[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]




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

=======================================================================

                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
                   HOUSING AND COMMUNITY OPPORTUNITY

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                      ONE HUNDRED EIGHTH CONGRESS

                             FIRST SESSION

                               __________

                           FEBRUARY 25, 2003

                               __________

       Printed for the use of the Committee on Financial Services

                            Serial No. 108-3


87-794              U.S. GOVERNMENT PRINTING OFFICE
                            WASHINGTON : 2003
____________________________________________________________________________
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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                    MICHAEL G. OXLEY, Ohio, Chairman

JAMES A. LEACH, Iowa                 BARNEY FRANK, Massachusetts
DOUG BEREUTER, Nebraska              PAUL E. KANJORSKI, Pennsylvania
RICHARD H. BAKER, Louisiana          MAXINE WATERS, California
SPENCER BACHUS, Alabama              CAROLYN B. MALONEY, New York
MICHAEL N. CASTLE, Delaware          LUIS V. GUTIERREZ, Illinois
PETER T. KING, New York              NYDIA M. VELAZQUEZ, New York
EDWARD R. ROYCE, California          MELVIN L. WATT, North Carolina
FRANK D. LUCAS, Oklahoma             GARY L. ACKERMAN, New York
ROBERT W. NEY, Ohio                  DARLENE HOOLEY, Oregon
SUE W. KELLY, New York, Vice         JULIA CARSON, Indiana
    Chairman                         BRAD SHERMAN, California
RON PAUL, Texas                      GREGORY W. MEEKS, New York
PAUL E. GILLMOR, Ohio                BARBARA LEE, California
JIM RYUN, Kansas                     JAY INSLEE, Washington
STEVEN C. LaTOURETTE, Ohio           DENNIS MOORE, Kansas
DONALD A. MANZULLO, Illinois         CHARLES A. GONZALEZ, Texas
WALTER B. JONES, Jr., North          MICHAEL E. CAPUANO, Massachusetts
    Carolina                         HAROLD E. FORD, Jr., Tennessee
DOUG OSE, California                 RUBEN HINOJOSA, Texas
JUDY BIGGERT, Illinois               KEN LUCAS, Kentucky
MARK GREEN, Wisconsin                JOSEPH CROWLEY, New York
PATRICK J. TOOMEY, Pennsylvania      WM. LACY CLAY, Missouri
CHRISTOPHER SHAYS, Connecticut       STEVE ISRAEL, New York
JOHN B. SHADEGG, Arizona             MIKE ROSS, Arkansas
VITO FOSELLA, New York               CAROLYN McCARTHY, New York
GARY G. MILLER, California           JOE BACA, California
MELISSA A. HART, Pennsylvania        JIM MATHESON, Utah
SHELLEY MOORE CAPITO, West Virginia  STEPHEN F. LYNCH, Massachusetts
PATRICK J. TIBERI, Ohio              BRAD MILLER, North Carolina
MARK R. KENNEDY, Minnesota           RAHM EMANUEL, Illinois
TOM FEENEY, Florida                  DAVID SCOTT, Georgia
JEB HENSARLING, Texas                ARTUR DAVIS, Alabama
SCOTT GARRETT, New Jersey             
TIM MURPHY, Pennsylvania             BERNARD SANDERS, Vermont
GINNY BROWN-WAITE, Florida
J. GRESHAM BARRETT, South Carolina
KATHERINE HARRIS, Florida
RICK RENZI, Arizona

                 Robert U. Foster, III, Staff Director
           Subcommittee on Housing and Community Opportunity

                     ROBERT W. NEY, Ohio, Chairman

MARK GREEN, Wisconsin, Vice          MAXINE WATERS, California
    Chairman                         NYDIA M. VELAZQUEZ, New York
DOUG BEREUTER, Nebraska              JULIA CARSON, Indiana
RICHARD H. BAKER, Louisiana          BARBARA LEE, California
PETER T. KING, New York              MICHAEL E. CAPUANO, Massachusetts
WALTER B. JONES, Jr., North          BERNARD SANDERS, Vermont
    Carolina                         MELVIN L. WATT, North Carolina
DOUG OSE, California                 WM. LACY CLAY, Missouri
PATRICK J. TOOMEY, Pennsylvania      STEPHEN F. LYNCH, Massachusetts
CHRISTOPHER SHAYS, Connecticut       BRAD MILLER, North Carolina
GARY G. MILLER, California           DAVID SCOTT, Georgia
MELISSA A. HART, Pennsylvania        ARTUR DAVIS, Alabama
PATRICK J. TIBERI, Ohio
KATHERINE HARRIS, Florida
RICK RENZI, Arizona


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    February 25, 2003............................................     1
Appendix:
    February 25, 2003............................................    57

                               WITNESSES
                       Tuesday, February 25, 2003

Birnbaum, Peter J., President, Attorneys' Title Guaranty Fund, 
  Champaign, IL, on behalf of National Association of Bar Related 
  Title Insurers.................................................    39
Canfield, Anne C., Executive Director, Consumer Mortgage 
  Coalition, Washington, D.C.....................................    12
Courson, John A., Chairman, Mortgage Bankers Association of 
  America, Washington, D.C.......................................     7
Fendly, Neill, Chair, Government Affairs Committee, National 
  Association of Mortgage Brokers, Washington, D.C...............    15
Friedlander, Stanley B., President, American Land Title 
  Association, Washington, D.C...................................    10
Garczynski, F. Gary, Past President, National Association of Home 
  Builders, Washington, D.C......................................    18
Mendoza, Charles J., Member, Board of Directors, American 
  Association of Retired Persons, Washington, D.C................    41
Rheingold, Ira, Executive Director, National Association of 
  Consumer Advocates, Washington, D.C............................    45
Rovick, Arne, Vice-Chair & General Counsel, Edina Realty Home 
  Services, Edina, MN, on behalf of the Real Estate Services 
  Providers Council, Inc., (RESPRO)..............................    42
Saunders, Margot, Managing Attorney, National Consumer Law 
  Center, Washington, D.C........................................     9
Taylor, D. Russell, Chairman, America's Community Bankers, 
  Washington, D.C................................................    17

                                APPENDIX

Prepared statements:
    Oxley, Hon. Michael G........................................    58
    Clay, Hon. Wm. Lacy..........................................    60
    Manzullo, Hon. Donald A......................................    61
    Birnbaum, Peter J............................................    63
    Canfield, Anne C.............................................    69
    Courson, John A..............................................   158
    Fendly, Neill................................................   168
    Friedlander, Stanley B. (with attachments)...................   239
    Garczynski, F. Gary..........................................   325
    Mendoza, Charles J. (with attachments).......................   329
    Rheingold, Ira...............................................   375
    Rovick, Arne.................................................   381
    Saunders, Margot.............................................   400
    Taylor, D. Russell...........................................   418

              Additional Material Submitted for the Record

Tiberi, Hon. Patrick J.:
    Uniform Mortgage Costs Disclosure Form.......................   450
Friedlander, Stanley B.:
    Response to an inquiry from Hon. Mark Green..................   452
American Bankers Association, prepared statement.................   458
Appraisal Institute and American Society of Appraisers, prepared 
  statement......................................................   476
Consumer Bankers Association, prepared statement.................   485
Independent Community Bankers of America, prepared statement.....   506
National Association of Realtors, prepared statement.............   512
``Take Home Pay'' The Wall Street Journal February 24, 2003......   519

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

                              ----------                              


                       Tuesday, February 25, 2003

             U.S. House of Representatives,
                        Subcommittee on Housing and
                             Community Opportunity,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to call, at 2:07 p.m., in 
Room 2128, Rayburn House Office Building, Hon. Bob Ney 
[chairman of the subcommittee] presiding.
    Present: Representatives Ney, Green, Bereuter, Baker, 
Shays, Hart, Tiberi, Harris, Waters, Lee, Watt, Miller of North 
Carolina, and Davis. Also present was Mr. Manzullo.
    Chairman Ney. [Presiding.] Good afternoon. The subcommittee 
on Housing Community Opportunity will come to order. And 
without objection, all members opening statements will be made 
part of the record. Hearing no objection they are part of the 
record. I would remind subcommittee chairs and ranking minority 
members are recognized for five minutes each. All other members 
are recognized for three minutes each. And we will alternate, 
of course, between the majority and minority. I would also want 
to note due to the length of the time we are going to have to 
spend and the amount of witnesses, we will try to keep fairly 
strict on the opening statements to the time so that we can 
have the opportunity to hear from the witnesses.
    This is the first housing subcommittee hearing since I was 
selected as Chairman. It is my hope that the hearings we 
conduct in the 108th Congress will be informative and of an 
invaluable assistance to the members as we contemplate 
legislation that provides housing opportunities for all 
Americans. I intend for all the hearings to be fair and 
balanced, and I pledge to work with Ms. Waters, the ranking 
member, and all the members to see that this is a very 
productive subcommittee. And I would note, Ms. Waters and I had 
a conversation just this past week on communicating with each 
other throughout this process.
    Today's hearing is about the Department of Housing Urban 
Development's July 28, 2002 proposed rule that attempts to 
reform the Real Estate Settlement Procedures Act, as we all 
know as RESPA, which will be the first major reform attempt 
since 1974. On October 5, 2002, the Financial Services 
Committee heard testimony from Secretary Martinez. Chairman 
Oxley and the members have expressed a desire to hear other 
perspectives on this proposal before it became final. This 
hearing is a continuation of that process in reviewing the 
proposed rule by hearing from the many different groups that 
will be affected by this proposed regulation.
     The Committee has invited a broad cross-section of the 
real estate and mortgage finance industry as well as consumer 
advocates in an attempt to fully understand this impact of 
RESPA reform. I think that everyone here shares the intent of 
HUD in crafting this regulation which is making real estate 
settlements easier and more transparent for consumers.
    Buying a home has become simply too complex and needs to be 
simplified so there is more transparency in the pricing of 
settlement services. While we all may agree on that goal, of 
course, there are a lot of differences on how we are going to 
achieve that goal. Our witnesses today are here to offer their 
views on whether or not the proposed rule will achieve that 
transparency and simplify the home buying process, and if not, 
what can be done to improve the proposal.
    I do look forward to hearing from our witnesses. And I want 
to take a moment to recognize that because of the size and 
complexity of the real estate settlement industry, we are 
unable to accommodate, of course, every group that wanted to 
come to testify today. We also have some material for the 
record that we will submit. I know that such groups as the 
Independent Community Bankers of America and the Appraisal 
Institute have statements that reflect important segments of 
the real estate settlement process, and with objection, their 
statements, as well as those of the Consumers Bankers 
Association, American Bankers Association, and the National 
Association of Realtors, will be entered in the record. Hearing 
no objection, they are entered into the record. Also, without 
objection, the members will be allowed to submit again their 
written statements for the record.
    At this time I would yield to Mr. Watt.
    Mr. Watt. Thank you, Mr. Chairman. I will be very brief. If 
our ranking member was here and--or if we had other members who 
had not been here previously to discuss this issue, I probably 
would just pass, but--actually I will defer to my ranking 
member since she just walked in. And then I can pass.
    You want me to continue or you----
    I think I agree with the Chairman that we all think that 
some procedures that make the buyers more aware of what is 
happening, and speed up the process, and less complex are 
desirable, but that the devil is always in the details. And how 
you get there from here is a very complex issue that, I guess I 
have probably been dealing with longer than most people on this 
committee because I practiced law for 22 years doing real 
estate work before I came to Congress. So that is 22 years plus 
the 10 years that we have been talking about this on the 
committee. Thirty-two years I have been working on this issue, 
and some things that appear to be logical are not necessarily 
the most logical way to proceed. And some ways that appear to 
be illogical may be the only way that you can achieve the 
necessary objectives.
    So I will be anxious to listen to all of the people who 
have input to make on this issue. I think our objectives are 
all the same, to simplify and make the process more transparent 
and more visible. How we get there from here can be a very 
difficult issue, and I will be looking forward to your 
suggestions about how you do that.
    I did submit a letter to HUD on this issue on the proposed 
regs and they did not much care for what I had to say, but 
maybe you all can have some influence, and maybe we can have 
some influence in this process. So I look forward to it and I 
will yield back the balance of my time.
    Chairman Ney. I thank the gentleman for his statement. And 
the chair will yield to the ranking member.
    Ms. Waters?
    Ms. Waters. Thank you very much, Mr. Chairman. I would 
first like to thank you for making this such a top priority for 
the work of the subcommittee. We could not have a more timely 
or important attempt at reforming and simplifying the home 
buying process.
    I would like to commend HUD for the work that they have 
done. I know the length of time that HUD has been involved in 
trying to deal with this reform, and it is not easy. We had a 
lot of vested interest here from the mortgage brokers to the 
lenders themselves, and everybody who does loan origination, 
the real estate interest, insurance interest. And I have noted 
in the information that I have been given that everybody has 
got something to say about what is good and what is bad about 
the proposed reform. And so we are all going to have to work 
together to see if we can do the best possible job for the 
citizens of this country.
    I need not say to anyone in this room that home ownership 
is perhaps one of the most important efforts that any citizen 
can be involved with. This business of home ownership has been 
referred to as like motherhood and apple pie. We are all told 
that we should aspire to own a home and we all do want to own a 
home and should be able to own a home.
    And so most people do not pay cash for their home, they 
have to get involved in a very complicated and sometimes scary 
system and procedures in order to do that. And we have got to 
help our citizens be able to have access not only to mortgages, 
but to be able to feel comfortable that they can sit down with 
loan originators and others and not be frightened or have the 
procedure so complicated that they do not understand what is 
going on.
    In all that we do, I think someone mentioned it in their 
proposed statement here, we must not do anything that will 
exacerbate the problems that we are trying to straighten out in 
this committee. Whether it is on the Republican side of the 
aisle or the Democratic side of the aisle, we are all focused 
on doing something about predatory lending. And we do not 
intend to allow anything to happen in this reform process that 
will make that job more difficult or more complicated.
    So I am delighted that you are all here today. I look 
forward to hearing your testimony. And I am hopeful that we can 
have a bipartisan effort that will move forth from this 
committee at the appropriate time, based on all of the 
information that we have gathered and all that we have come to 
understand about the process so that in the final analysis, we 
will be able to serve our constituents and protect our 
consumers.
    So I would like for everybody to make some money, but not 
at the expense, necessarily, of our consumers.
    So, with that, Mr. Chairman, I will turn this hearing back 
over to you.
    Chairman Ney. I thank the ranking member for her statement.
    And the gentleman from Wisconsin, Mr. Green?
    Mr. Green. I thank you, Mr. Chairman, I have no opening 
statement. I look forward to the testimony.
    Chairman Ney. The gentleman from Alabama, Mr. Davis?
    Mr. Davis. Thank you, Mr. Chairman.
    The up side, I guess, of these kinds of hearings is that 
junior members, like myself, get to question relatively near 
the beginning. The down side is having to follow Mel Watt and 
Maxine Waters. So I hope you will take that into account.
    I want to welcome all of you today. I have the advantage, I 
suppose, of being a new member of this committee. I do not have 
a lot of preconceptions about what took place before I got 
here.
    What I can tell you is as I look at RESPA, first of all, I 
share Ms. Waters' comment that this is a serious problem and I 
think that HUD ought to be complimented for trying to get its 
hands around it.
    I would also echo Mr. Watt's comments and the Chairman's 
comment that all of us, I think, want to see consumers have as 
much information as possible--no less than that. What none of 
us want to see is a system that at the end of the day purports 
to offer a certain level of predictability, but then to see 
that predictability undone by various definitional ambiguities.
    At the same time, none of us want to see a world where the 
burden is put on consumers--on people that were trying to buy a 
home for the first time to unravel the process that is already 
frighteningly complex.
    I have a third concern, that I suspect Mr. Watt may have, 
too--a lot of solo practitioners--a lot of small practice 
lawyers in this country of ours depend on real estate closings 
and they depend on the real estate closing business to earn a 
livelihood. I have a natural predisposition against a system 
that does not give people a chance to select their own lawyer--
that may be the old criminal defense lawyer in me talking, to 
some extent. But what troubles me about these reforms--and my 
questions may well be along these lines--deal with the lack of 
flexibility with individual borrowers--potential homeowners 
would have in a system which does not necessarily allow them to 
select their own counsel.
    I would agree, as a general proposition, that the interests 
of people trying to buy a home and people trying to sell it is 
often an antagonistic one. Certainly a lot of the people who 
are engaged in the process believe it is an antagonistic one. 
So I favor a regime, if we can find a way to serve our 
predictability interests--I favor a regime that would give 
people more flexibility in selecting counsel of their choice.
    But I am eager to learn from you. I am eager to listen to 
you. And I suspect since not that many of us are here, it will 
not take that long to do either one of those.
    I yield back the balance of my time, Mr. Chairman.
    Chairman Ney. I want to thank the gentleman.
    Next is the gentleman from Nebraska--Mr. Bereuter?
    Mr. Bereuter. Thank you, Mr. Chairman--no opening 
statement.
    Chairman Ney. Thank you.
    The gentleman from North Carolina, Mr. Miller?
    Mr. Brad Miller. No opening statement--I am struck by how 
diverse the perspectives are with the witnesses and I look 
forward to hearing the testimony.
    Chairman Ney. The gentlelady from Florida?
    Ms. Harris. No opening statement, Mr. Chairman. Thank you.
    Chairman Ney. What an easy committee.
    The gentleman from Connecticut?
    Mr. Shays. Mr. Chairman, just to thank you for holding 
these hearings and thank our witnesses--no statement.
    Chairman Ney. And the gentleman from Pennsylvania?
    Oh, the gentleman from Illinois, Mr. Manzullo?
    Mr. Manzullo. Thank you, Mr. Chairman, for the opportunity 
to provide a statement at today's hearing. I am a member of the 
Financial Services Committee, but not of this subcommittee.
    Without a doubt, the residential real estate market is a 
bright spot in our otherwise uneven economy. HUD's proposal to 
revise the regulations governing the residential real estate 
settlement process is ambitious, it is complex and it is 
rushed.
    While I support simplifying the process so that more first-
time home buyers could enter the market, I believe that HUD's 
rush to finalize its proposal jeopardizes our real estate 
market in the short term. In addition, if adopted, it will make 
fundamental and perhaps irreversible changes to the process 
that may undermine the long-term goals of providing affordable 
housing and consumer benefits within a residential real estate 
market.
    I believe that HUD has not--N-O-T--HUD has not fully 
analyzed and carefully deliberated all the critical issues from 
this proposal. Specifically, HUD has not thoroughly considered 
the economic effects of the proposal on small businesses, a 
very important segment of our community--of our economy.
    Pursuant to the Regulatory Flexibility Act and Executive 
Order 12866, HUD attempted to undertake an economic analysis of 
the proposal and its effect on small businesses. While the 98-
page document summarizes and highlights many elements of the 
proposal, HUD has failed to adequately determine the economic 
effect on segments of the small business community. HUD readily 
admits the small business community may lose anywhere from $3.5 
billion to $6.3 billion annually. However, HUD does not break 
down the costs to each segment of the industry. HUD does not 
even include all the industries impacted.
    There is no detailed economic analysis for the community 
banks, small real estate agents, small title agencies--just to 
name a few, along with the other small businesses.
    As chairman of the Small Business Committee, I am going to 
be holding a hearing on HUD's regulatory flexibility analysis 
to determine why this organization cannot simply follow the 
law.
    Ms. Velazquez, who is my ranking member on the Small 
Business Committee, is opposed to this proposal. The Small 
Business Administration, through Tom Sullivan, chief counsel 
for advocacy, is opposed to this proposal because HUD has not, 
Mr. Chairman, followed the law.
    In fact, if you take a look at their proposal, they attempt 
to do in 88 pages a $6 billion economic analysis. And HUD 
should hang its head in shame over having all the resources and 
not being able to simply determine the groups that are 
involved.
    As a practitioner of law for 22 years--the same as Mr. 
Watt--and someone who has been through over a thousand real 
estate transactions, this is not a new area to me. But I can 
assure you of this--if this goes through, Mr. Chairman, you 
could find this entire industry will be tied up by five or six 
major lenders across the country, creating one of the largest 
monopolies and smoking all the small businesses in the country.
    I would call your attention to page 63 of the report that 
says, ``Summary of Small Businesses Impacted and Alternatives 
Considered''--all they had to say is that because you have 
third party providers out there they could participate and be a 
part of these large conglomerates. I mean, it is such a naivete 
that they will get smoked simply because they are not big.
    Chairman Ney. I want to thank the gentleman. The time of 
the gentleman has expired.
    An opening statement, if Mr. Baker wishes, from Louisiana?
    Mr. Baker. Thank you, Mr. Chairman. I have no statement at 
this time.
    Chairman Ney. I want to thank the gentleman.
    We will move on to introduction, quickly, of the witnesses 
and then we will move on to the panel.
    I want to thank all of the witnesses for being here today.
    First is John Courson. Mr. Courson currently serves as 
Chairman of the Mortgage Bankers Association of America. The 
Mortgage Bankers have a membership of approximately 2,600 
companies, including all elements of real estate finance, 
mortgage companies, mortgage brokers, commercial banks, 
thrifts, life insurance companies, as well as others in the 
mortgage lending field.
    Mr. Courson also serves as the CEO of Central Pacific 
Mortgage Company, which is headquartered in Folsom, California.
    Margot Saunders--Ms. Saunders serves as the managing 
attorney of the National Consumer Law Center, NCLC; provides 
support training and technical assistance for legal 
professionals in the areas of consumer fraud, debt collection, 
finance law and home ownership programs. Ms. Saunders duties 
include representing low-income clients on financial credit 
issues and analysis of water and energy issues as they affect 
low-income people.
    She has recently completed terms on the Federal Reserve 
Board's Consumer Advisory Council and the American Waterworks 
Association Public Advisory Forum.
    Stanley Friedlander--Mr. Friedlander is the President of 
the American Land Title Association and the past President of 
the Ohio Land Title Association. He is the Co-founder and 
President of the Continental Title Agency Corporation, 
headquartered in Cleveland, Ohio.
    It is a little warmer in D.C.--not much--than Cleveland 
this morning.
    Anne Canfield--Anne Canfield is Executive Director of the 
Consumer Mortgage Coalition, known as CMC, a trade association 
representing national mortgage lenders, servers--servicers and 
service providers. Ms. Canfield is also President of Canfield 
and Associates, Incorporated.
    Neill Fendly--Mr. Fendly currently works with Camelot 
Mortgage, Incorporated, an Arizona-based mortgage company, and 
has been involved with the National Association of Mortgage 
Brokers as a member of the board of directors before serving as 
Vice President elect and President of NAMB.
    He is currently the Government Affairs Chair for NAMB and 
was a member of the federally mandated mortgage reform working 
group.
    D. Russell Taylor--Mr. Taylor is the first Vice Chairman of 
America's Community Bankers. He has been a member of ACB's 
board of directors since 1998. Members of ACB originate more 
than 25 percent of all mortgages in the United States and 
significantly more than half of all mortgages originated by 
depository institutions.
    Mr. Taylor also serves as a member of the New Jersey League 
Community and Savings Bankers and is a member of the Government 
Affairs Counsel on Legislative and Regulatory Committee. He is 
currently the President and CEO of Rahway Savings Institution 
in Rahway, New Jersey.
    And F. Gary Garczynski--Mr. Garczynski is the immediate 
past President of the National Association of Home Builders. He 
is testifying today for C. Kent Conine, NAHB's current 
president, whose flight to Washington from Dallas was canceled.
    Mr. Garczynski is President of the National Capital Land 
and Development Company in Woodbridge, Virginia. In the past 30 
years, he has built over 4,000 homes in the greater Washington 
metropolitan area. He has served on the executive committee of 
NAHB since 1993 and on the Virginia Housing Study Commission 
since 1995. He was also an appointee to Virginia's Commission 
on Population and Growth.
    I want to thank all of the witnesses for your important 
testimony today.
    And without objection your written statements will be made 
part of the record. You will each be recognized for a five-
minute summary of your testimony.
    And we will begin with Mr. Courson.

