
    to obtain up front dollars in exchange for a larger or higher
    interest rate so that he or she can offset the cost of
    settlement. That now is disclosed clearly as a credit to the
    borrower, allowing the borrower to understand the nature of
    that--
        Mr. Bentsen. If I might, Mr. Secretary, but am I correct in
    understanding it may only be used as a credit to the borrower,
    not for any fees related to the broker?
        Secretary Martinez. That is correct, but that is not
    inconsistent with HUD's past rules.
        Mr. Bentsen. I am not sure that it is not. I think in the
    past that HUD had taken the position that they did not oppose
    yield-spread premiums inasmuch as they were properly disclosed
    and the borrower understood that in fact the retail lender
    might be receiving compensation through the loan rate from the
    wholesale lender.
        Secretary Martinez. That is correct. The point of
    distinction between the HUD rule and the litigation that was
    taking place was in the treatment of the individual borrower as
    a single case-by-case transaction, or whether we could make
    assumptions and lump all of the transactions together and deal
    with yield-spread premium in that fashion. We have said all
    along, and in fact the issuance of our rule clarification was
    in response to the litigation so that we could preserve yield-
    spread premium as a vehicle for borrowers who had to have a
    yield-spread premium in order to make those closing costs fit
    their needs.
        Mr. Bentsen. But--and I need to move on because my time is
    short--I do think it changes to some extent. Let me ask this,
    and I assume that the opinion of the department is that the
    need for this also is insufficient transparency in the retail
    mortgage market?
        Secretary Martinez. Correct. In other words--I am sorry, I
    do not want to take your time. That is correct.
        Mr. Bentsen. I appreciate that. I do not mean to cut you
    off.
        Secretary Martinez. I am sorry.
        Mr. Bentsen. And the other part of the rule, you have the
    GMP, guaranteed mortgage package, or whatever--I have to get
    all my acronyms straight--but, and then the new good faith
    estimate. Is it correct that, are wholesale lenders able to
    provide the GMP product or not?
        Secretary Martinez. Yes, they can.
        Mr. Bentsen. So a lender can, as part of their overall loan
    package, a wholesale lender, provide this package.
        Secretary Martinez. Yes.
        Mr. Bentsen. Is there any concern with respect to HUD that
    a wholesale lender, which is not subject to the same yield-
    spread premiums, would have the ability in basically buying the
    business as opposed to the current structure? By that, the
    wholesale lender not only because of size and capital and
    equity, as compared to the market players now--the title
    insurance companies, mortgage brokers and all the rest--but
    also because of access to the capital markets for purposes of
    pricing loans, that basically they would be subsidizing to buy
    the business. It is something we have seen in other factors of
    the capital markets recently that raised some concerns of this
    committee and the Congress. But is this something that the
    department considers?
        Secretary Martinez. I do not think that would be the case.
    I mean, I think we have not seen that as a problem.
        I want to go back to that yield-spread premium issue. I
    think the way to clarify your view of it and what I have been
    trying to say is that while the department viewed yield-spread
    premium as a problem, we in keeping consistent with our rule,
    did not feel like the litigation avenue was the most viable way
    to regulate RESPA, and that this rule change will now do what
    could not be done under the existing rules. And so in other
    words, we are going to now allow for a clear disclosure of YSP
    in a way that makes it very difficult for its misuse by those
    in the marketplace who would abuse the borrower.
        Mr. Bentsen. Thank you.
        Mrs. Kelly. [Presiding.] Thank you very much.
        We go to Mr. Royce.
        Mr. Royce. Yes, before we vote, let me just ask you, today
    it is estimated that over 50 percent of mortgages are
    originated through mortgage brokers, and traditionally these
    mortgage brokers are small business owners, often having less
    than five employees on their staff. Many of these small
    business mortgage brokers are concerned that they will not be
    able to offer a guaranteed mortgage package and will be forced
    to continue to offer good faith estimates, which will put them,
    in their view, at a competitive disadvantage. I would like to
    ask if either of you could comment on that concern.
        Secretary Martinez. I understand the concern. I do believe
    that a small participant in the marketplace can only, without
    packaging, through the GFE, continue to be a viable player in
    the process. I think a small businessman and a small broker
    will have the benefit of being the closest to the consumer.
    That is not going to change. They will have the benefit of a
    network of people who give leads into businesses, whether it be
    a realtor or whoever it may be. So I view their function as
    vital and important, and I think it can continue whether or not
    they have become a part of the packaging scheme or not. In
    other words, what we are proposing allows the possibility of
    packaging. It does not mandate it and does not dictate that
    that would be the only way to do business.
        Now, if a broker is efficient and if a broker can in
    participation or partnership with other providers to the
    closing process take advantage of the new scheme of doing
    business, I think they could be very successful. So I do not
    think there is anything here that predetermines winners and
    losers in the marketplace. It does open the marketplace to
    greater competition, to greater transparency and greater
    clarity, which will allow the consumer to make better choices.
        Mr. Royce. Let me ask your colleague there to comment as
    well. John, do you have anything to add to that?
        Mr. Weicher. No, I think that is absolutely right. The
    brokerage industry was a very small industry 10 or 12 years
    ago. Brokers have found ways to provide mortgages, to originate
    mortgages that other participants had not found. We do not
    think that anything in the rule is going to make it harder for
    brokers to do the job that they have been successfully doing
    for the last dozen years.
