[Senate Hearing 108-449]
[From the U.S. Government Publishing Office]



                                                      S. Hrg. 108 - 449

 
                       HUD'S PROPOSED RULE ON THE
                 REAL ESTATE SETTLEMENT PROCEDURES ACT

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

                                HEARINGS

                               before the

                              COMMITTEE ON
                   BANKING,HOUSING,AND URBAN AFFAIRS
                          UNITED STATES SENATE

                      ONE HUNDRED EIGHTH CONGRESS

                             FIRST SESSION

                                   ON

 ISSUES RELATING TO THE REAL ESTATE SETTLEMENT PROCEDURES ACT (RESPA) 
 AND TO ADDRESS THE PROBLEMS THAT HAVE BEEN IDENTIFIED WITH RESPECT TO 
                         HOME MORTGAGE CLOSINGS

                               __________

                       MARCH 20 AND APRIL 8, 2003

                               __________

  Printed for the use of the Committee on Banking, Housing, and Urban 
                                Affairs


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                            WASHINGTON : 2003
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            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                  RICHARD C. SHELBY, Alabama, Chairman

ROBERT F. BENNETT, Utah              PAUL S. SARBANES, Maryland
WAYNE ALLARD, Colorado               CHRISTOPHER J. DODD, Connecticut
MICHAEL B. ENZI, Wyoming             TIM JOHNSON, South Dakota
CHUCK HAGEL, Nebraska                JACK REED, Rhode Island
RICK SANTORUM, Pennsylvania          CHARLES E. SCHUMER, New York
JIM BUNNING, Kentucky                EVAN BAYH, Indiana
MIKE CRAPO, Idaho                    ZELL MILLER, Georgia
JOHN E. SUNUNU, New Hampshire        THOMAS R. CARPER, Delaware
ELIZABETH DOLE, North Carolina       DEBBIE STABENOW, Michigan
LINCOLN D. CHAFEE, Rhode Island      JON S. CORZINE, New Jersey

             Kathleen L. Casey, Staff Director and Counsel

     Steven B. Harris, Democratic Staff Director and Chief Counsel

                Sherry E. Little, Legislative Assistant

                Mark Calabria, Senior Professional Staff

               Jennifer Fogel-Bublick, Democratic Counsel

             Jonathan Miller, Democratic Professional Staff

   Joseph R. Kolinski, Chief Clerk and Computer Systems Administrator

                       George E. Whittle, Editor

                                  (ii)


                            C O N T E N T S

                              ----------                              

                        THURSDAY, MARCH 20, 2003

                                                                   Page

Opening statement of Chairman Shelby.............................     1

Opening statements, comments, or prepared statements of:
    Senator Reed.................................................     6
        Prepared statement.......................................    28
    Senator Bunning..............................................     8
        Prepared statement.......................................    28
    Senator Sarbanes.............................................    21
    Senator Sununu...............................................    24
    Senator Dole.................................................    29

                                WITNESS

Mel Martinez, Secretary, U.S. Department of Housing and Urban 
  Development, Washington, DC....................................     2
    Prepared statement...........................................    29
    Response to written questions of Senator Sarbanes............    32

              Additional Material Supplied for the Record

Letter to Mel Martinez, Secretary, U.S. Department of Housing and 
  Urban Development, from Committee Members, dated December 19, 
  2002...........................................................    36

                              ----------                              

                         TUESDAY, APRIL 8, 2003

Opening statement of Chairman Shelby.............................    43

Opening statements, comments, or prepared statements of:
    Senator Sarbanes.............................................    44
    Senator Crapo................................................    46
    Senator Stabenow.............................................    46
        Prepared statement.......................................    85
    Senator Reed.................................................    75
        Prepared statement.......................................    85
    Senator Carper...............................................    77
    Senator Dole.................................................    86

                               WITNESSES

Donald A. Manzullo, a U.S. Representative in Congress from the 
  State of Illinois; Chairman, House Committee on Small Business.    47
    Prepared statement...........................................    86

Charles J. Kovaleski, President-Elect, American Land Title 
  Association....................................................    55
    Prepared statement...........................................    89
    Response to written questions of Senator Reed................   126

Gary E. Acosta, Chairman, National Association of Hispanic Real 
  Estate Professionals...........................................    57
    Prepared statement...........................................    94
Catherine B. Whatley, President, National Association of 
  REALTORS '..........................................    59
    Prepared statement...........................................    96
    Response to written questions of Senator Reed................   161

Margot Saunders, Managing Attorney, National Consumer Law Center; 
  on behalf of the Consumer Federation of America, Consumers 
  Union and U.S. Public Interest Research Group..................    61
    Prepared statement...........................................   101
    Response to written questions of Senator Reed................   163

John A. Courson, President & Chief Executive Officer, Central 
  Pacific Mortgage Company, Folsom, California; on behalf of the 
  Mortgage Bankers Association of America........................    63
    Prepared statement...........................................   111
    Response to written questions of Senator Reed................   173

Neill Fendly, Government Affairs Chairman & Past President, 
  National Association of Mortgage Brokers.......................    64
    Prepared statement...........................................   117
    Response to written questions of Senator Reed................   174

Ira Rheingold, Executive Director & General Counsel, National 
  Association of Consumer Advocates..............................    66
    Prepared statement...........................................   123

              Additional Material Supplied for the Record

Statement of America's Community Bankers, dated April 8, 2003....   176
Statement of the Seniors Coalition, dated April 8, 2003..........   177


                   ISSUES RELATING TO HUD'S PROPOSED
                   RULE ON THE REAL ESTATE SETTLEMENT
                             PROCEDURES ACT

                              ----------                              


                        THURSDAY, MARCH 20, 2003

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.

    The Committee met at 9:35 a.m. in room SD-538 of the 
Dirksen Senate Office Building, Senator Richard C. Shelby 
(Chairman of the Committee) presiding.

        OPENING STATEMENT OF CHAIRMAN RICHARD C. SHELBY

    Chairman Shelby. The hearing will come to order.
    I want to thank Mel Martinez, Secretary of the Department 
of Housing and Urban Development, for coming here today. We 
asked the Secretary to appear before the Committee today to 
discuss the Department's Proposed Rule on the Real Estate 
Settlement Procedures Act, or RESPA, as it is known in the 
industry.
    I understand that the Secretary has another commitment and 
won't be able to be with us all day. But I hope you can be here 
for an extended period of time. However, I know you are going 
to want to have the opportunity to fully address our questions, 
since RESPA is one of the Department's top priorities. I want 
to do what I can to respect your time constraints because we 
are going to have several hearings on this.
    Secretary Martinez. We don't have a problem, Mr. Chairman.
    Chairman Shelby. So, I have asked Members on both sides as 
they come in to waive their opening statements so that we can 
get directly to your testimony and the questions.
    Mr. Secretary, before you proceed with your opening 
statement, you should know from the outset that while I and 
many on this Committee support the goals of your effort, we 
have significant concerns with the Rule as proposed. RESPA 
reform has broad, far-reaching implications for the $2 trillion 
housing industry and the changes proposed would affect all 
players in the market--from 
consumers to lenders, to settlement service providers, and many 
others. I understand the Subcommittee on Housing and Community 
Opportunity, the full Committee on House Financial Services, 
and the House Committee on Small Business have all had hearings 
on this issue. And I was told earlier this morning that there 
are going to be more hearings over in the House. That, and the 
40,000 comments your Department has received on this proposal, 
should be indicative of the great level of interest and concern 
that this Rule has generated. With that, I will let you, Mr. 
Secretary, proceed with your opening statement and we will go 
from there.
    We welcome you to the Committee.

                   STATEMENT OF MEL MARTINEZ

                           SECRETARY

        U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

    Secretary Martinez. Mr. Chairman, thank you very much and 
it is good to be back with you. And while I do have some other 
issues to address, I am certainly here for as long as it is 
necessary for me to attempt to answer all of the questions. 
Although I will say, as it gets tremendously technical, I may 
need some assistance from some of our folks.
    Chairman Shelby. Okay. We all do that. We all need it.
    Secretary Martinez. Yes, sir. But I appreciate the chance 
to come and let you know what I believe is one of our very 
important initiatives for the Bush Administration in terms of 
the reform of the Settlement Procedures Act. We have fuller 
comments which we will put in the record.
    Chairman Shelby. Your written testimony will be made part 
of the record in its entirety.

    Secretary Martinez. Thank you very much. We are committed 
to helping more families achieve the dream of homeownership. 
And as we do that, we believe that the mortgage finance process 
and the cost of closing remain major impediments to 
homeownership. Every day, Americans enter into mortgage loans, 
which are the largest 
financial obligations most families ever undertake, without the 
clear and useful information they receive with most any other 
major purchase. The uncertainty hurts consumers.

    Therefore, we are streamlining and improving the mortgage 
finance process through the reform of the rules governing the 
Real Estate Settlement Procedures Act. Our intent is to 
establish better and timelier disclosure for consumers so that 
they have the opportunity to shop for the best loan, to 
simplify the mortgage origination process itself, and to 
eliminate the confusion and uncertainty, and ultimately, to 
lower the settlement costs for homebuyers. At the same time, 
the Department is committed to issuing a Final Rule, fully 
mindful of the impacts on small businesses.

    The Proposed Rule addresses the inadequacies of the 
existing regulatory scheme by fundamentally changing the way in 
which compensation to mortgage brokers is disclosed to 
borrowers. That is a very important issue because there have 
been an incredible number of concerns and even litigation 
relating to mortgage broker disclosures, significantly 
improving HUD's Good Faith Estimate, GFE, the settlements' 
costs and disclosures, and removing the 
regulatory barriers to allow the industry the option of 
offering guaranteed packages of settlement services and 
mortgage loans to borrowers.

    Most loans originated by mortgage brokers include a yield 
spread premium. These help families buy homes when they do not 
have enough cash for a downpayment and closing costs. A lender 
pays part of these costs to the broker and, in turn, the lender 
is compensated by a higher interest rate on the loan.
    The current Good Faith Estimate does not explain what yield 
spread premium is and does not make clear how it helps the 
homebuyer. Our Proposed Rule included a new proposed Good Faith 
Estimate form, which is intended to make this clear. We want to 
make sure that consumers know which loan is going to cost them 
the least, whether it comes from a broker, a lender, or anyone 
else. We want to level the playing field. We are working with 
the Federal Trade Commission on that and we are testing 
alternative GFE's.
    In many of the comments received by the Department, we have 
heard concerns that packaging would be dominated by the large 
lenders. The truth, in fact, is that our Proposed Rule would 
level the playing field between large firms and small firms. 
This is due to the fact that RESPA currently places a much 
greater burden on dealings between firms than on any one firm 
in-house and affiliated operations.
    Essentially, there is nothing stopping larger firms from 
buying the smaller firms today if the transaction were to make 
sense. For instance, if a large lender wanted to have his own 
in-house appraisers, this employee-employer relationship would 
be largely free from RESPA. Whereas, this transaction between a 
lender and an independent appraiser is currently subject to 
RESPA.
    Put simply, any lender can largely get around RESPA today 
by bringing all settlement services in-house. The reason you do 
not see this today is that it is not economical and we do not 
envision it being any more economical under our new proposal.
    The intent of the Proposed Rule is not to change the 
playing field, but to remove regulatory barriers and allow 
greater innovation. In our Proposed Rule, we ask 30 questions. 
We wanted consumers and businesses to give us their comments on 
these important issues. We have been in active consultation 
with those in the business and we will continue to look to the 
comments of interested parties and formulate in the Final Rule.
    HUD received nearly 43,000 public comments in response to 
our Proposed Rule. The 18 weeks since the comment period closed 
on October 28, 2002, have been spent carefully studying the 
written comments. These comments came from individuals and 
businesses who provide settlement services, such as mortgage 
brokers, lenders, title companies and appraisers, and from 
consumer advocates. Also there were many detailed letters from 
trade associations.
    Many of the comments have come from small businesses, and I 
want to take this opportunity in this hearing to emphasize my 
commitment to ensuring the fullest consideration of the 
regulatory impacts on small businesses in our RESPA rulemaking.
    We regard this Administration's RESPA reform and small 
business objectives as necessarily complementary. For RESPA 
reform to work, small businesses must continue to serve a 
pivotal rule in an efficient and effective settlement process. 
Small businesses have long been incubators of innovation. We 
will structure a Final Rule to maintain the important role of 
small businesses in the real estate industry.
    HUD is very committed to creating a homebuying and 
mortgage-finance process that protects consumers by being 
grounded in transparency and simplicity. By reforming the rules 
governing the purchase and finance of homes, we will create new 
opportunities for the first-time homebuyers, keep the American 
Dream of homeownership alive for more families, and inspire 
greater public confidence in the mortgage-lending process.
    And again, Mr. Chairman, I would be happy to try to answer 
your questions and we are pleased to be here with you today.
    Chairman Shelby. Thank you, Mr. Secretary.
    Secretary Martinez, just about every small business 
organization, including the NFIB and every settlement service 
provider, has significant objections to your Rule.
    The National Association of Realtors and Homebuilders have 
voiced substantive concerns about the impact of this Rule on 
the mortgage market especially.
    Community bankers think it will give large lenders an 
unfair competitive advantage. Minority small business-owners 
worry that they will be closed out of the process and with 
them, the communities they serve.
    The SBA Office of Advocacy says that you did not 
sufficiently follow the law in formulating this Rule. And the 
FTC--the Federal Trade Commission--says it is not sure if this 
Proposed Rule will actually result in greater clarity to the 
consumer and even might actually harm the consumer.
    The consumer groups are tepid and worried about the impact 
on low-income borrowers. The House Financial Services 
Committee, the House Subcommittee on Housing, the House Small 
Business Committee, and now this Committee--we have held 
hearings on this Proposed Rule. And I am certain there will be 
more.
    Mr. Secretary, this raises very real, very serious concerns 
about how this will affect the competitive landscape of the 
mortgage market. How do you explain the unprecedented 
controversy surrounding your Proposed Rule?
    Secretary Martinez. I would say, Mr. Chairman, that if it 
was easy and uncontroversial, it would have been done a long 
time ago.
    The fact that it does shake up the marketplace does not 
deprive the merits of the proposal. We have received a large 
number of comments. The fact is that we have been actively 
engaged in discussions and hearing from these comments, 
proposals, and additional input on how this Rule might be made 
more palatable to many of the interests that you mentioned. The 
fact is that the mortgage bankers are very supportive of it. 
They don't believe it is going to have an impact on the 
mortgage industry or in the availability of mortgage money. 
Quite the contrary.
    Mr. Chairman, this is a Rule that for more than 30 years, 
has largely gone unreformed and unchanged, at the same time 
that the mortgage-backing industry, the lending industry, has 
gone through tremendous changed. We didn't have PC's in offices 
when this was envisioned. So, I do believe that what we are 
doing is important. It isn't easy. And it does cause people 
concern because it changes the way business is done.
    I do hope you know that we are trying very, very much to 
listen to the comments and deal with a lot of the issues that 
are raised. In fact, I think they effectively have dealt with a 
lot of the issues that initially surrounded this Rule.
    Chairman Shelby. That is what hearings are about.
    Secretary Martinez. Exactly. Exactly. And so, we have not 
been inflexible. We have not been committed to a course and not 
understanding that there are impacts from all sides.
    We have people like the AARP that are very supportive of 
what we are trying to do. We believe that this is well-intended 
and we believe that it can make a big difference in changing 
how business is done.
    Chairman Shelby. Mr. Secretary, the release for the 
Proposed Rule claims that one of its benefits would be, and I 
will quote: ``To improve the existing RESPA disclosure scheme 
by establishing a new required format for the Good Faith 
Estimate providing greater accuracy and usefulness for 
borrowers.'' Do you agree with that characterization?
    Secretary Martinez. That it would provide----
    Chairman Shelby. Yes, this is your----
    Secretary Martinez. Yes, sir.
    Chairman Shelby. Okay. One of the touted features of the 
Good Faith Estimate format is the reclassification of lender-
paid fees for mortgage brokers. The Rule will reclassify, as I 
understand it, the lender-paid fees as payments to the 
borrower. Is that correct?
    Secretary Martinez. That's correct.
    Chairman Shelby. Will release fees that other mortgage 
originators receive when they sell a loan in the secondary 
market also be disclosed as part of the Good Faith Estimates 
under your original proposal?
    Secretary Martinez. We have been trying to work with the 
mortgage broker industry to try to make sure that the 
disclosure of----
    Chairman Shelby. The answer is no.
    Secretary Martinez. The answer is no. But there is a good 
reason why the answer is no.
    If you want me to hold there, I will.
    Chairman Shelby. No, I want you to explain because this is 
causing a lot of trouble.
    Secretary Martinez. Right.
    Chairman Shelby. I think everything ought to be disclosed.
    Secretary Martinez. Exactly. And what we had in the past is 
that mortgage fees were not disclosed--I mean, broker fees were 
not disclosed. What we had also was tremendous abuse of the 
yield spread premium.
    Chairman Shelby. Sure.
    Secretary Martinez. Which it does not belong to the broker, 
but it is really designed to help the borrower that can't 
afford the downpayment and all the costs.
    Chairman Shelby. Absolutely.
    Secretary Martinez. To have up-front money. That doesn't 
belong to the mortgage broker. It belongs to the borrower. So 
it ought to be disclosed as such so that they understand it and 
they know it is their money that they are getting to help them 
in the closing process.
    Chairman Shelby. Why not disclose everything?
    Secretary Martinez. Because whether or not----
    Chairman Shelby. Wait a minute. What is wrong with 
disclosing and putting everything on top of the table where the 
consumers know what the costs are, who gets what, and for what?
    Secretary Martinez. Mr. Chairman, the secondary mortgage 
market is part of the business. When a banker decides days 
after closing to sell the mortgage loan, it is not something 
that is known on the day of the closing.
    We can't ask a banker to disclose on the day of the closing 
what he may or may not do in a month, 2 months, 6 months later, 
and what that transaction may cost the banker and the secondary 
marketer. In other words, that fee that the banker may get is 
not a definitive fee. It is not part of the closing and it is 
not paid by the consumer. So, therefore, Mr. Chairman, we 
cannot do that.
    What we can do is work with the broker industry, as we have 
been doing, to try to ameliorate what seemed to them initially 
to be a very unfair description and designation of the fee in a 
way that would be a competitive disadvantage to them.
    We are working diligently with them to try to accommodate 
those concerns and find a way that we can disclose the fee, let 
the consumer know what is happening, but not disadvantage the 
mortgage broker industry.
    Chairman Shelby. But disclosure, I believe is sound policy.
    Secretary Martinez. Absolutely.
    Chairman Shelby. When things are hidden from the consumer 
or from everybody, you begin to question that. That is just 
common sense.
    Secretary Martinez. Totally.
    Chairman Shelby. Okay.
    Secretary Martinez. The problem we face is that we cannot 
disclose the fee that is not part of the closing transaction. 
The Settlement Procedures Act deals with the settlement. The 
fee you are speaking of is not a fee at closing.
    Chairman Shelby. Senator Reed.

                 COMMENTS OF SENATOR JACK REED

    Senator Reed. Thank you very much, Mr. Chairman.
    First, let me commend the Secretary. I know that this has 
been an arduous task. The Rule is not perfect, far from 
perfect, but at least we are talking about a rule today. So 
thank you for your leadership on that.
    Last year, at our hearing, Mr. Secretary, there was some 
debate about whether yield spread premiums are adequately 
disclosed under the current system. Currently, these premiums 
are disclosed as payments made by the lenders to the broker 
outside of closing.
    It is my understanding that nowhere in the current HUD -1 
closing form or the Good Faith Estimate is it required that the 
broker inform the borrower that the broker is receiving a 
payment for the lender specifically in exchange for the 
borrower getting a higher 
interest rate. Nor is it required to disclose that the borrower 
is 
paying for that yield spread premium by accepting a higher 
interest rate. Is that correct?
    Secretary Martinez. That is correct, sir.
    Senator Reed. The Rule that you are proposing would rectify 
this. Can you explain that?
    Secretary Martinez. That absolutely is correct.
    Senator Reed. The Guaranteed Mortgage Package is one of the 
more innovative approaches in this Rule. I presume that in 
order to make it work, that the closing costs and the interest 
rate must be fixed. Is that your presumption?
    Secretary Martinez. That would be correct, yes, sir. The 
borrower would have a fixed rate.
    Senator Reed. Also the closing costs.
    Secretary Martinez. And the closing costs. So, they would 
go into the transaction knowing what it is going to cost them, 
period, amen. They know the interest rate and they know the 
closing costs.
    Senator Reed. There has been some concern that large 
companies will have an advantage in offering these GMP's. 
Specifically, they will be able to--in fact, the allegation--
push the smaller settlement companies out of the business. Do 
you have any concern about that, Mr. Secretary?
    Secretary Martinez. It is a concern, but it is also not 
something that we believe would occur because the settlement 
companies are local. They are closer to the consumer. There are 
12,000 lenders in the mortgage business today. In fact, today, 
a large lender could, just by hiring within their firm, a 
settlement service provider, a real estate appraiser, a land 
title company, conduct a package fee, and some are doing it 
today.
    But what we are doing is allowing the marketplace not just 
to advantage those who choose to do it within their framework 
or their four walls of their business, but can do it in a way 
that these fees can pass back and forth between the small 
businesses and large businesses.
    Senator Reed. One of the other concerns that we have heard, 
particularly from realtors, is that they often have 
relationships with service providers, whom they know to have 
high quality and very responsive, et cetera. But if they are 
not in the package, they can't use these particular service 
providers. Is that the case?
    Secretary Martinez. First of all, I don't believe that 
would be the case. Second, sir, we do not require packaging. We 
believe that the marketplace will decide what works best and 
maybe realtors will--settlement service providers may package. 
And anybody would be allowed to then provide the service 
however they best saw fit.
    Senator Reed. There is another issue here and that is, even 
with all these innovations, the question is what happens if the 
individual borrower discovers that they have been misled or 
that the terms of the package have not been complied with? What 
is the remedy?
    Secretary Martinez. Obviously, I believe there still would 
be civil remedy. But I also believe that we need, and it is 
encumbent upon us, to have aggressive RESPA enforcement, which 
we should do regardless of what happens with the Rule. We have 
taken that responsibility seriously and continue to believe 
that we must be able to aggressively enforce. I don't think 
that it can be only an enforcement remedy, but there ought to 
be individual enforcement through civil action.
    Senator Reed. Well, one of the problems, Mr. Secretary, in 
trying to understand all the ramifications of the Rule, is that 
the damages are limited, I believe. Is that correct?
    Secretary Martinez. No, they are not limited. No, sir.
    Senator Reed. So what would be the types of damages?
    Secretary Martinez. No, it is not limited, no, sir. There 
would be no limitation on the right of action.
    Senator Reed. What would be the types of damages that one 
could collect? The reason I ask that is, if the damages are of 
small monetary value, yes, you have a civil right. But to 
vindicate that right, it often costs more than what you will 
get. And as a result, practically, you don't have that.
    Secretary Martinez. I know that well from my days in 
private law practice.
    Senator Reed. Indeed.
    Secretary Martinez. So, I believe the remedy for civil 
damages is preserved. I guess the question really goes to 
whether class 
action suits would also be permitted. And I am not sure that I 
can answer that readily. We might need to provide that answer.
    Senator Reed. I am asking, not advocating the moment.
    Secretary Martinez. I understand.
    Senator Reed. The other issue here too, which you brought 
up, is the notion that there has to be vigorous regulatory 
enforcement. And often what we find, Mr. Secretary, and this 
has been the case not just recently, but throughout my career, 
is that we pass these rules, and particularly in this area, 
consumer issues, we don't provide the resources and the 
oversight for vigorous enforcement.
    I think if you are, as you are, quite sincerely proposing 
that this Rule go forward and it be enforced, then we also have 
the responsibility to request the resources and the authority 
and the personnel to enforce it. And I presume that you will do 
that.
    Secretary Martinez. Yes, sir. I think that is part and 
parcel of what we are trying to do, is to also provide various 
enforcement.
    Senator Reed. Thank you, Mr. Secretary.
    Secretary Martinez. Yes, Senator.
    Chairman Shelby. Senator Bunning.