   STATEMENT OF JOHN A. COURSON, CHAIRMAN, MORTGAGE BANKERS 
             ASSOCIATION OF AMERICA, WASHINGTON, DC

    Mr. Courson. Good afternoon. Thank you for inviting the 
Mortgage Bankers Association to participate in these hearings.
    Mr. Chairman, I would like to just state up front that the 
Mortgage Bankers Association does stand behind Secretary 
Martinez' bold and far-reaching proposal to reform the mortgage 
disclosure system.
    I have been in this business--many would say too long, but 
over 40 years. And throughout those 40 years, the one 
consistent thing that I have seen is the growing amount of 
paperwork, numbers, calculations and confusion that has built 
up and seems to build every year as we move through the genesis 
and development of the mortgage lending process, a process 
that, through those numbers and that myriad of paperwork has 
tended only to fool and mislead borrowers and certainly add 
confusion to an already confusing transaction.
    So we, at the Mortgage Bankers Association, commend and 
applaud Secretary Martinez for really stepping up to the plate 
and putting forth a proposal--a far-reaching proposal that 
would, in fact, address the complexity and confusion in the 
mortgage lending process.
    Through the introduction and the concept of a guaranteed 
fee package, the proposal has put forth a rule that would, in 
fact, simplify--would, in fact, take some of the mystery, some 
of the detail and some of the confusion out of this existing 
disclosure system.
    As you know, the Guaranteed Package, obviously, is a 
package that contains two components--a lump sum of the cost to 
close the loan and an interest rate. We, at MBA, are very 
confident that HUD's package has three very important 
objectives to it. The first, it simplifies the process of 
mortgage--of the mortgage disclosure systems. Secondly, it 
certainly provides consumer certainty. And it will foster and 
does foster competition.
    And, Mr. Chairman, just let me say, again, simplification, 
certainty and competition--let me just talk for a minute, if I 
may, about simplification. I have talked about the complexity 
of the process not only from the consumer standpoint, but those 
of us who are practitioners who originate loans. Through the 
guarantee fee package arrangement, we are able to give the 
consumer a single price and an interest rate that is more clear 
and clearly more simple than trying to pour through a list of 
charges that are very confusing and, frankly, the purposes of 
which are unknown to many consumers.
    Secondly, the certainty--the consumer now will have, with 
certainty, a price that he or she can shop effectively to 
determine that they are getting the best deal for them.
    And, of course, lastly, fostering competition because with 
this process, we will be able--and they will be able to 
negotiate and go to lenders--go to originators and shop for the 
best transaction and create competition in a marketplace that, 
today, really is forestalled by virtue of the fact of the 
complexity.
    Obviously, we have submitted our comments to the department 
for some areas where we think there can be improvement and 
modifications. But let me say that we do believe that the 
Secretary--and I applaud the Secretary for being on the right 
track.
    Before I close, Mr. Chairman, though, I would like to say 
one other thing. There has been a lot of conversation in past 
weeks and months about the negative impact of this rule on 
small businesses and the fact that small lenders will, in fact, 
be disadvantaged and large lenders will replace them as 
effectively being able to compete.
    MBA dissents from that view and we can speak, frankly, with 
some certainty in that more than 50 percent of our members are 
small, midsize lenders. We compete today. There are large 
lenders out there that are better capitalized, have lower cost 
of funds, have affiliated a business arrangement and have the 
wherewithal, clearly, that many of us who are small and midsize 
lenders do not have, but yet I will tell you that we compete 
effectively in this marketplace.
    Actually I look at it and say that this proposal gives us a 
better opportunity to compete. We now can enter into co-ops, 
affiliations, alliances that allow us to become part of groups 
that we assemble services to provide to the consumer to more 
effectively compete in the marketplace. So I would tell you--I 
would say to you that our members are competing today against 
the same lenders that will be there after this rule is passed. 
And we think, in fact, we can effectively compete.
    So I thank you and I appreciate the opportunity to testify 
before this committee.
    [The prepared statement of John A. Courson can be found on 
page 158 in the appendix.]
    Chairman Ney. Well, I thank the gentleman for his 
testimony.
    Ms. Saunders?

   STATEMENT OF MARGOT SAUNDERS, MANAGING ATTORNEY, NATIONAL 
              CONSUMER LAW CENTER, WASHINGTON, DC

    Ms. Saunders. Thank you, Mr. Chairman. I appreciate the 
opportunity to be here today. I testify on behalf of the low-
income clients of the National Consumer Law Center, as well as 
the Consumer Federation of America, Consumers Union and U.S. 
PIRG.
    We wish, also, to commend Secretary Martinez for the 
dramatic approach to RESPA reform advocated in these proposed 
rules. The stated goals of the rules and the orientation are 
wonderful to protect consumers. We credit the hard work and the 
creativity of the HUD staff in the conception of the rule and 
we think that many of the ideas in the rules are constructive.
    There are several overarching concerns and a myriad of 
important details that we believe must be worked through to 
ensure that the rules do, in fact, protect consumers. And we 
have provided 47 pages of comprehensive comments to HUD to 
facilitate that.
    However, we want to make absolutely clear that our most 
important concern is that this rule not be allowed to 
facilitate predatory lending. And we have that concern because 
the Guaranteed Mortgage Package, which is the subject of so 
much of the debate, will have the effect of hiding the Truth in 
Lending Disclosures that are required in most mortgages today. 
The impact of that cannot be understated for agency and 
consumer enforcement of the single most effective and important 
consumer protection law that we have on the books affecting 
consumer mortgages.
    As a result we--and, now, this is a broad coalition of 
consumer and legal services programs across the country--have 
strongly advocated to the Secretary that if he moves forward 
with the Guaranteed Mortgage Package that he exclude from it 
all subprime loans. They have proposed excluding all HOEPA 
loans. That is not a broad enough category because the impact 
of the Guaranteed Mortgage Package would be to allow many loans 
which would otherwise be counted as HOEPA loans to be included 
in the guarantee and we would have no way of determining if, in 
fact, it was a HOEPA loan. By HOEPA, I mean the Homeownership 
Equity Protection Act, which is the federal law designed to 
protect against predatory lending.
    There are three main aspects to the rule. One is the 
Guaranteed Mortgage Package. The second is the change in the 
disclosures of the yield-spread premiums charged by brokers. 
And the third is the rule's proposal on how to deal with Good 
Faith Estimate disclosures.
    The Guaranteed Mortgage Package, we think, has a lot of 
good ideas and we support it, so long as it, in fact, is a 
guarantee of both closing costs and points and interest rate. 
That is crucial. If you allow someone to buy a package of 
services without also buying the interest rate, it is like 
buying the wheels on a car without buying the car. And those 
wheels are only going to go on certain cars. In fact, you are 
tied into certain loans without knowing what the price for the 
rest of the loan package will be.
    The yield spread premium proposal that HUD has made is very 
good. Essentially for the first time, HUD is actually requiring 
that consumers be given the benefit of the fee that the lender 
is paying to the broker. And since the fee the lender is paying 
to the broker is reflected in the interest rate that the 
consumer pays, the consumer should have control over how that 
fee is applied.
    In the amount of time I have now, I cannot go into the 
complexities here, but while we do support the proposal, we 
must point out that to make this proposal effective, it must be 
included in those parts of the regulations that deal with yield 
spreads, which are enforceable. It cannot just be included in 
those parts of the regulation which deal with disclosures, 
which are not privately enforceable.
    Thirdly, HUD has proposed that the information that 
consumers received on the Good Faith Estimate when they first 
apply for a loan actually be true information and that there be 
small tolerances between the amount of money that the lender 
says is going to be charged and the amount of money that is 
actually charged for closing costs when the consumer gets to 
closing. We support these proposals and think they are very, 
very good.
    And, in sum, I am happy to answer any questions. We have 
worked extensively with HUD in the hopes that they will 
continue with some parts of this rule and guard against 
facilitating predatory lending in other parts.
    Thank you.
    [The prepared statement of Margot Saunders can be found on 
page 400 in the appendix.]
    Chairman Ney. Thank you for your testimony.
    Mr. Friedlander?

 STATEMENT OF STANLEY B. FRIEDLANDER, PRESIDENT, AMERICAN LAND 
               TITLE ASSOCIATION, WASHINGTON, DC

    Mr. Friedlander. My name is Stanley Friedlander. I am the 
President of Continental Title Agency located in Cleveland, 
Ohio. I am appearing today as President of the American Land 
Title Association, which represents both title insurance 
companies and over 1,750 title insurance agents, most of which 
are small businesses like mine.
    ALTA, and I, personally, would like to thank you for 
holding these hearings. We understand the concerns--that many 
have prompted the HUD proposed regulations and believe that the 
Secretary and the Department deserve credit for the boldness of 
their initiative.
    However, the HUD proposed rules could have a very negative 
impact on our residential real estate market. We believe the 
rules proposed by HUD do not serve the interests of the 
consumers of our products and services; would adversely affect 
competition in our business; and will particularly hurt the 
small businesses that are the cornerstone of our industry.
    HUD is proposing to replace the current regime with two 
alternatives. The first is a revision of the current Good Faith 
Estimate regime. The second regime HUD proposes would encourage 
mortgage lenders to offer what HUD refers to as a Guaranteed 
Mortgage Package, which would contain essentially all of the 
loan and other real estate-related settlement charges at a 
single guaranteed price, together with a loan at a guaranteed 
interest rate.
    We have serious concerns about these proposals and I will 
highlight an alternative we have recommended to HUD that would 
achieve many of the agency's objectives, while minimizing 
consumer and industry problems. We urge the committee to ask 
HUD to seriously consider this alternative.
    The HUD-proposed regimes would pose particular problems for 
consumers in purchase sale transactions, as opposed to 
refinance transactions. In those transactions, the buyer and 
the seller have separate interests from the lender in the 
nature and the quality of the title services required. Under 
the HUD blind package proposal, the consumer will not know the 
services that they are obtaining or the individual costs. And, 
therefore, will not be able to compare packages.
    In addition, in a home purchase, the buyer and the seller 
may already have agreed on the selection of the provider of the 
title or closing services before the buyer has even begun to 
shop for a mortgage.
    As the price of the Guaranteed Mortgage Package might also 
include these services, the borrower could end up paying twice 
for the same service. Further, in most areas of the country, as 
in Ohio, the seller generally pays half the costs of closing or 
a significant portion of the title insurance charges and 
government transfer and deed recordation charges. The HUD 
proposals tilt heavily in favor of the packaging alternative, 
because packagers are provided an exemption from the Section 8 
of RESPA.
    As a mortgage loan at a guaranteed interest rate must be a 
part of the Guaranteed Mortgage Package, therefore only lenders 
will effectively be able to offer packages. This will have a 
particularly adverse consequence for our small businesses.
    HUD has structured its GMP proposal in a way that mortgage 
lenders are in a position to realize greater profits on the 
Guaranteed Mortgage Package prices by negotiating lower prices 
from the providers of the service packages and will, 
themselves, pick up a packaging fee. Smaller abstractors and 
title agencies will not have the resources to be able to offer 
the kinds of prices that the larger company can provide and 
still be able to provide the quality of services required. 
Accordingly, these smaller businesses will have a difficulty 
competing for the consumers' business and surviving.
    We believe the two-package approach will allow lenders and 
others to package on a local level. It will take into account 
local costs, local needs and allocations that allow 
customization. We suggest that the HUD proposal be modified to 
adopt a Guaranteed Mortgage Package which would consist of a 
loan at a guaranteed interest rate and then all lender-related 
services as one charge and, in addition, a guaranteed 
settlement package. That could be offered by any party--by 
title insurers, agents, real estate brokers, lenders, escrow 
companies or attorneys. That would guarantee a single price for 
the settlement charges and they would include title and related 
charges, government recording and transfer charges and charges 
required for closing purposes.
    We believe this two-package approach would better achieve 
HUD's goals of ensuring price certainty in the settlement 
process for the customers and injecting significant 
shopability--price competition in both the lending and the 
settlement industries.
    Please also note that irrespective of whether one believes 
that HUD's proposals are good or bad, or workable or 
unworkable, this Committee and the Congress should be concerned 
about HUD's implementing such a change without clear legal 
authority.
    I thank the committee for the opportunity to participate in 
this process. And we encourage HUD to move slowly and carefully 
on this proposal.
    [The prepared statement of Stanley B. Friedlander can be 
found on page 239 in the appendix.]
    Chairman Ney. I thank the gentleman for his testimony.
    Ms. Canfield?

