[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










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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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