        Mr. Royce. Yes, they are a rather amazingly large share of
    the market. They are half of the market, I believe.
        Secretary Martinez. And they are because even financial
    institutions find it useful to use the broker network in order
    to create efficiencies in the way they generate loans. So I
    think all of those marketplace efficiencies will continue. I
    think it will create some changes in the way their fees are
    disclosed, and I think frankly more clarity will only enhance
    the good honest broker out there trying to do a good job for
    their customer.
        Mr. Royce. Well, Chairwoman?
        Mrs. Kelly. Thank you very much.
        Ms. Tubbs Jones?
        Mrs. Jones of Ohio. Thank you, Madam Chairwoman.
        Good morning, Mr. Secretary, how are you?
        Secretary Martinez. Good.
        Mrs. Jones of Ohio. A couple of questions, short questions.
    Overall, I think this is a great idea. There are just some
    questions I have with regard to the packaging. On the
    application itself, it says interest rate guarantee on the
    guarantee mortgage package agreement--even though this is
    guaranteed, a lot of consumers do not realize that, and you
    have it in small writing that this agreement is subject to
    verification of your credit rating. They do not realize that
    their credit rating has a flux. Maybe if this is going to be
    the end form, that you could make it large that credit rating
    affects the rate that you are going to get, so that they
    understand, well, you gave me 7 percent, and my credit, I am a
    C credit person, that it is going to fluctuate, because
    "guarantee" kind of misrepresents that your credit has to be at
    a certain level.
        Secretary Martinez. We have been hearing that comment, and
    I think it is well taken. I think what we have here, by the way
    congresswoman, is not what we hope will be the final form.
        Mrs. Jones of Ohio. Okay.
        Secretary Martinez. This is still too much lawyer-speak for
    me. I want to make it more consumer friendly.
        Mrs. Jones of Ohio. Wait a minute.
        Secretary Martinez. I understand. You are one.
        Mrs. Jones of Ohio. Okay.
        Secretary Martinez. But you know, so I agree with what you
    are saying, and we are taking that into account as we go
    forward, and "guarantee" may not be the right terminology.
        Mrs. Jones of Ohio. Okay. Let's go to federal preemption.
    It appears that the packaging concept may be at odds with some
    of our State laws. For example, the package provides applicants
    with aggregate cost amounts rather than detailed itemization,
    and many States require itemization. The package allows freedom
    to negotiate volume discounts, to use average cost pricing over
    multiple transactions, and several other things. I am just
    wondering, how are we going to--to realize the benefits of the
    package, are you willing to adopt a strong position on federal
    preemption? Or where are you on that, when you have a
    disagreement between the State and the federal law in some of
    these things?
        Secretary Martinez. We are still working through that, and
    I do not have a final answer for you on that today.
        Mrs. Jones of Ohio. Okay.
        Secretary Martinez. But the fact is, I think for this to
    work, it has to be available throughout the country. We want to
    not just limit it where it is applicable. So the best answer I
    can give you is that we are still working through that.
        Mrs. Jones of Ohio. Okay.
        And then the other thing is, have you thought through how
    you would implement this? Are you thinking that maybe you would
    do either guaranteed mortgage package at one time, and then do
    the other, or vice versa? One of the things when I was an
    administrator, I used to always think, oh, this is a great idea
    and I am going to implement it, but when it got down to the low
    level folks who had to implement it, it became a struggle. Are
    you thinking you are just going to go, this will be done at one
    time, or you will implement in stages, or where are you on
    that?
        Secretary Martinez. I have a great fear, that the greatest
    enemy to this process is delay and those kinds of issues, so I
    am focused on getting it done. But I think good reason should
    prevail. If we can implement it in a way that will allow people
    to go forward and apply it, we will. I think, frankly, my sense
    is to apply it all at once and then allow for a period of
    shaking out in the marketplace where enforcement will work with
    people as they try to implement it. But I would be disinclined
    to have incremental application of it.
        Mrs. Jones of Ohio. Lastly, part of this guaranteed
    mortgage package and the other implementation is focused on
    mortgage brokers who--I have attempted to implement some
    legislation that would have required them to have a
    certification or training in the processing of applications
    because there is no regulation on them. I am not saying all
    mortgage brokers are not great people, but I am just saying
    that some of the dilemmas that people purchasing housing have
    had has been with the mortgage broker. I note that in your
    proposal, the fees would come directly from the borrower,
    rather than from the lender. What can we do to help borrowers
    in this process, even though they are paying the fee, have a
    better understanding of the process? I do not have necessarily
    any ideas other than education and the like, but I think that
    once we give that back to them, it is their responsibility,
    where some people when you see a check, they are going to take
    whatever is on the other side of the table.
        Secretary Martinez. Right.
        Mrs. Jones of Ohio. That is my last question.
        Secretary Martinez. You are precisely right about the
    problems. What we have attempted to do to the rule is to
    clearly disclose it and let the borrower know this is something
    that you are paying for. You are getting a higher interest rate
    so that this amount of money here which is coming to you now is
    going back as a closing cost. So we believe disclosure and
    education are a big part of it. We are also more than doubling
    our enforcement staff for RESPA enforcement. So all of these
    things I think working together will help.