  STATEMENT OF ANNE C. CANFIELD, EXECUTIVE DIRECTOR, CONSUMER 
               MORTGAGE COALITION, WASHINGTON, DC

    Ms. Canfield. Thank you, Mr. Chairman for the opportunity 
to testify. The Consumer Mortgage Coalition is pleased to be 
here today.
    We would like to submit a copy of our full statement and 
comment letter that we submitted to HUD for the committee 
record if that is possible.
    Chairman Ney. Yes, without objection.
    Ms. Canfield. Thank you.
    The CMC believes HUD's proposal represents a major step 
toward improving the process by which consumers obtain mortgage 
loans in this country. Significantly, it gives loan originators 
and other settlement service providers the option of 
guaranteeing closing costs to consumers. And if such a 
guarantee is provided, it allows packagers to use their 
purchasing leverage to lower these costs--something which 
RESPA, to date, has prohibited.
    With this guarantee, consumers will have a better 
understanding of closing costs and be better able to shop for 
the best loan that suits their needs. We also believe that this 
guarantee, which the proposal calls a ``Guaranteed Mortgage 
Package'' or a ``GMP,'' if structured properly, will help 
reduce predatory practices.
    The CMC has developed a comprehensive set of proposals to 
address predatory lending, which are in Tab 1 of our comment 
letter to HUD. The GMP is an important element of those 
proposals for two reasons. First, the proposal will ensure that 
consumers receive relevant information about a loan's costs 
early in the process, which promotes comparison-shopping. 
Second, by simplifying the comparisons, it will increase 
consumer understanding and make more difficult the deception 
that characterizes abusive loans.
    I would like to focus today on five key aspects of HUD's 
proposal that we believe are crucial to this rule becoming a 
reality--not just the reality of becoming a final rule, but the 
reality of millions of borrowers obtaining lower cost loans as 
a result of receiving offers of guaranteed mortgage packages.
    First, the structure of the Guaranteed Mortgage Package--
HUD has included in the GMP the guaranteed settlement costs and 
an interest rate component. Although the proposal calls this an 
``interest rate guarantee,'' the interest rate is not, and 
cannot be, a guaranteed rate, unless the borrower locks in the 
rate and qualifies for the loan. The costs to the consumer and 
the industry of actually offering every applicant a guaranteed 
rate would be staggering. HUD understands this.
    Because they are not guaranteed, we have urged that the 
interest rate and any discount points which together constitute 
the interest price of the loan be separated from the guaranteed 
closing costs package. Consumers need to receive, and shop 
with, offers of guaranteed settlement costs. These costs, far 
more than the interest rate, are misunderstood and are not 
subject to comparison-shopping and come as unwelcome surprises 
to borrowers at the closing table.
    Also, if the interest price were removed from the package, 
non-loan originators will be more readily able to assemble and 
offer a guaranteed package because they would not have to offer 
the actual loan, an act that requires special licensing 
authority.
    If HUD determines to include an interest rate component in 
the GMP, it must be a conditional rate, subject to 
underwriting. HUD also wants borrowers who have either not yet 
accepted a GMP offer, or have accepted but not locked in the 
rate, to be able to track the rate using some verifiable index. 
This is a problem, however, because there is no universal index 
that can be used to track lenders' rates.
    Because loan pricing is highly company-specific and is 
driven by numerous internal and external factors, the only way 
for this to work is to require that loan originators make their 
rates available to these applicants on a daily basis, by phone, 
on a Web site or via some other medium. This will assure that 
similarly situated borrowers will be treated alike.
    A few trade associations, as my colleague just mentioned, 
have urged HUD to adopt a two-package approach to the rule. One 
package would be the loan package, including the interest rate 
and any separate settlement charges imposed by the lender, such 
as loan origination or loan processing or underwriting fees. 
The second package would be a settlement package, which 
presumably would include the remaining settlement costs, such 
as title insurance, closing attorney, survey, et cetera. It is 
not clear where the costs for the appraisal or credit report 
would go. In some proposals, there would be a Section 8 
exemption for the services within each package, but not across 
the packages.
    After looking closely at this approach, we cannot support 
it because it significantly complicates the origination process 
and raises more questions than it answers. Consumers want 
simplified shopping. They understand and shop for the interest 
rate, and they understand that they can raise or lower the rate 
with discount points. They now need a simple way to compare and 
shop for closing costs. Having certain closing costs in one 
package and other closing costs in another package makes it 
harder, not easier, to shop for these costs.
    The structure we see working best is one in which lenders 
and other settlement service providers may assemble and offer 
packages of guaranteed settlement costs.
    Second, the treatment of HOEPA loans--this proposal 
excludes from the exemption for packaging loans subject to the 
federal HOEPA, which applies to loans whose rate and points 
exceed specific thresholds. We strongly disagree with this 
exclusion. We think it is wrong to withhold from subprime 
borrowers the clear shopping and cost-saving advantages of 
obtaining GMP offers. It has been argued that many HOEPA 
borrowers today do not shop effectively for loans. That is all 
the more reason to include them under this rule. We need to 
give them every tool and motivation to shop. In fact, HOEPA 
borrowers are likely those most in need of GMP offers. Armed 
with guaranteed settlement cost offers, HOEPA borrowers can 
focus on obtaining the best loan price for the loan available 
to them in the market--price being the interest rate and the 
points.
    Third, federal preemption--many state laws conflict with or 
frustrate the purpose of the HUD proposal. There are state laws 
that require the disclosure and itemization of all closing 
charges. There are other state laws, like Section 8, that--like 
Section 8 prohibit referral fees, or that require a direct 
pass-through of all third party closing charges to providers--
of settlement--third party charges to consumers. An exemption 
from Section 8's federal prohibitions and the express federal 
authority to bundle and guarantee settlement costs, will have--
--
    Chairman Ney. I am sorry to interrupt--I would have to note 
that the time has expired if you want to----
    Ms. Canfield. Okay.
    Well, I was going to say that preemption is important--HUD 
has the authority to issue the rule with preemption. We would 
encourage them to do so, so that the Guaranteed Mortgage 
Package can actually work.
    And finally, as noted by some--by my colleagues here to my 
right, there are significant changes in the Good Faith 
Estimate. We have encouraged HUD to delay those changes in our 
proposed comment letter for two reasons. One is that if it 
became a requirement, all of our lenders would have to focus on 
implementing those mandatory changes, which would take up to 18 
months, and delay doing the Guaranteed Mortgage Package.
    The second is that HUD's legal authority in this area is a 
little bit questionable. And it would delay--it might--pending 
lawsuits might delay the whole rule for years.
    [The prepared statement of Anne C. Canfield can be found on 
page 69 in the appendix.]
    Chairman Ney. Thank you for your testimony.
    Ms. Canfield. Thank you.
    Chairman Ney. Mr. Fendly?

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

    Mr. Fendly. Chairman Ney, Ranking Member Waters, members of 
this subcommittee, I am pleased to be here and appreciate the 
opportunity to discuss HUD's proposal to reform RESPA.
    Today, mortgage brokers originate more than 60 percent of 
all residential mortgages and are the key to bridging the gap 
in minority home ownership, based on a recent study. A mortgage 
broker does not simply press keys and provide the customer with 
a loan, but instead, serves the role of adviser, credit 
counselor, underwriter and personal contact to the consumer. 
Brokers also provide lenders a nationwide distribution channel 
that is less expensive than traditional lender branch 
operations.
    We support the administration's goal to increase home 
ownership and HUD's stated goals of simplifying the mortgage 
process, but this rule achieves just the opposite. The proposed 
rule is unworkable in the real world for both industry and 
consumers, will harm small businesses and the mortgage broker 
industry, in particular.
    In our comment letter, NAMB provided HUD with a sample Good 
Faith Estimate form. Our proposal will strengthen, simplify and 
clarify the disclosure of costs provided to consumers in 
advance of settlement and give consumers a true comparison of 
the costs of a mortgage loan.
    NAMB has many concerns with HUD's proposed rule, but the 
single most important issue is HUD's re-characterization of 
yield spread premiums. The characterization of a yield spread 
premium is a lender payment to the borrower for a higher 
interest rate trades and ambiguity in the marketplace that will 
not only confuse borrowers, it negates HUD's own 1999 and 2001 
statements of policy, which define a yield spread premium as a 
payment for goods, facilities or services actually furnished or 
services actually performed for the lender, as well as the 
borrower.
    Mortgage lenders save millions of dollars in facilities and 
employee costs by originating loans through mortgage brokers. 
Yield spread premiums help pay the day-to-day broker 
operations. HUD's re-characterization of a yield spread premium 
ignores lender payments to the mortgage brokers for the 
facility that the broker provides to the lender.
    In addition, this re-characterization will lead to a new 
round of class action litigation, as borrowers will be confused 
as to the function of a yield spread premium and will ask at 
closing, ``Where is my check?'' The class action plaintiffs bar 
will seek these consumers out, causing another wave of class 
action lawsuits for the industry, which will only increase the 
costs to the consumer.
    The proposed rule also creates an artificial and 
competitive disadvantage for the mortgage broker industry. By 
regulating that the broker include the yield spread premium in 
the calculation of net loan origination charge, but not 
including the same for all originators, HUD is complicating the 
real estate settlement prices--process. The consumer is unable 
to do a true apple-to-apple comparison of the cost of the 
mortgage.
    This proposed rule will also prohibit a mortgage brokers' 
ability to advertise a no-point loan, even though our 
competitors will be allowed to do so. A broker and a lender 
might charge a consumer the same rate and cost for a mortgage 
loan, but if both receive indirect compensation, only the 
broker must show this as direct compensation. Thus, for the 
very same loan to the consumer, a broker cannot advertise this 
loan as a no-point loan and will appear less competitive.
    Under the proposed rule, many mortgage brokers will no 
longer be able to originate FHA and VA insured mortgage loans. 
Direct compensation is limited, by regulation, to 1 percent on 
these types of loans.
    In the proposed rule, indirect compensation is artificially 
transformed into direct compensation and subject to the cap. If 
brokers cannot charge enough to cover their costs for these 
types of loans, brokers will be forced out of the VA and FHA 
lending industry. This is significant as approximately 31 
percent of all FHA insured mortgage loans are originated by 
mortgage brokers.
    This proposed rule was not built on a solid foundation of 
market realities, but, instead a fundamental misunderstanding 
of such realities due to its flawed economic analysis. 
Constructing the rule based on inaccurate analysis will lead to 
a flawed rule that will cause great harm to consumers and could 
have devastating repercussions in a $2 trillion housing market.
    The SBA has requested that HUD issue a revised analysis 
that takes into consideration the comments of affected small 
entities and develops regulatory alternatives to achieve HUD's 
objectives while minimizing the impact on small business. Even 
the FPC said the disclosure of both compensation contained in 
the proposal could confuse consumers and lead them to 
misinterpret the overall costs of a transaction and that it 
might inadvertently burden consumers and competition.
    NAMB believes HUD has significantly underestimated the 
regulatory burden of its proposed rule. HUD admits the proposed 
rule would increase the regulatory burden by 2.5 million burden 
hours, which is the equivalent of 289 years. Such a huge burden 
will increase the cost of credit to consumers.
    NAMB sincerely appreciates the opportunity to share our 
concerns with you on HUD's proposed rule to reform RESPA. We 
respectfully request that the subcommittee and the Financial 
Services Committee work with HUD to ensure that any finalized 
rule actually achieves HUD's stated goals of providing clarity 
and simplification to the consumer, while not providing further 
confusion or complexity to the marketplace.
    In achieving this goal, HUD must ensure that credit remains 
available for consumers and is not compromised.
    Thank you.
    [The prepared statement of Neill Fendly can be found on 
page 168 in the appendix.]
    Chairman Ney. Thank you.
    Mr. Taylor?

 STATEMENT OF D. RUSSELL TAYLOR, CHAIRMAN, AMERICA'S COMMUNITY 
                    BANKERS, WASHINGTON, DC

    Mr. Taylor. Thank you.
    Chairman Ney, Ranking Member Waters, Members of the 
Subcommittee, thank you for this opportunity to be here today 
and testify on this important issue.
    My name is Russ Taylor. I am the President and the CEO of 
The Rahway Savings Institution, which is located in Rahway, New 
Jersey. We are a New Jersey state chartered mutual savings 
bank, founded in 1851. We have $430 million in assets. And our 
primary business is one to four family residential mortgage 
lending.
    Today I have the honor and the privilege of testifying as 
Chairman of America's Community Bankers. ACB member banks 
originate more 25 percent of all mortgages originated in the 
United States and significantly more than half of all mortgages 
originated by depository institutions. In our members operate a 
large number of mortgage banking affiliates that originate a 
substantial part of the business from the segment of the 
industry.
    Thank you for this opportunity to testify today on RESPA 
reform.
    Mortgage process mandates are extremely burdensome, costly 
and confusing for consumers and lenders. Reform is long 
overdue. ACB is pleased that Secretary Martinez has taken an 
important step forward in this issue. But changes must be 
implemented with careful deliberation and with a sufficient 
transition period consistent with the cost of compliance.
    ACB generally supports the concept of the Guaranteed 
Mortgage Package and the proposal to require mortgage broker 
disclosures. However, we strongly urge HUD to reconsider making 
changes to the Good Faith Estimate contemporaneously with 
introduction of the Guaranteed Mortgage Package. We believe 
that making all of these changes at the same time would 
unnecessarily disrupt the mortgage market.
    ACB strongly supports HUD's efforts to require disclosure 
of mortgage broker fees and believes this requirement should be 
implemented immediately. Mortgage broker disclosure is 
essential to preventing possible abuse of yield spread premium 
payments. We do not believe that potential delays in other 
elements of HUD's proposal should delay this new requirement.
    ACB supports the option of Guaranteed Mortgage Package, but 
we strongly believe that the current Good Faith Estimate must 
remain a viable alternative for those lenders who do not wish 
to package or who are unable to do so. It is simply too 
dangerous to dramatically change Good Faith Estimate procedures 
while simultaneously launching the potentially revolutionary 
Guaranteed Mortgage Package.
    ACB believes that small to medium-sized lenders are an 
integral part of the mortgage process and it is imperative that 
they be able to use the packaging option to the extent that 
they wish. We believe that many community banks will be able to 
work with local service providers to offer an attractive 
package. It may be that the optimal way for smaller 
institutions to participate in the packaging option may be to 
use larger third parties to coordinate or provide the 
Guaranteed Mortgage Package. In this case, we support 
restrictions in the ability of GSEs to offer packages and 
regulation to prevent loan steering by third party packagers. 
Without such regulations, the full competitive benefits of 
RESPA reform are unlikely to be realized.
    The proposed Guaranteed Mortgage Package, arguably, would 
provide customers an easy method of comparison-shopping. 
However, we are concerned that providing a so-called interest 
rate guarantee that is held open for a minimum of 30 days as 
part of the package would just not work. Problems arise because 
it is not a true interest rate guarantee. And the length of 
commitment is beyond industry norms. We suggest that HUD work 
with lenders to develop a methodology for establishing and 
adjusting rates.
    Another concern is conflict with state law. There are 
approximately 40 states in which the Guaranteed Mortgage 
Package may not be able to be implemented for a variety of 
reasons. ACB suggests that HUD look at the differences in how 
closings are conducted from state to state and at what 
different state laws may require.
    In conclusion, ACB believes that--one, mortgage broker fee 
disclosures are an integral part of making mortgage fees 
comprehensible to consumers and should be implemented 
immediately. The Guaranteed Mortgage Package, with revisions, 
should take priority and be tested in the market as soon as 
practicable. And finally, revisions to the Good Faith Estimate 
should be postponed, re-examined and adjusted as the Guaranteed 
Mortgage Package is being tested.
    ACB members stand ready to work with the members of the 
committee and HUD to complete the RESPA reform process in an 
effective manner.
    We thank you for the opportunity to testify on this issue 
today.
    Thank you, Mr. Chairman.
    [The prepared statement of D. Russell Taylor can be found 
on page 418 in the appendix.]
    Chairman Ney. Thank you.
    Mr. Garczynski?