                COMMENTS OF SENATOR JIM BUNNING

    Senator Bunning. Thank you very much, Mr. Chairman. 
Welcome, Secretary Martinez.
    Secretary Martinez. Senator.
    Senator Bunning. I would like to enter my statement into 
the record.
    Chairman Shelby. Without objection, it is so ordered.
    Senator Reed. Mr. Chairman, could I also ask that my 
statement be included?
    Chairman Shelby. Without objection, both statements will be 
made part of the record.
    Senator Bunning. You have heard some of the criticisms of 
your proposed changes. A lot of people think this is big versus 
little. Many are saying that only large mortgage bankers will 
be able to package loans. Please respond to that.
    Secretary Martinez. Yes, sir. Senator, I know that there is 
a lot of anxiety in some circles about the Rule, but I think we 
need to deal with the facts and we need to deal with the 
certainty of what is being done and not being done.
    We should understand that, today, one can create a package 
product. And if it was that profitable and if the marketplace 
was driving it in that direction, we would have more of it. All 
they would have to do is not do business with someone outside 
their firm. See, today, they can package as long as the 
transactions take place with captive companies or people they 
are in business with.
    If we deregulate, if we allow the marketplace to flow 
freely, then the same packaging can take place. But it can also 
now take place with that small provider in Tuscaloosa, Alabama. 
It doesn't just have to be the big banker in Birmingham, just 
to use an example.
    [Laughter.]
    Chairman Shelby. Mr. Secretary, the big banker might be in 
Tuscaloosa.
    [Laughter.]
    Senator Bunning. It is not that far away, by the way, Mr. 
Secretary. Tuscaloosa is not that far away from Birmingham, as 
we both know.
    Chairman Shelby. No.
    [Laughter.]
    Birmingham is a suburb of Tuscaloosa.
    [Laughter.]
    Secretary Martinez. Okay.
    [Laughter.]
    Senator Bunning. I know that you are studying the comments 
that have come in and have been submitted to HUD on this 
Proposed Rule. Are you planning on issuing a Final Rule next, 
or will there be a second interim reflecting comments and 
improving on what has been submitted?
    Secretary Martinez. We have been very, very seriously 
listening to the comments. We have been seriously modifying our 
thinking from where we were originally and we are doing so in a 
very serious way.
    So, I believe that our goal would be to issue a Final Rule 
that incorporates a great deal of consultation with the 
industry, understanding the concerns and doing the best we can 
to reach middle ground.
    Senator, part of the problem here is that what is great for 
someone, then impacts someone else. We are trying to reach 
middle ground. We are trying to do things like, for instance, 
some have criticized the plan because it does not require 
disclosure of every single element that might be included in a 
package.
    The fact of the matter is that the AARP has implored us not 
to do that because they think that that would be confusing to 
the consumer, to the customer.
    So what we are doing is letting the marketplace decide 
whether the consumer wants that kind of disclosure or not. And 
let the marketplace either include them or not include them.
    We are not dictating that they be all listed or that they 
not be listed. This is a very Republican thing. We are 
deregulating. We are letting the marketplace decide where it 
will flow.
    If consumers want that detailed information, they will go 
to the service providers that give them that information. If 
they don't, they will just go to the other.
    Senator Bunning. The Chairman brought out that the mortgage 
brokers have portrayed this Rule as creating what is considered 
an unlevel playing field. Specifically, they argue that a 
lender can advertise and show his customers a zero-point loan, 
while the mortgage broker cannot, for the very same loan and/or 
customer. How do you comment on this?
    Secretary Martinez. Senator, what I can tell you is we have 
been in a very active listening mode to the mortgage brokers. 
We have been actively trying to change the original form in a 
very 
profound way to ensure that the disclosure of their fee does 
not 
provide them or put them at a business disadvantage.
    I would just challenge you to say that the situation we 
have today is not good for the consumer. It is not fair that 
the mortgage fee not be disclosed.
    What we need to do is make sure that we require that 
disclosure. By the way, and if I am in the business, the less 
disclosure that I have to give, the better it is for me. Is 
that good for consumers? Probably not.
    What we need to do is to find a middle ground that allows 
disclosure, but not unfairly disadvantages the mortgage broker 
from being in the business and being competitive against other 
services that are not through a broker.
    The fact is, in most mortgage businesses these days, more 
than half, I believe, are done through brokers. They play a 
very important role. The big banks, the feared big banks rely 
on the brokers and their flexibility, their local contacts, and 
all of that, to reach the consumers. And I believe that that 
will continue.
    Senator Bunning. The last comment that I want to make is 
that the housing industry itself has been a stalwart through 
all the problems that we have had. I have had no one knocking 
down my door to change the rules and regulations. So, I want to 
create no harm here--no harm, no foul. I hope you keep that in 
mind when you are writing your final regulation.
    Secretary Martinez. Yes, Senator.
    Senator Bunning. Because the housing industry has been one 
of the very, very few industries, and those servicing the 
housing industry have been one of the very, very few industries 
that have been stalwarts in this 3-year underperforming economy 
that we have had.
    Thank you very much.
    Secretary Martinez. Thank you, Senator.
    Chairman Shelby. Thank you, Senator Bunning.
    Mr. Secretary, to follow up, disclosure is important to me, 
and I think it is important to most consumers.
    Whether the AARP might think it would confuse consumers, I 
don't think so. I think most consumers want to see what they 
pay, who gets what. I have seen that for a long time.
    Let's go back to the originators of loans. The originators 
of loans, as we know, are not portfolio lenders. They originate 
for the secondary market. You alluded to the secondary market.
    Secretary Martinez. Yes, Senator.
    Chairman Shelby. To Fannie Mae, Freddie Mac, and so forth. 
Are you saying that they have no idea that they are going to 
sell the loan and what they are going to get for it?
    They have this working relationship with both Fannie Mae 
and Freddie Mac. They know just about everything before they 
even give a commitment to me or you for a loan, what they are 
going to sell that loan for, what they are going to get. So 
disclosure for the consumer, not just in housing, but in 
everything, I think it is important to put it on the table. 
That is just one of the aspects of disclosure.
    Secretary Martinez. I understand.
    Chairman Shelby. We shouldn't hide things.
    Secretary Martinez. Correct. And I would assume that it 
wasn't hidden. The problem I have is that, the Rule I am 
dealing with only touches the settlement process.
    Chairman Shelby. We understand.
    Secretary Martinez. This is not a transaction at the table.
    Chairman Shelby. We know.
    Secretary Martinez. The second thing I would point out is--
--
    Chairman Shelby. But it has to do with, when you buy a 
piece of property and you are borrowing money, that is the most 
important decision in most people's lives, buying property.
    Secretary Martinez. Senator, the most impacted people in 
this are the mortgage brokers. And what I would say to you is 
that, in our conversations with them, and in our give and take 
with them, they provided us with a proposed GFE declaration. 
And in that, they did not provide a disclosure for the banker's 
fee, as such. So, we want to work in a way that provides 
fairness to all of this.
    Chairman Shelby. Well, we want to work with you. But I 
think you are rushing this Final Rule too hard. I will get into 
this as we go along.
    Secretary Martinez. Sure.
    Chairman Shelby. I hope you will listen because, at the end 
of the day, I think you could get a lot of constructive 
comments from these hearings, both in the House and in the 
Senate, from everybody because, as Senator Bunning says, I know 
you fairly well and we are friends. But, gosh, don't do any 
harm out there.
    Secretary Martinez. Absolutely.
    Chairman Shelby. And if you are going to hide things from 
the consumer and you are not going to disclose everything, I 
think that is off to a bad start.
    Secretary Martinez. Senator, I agree with you completely. 
The importance of the housing market to this economy is very 
profound and very important. This Rule could be blamed for a 
lot of things. But hiding would not be a part of it, I don't 
believe, necessarily.
    Chairman Shelby. Let's disclose everything and not hide 
things.
    Secretary Martinez. To the extent we can----
    Chairman Shelby. If you don't disclose, you are hiding.
    Secretary Martinez. Senator, your question almost gives the 
inference that we are purposely looking not to disclose a given 
fee to advantage someone in the relationship.
    Chairman Shelby. I don't know what is out there. But I 
think if you put everything on top of the table, Mr. Secretary, 
people see what they are paying. I see nothing wrong with that.
    Secretary Martinez. There is nothing----
    Chairman Shelby. But I do see things wrong when you don't 
disclose everything.
    Secretary Martinez. I don't have authority under the RESPA 
Rule to provide or to require disclosure of a fee that doesn't 
take place at the time of closing. If you find me a solution to 
that----
    Chairman Shelby. Well, we might be able to do that.
    Secretary Martinez. --I will be happy to.
    Chairman Shelby. We might be able to.
    [Laughter.]
    That is what this Committee is about, among other things.
    Secretary Martinez. Absolutely. And that is the problem 
that we are dealing with, just so you know.
    Chairman Shelby. That is why I ask you to slow down. 
Because I have a number of questions.
    Secretary Martinez. Yes, sir.
    Chairman Shelby. In a comment letter to HUD, the Federal 
Trade Commission argued that the proposal's broker compensation 
disclosure requirement could--and I am now quoting--``Confuse 
consumers and lead them to misinterpret the overall cost of a 
transaction.'' This is the Federal Trade Commission.
    Further, the Federal Trade Commission warned that the 
proposed changes that you have brought about in the Proposed 
Rule may not increase customer welfare as much as HUD intends. 
And in the worst case, Mr. Secretary, may actually result in 
consumer harm--the same words that Senator Bunning alluded to.
    The Federal Trade Commission noted that since the 
disclosure requirement only applied to mortgage bankers, and 
not other originators, it will result in an asymmetric 
disclosure of compensation that could hamper competition 
between brokers and other originators and confuse consumers.
    Secretary Martinez. The FTC, I am told, supports the Rule 
in general. In fact, they filed a response to our proposal 
stating that the proposed packaging initiative will enhance 
competition and will ultimately lower the cost of settlement 
services for the consumer. In fact, we are working actively 
with the FTC in testing the GFE.
    Chairman Shelby. So are we. We want to do that, too.
    Secretary Martinez. So while I understand those comments, I 
think they also have issued some more supportive comments also. 
But we are in this thing together and all we want to try to do 
is to come up with a good product.
    Chairman Shelby. I have a number of other statements and 
questions.
    How do you square this criticism from the FTC with your 
claim that the reclassification of brokers' fees would create 
greater clarity for consumers and permit them to comparison-
shop, enhancing the competition? You see, they are raising this 
question. Not me, but they are.
    Secretary Martinez. Right. I think, sir, that part of what 
they were concerned about was the individual disclosure items, 
as you were suggesting, what I would call the pickle and the 
hamburger. You go to a McDonald's, you get a hamburger for a 
dollar. Do you need to know how much the pickle costs? Are you 
concerned about how much Burger King charges for a hamburger?
    Chairman Shelby. I think that is a false analogy.
    Secretary Martinez. It may be. But the point is that what 
this Rule does----
    Chairman Shelby. You are a smart man. You can come up with 
a better analogy than that.
    [Laughter.]
    Secretary Martinez. I thought it was pretty good, 
actually----
    [Laughter.]
    --but I now know better. Now, I know it isn't.
    [Laughter.]
    But, anyway, I think that the Rule, the way we have it 
framed, allows for someone to do just that and provide the 
itemization.
    Chairman Shelby. Sure.
    Secretary Martinez. However, I want to hear your concerns 
and others. And if that is the issue that would make a big 
difference in a lot of people's minds and doesn't necessarily 
create what some would view as a disastrous situation, maybe it 
is something that we should consider requiring. Right now, we 
have been of the view that it would be more confusing and less 
desirable.
    Chairman Shelby. Mr. Secretary, what I am trying to get at 
here, I am not talking about packaging. Packaging might have a 
lot of merit. Who knows? I am talking about broker disclosure.
    Secretary Martinez. Okay.
    Chairman Shelby. Mr. Secretary, broker disclosure is what I 
was trying to get at.
    Secretary Martinez. Broker disclosure currently, Mr. 
Chairman, is not--when you think about what got me into this 
RESPA, you might wonder, why in the world would this fellow 
decide he would want to get himself in the middle of this mess?
    Well, you know, it is about the desire to make a 
difference, to do something right to help people. I was 
confronted with the issue of broker abuse.
    Chairman Shelby. That's right.
    Secretary Martinez. I was confronted with the problem of 
yield spread premiums. And I was confronted with a series of 
lawsuits that were threatening the very things we are talking 
about, the housing industry, the liquidity of the banking.
    Chairman Shelby. Absolutely. We talked about that.
    Secretary Martinez. Mortgage banking services. And I felt 
it was important for us to clarify HUD's long-standing Rule.
    The result of that was that there were very many groups, 
and in fact, the Senator in the majority at that time and the 
Chairman of this Committee, was very upset with me because of 
what he felt was that I had destroyed the ability for there to 
be civil remedy in a class action sort of way to enforce or to 
try to prevent the broker abuse upon consumers.
    Once I did that, which I thought was the right thing to do, 
which was something that benefited the broker industry greatly, 
as well as the mortgage banking industry, I felt that the job 
was not done, that we needed to do more to fulfill our 
commitment to ensure that the consumers were well-informed in 
the settlement transaction.
    That is why what today is rampant abuse, yield spread 
premiums in the brokerage industry, is something that I believe 
disclosure of brokerage fee and providing the consumer with the 
knowledge that they get a yield spread premium to use toward 
their downpayment, I felt needed to be done.
    So what we are doing is responding to the marketplace, not 
to theory, but, in fact, to the marketplace and the 
circumstances that existed.
    Chairman Shelby. I don't have any quarrel with what you are 
trying to do. And I think that is what we need to do, to a 
point. We want you to disclose everything. We don't want you to 
hide anything.
    How were the savings calculated that you are talking about 
would come up? And can you itemize the estimated savings? Last, 
and I think this is important, are you sure the savings that 
you projected will go to the consumers? If they are going 
somewhere else, the consumer is not ultimately going to 
benefit.
    There seems to be agreement among some of the people that 
your proposal would favor larger institutions and, as a 
practical matter, would only be available to lenders. This is 
one of the deals that the small business community has pointed 
out, as you know, Mr. Secretary.
    Secretary Martinez. Yes, Mr. Chairman. And I think, 
unquestionably, when we have a Rule that we believe will save 
the consumer $700 per transaction, that $700 doesn't come out 
of thin air.
    Chairman Shelby. Can you furnish how you arrived at that to 
the Committee?
    Secretary Martinez. Yes, sir, we can, and we would be happy 
to do that in a written form.
    Chairman Shelby. Absolutely.
    Secretary Martinez. We will be happy to have our folks do 
that.
    Chairman Shelby. We will have our economists look at that.
    Secretary Martinez. Right. The fact of the matter is that 
we do believe that it will result in savings. So if it results 
in savings, Mr. Chairman, it also results in a loss to someone 
that today provides a service that perhaps is not priced at a 
competitive rate.
    Chairman Shelby. We are interested in competition, aren't 
we?
    Secretary Martinez. Exactly. What I would like to do is 
rather than try to run through figures that may or may not be 
completely accurate, is provide you in writing our economic 
analysis of where the saving comes from.
    Chairman Shelby. I am going to go back to something that we 
were talking about earlier, whether HUD has some jurisdiction 
of secondary market compensation dealing with RESPA.
    Secretary Martinez. Right.
    Chairman Shelby. The secondary market compensation is not 
outside of the RESPA Rule. HUD has granted an exemption to the 
secondary market transaction. And if you choose, you can take 
that exemption away.
    Secretary Martinez. If that is correct, it is something 
that we should address.
    Chairman Shelby. I have been told that by counsel.
    Secretary Martinez. I think that a secondary problem to 
that, and maybe they can help us to clarify, is the fact that 
the transaction of the banker with the secondary market doesn't 
take place at closing. In fact, it is not known at closing.
    I understand what you are saying, that there are 
arrangements. But banks sometimes sell their loans off, 
sometimes they don't. Sometimes they sell it to one, sometimes 
they sell it to another. How much that fee is, it is not a fee 
that is known at closing.
    I understand the need to disclose it, and if we can find a 
way to disclose it, I see no harm in that.
    Chairman Shelby. Well, I just believe that total disclosure 
is more healthy than not disclosing the fee.
    Secretary Martinez. And I agree with you on that.
    Chairman Shelby. Mr. Secretary, recent trends in the 
marketplace have seen a doubling of market share by the top 
mortgage providers, from approximately 25 to 56 percent of the 
market.
    There is general concern about the overall effect of the 
Proposed Rule on competition here. Specifically, there is a 
concern that the Rule will result in even greater consolidation 
in the market and the loss of many small-business providers. 
How do you answer that there will be out there competition, 
that the mortgage business will not be controlled, say, by 
eight or ten big people, as opposed to everybody else, where 
there is so much competition today?
    Secretary Martinez. We share that concern. We don't want to 
see that happen. That is not at all our intent or goal.
    We believe, Mr. Chairman, that through the reform we are 
proposing there will continue to be a healthy marketplace for 
small service providers because they are in the local 
communities. It wouldn't make sense to only furnish these 
services through a big bank relationship. The local broker 
knows the consumers, knows the marketplace.
    We see, in fact, a trend toward more use of brokers than we 
have in the past. And that I think speaks in the other 
direction.
    Lenders could buy up settlement services companies now, 
title companies, appraisers, and everybody else. And they don't 
do it because it really doesn't appear to be in their best 
economic interest. So the Rule is not going to change that 
possibility or that fact of the marketplace which appears to be 
today.
    Banks are making fewer loans than they used to. Brokers now 
originate 60 percent of all loans. And that is a change that 
has taken place just over the last 10 years. So that trend 
would suggest that the viability of the broker in the 
relationships with the consumers is an important one and one 
that seems to be not losing, but gaining, favor.
    Chairman Shelby. I want to get into another area, the 
exemption from Section 8 prohibition on referral fees and 
kickbacks.
    Mr. Secretary, one of the biggest concerns that I have with 
your Proposed Rule--safe harbor provision for lenders who 
provide settlement services packages--is this. I am concerned 
about the effect that such an allowance will have on the 
abilities of lenders to hide fees and further prevent consumers 
from effectively shopping among settlement service providers.
    Your Rule does not require--we have already been talking 
about this some--a detailed disclosure of costs for each 
settlement service, but, rather, a bottom-line price for all 
services provided.
    In his testimony before the House Small Business Committee, 
Assistant Secretary Weicker stated that small settlement 
service providers could arguably compete against the larger 
lenders that package services and that consumers could request 
a specific service provider be used in the transaction if they 
wished.
    Mr. Secretary, how does a consumer shop among settlement 
service providers if the cost is not disclosed within the 
package? In other words, if they don't know, how would they 
compare, how would they shop? I think this would make it 
impossible for them to compare.
    Secretary Martinez. Mr. Chairman, the marketplace would 
allow them to then choose a service provider that was giving 
them the kind of disclosure that they felt was better for them. 
In other words, RESPA----
    Chairman Shelby. But if they don't know, sir, if they don't 
know, and they are not given the information to begin with----
    Secretary Martinez. They would go to a provider that was 
giving them that kind of detailed information. There would be 
one out there if the consumer--if you believe in the 
marketplace and the way it functions, if that was something 
that consumers wanted, if that was something that the 
marketplace wanted, there will be someone who will provide it 
and they can go to that type of provider that is giving them 
the details of every piece of the transaction and they can 
choose to do business there.
    Chairman Shelby. But what if there are no providers other 
than the package people?
    Secretary Martinez. Mr. Chairman, that is just not----
    Chairman Shelby. I guess what bothers me and others, is 
less disclosure better for consumers? If it is, I have never 
heard of that in my life.
    Secretary Martinez. I hear your point of view. It is 
something that we can remedy if that was felt to be the better 
way to go. And that is why this process is important. The only 
reason not to disclose is because most of the comments from 
those who represent the interests of the consumer have been to 
the effect that what they want is to see the bottom-line 
number.
    Most people, as I hear anecdotally about their experience 
at the settlement table, what they have is an overwhelming 
amount of paperwork with little information.
    So, they want a bottom line--what is it going to cost me?
    Chairman Shelby. I believe they want information.
    Secretary Martinez. Well, and that may be true, and that is 
why we allow it.
    Chairman Shelby. And then the bottom line.
    Secretary Martinez. We don't prohibit it. We allow there to 
be that kind of disclosure.
    Chairman Shelby. If I go to the grocery store, each item is 
itemized. As a matter of fact, I have gone through it to see if 
I got what my wife sent me to get.
    [Laughter.]
    Each item is itemized. It takes just a minute or two.
    Secretary Martinez. Mr. Chairman, if I may comment on that.
    Chairman Shelby. Sure.
    Secretary Martinez. When I go purchase a vehicle, I am not 
real concerned how much the transmission costs GM. I am more 
concerned with what that bottom line is, and then I ask the 
fellow, tell me what I am going to have to write you a check 
for.
    Chairman Shelby. That is a little different.
    Secretary Martinez. Well, sir, I don't know that it is so 
different.
    Chairman Shelby. Now wait a minute.
    Secretary Martinez. Because if you are buying one of 
those----
    Chairman Shelby. I think your analogy would be, a man might 
not be interested in what the 2x4's cost in the house he is 
buying, but he is interested in the total cost of the house, 
just like a car is a final product.
    Secretary Martinez. You may be paying for one of those 
fancy Mercedes that is made in Tuscaloosa as much as someone 
would be paying for a house.
    [Laughter.]
    Chairman Shelby. I wish I could, but I can't afford it.
    [Laughter.]
    Secretary Martinez. I say, one would be.
    Chairman Shelby. My car is 20 years old.
    [Laughter.]
    Secretary Martinez. But if you purchase a vehicle, and that 
is a fairly large transaction, you want to know ultimately what 
it is going to cost you to walk out of there or drive out of 
there in your new vehicle.
    You should have that same kind of opportunity to purchase a 
home knowing the day you commit to buy it, the day you get your 
mortgage loan, what you are going to pay 3 months later when 
you sit down and write your final check.
    Chairman Shelby. I might not be interested in what the 
transmission costs or what the plumbing in the house costs. But 
I am interested in the bottom line. I am interested in what 
those transaction fees are for a car, for a house, a mobile 
home, appliances, or whatever.
    Secretary Martinez. But if I may just continue on this.
    Chairman Shelby. Sure.
    Secretary Martinez. If you were to go purchase a home and 
you knew your closing settlement costs were going to cost you 
$1,500, and that was the bottom line, is that more important 
than knowing how much the title insurance was, how much the bug 
inspector costs? Ultimately, you want to know what it is going 
to cost you.
    Chairman Shelby. I want to know the parts and then the 
whole.
    Secretary Martinez. You would then shop for a provider that 
was going to give you that kind of detail.
    Chairman Shelby. I might.
    Secretary Martinez. You would.
    Chairman Shelby. It depends on how the costs were.
    Secretary Martinez. And you could. You would ultimately 
want to know what it is going to cost you, too.
    So, we now provide the opportunity for the marketplace to 
give you that kind of detail or not give you that kind of 
detail, either way to give you a bottom-line price, and that is 
very good for the consumer.
    Chairman Shelby. Ultimately, though, the consumer needs to 
know all the costs and they need to be able to shop, go 
somewhere else, don't they?
    Secretary Martinez. The question is what does the consumer 
need in order to shop? What they need is a guaranteed price. 
What they need is to know with certainty early on. What they 
need is for the GFE not to change at closing dramatically. And 
what they need is to know what the bottom-line settlement costs 
are. That is what I think.
    Chairman Shelby. They also need to know the parts, how you 
get to that bottom line, where there is nothing hidden.
    Secretary Martinez. And the Rule we are offering provides 
that for the marketplace to do, if they so choose.
    Chairman Shelby. Let's don't just hide anything. I want to 
ask you this, Mr. Secretary. I have a number of things.
    You assume a savings of about $1.8 billion here. Could you 
furnish us the basis for all this where we can analyze this?
    Secretary Martinez. Yes, sir. We will provide you with the 
economic analysis of all of that.
    Chairman Shelby. Okay.
    Mr. Secretary, in your testimony before the House Small 
Business Committee, you state on several occasions that this 
proposal was one of deregulation and that the proposal 
deregulates the field. What kind of deregulation increases the 
regulatory burden by 2\1/2\ million burden-hours, which was 
outlined in HUD's Paperwork Reduction Act submission on this to 
OMB?
    Secretary Martinez. Sir, that would be purely in the 
transition cost. That is the cost of going from a system that 
has been ingrained for many years.
    Chairman Shelby. It is still a lot of hours, isn't it?
    Secretary Martinez. Yes, sir, it is.
    Chairman Shelby. But before the House Small Business 
Committee, HUD characterized this 2\1/2\ million hour burden as 
one-time transition costs, as you just said.
    Secretary Martinez. Correct.
    Chairman Shelby. Isn't it something like 285 years or, 
essentially, three centuries? That is assuming 24 hours a day, 
7 days a week. That is a long transition if you put it into 
this. It doesn't sound like deregulation to me. I am just 
raising these points that the Small Business Committee in the 
House raised the other day.
    Mr. Secretary, we are all a believer in homeownership and 
what it means.
    Secretary Martinez. Correct.
    Chairman Shelby. The impact it has on families and 
communities is well-documented. The mortgage broker industry 
provides an invaluable service to minority homeowners, 
homebuyers in the rural communities all over the country. And 
in the big cities, too.
    Over half of all mortgage loans in this country are 
originated by brokers, which you said a minute ago. The numbers 
of percentages are higher amongst minority families.
    How will this Proposed Rule change positively affect the 
homebuying process, especially in the minority community, where 
we are trying to push homeownership more and more because they 
have fallen behind?
    Secretary Martinez. The first way we will do it is by 
lowering the cost by $700, which is going to make that many 
more people able to go to the closing table and buy a home of 
their own. We have a very active program of helping people with 
the downpayment as a key component of getting minority families 
into homeownership.
    Chairman Shelby. We worked together on that.
    Secretary Martinez. Correct. And I appreciate your 
cooperation and help on that. By lowering the costs by $700, it 
is going to make that many more people able to do it.
    Chairman Shelby. Will the consumer get that $700? That I 
think would be the central question. If you assume that what 
you say is true, would it be passed on to the consumer or would 
it go to somebody else?
    Secretary Martinez. We think competition will drive it to 
the consumer. We believe that that will be possible.
    Chairman Shelby. If there is less competition, then there 
are fewer choices.
    Secretary Martinez. Correct. But we also believe that there 
will continue to be competition.
    In addition to that, they will still be able to do business 
with the broker. It is just that now, they will know exactly 
what they are paying the broker and they will not be as likely 
to have the yield spread premium for which they are paying a 
higher interest rate be utilized as broker fee. There will be a 
number of things that will come about as a result of this that 
I think will improve the climate.
    Chairman Shelby. Mr. Secretary, I have talked about the 
Small Business Committee hearing last week. I have seen the 
transcript. Frankly, it was not a pretty hearing. I say this 
because----
    Secretary Martinez. Sir, if I might say, I also find this 
hearing to be far more respectful, even though we are 
disagreeing at times.
    I thought Mr. Weicker's treatment last week at that hearing 
was not worthy of a public servant in the U.S. Government.
    Chairman Shelby. But I say this because it reinforces what 
I believe is a very serious problem HUD has on this Rule. I 
keep going through this because I think if we could work 
together on this, and if you wait until we conduct our hearings 
and hear everybody and then think about going back to a Final 
Rule, because if you do, I think you are making a mistake. I 
say that out of respect to HUD.
    Secretary Martinez. Mr. Chairman, I don't know why there is 
this feeling that----
    Chairman Shelby. Rushing through.
    Secretary Martinez. --rushing. In fact, when we were 
closing the comment period, because it had to have a closure, 
we received more comments, as you well pointed out, than there 
has ever been in the history of comments. The thought was that 
we should leave the comment period open even longer. I am 
reluctant to just delay for the sake of delay.
    Chairman Shelby. Not interested in that.
    Secretary Martinez. And allow that to be a way of defeating 
the Rule change. But I am also very interested in working with 
you. I have a wonderful relationship with you. I respect your 
judgment greatly, and my door is open to you and others to 
continue the conversations.
    Chairman Shelby. I know that.
    Secretary Martinez. So this is not going to be a rush to 
judgment, if I may interrupt you, to say that.
    Chairman Shelby. The SBA Office of Advocacy determined that 
your Agency, HUD, did not sufficiently calculate the cost of 
the Proposed Rule on small businesses, and recommended that you 
issue a supplemental RFA to meet your obligations under the 
Act.
    I cannot imagine how you could go forward with a Final Rule 
without stepping back, looking at what a lot of the issues have 
been that have been raised, and doing the basics which are 
necessary, I believe absolutely necessary, to support a 
Proposed Rule, much less a Final Rule.
    I see nothing, Mr. Secretary, absolutely nothing that I am 
aware of that compels you to push forward like on a calendar 
for a Final Rule here. Especially with all the hearings that 
will be going on concerning this.
    Indeed, the level of concern, the lack of certainty over 
both the costs and benefits of this Rule would seem to dictate 
a revised Rule that more accurately considers all these issues, 
some of which we have raised and will raise in the next few 
weeks.
    In addition, a revised rule allows the small business 
community and other stakeholders, consumers, an opportunity to 
appreciate the real cost and potential benefits to have 
additional comments before a Final Rule is adopted.
    Otherwise you are saying to us, Mr. Secretary, and out of 
all due respect, and we have a good relationship, just trust us 
and we will go on and issue the Rule. But that is not our job, 
to just do this. We have an obligation in the Congress and on 
this Committee to scrutinize these rules, and that is what we 
are doing. So, I think it is imperative that you work with us, 
and I believe you will, that you do not rush to judgment here. 
And in a good-faith effort, try to adjust and take into 
consideration the concerns that you have put forward.
    Disclosure I think is absolutely crucial--disclosure of 
everything. Hide nothing from the consumer.
    I am just not one that has ever wanted things hidden from 
me, and if I am the average consumer, I will figure it out one 
way or the other.
    But if it is hidden, they never figure it out. And nothing 
should be hidden. Mr. Secretary, I hope you will work with us 
on this, that you will not rush to judgment because we 
contemplate at least one or two more hearings on this Rule here 
in the Senate Banking Committee. And I know maybe the Small 
Business Committee, the House and others do, too.
    Secretary Martinez. Thank you, sir. I will only say that I 
have no desire to do this.
    I don't think the way that we have approached this Rule 
should suggest to anyone that we are unwilling to listen, that 
we are unwilling to work with people.
    It bothers me greatly, frankly, to have groups that we have 
been closely working with to try to accommodate their concerns 
continue to act as if nothing was being done to help them. That 
is a problem. There really should be an understanding by the 
Chairman that we are very, very diligently listening actively 
and evolving our thinking as we hear concerns.
    Therefore, sir, we continue to do that and will continue to 
do that. If it appears that full disclosure is the way that 
this should go, I have no reason to want to not do it. And so, 
we want to make sure that as we go forward, we continue on a 
pace that allows--just like we did with the comments, Mr. 
Chairman. At some point we had to close it. But we had all the 
comments in the world that we could want. We have worked 
actively to listen to the comments, to read them, and to not 
only do that, but to also incorporate a lot of good ideas that 
we've received from those in the marketplace.
    What I say to our folks is, we need to hear from the people 
out there doing these settlements. We need to hear from the 
people in business so that we can do something that enhances 
how business is done. But also, we need to hear from consumers 
and how they feel that they can best be represented through the 
process.
    So, I just would reiterate to you that we continue to 
listen and we look forward to working with you and with others.
    Chairman Shelby. I hope you will want to do it right, to 
have a public process and comment period because we in the 
Congress are now involved in this, as we should be. And I would 
hope that you would issue the Rule and put it all on the record 
because there is going to be a lot more there for you to 
consider.
    Senator Sarbanes.