        But again, we are open to suggestions. We are working
    closely with the consumer groups. We find a lot of support
    among them, some with some reluctance, and we look forward to
    hearing their concerns so that they can enthusiastically
    embrace it. So we will work with them and continue to hear
    their concerns.
        Mrs. Jones of Ohio. Thank you, Mr. Secretary. I am sending
    you a letter about a project in my district. I hope to hear
    back from you. Thank you.
        Secretary Martinez. Thank you. Okay.
        Mrs. Kelly. Thank you, Ms. Tubbs Jones.
        We have been called for a vote on the floor. There may be a
    second vote following this one, so the committee will recess
    for the floor vote and reconvene in approximately 15 minutes.
    It depends on whether we have that second vote. So thank you.
    The committee is in recess.
        [Recess.]
        Mrs. Kelly. If everyone will be seated please, we will re-
    start the hearing, and we go to Mr. Ney.
        Mr. Ney. Thank you, Madam Chairwoman.
        Mr. Secretary, you have made clear that one of your main
    goals in promulgating the rule is to empower consumers and have
    transparency. I think that is tremendous and I want to give you
    a lot of credit for that.
        Also, I think in your testimony, you believe this rule
    would help reduce instances of predatory lending because of how
    it empowers the consumers and increases disclosure. I think
    that is also a good direction to go.
        I had one concern I wanted to ask about, and that is the
    proposed rule will not apply to HOEPA loans. I just was curious
    why the rule does not extend the benefits of increased
    disclosure and loan simplification to the segment of the market
    that I think really needs it most, which are the high-cost
    loans, namely those covered by HOEPA. So I was just curious
    about that, what I think is maybe a missing component in that
    rule. Madam Chairwoman, may I just, if you would indulge me for
    a second, ask one more for the record. I may not be able to be
    here, but I would just like to get the second question out, if
    I may.
        Mrs. Kelly. By all means.
        Mr. Ney. Thank you. I appreciate your indulgence on that.
    In 2001, Mr. Secretary, HUD reiterated that broker fees could
    be legal under RESPA, as long as they were payments for goods,
    facilities and services and the amounts of payments were
    reasonably related to what was provided.
        I agree with that interpretation, and I think probably many
    members of this committee also would appreciate your efforts to
    provide certainty in the 2001 policy statement.
        The problem, however, is that I am not sure the proposed
    rule truly matches completely as it should the statement of
    policy. The rule characterizes the yield-spread premium as a
    lender payment to the borrower. I think something might have
    gotten lost in the translation in the sense that payments for
    goods, facilities and services is not the same as the lender
    payment to the borrower. So I just wondered if there is further
    clarification needed on this point, and that is my question for
    the record.
        Mrs. Kelly. Thank you, Mr. Ney.
        What I will do is hold the record open for 30 days anyway,
    so that people can submit written questions. But in addition to
    that, if you are amenable to it, we will just go then to the
    next person on the list and we will let people ask questions
    until we can get the sound system fixed, and then we can go on
    with it that way. If you do not mind, you can answer these
    questions in writing, if that would be preferable for
    everybody.
        Mr. Watt. Madam Chair, could they just come up to the one
    of the mikes that is working?
        Mrs. Kelly. That is possible, but I think maybe we have a
    few people crawling under the table right now to fix this, and
    hopefully we will get it done. So if we can just--Mr. Lucas,
    you are next, and if you would like to just pose your questions
    and we will go on from there, because the Secretary is under a
    time constraint. He needs to leave here and I want to try to
    get everyone in as quickly as possible.
        Mr. Lucas of Kentucky. Okay, Madam Chairman.
        Mr. Secretary, I commend you for your leadership on this
    issue. This proposed rule would allow lenders and non-lenders
    such as real estate brokers and home builders and title
    companies to participate in the packaging. The rule would also
    require that the packagers guarantee the interest rate, as well
    as the closing costs for a loan. Non-lenders, however, who are
    a major source of funds in the real estate finance market, are
    not in a position to guarantee the interest rate. This seems
    like it is going to create an unlevel playing field here, and I
    have heard you say that everyone can participate, but how does
    a non-lender guarantee an interest rate? That would be my
    question for the record.
        Mrs. Kelly. Have you any further questions, Mr. Lucas?
        Mr. Lucas of Kentucky. No, ma'am.
        Mrs. Kelly. Thank you.
        Secretary Martinez, I am next on the list, and I just would
    like to know how this rule will impact small businesses. By
    that, I am concerned about the large lenders dominating the
    market by packaging services, and that could hurt small
    businesses. For instance, is it not possible that small title
    companies could be run out of the market from this? My interest
    is in trying to protect our small businesses. At some point, I
    would hope that we can get an answer for that question.
        My next question is that under HUD's proposed rule, a
    yield-spread premium is characterized as a credit from the
    lender to the borrower. Is it not really a payment from the
    lender to the broker for the goods and the facilities or the
    services? If that is not so, then I believe that this needs
    further clarification. I would hope that HUD would address--
        Do you want to come up? We could be very unconventional
    here, and the two of you could come up and sit here and have
    one of these microphones. I think these microphones work. Yes,
    these do, so why don't you just come on up here and we can do
    it that way.