   STATEMENT OF F. GARY GARCZYNSKI, PAST PRESIDENT, NATIONAL 
                  ASSOCIATION OF HOME BUILDERS

    Mr. Garczynski. Chairman Ney, Vice Chairman Green and 
Members of the Committee, on behalf of the 212,000 member firms 
of NAHB, I am pleased to have this opportunity to testify in 
support of HUD's proposal to reform RESPA.
    NAHB's comments today will focus on two major components of 
HUD's proposal. First are the changes in the disclosure 
requirements of the cost of mortgage transactions to the 
consumer--the Good Faith Estimate. Second, I want to comment on 
the addition of an option for lenders to offer a package of 
settlement services at a guaranteed cost--the Guaranteed 
Mortgage Package.
    NAHB applauds HUD's efforts to increase the transparency 
and simplify mortgage transactions and loan closings by 
improving the disclosure of mortgage fees and expenses to 
consumers. The proposed changes should also eventually lower 
mortgage transaction costs and help minimize unexpected charges 
at the time of loan settlement.
    My oral statement will be confined to those aspects of the 
proposed rule which deal with the circumstances involved in 
processing mortgages for newly built homes. Transactions for 
newly built homes are different in that they typically involve 
a fairly lengthy loan origination process that matches a 
sometimes lengthy building process.
    On the Good Faith Estimate, under the requirements for the 
estimate, the proposed rule does not specify when changes in 
the transactions warrant a new disclosure. Re-disclosure could 
be burdensome to lenders in a new construction environment 
where the loan origination period spans from housing start to 
home completion and may last anywhere from four months to nine 
months or more. Many changes can, and normally do, take place 
during the construction process. For example, the purchase 
price may fluctuate, depending on the buyer's optional 
preferences. Also, the attractiveness of different mortgage 
products may change, as could the buyer's financial situation.
    Changes in the home purchase price directly impact the cost 
of document stamps, transfer tax fees. And similarly, changes 
in the loan amount affect the fee charge for the lender's title 
insurance. On the Guaranteed Mortgage Package--the concept of 
the Guaranteed Mortgage Package is appealing and could reduce 
consumer costs primarily through originator's negotiations with 
settlement services that are provided.
    However, a guaranteed package that is determined at loan 
commitment and lasts until settlement on a new home transaction 
puts the packager in a position of excessive risk. This may 
lead the original packager to offer less competitive terms than 
packagers who have an opportunity to offer a mortgage package 
closer to the date of the projected loan closing. Wider 
tolerances in guarantees would be needed for a new home 
transaction where the price and loan amount often change 
dramatically during the construction period.
    So NAHB recommends for financing quotes on newly 
constructed homes that both the Good Faith Estimate and the 
Guaranteed Mortgage Package have an alternative that is based 
upon a days-until-closing threshold for providing final quotes 
and guarantees. For example, a lender would provide preliminary 
estimates at the initial application and then issue final 
guaranteed estimates 30 or 60 days out from the proposed 
closing. This procedure would be comparable to the timing of 
guarantees that would be made in financing an existing home 
purchase.
    The solution would allow the customer sufficient time to 
shop again if the final package was deemed to be less than 
competitive, while providing the lender an opportunity to 
adjust those components of the package that actually changed.
    In closing, NAHB recognizes the effort HUD has put into 
correcting some salient shortcomings in an otherwise effective 
housing financing system. However, loans for new homes, which 
represent more than a quarter of the annual purchase mortgage 
originations, have unique characteristics and, thus, they must 
be specifically addressed in any RESPA reform package. We are 
confident that HUD will address the concerns that have been 
expressed regarding this proposal and can do so without 
sacrifice to mortgage services.
    Thank you.
    [The prepared statement of F. Gary Garczynski can be found 
on page 325 in the appendix.]
    Chairman Ney. I want to thank the panel for their 
testimony.
    One question I have for anyone on the panel that would like 
to answer it--under the proposal, loan originators offering 
loans whose rate or points trigger the HOEPA protections may 
not benefit from the Section 8 exemption. Should the packaging 
proposal be extended to HOEPA? And if not, what is the lender's 
incentive to offer a guaranteed package?
    Would anybody like to comment on that?
    Ms. Canfield. We believe, and stated in our testimony, that 
the Guaranteed Mortgage Package proposal should be extended to 
HOEPA loans and they should be included. Without it, there is--
HOEPA borrowers are not going to be able to get the benefit of 
the Guaranteed Mortgage Package offer.
    Chairman Ney. I assumed you would want to respond, Ms. 
Saunders.
    Ms. Saunders. That is right, Mr. Chairman. I appreciate the 
opportunity.
    Because the effect of the package will be to hide Truth in 
Lending Disclosures and it will be impossible to determine 
whether a lender has complied with Truth in Lending when a 
package is offered, we think that it is very important to 
preserve Truth in Lending Compliance for all loans which are 
not of the most competitive nature. And there can be no debate, 
I think, that some subprime loans are predatory. To avoid 
spreading the problem of predatory loans, we need to at least 
maintain the current transparency, not add to the murkiness of 
the situation.
    So we think that, at least at the beginning part of the 
process, the Guaranteed Packages should not be allowed not only 
to HOEPA loans, but to all subprime loans.
    Mr. Courson. Mr. Chairman?
    Chairman Ney. Thank you.
    Mr. Courson?
    Mr. Courson. I am sorry--if I may----
    Chairman Ney. Yes.
    Mr. Courson. In due respect, the system under the proposed 
rule of the guaranteed fee package--Guaranteed Mortgage Package 
does not obviate the need to still provide a Truth in Lending 
Disclosure at the time of the closing of the loan. So, in 
effect, the borrower will still receive a Truth in Lending 
Disclosure disclosing those charges that are in the finance 
charges and the amount financed and an APR, in addition to the 
Guaranteed Mortgage Package disclosures.
    There will be two disclosures. And the TILA, if you will--
the Truth in Lending--will still be provided as it is today.
    Chairman Ney. Thank you.
    One other question I would have, I think, for Ms. 
Canfield--there is currently at least four national lenders 
offering one-fee loan products--an example would be ABN AMRO. 
Since lenders are doing this without a Section 8 exemption, why 
is there a need for a regulatory change because they are doing 
it without Section 8 exemption?
    Ms. Canfield. First, I would make the observation that 
there are tens of thousands of loan originators out there and 
only four that are offering any kind of product similar to what 
we are talking about. But the difference here is a timing 
difference. Under the HUD proposal, HUD is saying that you will 
get the Section 8 exemption if you guarantee closing costs at 
application and send out the guarantee in writing to consumers 
within three days. For the products that I have seen out there 
in the marketplace today, their guarantee does not come until 
much later in the loan--in the loan process--really almost near 
loan commitment, after the loan has been underwritten and the 
property has been appraised. So the HUD proposal would provide 
more certainty much sooner in the process than what is allowed 
today under current law because RESPA prevents it from 
happening.
    Chairman Ney. One final question I have and, Mr. Fendly, I 
do not know if you want to comment on this, but the ``Wall 
Street Journal'' ran an article yesterday that stated that all 
mortgage brokers are making millions off of the refinance boom. 
And I just wondered if you wanted to give us your----
    Mr. Fendly. I did, Mr. Chairman. I would like to make a 
couple comments about it.
    First of all, the writer picks the top producer at one of 
the top brokerage firms in the highest cost metropolitan areas 
in the country to stereotype our industry. And I think it is 
somewhat absurd to criticize an industry and characterize them 
in this manner, based on one individual.
    But it also states that 5 percent of the brokers make over 
$1 million, but the average broker made $120,000. 
Statistically, if you run the numbers, this means the other 95 
percent make an average of less than $74,000, working 10 to 12 
hours a day, seven days a week--meeting with loan applicants 
virtually any time day or night.
    And I think they have glossed over the good things about 
mortgage brokers. A wide yield spread premium was used to pay 
closing costs and consequently, the borrower got a great rate 
and paid no closing costs. The actual payment for the loan was 
slightly more than 1 percent--$2,800 on $240,000. And I think 
this underlines our assertions that yield spread premiums are 
used to help the borrower. And furthermore, 1 percent on a loan 
is a far cry from 6 percent realtors make on the purchase of a 
home.
    Now, it is true, some loans are less labor intensive than 
others, but just like the realtors, some homes sell faster than 
others, but they still get their 6 percent and that is pretty 
much non-negotiable.
    And last----
    Chairman Ney. My time has run out.
    [Laughter.]
    Mr. Fendly. All right.
    Chairman Ney. Luckily, I think somebody else might want to 
respond to that, I would assume.
    [Laughter.]
    Thank you.
    Ranking Member--Ms. Waters?
    Ms. Waters. Well, let me apologize for having to go out for 
a few minutes. Let me pick upon some of the discussion that I 
heard coming back in. For many years, there have been a lot of 
questions about fees and charges for mortgage brokers. As was 
indicated in testimony by our consumer advocate here, the 
concern about mock displaying all of the charges is a concern 
that did not just start today, but it has been there for a long 
time. And I do not have the empirical data, but the reputation 
of brokers for charging exorbitant fees is a reputation that 
you have gained, whether or not you are deserving.
    If, in fact, there is a belief by consumers, and 
particularly by consumer advocates, that the charges have been 
exorbitant, what can you do to convince us who are concerned 
about that, that we do not need to continue to display every 
fee that is charged in a transaction?
    Let me ask that question of Mr. Courson.
    Mr. Courson. Let me respond from the Mortgage Bankers 
Association standpoint. Obviously, I think that what you are 
getting, Congresswoman, is, in fact, the certainty of a one--of 
a guarantee. The issue today is one, frankly, of an opportunity 
of bait and switch--of showing a consumer at the time of 
application a list of charges on a Good Faith Estimate that has 
no important law to enforce that if by the time that consumer 
goes to the closing or the funding those numbers change through 
the addition of fees or other hidden charges and now the 
consumer is so far down the path they are at the closing 
table--and under current law, there is no penalty for that.
    And so this system is one that says, ``Tell the consumer up 
front, give them a guarantee--a one number guarantee and when 
they get to closing, that number does not change.''
    Ms. Waters. How can I be assured, as a consumer that that 
one number is not exorbitant? How do I know that you have not 
doubled what I would have had to pay had I known what the fees 
for each of the items should have been--could have been?
    Mr. Courson. That is a very good question. If, today, you 
took a Good Faith Estimate, which you are given, which is a 
laundry list, if you will, of charges and tried to shop it, I 
would submit to you that even some of us in the business would 
have difficulty shopping that to try to match up different 
fees, different language, different terminology, different 
charges. And, in fact, very honestly, we talk about predatory 
lending, if--anything that has that much confusion in it is, in 
fact, an opportunity to fool the consumer.
    So now, what you do is with one number--that is a shopable 
number. They now have one figure that they can shop with other 
originators. You know, when a customer comes in to one of our 
branch offices--consumer--they really, in all due respect, want 
to know two things--maybe three. One, how much cash do I have 
to bring to closing? What is it going to cost me? How much cash 
do I have to have? And what are my payments and my interest 
rate?
    And I will tell you that my experience in 40 years in the 
business--of people looking at Good Faith Estimates and trying 
to, if you will, see if the pest inspection or the flood 
certification or the whatever else we have certifications are 
marketable--in our market, it just does not happen.
    So let us simplify it--give them one price and now they can 
call any company and say, ``I have been told my closing costs 
for this transaction are not going to exceed X, what are 
yours?''
    Ms. Waters. But does this make it very difficult for small 
businesses to be competitive where the big boys just wipe you 
out by undercutting all those prices that you are getting?
    Mr. Courson. Well, in all due respect, if I thought that, I 
would not be here testifying as part of this. I do not--I do 
not envision being wiped out.
    [Laughter.]
    Actually, I think it proposes some opportunities. We do 
compete against the big people now. The lenders are out there--
they are certainly much better capitalized--lower cost of 
funds. They have affiliated business arrangements and they 
compete on closing costs, too. I mean, we are out there trying 
to originate loans and close loans and competing with rates and 
fees and closing costs.
    Frankly, I think this gives the small business person such 
as myself an opportunity to come in and form co-ops, 
affiliations--you read about groups that are forming--which 
allow us, frankly, to go with others and, perhaps, negotiate 
better transactions to compete more effectively than we do, 
really, head-to-head today.
    Ms. Waters. Thank you very much.
    Chairman Ney. Thank you.
    Mr. Green?
    Mr. Green. Thank you, Mr. Chairman.
    I have a few questions for Mr. Friedlander, if I could.
    Mr. Friedlander, the assumption that HUD is apparently 
making with its proposal is that title companies and other 
service providers have a fee that is large enough that it needs 
to be, essentially, attacked or squeezed in the packaging. And 
then they assume that that savings will be passed on to 
consumers. What is your reaction to that assumption?
    Mr. Friedlander. This has been one of our major concerns 
about the packaging proposal. The squeezing of the title 
service fee is going to hurt the small business. First of all, 
we have to give quality service and we have to give a quality 
product. We are highly regulated by the state's departments of 
insurance. And being able to reduce the price of a insurance 
policy is absolutely wrong and illegal in Ohio. So we would 
have to have some preemption, to start with, in order to change 
the title insurance premium.
    To reduce the cost to the point where we will no longer be 
able to give the quality of service I think would be a 
detriment to the consumer.
    The packaging fee will be a fee and the packager will not 
disclose what is actually in the package. So we may be reducing 
our costs, but the package price may just result in additional 
profit to the packager or to the lender if he is the packager.
    Mr. Green. Well, I guess the question is if the proposal 
is--if, in fact, it is going to lower costs to consumers, why 
should we care if the packaging proposal favors big lenders or 
big title companies over smaller ones? I mean, why should any 
of us up here care about that?
    Mr. Friedlander. If it was a matter of reducing costs 
because of efficiencies, that would be one thing. But it is 
reducing costs by squeezing the title company. And by squeezing 
the small agent, it would virtually put them out of business so 
only the large title companies would be able to compete and the 
playing field would not be level.
    Mr. Green. You said something a little earlier that caught 
my attention. You said that in Ohio--did I understand you to 
say that there are--that you are state regulated to the point 
where you do not have flexibility--is it in the rates that you 
provide or the fees that you charge?
    Mr. Friedlander. There are--there are different ways of 
charging fees in different states. Some states have what is 
called a single price that would include the title search, the 
premium and the closing costs. In Ohio, the premium is the only 
regulated part of the fee so that the title search and the 
closing costs are work charges--the title insurance premium is 
regulated by the state.
    Mr. Green. And then something else that you said in your 
statement that I found interesting--you pointed out that in 
Ohio--I think you said the custom is that title insurance is 
split half-and-half between the buyer and the seller.
    Mr. Friedlander. Yes, that is correct--in Ohio and in many 
other states, that the seller and the buyer split the costs of 
the title--in some places the seller pays all of it. For 
example, in Cleveland, the conveyance fee tax is generally paid 
by the seller. In other parts, it is split half-and-half.
    Mr. Green. So in other words, this proposal is going to 
have a very different--a varied effect, I should say, state-by-
state because of the way that the transaction is treated now 
under current law.
    Mr. Friedlander. In every state the regulations are a 
little bit different. Some states are highly regulated. But in 
all states, the state department of insurance controls the fees 
of the premium. And I would say that there would be a--really 
an unfair situation where we would be charging a lower premium 
to a purchaser who is buying a property being financed by a 
large lender and charging a different premium by a purchaser 
who is coming from a smaller lender. I think that would be 
illegal. In fact, the NAIC--the National Association of 
Insurance Commissioners--have written a letter that--I will 
provide a copy of that to the committee.
    Mr. Green. Thank you.
    And just with the brief time I have left, Ms. Saunders, 
have you had a chance to see the two package proposal that the 
title companies have talked about? And do you have any reaction 
to it?
    Ms. Saunders. Yes, I have seen it. And I do have a reaction 
to it. I think that, unfortunately, it would not work. Let me 
make it clear that we have no problem with anybody offering a 
package. Our problem is the Section 8 exemption being provided 
in response to a package. Our concern is that a consumer not be 
tied into a portion of the closing costs of the loan without 
knowing what the loan interest rate is, itself.
    Mr. Green. My time is up.
    Chairman Ney. I would note that the time has expired.
    Mr. Watt?
    Mr. Watt. Thank you, Mr. Chairman.
    If I have listened carefully to all of the people on this 
panel who have testified, I have concluded that the only person 
who has wholeheartedly endorsed this proposal is Mr. Courson, 
although the gentleman on the end, whose name I cannot 
pronounce----
    Mr. Garczynski. Garczynski.
    [Laughter.]
    Mr. Watt. ----Garczynski--said that he was endorsing it, 
then he proceeded to say that he wanted several different 
changes made to it for home builders.
    So I take it the only person on this panel who actually 
endorses this proposal as it is written is Mr. Courson. Am I 
correct in that?
    Mr. Courson. Congressman, I--let me characterize--I did say 
in my testimony we have submitted a 60-page comment letter that 
we did offer some suggested modifications. We certainly 
support----
    Mr. Watt. So you do not endorse it either, then?
    [Laughter.]
    Mr. Courson. I did not say that.
    Mr. Watt. All right. Well, let me--let me get--I was going 
to focus more on you because you were the--you were the person 
who seemed to be endorsing it most. And you seemed to suggest 
that this will increase competition. And it may well increase 
competition between lenders. I think some of us are concerned 
at--about the impact on competition below the level of the 
lender.
    And let me just play this out for you because as I 
understand this proposal, the Guaranteed Mortgage Package is a 
one number figure. And if I get a one number figure from you, 
as a lender, I do not know what is in that one number figure 
for attorney's fees, for title insurance, for deed preparation, 
for recording fees. I have got one number. And so I do not find 
out, as I understand it, until I get to the closing to a 
settlement sheet what the specific number is for attorney's 
fees and the various other components of that one number.
    How do I, under those circumstances, have the ability to go 
out and shop, as you said, for a lower attorney's fee, a lower 
mortgage--title insurance premium? You know, I do not know 
how--and I think what you said is it might increase competition 
between lenders, but what you are--what you have done is set up 
a system where you control the whole system, as the lender, for 
title insurance, for attorney's fees, for the whole range of 
other things that are variable. Now, recording fees are 
controlled. Title insurance premiums may be controlled. But 
there is a whole range of services that I could go and shop if 
I had the numbers and if I were inclined to shop.
    Now, that is one concern I have about it. And maybe you 
have an answer to that.
    My second concern is that with this Section 8 exemption, 
which is, in effect, I understand, a safe harbor, if I get down 
to the closing, I get my fees disclosed--if something is 
dramatically out of line--suppose you have squeezed everybody--
you have squeezed the title insurance company--you have 
squeezed the title lawyer and, in the process, what you have 
done is you have increased the amount of fees that are paid to 
the lender. And now you are telling me I cannot even--I do not 
even have any recourse against you for doing that because you 
have got a Section 8 exemption there.
    Now, those are the concerns I have about what you are 
saying. And perhaps there are responses. I hope you will use 
the balance of the time, maybe, to respond to it.
    Mr. Courson. I would be happy to, Congressman.
    When a consumer comes to one of our offices, they want a 
loan. They want a mortgage loan.
    Mr. Watt. No, I want the best loan I can get. I mean, I--
and I want the best legal fees I can get. I want the--you know, 
I want to have the option to choose to use a lawyer friend of 
mine, even if--even if he charges me more. If you are not 
telling me how much he is charging for that, I do not--you 
know, you are assuming the only thing I am looking for is a 
loan. And that is just not the case in my experience.
    Mr. Courson. May I finish? I will finish the rest of my 
answer now.
    And when that person comes, they obviously are concerned 
about the amount of cash that it is going to take to close that 
loan and the rates and the payment that they will have. And I 
will submit to you today, Congressman, that people that come--
the customers that come to one of our retail branch offices--
coming for a loan do receive a piece of paper that has itemized 
costs on it. And----
    Mr. Watt. But does--is that required under this?
    Mr. Courson. It--well, no, it----
    Mr. Watt. I am saying required under this--under these 
regulations.
    Mr. Courson. That is correct.
    Chairman Ney. I am sorry, the time has expired.
    Mr. Shays?
    Mr. Shays. Mr. Chairman, thank you.
    I enter into these questions with some reluctance because 
I, frankly, think that this is some of the most confusing 
stuff. I have had about seven closings in three years. I have 
signed more things. I do not pay any attention, frankly, to 
what I sign. I hire the best lawyer I can hire to trust him. 
And I hire a broker--a real--a broker who I can trust and then 
I just have them give me the one page that summarizes. And then 
I go back and I figure out when I refinanced if I am paying 
less each month than I was the last time. And then kind of feel 
pretty good about it.
    But I am saying to you that most of what I fill out I think 
it is junk--I think it is stupid. And I know that somehow we 
are responsible for it right here--all of you and all of us.
    [Laughter.]
    And so, I am just curious as to have someone here, as 
clearly as possible, without using words like ``it will be a 
disaster,'' tell me why this is not good to have it be easier 
and less expensive.
    Chairman Ney. Anybody want to offer?
    [Laughter.]
    Going once----
    Mr. Friedlander. The issue that we are dealing with is a 
change in a current regulation. We have all agreed----
    Mr. Shays. Well, my philosophy is that anything that is 
going to change what currently happens is 50 percent likely to 
be an improvement.
    [Laughter.]
    Mr. Friedlander. The RESPA rules have needed modification 
and changes. It is very difficult to make these changes. And in 
order to make the changes, we have a lot of people sitting at 
the table with a lot of different interests.
    Mr. Shays. A lot of vested interest--correct.
    Mr. Friedlander. The consumer should be number one in this 
process, but the disclosures that the consumer needs--and I 
will speak from the title point of view--that in a refinance 
situation, the consumers needs are not the same as in a 
purchase sale transaction. Certainly there is need to know 
``What am I getting?'' And this is part of the problem that we 
see in this proposal--it is blind. The consumer does not know 
what is in the package--he does not know if he is getting an 
appraisal. He does not know if he is getting an owners policy.
    And this is why we are----
    Mr. Shays. But, you know, the sad thing is even when you 
sign the documents, you do not know.
    Mr. Friedlander. I am sorry?
    Mr. Shays. Even when you sign all of those documents, you 
do not know what you are getting.
    Mr. Friedlander. In this proposal----
    Mr. Shays. No, under present circumstances.
    Mr. Friedlander. You are probably right.
    Mr. Shays. You are under this assumption that all of these 
papers tell me something. There is so much and it is--you know, 
there is only about two pages in the entire document--the 
summary--that I find valuable. Everything else, I do not find 
valuable.
    Ms. Canfield. Perhaps if I could say something, 
Congressman, I think that is why the lender trade associations 
do support the rule with some modifications to make it simpler, 
because the services that are going to be included in the 
Guaranteed Mortgage Package are not for the benefit of the 
borrower, really--for the--for the benefit of the lender so 
that the lender can make the loan. And if the consumer is--if 
we get Section 8 relief, you will see downward pressure in 
pricing on all sorts of services that go in that package 
because packagers, not just lenders, will be able to average 
cost price.
    In addition, from a simplification perspective, the 
consumer will get that one number at application. Now, what we 
have also suggested is that the changes in the GSE be postponed 
so that if the consumer wants to, as under existing law, go 
choose the title--go choose the closing attorney or a separate 
title policy or whatever, they can--they can operate under 
existing law and continue to do that.
    But what we are talking about here is allowing for the 
option for all the settlement services to be guaranteed at 
application to the consumer.
    Mr. Shays. The one tragedy in this business, as I see it, 
is I have a lot of constituents who basically may have missed a 
month--have kept current, but they are always one month or two 
months behind. They have not been able to refinance in the last 
four or five years. The irony is they need these--refinancing 
more than anyone else, and they are the ones that have the 
least likelihood of being able to do it. And yet they have been 
constant in their payment, they just were behind years ago. And 
I would love to find a way that this committee can solve this 
problem. And I will tell you, that is one reason why I chose to 
be on this committee.
    Chairman Ney. I thank the gentleman.
    Ms. Canfield. I will talk to you.
    Chairman Ney. A response to that?
    Mr. Taylor. Very quickly.
    Chairman Ney. You were still yellow.
    Mr. Taylor. I can tell you, as a lender and a local lender 
and that is our main business, that why this guaranteed package 
becomes an interesting alternative is nobody looks at those 
numbers which are itemized. Nobody understands them as a 
consumer. It is not that they are good or bad or that the good 
intentions did not bring them to the table. The fact is that 
nobody knows what they are about, so nobody does look at them.
    What the Guaranteed Mortgage Package allows to happen is 
one number be given to that consumer when they walk in the door 
because there is two questions that they ask me: What is my 
rate? And what is it going to cost to close? And that is all 
they need to know, from their perspective. I am not suggesting 
that is all they need to know--that is what they think they 
need to know. And there is nothing else that you are going to 
tell them other than ``Here is my rate, and here is the closing 
costs in this loan.''
    When you give them that itemized list, the fact of the 
matter is, nobody looks at it. They say, ``Where do I sign? You 
tell me.'' So they are relying on community institutions 
already to guide them through the process and to tell them what 
is right and what is wrong and where they should sign.
    Chairman Ney. Thank the witness.
    Mr. Davis?
    Mr. Davis. Thank you, Mr. Chairman.
    Let us assume for a minute all of the virtues of the 
Guaranteed Mortgage Agreement in terms of consistency and 
predictability. As I look at the regulations, one of the things 
that really strikes me is kind of a catch-all exception that 
says that the price can be modified, subject to--the language, 
I believe, is ``acceptable final underwriting and property 
appraisal.'' Now, we struggle with reasonable doubt in this 
society. We struggle with preponderance of evidence in the 
civil cases. That strikes me as being one of the more 
untrammeled standards I have ever seen, frankly.
    Can any of you explain to me why that exception and the 
reference to ``acceptable, final underwriting and property 
appraisal'' does frankly not constitute such a big potential 
exception that it rips a hole through the whole--virtues of the 
mortgage agreement?
    Yes, ma'am?
    Ms. Saunders. I would agree with part of what you said and 
try to distinguish another part. We have expressed very deep 
concerns about the meaning of ``subject to final 
underwriting.'' The idea behind the Guaranteed Mortgage 
Package, and we support this idea--that the consumer gets to 
call up four or five different creditors and say, ``Here is my 
Social Security number, here is my income, here is what I think 