              COMMENTS OF SENATOR PAUL S. SARBANES

    Senator Sarbanes. Thank you very much, Mr. Chairman.
    Mr. Chairman, I wasn't here at the outset.
    Chairman Shelby. That's okay. You go right ahead.
    Senator Sarbanes. I would like to take advantage of this 
and make a brief opening statement.
    Chairman Shelby. Secretary Martinez was also tied up in 
traffic earlier this morning.
    Senator Sarbanes. Okay.
    Chairman Shelby. Traffic is tough.
    Senator Sarbanes. It happens to all of us.
    Chairman Shelby. Yes.
    Senator Sarbanes. Mr. Secretary, I want to commend you for 
undertaking this very difficult, complex, and obviously 
controversial task of improving the mortgage origination 
process. It has become something of a sport on the part of many 
I think to belittle the Real Estate Settlement Procedure Act, 
RESPA. It seems to be a favorite pastime now of a number of 
groups. But I think it is worth reminding people that the law 
helped bring order and equity to a process that was suffering 
from rampant kickbacks and referral fees among settlement 
service providers. That was what prompted the enactment of 
RESPA in the first place. Those side payments clearly resulted 
in higher costs for consumers. For many years, RESPA has served 
consumers well by aligning market incentives with the interests 
of borrowers. And I think the result has been a stronger and 
more effective real estate market.
    Now in my view, RESPA can continue to play this valuable 
role if the regulations are updated to address new issues as 
they arise. HUD has put a proposal on the table that it hopes, 
or it is putting forward with the objective of achieving this 
goal. In my view, if done correctly, the Proposed Rule holds 
out the prospect of resulting in significant good. If not done 
correctly, it would result in significant harm. And I am 
anxious to work with the Secretary and the Department to ensure 
the better outcome.
    As you well know, a number of us on the Committee have sent 
you a letter outlining what we think are the essential elements 
of a Final Rule. The key principles that are included in that 
letter are as follows, and I want to take just a moment to 
touch on them.
    First, the Rule must not undermine existing RESPA or Truth 
in Lending Act protections for subprime borrowers. Subprime 
borrowers are far more likely to be subjected to predatory 
practices against which RESPA and TILA provide at least some 
remedies. And we want to be sure that those protections are 
preserved in any Final Rule.
    Second, the additional protections or rights that the 
Proposed Rule would create may be of little use if they are not 
enforceable. I differed with the Department on its 
clarification earlier in 2001 because I thought it undercut the 
ability of consumers to seek redress against illegal yield 
spread premiums and, of course, you are trying to address that 
issue now in your Rule. It is clear by studies that at least 
half of those yield spread premiums are not used to offset 
closing costs as it was asserted would be the case. In my view, 
your proposed changes in the treatment of yield spread 
premiums, as well as your proposals for a Guaranteed Mortgage 
Package, should allow for effective enforcement, including 
private enforcement.
    Third, a Final Rule must be careful not to allow the ``bait 
and switch'' tactics. The Guaranteed Mortgage Package should 
include an interest rate, and be contingent only on the 
confirmation of information provided by the borrower, so that 
they cannot be led down the path and then have a surprise 
sprung on them. If done in this way, and if limited to the 
prime market, the Guaranteed Mortgage Package has the potential 
of significantly improving the outcomes for consumers.
    Finally, the Rule should not preempt State laws. For 
example, a number of States have laws that require brokers to 
act as agents for the borrower. I don't think HUD should 
undermine those laws.
    I won't go on to repeat other matters contained in the 
comment letter. Let me simply say that, at the very least, I 
think it is imperative that you go forward with the proposal to 
ensure that brokers tell the consumers, upfront, what they 
charge, and ``Ensure that the yield spread premiums are fully 
disclosed to consumers, that consumers determine whether and 
how to use them, and that consumers receive the full benefit of 
any such payment.''
    The whole rationale that the consumer is led into a higher 
interest rate is to offset the closing costs. Now if they are 
not aware of that or can't exercise that option, they are led 
into a higher interest rate, and instead of that amount going 
to offset the closing costs, it goes to the person who led them 
into the higher interest rate, clearly working directly against 
the consumer's interest.
    Let me just close my statement by saying that I am 
supportive of the goals the Secretary has expressed, and some 
of the steps that he is seeking to take to achieve the goals. I 
appreciate this is a complex issue. I know that you are being 
flooded with comments, to some extent kind of being battered 
around, which is always what happens when you set out to try to 
do the right thing.
    I look forward to continuing to try to work with you and 
your staff to see that we can come up with a Final Rule. And I 
encourage all of those that are standing in line to beat up on 
the Secretary, to sort of take a view that, look, there are 
some problems here. In fact, I don't know of anyone that denies 
that there are at least some problems, and the focus of 
attention, it seems to me, ought to be directed toward trying 
to solve those problems so that we can move forward in this 
area.
    Let me just ask a couple of questions, if I may, Mr. 
Chairman.
    Chairman Shelby. You go ahead, Senator.
    Senator Sarbanes. In a briefing earlier this week that was 
given by HUD, your staff characterized yield spread premiums as 
the borrower's money because consumers are paying the yield 
spread premiums through a higher interest rate. I take it you 
agree with this characterization.
    Secretary Martinez. Yes, sir, I do. Unfortunately, as you 
pointed out in your comments, all too often, some brokers view 
this as their money, which is very, very wrong.
    Senator Sarbanes. Yes. Actually, both the industry and 
consumer groups seem to agree that the yield spread premiums 
are a necessary tool to allow people to take out low- or no-
cost loans. The broker advances closing costs on behalf of the 
borrower and then gets reimbursed through the yield spread 
premium. But if you take that approach, shouldn't the yield 
spread premiums go to offset closing costs on a dollar-for-
dollar basis?
    Secretary Martinez. In my opinion, they should.
    Senator Sarbanes. Yes.
    Secretary Martinez. The broker fee should be one thing, the 
yield spread premium is an offsetting of a higher interest rate 
in order for the broker or for the consumer to have his up-
front costs paid for. In other words, it is blending into the 
loan the up-front cost of the loan.
    Senator Sarbanes. Actually, the industry people, when 
pressed on this, concede that. It is hard to develop any 
rationale.
    The broker charges a fee for his services. The whole 
concept of the yield spread premium is someone agrees to do a 
higher interest rate in order to offset the closing costs. Now 
if you don't offset the closing costs with a higher interest 
rate, there is no underlying justification for that, is there?
    Secretary Martinez. There isn't. And just to show you how 
distorted the current system is, which is why we are doing this 
in the first place, you know. This isn't for fun because it 
isn't much fun.
    [Laughter.]
    But to have among us 43,000 comments, letters from brokers 
saying, you are not going to take the YSP from me. That is how 
I make my living.
    Well, you know, there is something very fundamentally wrong 
with that person's understanding of the yield spread premium. 
If you give that to the borrower, how do I get my fee? That is 
my fee.
    Senator Sarbanes. Yes.
    Secretary Martinez. Well, that is not what I understand the 
yield spread premium to be. So that just goes to show you the 
level of misuse and misunderstanding that there is out there.
    Senator Sarbanes. And the consumer generally doesn't know 
what is happening. Isn't that the case as well?
    Secretary Martinez. That is absolutely the case.
    Senator Sarbanes. Now let me go to the enforcement issue.
    I am concerned that we have a sufficient opportunity for 
private enforcement with respect to these problems. Including 
class action suits since often, the amount of money that is at 
stake to the individual is fairly small.
    So if you are the plaintiff in that situation, there is not 
enough at stake to justify taking action. If you are on the 
other side, recovering a small amount from a lot of people, it 
is a big chunk of money. And the only way it seems to me that 
you can even up that equation is to allow on the plaintiff 's 
side the aggregation of all of these small claims so you have a 
sufficient amount at stake to make it worthwhile to bring 
action.
    I think it is very important for the Department to keep 
that in mind as they consider how these matters are going to be 
enforced.
    Secretary Martinez. I agree with you, sir. I understand the 
private enforcement, the right to civil action should be 
preserved. I don't think that there is an effective enforcement 
mechanism that we can devise from within. We could never police 
every transaction. We could never have enough resources devoted 
to effective enforcement. I think a private enforcement right 
of action should exist.
    Now, I am not certain how I can make that happen through 
the RESPA Rule. And if there are suggestions along those lines, 
I would like to hear them. Although I don't know whether that 
needs to have a right of action derived from law or how. But I 
understand the concern and I am aware of it. I am just not sure 
how I can provide a class action right of action through 
rulemaking.
    Senator Sarbanes. Let's work at that problem.
    Secretary Martinez. Yes, sir.
    Senator Sarbanes. Because I think it is important.
    Mr. Chairman, my time is up and I appreciate your 
generosity.
    Chairman Shelby. Mr. Secretary, we appreciate you coming 
here today. Excuse me. I didn't see my good friend. I have 
blinders on.
    Senator Sununu. Well, it is a small State and I am way down 
here at the end.
    [Laughter.]
    Chairman Shelby. But an important State.
    [Laughter.]
    And an important Senator, Senator Sununu.
    Senator Sarbanes. There are those who love it, correct?
    [Laughter.]
    Chairman Shelby. Absolutely.
    Senator Sununu. There are a few.
    Chairman Shelby. Including the Chairman of the Committee.
    [Laughter.]
    Senator Sununu.