        Secretary Martinez. I did not realize today's testimony
    would also involve a promotion.
        [Laughter.]
        But I am happy to be up here.
        Let's see, where were we?
        Mrs. Kelly. I had a question. I am going to go back and let
    Mr. Lucas have a shot. Mr. Lucas, do you want to re-pose that
    question?
        Mr. Lucas of Kentucky. You probably heard the question, but
    I think just to repeat the important part is, how can a non-
    lender guarantee an interest rate? It seems like to me that
    puts him at a big disadvantage.
        Secretary Martinez. I think what will have to happen is
    that this is going to be a changed marketplace. I do not think
    a non-lender can guarantee a package. But what I have been
    hearing is that there are arrangements already being created in
    a sense to react to the rule. So in some ways it will be a
    somewhat changed business environment, but I do not believe it
    will dictate necessarily that someone who is a broker cannot
    participate in the system as is currently proposed. There still
    is room for non-packaged deals to go forward. They will have to
    be well designed. The cost will have to be reasonable because
    the consumer will have a chance to compare costs.
        And let me just point something out which I think in part,
    Madam Chairwoman, goes to answer your question, which is, I am
    looking now at the language of the act in section two of RESPA.
    It says that the purpose of this act is to ensure that
    consumers throughout the nation are provided with greater and
    more timely information on the nature and cost of the
    settlement process, and are protected from unnecessarily high
    settlement charges. So while at the same time I am sympathetic
    to a small business person, I do not think we are designing a
    system that does not allow them to succeed. I also do not
    believe the purposes of the RESPA act are focused on the small
    businessman. They are focused on the consumer.
        Mr. Lucas of Kentucky. But a non-lender in fact cannot
    participate in the packaged area competitively.
        Secretary Martinez. They can participate if they create an
    arrangement with a lender. In other words, they will now have
    to work in--they do now work in partnership with a lender. A
    broker has to go somewhere for the loan, so they can put a
    package together with the people that they are now in business
    with.
        Now, one other question that was raised is the nature of
    broker fees. I believe that broker fees are derived from the
    origination fee that is still going to be paid by the borrower.
    The YSP is something that the borrower needs to understand is
    something that he is getting at the time of closing, at the
    time of settlement, in exchange for a higher interest rate. And
    that fee properly is to offset the closing costs, the
    origination fee is part of that closing cost. So the broker fee
    as part of the origination cost will still be paid by the YSP.
    It is just that the borrower understands that is something that
    came to him or her, so that now the borrower can go back and
    pay the person or the lender for the origination fee, which
    includes the broker fee. It is a little convoluted, but I think
    you follow me.
        Mrs. Kelly. Thank you.
        Reclaiming my time, I feel that this is a fairly
    complicated issue, and I think that perhaps we may need some
    clarification so that the borrower understands what is going on
    here in very simple terms. As you stated earlier, you want it
    in less legalese. I think it is very important that the YSP be
    explained to the borrower in such a way that they understand
    and this gets clarified in a better way.
        Some people have said that this method of having the YSP
    credited to the borrower toward the broker's fees and the total
    loan origination cost is just likely to be very, very confusing
    to the consumer, more confusing than the current disclosure
    requirements. I would like you to explain why you think the
    change is necessary and what the benefit is to the consumer.
        Secretary Martinez. I have heard that in the last couple of
    days and I find it just shocking that anyone would suggest
    that. I think even though the proposed GFE that we now have is
    not final, if you were to put it side by side with the current,
    it goes from about 62 potential items to one or two or three.
    So I think it will be much clearer. Currently, YSP is put on
    there as YSP dot and a number, or a figure. It does not come
    back to a ledger to be deducted or added, and someone would
    have to presume to know what YSP is. In the form we are
    proposing, it will say payment to broker in exchange for higher
    interest rate. That is what it is. And so in other words, I
    think we have covered that, and I would continue to invite
    those who find it too confusing in the way we are proposing it
    to work with us to make it simpler. We are asking for comments.
    We have even gone to length of hiring a consultant to work with
    us on language that would be less legal and more consumer
    friendly, and we look forward to input that would clarify it
    even more.
        Mrs. Kelly. We have some question here, Mr. Secretary, as
    to whether that is stated in the way that you just described,
    or whether it is stated as simply credit to borrower. If that
    is the case, then the borrower does not get a clear picture. So
    I think it is incumbent upon us to look for clarification so it
    is quite clear on the face of it, and I think that that may be
    worth having a look.
        Secretary Martinez. Absolutely. We welcome the comments and
    input on that, absolutely.
        Mrs. Kelly. Thank you.
        We go now to Mr. Watt.
        Mr. Watt. Thank you, Madam Chair.
        First of all, Mr. Secretary, I thank you very much for
    being here and for the effort that you have made to try to
    improve the system. I think it is an important effort and it
    can be a controversial effort, and just getting in the middle
    of it and trying to do something in and of itself has to be
    commended.
        I want to make a couple of comments that may be a little
    counter-intuitive and express some concerns. This is based on
    the fact that I was out there doing this stuff for 22 years.