the house is worth. Will you do an initial credit analysis and 
tell me what I qualify for, assuming that the information that 
I gave you about the house value and the income and any other 
questions that I am answering for you are true?''
    The black box that we all do not understand of credit 
worthiness, then, is resolved before the consumer pays 
anything. And that allows the consumer to shop between lenders 
about all those issues which most consumers do not understand, 
which is what loans they actually qualify for.
    The issue of how much the house is worth is going to stay 
the same. It will be resolved by an independent appraiser, 
regardless of what lender that the consumer eventually chooses.
    So the idea is that the consumer will get a commitment on 
points, and on costs to close and interest rates, subject only 
to verification of the information that the consumer has the 
ability to determine himself--him or herself, up front. But HUD 
has not been clear in the proposed regulations what ``final 
underwriting'' means. If it only means determining verification 
of those things, that is fine. If it means something more, we 
have concern--great concern.
    Mr. Davis. Let me follow before anyone else answers--that 
there is another item in the regulations that do not make a 
whole lot of sense to me. Given the fact that this particular 
provision does not require a disclosure of the itemized costs, 
how would a litigant or how would a potential buyer have a clue 
what in the world would potentially constitute ``underwriting 
and property appraisal'' if all you get is a final number and 
you have no capacity to actually pull out the itemized costs?
    That strikes me as a major tension in the regulations.
    Mr. Courson. Congressman, there is, as part of the proposed 
disclosure in the HUD rule a disclosure where the lender does 
disclose certain services whether they--yes or no answer they 
will or will not obtain, appraisal being one, for example. So 
they will tell the consumer--there is an addendum says I will 
or will not get an appraisal. And certainly in most states 
there are laws on the books that the consumer is entitled to a 
copy of that appraisal or their credit, if in fact it is--there 
is one that exists.
    Mr. Davis. Ms. Saunders?
    Ms. Saunders. That is another problem with the rule, 
frankly. If you get--if the lender gets an exemption from 
Section 8 for providing the package, then at closing it turns 
out that the lender has not complied with the promise, all the 
consumer has is the ability to bring a Section 8 case. But the 
consumer does not have any of the information, as you have just 
identified, to enable him to bring the Section 8 case. So 
losing the exemption means you now have a right, which you have 
no ability to enforce.
    So what we have proposed is that if HUD moves forward with 
this, they have to say that if you do not keep your promise, 
you have got--you have created a presumption that Section 8 has 
been violated, otherwise, taking away and then giving back the 
Section 8 exemption is meaningless because the consumer would 
not have the information.
    Mr. Davis. One final question before my time runs out--
given the fact that these cases would be litigated in the state 
court, I think almost all of you would agree that certain 
states might have widely varying definitions of what fits this 
criteria. So, were any of you proposing to possibly federalize 
this cause of action? And if you are not proposing that, how do 
you deal with the inherent inconsistency that would result?
    My time has expired, but, Mr. Chairman, if you would 
indulge someone answering that?
    Mr. Courson. Under the two package agreement, our closing 
package--we do not require a Section 8 exemption.
    Ms. Saunders. It is already a federal claim.
    Mr. Davis. Okay.
    Ms. Saunders. So it would be a federal claim.
    Mr. Davis. Thank you, Mr. Chairman.
    Chairman Ney. Thank you, Mr. Davis.
    The gentlelady from Florida?
    Ms. Harris. Thank you, Mr. Chairman.
    I came to this meeting today wondering what was good about 
this package. And I did not like the idea that larger lenders 
might have the--that we might have been creating an unfair 
competitive advantage for large lenders over small and other 
small businesses.
    But I cannot help but make the assumption that Secretary 
Martinez would only be doing this for good reasons. And by 
listening to you, it sounds as though we are--he is trying to, 
of course, lower costs and simplify the process.
    I think it still comes down--that is really what I want to 
know--is that going to happen? Are consumers really going to 
experience lower costs? Or are lenders just going to experience 
larger profits? Are we really going to create the kind of 
competition that, in essence, less--it would simplify in that 
the consumers would bear a smaller share of the cost?
    And then on a smaller--on the micro--the second part of the 
question is--two more questions--why cannot we list out--even 
though I know that it is complicated and they do not go to look 
at each of the different--pricing of each service and they each 
come in for different things, why not be more transparent? Why 
not list them all out?
    And then the second part of that is why cannot the borrower 
choose if they have an attorney that they feel close to--if 
they have a relative in the real estate business? Why cannot 
they opt to choose those individuals or those businesses should 
those individuals be able to comply with the lenders' specific 
price points?
    Mr. Fendly. Mr. Chairman, can I answer the last two first? 
And then----
    Ms. Harris. Yes.
    Mr. Fendly. I think the issue of listing them out, if you 
would--remember, this is a guarantee now, that is given at the 
time of--within three days of application. Today the system--we 
list them out on a Good Faith Estimate. But, remember, there is 
no enforcement provision if you are right or wrong or have 
listed some or not listed some or omitted some or put the wrong 
price. Now we are putting a guarantee out, so in some respects, 
frankly, as an originator or lender, we are taking some risk in 
that we have missed a cost or we have mis-estimated or mis-
priced a cost, but yet we are guaranteeing that. So there is a 
difference between listing them as an estimate that has no 
enforceability or giving a guarantee as to what those costs 
will be.
    Ms. Harris. If you were working with specific vendors, if 
you will or specific service providers and they had committed 
to that cost, then at least you would have that backup 
provision. But if others would also be willing to work for that 
amount, then it would seem that the transparency aspect would 
be important, just to be able to show.
    Mr. Fendly. Some may or may not. You know, we focus very 
different--well, we focus on the package concept here. The 
basic tenet of the proposed rule is that the customer has a 
guaranteed settlement fee disclosed to them. The idea of 
putting together packages, if you will, is sort of an off-shoot 
of the basic tenet of the rule, which is tell the customer up 
front and give them a guarantee of what their settlement 
service costs are going to be.
    And so, in many packages that will go forward, there may or 
may not be discounting or packages, if you will. It may be that 
the originator knows for that type of loan in their marketplace 
that the closing costs will be this and they are willing to 
guarantee that and have to compete because they are going to 
have to be competitive as that--as that package does get 
shopped elsewhere.
    And if the consumer asks--if any came in and asked for an 
itemization, there is nothing that precludes an originator or 
lender from giving him the list of the charges.
    Mr. Courson. If I may, this is exactly what we are talking 
about in our two package proposal. What the lender needs in 
order to make the loan is the lender's concern. And that is--
they know what they have to do. But the second part of the 
package, the settlement part, we feel strongly that the 
consumer has the option to choose what he wants in that package 
and whether he wants an owner's policy--whether he wants a 
survey.
    These are items that he may choose to get for himself where 
you have a buyer and a seller. So our proposal simplifies, 
itemizes and allows choice. Every area is a little bit 
different--different needs in different places. And I think 
that the two package proposal certainly would answer that 
issue.
    Ms. Canfield. I guess, Congresswoman, I have a slightly 
different view. RESPA was created over 30 years ago and it was 
based on the premise that consumers would shop for all these 
settlement services. Thirty-plus years later, they do not shop 
for those services.
    With regard to itemization, the fact is that in a 
Guaranteed Mortgage Package there will be some loans where, you 
know, the lender--or the packager and the lender will not feel 
it necessary to make a full-blown appraisal. They might be able 
to do an automated evaluate--automated appraisal. They might 
decide that a more simplified title insurance arrangement is 
appropriate for that loan. So borrowers of the services on 
those loans are going to vary. In addition, the pricing on them 
will vary.
    And as these packages are going to be put together, 
packagers will go out and negotiate volume discounts and they 
will say, ``Okay, for the first $100,000--100,000 loans, we 
will give you a price we will set at, say, $100 a loan. If you 
bring us 500,000 loans, those appraisal prices are going to go 
down to $50 a loan.'' So you do not know, for the consumer, 
which loan is actually getting which price appraisal or which 
price service.
    The idea here is that competition in guaranteeing the 
consumer a package price--one price up front at application 
that competition will simply the process for the consumer, 
drive competition in the cost of those services and ensure that 
the consumer understands the transaction better than they do 
today.
    Chairman Ney. Time is expired.
    Thank you.
    The gentlelady from California, Ms. Lee?
    Ms. Lee. Thank you, Mr. Chairman.
    Let me first say the more I listen, the more questions I 
have. But I know I only have a few minutes. So let me see if I 
can move it pretty quickly.
    First of all, it seems to me that somehow--and I cannot get 
my hand on it yet, but it seems like under this Guaranteed 
Mortgage Package the consumer, the smaller institutions, the 
smaller law firms--they are going to get the short end of the 
stick. And I cannot really figure out how they are going to get 
the short end of the stick, it just sounds like it.
    Let me ask you one question with regard to--and I am trying 
to unravel this--in the bundled package, for example, you lock 
in an interest rate. Does the consumer know that you pay a 
point or whatever it is now to lock in this interest rate? Is 
that disclosed? I believe now under Good Faith Estimate you are 
required to--if you lock in an interest rate--to say, ``Well, 
you are going to pay a premium for this.''
    Mr. Courson. The interest rate component that they receive 
when they receive a good faith--or a Guaranteed Mortgage 
Package contains the cost and it contains an interest rate that 
is based upon or tied to an observable or verifiable index. In 
other words, some borrowers come in and do not want to lock 
their loan right away. They want to float with the market. Some 
of them think they are maybe smarter than we are, so they do 
not lock their loan right away.
    And what this says is if they do not lock, from the time 
they get the Guaranteed Mortgage Package until the time they 
lock, their loan--their interest rate they are quoted will not 
move by more than the market index on which their loan has been 
based. So they have--in effect, they have avoided the bait-and-
switch where you tell them one thing and then the market moves 
a half-a-point, but you ratchet up the rate a full point. So 
they have that.
    Now, any time they come--and for that--and for the issuance 
of that Guaranteed Mortgage Package, there are no fees 
permissible under the proposed rule.
    If in--if sometime they come back and they want to lock 
their loan later, or so--and then, as in today, that is an 
agreement and whatever, you know, they agree to and the lender 
charges, it would be an agreement to collect a lock-in fee, but 
only when they lock in the loan and assure that that is going 
to be the absolute rate.
    Ms. Lee. And the average consumer is supposed to understand 
this and know this and be able to shop around and call three 
lenders within three days--and five lenders within three days 
and make some kind of rational informed decision on which 
option they would want?
    Mr. Courson. I would suggest that, as opposed to 
Congressman Shays' stacks of paper and what they go through 
today, this is a far superior opportunity for the consumer to 
make sure that they are getting the best deal.
    Ms. Lee. Let me ask you, with regard to the subprime 
lenders--that maybe I can get a clear answer on that--why are--
and I--it is my understanding subprime lenders are exempt from 
the RESPA regulations. Are they--are they required to comply 
also?
    They are? Okay. What about home equity loans? What about 
reverse mortgages? Are all mortgages--does RESPA cover all 
mortgages?
    Ms. Saunders. Yes.
    Ms. Lee. All types of mortgages--subprime?
    Ms. Saunders. No. Currently RESPA covers all subprime 
mortgages, however it does not cover open-end lines of credit.
    Ms. Lee. Does not? Okay.
    Ms. Saunders. No. The disclosures are not required for 
open-end lines of credit. So those are--home equity lines, if 
you--if you mean by that you get a $25,000 line of credit----
    Ms. Lee. Yes.
    Ms. Saunders. ----and you would be able to draw down $1,000 
and pay it back and draw down another $1,000, RESPA does not--
is not----
    Ms. Lee. It does not cover that.
    Ms. Saunders. ----at this point. It could be----
    Ms. Lee. Yes.
    Ms. Saunders. ----that is a matter of regulation. HUD could 
decide to cover it and we have, in fact, recommended that HUD 
do cover home equity loans.
    Ms. Lee. Okay. Good because I know senior citizens, 
oftentimes, take home equity loans and they need, I think, to 
be covered under this. And--you all have sent in a 
recommendation on that?
    Ms. Saunders. Yes, ma'am.
    Ms. Lee. Okay. On the unforeseeable circumstances, can 
anyone define what ``unforeseeable circumstances'' means? I 
mean, what is that? Does anybody have an understanding or can 
define what that means? I think it is--HUD provide for that, as 
it relates to a brokers obligation to live up to the terms that 
any--I think the language in it is ``any emergency making it 
impossible or impractical to perform.''
    Ms. Canfield. Are you referring to the changes on the Good 
Faith Estimate, Congresswoman?
    Ms. Lee. Yes, as it--yes, in terms of how you get out of 
the loan--that is a clause that--it is sort of an out clause, 
as I understand it.
    Ms. Saunders. Another--may I address that?
    Ms. Lee. Yes.
    Ms. Saunders. As I said in my testimony, there are three 
different proposals which HUD is making and they are each 
substantively different. The third one, which we have spent 
very little time here discussing, would require that there be 
very little change that lenders make on the third party charges 
from what is disclosed on the Good Faith Estimate, which you 
get three days after application, to what you actually have to 
pay. We are not talking any longer about the package.
    Ms. Lee. Yes.
    Ms. Saunders. This is, essentially, the current method 
ramped up. Right now, if you apply for a mortgage, you will get 
a good faith estimate a few days later which will say, ``Your 
title insurance will be this much. Your appraisal will be this 
much. Your--'' and so on, but when you--when you go to closing, 
there is nothing in the current law that requires that mortgage 
originator to have kept those promises. The disclosures that 
are made in the Good Faith Estimate are not privately 
enforceable.
    So if, as happens all the time, you--the consumer goes to 
closing and the charges are considerably higher than promised 
in the GFE, there is nothing the consumer can do, except to 
walk away from the loan, which is generally not an option.
    Chairman Ney. Time.
    Ms. Saunders. So what HUD has proposed is that there be a 
very small tolerance between what is proposed--what is 
disclosed up front and what is actually charged at the end. And 
then HUD said you can get out of that--the originator can 
change that for unforeseeable circumstances, such as the house 
is not a house, it is a farm and the appraisal is far more 
complicated to do than just reviewing a one-story house.
    Chairman Ney. The time has expired. Thank you.
    The gentleman from Ohio, Tiberi?
    Mr. Tiberi. Thank you, Mr. Chairman.
    I was a licensed realtor in Ohio and you all have succeeded 
to confuse me today in your testimony.
    Mr. Courson, if you could explain something to me--a 
comment you made--and let me frame the issue. Mr. Fendly, I 
believe, said that the proposed rule--the 1 percent cap on FHAs 
would essentially put brokers out of the FHA business.
    Is that correct, Mr. Fendly?
    Mr. Fendly. Correct.
    Mr. Tiberi. And you also said that 31 percent of the market 
right now in FHAs is provided by mortgage brokers?
    Mr. Fendly. Also correct.
    Mr. Tiberi. And, Mr. Courson, you said that the proposed 
rule would increase competition in the lending area. How does 
31 percent of the lending going away increase competition?
    Mr. Courson. Our comments also included the fact that there 
is an inconsistency and have asked--have asked the department 
to revise the 1 percent cap. There is an inconsistency there. 
It has been there for a number of years. That regulation has 
been there for a long time and is inconsistent with the current 
proposal. And so we have--now, with the guarantee, we have also 
made the same comment as the National Association of Mortgage 
Brokers.
    Mr. Tiberi. Do you believe that HUD has the ability, Mr. 
Courson, to raise the cap?
    Mr. Courson. I do not want to speak for what HUD can or 
cannot do, but it is--and it is--and I am not an attorney, but 
it is my understanding it is a regulation, so it could be 
changed by a regulatory proposed rule or regulatory rule.
    Mr. Tiberi. Mr. Fendly, do you believe that they have the 
ability to raise the cap?
    Mr. Fendly. They do--whether they will do it or not remains 
to be seen.
    Mr. Tiberi. Mr. Taylor, do you have the--do you believe 
they have the ability to raise the cap?
    Mr. Taylor. We believe--excuse me--yes, we do and we do 
believe that his regulation could be, in part, brought to 
fruition through HUD--that there needs to be no further 
regulatory or legislative action taken.
    Mr. Tiberi. Mr. Fendly, why do you believe that the cap 
causes your members to--how do I want to put this--not be able 
to make the loan?
    Mr. Fendly. You are referring again to the FHA loan?
    Mr. Tiberi. Yes.
    Mr. Fendly. Historically, a broker will receive 
compensation--two forms on an FHA loan. The direct compensation 
would be the one point cap on front. The indirect compensation 
is the yield spread premium, which they will charge, generally 
speaking, an average of another point, in order to cover their 
costs.
    By recasting that yield spread premium from indirect 
compensation to direct compensation, that violates the cap that 
is in current existence right now because that would be two 
points. It limits us to one point and there is absolutely no 
way we can cover our costs with one point.
    FHA loans, by their very nature, are more difficult and 
time consuming to consummate than a conforming loan.
    Mr. Tiberi. And Mr. Taylor, you would agree with that?
    Mr. Taylor. Yes, I would--yes, I would.
    Mr. Tiberi. And Mr. Courson, you would agree with that, as 
well?
    Mr. Courson. Yes. The 1 percent cap, Congressman, is years 
old and it was always assumed that a FHA loan is a 1 percent 
origination fee--there is an interest rate and there is a 
discount. And as, obviously, you well know, that marketplace 
changes and now we are into providing closing costs through 
grades of trade-off, if you will, of the teeter-totter. And all 
of that new innovation and new financing tools that are 
available have really rendered that regulation antiquated and 
outdated.
    Mr. Tiberi. Back to you, Mr. Fendly, you mentioned in your 
testimony about no-point loans and advertising. Explain to--
explain to us a little bit more why you believe that is a 
disadvantage to brokers, as opposed to others in the lending 
field.
    Mr. Fendly. There is re-characterized in the yield spread 
premium, once again, from a direct compensation to direct 
compensation. As such, a retail mortgage lender and a mortgage 
broker offer the same loan at the same terms and they are 
receiving the same amount of indirect compensation. However, in 
order to advertise that, by this proposed rule, we would have 
to show that as a one point direct compensation fee--in it--in 
any----
    Mr. Tiberi. A one-point direct compensation fee to--
    Mr. Fendly. To the broker--the retail mortgage lender would 
show zero points. By definition, we would have to show one 
point for the exact same loan with the exact same costs and the 
exact same terms. I think it is reasonable to assume that the 
average consumer looking at such an advertisement would think 
that a mortgage broker was more expensive.
    Mr. Tiberi. Why are not they, then, in your--in your mind?
    Mr. Fendly. I am sorry?
    Mr. Tiberi. Why are not they more expensive, then, in your 
mind, under that scenario?
    Mr. Fendly. Well, the biggest reason is because we are in 
the communities themselves--we are actually in with the local 
people. We work in their communities. we are strengthening home 
ownership in their communities. we are going out to their 
homes. We make those house calls. We deal with these borrowers 
frequently, for years and years and years and subsequently 
their children. We provide better prices, better service and 
better product.
    Mr. Tiberi. Under the FHA, you said that you--your industry 
provides 31 percent of the loans. Do you know the breakdown for 
the rest of the 69 percent?
    Mr. Fendly. I do not.
    Mr. Tiberi. All right. Do you provide the largest bulk, do 
you know?
    Mr. Fendly. I do not know the answer to that question, 
Congressman.
    Mr. Tiberi. Mr. Taylor, do you know?
    Mr. Taylor. No, I do not have any specific numbers, 
Congressman.
    Mr. Tiberi. Okay.
    Mr. Chairman, I know my time has expired. I would just like 
to submit for the record the Uniform Mortgage Cost Disclosure 
that was part of the comment period that was provided by the 
mortgage brokers. it is a disclosure form. I would like to 
provide it into the record.
    [The following information can be found on page 450 in the 
appendix.]
    Chairman Ney. Without objection, provide it for the record.
    Thank the gentleman.
    The gentlelady from Pennsylvania?
    Ms. Hart. Well, since Mr. Tiberi was a licensed real estate 
broker, I was a licensed title agent and an attorney who 
handled quite a bit of mortgage closings and used to--I will 
not admit it, but giggle at some of the forms that I had to 
have people sign.
    So when I heard that this was being reviewed--what was 
required--I was pretty happy about it. But, unfortunately, I 
have not been completely happy with the result. But listening 
to all of you today, I guess I am in good company.
    My question, actually, has to do--back--and I hate to keep 
asking questions to create sort of a fuss between the brokers 
and the--and the mortgage bankers, but I am going to do that.
    The RESPA--actual preamble to the change in the--in the reg 
stated that mortgage brokers originate more than 60 percent of 
the residential mortgages. And I know it was also cited in some 
testimony today. That would lead me to believe, since the 
market usually works--it always works if we let it--but--
because it usually works, but if we interfere with it a lot--
that would lead me to believe that mortgage brokers provide a 
product that the public wants.
    That having been said, I would like anybody who represents 
the actual mortgage bankers themselves to tell me, in light of 
the fact that we have heard that a number of mortgage brokers 
will be put out of business by this, what are you going to do 
that is different than what you do now to fill in the blank? 
What would you have to do differently than you do now to fill 
in the blank if all of these mortgage brokers are put out of 
business?
    Ms. Canfield. I--John, do you want me to take this? Okay.
    First, the brokers are a very valuable distribution system 
for the lenders' loans. And we think that they will--and want 
them to continue to remain a very valuable distribution system 
for our product.
    With the changes that all of the lender organizations have 
recommended to HUD, we think that will be a reality.
    The other thing is that with regard to the Guaranteed 
Mortgage Package----
    Ms. Hart. Before you go on, you are suggesting then that 
they will not go out of business as a result of this?
    Ms. Canfield. We certainly hope not.
    Ms. Hart. Okay. Go on.
    Ms. Canfield. Secondly, with regard to the Guaranteed 
Mortgage Package itself, what we see happening is that there 
will be the manufacturers of the packagers--of the package and 
then the distributors for the package. So the distributors will 
be not only lenders and bank branches, et cetera, or mortgage 
bankers, community--thrift, savings and loans, et cetera, also 
be mortgage brokers, potentially real estate agents, 
potentially anybody that wants to get out there and distribute 
packages to consumers, including title insurance companies. We 
also think that they will have an opportunity to package--put 
together the packages.
    So I think John mentioned earlier that he thought----
    Ms. Hart. You think that they will also be, as a result of 
the package distribution----
    Ms. Canfield. They will be manufacturing----
    Ms. Hart. ----originating loans--the mortgage--well, I 
mean, the only people who can in that category would be the 
mortgage brokers.
    Ms. Canfield. Brokers and lenders--you have to be licensed 
in order to----
    Ms. Hart. Right.
    Ms. Canfield. ----originate a loan. So----
    Ms. Hart. But----
    Ms. Canfield. ----they will continue to do that. Maybe I am 
misunderstanding what----
    Ms. Hart. You are convinced that they will be.
    Okay. Let us go back to the mortgage brokers, then. In 
light of that statement, can you tell me, aside from the 
issue--or is the main issue the low value--the low amount 
mortgages and the ones that are government insured that you are 
not going to make any money on so you are not going to bother 
with them anymore--is that the issue? Or is there another issue 
that we are missing that Ms. Canfield has missed?
    Mr. Fendly. I believe there are multiple issues. And 
certainly the FHA-VA loan program is part of that issue. But to 
get back to small business again, I think it is very, very 
important to understand, as the statement you made, my company 
has five employees. I have been in the business industry for 20 
years. You are never going to convince me that I can compete in 
a packaging scenario with a mega-lender. And quite frankly, our 
industry is composed mostly of small brokers.
    Contrary to what I have heard at this hearing, I believe 
the only opportunity it provides for small mortgage brokers is 
to seek a new career.
    Mr. Courson. Can I respond, Congresswoman? I am sorry.
    Ms. Hart. Well, sure.
    Mr. Courson. Well, you know, one of the--and that is one of 
the reasons that in our comment letter to the department, we, 
frankly, have encouraged them--there are two different 
proposals, if you would, one talking about the Guaranteed 
Mortgage Package, the other about the Good Faith with the 
tolerances.
    We are saying to the department, ``Let us take the 
package--let us put it into play--let us see if the consumer, 
the originators, the lenders will accept it.'' Is the guarantee 
something that is acceptable in the marketplace? Is it good for 
the consumer? Is it good for the industry? Does the packaging 
benefits benefit closure? Because if they do, in a free 
marketplace it will get acceptance, it will get traction and it 
will move forward. But do not change both at the same time. 
Leave the current Good Faith, allow the marketplace to work the 
way it is working today because if the package, in fact, is 
viable, then in the--in the marketplace, it will gather that 
acceptance. And do not change both at the same time.
    Chairman Ney. Thank you.
    Time has expired.
    Ms. Hart. Thank you, Mr. Chairman.
    Chairman Ney. I want to thank the panel for their 
testimony--a very interesting testimony on an important subject 
today. I want to thank you.
    Also note--the chair would note that some members may have 
additional questions for this panel which they may wish to 
submit in writing to the panel. Without objection, the hearing 
record will remain open for 30 days for members to submit 
written questions to these witnesses and to place their 
responses in the record.
    I want to thank you.
    We can move on to the second panel, please.
    I want to thank the second panel for being here.
    The first witness is Peter Birnbaum. Mr. Birnbaum is the 
President and Chief Executive Officer of Attorneys' Title 
Guaranty Fund, Incorporated, which is headquartered in 
Champaign and downtown Chicago, Illinois. Attorneys' Title 
Guarantee Fund provides title insurance to home buyers and 
lenders through its network of 3,500 member lawyers.
    Dr. Charles J. Mendoza--Dr. Mendoza is a member of the 
board of the American Association of Retired Persons--AARP. As 
a former criminal defense attorney, Dr. Mendoza is active in 
AARP's telemarketing fraud campaign. He has written numerous 
articles on consumer fraud which have been published in 
national magazines. He also plays a key role in working with 
AARP's Hispanic membership. AARP is a non-profit, of course, 
non-partisan membership organization for people aged 50 and 
over.
    I will see you in a year.
    AARP provides information and resources, advocates on 
legislative, consumer and legal issues, assists members to 
serve their communities and offers a wide range of unique 
benefits, special products and services for its members.
    Arne M. Rovick--Arne M. Rovick is Vice Chairman General 
Counsel for Edina Realty Home Services, a large regional broker 
operating in Minnesota and Western Wisconsin. Edina Realty has 
had an affiliated mortgage company and an affiliated title 
insurance and closing services company and an insurance agency 
that was added.
    Arne has been a Director of the Real Estate Services 
Provider Counsel, Incorporated--RESPRO--and is a past chairman.
    Ira Rheingold--Mr. Rheingold is the Executive Director and 
General Counsel of the National Association of Consumer 
Advocates--NACA. And NACA is a nationwide association of more 
than 800 attorneys and consumer advocates who have a wide range 
of experience curbing abuse of the predatory business practices 
and promoting justice for consumers.
    I want to welcome everyone here today on the panel. Thank 
you for attending.
    And we will start with Mr. Birnbaum.