               COMMENTS OF SENATOR JOHN E. SUNUNU

    Senator Sununu. Thank you very much, Mr. Chairman.
    Chairman Shelby. Take as much time as you need.
    Senator Sununu. I will try not to belabor any of these 
questions. And I know a lot of them have been covered. In fact, 
my first question was going to be whether you were having fun.
    [Laughter.]
    But you touched on that already. So, I will move right on 
to the technical stuff.
    [Laughter.]
    Why don't I pick up on yield spread premiums? Could you 
discuss the extent to which you have modified the proposal, if 
at all, to deal with any of the concerns that were raised 
regarding yield spread premiums during the comment period?
    Secretary Martinez. Yes, sir. What we have done is, of 
course, required the disclosure of broker fees and we disclosed 
the yield spread premium as belonging to the consumer, to the 
borrower.
    We were concerned by the comments that mortgage fee 
disclosure would disadvantage brokers unfairly and we have been 
diligently working to incorporate suggestions made by the 
industry on how disclosure of their fee could be accomplished 
in a way that does not unfairly disadvantage the industry.
    Senator Sununu. Do you have any specific examples, though, 
of the suggestions that they have made to level that playing 
field?
    Secretary Martinez. We could provide you, or I am sure that 
they could provide you with their suggestions. The rulemaking 
process doesn't allow me to just publish something that isn't 
really part of the Final Rule on a piecemeal basis. But suffice 
it to say that we are actively engaged in the process with the 
industry and I am sure that we can provide you with some of 
their suggested reforms to the original disclosure that we had 
anticipated doing.
    Senator Sununu. Regarding the proposal on packaging, I have 
heard a suggestion made that HUD doesn't have the authority to 
enact a requirement on packaging. Could you discuss that a 
little bit, whether you have the authority and where it is 
derived from?
    Secretary Martinez. Yes, sir. Currently, what we have is a 
situation that the Rule prohibits packaging. What we are 
seeking to do is to deregulate that and to permit the 
marketplace to determine if packaging was an option that they 
chose to utilize.
    Packaging exists today, but it doesn't exist in the freer 
form, which is now you can package services. You can provide 
them to a consumer, and some do. But in order to do that and to 
not run afoul of Section 8 of RESPA, they must have a captive 
set of services within the company, so the fees are not 
exchanged with people that are not part of that same business.
    Now with the deregulation of Section 8, it will permit the 
marketplace to determine if and when they chose to package. You 
could package or you could not package. If you packaged, you 
could now utilize small service providers that are not 
necessarily captive of your company.
    So, you could then have a freer flow of participation----
    Senator Sununu. You would access those small businesses, 
those small providers, through your lender, however.
    Secretary Martinez. That is correct. Or whoever formed the 
package. It could be a lender or it might be someone else that 
decides to package services. It could be a settlement service 
provider. Brokers, in fact, I hear are talking about how they 
might come together to package services themselves and compete 
in the package environment.
    It would be a change in the environment, which makes people 
very nervous. But it also would have the effect that the 
marketplace always has, which is to lower the cost to the 
consumer and provide innovation and more ways of getting the 
work done.
    Senator Sununu. How will HUD's role on enforcement change 
with the new rule? How does HUD intend to enforce the new rule?
    Secretary Martinez. We will beef up our enforcement. But 
beyond that, it is not going to dramatically change how we 
enforce. We have doubled the staff already and are still in the 
process of hiring even additional staff in that enforcement 
arena.
    Senator Sununu. At the risk of sounding contrarian, it 
would seem to me that one of the objectives of the new rule 
should be that the new rule would be easier to enforce than the 
old rule, which might not require a doubling of the staff.
    Secretary Martinez. Actually, we need to do better at 
enforcing RESPA and we should be doing that regardless of the 
rule change, and we are in that process. I think the best way 
this is going to allow for enforcement is by making a better 
informed consumer with more information and the opportunity to 
compete.
    In other words, to be able to shop apples-to-apples source 
of comparisons. Right now, a consumer is inundated with 
information, but given very few choices when they go to the 
settlement table.
    So, we believe that there will be actual self-enforcement 
in the marketplace of RESPA.
    Senator Sununu. Well, let me at least place myself on the 
record as being in favor of apples-to-apples.
    [Laughter.]
    But regarding that point, it does effectively set up a dual 
system for disclosure, either to go through the Good Faith 
Estimate or through packaging.
    Secretary Martinez. No, there would always be a Good Faith 
Estimate. The Good Faith Estimate would be a far better one 
that there used to be because it will have stringent tolerances 
to allow someone to have some certainty when they go to the 
settlement table of what they have to pay. But in addition to 
that, it will permit packaging of services in a broader context 
than today is only possible through large corporate 
arrangements.
    Senator Sununu. So going through someone who is packaging 
these services will not make it any more difficult to compare 
the actual cost to the consumer to a situation where they are 
not 
packaging?
    Secretary Martinez. No, because I think that ultimately, 
the consumer will know a bottom-line price. And if they know a 
bottom-line price, they could compare that price to the 
competitor and make a choice.
    Senator Sununu. Thank you very much, Mr. Chairman.
    Chairman Shelby. Senator Sarbanes.
    Senator Sarbanes. Mr. Chairman, I know the Secretary I 
think is going to depart. Mr. Secretary, I have an issue not 
immediately related to the Rule under discussion today.
    In late February, WBAL, one of our major television outlets 
in Baltimore, actually a Herst outlet, reported on a number of 
complaints about a mortgage-servicing company that appears to 
be mishandling the mortgage accounts of a number of its 
borrowers.
    This has resulted in overcharges, insurance being forcibly 
added to certain mortgages at great cost to homeowners, and 
even in some cases, threats of foreclosure, which obviously 
sends people into a panic.
    As you well know, Section 6 of RESPA sets out certain 
requirements for the servicing of mortgages. I would very much 
appreciate it if HUD could investigate this matter and report 
to me or my staff regarding these problems. I will send you 
some information later in the day outlining the problem in 
greater detail, and I very much hope that you can pay attention 
to it. It seems to be a case of clear abuse and we are very 
anxious to get at it.
    Secretary Martinez. Senator, we look forward to your input 
on this. The Inspector General, I am happy to tell you, is 
investigating the situation already and we would look forward 
to any further input that you can provide us. But our Inspector 
General at HUD is already engaged in investigating what appears 
to be a horrible situation.
    Senator Sarbanes. Thank you very much, Mr. Secretary.
    Thank you, Mr. Chairman.
    Chairman Shelby. Mr. Secretary, now, and I don't believe 
anybody's left here.
    [Laughter.]
    Secretary Martinez. Thank you, Mr. Chairman.
    Senator Sarbanes. You are still standing, Mr. Secretary.
    [Laughter.]
    Secretary Martinez. Somewhat standing.
    [Laughter.]
    Senator Sarbanes. Still sitting, or whatever.
    Chairman Shelby. We welcome you here.
    Secretary Martinez. Mr. Chairman, thank you very much.
    Chairman Shelby. Let's work together on this.
    Secretary Martinez. We look forward to that. Thank you.
    Chairman Shelby. Thank you.
    The hearing is adjourned.
    [Whereupon, at 10:55 a.m., the hearing was adjourned.]
    [Prepared statements, response to written questions, and 
additional material supplied for the record follow:]

                PREPARED STATEMENT OF SENATOR JACK REED

    Secretary Martinez should be commended for his efforts and 
leadership to streamline the homebuying process so Americans can shop 
for mortgages and can better understand what will happen at the closing 
table. If implemented correctly, the Proposed Rule reforming the Real 
Estate Settlement Procedures Act (RESPA) regulations could help achieve 
these worthy goals.
    While I applaud HUD for undertaking this reform, I have a few 
concerns about the Proposed Rule to ensure that the goals of the reform 
and HUD's intentions are achieved.
    First, yield spread premiums (YSP 's), essentially the payments 
representing the difference between the underlying interest rate of the 
loan and the rate charged to the consumer, must go for closing costs 
and nothing else. Any other purpose should be classified as an illegal 
referral under RESPA law. According to a study by Freddie Mac and HUD's 
own analysis, 45 cents of every dollar of YSP does not go for closing 
costs, and that practice must stop.
    Second, the Guaranteed Mortgage Package (GMP) as proposed by the 
reform should be limited to the prime market only. The exemptions 
provided by the Proposed Rule would make it too easy for subprime 
lenders to engage in predatory practices, which this Committee has been 
working very hard to prevent. There are 
relatively straightforward ways that HUD could ensure that GMP 's are 
only offered in the prime market.
    Finally, there has to be a stiffer penalty for the failure to 
follow rules, such as a private right of action, or originators will 
ignore the new rules when it is to their advantage to do so.
    As a result, I hope that you will work to incorporate some of these 
changes into your Final Rule. If done appropriately, I believe your 
proposed reforms will help more Americans achieve the dream of 
homeownership. I am looking forward to your testimony today.

                               ----------

               PREPARED STATEMENT OF SENATOR JIM BUNNING

    Mr. Chairman, I would like to thank you for holding this very 
important hearing. I would like to thank Secretary Martinez for 
testifying today.
    I do not think anyone here is not thinking about the military 
action in the Middle East. Many brave Americans have gone and or will 
soon go into harm's way. Our thoughts and our prayers are with those 
brave young men and women and with their families.
    We must continue, however, with the work of the Senate, and we do 
have a very important issue before us today. I certainly applaud what 
Secretary Martinez has undertaken. Anyone who has recently bought a 
home knows how very complicated it is. At the end of the process, many 
homebuyers have no idea what they are signing. And many feel like they 
have ``signed their lives away.'' Many times there are new last minute 
charges that require cash that suddenly appear. It is not always a fun 
process.
    However, the housing market has been one of the very few bright 
spots in our economy. I understand the fear of having rules adversely 
affect that market. I think your charge on any change to RESPA should 
be: ``First, do no harm.'' I know HUD has received many comments on 
this Proposed Rule. I know the Secretary has and will study them 
carefully.
    Opponents of this Rule are making the case that this is a big guy 
vs. little guy fight. They are telling me the little guys cannot 
compete. I would like to hear the Secretary address that and also some 
other process questions, about the economic impact, for example, that 
have been raised. I know our colleagues in the House made the Secretary 
aware of some of these questions last week.
    I also believe that some in the housing industry do not want any 
reform. The housing industry is vibrant and they do not want to fix 
what ain't broken. I can understand that. I also believe that it is in 
the best interest of some in the industry to keep the process as 
complicated as possible. That I cannot accept. We need to make it 
easier on the consumer to be able to purchase housing. We want more 
people in the market and we do not want them to feel intimidated. But 
we also must make sure that any solutions to the complications of RESPA 
are fair, and do not harm the industry. We really must try to minimize 
unintended consequences.
    Once again, Mr. Chairman, I thank you for holding this important 
hearing. And thank you, Mr. Secretary, for testifying today.

              PREPARED STATEMENT OF SENATOR ELIZABETH DOLE

    Mr. Chairman, I would like to express my appreciation to you and to 
Ranking Member Sarbanes for agreeing to hold this hearing on the Rule 
proposed by HUD regarding the Real Estate Settlement Procedures Act 
(RESPA). This Proposed Rule seeks to make it easier for consumers to 
compare prices and get the best loan possible. Unfortunately, the 
current costs and complexities of the mortgage settlement process have 
created a barrier to homeownership for many Americans. Secretary 
Martinez and his staff should be applauded for their efforts to address 
these issues.
    In recent years, the housing industry has supported and propped up 
our struggling economy. Mortgage rates are at an all-time low, the 
national homeownership rate is on the rise, and other countries look to 
our mortgage finance system as a model to be emulated. Naturally, 
changes to this process will raise questions from homebuyers and from 
businesses involved in the mortgage service industry.
    Unfortunately, the mortgage settlement process is very complex, 
making it difficult to fully grasp the potential impact of this 
initiative. Some have stated that the Proposed Rule would create an 
imbalance on the playing field among mortgage originators, which could 
have unintended consequences for industry and consumers. That is not 
the intent of this Proposed Rule.
    I believe each of my colleagues would agree that an effort to give 
homebuyers more options, to provide greater transparency, and to lower 
prices should be one of our highest priorities.
    I certainly hope that this hearing allows all of us to gain a 
better understanding of how this new RESPA proposal will affect our 
housing and mortgage markets as we work together to ensure that more 
Americans are able to realize the dream of homeownership.
    Thank you.

                               ----------
                   PREPARED STATEMENT OF MEL MARTINEZ

      Secretary, U.S. Department of Housing and Urban Development
                             March 20, 2003

    Chairman Shelby, Ranking Member Sarbanes, distinguished Members of 
the Committee, thank you for the opportunity to join you this morning 
to discuss the impact of a major initiative of the Bush Administration: 
Our unprecedented effort to better protect consumers and increase 
homeownership by making the home 
financing process more transparent, simpler, and less costly.
    The emphasis Americans place on homeownership sets us apart from 
many other nations of the world. In this country, homeownership 
provides financial security for families and stability for children. It 
creates community stakeholders who have a vested interest in what 
happens in their neighborhoods. It generates economic strength that 
fuels the entire Nation.
    The Bush Administration is very committed to helping more families 
achieve the American Dream of homeownership.
    To do this, we must eliminate the homeownership gap that exists 
between the minority and nonminority populations. Last year, the 
President set a goal of creating 5.5 million new minority homeowners by 
the end of this decade, and he challenged the real estate and mortgage 
finance industries to work with us to boost homeownership among 
minorities.
    Our partners have responded enthusiastically, by making specific 
commitments that will move us toward the President's goal. The 
Administration is doing its part by proposing a number of new and 
expanded homeownership initiatives in HUD's Fiscal Year 2004 Budget. 
Each initiative will help us break through the barriers that prevent 
too many Americans from knowing the security that comes with owning 
their own home.
    The mortgage finance process and the costs of closing remain major 
impediments to homeownership. Every day, Americans enter into mortgage 
loans--the largest 
financial obligation most families will ever undertake--without the 
clear and useful information they receive with most any other major 
purchase. This makes them vulnerable to predatory lending practices.
    After agreeing to the price of a house, too many families sit down 
at the settlement table and discover unexpected fees that can add 
hundreds, if not thousands, of dollars to the cost of their loan. As a 
result, many homebuyers find the settlement process to be filled with 
mystery and frustration.
    This Administration is committed to streamlining the mortgage 
finance process, so consumers can shop for mortgages and better 
understand what will happen at the closing table. For these reasons, 
HUD has proposed a major overhaul of the regulations governing the Real 
Estate Settlement Procedures Act (RESPA).
    RESPA has been a priority of mine since I came to HUD. Shortly 
after taking office, I was faced with a major RESPA issue: The legality 
of yield spread premiums. Yield spread premiums are payments from 
lenders to mortgage brokers that are 
reflected in a higher interest rate. Since yield spread premium entails 
a higher interest rate, it can be unclear whether the higher rate 
results in the borrower being given a higher cost loan or whether it is 
being used to offset origination costs. In response, we issued a policy 
statement repeating our view that as long as the broker's compensation 
is for goods, facilities, or services, and the total compensation is 
reasonable, yield spread premiums to the mortgage broker are legal 
under RESPA.
    At the same time, we recognized that there were serious disclosure 
problems 
involving yield spread premiums. We noted that less-scrupulous brokers 
often used yield spread premiums to generate additional profits, 
placing unsuspecting borrowers in higher-rate loans without their 
knowledge. And so in the process of issuing the policy statement, I 
committed HUD to establishing clearer disclosure rules for mortgage 
broker fees, and to simplifying and improving the mortgage origination 
process for everyone involved. There was general--virtually unanimous--
agreement among all the industry groups, as well as consumer advocates, 
about the need for better disclosure: Simpler, clearer, and on a timely 
basis so consumers could shop for the best loan.
    Beginning last year, we undertook a major reform of RESPA's 
regulatory requirements. And from day number one, we reached out to the 
affected industry groups to ensure their involvement.
    As you know, the real estate settlement services industry is not a 
single industry but several that provide settlement services needed to 
help originate and to close mortgage loans. Settlement service 
providers include mortgage lenders, mortgage brokers, real estate 
professionals, title insurers, title and settlement agents, pest 
inspectors, appraisers, credit bureaus, and others. These businesses 
range from the very large to the very small, and include many sole 
proprietors. The combined efforts of settlement service businesses, 
large and small, have helped to make the mortgage finance system in 
this country the envy of the world.
    At the start of our reform process, we met with industry groups, 
consumer advocates, and other interested parties to solicit their 
concerns about the RESPA regulations and their suggestions for reform. 
Many of their recommendations helped shape the direction of our 
proposal.
    As we were drafting our reform proposal, we continued to meet with 
industry groups, consumer advocates, and other interested parties to 
ensure that, to the best of our ability, their concerns were addressed 
in our draft proposal. We were methodical and deliberative in our 
planning, and we took the time to get it right.
    Nine months after first publicly announcing our intention to reform 
RESPA's regulatory requirements--and well over a year after our 
internal work had begun--HUD published its reform proposal for public 
comment. Within the Rule itself, we solicited additional input from the 
industry groups, consumer advocates, and other interested parties we 
had been communicating with throughout this process. The Rule asked 30 
specific questions to help us gauge the impact of our proposal on these 
various stakeholders. We felt it was critical to know whether the 
approaches we have proposed are the right ones--and if not, what 
alternatives may work better.
    HUD received nearly 43,000 public comments in response, although 
many of them were form letters. The 18 weeks since the comment period 
closed on October 28, 2002, have been spent carefully studying the 
written comments. Many have come from mortgage brokers and title 
agents. Also there were many detailed letters from trade associations 
for these industries. As you can imagine, reviewing and cataloguing the 
comments has been a lengthy process due to the sheer volume that we 
received.
    These comments, along with the meetings that we have continued to 
hold since October with industry groups, consumer advocates, and other 
interested parties have been helpful in assisting the Department as we 
examine the impacts of the proposal on small businesses, and consider 
how best to minimize such impacts. All the while, we are keeping in 
mind that the goal of RESPA is to ensure that settlement costs for 
consumers are reduced.
    Since the Proposed Rule was published last summer, alternatives 
have been brought to our attention. Our thinking is evolving on how 
portions of the proposal can be revised for the Final Rule, to ensure 
that all businesses, large and small, can take advantage of the 
opportunities presented by the Rule.
    We remain committed to addressing the concerns raised by small 
businesses, and we are continuing to work with the Small Business 
Administration's Office of Advocacy as we develop the Final Rule. I 
want to assure the Committee that our Final Rule, and the economic 
analysis to be issued with it, will address the concerns raised by the 
affected small businesses. The Department is committed to issuing a 
Final Rule fully mindful of impacts on small businesses.
    Because they ensure greater transparency, our proposed reforms will 
make it more difficult for unscrupulous lenders to abuse borrowers. But 
let me be clear that RESPA reform alone will not end predatory lending. 
Efforts HUD has undertaken in the past 2 years to target abusive 
lending practices include at least 15 new rules focused on, among other 
priorities, weeding out unscrupulous appraisers, ending the practice of 
quick resales or ``flipping,'' and helping us to identify problem loans 
and lenders early on. We intend to do even more to address predatory 
lending while 
preserving a source of credit for those with less-than-perfect credit 
histories.
    HUD is committed to creating a homebuying and mortgage finance 
process grounded in transparency and simplicity. By reforming the rules 
governing the 
purchase and financing of a home, we will create new opportunities for 
first-time homebuyers, keep the American Dream of homeownership alive 
for more families, and inspire greater public confidence in the 
mortgage lending industry.
    I would again like to thank the Committee for the opportunity to 
meet with all of you today. I welcome your continued counsel as we work 
together on behalf of the American people.

  RESPONSE TO WRITTEN QUESTIONS OF SENATOR SARBANES FROM MEL 
                            MARTINEZ

Q.1.a. Both industry and consumer groups agree that YSP 's are 
a necessary tool to allow people to take out low- or no-cost 
loans. In this case, a broker advances closing costs on behalf 
of the borrower, and then gets reimbursed through the YSP. 
According to this approach, YSP 's should go to offset closing 
costs on a dollar-for-dollar basis. Indeed, Mr. John Courson, 
Chairman of the MBA, expressly stated at last year's hearing 
that YSP 's should go to offset closing costs in full. Do you 
agree that a legitimate use of YSP 's is to allow for low- or 
no-cost loans?

A.1.a. Yes.

Q.1.b. As you made clear in the hearing, you agree that, for a 
YSP to be legitimate, it must be fully used to offset the 
closing costs. In order for a borrower to know that the whole 
YSP is going toward closing costs, a borrower would need to 
know in advance what the broker is charging. Do you agree?

A.1.b. Yes, I agree. That is why we have proposed to modify the 
way loan originator compensation is reported to consumers.

Q.2. If brokers disclose their costs, wouldn't we expect 
consumers to start shopping for brokers based on their price? 
Wouldn't competition among brokers be a good thing for 
consumers? If you do not know a broker's price, you could not 
shop, is that correct?

A.2. Many brokers do disclose all their compensation to their 
customers. Others reveal the fees they are charging the 
consumer 
directly, but do not adequately explain any YSP they may be 
receiving. We believe complete disclosure of all broker 
compensation, both direct and indirect, early in the process, 
will better inform consumers of the impact of any YSP, and will 
empower consumers to shop and make more informed decisions.

Q.3. Some legitimate concerns about competitive equity have 
been raised regarding the issue of disclosure of broker 
compensation. The argument is that the Proposed Rule requires 
the brokers to reveal their compensation, but it does not 
require lenders to reveal their compensation. In some regards, 
this is academic, because it is my understanding that brokers 
have agreed to full and upfront disclosure. Furthermore, we 
have seen that it is absolutely necessary to disclose broker 
compensation in order to ensure that YSP 's are fully used to 
offset costs. Nonetheless, does the Proposed Rule allow 
borrowers to fairly compare the costs of a lender-originated 
loan with a broker-originated loan?

A.3. That certainly was our purpose and intention in the 
Proposed Rule. We received a number of comments raising 
questions about the proposed GFE. Based on those comments, and 
on consumer testing conducted in conjunction with the Federal 
Trade Commission, we are revising the proposed GFE rules and 
form, and we believe the Final Rule will ensure a more level 
playing field for all originators while further enhancing the 
consumer's ability to compare products and providers.