    Sometimes we can sit here and do something either, and it has a
    completely different impact in the real world. Quite often, I
    have been kind of out of step on some of these issues because
    even if it has the intended impact in the real world, sometimes
    my experience in the real world is a little bit different than
    other people's experiences in the real world. I think that is
    what we come here to try to bring to the process and
    understanding of what impact this is going to have in the real
    world.
        Let me just make a couple of comments about several things
    that I think may have unintended consequences. Number one, and
    this is not one of those, I just want to call it to your
    attention, one of the comments I have gotten is that you are
    not accepting either online or fax comments, and that plus the
    fact that you have this deadline that is looming on people may
    impel you to go back and look at the deadline, not for the
    purpose of delay, but to make sure that everybody gets their
    day. I do not know whether that is the case or not, and I am
    not even asking the question at this point, but if that is the
    case, I hope you will look at the possibility of maybe
    extending the comment deadline.
        Second, my real concern is that this puts lenders in much,
    much greater control of the entire process, and maybe that is
    necessary to get costs down in this area, but I think it is
    going to have some real world consequences that I am not sure
    how to address, but at least ought to be on the table. If you
    all can find a way to address them, I hope you will consider
    that. This is my experience, even under the existing RESPA
    process, lenders basically dictate to borrowers who their
    lawyers will be and who their title insurance companies will
    be. So I am concerned that this category of lender-required
    services and shoppable lender required third-party services
    gets some more scrutiny, because in the real world basically
    lenders will have their own buddies, the good old boy system I
    used to call it, who will close all of the loans and small
    minority attorneys simply will not be able to get into the
    process.
        I saw it happen time after time after time. The only time I
    ever closed a loan was when the borrower demanded that I be
    used; never did the lender say, we want to use this person
    because they had their own infrastructure. This guaranteed
    mortgage package system is going to make that even more heavy-
    handed and more closed and more controlled, similar to the
    point that Chairperson Kelly was raising. The smaller people in
    this process are going to get frozen out. The people who are
    not in the good old boy system are going to get frozen out.
    Maybe it will drive down costs some, but I think we have the
    responsibility to look at a broader impact if we are going to
    be doing this.
        Mrs. Kelly. Mr. Watt, you need another 30 seconds.
        Mr. Watt. If you would, thank you.
        The other thing that I think this has the capacity of doing
    is, and there is legislation, I acknowledge, on the books that
    prohibits lenders from doing titling, but now that we have
    allowed lenders to branch out into other things, including
    title insurance, I think the possibility of heavy-handedness
    there, not with some illegal transaction, but just with a wink
    and a nod exist, and you need to be aware of that.
        If there is any way to address those concerns and still do
    what--I mean, I understand what you are trying to do. This is
    not a criticism of what you are trying to do. But it is
    important that we do not freeze out people who should be
    participating in this process in the lender assistance process
    and in the servicing process, and I hope you will take those
    comments into account.
        Thank you.
        Secretary Martinez. Thank you very much, sir.
        Mrs. Kelly. Ms. Biggert?
        Mrs. Biggert. Thank you, Madam Chair. If you sit here long
    enough waiting for your turn, usually all the questions have
    been answered and the concerns. I would say that was true, but
    I do want to comment on the packaging. I, too, in one former
    life was a lawyer for real estate transactions, as well as some
    other things, but the thing that I heard was how complicated
    the rest of the package is, or the forms. And I would have to
    say that I think for consumers that have had trouble with that
    as not having a good lawyer who is really able to explain what
    is on there and go through the mortgage package. I think that
    is very important that people have that now. That probably
    raises the cost, and to spend a little more time, although I
    would not say that for most lawyers that real estate closings
    are a money-making deal, or that you are going to make a living
    just off of that.
        But I do have concern with the packaging and particularly
    with the title insurance, because I think it is so important
    that there be a title insurance company that is independent of
    a lender because of the possibility of just assigning to a
    particular company all the time, and they might get a little
    remiss in the duties and just take it for granted and not
    really do the title search and looking at all of the different
    things that appear on that title policy and are taken care of.
    So I think that is something to be concerned about that we have
    some independence. I think as Mr. Watt said about the lawyers,
    even that it is just everybody working together, and you get--
    you are not competing, and I think that to choose is very, very
    important, and to have the independence of all of those groups.
    To me, that is the most important.
        The other thing is that since you are making all of these
    changes, do you have the legal ability to do that, or does
    there have to be legislation to provide that safe harbor for
    the packaging?
        Secretary Martinez. On the issue of the legal ability, it
    is clear that the Secretary is designated or delegated by the
    Congress the ability to exempt for a good purpose anyone from
    the application of certain parts of the RESPA act. So we
    clearly do have it. I would say on the whole issue of
    packaging, and it really goes to the last question as well, we
    are not mandating it. We currently have the situation whereby
    government regulation, the packaging of certain services is
    simply prohibited. All we are doing here is allowing the
    marketplace to determine and to work in the field, and if
    packaging evolves so be it.
        We are not mandating it. We are not preferring it. We are
    not advancing it. We are simply removing the regulatory
    barriers that have kept it from occurring. It is going to be a
    changed marketplace which will require different practices and
    different arrangements than what has been done in the past, but
    that is always the way of the marketplace. Frankly, more
    competition and lower cost to consumers in buying a home I
    think is well worth the disruption that it might bring to long-
    established business practices. So it is a weighing of benefits
    and challenges.