  STATEMENT OF PETER J. BIRNBAUM, PRESIDENT, ATTORNEYS' TITLE 
GUARANTY FUND, CHAMPAIGN, IL, ON BEHALF OF NATIONAL ASSOCIATION 
                 OF BAR RELATED TITLE INSURERS

    Mr. Birnbaum. Mr. Chairman, thank you.
    Members of the committee, I represent a constituency of 
about 20,000 law firms nationwide that represent the typical 
mom and pop in their home closing. So I could certainly relate 
to many of the comments by Congressman Manzullo, Congresswoman 
Hart, Congressman Watt, Congressman Davis in terms of what it 
is like to practice law in this area.
    We are opposed to the packaging aspects of the proposed 
rule. And I thought in articulating that we would look back and 
then look to where we are today before making comments.
    When Congress enacted this legislation in 1974, it is clear 
that it wanted to accomplish four things--one is to give 
consumers better protection for the largest financial 
transaction of their lives; two, to prohibit kickbacks because 
Congress found that the cost of the kickbacks passed on to the 
consumer; three, to disclose the cost of home sales and home 
purchasers to the seller and buyer; and finally, to give 
consumers the right to shop.
    RESPA is not perfect, and we heard a lot of comments 
related to that today. It needs a lot of work--lots of dumb 
stuff--these closings with hundreds of documents. I agree it is 
totally confusing. But the concept works. And certainly the 
proposal does not address some of those comments that were 
addressed today.
    I think it is important to step back for a second and do 
look at the fact that the closing business and the title 
business is a highly competitive business. There are lots of 
competitors, lots of price competition, lots of service 
competition.
    The proposed rule, in my opinion, is going to overturn an 
important cornerstone in terms of consumer protection in the 
housing industry. We have got four serious problems with the 
proposed rule.
    First, and foremost, we believe that the proposed rule has 
the effect, and I think it has been noted by members of the 
committee today, of eliminating competition and, in effect, 
giving a monopoly to big banks and mortgage banks. Effectively, 
small law firms, small title agents are going to be out of 
business if this becomes a reality.
    Second, and startling to me--and I am surprised there has 
not been more comment on this--is that it gives banks, and no 
one else, pretty much safe harbor immunity from criminal and 
civil prosecution for taking kickbacks. One, I question the 
statutory authority for that and two, when Congress found the 
need to make this prohibition was specifically to protect the 
consumer.
    Three, it allows lenders to sell these closing services as 
part of a package with no disclosure to the consumer of what 
they are buying, from whom or what price.
    And then finally, and it was addressed by one of the 
committee members earlier, it seeks to set a national framework 
for real estate transactions. And as a result--and I think 
Congressman Green raised this--it is going to have the 
practical effect of preempting state law. Before we do that--
before we go down that path, we have got to remember that 
closings are very parochial in nature--who does closings--who 
pays for these closings--how the services are allocated between 
the parties in terms of costs--very parochial--a patchwork 
quilt, if you will. it has always been regulated at the state 
level and it is impractical, improper and probably exceeds 
HUD's authority to suggest otherwise.
    My opinion if this rule passes--I think that four things 
are going to happen. One, prices are going to rise. Kickbacks--
there is no question in my mind--are going to be passed on to 
the consumer in the form of higher prices. Also, in terms of 
cost allocation in seller-pay states, those costs are going to 
be shifted to the buyer and it is going to make prices rise.
    Two, consumers, if they are bewildered today, they are 
going to be even more bewildered by this process that hides 
virtually all the costs.
    Three, competition is going to be eliminated.
    And then, four, all lawyers and all the other small folks 
that are in there providing this kind of competition are going 
to be gone from this business.
    What do we think you should do? A couple of suggestions--
one, there is a lot of talent in this room today, alone. And 
there is a lot of talent in this industry. And to my knowledge, 
HUD has not worked with an advisory council on trying--there is 
a lot of disagreement about how to implement these rules. And I 
would love to see HUD bring us in to try to work through some 
of the issues.
    Two, I think you should study the costs. The Secretary says 
that this is going to lower consumer prices. I do not see that. 
I do not see that at all and I think we owe it to the consumers 
to study that issue.
    Three, I think that absolutely this should be done by 
legislative process and not by rule. I do not believe that HUD 
has the authority to promulgate this regulation.
    We ask that you not implement the rule as drafted. We think 
that costs are going to skyrocket. We think that housing is 
going to become less affordable. There is going to be no less 
paperwork involved. And a complex process is going to become 
even more mystifying to the consumer.
    Thank you.
    [The prepared statement of Peter J. Birnbaum can be found 
on page 63 in the appendix.]
    Chairman Ney. The time has expired. Thank you.
    I also would note, without objection, your written 
statements for the entire panel will be made a part of the 
record. You will be each, of course, recognized for your five 
minutes, but it can be made part of the record without 
objection.
    Dr. Mendoza?