Q.4. How do you respond to the concern that large companies, 
particularly large lenders, will have an advantage in creating 
these Guaranteed Mortgage Packages (GMP 's)? Specifically, will 
these large companies be able to force smaller settlement 
service providers or even title companies to drop prices so 
much they will be put out of business?

A.4. First, I do not subscribe to the idea that ``packaging'' 
will result in a greater concentration of market power in large 
lenders. Our proposal opens the door to anyone to become a 
``packager,'' and I believe a wide variety of players will 
ultimately emerge. Packaging is not required. It is optional 
and smaller providers may compete as packagers or as 
independent providers. Moreover, mortgage origination is, by 
its nature, a local process--all transactions require specific 
settlement services that are performed locally, such as 
appraisal, property inspection, title search and the like, and 
it is entirely conceivable that these settlement service 
providers, working with smaller lenders, may, either 
independently or cooperatively, offer their own packages. 
Mortgage brokers, and realtors, who are familiar with the local 
service providers in their area, may do the same.

Q.5. Another criticism I have heard is that the GMP may, in the 
short run save consumers money as all the independent service 
providers are forced by large lenders to lower their prices to 
get into a package. However, there is no guarantee that the 
larger institutions will pass those savings on to consumers. 
How do you 
respond to that?

A.5. We believe that packaging will force competing packagers 
to innovate to lower the costs of their packages and that 
simple, easy to understand, firm, and binding offers will 
empower consumers to shop effectively, and that this will lower 
costs further and drive the marketplace. It is true that there 
is nothing in the GMP proposal requiring ``packagers'' to pass 
along to consumers any of the savings realized when packagers 
and third-party settlement service providers negotiate 
discounted prices. But there will be many packagers competing 
with each other, and therefore no such requirement is needed, 
because competition will squeeze out excesses in the pricing of 
packaged mortgage loans.

Q.6. Some even argue that, in the long run, large institutions, 
using their economic leverage, will undersell smaller 
institutions, brokerage firms, and others, driving them out of 
the mortgage business. Then, having eliminated the competition, 
they will raise their prices to consumers. Again, how do you 
respond?

A.6. As I noted earlier, it is particularly hard for me to 
envision a mortgage world in which smaller, local entities are 
not active participants. It is worth noting here that one of 
the reasons mortgage brokers have become such a large component 
of the industry is that large wholesale lenders have found it 
more efficient to a greater or lesser extent to utilize brokers 
than to maintain their own retail outlets. If large lenders 
drive smaller loan originators and settlement service providers 
out of business, they will have to establish their own network 
of local actors to replace them. That is a cost they are not 
likely to incur.

Q.7. As I mentioned, one of my concerns with the Proposed Rule 
is that it does not allow for sufficient enforcement. Let me 
discuss this in the context of the GMP. Assume a lender 
guarantees a borrower a 30-year mortgage at 6 percent with 
$2,000 in closing costs. Yet, at the closing table, the 
borrower is charged $3,000. He can refuse to close the loan, 
but he may lose the house he is buying. It is likely that a 
consumer will go ahead and sign the loan.
    In this case, the Proposed Rule says that the borrower has 
a remedy in contract law, and that the lender would lose the 
Section 8 protection that came along with the package. This has 
2 problems. First, there is no practical way to enforce the 
contract. No attorney will take a case where the damage is only 
$1,000.
    Second, this approach puts the burden on the consumer, who 
has been cheated, to prove his case. In fact, a consumer would 
not be able to prove the case because he or she will not have 
access to specific settlement costs, so they will not be able 
to pursue a Section 8 claim. How could a consumer realistically 
be able to pursue a claim and enforce the law unless the Rule 
puts the burden on the originator who failed to live up to the 
guarantee to prove that there is no Section 8 violation?

A.7. We are seeking through this rulemaking to provide as much 
protection for consumers as is possible under current law. In 
that vein, as we develop a Final Rule, we will be considering 
comments on our proposed remedies to enhance consumer 
protection under the law. As I have previously said, we will 
then turn to the question of whether additional legal authority 
in the enforcement area is likely to be needed to complement 
these new rules.

Q.8. I am also concerned that the YSP provisions in the Rule do 
not allow for any enforcement. As you know, the YSP provisions 
are in the GFE section, which has no enforcement mechanism or 
penalties. Prior to the 2001 ``clarification,'' consumers could 
enforce the prohibition against the use of YSP 's as illegal 
referral fees through Section 8 of RESPA. The 2001 policy 
``clarification'' cited the ``ambiguity'' of the treatment of 
YSP 's in eliminating the ability to pursue class actions.
    The new proposal under consideration eliminates this 
ambiguity and would fairly allow for the enforcement of the YSP 
provisions through Section 8, the mechanism that was used prior 
to the 2001 ``clarification.'' Why not restore this enforcement 
mechanism by putting the section of the regulation dealing with 
the YSP 's in the 
part of the Code of Federal Regulations dealing with Section 8 
of the law?

A.8. The Proposed Rule's treatment of YSP 's is located in the 
GFE disclosure section of the Rule because what is proposed is 
a change in the means by which a particular aspect of a 
transaction is disclosed. We are examining the comment that a 
failure to disclose should be explicitly treated as a Section 8 
violation in the Final Rule, along with other comments from the 
consumer advocates and also industry groups regarding 
appropriate penalties for failure to properly disclose.

Q.9. It has come to my attention that some HUD-certified 
housing counselors are having difficulty supporting their 
excellent work promoting homeownership because certain lenders 
are concerned that the payment of a fee to a certified 
counselor in exchange for bona fide counseling services might 
violate RESPA. I have heard this concern specifically from the 
National Council of La Raza Network Housing Counseling Network. 
Some La Raza affiliates offer, or would like to offer, these 
services for a very modest flat fee. Do you agree that RESPA 
allows payments from lenders or other settlement service 
providers to housing counselors in exchange for bona fide 
counseling services?

A.9. Yes. RESPA always permits payments for bona fide services 
rendered. It prohibits kickbacks, payments for the referral of, 
splits of fees, and unearned fees in connection with the 
settlement service business.





                 THE IMPACT OF THE PROPOSED RESPA RULE
                   ON SMALL BUSINESSES AND CONSUMERS

                              ----------                              


                         TUESDAY, APRIL 8, 2003

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.

    The Committee met at 10:05 a.m. in room SD-538 of the 
Dirksen Senate Office Building, Senator Richard C. Shelby 
(Chairman of the Committee) presiding.

        OPENING STATEMENT OF CHAIRMAN RICHARD C. SHELBY

    Chairman Shelby. The hearing will come to order.
    I want to thank the panel for assembling today before the 
Senate Banking Committee for the second in a series of hearings 
on HUD's Proposed Rule to the Real Estate Settlement Procedures 
Act.
    On March 20, the Committee heard from Mel Martinez, 
Secretary of the Department of Housing and Urban Development, 
on HUD's goal of reforming the real estate industry through 
this rulemaking. At that time, I, and several other Members of 
the Committee expressed our agreement that the underlying goals 
behind HUD's effort are laudable. Simplifying the complex 
paperwork surrounding homebuying has the potential to improve 
homeownership rates, eliminate unwelcome surprises from 
occurring at the settlement table, and increase competition 
within the industry. There is no debate on whether these are 
worthy goals.
    Substantial debate, however, has centered around whether 
this Proposed Rule would accomplish those goals. Concerned 
parties from across the Nation, and even internally in the 
Federal Government, have let HUD know of their concerns. During 
the public comment period, and even after, a barrage of 
objections were released. HUD received in excess of 40,000 
comment letters. Three committees or subcommittees on the House 
side have received testimony on this controversial proposal. 
This Committee met just last month about the Proposed Rule to 
hear from the Administration and is again gathering to hear 
from consumer groups and industry groups about the impact this 
Proposed Rule would have on the central players in the $2 
trillion real estate market. Additionally, we have received 
more mail on this issue at the Committee than on any other 
topic that I can recall.
    My views on the Proposed Rule are widely known. In its 
current form, I think it is anti-competitive, significantly 
damaging to small businesses, and lacks effective provisions to 
provide clarifications for consumers. While I feel there could 
be an emerging place for packaging in the current real estate 
environment, I have significant concerns that HUD's proposal 
allows packagers an exemption from disclosing fees. And I have 
not been able to get a satisfactory answer from anyone that 
explains why hiding information from consumers protects them. 
In my experience, the best decisions are made when consumers 
are armed with all the information they need to make an 
informed choice. Transparency, I believe, is a central 
component.
    Regarding competition, I feel like this Rule accomplishes 
the opposite of what is intended. The underlying principle of 
guaranteed mortgage packaging is that savings achieved through 
volume discounts with settlement service providers will be 
passed on to the consumer, resulting in lower settlement costs. 
But what evidence is there to demonstrate that those savings 
would be passed on?
    It is my fear that only large institutions would have the 
market power and volume of business to compete in that 
environment. The result could be that small businesses, who 
lack the resources of large lenders, could be shut out of the 
process and only large lending institutions would prevail. 
Ultimately, competition would be stifled, rather than enhanced, 
as the large players increase their market share and push small 
firms out of business. What incentive would exist then to pass 
on savings to the consumer?
    Finally, the recharacterization of yield spread premiums as 
a lender payment to the borrower is a misleading one that will 
limit the broker's ability to compete on a level playing field 
with lenders. It would not, in fact, lend ``clarity'' to the 
process. And this sentiment is just not my own. The Federal 
Trade Commission actually said that this change could, 
``Confuse consumers and lead them to misinterpret the overall 
cost of a transaction.''
    For these reasons and others that will likely be 
articulated here this morning, I asked Secretary Martinez to 
reconsider this proposal and address these concerns. At our 
March hearing, I asked that the Secretary commit to issuing 
both a new, more thorough, and expansive Economic Analysis and 
revised Proposed Rule that takes into consideration the results 
of the new Economic Analysis. I have hopes that he will do just 
that. I have conveyed the message that I firmly believe that it 
can only lend credibility to the process and win him points for 
being conscientious and fair.
    Having said this, let's hear opening statements and then 
move on to the first panel.
    Senator Sarbanes.

             STATEMENT OF SENATOR PAUL S. SARBANES

    Senator Sarbanes. Thank you very much, Mr. Chairman, I want 
to commend you for holding this hearing. I think it is very 
helpful, particularly with issues as complicated as RESPA, to 
have witnesses representing different points of view coming 
before us, and I anticipate considerable give and take from the 
panel that is going to follow Congressman Manzullo. Hopefully, 
that discourse will help us to shed some additional light on 
this important issue.
    The Real Estate Settlement Procedures Act helped to bring 
some order and equity to a process that was suffering from 
rampant kickbacks and referral fees among settlement service 
providers at the expense of the consumers, and we need, of 
course, to recall that history that has led to the enactment of 
the legislation in the first place.
    RESPA has sought to align market incentives with the 
interests of borrowers and it has had some success in doing so. 
But RESPA needs to be updated, however, the goals should 
continue to be the same--the creation of a mortgage market that 
effectively serves consumers' interests.
    HUD is working on a proposal that it hopes will achieve 
this goal. In my view, if done correctly, the Proposed Rule 
holds out the prospect of resulting in significant good. 
However, if not done correctly, I think it could result in 
significant harm. So, we have an important issue before us. Or 
HUD, more accurately put, has an important issue before us.
    A number of us on this Committee sent a letter to Secretary 
Martinez outlining what we think should be essential elements 
of a Final Rule. And I would like to just touch on a few of 
those key principles.
    First, the Rule most not undermine existing RESPA or Truth 
in Lending Act protections for subprime borrowers. Subprime 
borrowers are far more likely to be subjected to predatory 
practices against which both RESPA and TILA provide some 
remedies. We must be sure the Final Rule retains these 
important protections.
    Second, the additional protections that the Proposed Rule 
would create are of little use if they are not enforceable. 
Regrettably, the Department's 2001 policy ``clarification,'' 
undermine the ability of consumers to seek redress against 
illegal yield spread premiums, half of which, as HUD's analysis 
points out, are not used to offset closing costs, which, of 
course, was the industry assertion as to why these things were 
appropriate. The proposed changes in the treatment of yield 
spread premiums, as well as the Guaranteed Mortgage Package, if 
we proceed on that front, must allow for effective enforcement, 
which includes private enforcement.
    Third, a Final Rule must not allow bait and switch tactics. 
The Guaranteed Mortgage Package should include an interest rate 
and should be contingent only on the confirmation of 
information provided by the borrower. If done in this way and 
if limited to the prime market, the package has the potential 
of improving outcomes for consumers.
    Finally, the Rules should not preempt State laws. For 
example, a number of States have laws that require brokers to 
act as agents for the borrower. HUD should not undermine those 
laws.
    Of late, there has been a lot of discussion in the press of 
efforts by HUD to find a compromise or to work out a proposal 
that would command a broader consensus. It seems to me, at the 
very least, the Department needs to move ahead with a proposal, 
and I now quote the Department from its written testimony to 
the Congress earlier in the year: ``To ensure that yield spread 
premiums are fully disclosed to consumers, that consumers 
determine whether and how to use them, and that consumers 
receive the full benefit of any such payment.''
    If the consumer is going to be led into a higher interest 
rate, then the consumer should receive the benefit of that rate 
and it ought not to go to the person leading them to the higher 
rate.
    One thing that was made abundantly clear about yield spread 
premiums last year is that it is minority homebuyers that bear 
a disproportionate burden under the current system.
    In a letter to Secretary Mel Martinez, the National Council 
of LaRaza, the NAACP, and the National Hispanic Housing Council 
wrote: ``That the abuse of yield spread premiums, rather than 
promoting minority homeownership, is disproportionately making 
it harder for Americans of color to buy their own homes.''
    The whole rationale by which the consumer is led into a 
higher interest rate is to offset closing costs. Now if the 
borrower is not fully aware of the fact that he has paid a 
higher rate, he cannot exercise that option. Instead of the 
amount going to offset the closing costs, those amounts go to 
the person who led them into the higher interest rate.
    Stop and think about that for just a moment. It is clearly 
an anti-consumer practice, and in my view, my strongly held 
view, the Final Rules should prevent this from happening.
    Mr. Chairman, I look forward to hearing Congressman 
Manzullo, and then, subsequently, the panel.
    Chairman Shelby. Senator Crapo.

                 COMMENTS OF SENATOR MIKE CRAPO

    Senator Crapo. Thank you very much, Mr. Chairman. In the 
interest of time, I won't make a long statement.
    I do want to say that I share the concerns that you have 
raised and hope that message is getting through. I believe that 
what we will hear today are a series of concerns that need to 
be heard, and as you said, a reminder that the goals of this 
Rule, and of the legislation underlying it, are very worthwhile 
and laudable, which we should be working expeditiously to 
achieve.
    I hope that we can move forward with these oversight 
hearings to help the Agency understand the reforms that need to 
be made in its approach to the management of the issues.
    I also want to welcome my good friend and colleague--our 
good friend and colleague--Representative Don Manzullo. Don and 
I were elected to the House at the same time, and we worked on 
a lot of issues over there together, and still work on a lot of 
issues together. He is one of my good friends over in the 
House. In fact, when I need my batteries recharged, I go back 
over there to the House to talk with some of those guys and get 
a little bit of that fiery spirit back again.
    So, I appreciate you being here with us today also, Mr. 
Manzullo.
    Mr. Chairman, I thank you for holding this hearing.
    Chairman Shelby. Thank you.
    Senator Stabenow, do you have an opening statement?

              COMMENTS OF SENATOR DEBBIE STABENOW

    Senator Stabenow. Thank you, Mr. Chairman, very much for 
holding this hearing. And welcome to my former colleague as 
well.
    Like Senator Crapo, I enjoy going back to the House and 
visiting with friends and I appreciate your advocacy on behalf 
of small business and your efforts in the House.
    Also, I want to thank Chairman Shelby for holding this 
second hearing on a very important topic--the Real Estate 
Settlement Procedures Act. I have joined with colleagues for 
some time in indicating that consumers need more certainty and 
more transparency in homebuying.
    I hear that at home all the time, concerns about the issues 
that are raised. And any sound and balanced effort that 
accomplishes these goals is one that I want to lend my support 
to.
    Buying a home is the single most complicated financial 
transaction that most Americans will ever undertake, and 
probably the most important, since the majority of Americans 
save through the equity in their home, and that is a very 
important investment. It can be very confusing and consumers 
often have a difficult time shopping for different loan 
products. Even people who consider themselves relatively 
financially savvy can get bogged down in the process.
    So, I think it is important that we are looking at these 
reforms. And I am anxious to hear what our witnesses have to 
say about the Good Faith Estimates and what they feel about 
that process, as well as the additional processes that relate 
to the loan packages.
    I appreciate the Chairman having this hearing. I will 
submit my full statement for the record and ask that it be 
included.
    Chairman Shelby. Without objection, it will be included.
    Senator Stabenow. Thank you.
    Chairman Shelby. We are pleased to have with us this 
morning, Congressman Donald Manzullo, Chairman of the House 
Small Business Committee. His Committee, as he will likely 
elaborate on, held a hearing in March on the impact of the 
RESPA Rule on small business providers. He will be our first 
witness.
    The second panel is comprised of industry and consumer 
groups, which I will introduce individually once we move to 
that panel.
    Your prepared statement, Congressman, will be made part of 
the record in its entirety. We welcome you to the Senate. You 
have a lot of friends over here. We respect the position you 
hold in the House as far as small business and your interest in 
this issue. You proceed as you wish.