        Mrs. Biggert. Well certainly, you know, more people can buy
    more of a first home, but we have seen the largest boom in real
    estate right now. We certainly do not want to do anything that
    will harm that and drive the ability for people to purchase
    homes down.
        With that in mind, I had one other question, which now I
    have lost, so I will yield back my time.
        Thank you.
        Mrs. Kelly. Thank you.
        Mr. Clay?
        Mr. Clay. Thank you, Madam Chair. Mr. Secretary, Good
    morning, how are you?
        Tell me, do you think--does HUD believe this rule is a
    solution to the problem of predatory lending?
        Secretary Martinez. Absolutely not.
        Mr. Clay. You do not.
        Secretary Martinez. No, sir. I think the problem of
    predatory lending, the problems of TILA, which are not governed
    by HUD, aside from this rule, we think that greater disclosure
    will help the consumer be a smarter, more informed, better
    armed consumer and in that way I think it can help someone not
    fall prey to predatory lending. But predatory lending is a
    problem which the changes in this rule are not going to cure.
        Mr. Clay. Have you proposed any legislation to impact
    predatory lending or to rid us of predatory lenders?
        Secretary Martinez. We are going to be proposing certain
    things in further reform of RESPA that need to be legislative
    changes. Predatory lending is only regulated by HUD as it
    relates to FHA lending, which is about 7 percent of all
    mortgage lending. So we have a very small role in that. We do
    work very closely in the area of predatory lending with the
    Federal Trade Commission. We recently finished a case with them
    where we did a joint prosecution with great results. We have
    worked very closely with the predatory lending task force in
    Baltimore. We are now taking it to a couple of other
    communities where we are using that same task force approach.
    So we are doing a number of things in predatory lending, but
    you also have to understand that the Truth in Lending Act and
    other areas of regulating the banking industry is really where
    there is greater enforcement of lending laws.
        Mr. Clay. Another question--do you have any concerns that
    these new rules could adversely affect mortgage brokers and
    thus reduce the availability of mortgage credit in some areas?
        Secretary Martinez. We do not believe that it will affect
    the availability of credit. Quite the contrary, the mortgage
    banking industry is very supportive of these changes. I do
    understand that there is great concern from some brokers. I
    just do not believe that the fears are warranted, for the good,
    ethical, efficient broker who is doing a good job for his
    consumer. All we are doing is requiring clear disclosure of
    their compensation, and in doing so we are just putting it out
    there for the marketplace for the consumer to have a greater
    opportunity to make a choice in his purchasing of a mortgage
    loan.
        Mr. Clay. Thank you, Mr. Secretary.
        Madam Chair, may I yield the balance of my time to Mr.
    Watt?
        Mrs. Kelly. Certainly.
        Mr. Clay. Thank you.
        Mr. Watt. I will not use the balance of the time. I just
    wanted to take issue with the Secretary's presumption that this
    process is going to somehow increase competition. The concern I
    have is that in the real world, it is going to decrease
    competition for the kind of closing services that you think,
    you keep saying it is going to increase competition for because
    basically what the lenders are going to do is close the ranks
    of who closes loans. That cuts down on the amount of
    competition, not increases the amount of competition.
        So I hear what you are saying in a theoretical sense this
    might have the impact, but in the real world that is not going
    to happen. I hope you will not continue with that mindset,
    because if you continue with that mindset, you will not do
    anything to try to address the issue. So I want to break you
    out of the mindset that this is somehow going to increase
    competition. It is not. Lenders will have their own package
    teams and they will funnel all of their business to that
    package team, and everybody else in the marketplace will be
    left out. That will not increase competition, believe me.
        Secretary Martinez. I hear you, sir. I think I am speaking
    of competition in the sense of consumers will be better
    informed, will be informed earlier in the process, will have a
    chance to shop for services--so competition in that sense. I
    hear your concern, though, and we will take that into account.
    And if there is any way that we can improve the rule to create
    more competition to ensure that this is not just all of a
    sudden now done by five people in America, I will do what we
    can to tweak it in that direction. Any input that your office
    of those of your constituents that are concerned want to
    provide, we will be listening to them. And by the way, I should
    tell you I have already heard very clearly and directly online
    comments about the rule in my e-mail, so we will be available
    to hear about it.
        Mr. Watt. Are those becoming part of the official record,
    though?
        Mrs. Kelly. Mr. Watt, I am sorry, your time is up.
        Just as an observation, since we are talking about
    information for the borrowers, and information for these first-
    time home buyers, I would like you, Mr. Secretary, to review
    and consider an appropriate letter-size font. I am concerned
    that these documents are written in such tiny type they
    discourage people from reading them. So I think it is very
    incumbent upon all of us to make these documents easily
    readable. They are difficult enough to read, but the font size
    is so small they are quite hard to read.
        We go now to Mr. Tiberi.
        Secretary Martinez. You are absolutely right.
        Mr. Tiberi. Speaking of small print--first off, I want to
    thank you, Mr. Secretary, for your work on this. You and I have
    talked about this in the past. I want to talk a little bit
    about the level playing field that you and I have agreed on,
    and also thank Ken and Theresa for their work. And yesterday,
    Ken gave me this document, and it is in pretty small print. But
    on the document, the issue that has been talked about today,
    and I know enough to make me dangerous because of my former
    life as a realtor, the point that we have all been talking
    about is this lender payment to borrower for higher interest
    rate. And right below that, there is a box that you have been
    talking about--the disclosure part, which is a net loan
    origination charge from the borrower.