 STATEMENT OF CHARLES J. MENDOZA, MEMBER, BOARD OF DIRECTORS, 
    AMERICAN ASSOCIATION OF RETIRED PERSONS, WASHINGTON, DC

    Mr. Mendoza. Good afternoon, Chairman Ney and Ranking 
Members Waters and Members of the Subcommittee on Housing and 
Community Opportunity.
    I am Charlie Mendoza and I am a member of AARP's board of 
directors. And I really appreciate this opportunity to offer 
AARP's assessment of the U.S. Department of Housing and Urban 
Development's proposal to reform the Real Estate Settlement 
Procedures Act.
    We believe, at AARP, that there is a clear need to simplify 
and improve the process of shopping for and obtaining home 
mortgages. And AARP strongly supports the thrust of HUD's 
approach for reforming today's confusing settlement process.
    For nearly a decade, AARP has been actively advocating for 
the reform of RESPA, with these same objectives in mind. Many 
homebuyers are mid-life Americans buying a long awaited first 
home, or those who are trading up, or older
    Americans who are restructuring their households as they 
approach their retirement years. Unfortunately, the existing
    RESPA disclosure requirements have turned a virtue into a 
vice by inhibiting, rather than facilitating, competition for 
loan products and comparative shopping by homebuyers.
    Chairman Ney, because of the importance and complexity of 
the issues being raised, I have attached to my statement a copy 
of AARP's detailed agency comments regarding the proposed RESPA 
reform rule. If space permits, I would like to request that our 
comment letter be made a part of today's hearing record.
    [The following information can be found on page 336 in the 
appendix.]
    Chairman Ney. Without objection.
    Mr. Mendoza. Thank you.
    HUD's proposal contains three major provisions--enhanced 
disclosures of mortgage broker or loan originator compensation; 
revisions to the Good Faith Estimate system, often referred to 
as GFE Disclosure; and the availability of guaranteed mortgage 
packages that include guaranteed settlement costs and interest 
rates. This loan package is often referred to as the GMP 
option.
    In the limited time that I have to address the 
subcommittee, I would like to suggest or highlight several key 
features of AARP's comment letter as they refer to these 
provisions.
    First, AARP supports HUD's proposal to streamline and 
improve the Good Faith Estimate and to create a new disclosure 
form to permit the offering of a Guaranteed Mortgage Package. 
The GMP package carries with it guaranteed loan terms and 
settlement costs.
    Second, we support HUD's proposal to streamline and improve 
the accuracy of the GFE option. The proposed changes will offer 
significant advantages to borrowers over the current system by 
creating greater certainty. The revised GFE will be especially 
beneficial for subprime borrowers who will receive firmer cost 
information without the risk of losing important consumer 
protection rights.
    Third, we favor the GMP as a novel concept to promote true 
comparison shopping by providing certainty for consumers at an 
early shopping stage.
    Fourth, we strongly recommend, however, limiting the GMP 
package to the competitive prime market until knowledge 
regarding subprime market behavior becomes more standardized 
and reliable. Our concern is that the subprime market has not 
yet developed the required market information that is necessary 
for creating competitive pricing standards.
    Fifth, in our comments to the department, we detail the 
need for greater enforcement mechanisms for the GFE and the 
GMP.
    And lastly, we suggest revising the proposed GFE and GMP 
disclosure forms to improve their clarity and 
comprehensibility.
    Arcane as the language of RESPA may be, the substance of 
RESPA is tied directly to a central component of the American 
dream, the expectation that most of us, as Americans, will be 
able to afford to own our home.
    We really appreciate the purpose served by this hearing in 
focusing public attention on an important rule-making proposal 
and process. And let me close by saying that while a number of 
important and useful modifications can and should be made to 
the proposed RESPA rule before final promulgation by HUD, we 
strongly support the department's efforts to move this rule 
forward. And we, at AARP, would be happy to answer any 
questions that you have regarding our proposal.
    Thank you.
    [The prepared statement of Charles J. Mendoza can be found 
on page 329 in the appendix.]
    Chairman Ney. I would thank the witness for his testimony.
    Mr. Rovick?

STATEMENT OF ARNE ROVICK, VICE-CHAIR AND GENERAL COUNSEL, EDINA 
 REALTY HOME SERVICES, EDINA, MN, ON BEHALF OF THE REAL ESTATE 
               PROVIDERS' COUNCIL, INC., (RESPRO)

    Mr. Rovick. Mr. Chairman, good afternoon.
    My name is Arne Rovick and I am Vice Chairman and General 
Counsel of Edina Realty Home Services, a full service real 
estate brokerage company headquartered in Edina, Minnesota. 
Edina Realty Home Services is the parent company of Edina 
Realty, which participated in over 33,000 residential real 
estate transactions in the year 2002 in Minnesota and Western 
Wisconsin. Edina is also the joint venture partner in Edina 
Realty Mortgage, which originated over 6,300 residential 
mortgages; and the parent Edina Realty Title, which issued over 
16,000 title policies and performed 20,000 closings during the 
same period.
    Today, I represent the Real Estate Services Providers 
Council, known by the acronym RESPRO, of which I have served as 
past chairman and currently serve as a member of the board of 
directors. RESPRO is a national non-profit trade association of 
approximately 220 companies from a cross-section of the home 
buying and financing industry, including real estate brokerage 
companies, mortgage companies, title and other settlement 
service providers.
    Mr. Chairman, RESPRO supports the goals of providing 
consumers early, simple and firm information about their 
mortgage costs. However, RESPRO believes that HUD's proposed 
single-package approach to RESPA reform would not accomplish 
these goals.
    First, HUD's single-package approach contains a 30-day 
interest rate guarantee requirement that will prevent virtually 
all mortgage lenders from guaranteeing a loan package. This is 
explained further in my written testimony.
    Second, even if it was possible for mortgage lenders to 
guarantee the interest rate, HUD's single-package approach, as 
a practical matter, would bar non-lenders such as title 
underwriters and agents, vender management companies and other 
settlement service providers from competing with lenders in the 
packaging marketplace because they do not offer, and therefore 
could not guarantee, the interest rate or the loan origination 
services that HUD requires to be included in the package. 
Instead, they would be forced to partner rather than compete 
with a mortgage lender if they want to offer a guaranteed 
settlement service package.
    And as a result, we believe the competition that is 
supposed to pass on cost savings to consumers will be 
diminished and not promoted.
    Let me give you an example from the perspective of Edina 
Realty Home Services. Our title company currently issues title 
policies and performs closings on behalf of our mortgage 
company and over 100 other mortgage originators operating in 
our marketplace. Edina Realty Title would like to offer 
guaranteed settlement service packages directly to our real 
estate customers that could be used not only for mortgages 
provided by our company, but by any of the more than 100 
mortgage originators in our marketplace.
    Not only would this allow us to offer more of our real 
estate customers the potential benefits of packaging, but it 
would also provide small local mortgage originators in our 
marketplace a means to compete against the large national 
lenders.
    HUD's proposal, however, would prevent us from offering 
these packages for these local mortgage originators because we 
would not guarantee the interest rate and points, even though 
we could and would offer superior service and pricing with 
respect to all of the services needed to close a transaction.
    Edina is not alone in their willingness to compete and do 
packaging in the marketplace. A significant number of the 
nation's residential real estate brokerage companies and home 
builders offer title services to their customers through wholly 
owned subsidiaries with joint ventures.
    In addition, many title and vendor management companies 
would like to be able to offer settlement service packages 
directly to customers that could be used with the loan they 
eventually select. By excluding such a substantial base of 
potential competitors from the packaging marketplace, HUD's 
single-package proposal would effectively put control over the 
distribution and marketing of settlement service packages in 
the hands of mortgage lenders. We believe this would diminish 
competition and will increase prices of loan packages over what 
they would be in a more competitive environment.
    To correct these deficiencies, RESPRO has proposed to HUD a 
two package concept. Under our proposal, a consumer would shop 
among mortgage lenders for a loan with a guaranteed price for 
lender services and among both lenders and non-lenders for a 
guaranteed price for the closing services needed to close the 
loan.
    Finally, RESPRO believes that the proposed binding Good 
Faith Estimate--the alternative to packaging--would 
significantly disrupt the marketplace by increasing liability 
risks for lenders, creating consumer confusion and increasing 
administrative burdens for providers in all industries.
    In the opening statement of its proposed RESPA rule, HUD 
stated, ``The American mortgage finance system is justifiably 
the envy of the world. It has offered unparalleled financing 
opportunities under virtually all economic conditions to a very 
wide range of borrowers that, in no small part, have led to the 
highest home ownership rate in the nation's history. Clearly, 
our residential mortgage industry is not broken. It has 
functioned well. The residential real estate industry has been 
one of the strongest sectors of our nation's economy for the 
past three years. This is not to say it cannot be improved.''
    We welcome the opportunity to----
    Chairman Ney. Mr. Rovick, if you could summarize your 
testimony.
    Mr. Rovick. Yes. We welcome the opportunity to test the 
theories of the packaging system and believe that the GFE 
system should stay in place until the theories of that 
packaging system are tested in the marketplace.
    Thank you.
    [The prepared statement of Arne Rovick can be found on page 
381 in the appendix.]
    Chairman Ney. Thank you, Mr. Rovick.
    Mr. Rheingold?