                STATEMENT OF DONALD A. MANZULLO

               A U.S. REPRESENTATIVE IN CONGRESS 
                   FROM THE STATE OF ILLINOIS

          CHAIRMAN, HOUSE COMMITTEE ON SMALL BUSINESS

    Representative Manzullo. Thank you, Chairman Shelby, 
Ranking Member Sarbanes, and the Members of the Committee for 
the invitation to testify on the effects on the small business 
community and on consumers of the Department of Housing and 
Urban Development's proposal to revise the regulations 
implemented in RESPA. I come before you today not just as the 
Chairman of the House Small Business Committee, but also as a 
Member of the House Financial Services Committee. In addition, 
prior to being elected to the Congress, I was an attorney in 
private practice for over 22 years and I personally closed more 
than a thousand real estate transactions. Those transactions 
were commercial, residential, and farms. Also, I represented 
banks, I represented the FDIC, and I mopped up when a bank 
failed. I have represented real estate firms, title companies, 
and an array of people that are involved in title real estate 
closings.
    I agree with the opening statements of all four Senators. 
They are not inconsistent. And there is a way to use the system 
in order to protect consumers. But let me frame the question 
this way. It is a tough question, but I am going to frame it 
this way. Why has HUD taken a position that legitimizes 
kickbacks to large lenders that enter into agreements with 
settlement service providers and allows those relationships to 
be hidden from consumers while at the same time proposes to 
more fully disclose other transactions to consumers? That is 
the issue.
    Senator Sarbanes mentioned the word kickbacks. I do not 
like that word because that means a payment that does not have 
to be disclosed. And that is exactly what could be done for the 
ones involved that guarantee the package, that guarantee the 
interest rate lock, that can enter into different transactions.
    The proposal should focus on better disclosure of the 
various settlement fees so that consumers are fully advised of 
all fees going into a settlement transaction rather than 
permitting large mortgage lenders to hide their fees charged to 
consumers and the monies received from settlement providers.
    Everybody is in favor of disclosures. But the disclosures 
should be fair. The same thing that a mortgage lender has to 
disclose should be exactly what a mortgage broker has to 
disclose. Same rules, same transparency.
    I fully support simplifying and clarifying the settlement 
process so that first-time borrowers and homebuyers can enter 
the market. I believe that HUD's RESPA proposal will make 
fundamental, and most likely, irreversible changes to our 
residential real estate market. In the short-term, the proposal 
may jeopardize a robust real estate market. In the long-term, 
the proposed changes may undermine the goals of providing 
affordable housing and enhance protections for consumers. This 
proposal is bad for small businesses and it is bad for 
consumers.
    On March 11, I chaired a hearing of the House Small 
Business Committee to hear testimony from Secretary Mel 
Martinez and the small business community on the impact of the 
proposal on small entities. This was a bipartisan effort with 
Members of both sides of the aisle expressing strong concerns 
about the proposal, including Ranking Member Nydia Velazquez. 
She is also a Member of the Financial Services Committee and 
she wrote a comment letter directly to HUD about her concerns.
    In addition, there are bipartisan Members of the House 
Financial Services who share our concerns. Congressman Mel Watt 
of North Carolina is a Democratic Member of the Financial 
Services Committee. We have very similar backgrounds and we 
were elected to Congress the same year. He and I have the same 
view of the RESPA proposal and believe that it would 
significantly harm our real estate market, consumers, and small 
businesses. The two of us circulated a Dear Colleague letter to 
HUD to simply deep-six this proposal and start it all over 
again.
    While the small business community has many concerns about 
HUD's RESPA proposal, the two primary concerns are that the 
proposal is tilted unfairly toward the mortgage lending 
community and against small business real estate professionals, 
and HUD did not fulfill its obligations pursuant to the 
Regulatory Flexibility Act.
    The Small Business Committee has a lot of jurisdiction over 
the Regulatory Flexibility Act and SBREFA, which allows for 
judicial review of that.
    The overwhelming majority of the small business community 
that have contacted the Committee, including virtually all the 
small settlement providers and a significant portion of the 
community banks, believes the proposal would unfairly give 
significant power to the mortgage lending community, especially 
large lenders, to put together Guaranteed Mortgage Packages. 
Small businesses that are unable to participate in the package 
arrangements must attempt to compete using the detailed 
itemized listings under the proposed Good Faith Estimate 
reforms. Those small businesses also would be ineligible for 
safe harbor relief.
    A significant fear is that large mortgage lenders may use 
the package of settlement services as a ``loss leader'' in 
order to obtain the more lucrative servicing and secondary 
market fees associated with the administration of a residential 
real estate loan. Once competition in the marketplace is 
reduced, the packagers may attempt to bulk the price of other 
products, services, and items with the purchase of a home.
    With regard to its economic analysis conducted pursuant to 
the Regulatory Flexibility Act and Executive Order 12866, HUD 
acknowledged that the proposal would place a $9.4 billion 
burden on small businesses. Of this $9.4 billion, $3.5 billion 
comes from the revised Good Faith Estimate proposal and $5.9 
billion comes from the packaging initiative. However, HUD does 
not break down the costs in its economic analysis for each 
segment of the industry.
    Of the 98 pages in HUD's failed attempt, their unscholarly 
attempt, to comply with the law that protects the consumers, 
small businesses, and entities affected, only 64 pages deal 
with the economic analysis. That comes out to $147 million per 
page.
    In the hearing that we held on March 11 in my Committee, I 
asked Assistant Secretary Weicher, where in this report do you 
mention the role that attorneys which our small businesses have 
in real estate closings?
    His reply to me was, well, we have identified here the 
bigger impact--the big impact. And that led to a very 
interesting colloquy where I said, ``You cannot pick and choose 
which businesses you are going to do research on.''
    The analysis of HUD is fundamentally flawed because it 
must, by statute--must, must--reach out to every single 
business affected and do an economic impact on exactly what 
will happen to those businesses should the regulation go into 
effect. HUD has failed to do so.
    I asked HUD to issue a revised economic impact. They 
refused to do that. What I get from HUD is, well, when we issue 
the Final Rule, then we will give you the final economic 
impact. And at that point, it is too late. It is just too late.
    There is no room in this Government for lack of 
scholarship. HUD simply has lots of people there. They have 
economists, they have lawyers, and they have accountants, 
people that can do a very thorough economic analysis.
    On page 45 of their report, two sentences talk about the 
role of lawyers in real estate closings. The question Dr. 
Weicher asked me was, what did you charge for a real estate 
closing? I said $100 to $300. His comment was, we only focus on 
the big issues.
    Well, excuse me. But small-town lawyers, title companies, 
people who draw deeds, people who are involved in pest control, 
mortgage brokers, appraisers, surveyors--these are all people. 
They are not just names of professions. These are people who 
know what they are doing and understand this subject.
    The bigger problem in what we will see is this. If this 
goes through, you are going to see ads coming out from one of 
the 13 big companies that say, ``You trusted us in the past. 
Trust us now. Before you buy or sell your house, this is a one-
stop-shop. You call 1-800-BIG-BOYS and we will do all the work 
for you. All you have to do is show up at closing. We will take 
care of all of the details for you.''
    They sure will because Section 8 is waived that allows a 
kickback. They can go in there. The bundlers. They can go in 
there and they can enter into an agreement with the title 
company and have a secret, undisclosed agreement to get a 
kickback for an undisclosed fee. But they will do more than 
that because they will use their power to put together this 
package and to determine and fix in the interest rate.
    By the way, nobody except the mortgage lenders can lock in 
the interest rate. The surveyors cannot do it. The attorneys 
cannot do it. The title companies cannot do it. It is the ones 
that control the money, and those are the large lenders.
    And what will happen, Senators, is you will have a 
situation where they will say, we will take care of everything 
for you. Oh, by the way, we would suggest that your house is 20 
years old and it has single-pane windows. We can put you in 
contact, yes, with a window company and nothing would have to 
be disclosed there as to that cozy arrangement. By the way, we 
can clean your carpets, clean your gutters, put on that new 
roof. And you know what? You work very hard. Maybe you should 
borrow an extra $5,000 and you can put in new rugs and new 
flooring.
    I see this thing as nothing but a monster, and we do not 
need it because the system is not broken.
    If the Senate and the House want to do something for small 
businesses and for consumers, separate the disclosure end from 
the bundling end. Concentrate on the disclosure. Let's work on 
that and make sure that whoever is involved in that real estate 
transaction knows exactly what he or she is paying.
    Thank you for your testimony--for my testimony.
    [Laughter.]
    That is what happens when you are a Chairman, right?
    [Laughter.]
    Well, that is my testimony. Thank you for listening.
    Chairman Shelby. Congressman, we appreciate you coming 
today and sharing this with us. You are the Chairman of the 
Small Business Committee. So, I want to ask you a question. As 
the Chairman of the Small Business Committee in the U.S. House 
of Representatives are you aware of any nonlender, small 
business trade group that supports HUD's RESPA proposal?
    Representative Manzullo. I do not know of any. In fact, a 
lot of the small-town banks are terrified because they would 
get smoked.
    Chairman Shelby. Okay.
    Representative Manzullo. They would be wiped out.
    Chairman Shelby. Why do you believe the lender groups are 
the biggest supporters of the proposal?
    Representative Manzullo. It is an opportunity to pick up 
business. It is an opportunity to do a lot of packaging to get 
more of the market. And what this could lead to is the more of 
the local real estate market you develop, the less local banks 
have of local real estate loans, which is their bread and 
butter.
    So then you end up with an oligopoly of 12 or 13 or 14 of 
the largest lenders in the country that can end up controlling 
not only the mortgage, but also all the affiliated services. 
And that doesn't help anybody.
    Chairman Shelby. Congressman, what is wrong with the 
principle of total disclosure and no kickbacks?
    Representative Manzullo. Well, that is what it should be.
    Chairman Shelby. I agree with you.
    Representative Manzullo. I mean, I am just abhorred, 
Senator Sarbanes hit it on the head. He says, no bait and 
switch, adequate enforcement, and must not undermine existing 
rules concerning subprime borrowers. This would allow the 
illegal kickback. How would that help consumers?
    Chairman Shelby. Thank you for the example.
    Senator Sarbanes.
    Senator Sarbanes. Thank you very much, Mr. Chairman.
    I just want to focus on your view on the yield spread 
premiums. We had a hearing devoted to that subject here last 
year. It turned out that brokers have an incentive to up-sell 
borrowers. That is, they get a payment from the lender if they 
get the borrower to sign up for a higher rate than that 
borrower might qualify for. What is your view of that practice?
    Representative Manzullo. I think it all goes to the 
disclosure. If the interest rate is being increased in lieu of 
money paid up-front, that should be disclosed.
    Senator Sarbanes. To the borrower.
    Representative Manzullo. To the borrower, that is correct.
    Senator Sarbanes. Yes.
    Representative Manzullo. Complete disclosure.
    Senator Sarbanes. Now, Senator Faircloth, Republican of 
North Carolina, and former Member of this Committee, actually 
got much of the current debate started with an amendment 
directing HUD and the Federal Reserve Board to study RESPA and 
TILA.
    Incidentally, it was that study that HUD used as the basis 
for the Rule, for this Rule, the one that we are talking about.
    At a hearing in 1997 that he chaired, Senator Faircloth 
suggested, and I quote him: ``There should be a requirement 
imposed upon the mortgage broker that the broker have an 
absolute fiduciary and moral obligation to represent that 
person to the best of the broker's ability, to the exclusion of 
all other interests.''
    Of course, the marketing undertaken by the broker's 
association and many individual brokers in effect tracks that. 
The National Association of Mortgage Brokers describes a broker 
as a mentor for the borrower--a mentor, a trusted adviser for 
the borrower. And a quick review of Internet ads reinforces the 
Association's claims--mortgage brokers represent you. We shop 
the market for you so that you can be assured that you are 
receiving the best mortgage rates and terms available. What is 
your view about the position of trust that brokers occupy with 
respect to borrowers?
    Representative Manzullo. I think that the same standard 
would apply both to mortgage brokers and to mortgage banks, to 
large lenders. It is all in the disclosure.
    If you call a bank and say to them, I want to refinance. It 
is a large bank or a small bank. And they will give you three 
or four different options--a 15-year, a 20-year, a 30-year.
    Senator Sarbanes. Yes, but the bank--the lender--it is 
clear to the borrower that the lender does not represent the 
borrower's interests. The lender is on the other side of the 
fence. I mean, any borrower knows that, I think probably flat 
out.
    Now, I am asking the question, what position does the 
broker 
occupy with respect to the borrower?
    Representative Manzullo. Senator, I would say it is the 
same. When I practiced law--
    Senator Sarbanes. How can you say it is the same when the 
mortgage brokers, by their own advertising, represent 
themselves as a mentor to the borrower? They tell the borrower, 
mortgage brokers represent you. Or they say, we shop the market 
for you, so you can be assured that you are receiving the best 
mortgage rates and terms available.
    I know when I am going to the lender, they are on the other 
side and I am going to shop amongst different lenders. A broker 
comes in and he says, look, we will do the shopping for you. We 
are your guy. We represent you. Isn't that the posture they 
occupy?
    Representative Manzullo. I think they should, and so should 
the bank. I think it is pretty sad if you cannot go to a bank 
and rely upon the information that the bank gives you. They 
should be in the same fiduciary capacity.
    When I practiced law, Senator----
    Senator Sarbanes. Do you think that the bank is under an 
obligation to give you the best deal?
    Representative Manzullo. You bet.
    Senator Sarbanes. Oh, no.
    Representative Manzullo. Because they advertise the same 
thing.
    Senator Sarbanes. But they are competing with other banks, 
aren't they?
    Representative Manzullo. The mortgage brokers are competing 
with other mortgage brokers. That is the essence of 
competition.
    Senator Sarbanes. So, you think it is reasonable for a 
mortgage broker to steer a client into a higher interest rate 
and then the mortgage broker to get a payment from the lender 
because they brought the client into a higher interest rate?
    Representative Manzullo. If the disclosure is clear so that 
the consumer can understand exactly what he or she is paying--I 
just refinanced a farm back home. I talked to our family 
banker.
    Maybe things are different, Senator, in the Midwest than 
they are here on the East Coast. But the people at Stillman 
Bank, from Stillman's Alley, Illinois, they have a fiduciary 
relationship with me. They keep my money. When I called them, I 
said, ``Brian, I am refinancing the farm, give me the best rate 
you can get.'' Do you know what he does? He says, let me get 
right back to you, and he takes a look at what he is offering 
out there.
    I have the opportunity to call somebody else. When I bought 
a townhouse out here, I used a mortgage broker because I did 
not know these banks out here. The mortgage broker I used said 
not only did he find the lowest rate, but also the bank wanted 
to charge me $137 a month on premium mortgage insurance and the 
broker went to battle for me and got it down to $77 a month.
    Senator Sarbanes. So the broker was acting on your 
interest.
    Representative Manzullo. Absolutely. Absolutely.
    Senator Sarbanes. That is what they should be doing.
    Thank you, Mr. Chairman.
    Chairman Shelby. Senator Crapo.
    Senator Crapo. Thank you, Mr. Chairman. I have no 
questions.
    Chairman Shelby. Senator Stabenow.
    Senator Stabenow. Thank you, Mr. Chairman. Just to follow 
up on Senator Sarbanes' question.
    It is not clear to me whether or not you are saying that--
you are saying then that the fee involved is appropriate--are 
you saying that it should be disclosed, the mortgage broker's 
fees should be disclosed to the consumer? I am not 
understanding.
    Representative Manzullo. I believe in full disclosure. I do 
not understand to the Nth degree what the mortgage brokers are 
going to be testifying about. I do not consider that to be my 
role to fully understand that. But the bottom line is that 
whatever arrangement that is made can be taken care of in 
complete disclosures.
    Senator Stabenow. So, do I understand, in your testimony, 
you are wanting to separate the Good Faith Estimate portion of 
the Rule from the GMP's.
    Representative Manzullo. That is correct, to separate the 
two, is to spend a lot of time and effort on coming up with a 
Good Faith Estimate that satisfies the consumers, satisfies the 
banks, satisfies the mortgage brokers and all the parties 
involved. That was the purpose of RESPA. But the bundling 
aspect goes backward and says you can have these kickbacks 
without making a disclosure of the tied agreements.
    Senator Stabenow. So at this point, I just wanted to be 
clear. The Good Faith Estimate, locking in these numbers, full 
disclosure as it relates to mortgage broker fees and so on, is 
something that you would support.
    Representative Manzullo. The problem is, to try to lock in 
that interest rate when you are 30 or 60 days out--when we 
first bought this townhouse out here, I talked to one bank and 
they said, ``Look. If you give us an extra 250 bucks, we will 
lock in between now and when you close the lowest interest rate 
that is available during that period of time.'' That is pretty 
good. And that is exactly what we did. I bargained that with 
the bank and the bank offered that.
    Senator Stabenow. I think there is a difference between 
certainly locking in 2 months out or 1 month out and 3 days 
out, and what happens to people right now with Good Faith 
Estimates that are given 3 days from closing and change.
    Representative Manzullo. Well, yes and no. You make the 
application and the mortgage broker or the bank will send you 
an estimate, give you a range that you have to come up with at 
closing, say, between $2,000 and $2,500.
    Senator Stabenow. Sure.
    Representative Manzullo. Then they give you the option to 
roll that into the loan itself or to write a check at closing 
and they will say, if you roll it into the loan itself, 
obviously, you are going to borrow more money and it is going 
to be more money that you pay each month on it.
    Senator Stabenow. I just wanted to be clear, Mr. Chairman, 
as to whether or not you were saying that you supported the 
Good Faith Estimate and the disclosure of the YSP's. And it 
sounds like at this point that you are supporting disclosure.
    Representative Manzullo. I do.
    Senator Stabenow. You are supporting disclosure.
    Representative Manzullo. The good-faith disclosure--to lock 
in a rate 3 days out, that is not a problem on there. But I do 
not know where locking in a rate has been a problem, especially 
when the banks give you the opportunity to pay a little bit 
more and to lock in the lowest rate within the next 60 days. 
And sometimes the mortgage brokers will do the same thing.
    Senator Stabenow. On the GMP's--just one other question--
some have talked about limiting that to the prime market versus 
subprime. Does that make any difference from your standpoint?
    The second question I would ask is, right now, in looking 
at the kind of thing you are talking about--and I am very 
sensitive to the concerns of small business, as well as it 
relates to the big guys, as you say, having the ability to 
leverage and to be able to squeeze out small business. But, 
essentially, the packaging that you are talking about, the 
ability to do things in-house, to a large extent, exists now. 
They could do that right now and are choosing not to do that 
right now.
    Representative Manzullo. Well, we had a situation in our 
office, Adam McGarry, my Chief of Staff, he could tell you 
about the nightmare he had when he bought his townhouse in 
Springfield with a real estate firm that offered a one-stop-
shop and had a tie-in agreement with a mortgage company. In 
real estate----
    Senator Stabenow. That is what I am asking.
    Representative Manzullo. I am sorry?
    Senator Stabenow. What do you see about the Rule that would 
change from what they could be doing right now and choosing not 
to do under this new process? Why would it be more 
advantageous? Why would it be more attractive to them to do 
what they could be doing right now but are choosing not to?
    Representative Manzullo. You mean the bundling?
    Senator Stabenow. Right.
    Representative Manzullo. It would just give credence to it. 
It would encourage it. It would allow more of it to go on. But 
the key is, it would allow that secret kickback because Section 
8 would be waived, which to me is astonishing, when the whole 
purpose of RESPA was to avoid the illegal kickback. And now, it 
makes the illegal kickback a legal kickback. It encourages 
under-the-counter transactions.
    When I prepared a closing statement before RESPA, my 
closing statement was clearer than RESPA's has ever been. I was 
just a small-town lawyer. Whatever goes on--we did not deliver 
a piece of sod at the closing. It wasn't that archaic. But it 
was complete and honest disclosure of what you are doing.
    Which is what all people ask in these transactions. That is 
what all the Senators have asked. That is all the House has 
asked. This legislation doesn't do that. So let's get together 
and concentrate on those disclosures and we could accomplish 
every suggestion that every Senator here has.
    Senator Stabenow. Okay. Thank you, Mr. Chairman.
    Representative Manzullo. Thank you.
    Chairman Shelby. Congressman, thank you for your appearance 
today. And we will keep working together on this.
    Representative Manzullo. Thank you.
    Chairman Shelby. Thank you.
    I now call our second panel: Charles Kovaleski, President-
Elect, American Land Title Association; Gary Acosta, Chairman, 
National Association of Hispanic Real Estate Professionals; 
Catherine Whatley, President, National Association of 
REALTORS '; Margot Saunders, Managing Attorney, 
National Consumer Law Center; John Courson, Chairman, Mortgage 
Bankers Association; Neill Fendly, Government Affairs Chairman 
and Past President, National Association of Mortgage Brokers; 
and Ira Rheingold, General Counsel, National Association of 
Consumer Advocates.
    I welcome all of you. I know it is a little crowded at the 
table. Your written testimony will be made part of the record 
in their entirety. I ask that you sum up your statement as 
briefly as you can.
    We will start with Mr. Kovaleski and go from left to right.
    Mr. Kovaleski, we would be happy to hear from you.

               STATEMENT OF CHARLES J. KOVALESKI

        PRESIDENT-ELECT, AMERICAN LAND TITLE ASSOCIATION

    Mr. Kovaleski. Thank you, Mr. Chairman. My name is Charles 
Kovaleski and I am the President of Attorneys' Title Insurance 
located in Orlando, Florida. I am appearing here today as 
President-Elect of the American Land Title Association, which 
represents both title insurance companies and over 1,700 title 
insurance agents, most of which are small businesses.
    ALTA, and I personally, would like to thank the Chairman 
for holding these hearings. We understand the concern that may 
have prompted the HUD-proposed regulations and believe that the 
Secretary and the Department deserves credit for the boldness 
of their initiative. However, we also believe that HUD lacks 
the statutory authority to make these sweeping changes. In 
fact, the ALTA has agreed to explore litigation should HUD come 
out with a Final Rule similar to the Proposed Rule.
    We believe there will be sweeping changes in the real 
estate marketplace under the Proposed Rule because the 
elimination of Section 8 and the kickback provisions for the 
GMP, Guaranteed Mortgage Package, will provide a substantial 
incentive for packaging, just as Congressman Manzullo pointed 
out. Therefore, the market will move in that direction rather 
than toward the revised Good Faith Estimate regime.
    In addition to the problems consumers face, shopping for a 
blind package that may or may not contain all of the services 
that the 
consumer needs, the lender will decide which attorney or title 
company would be part of the package. The consumer will have to 
accept that selection if he or she wants that loan. And since 
the package must include a guaranteed loan rate, only lenders 
can effectively offer that package. This can well lead to 
increased nationalization of the real estate services delivery 
system, thus eliminating many small, local businesses.
    The HUD proposed regimes would pose particular problems for 
consumers in purchase and sale transactions as opposed to 
refinancings, which HUD apparently has focused on. In purchase 
and in sale transactions, the buyer and the seller have 
separate interests from the lender. Also either the buyer or 
seller may have already agreed on the selection of the provider 
of title or closing services before the buyer has begun to shop 
for a mortgage loan. As the price of the package may also 
include those title or closing services, the borrower could end 
up paying twice for the same service.
    Further, in many areas of the country, as in parts of 
Florida and Alabama, the seller generally pays half the cost of 
closing and can pay all or significant portion of the title 
insurance charges and the governmental transfer and deed 
recordation charges. A recent ALTA survey found that 51 percent 
of our title insurance agents and abstractors in the country 
had less than a half-million dollars in gross revenue and a 
little less than three-quarters had less than a million dollars 
in the previous year. Sixty-eight percent had 10 or fewer 
employees and 42 percent had less than five employees.
    By any measure, these are very small businesses. But these 
individuals and companies, despite that, have demonstrated over 
the years that they can effectively compete for the consumer's 
business.
    HUD believes the myth that mortgage lenders will forgo the 
opportunity to pick up substantial packaging fees and instead 
will pass alleged savings on to consumers.
    On the contrary, we believe, as Congressman Manzullo said, 
that this will simply shift revenue from settlement service 
providers to major lenders, providing a new revenue source for 
major lenders, not a streamlining of the system. Small or local 
firms will not have the resources to be able to offer such 
discounts, along with quality service to lenders, particularly 
national lenders. And accordingly, these smaller businesses 
will have difficulty competing for the consumer's business and, 
in fact, surviving.
    Further, HUD estimates that packaging will have economic 
benefits because time will be saved. This time will be saved 
because consumers will not shop as much for settlement services 
and for lenders and settlement service providers will not have 
to answer questions about the services or prices.
    ALTA believes that savings should not be achieved at the 
expense of consumers' knowledge and understanding of the 
process.
    HUD estimates that small businesses will lose between $3.5 
and $5.9 billion in annual revenues if their proposals are 
implemented. In this environment, the local attorney, small 
local abstractors, and title agencies will not be able to 
maintain service.
    HUD's economic analysis concludes that lower prices will 
drive out the less efficient firms with no evidence of such 
inefficiency. However, many counties in this country, 
particularly in rural areas, have only one or maybe two title 
companies. Packaging will eliminate some of those provides.
    Consumers may not have any access to those services and 
will certainly have fewer choices and likely higher prices.
    I will highlight an alternative to this proposal that we 
have recommended to HUD that will achieve many of the Agency's 
objectives, while minimizing consumer and industry problems.
    We urge the Committee to ask HUD to seriously consider this 
ALTA alternative. However, we do believe that Congressional 
action is best to avoid any challenges.
    We believe that a two-package approach will allow lenders 
and others to package on a local level. It will take into 
account local costs, needs, allocations, and allow 
customization.
    We suggest that the HUD proposal be modified to adopt two 
packages, the first, a Guaranteed Mortgage Package that would 
consist of a loan at a guaranteed interest rate and all lender 
related services and charges. And second, a guaranteed 
settlement package that could be offered by any party--title 
insurers and agents, real estate brokers, lenders, escrow 
companies, or attorneys. It would guarantee a single price for 
the settlement charges that would include title and related 
charges, Government recording and transfer fees, and charges 
required for closing purposes. This approach would not include, 
however, a Section 8 exemption and would require disclosure of 
package components.
    We believe that this two-package approach would better 
achieve HUD's goals of ensuring price certainty in the 
settlement process for consumers and injecting significant 
shoppable price competition, and a word I have heard this 
morning a number of times, and transparency, into both the 
lending and settlement industries.
    I thank the Committee for the opportunity to participate 
this morning. We encourage HUD to move slowly and very 
carefully on this proposal.
    Thank you, Mr. Chairman.
    Chairman Shelby. Mr. Acosta.