        Let me tell you why I do not think it is a level playing
    field. I hope we have enough time to circle back to talk about
    Congressman Watt's concern. But let me get a little chart that
    I did. This chart shows under your proposed rule what I believe
    can happen. And that is because of the yield-spread premium, a
    broker is going to have to, with respect to advertising to a
    consumer on a 7 percent interest rate mortgage, they are going
    to have to advertise a two point origination fee. At the same
    time, because of the way the lender is paid on the back end of
    a deal, the lender can advertise at zero points. Now, the
    bottom line is under your disclosure form, and I agree with
    this, under the net origination, it is going to end up the same
    in terms of the cost to the borrower. I think your staff would
    agree.
        However, the broker is going to be disadvantaged because as
    we all know through advertising today and as a realtor,
    consumers are very, unless it is a lawyer who does real estate
    work, are very much influenced by zero points. I can tell you
    that as a realtor. And so the broker is going to be
    disadvantaged even though their client in the end will pay the
    same.
        Now, to complicate that, I believe, on your form this
    lender payment to borrower at a closing, I could just imagine
    sitting at a closing table where the borrower is going to say,
    well, does not the lender owe me a check for $675. So I
    appreciate what you are doing. I agree 100 percent that RESPA
    needs to be reformed. I think we are going to disadvantage
    small brokers at the expense of lenders. I think that if you go
    further on and talk about what Congressman Watt talked about
    with respect to FHA and VA, many first-time home buyers, many
    brokers in my district are dealing with those first-time home
    buyers. You have a 1 percent cap on FHA and VA, and again
    brokers are going to be disadvantaged because they are going to
    have to disclose. The lender gets paid on the back end, and
    suddenly I think you are going to have less competition because
    the broker is just going to say, I cannot compete on this end.
    And so you have got 33 to 35 to 40 percent of the market being
    taken out because they are just simply not going to originate
    these loans.
        So two questions there, one, comment on the FHA-VA; and
    two, comment on what I think you are trying to disclose, but
    through this type of disclosure on this type of form, you are
    actually disadvantaging the broker because of the way this is
    going to be advertised in the market.
        Secretary Martinez. Well, we need to make sure that we do a
    form that is fair, honest, clear disclosure. What you have
    suggested there would not be an honest way to compare apples to
    apples. We are trying to come to a form that will allow a
    consumer to look at apples to apples comparisons and shop for
    services so they can get the best deal out there.
        Right now, they do not. Right now, they have no clue what
    they are paying. So we are moving forward in this process, but
    we are also looking forward to comments. Whatever proposals
    would improve this form that come to us, we will take into
    account, and if it improves it, we will do it. So we are
    looking forward for that input on those comments.
        Mr. Tiberi. I appreciate that, because I think right now--
        Secretary Martinez. This is not a final form. This is not a
    final product.
        Mr. Tiberi. My concern is, and I think it was mentioned
    earlier by the Chair, that the closing period is at the end of
    this month. Congress is going to be gone. I think we all agree
    this is a confusing issue, and we are on the same page in terms
    of level playing field and disclosure. But clearly, I believe
    that what is proposed thus far will not only disadvantage small
    brokers in particular with respect to packaging, with respect
    to the way the advertising will end up occurring, even though
    in the end the net origination fee will be the same. I think
    the confusion with the lender payback credit causes really a
    broker to have to go and meet additional hurdles than a lender.
    I think ultimately that will constrict the market. You will
    have less competition and in the end, I think we all agree that
    we want more competition. We want more disclosure and a level
    playing field. I do not think this actually does that. I
    appreciate your comments in terms of getting us there.
        Secretary Martinez. Thank you.
        Mrs. Kelly. Thank you.
        Mr. Manzullo?
        Mr. Manzullo. Thank you, Mr. Secretary.
        I do not know of one member of Congress here that is in
    favor of your proposed packaging. I associate myself with the
    remarks of Mr. Watt and Mrs. Biggert. I have closed over 1,000
    real estate transactions as an attorney for 22 years. I did a
    lot of commercial litigation. As far as I am concerned, the
    more adverse parties you have at a closing, the more protected
    the consumer is, because everybody checks on what everybody
    else is doing.
        This is a very dangerous rule for several reasons. Number
    one, I think it is naive to say that it is going to help out
    the consumer. You admitted, and the statement is there, that
    somebody who wants to come up with a guaranteed package has to
    know what the interest rate is going to be fixed at. If it is
    not the lender, then it is somebody who has to have, quote, an
    arrangement, with the lender. But what is going to happen here
    is the lenders will smoke out everybody else. They will have
    their own party. They will not be able to get in--the
    appraisers, the title company, the surveyors, the escrow agent,
    whatever is necessary to close. This is a dangerous rule.