   STATEMENT OF IRA RHEINGOLD, EXECUTIVE DIRECTOR, NATIONAL 
       ASSOCIATION OF CONSUMER ADVOCATES, WASHINGTON, DC

    Mr. Rheingold. Thank you, Mr. Chairman, and members of the 
committee for inviting us to testify today.
    As I hear people comment about being involved in the real 
estate process and being involved in the closing process, I 
also am an attorney who has been involved in the real estate 
process, although my background is a little different. I spent 
the last six years, prior to coming to Washington, working in 
Chicago running a foreclosure prevention project, representing 
seniors and low-income people in the poorest communities of 
Chicago who were victimized by bad loans and were facing 
foreclosures.
    So the perspective that I bring and the membership that I--
that--of National Association of Consumer Advocates are from 
people who are representing folks who have been damaged by the 
mortgage lending process. And the eye we bring toward HUD 
reforms is that eye. And we look toward it to see whether it is 
going to help those consumers, as well as other consumers who 
are confused by the real estate mortgage process.
    When we look at the HUD proposal, we have three positive 
comments. We think that its intention is extremely good. We 
particularly like the part of the Guaranteed Mortgage Package, 
which provides an interest rate and closing cost guarantee when 
a Guaranteed Mortgage Package agreement is offered. The 
mortgage--the interest rate and closing cost guarantee is 
essential to help in the shopping process. A package that does 
not include both closing costs and interest rates would be 
meaningless because a closing--interest rates can be changed to 
maximize the benefit for people--to maximize lending industry--
I am sorry, let me start again.
    If the closing costs are brought down to get somebody to 
buy that loan, that cost will be made up in the interest rates. 
We think that unless the package includes both the closing cost 
guarantee and an interest rate guarantee, the--it simply cannot 
work.
    A second point of the proposal, which is very important and 
very good is HUD's attempt to re-characterize yield spread 
premiums as a payment from the lender to the borrower. During 
the last several years, no issue has been more contentious than 
the use of the yield spread premiums in the home mortgage 
lending process. Time and again, consumers have unknowingly 
received a mortgage with a higher interest rate than they had 
otherwise qualified for because of inappropriate and illegal 
kickbacks paid by lenders to brokers in the form of yield 
spread premiums.
    HUD's proposal to change the way yield spread premiums are 
disclosed is an important first step in allowing consumers to 
have greater control in choosing the type and structure of 
their loans and the methods--and in the methods they choose to 
compensate their mortgage broker.
    Finally, in terms of the proposal, we like HUD's bright 
line rule that attempts to make the Good Faith Estimate a 
meaningful binding document that provides real information to 
consumers. it is a game right now and I--as some of the great 
works of fiction, as clients walked into my office with the 
original Good Faith Estimate, as I compared that to their 
closing document. There was no correlation--there was no 
reality in what we looked at from the beginning of the process 
to the end of the process.
    Making that binding becomes very important for a consumer 
so that at the end game, when they are trying to close, they 
are not surprised by costs that have just changed enormously. I 
think that is an extremely important proposal and a very good 
thing that HUD has done.
    With that as background, we do have some problems with it--
with the HUD's proposed rules.
    The major problem--maybe not a problem, but a major concern 
is we think that their proposal does nothing about predatory 
lending. And if it is not looked at carefully, can, in fact, 
enable predatory lending.
    One of the assumptions that the proposal creates is that 
people shop for loans. And I think in the prime marketplace, 
you and I--members of this committee--people here--we may shop. 
In the subprime marketplace, people are not shopping.
    Creating a Guaranteed Mortgage Package with the assumption 
that people are going to just take that information in poor 
communities and unsophisticated communities are going to take 
that information and shop is simply false. And it does not help 
them. And, in fact, it will hurt them because it eliminates the 
single biggest tool people will have to defend themselves in 
foreclosure, which is Truth in Lending defenses. They will be 
unable--people will be unable to determine whether or not the 
loan they have violates Truth in Lending with the Guaranteed 
Mortgage Package as it is currently structured.
    And it is crucial that HUD, if they go forward on this, 
talk with the Federal Reserve--coordinate with the Federal 
Reserve to determine how those costs function along with Truth 
in Lending.
    I am about out of time, so I am going to stop here. I have 
additional remarks in my written commentary.
    I think overall, the direction that HUD is taking in this 
proposal is a good one. I think there are specific concerns 
that we have that they need to amend the proposal so that it 
really does help people and it does not do anything to extend 
the predatory lending problem that we see in the country today.
    [The prepared statement of Ira Rheingold can be found on 
page 375 in the appendix.]
    Chairman Ney. Thank you for your testimony.
    Questions--Mr. Rovick, you talk about a two-package 
proposal--have you seen the two-package proposal being put 
forward by the title industry?
    Mr. Rovick. Yes, I have--yes, I have.
    Chairman Ney. How does it compare?
    Mr. Rovick. Our proposal differs on two points--one, our 
proposal does not call for the guaranteed interest rate in the 
lenders' package for the reasons that the lenders have said--
that it is difficult to lock an interest rate for 30 days.
    And the second point escapes me at the moment. I am sorry.
    Chairman Ney. You can get back to me on it.
    Mr. Rovick. Yes.
    Chairman Ney. Mr. Birnbaum, would the two-package 
proposal--first, have you seen the two-package proposal put 
forward by the title industry?
    Mr. Birnbaum. I have.
    Chairman Ney. And does that address some of the concerns 
that you have raised?
    Mr. Birnbaum. Not completely, but we are talking with ALTA 
about that issue right now.
    Chairman Ney. So you at least see some selling points--some 
positive effects that you are looking at?
    Mr. Birnbaum. I do. I am still concerned about who is in 
control of the process in either package approach. It seems to 
me that when we look at the packages, a lot of independence is 
lost in terms of who is choosing and whether the consumer 
really has a say in that process.
    Having said that, though, I have been working with the ALTA 
folks and they--we are hoping to come up with a agreement.
    Chairman Ney. Mr. Mendoza or Mr. Rheingold, I do not know 
if you have opinions on the two-package proposal?
    Mr. Rheingold. I received it this afternoon, so I--
    Chairman Ney. Fair enough. Obviously, you can supply 
comments at a later date.
    Mr. Rovick. Congressman, Mr. Ney, the second point I wanted 
to make is that in our two-package proposal, RESPRO provides 
for a Section 8 exemption in the settlement services package, 
which the ALTA package did not. And we believe that is 
important so that the vendors participating in that package can 
freely negotiate the prices among themselves.
    Chairman Ney. Okay. Thank you, that is helpful.
    One question I had, I guess, for all of you, if you can 
comment on it. we have had different people, Mr. Birnbaum, for 
example, make reference to the inconsistencies in some ways of 
this proposal with some of the state laws. Do you have 
suggestions on how we might be able to have some sort of 
reconciliation of these state inconsistencies with the federal 
proposal?
    Mr. Birnbaum, I will begin with you.
    Mr. Birnbaum. Well, you could start with the--one of the 
things, I guess, that troubles me the most is this whole 
Section 8 issue. You know, what we are talking about--it is 
unprecedented, really, in my experience to allow immunity from 
prosecution to a class of people while still leaving the rest 
of the industry exposed to prosecution. And I question whether 
HUD has the authority to do that independently of Congress. It 
certainly seems like that would be your province.
    If there is a feeling that you want to delegate that back, 
I suppose being admittedly somewhat myopic on it, if you were 
to give--leave that up to the states to make that decision--
that is something, if I had to live with it, I probably could 
live with it.
    Chairman Ney. How about some of the other inconsistencies?
    Mr. Birnbaum. Well, again, you know, the packaging idea 
seems to gut all of the--I am from Chicago and--Illinois, it 
would seem to be inconsistent with our consumer fraud act. So, 
again, if you allow the states--and, again, you know, Carl 
Sandburg called my town the patchwork quilt of cultures. And 
that is--I think you heard that today in terms of this 
industry. If you--if you leave it up to the states to govern 
these kinds of issues--and if HUD wants to make broad policy 
statements about this, fine. But ultimately, in the trenches, 
doing--and 90 percent of what we do are mom and pop's bungalow 
on the north side of Chicago--let our marketplace decide and 
let our state decide. And that certainly seems consistent with 
the approach that Congress has taken on this issue.
    Chairman Ney. Well, if other members--Mr. Rheingold?
    Mr. Rheingold. There is one other matter--one inconsistency 
and area that I have addressed in my written comments, but I 
think it is very important that HUD stay out of--in the Good 
Faith Estimate proposal, there is language in it that I think 
is extremely dangerous and really would offend state law. And 
the language gives mortgage brokers a tremendous benefit that 
we think is extremely dangerous. And I will read a little bit. 
``We do not offer loans from all funding sources and we cannot 
guarantee the lowest price or the best terms available in the 
market.''
    This is a written document--you have heard all this 
testimony about people who read that--who do not read any of 
the documents, yet one of the HUD forms that people are going 
to be handed is a document that basically says, ``I am your 
mortgage broker, but I am not going to get the best loan for 
you or I am not going to be obligated to get the best loan for 
you.''
    Well, that is fine, except for the fact that in a lot of 
mortgage transactions, particularly with mortgage brokers, they 
are telling people, orally, ``I am going to get you the best 
loan. I am going to get you the best deal.'' And I think it is 
really dangerous. And there are lots of state law out there 
that defines when a fiduciary exists and protects people when, 
in fact, they have been misled or have been told that there is 
a relationship there that somebody is--a relationship of trust. 
And I think that language in that federal statute is extremely 
dangerous. And we deserve some important state protections for 
the consumers.
    Chairman Ney. Thank you.
    Thanks to all of you.
    Ms. Waters--questions?
    Ms. Waters. Well, I think a lot of my concerns have been 
addressed. But I guess I want to ask anyone who would like to 
respond on the panel whether or not you believe HUD has the 
authority to propose the reforms that are being proposed. I 
hear a lot about--several people saying they do--they do not.
    If you do not believe that they have the authority, tell me 
why.
    Mr. Rovick. Congresswoman, we believe that there is very 
questionable authority on the ability to provide for the firm 
GFE. The legislative history of the statute shows that the 
prior provision that called for a firm GFE was repealed and in 
its place the Good Faith Estimate as we know it today was put 
in there. So we think that the GFE that they have proposed here 
would not be sustained by the courts. And that is why we have 
recommended that the GFE program stay in place while we test 
the packaging.
    The packaging issue, I think, is a close call. There are 
arguments either way as to whether that is supported by the 
statute or not. And I am not sure which way a court would come 
out on that decision.
    Mr. Birnbaum. Congresswoman?
    Ms. Waters. Yes?
    Mr. Birnbaum. When you enacted RESPA in 1974, I think the 
direction from Congress to HUD was to implement regulations 
that were supportive of the goals that were articulated by 
Congress. Now, by regulation--I mean, frankly, in my market, 
one of the most important provisions is this anti-kickback 
provision--Section 8 of RESPA. It keeps people aware--on their 
toes--keeps the marketplace in check and I think it keeps costs 
down.
    How a federal agency can now, by regulation, grant immunity 
to a certain class of parties from criminal prosecution is 
beyond me.
    The other issue is state preemption. I think that the 
policy statement was clear when the statute was enacted as that 
to the extent that the states offered greater consumer 
protection that the state statute would control. Here, the 
packaging proposal, at least my opinion and the way that I 
think our legislature would look at it, would say that this is 
taking away important consumer protection, particularly in this 
area of disclosure and who is paying what for--at what price 
and from whom.
    You know, rather than this being transparent, which is the 
goal, I would suggest that the closing services part--the 
pricing is totally invisible to the consumer. And I think that 
is up for the states to decide.
    Ms. Waters. So you think that any local statues--state or 
city statues--that create disclosure in a particular way would 
be preempted--could be preempted if, in fact, we adopted the--
--
    Mr. Birnbaum. That is absolutely the way I read this. And 
that terrifies me. I just do not think it is appropriate.
    Ms. Waters. Any other opinions on authority or preemption?
    Mr. Rheingold. I actually do not know the answer to that 
because, in fact, the way the courts--I did not think HUD had 
the authority to issue its 2001 letter, which damaged consumers 
incredibly when they redefined how yield spread premium should 
be utilized. Yet, courts had deferred to HUD in what they have 
done. So I am not sure I have an answer to that.
    I think that there are much bigger preemption issues that 
is face--that Congress is facing besides RESPA right now. I 
think you have a national--you have OCC doing preemption of 
state laws and city laws. you have got OTS doing preemption. I 
am not sure that that--this is as big a concern as what we have 
got elsewhere involving mortgage lending.
    Ms. Waters. Yield back.
    Chairman Ney. I thank the ranking member.
    The question I wanted to ask you was asked of the last 
panel by the gentlelady from Florida, Katherine Harris, will 
this make things better for the consumer in the mortgage 
market?
    Mr. Rovick. We support the premise underlying the concept 
of packaging. The one price, all-encompassing package may make 
it easier for the consumers to comparison shop. But what we 
disagree with is the single-package approach. But we think 
giving the consumer a single price for each of our proposed two 
packages and giving them the ability to compare that with other 
packages could, conceivably, result in competition.
    Chairman Ney. Okay. On that point, just to narrow it down a 
little bit, then, overall, when you weigh them, what you have 
said, is the answer no or is the answer yes?
    Mr. Rovick. Packaging has never been tested in the 
marketplace and, therefore, we would like to see it tested in 
the marketplace and prove itself out, leaving the current GFE 
in place as an alternative until the theories of packaging are 
proved out. But I think packaging may lead to easier comparison 
shopping.
    Mr. Birnbaum. Come on, you know, how can it be? I mean, if 
you have fewer competitors and you have got a scheme where the 
folks, which are mainly going to be large institutions can 
control the payments that are flowing to them, which are 
really, today, are a federal crime--it can be prosecuted for 
giving and receiving kickbacks.
    If they are controlling that process and they are receiving 
that dough, that money is not going to, you know, be passed on 
to the consumer, it is going to come in the form of higher 
prices. So if you have fewer competitors and higher prices, how 
does the consumer win?
    Mr. Rheingold. I guess I would disagree with my fellow 
Chicagoan a little bit here. I think there is a finite class of 
consumers who can be benefited by this proposal. I think the 
GMP works for sophisticated consumers who will understand how 
to shop around. I think it does absolutely nothing and may do 
damage to people in the subprime market who are sold to and who 
are not shopped to.
    I also think that there is something that seems to be 
missing here--is that there is nothing in this HUD package 
that--HUD proposal that requires lenders to use the GMP. it is 
simply an option if they are seeking Section 8 exemption.
    The GFE will still be alive and well and people can make 
loans under that--on that criteria, as well. So I think it 
simply opens another opportunity for lenders to offer a 
different lending package to people.
    So I think that, if done right, I think it will help 
consumers, even--particularly sophisticated consumers in the 
prime marketplace.
    Chairman Ney. AARP have any pains, Doctor?
    Mr. Mendoza. Well, I am an unlicensed consumer. We can talk 
about sophisticated consumers but, obviously, I am not one of 
them.
    I think what we need is for the language to be a lot 
simpler. I looked at one thing there and it said, ``Origination 
charges.'' And as I looked, I am thinking--``What are we 
talking about?'' We are talking about what we are going to be 
charged by the broker and by the lender. I think that--and we 
put it in our package, as I looked at it, some things that I 
think we really need to do to make it simpler for the consumer 
to understand what they are looking at so then they can go 
ahead and make comparisons. But until the consumer can look at 
the sheet and understand it, I think we are repeating history 
all over again. And I am not an expert in this area, obviously.
    Chairman Ney. I will yield to the gentlelady.
    Ms. Waters. Let me be clear--as I remember your testimony, 
you supported this proposed reform for the GMP in offering one 
price, without having to delineate all of these charges. Is 
that correct?
    Mr. Mendoza. Yes, because I think that in there is another 
option. What we are also saying is that you have got to make 
this cover sheet a lot simpler so the person can understand 
when they start doing their comparison shopping what it is we 
are comparing--what price is this versus what----
    Ms. Waters. ----comparing two things now under this reform.
    Mr. Mendoza. Right.
    Ms. Waters. And that is the bottom line consolidated price 
of all those fees that you used to see that you will not see 
any more and the interest rate. Is that right?
    Mr. Mendoza. Yes.
    Ms. Waters. So do you think that is simplifying it? Or do 
you think that is hiding or confusing?
    Mr. Mendoza. Well, we think that this form here simplifies 
it much more than it is--I was just handed this form here. And 
we have made some suggestions to this form. We think the form 
is a good start and you can see in our package, once you get 
it, that we have added some suggestions, I think, that will 
make this form a little better for the consumer.
    Ms. Waters. And let me be clear about what Mr. Rheingold is 
saying.
    Are you saying the same thing--that you think that this 
proposed----
    Mr. Rheingold. I think it is a good idea. I think that the 
concept is a very good one. I think it simplifies the process. 
I think there are a lot of risks involved in it and I think it 
has to be done well. I think that when you do the GMP and you 
give Section 8 exemption that you need to be very--and that is 
basically an exemption from liability--you need to be very 
clear about what happens when that gets violated.
    I think it can benefit consumers. I think it would make 
shopping easier for consumers, yes, I do, but I think there are 
things in that proposal that need to be put in place so that 
when a lender does not follow the rules that lay--are laid out 
under the HUD proposal, there is enforcement mechanisms to make 
them comply. And that is something that is in my written 
proposal, but I think it is also--it is very important to make 
it work.
    Ms. Waters. Okay. Just to make sure that I am understanding 
you correctly--you believe that there are things that can be 
done to make the proposal beneficial to the consumers without 
identifying all of the fees and charges?
    Mr. Rheingold. Absolutely. I mean, I have to tell you, I 
have gone over more closing documents with consumers who were 
faced with foreclosure who had no clue as to what all of those 
charges were. Simplifying the process, saying, ``Here is your 
closing costs, here is your interest rate,'' would eliminate a 
lot of confusion. I think that is a good idea in concept--yes, 
I do.
    Ms. Waters. Thank you.
    Mr. Rovick. Congressman, I would just like to amplify--the 
complaint in today's market is that there is 30 to 40 itemized 
items on a HUD one settlement sheet. So I think by having two 
packages with two prices simplifies all of those line items.
    We disagree with HUD--we do believe that the services which 
are provided within each of RESPRO's proposed two packages 
should be itemized so the consumer knows what services are 
being provided. But we think that there is some merit to the 
single price on each of the two packages in enabling the 
consumer to comparison shop with other providers.
    Ms. Waters. So you think--what you are telling me is you 
think you should list out lawyer's fees, pest control fees, et 
cetera, without putting a price beside each of them and just 
say, ``These are the services we are getting you and this is 
the bottom line price?''
    Mr. Rovick. Yes, Congresswoman.
    Mr. Rheingold. If I can add one important point here about 
the GMP?
    Ms. Waters. Yes.
    Mr. Rheingold. it is fine to do--I mean, I think it is fine 
to do one cost. I think the problem runs into in the subprime 
market the fact that there is a real interplay between the 
RESPA and the breakdown of costs and determining whether a loan 
violates Truth in Lending or HOEPA.
    And if you have that one cost without any breakdown, it 
becomes impossible for consumer advocates and consumers to 
determine whether Truth in Lending has been violated. And that 
is an oversight in this proposal.
    For instance, when someone came to my office and I was 
representing them--they were being faced with a foreclosure in 
Chicago. They would come to me and the first thing I would do 
is look at all of their loan documents. And I would say, 
``Okay, this fee looks kind of funky.'' But under current law, 
particularly Truth in Lending, which--that breakdown of fees 
was extremely important for me to look at because if a fee was 
overblown--may not have been a RESPA violation, but, in fact, 
it may have led to a Truth in Lending violation.
    Ms. Waters. Yes, but you are here--you are saying it is 
okay to eliminate that.
    Mr. Rheingold. No, what I am saying it is okay in a finite 
market--in a subset of the marketplace. I think it is okay in 
the prime marketplace where you are not going to find Truth in 
Lending violations--where you are not going to find predatory 
loans. I think it is very important that the GMP proposal does 
not remotely sink--work its way into the subprime marketplace.
    Ms. Waters. I agree. And as a matter of fact, if I am--if I 
have read this correctly, HUD may be suggesting that also--that 
it not be used in the subprime market.
    Mr. Rheingold. They are--they--what they said was that it 
should not be used for loans that are HOEPA loans. We think 
that the subprime market and the predatory marketplace is far 
below where HOEPA is and we would suggest--I know AARP has 
suggested--my friends at NCLCS suggested different ways to 
measure what a subprime loan is because it--HUD goes there, but 
they do not go close to far enough in making that----
    Ms. Waters. Well, is this not a good compromise to others 
on the panel?
    Mr. Birnbaum. I think that if it is important to give 
consumers the opportunity to know what is going on that that 
opportunity should be available whether they are prime or 
subprime. And I think that the same theory applies. I mean, the 
typical consumer buying their house, whether they are rich or 
poor, is relatively a babe in the woods. And even the lawyers 
that are on this committee talk about how confusing these 
closing are.
    So, to me, if this is all done behind closed doors and the 
lender's picking the lawyer and the title company and all these 
other providers, what is the check and balance? You know, maybe 
Ira is right, maybe in a lot of cases they do not really pay 
attention, but is not it at least a governor on the process to 
say, ``well, at least you can hire your own lawyer. At least 
you can hire your own title company.'' And you do not have it 
done behind a curtain where the party that is picked is the one 
that is going to pay the most dough to get the business. It 
just does not make sense to me.
    Ms. Waters. Well, I do not want to jump to any early 
conclusions about any of this. I think we have got a lot more 
to learn. But I have to tell you that as we fight through this 
and we attempt to get some reforms that may be beneficial to 
the people who need them the most, I would lean on the side of 
making sure we protect those in the subprime market, because 
these are the people, for whatever reasons, are least able to 
do the competitive shopping and to raise questions and to do a 
lot of other things.
    You are right, you know, the preference would be that 
everyone would have equal protection under the law, but if we 
have got to do somebody, we do the ones at the high end.
    Mr. Birnbaum. Yes, but Congresswoman, let me respectfully 
suggest that in close--and we do--my company does 40,00 to 
50,000 closings a year, so we see a lot of stuff from A to Z--
soup to nuts kind of stuff. And the typical mom and pop--middle 
class, you know, qualified buyer--lots and lots of abuses go on 
at that level, too. So this is the American dream. And lots of 
people are paying too much dough because of bad lending 
practices. And I think that this proposed rule only exacerbates 
that problem.
    Ms. Waters. You are absolutely right.
    And it can be, if I may, Mr. Chairman, it can be sometimes 
confusing. But what is interesting about a lot of the people 
that I try to protect is they are thrown into subprime no 
matter how much money they make, no matter how good they pay 
their bills. And so we would be able to help some people a 
little bit, in a different way, perhaps, get some disclosure. 
Because unfortunately, a whole set of people are placed into 
subprime lending that could be in prime lending.
    So those are the kinds of considerations we have to give to 
this.
    Mr. Birnbaum. And that is a good point and Ira sees it more 
than me, but absolutely.
    Ms. Waters. Thank you.
    Chairman Ney. The point is they did not know they could 
have been in prime. And how do you get to that point?
    I think Mr. Rheingold mentioned about sophisticated and 
unsophisticated and somebody else mentioned about 
simplification. And you can simplify, but what do you do with 
the unsophisticated buyer, even if it is simplified if--who is 
the protector or the gatekeeper or the person that works with 
them. I think that is a--you know, I mean simplification is 
great and disclosure, of course, is important, but who also 
helps the unsophisticated buyer? Or is it buyer beware? I mean, 
you----
    Mr. Rheingold. Well, I think part of it--part of the piece 
that has to sit in here is that there has got to be some teeth 
to the regulation, which I do not think exists in the current 
proposal. If, in fact, you are going to allow this guaranteed 
mortgage price--and I actually think that it may lower prices--
if, in fact, a lender does not do--they do not comply with the 
Guaranteed Mortgage--they--in other words, they come up, they 
say, ``is is what your rate--interest rate is going to be. This 
is what your closing cost is going to be.'' And at closing it 
changes, then there has got to be some teeth there so that 
there is some real enforcement--so there is an incentive for 
lenders not to do that.
    Chairman Ney. So what is the suggestion?
    Mr. Rheingold. The suggestion is that if, in fact, they do 
not comply with the Guaranteed Mortgage Pack--if they do not 
comply with their promise--that initial promise, it becomes a 
presumption that they have violated Section 8 of RESPA. So you 
create a violation, because the consumer cannot prove it any 
other way.
    I think the GFE thing--the GFE proposal is a good one 
because it impacts the unsophisticated consumer. Like I said, 
the bait-and-switch is alive and well. That Good Faith Estimate 
bears almost no resemblance to what you see in the end product. 
Making that Good Faith Estimate binding becomes very important 
because people, up front, know what the cost they are getting, 
within some limited tolerances. I think that is a good 
suggestion.
    I think that HUD does not--but, unfortunately, as far as 
that proposal--this stuff gets just so complicated--the problem 
with that is there is no enforcement mechanism if, in fact, the 
end product does not match the Good Faith Estimate. It just 
says, ``Oh, we have to give you another Good Faith Estimate.'' 
Or you have to give them something that matches.
    One thing HUD can do, which is in our--in our suggestion, 
is simply say that if a lender gives you a final closing 
document that is not within the tolerances that the Good Faith 
Estimate is supposed to give you, then that would be considered 
an unfair and deceptive practice. And then you could be able to 
use state law to prove that they violated the law. That would 
be--that would be a suggestion to give it more teeth, as well.
    Chairman Ney. Mr. Birnbaum, did you a----
    Mr. Birnbaum. My experience--and, again, this is based on 
my own bias of where I am at and where I practice--but a good 
gatekeeper in our market is the lawyer that represents the 
client from contract to closing. I think that having an 
advocate for the largest financial transaction of your life is 
a great one. it is not true in all states, though.
    And Congresswoman Waters talked about seniors--at least, 
you know, in California lawyers do not do closings, but at 
least with reverse mortgages you have to go through that 
counseling period. And perhaps setting a mechanism in place 
where, particularly in predatory lending, where people get 
advocacy and counseling before they get into these rip-off 
deals would ameliorate the problem.
    Chairman Ney. I want to thank the panel.
    And also the Chair notices some members may have additional 
questions for this panel. They may want to submit them in 
writing. Without objection, the hearing record will remain open 
for 30 days for members to submit written questions of the 
witnesses and place their responses in the record.
    I want to thank the panel.
    And I also want to thank the ranking member, the gentlelady 
from California, and the other members for their participation 
in today's hearing.
    [Whereupon, at 4:56 p.m., the subcommittee was adjourned.]


                            A P P E N D I X



                           February 25, 2003
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