                  STATEMENT OF GARY E. ACOSTA

               CHAIRMAN, NATIONAL ASSOCIATION OF

               HISPANIC REAL ESTATE PROFESSIONALS

    Mr. Acosta. Chairman Shelby, Ranking Member Sarbanes, and 
Members of the Committee, I am Gary Acosta, President of SDF 
Realty in San Diego, California, and the Chairman of the 
National Association of Hispanic Real Estate Professionals, or 
NAHREP, a nonprofit trade association dedicated to increasing 
the Hispanic homeownership rate. NAHREP is the Nation's 
fastest-growing real estate trade organization and is a partner 
in President Bush's ``Blueprint for the American Dream'' 
minority homeownership initiative. We appreciate the 
opportunity to address the Committee today on the views and 
planned actions of the U.S. Department of Housing and Urban 
Development on the proposed amendments to RESPA.
    NAHREP has over 10,000 members in 43 States. Our members 
come from all segments of the housing industry, including, but 
not limited to, real estate agents and mortgage professionals. 
NAHREP provides professional education, industry 
representation, publications, and technology solutions for 
those real estate professionals primarily dedicated to serving 
Hispanic homebuyers.
    Today, the homeownership rate in the United States stands 
at 68 percent; however, for Hispanic Americans it is about 47 
percent. This disparity is driven by a number of factors 
including the lack of competitive mortgage financing in those 
markets. In addition, NAHREP estimates that approximately 80 
percent of Hispanic homebuyers are first-time homebuyers--
double the percentage of the overall market. Particularly for 
the first-time buyer, the purchase of a home is both a 
complicated and emotional experience, which often creates a 
more labor-intensive real estate transaction for the 
professional.
    Additionally, many Hispanic consumers have thin credit 
files, little money for down payment, and prefer to speak 
Spanish. In order to serve this market effectively, mortgage 
and real estate professionals must have specialized skills and 
have a keen understanding of this market. Accordingly, NAHREP 
supports policy and legislation that increases awareness, 
reduces cost, and simplifies the process of buying a home. In 
this regard, NAHREP applauds President Bush and Secretary 
Martinez for their demonstrated commitment to make 
homeownership attainable for more Hispanics, minorities, and 
other underserved Americans.
    A recent NAHREP member survey indicated that 81 percent of 
our members who are real estate agents ``regularly use the 
services of a mortgage broker to arrange financing for their 
clients.'' Latinos are more likely to use mortgage brokers and 
other small business professionals because they tend to live 
and to work in their communities and they tend to have strong 
language skills and cultural understanding. Today's mortgage 
industry is increasingly a formula-driven, high-volume, low-
margin business. Larger players generally lack the flexibility 
and diverse personnel necessary to adequately serve homebuyers 
that do not always ``fit in the box.'' For this reason, NAHREP 
believes that the growth in Hispanic homeownership will depend 
in large part on Hispanic-owned small businesses in those 
communities.
    NAHREP recognizes that HUD's Proposed Rules are designed to 
simplify the mortgage finance process and eliminate 
opportunities for predatory lending practices.
    NAHREP shares HUD's conviction that consumers should 
receive accurate information when choosing a mortgage 
originator in order to make an educated decision regarding 
mortgage products and services. We also believe that this 
outcome for the consumer could not be possible without real 
competition in the mortgage market. However, we see the 
potential for both the Enhanced Good Faith Estimate and the 
Guaranteed Mortgage Package to have unintended and detrimental 
effects on small real estate and mortgage companies that may 
prove to undermine the intended benefits to some consumers.
    NAHREP believes that placing small business owners at a 
disadvantage will ultimately hurt homeownership opportunities 
for the minorities that NAHREP and others want to reach.
    This Proposed Rule in connection with the Enhanced Good 
Faith Estimate results in ``different treatment of compensation 
in loans originated by lenders and those originated by mortgage 
brokers.'' This unequal treatment will create an uneven playing 
field among the mortgage originators and the disadvantage 
mortgage brokers compared to mortgage banks and lenders. In 
some cases, a consumer can select a more expensive product by 
assuming that the loan with no disclosed compensation to the 
originator is always the better deal.
    The proposed changes to the Good Faith Estimate include a 
mandate to guarantee third-party costs within a ``10 percent'' 
or ``zero'' tolerance. NAHREP believes this is critical in 
helping consumers identify the best mortgage possible. Holding 
mortgage originators responsible for making accurate 
disclosures to consumers within 3 days of application is 
appropriate and reasonable and will eliminate abuse of the Good 
Faith Estimate.
    However, loan originators do not have control over certain 
third-party costs. There are many examples of legitimate, 
unexpected costs that arise between application and closing.
    NAHREP recommends that when a price increases or a fee is 
added that changes the original Good Faith Estimate, a new Good 
Faith Estimate should be provided to the consumer within a 
reasonable timeframe along with a written explanation for the 
change. And this must take place before the consumer is at the 
settlement table.
    NAHREP also cautions HUD to consider the impact to small 
businesses of the proposed Guaranteed Mortgage Package. While 
we cannot know the exact impact to the marketplace of a GMP, we 
believe the packaging of settlement services offers a much 
greater business opportunity for large lenders than for small 
mortgage brokers or small real estate services providers and 
could ultimately hurt the consumers served by small businesses.
    The housing sector has been one of the few bright spots in 
our economy and Hispanic homebuyers have fueled the strength of 
our housing industry. Over the next two decades, nearly 80 
percent of all new homebuyers will be minorities and/or 
immigrants. Again, I appreciate the opportunity to be here 
today to express NAHREP's support for Secretary Martinez's 
effort to improve the process and reduce the cost of mortgage 
finance. The cautions I have expressed today are intended to 
ensure that this effort results in the best possible outcome 
for consumers and the mortgage finance industry. I look forward 
to working with this Committee and HUD to ensure that a Final 
Rule will encourage more minority-owned small businesses to 
enter the real estate and real estate finance market and 
thereby help to increase homeownership opportunities, 
particularly for minority families.
    Thank you.
    Chairman Shelby. Ms. Whatley.

               STATEMENT OF CATHERINE B. WHATLEY

    PRESIDENT, NATIONAL ASSOCIATION OF REALTORS '

    Ms. Whatley. Good morning, Mr. Chairman, Senator Sarbanes, 
and Members of the Committee. My name is Cathy Whatley and I am 
the President of the National Association of 
REALTORS ', representing over 860,000 practitioners 
in all areas of residential and commercial real estate 
brokerage.
    I thank you, Mr. Chairman, for holding this hearing and 
appreciate the opportunity to be with you today to discuss our 
views on HUD's RESPA reform proposal.
    Let me state that the National Association of 
REALTORS ', supports the goals set by Secretary Mel 
Martinez to simplify and to improve the mortgage process and to 
reduce settlement costs for consumers. However, while well-
intended, we do not believe this proposal will achieve those 
results.
    HUD assumes the Guaranteed Mortgage Package will result in 
increased competition, thus driving down the cost of the 
transaction. We disagree with that premise. We believe that HUD 
has failed to fully consider the disruptive impact that this 
proposal will have on the industry and the consumer.
    Let me explain what I believe are three likely outcomes of 
the Guaranteed Mortgage Package proposal.
    First, competition will decrease. This proposal creates a 
competitive advantage for larger lenders. It presumably allows 
anyone to package. However, since the Guaranteed Mortgage 
Package must include a guaranteed interest rate, it is 
difficult to see how any entity other than a larger lender will 
be able to compete effectively.
    Lenders will determine which service providers are included 
in the package. Realtors and other service providers will be 
hampered from competing and basically prohibited from offering 
their packages to the consumers unless the lender is willing to 
accept the package. Thus, the largest lenders will determine 
the winners and losers in the new world of packaging and 
consumers will have fewer choices.
    Second, transparency in the transaction will decrease. 
Today, services required to close the transaction are fully 
disclosed to the borrower. To move to a process where the 
borrower is assumed to only be interested in a lump-sum price 
of the package and not the individual services is flawed.
    Despite claims to the contrary, consumers want to know what 
they are getting for their money. If they do not know what 
services are in a lender package, they will not be able to 
comparison-shop, which was to be a key component of HUD's new 
Rule.
    Third, and critically important, we also believe the cost 
of the transaction may actually increase. Our biggest concern 
lies with the proposal to remove the consumer protection 
provision of Section 8 for the offering of a Guaranteed 
Mortgage Package. Granting lenders an exemption from this 
provision will permit lenders to charge whatever they want for 
these services without any assurance that the cost to the 
consumer will be lowered. As a result, the cost of the 
transaction could, and probably will, increase.
    Before HUD removes the most significant consumer protection 
provision in RESPA, it should more fully disclose and 
understand the consequences to the industry, as well as the 
consumer.
    Today, we enjoy a healthy market for settlement services. 
The Guaranteed Mortgage Package proposal may move us in a 
direction that threatens this environment. We believe the goals 
of reform can be achieved without sacrificing the important 
consumer protections of Section 8.
    NAR recommends HUD take an incremental approach to reform 
by first improving the Good Faith Estimate. The Good Faith 
Estimate can be improved by imposing some pricing discipline on 
lenders that will provide borrowers more certainty early in the 
process and enable them to shop and compare loans. In addition, 
clarifying that volume discounts are permissible should 
encourage lenders to seek discounts that can be passed on to 
the consumer.
    The Good Faith Estimate can become a better shopping tool 
if redesigned and some enforcement mechanisms are provided.

    We think it is a better approach to build on what the 
consumer and the industry already knows, rather than taking a 
giant leap of faith that is required if HUD pursues its 
Guaranteed Mortgage Package before it conducts appropriate 
analysis.

    Chairman Shelby, this packaging concept is not wholly 
without merit. But the unintended consequences of this Proposed 
Rule could be devastating. We feel it is imperative for HUD to 
understand and undertake additional research before moving 
forward to finalize this Rule. We recommend that HUD issue a 
new Proposed Rule that reflects this research, as well as the 
comments by all affected parties. The potential consequences to 
the industry and to the consumer are too great not to take this 
approach.

    I thank you, Mr. Chairman, on behalf of the National 
Association of REALTORS ' for the opportunity to 
testify today.

    Chairman Shelby. Thank you.

    Ms. Saunders.

                  STATEMENT OF MARGOT SAUNDERS

        MANAGING ATTORNEY, NATIONAL CONSUMER LAW CENTER

                        ON BEHALF OF THE

        CONSUMER FEDERATION OF AMERICA, CONSUMERS UNION

            AND U.S. PUBLIC INTEREST RESEARCH GROUP

    Ms. Saunders. Mr. Chairman, Senator Sarbanes, and Members 
of the Committee, I appreciate the opportunity to be here 
today.
    I am representing not only the low-income clients of the 
National Consumer Law Center, but also the Consumer Federation 
of America, Consumers Union, and the U.S. Public Research 
Group.
    We wish to commend Secretary Martinez for the dramatic 
approach to RESPA reform that he has advocated in these 
Proposed Rules. We applaud many of the positive features of the 
Rules and we commend HUD's steadfast commitment to ensuring 
that consumers benefit from the Rules.
    There are real complexities in these Proposed Rules, with 
dramatic impact on determining compliance with the Truth in 
Lending Act and the Home Ownership and Equity Protection Act. 
We want to make it absolutely clear that we support HUD's 
efforts to protect consumers through the Proposed RESPA Rules. 
While we have concerns with a number of important details, 
these should not be regarded as diminishing our overall support 
for the basics of HUD's proposals.
    Now, HUD has proposed three separate components to the 
Rules, and I think that it simplifies it if I analyze these 
components separately.
    The first, and probably the least controversial, although 
quite controversial I know with some members of this panel, is 
the proposal to deal with yield spread premiums. As you know, 
Senator Sarbanes held a hearing about a year ago regarding 
Secretary Martinez's policy statement issued in 2001.
    We all know that there is tremendous controversy over the 
legality and the morality of the payment of lenders' fees to 
brokers which are not fully disclosed and controlled by the 
consumer. There were a substantial number of class action 
lawsuits by consumers to challenge the payment of these fees 
when consumers did not know they were made and did not feel 
that they had received the benefit of these yield spread 
premiums.
    The driving force behind HUD's proposal today was to deal 
with the raging controversy over yield spread premiums. And in 
fact, the Guaranteed Mortgage Package was a creation of a group 
that included the lenders, the brokers, consumers, and HUD as a 
mechanism to allow brokers to continue shielding the full 
disclosure of how much the lenders were paying them, yet still 
ensuring that the consumer got the full benefit of the bargain 
for which the consumer was shopping.
    So, we have the yield spread premium proposal by HUD, which 
we fully support. However, as good as the proposal is on 
disclosures on yield spread premiums, HUD fails to put that 
proposal in the proper section of the regulations so that it 
would be enforceable.
    There is no private right of action for failing to make 
disclosures properly under RESPA. The only private right of 
action is for kickbacks. In order for the yield spread premium 
proposal to be really effective and enforceable, it must be in 
a different section of the regulations.
    The second component of what HUD has proposed is to make 
the Good Faith Estimate--that disclosure that is provided 3 
days after application--more meaningful. HUD proposes to say 
that when a lender or an originator of any kind--broker or 
lender--proposes to tell the consumer what the closing costs 
will be, those estimates must be more than just wild guesses. 
They must bear some reasonable semblance to reality. And HUD 
has proposed that there be only a tolerance of 10 to 20 percent 
between what is estimated up-front and what is actually charged 
at the end.
    The third proposal, the Guaranteed Mortgage Package, is 
what has drawn the most fire. While many of us agree with the 
overall goal of this proposal, the consumer groups that I 
represent have an overarching concern. And that is that unless 
the proposal is worked out with the Federal Reserve Board, the 
Guaranteed Mortgage Package, as it is currently proposed, will 
have the effect of potentially masking some predatory loans and 
of removing from the consumers the ability to challenge loans 
for not being properly disclosed and for not including all the 
protections they are required to include.
    So just to sum up--and I see that I am out of time--I would 

emphasize that HUD can move forward on all three of these 
components if they move forward carefully in coordination with 
the Federal Reserve Board and to continue their current 
orientation toward protecting consumers.
    Thank you. I will be glad to answer any questions.
    Chairman Shelby. Mr. Courson.

                  STATEMENT OF JOHN A. COURSON

              PRESIDENT & CHIEF EXECUTIVE OFFICER

                CENTRAL PACIFIC MORTGAGE COMPANY

                        ON BEHALF OF THE

            MORTGAGE BANKERS ASSOCIATION OF AMERICA

    Mr. Courson. Thank you and good morning, Mr. Chairman, 
Ranking Member Sarbanes, and Members of the Committee. Thank 
you for inviting the Mortgage Bankers Association to these 
important discussions on RESPA reform.
    Last year, driven by historically low interest rates, 
American consumers, working with local lenders across the 
country, borrowed $2.4 trillion to finance their piece of the 
American Dream. Too often, however, they just paid too much at 
closing. Overly complex, confusing, and burdensome settlement 
procedures have created a system that stifles competition and 
abets fraud. It is a system that works against the best 
interests of consumers.
    HUD's Secretary Martinez has proposed bold and far-reaching 
reforms of the mortgage disclosure system. These reforms 
warrant the attention of the Senate because the current system 
is something that so many of your constituents want changed.
    For years, we mortgage bankers have heard complaints about 
the difficulties and complexities of the mortgage process. For 
too long we have understood that the intricacies of the 
mortgage disclosure system served to confuse consumers, to hide 
unnecessary fees and, in some instances, to defraud borrowers 
into higher-price loans.
    Mr. Chairman, I compliment you for your interest in this 
subject and for holding this hearing. And I compliment the 
Secretary. Under Mel Martinez's leadership, HUD has stepped up 
to the plate and delivered to us a blueprint to resolve large 
portions of the problems that currently plague the mortgage 
disclosure system.
    We believe that the guaranteed fee package framework set 
forth in HUD's Proposed Rule has great benefits for all 
consumers and goes a long way to improving existing disclosure 
systems.
    We are very confident that HUD's package proposal will 
achieve three very important objectives: It will simplify 
disclosures. It will provide consumer certainty. It will foster 
competition. Let me just reiterate: Simplification, certainty, 
and competition. Please allow me to explain.
    The central element of HUD's proposal fosters the much-
needed simplification by creating a regulatory framework in 
which a prospective borrower may be quoted a single guaranteed 
price to close the loan. The guaranteed closing cost, combined 
with an interest rate guarantee that has been paid to an index, 
will allow the prospective borrower to make an apples-to-apples 
comparison between mortgage loan products using just two 
numbers.
    This is something that consumers absolutely want and can 
use to bring market forces into play on their behalf. The 
reason why this simplified disclosure is of such benefit to 
consumers, however, is because, based upon the second important 
aspect--certainty.
    Under the Proposed Rule, HUD would require that cost 
disclosure for mortgages be provided as an up-front, rock-solid 
guarantee of the costs associated with the loan transaction. 
Such a solid guarantee will truly empower consumers to 
comparison shop with effectiveness and certainty.
    We are also confident that HUD's package proposal will not 
only simplify disclosures and demystify the loan process, but 
also will foster real competition. By giving consumers early, 
simple, and solid cost information they will be able to compare 
and negotiate in ways they cannot do today. This ability to 
shop will vigorously spur competition and lower market prices.
    We believe that the increasing competition will actually 
foster and enhance market opportunities for our small and mid-
sized lenders. Equally important, this new system will provide 
consumers with a potent weapon to protect themselves against 
fraud and bait and switch tactics. With one single glance at 
the new binding disclosure, consumers will be able to discover 
any discrepancies and enforce their rights. It provides maximum 
transparency with increased competition that will maximize 
market efficiency.
    To conclude, I reiterate that MBA welcomes HUD's proposals 
and the new responsibilities that are placed on our members to 
ensure that consumers receive better information in the 
mortgage process. With some adjustments, the guaranteed cost 
packaging proposal advanced by HUD is a viable system that is 
certain to result in broad consumer benefits.
    Mr. Chairman, I thank you for the opportunity to appear 
today and look forward to answering your questions.
    Chairman Shelby. Thank you.
    Mr. Fendly.

                   STATEMENT OF NEILL FENDLY

          GOVERNMENT AFFAIRS CHAIRMAN & PAST PRESIDENT

            NATIONAL ASSOCIATION OF MORTGAGE BROKERS

    Mr. Fendly. Chairman Shelby, Senator Sarbanes, and Members 
of the Committee, thank you for inviting NAMB to discuss the 
impact of HUD's Proposed RESPA Rule and what it will have on 
consumers, as well as small businesses, particularly mortgage 
brokers.
    Mortgage brokers are typically small businesses who operate 
in the communities in which they live, often in areas where 
traditional mortgage lenders may not have branch offices.
    A mortgage broker does not simply press a few keys to 
provide the consumer with a mortgage loan. Nor are mortgage 
loans akin to products that can be picked from a shelf and paid 
for at checkout. Mortgage brokers perform a vital and unique 
role in assisting consumers in obtaining a mortgage loan. 
Indeed, this is why mortgage brokers originate more than 60 
percent of all residential mortgages and are also the key to 
bridging minority homeownership, as recently cited in a study 
by Wholesale Access.
    Chairman Shelby, our members are absolutely terrified about 
the impact that HUD's Proposed Rule will have on their ability 
to continue originating mortgages. They fear that HUD's 
Proposed Rule, if finalized, will forever cripple their ability 
to do what they do so well--putting families in homes.
    NAMB believes that HUD's Proposed Rule does not achieve 
HUD's stated goal--to simplify the mortgage process--but 
instead, achieves just the opposite. It will confuse the 
consumer and have the effect of limiting consumer choice and 
access to credit.
    HUD's proposal will substantially increase the regulatory 
burden on small businesses while accomplishing none of HUD's 
stated goals. Further analysis is necessary to ensure that the 
Proposed Rule's impact on the housing market is based on a 
foundation of market realities and not just good intentions.
    NAMB has grave concerns with HUD's recharacterization of a 
yield spread premium. The Proposed Rule recharacterizes a yield 
spread premium as a lender payment to the borrower for a higher 
interest rate. This characterization creates some unintended 
consequences and provides less clarity to consumers than is 
presently disclosed.
    The FTC expressed similar concerns stating that HUD's 
disclosure of broker compensation could confuse consumers and 
lead them to misinterpret the overall cost of the transaction. 
This recharacterization is also inconsistent with HUD's 1999 
and 2001 Statements of Policy in which HUD states that goods, 
facilities, or services can be furnished or performed for the 
lender, as well as the borrower.
    NAMB does not believe that RESPA reform should create an 
unlevel playing field among originators or, in essence, pick 
winners or losers. Unfortunately, the Proposed Rule does just 
that. It requires only mortgage brokers to include their 
indirect compensation in the calculation of net loan 
origination charge, but it does not require the same of all 
originators.
    HUD even acknowledges that their proposal results in 
different treatment of compensation in loans originated by 
lenders and those originated by mortgage brokers.
    HUD's new calculation will complicate a consumer's ability 
to shop because the consumer will be unable to perform a true 
apples-to-apples comparison of the cost of the mortgage.
    The FTC stated that HUD's asymmetric disclosure of 
compensation for mortgage brokers might inadvertently burden 
consumers and competition. This is a perverse impact of a Rule 
that is being implemented to help consumers.
    The Proposed Rule tilts the playing field by encouraging 
packaging and this will devastate small businesses since they 
do not have the bargaining power to enter into volume-based 
discounts with third-party settlement service providers as do 
larger entities.
    In addition, NAMB believes that HUD did not sufficiently 
comply with the Regulatory Flexibility Act in promulgating 
their Proposed Rule. HUD's economic analysis is inaccurate and 
incomplete. It does not provide a clear picture of the Proposed 
Rule's impact on a housing market that is functioning 
remarkably well, nor does it accurately reflect its impact on 
small business.
    The NFIB and SBA expressed concerns. They asked HUD to 
issue revised initial regulatory flexibility analysis to 
address the specific impact that the Proposed Rule will have on 
small business.
    HUD's failure to accurately analyze the economic impact on 
small business can also be illustrated through their own 
reported inconsistencies. For example, HUD's Paperwork 
Reduction Act submissions to OMB states that the annual 
responses for Good Faith Estimates is 11 million. However, 
HUD's analysis states that if the Rule were applied in the year 
2002, it would impact 19.7 million applications. This is very 
significant because the submission to OMB under-estimates the 
paperwork burden by at least 8.7 million GFE's. This is an 
inconsistency that demonstrates HUD's lack of due diligence and 
could cost small business millions.
    HUD states that the program change being mandated would 
increase the burden on industry by 2.5 million burden-hours. 
HUD has testified that this is a one-time transition burden. 
This one-time transition burden, equal to 289 years, will 
eradicate small business in the mortgage industry.
    The extreme burden that HUD's Proposed Rule forces on small 
business will not only dismantle small business, but it will 
also 
alienate consumers from the dream of homeownership.
    NAMB has a long history of supporting the reform of 
mortgage laws and we recognize that the laws are complex for 
both industry and consumers. NAMB has submitted an alternative 
disclosure form set forth in its comment letter that satisfies 
HUD's objectives to simplify and clarify the disclosure of 
settlement costs, but not at the expense of small business or 
to the detriment of consumers.
    It will allow the consumer to perform a true apples-to-
apples comparison of the cost of the mortgage while maintaining 
a more level playing field for mortgage originators.
    We commend you, Chairman Shelby, for convening this hearing 
on this terribly important issue. We ask the Committee for its 
support to request HUD to revise their Proposed Rule so that it 
accomplishes HUD's stated goals and objectives to simplify the 
mortgage process and increase homeownership while not creating 
competitive disadvantages in the marketplace.
    Thank you.
    Chairman Shelby. Mr. Rheingold.