        We have a problem. I am the chairman of the Small Business
    Committee, and I want to tell you right now on the record, if
    this becomes law, I will be the first one to file a bill under
    the Congressional Review Act to repeal the regulation. It needs
    to be vetted and the problem here--we are having problems now
    with small banks that are being smoked by some real estate
    agents, that have their own cozy arrangements with another
    bank. We have some title companies that are being smoked. We
    have some real estate agents that would like to have more of
    the pie and they somehow cannot get their foot in the door. The
    problems exist now. What this does is this legitimizes
    monopolistic practices. It places power in the hands of the
    lender in this case because only the guy that knows the fixed
    interest rate, he will call the shots. He will pick his
    appraiser. He will pick everybody involved in that real estate
    transaction and the entire closing on it.
        I think you have way exceeded--RESPA was set up for the
    purpose of disclosure. Somewhere down the line, somebody said,
    I do not think it is a good idea to have somebody in charge of
    the entire real estate closing. Now, you are changing your mind
    on it. Now, referral fees will be allowed from the person who
    devises this entire package on it. As I look at this thing,
    everybody is going to have a guaranteed mortgage package
    agreement. There will not be one real estate broker in the
    country that will not say this is a one-stop shop for you to
    come here and find out exactly what is going on.
        One of the purposes of the disclosure statement which is
    given weeks in advance is for the person buying the property to
    go out and shop. And it sure was my experience that I shopped.
    The fees are radically different, depending on where you go.
    But I am deeply disturbed about this because you will--you
    shall end up, you shall end up with entirely monopolizing of
    the practice of the sale of real estate in this country.
        Mr. Tiberi is right. Mrs. Biggert is right. We know. We
    have been there. I have been involved in extensive litigation
    and we have avoided a lot of litigation because we have had
    situations where you have had an appraisal at the real estate
    closing. I am sorry. We have had a survey, and there is a
    problem with the survey. Now, let me ask you a question. What
    happens when the lender, in this case the guaranteed mortgage
    package agreement, he is the one who has the survey done. And
    then he also has the title insurance lined up, and you have
    title insurance in this case that would guarantee the survey,
    with a special exception. Now you have got all these conflicts
    of interest. They are all down to one person, and that is the
    lender. Who is going to be the responsible party for this? The
    bank? The bank says, oh, no, we just loan money.
        Secretary Martinez. Are you suggesting, sir, that today a
    consumer goes to a closing with a full understanding of all
    that he is being charged, having shopped for a surveyor, having
    shopped for a title company, had an opportunity to compare
    prices between more than one title company, perhaps had an
    opportunity to even been guaranteed a closing cost that is
    going to be the same from the day he was given that figure, to
    the day of closing?
        Mr. Manzullo. Yes, absolutely. If you have a broker who is
    on the ball--
        Mrs. Kelly. Sorry. Your time is up.
        Mr. Manzullo. Could I have an additional one minute?
        Mrs. Kelly. Would you like 30 additional seconds?
        Mr. Manzullo. Thank you very much.
        What I am suggesting to you is that this will not solve the
    problem. This will make it even worse because it will close the
    doors on shopping--all that somebody who has a guaranteed
    mortgage program has is then we do not have to do anything
    anymore because it has all been taken care of by one person.
        I would like to see you delay this so we can have hearings
    before the Small Business Committee. Your Regulatory
    Flexibility Act says that $3.5 billion of the fees of the $6.5
    billion fees is generated by small businesses. The little guys
    are going to get smoked, and I think it would be in the best
    interest of them and the consumer to put off this until at
    least next year.
        Mrs. Kelly. Mr. Manzullo, can you please sum up?
        Mr. Manzullo. Thank you.
        Mrs. Kelly. Thank you.
        Mr. Secretary, would you like to respond?
        Secretary Martinez. Well, I know he likes what I am doing.
        [Laughter.]
        Actually, I would, if I may. I think that there are three
    portions to what we are proposing. Only one of those three
    deals with packaging. The other two have to do with disclosure
    of broker compensation, so we are two-thirds in agreement,
    then. That is good.
        The issue of packaging, and I should say, I guess it is a
    philosophical thing as to whether government ought to impose on
    the marketplace that there should not be packaging. If what you
    are saying is true, I think the marketplace has a way of
    evolving to allow for things to not be as dire as I think you
    suggest. But I look forward to continuing dialogue with you
    about this and discussing it further, because obviously you
    have some strong felt views on it. They are not consistent with
    a lot of what I am hearing. There are an awful lot of people
    out there who think that we are doing a good thing, whether it
    be on the consumer side or whether it be on the industry side.
    So I understand your concern and I would look forward to just
    continuing our dialogue.
        Mrs. Kelly. Mr. Secretary, we really appreciate HUD coming
    up here to explain and talk with us about this. We really thank
    you for your testimony today and we all look forward to working
    with you and your staff to try to improve the mortgage finance
    system in terms of making it fair and cost-effective in the
    settlement process. Also obviously there is some concern that
    we do not squeeze out our small businesses in that process.
        The chair notes that some members may have additional
    questions for this panel which they may wish to submit in
    writing. Without objection, the hearing record will remain open
    for 30 days for members to submit written questions to those
    witnesses, and to place their responses in the record.
        With that, we thank you very much for your time and
    appreciate it. This hearing is adjourned.
        [Whereupon, at 12:34 p.m., the subcommittee was adjourned.]

                                A P P E N D I X

                                October 3, 2002

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