                   STATEMENT OF IRA RHEINGOLD

              EXECUTIVE DIRECTOR & GENERAL COUNSEL

           NATIONAL ASSOCIATION OF CONSUMER ADVOCATES

    Mr. Rheingold. Thank you, Mr. Chairman, and Members of the 
Committee, for holding this hearing and allowing us to offer 
our perspective on the impact on consumers of HUD's proposed 
changes to RESPA.
    As I listened to others speak and as I engaged in 
conversation with people from the industry about RESPA reforms, 
I am incredibly struck by how different our perspectives are, 
and the extent that we almost live in parallel universes. It is 
important as I talk about the consumer perspective to talk 
about what lens we are looking at. What is the prism that we 
see HUD's proposal from?
    My perspective is as a long-time legal aid lawyer who 
worked in Chicago for a number of years representing homeowners 
who were faced with foreclosure. And when we look at the HUD's 
settlement process, we look at HUD's reforms, what we look to 
is whether the reforms make it easier, simpler, and fairer to 
those consumers who shop for mortgages, and we also look at 
where and how the new proposed system will enable mortgage 
lending abuses to continue against less sophisticated 
borrowers.
    So there are some things that we look at: Will it be fair? 
Will it be easier? And will it allow consumers to have real 
choice in buying a home or in taking out a mortgage? In 
addition, we look at the HUD proposal to the extent it will 
allow the proliferation of mortgage abuses.
    Overall, our perspective about HUD's attempt to change the 
Rules are that they are good and that they are necessary. The 
current system that we have today, while to a large extent 
working well in the prime marketplace, is not consumer-
friendly. Anybody who believes that it is consumer-friendly 
clearly has not signed any of the myriad of documents they have 
had to do when they have gone to a closing process.
    I know as someone who has bought a home and who has 
refinanced a home, my wife looks to me as the expert to handle 
those documents. And I say, sure, honey, just sign. But in 
fact, I am not quite sure what is going on there, either. I 
would like to think that I am about as sophisticated at looking 
at a HUD-1 as anybody who is sitting here.
    The move to simplify is important. It makes shopping easier 
and it is a good idea.
    The move to make the bait and switch less likely, 
particularly in the context of the Good Faith Estimate, is a 
good idea. A Good Faith Estimate needs to be more binding and 
that is an excellent proposal.
    A move to make the mortgage broker industry more 
accountable is an extremely good idea. They need to be 
accountable to their customers, who are their principals. And 
in the current system that we have today, there is no 
accountability.
    Do the RESPA Rules accomplish these important goals? In a 
very general sense, they do.
    What do we like? The GMP, the package, it is crucial that 
the package provide a guaranteed interest rate and a cost 
package. We have heard people from industry saying that the 
cost package alone is sufficient. That is absurd. If you have a 
cost package without an interest rate, what happens is that any 
additional costs get pushed into the interest rate. It has to 
have both.
    A more binding GFE, again, is extremely important. In my 
experience at looking at thousands of HUD-1's, and thousands of 
GFE's, there is no greater worker of fiction--well, two--as a 
Good Faith Estimate or a loan application. Mind-boggingly how 
different they turn out to be than what the original loan is.
    The people involved in sitting at the table and making 
those loans, they know what those costs are and they know it 
pretty closely, and there is no reason why that is not binding.
    The recharacterization of yield spread premiums, I cannot 
imagine anything more important to protect consumers. I find it 
interesting that we talk about yield spread premiums and how 
disclosures work and it is fair because people--once it is 
disclosed to them, they will understand what is going on with 
the yield spread premium.
    I have talked to so many consumers and I have looked at 
loan documents and I want to see that first consumer who looks 
on that HUD-1 and it says, YSP, POC, $3,000, and they 
understand what that says. Nobody understands that. Not only do 
they not understand it, they also do not understand it because 
it says, YSP, POC, $3,000, they are paying a higher interest 
rate than they otherwise would have qualified for.
    So those disclosures do not work, period. And 
recharacterization is crucial.
    I will sum up because I think this is very important. The 
point Ms. Saunders mentioned is something that we also are 
extremely concerned about.
    The proposal that HUD talks about, particularly the GMP, I 
believe works in a marketplace where people actually shop, 
where prices are fair and they are based on real market-driven 
decisionmaking. And that is the prime market.
    The subprime market, there is no shopping going on. We have 
captive audiences. And a proposal that emphasizes shopping that 
would work in the prime market simply does not work in the 
subprime market and we simply need, if we are going to go 
forward with the Guaranteed Mortgage Package, it needs to be 
limited to the prime market.
    If anybody has any questions, I would be glad to answer 
them.
    Thank you.
    Chairman Shelby. Thank you.
    Mr. Acosta, I will start with you. I was interested in your 
analysis of how HUD's Proposed Rule would impact minority 
families' ability to get into homes, especially in the Hispanic 
market. Would you explain again for us, or elaborate on the 
role that brokers play in the communities like yours, and how 
the Proposed Rule change in its present form, what it would do 
to your area?
    Mr. Acosta. Sure, Mr. Chairman.
    First of all, it is important to understand that Hispanic 
homebuyers have in many cases unique challenges. As I mentioned 
in my testimony, language barriers. Many Hispanic homebuyers 
are immigrants, tend to have less money for a down payment, 
tend to have thin credit files. There is cultural issues that 
also come into play as well.
    So our analysis tells us that, in large part, it is the 
small mortgage brokers, the small business professionals that 
are doing the heavy lifting in those communities. They tend to 
have the flexibility. They tend to come from the community. We 
are fearful that some of the proposals that HUD has put on the 
table will make it more difficult for them to compete. And if 
there is less small business professionals in the marketplace, 
we believe that that will have a negative impact on Hispanic 
homeownership.
    Chairman Shelby. Ms. Whatley, what would you assume would 
be the impact on settlement costs if there is not a requirement 
that each individual service provider disclose their costs?
    Ms. Whatley. Let me reiterate, Mr. Chairman, that I 
certainly think that costs will increase. We obviously have 
some differences of opinion here on the panel.
    Chairman Shelby. Sure.
    Ms. Whatley. From my perspective, I think any time that you 
have a packaged approach in which there is no transparency, in 
which the consumer does not know what is included in the 
package, it would be very difficult to shop because how would 
you even know what you were comparing from one to the other, 
whether or not every package contained the same elements. Not 
only that, you have no ability to determine who the service 
provider is within the package. And because of that, maybe the 
quality of the service is less than what you would expect as a 
consumer.
    From the real estate professional's point of view, we are 
the ones who are most closely connected throughout this entire 
transaction with the consumer. They look to us to help them 
understand what is involved in the process, help to guide them 
through this process. We literally work with vendors day in and 
day out. We meet the home inspector. We meet the pest control 
company. We can help the consumer to understand those people 
who have the ability to deliver and who have a quality of 
service that they are expecting. And when there is a 
nontransparent black box of providers in which we have no 
ability to have a dialogue with the consumer about those 
choices, it becomes a little bit more difficult.
    Chairman Shelby. What about kickbacks? The idea of 
kickbacks grates on a lot of us.
    Ms. Whatley. Well, certainly, included in the package, 
there is no requirement for the packager, even if they are able 
to deliver at a lower cost, to pass that along to the consumer.
    And if the overall approach of HUD is to have cost savings, 
I think that the design in its present form eliminates the 
ability for the consumer to know whether or not they have any 
savings at all, whether those savings are going to the 
packager.
    Chairman Shelby. Mr. Courson, in your written testimony, 
you assert that: ``In a competitive environment, any price 
reduction achieved by the packager will surely be passed along 
to the consumer.'' That sounds good. Can you tell where in the 
Proposed Rule it requires you to pass those savings on to the 
consumer?
    Mr. Courson. Obviously, Senator, as we are all well aware, 
there is no requirement within the Rule itself.
    Chairman Shelby. Sure.
    Mr. Courson. However, I think it is important that, as 
today, with the settlement costs that are out there, the 
consumers are not getting the best transaction because they are 
not shopping a menu, if you will, of individual services. With 
one number and one figure that they can go shop, in addition to 
the interest rate, competition will drive those costs down.
    Remember that consumers that are having their application 
taken, which this disclosure is given 3 days after that, are 
being taken on the local level by mortgage brokers, by small 
local lenders, by community banks. And so, by doing that, there 
will be a robust group of people who are taking applications 
and making meaningful disclosures to the consumers.
    Chairman Shelby. Wouldn't the packagers have more 
incentives to pass on savings if the costs were disclosed? In 
other words, if the consumer knew what was there, there was 
nothing hidden?
    Mr. Courson. You know, Senator, the key here is a 
meaningful disclosure. Meaningful to the consumer when they 
come to one of our offices is, tell me what is my interest 
rate, what is my payment, and how much cash do I have to bring 
to closing?
    So, I think the meaningful piece and simplification, 
simplification of giving them a number that they can go shop, 
is going to be the best assistance to that consumer.
    Chairman Shelby. Senator Sarbanes.
    Senator Sarbanes. Yes, thank you very much, Mr. Chairman.
    I wanted to, for the moment, narrow my focus down from the 
Guaranteed Mortgage Package and down from the Good Faith 
Estimate, both concepts of which involve a number of 
complications and done the right way, might be helpful, done 
the wrong way, would be harmful. But I want to get more narrow 
in the focus of this question. I wanted to discuss yield spread 
premiums, which of course could be addressed without either the 
GMP or the GFE.
    I want to ask, why this yield spread premium ought not to 
be credited to the borrower? If the borrower is being brought 
to a higher interest rate than the borrower might otherwise 
qualify for, and the lender who is receiving this higher 
interest rate is prepared to make a payment for it, so to 
speak, why that money shouldn't go to the borrower, who is the 
one paying the higher interest rate.
    So it is a straight trade-off. I pay a higher interest 
rate, then I get the benefit of the yield spread premium.
    I would like to ask each of you what you view is on that 
question. Mr. Kovaleski.
    Mr. Kovaleski. I think we agree with Chairman Manzullo, and 
that is that the disclosure of all the costs, including the 
yield spread premiums, is necessary to make this a transparent 
transaction so that the buyer knows what he is paying for, for 
what and to whom.
    Senator Sarbanes. Well, we will look at the disclosure in a 
little bit, whether what is being provided--do you regard 
current disclosures as anywhere near approaching adequate for 
this purpose?
    Mr. Kovaleski. The disclosure may be. The explanation 
perhaps is not.
    Senator Sarbanes. It is not adequate?
    Mr. Kovaleski. Perhaps it is not.
    Senator Sarbanes. Mr. Acosta.
    Mr. Acosta. I think what is important to emphasize is that 
we believe in competition. Now yield spread premiums I think 
for the most part are generally credited to the consumer in 
some capacity.
    Senator Sarbanes. HUD says that at least 50 percent of it 
on the basis of their study does not go to the consumer.
    Mr. Acosta. Well, I think I have a unique perspective in 
this in that I have worked for a bank. I have been a mortgage 
broker and I am currently a mortgage banker. And I can tell you 
that some of the concerns that have been brought up here today 
are no less prevalent in the mortgage banking arena than they 
are in the mortgage broker arena.
    Loan originators working for banks or mortgage bankers 
routinely get compensation for what is called overage, or by 
increasing the interest rate as well. So it is not limited to 
mortgage brokers.
    Our concern is not that disclosing yield spread premiums is 
a bad thing. We think it is a good thing. Our concern is that 
there should be something that is equivalent for mortgage 
bankers and bankers as well. And we think that that is of 
fundamental importance. I also agree with a couple of my 
colleagues in that we think that a lot of this could be 
resolved by putting some teeth to the Good Faith Estimate. I 
think that right now, it is too fast and too loose. There is no 
accountability to the originators, and that applies to both 
bankers and brokers. We think that can be done, and should be 
done.
    Senator Sarbanes. Ms. Whatley.
    Ms. Whatley. Well, Senator, I am not a mortgage broker. So, 
my comments will probably be a little different than those who 
are 
expert in that particular area. But certainly, the yield spread 
premium as a conversation with the consumer up-front should 
help them to understand that it is predominantly to reduce 
cost.
    Full disclosure is very important. And the consumer should 
be able to have a dialogue with their mortgage lender to 
determine whether or not they are going to pay a higher 
interest rate and thus, get a compensating benefit to them and 
lower closing costs up-front, or whether or not they are going 
to have a lower interest rate and they will pay those funds out 
of their own reserves.
    Senator Sarbanes. Do you think they should get the benefit 
of the higher interest rate by getting, somehow or other, the 
offset against their closing costs, the consumer?
    Ms. Whatley. When I am working with customers in my office 
and they come in and we are having a dialogue about whether or 
not they want to have a 6 percent interest rate or a 6\1/2\ 
percent interest rate, they may be able to wind up at 6 
percent. They may be paying points. Maybe they are not. Maybe 
it is 6\1/2\ because they do not necessarily have enough money 
for the closing costs, so they actually will pay a higher 
interest rate to either pay reduced closing costs or have 
credits given to them at closing where they do not have to 
bring as much money to closing.
    Senator Sarbanes. But if I am the consumer and I am led 
into paying a higher interest rate than I otherwise would 
qualify for, and then the receiver of the higher interest rate, 
the lender, pays out money because he has gotten this higher 
interest rate, and that money doesn't come to me, the borrower, 
but it goes somewhere else, I am being taken for a ride, aren't 
I?
    Ms. Whatley. I think as long as the consumer has full 
understandable disclosure and the consumer is making a decision 
about whether or not he or she feels the value of the service 
that is being provided to them is reasonable, maybe that in and 
of itself is of benefit to the consumer. They may want to work 
with their friend, Cathy Whatley. And because of that or other 
reasons, they believe that the fees are reasonable and fair.
    Again, I am not a mortgage broker, so I have not sat 
through those dialogues that the consumer has when that 
individual is having a discussion. That is a privacy issue. So 
it is generally not something where the real estate broker may 
necessarily be sitting in as the loan application is being 
taken. Sometimes they are, sometimes they are not.
    Senator Sarbanes. Ms. Saunders.
    Ms. Saunders. Senator Sarbanes, I think absolutely the 
consumer should be given the full benefit of the yield spread 
premium.
    I would like to quickly address what you were mentioning 
before, which is the big difference between a mortgage broker 
and a mortgage lender, which is why an equivalent disclosure is 
not really necessary.
    When a consumer goes to a lender, as you know, the consumer 
expects to be given a price, hopefully the best price of that 
lender. But the consumer knows that that lender is only 
providing the service that the lender provides.
    When the consumer goes to a broker, they are told, and I am 
quoting from an Internet search by brokers--``We shop the 
market for you so that you can be assured that you are 
receiving the best mortgage rates.'' We select the best lender 
from our many sources to provide you with a loan that meets 
your individual needs.
    The law says a lender does not owe a fiduciary duty to a 
consumer when the lender is simply engaged in a credit 
relationship. The law is unclear as to whether the broker owes 
a fiduciary duty.
    The point here today is that the broker holds himself or 
herself out to the consumer as the consumer's representative, 
the mentor, as you pointed out. And given that, any payment 
that the broker receives from anybody except the consumer 
should be explained to the consumer so that the consumer knows 
that the broker is not just responding to the consumer's needs, 
but is also getting paid for something by somebody else that 
may serve to dilute the broker's sole allegiance to the 
consumer's best interests.
    That is exactly what has happened with the yield spread 
premiums. There are payments coming to that broker from two 
different sources--both the consumer and the lender. When the 
lender pays the broker something, the consumer ends up paying 
more in the higher interest rate. And that is the problem that 
this entire Rule was designed to resolve--how to deal with the 
diverse methods of compensating the broker and make sure that 
the consumer only is the main person that pays the broker, so 
that the entire yield spread comes to the consumer and the 
consumer controls it.
    Senator Sarbanes. Mr. Courson.
    Mr. Courson. Senator, we had the privilege of testifying at 
the hearing that you had on the yield spread issue about a year 
ago, and continue to support the disclosure of yield spread 
premiums.
    Your specific question on the credit to the borrower on the 
Good Faith, we really haven't taken a specific position, but I 
urge some caution in the way that could transact in that if 
there is a credit to the borrower, and then there would be an 
offset, if you would, of some or part of that as broker 
compensation, there could be a double counting in terms of the 
fact if you have a higher interest rate and the broker 
compensation, you could be double-counting. So there is a 
technical question that needs to be looked at.
    But having said that, we do support and have supported, 
along with the coalition of our fellow lending groups, 
disclosure of a yield spread and we submitted it as an exhibit 
at your heading, the disclosure form, that in effect says, here 
is the compensation that the broker will receive. Here is that 
relationship. And then giving the borrower the opportunity of 
choosing whether to pay that compensation in a fee, pay it 
through a higher interest rate, or pay it through a combination 
of the two.
    It is not on the record with this Committee, or the 
Committee with Chairman Sarbanes at the time. That is a 
document that we still support today.
    Senator Sarbanes. Mr. Fendly.
    Mr. Fendly. Senator, I have a number of comments to make 
with respect to that question.
    First of all, we do believe in complete and total 
disclosure. Attached as part of our testimony is a Good Faith 
Estimate* that we designed and submitted to HUD early last fall 
which clearly lays out exactly what a yield spread premium will 
and won't do, along with a generic example. In fact, it covers 
it twice.
---------------------------------------------------------------------------
    *Attachments held in Committee files.
---------------------------------------------------------------------------
    I think one of the things that concerns me is when I hear 
about a benefit dollar to dollar to a consumer. It is well 
acknowledged, we deal with wholesale lenders, not retail 
lenders. Wholesale lenders. The rate that we quote to the 
borrower that covers our compensation in total is a rate that 
is shopped out in the marketplace.
    Now unless somebody's going to convince me that 60 percent 
of this populace does not even bother looking at a paper or TV 
or radio, that rate still has to be competitive. As current law 
states, it is for the benefit of both the lender and the 
borrower.
    We have a problem when we decide that we need to transfer 
any upgrade rate that we sell in order to cover costs, benefit 
for benefit, dollar for dollar, to the borrower. That 
represents a significant problem.
    One of the things I would like to talk about briefly----
    Senator Sarbanes. I am not quite clear why it represents a 
significant problem.
    Mr. Fendly. I will tell you. Please allow me a few more 
minutes.
    Senator Sarbanes. Presumably, you would charge fees to 
compensate you for the work or the services you are rendering.
    Mr. Fendly. What is failed to be realized here is that a 
broker's fee also can be covered in the yield spread premium.
    A simple analysis. If there was a $1,000 origination charge 
and a $1,000 yield spread premium on a transaction, and we 
aren't able to do this any more, the $2,000 will simply show up 
at origination. It is not going away. You have to make money. 
You have to cover the cost of business. You have to be able to 
do that. And that is one of the ways that the brokers utilize 
the yield spread premium, frequently for a borrower, frequently 
for part of their own fees. That is part of the process and it 
is the way that the real world operates.
    Senator Sarbanes. Would you say that a broker who charged a 
fee and then in addition, took the yield spread premium, but 
did not make it very clear and understandable to the borrower, 
that he could have, in effect, offset the fee with a yield 
spread premium, was behaving improperly?
    Mr. Fendly. Absolutely.
    Senator Sarbanes. Okay.
    Mr. Fendly. Absolutely. The problem--in recharacterization, 
this yield spread premium, if you will, is just a very simple 
example.
    On a loan where the broker is operating totally on a yield 
spread premium of one point and no other fees to the broker, 
the new recharacterization would turn that compensation into 
direct compensation, give the yield spread premium to the 
borrower, which would mean you would now have to charge one 
point, okay?
    When the borrower goes out into the marketplace to shop, 
the broker is going to look more expensive. But additionally, 
by turning that into direct compensation, it is now calculated 
into the annual percentage rate. Now, we have a higher annual 
percentage rate. We have a higher fee on paper for exactly the 
same loan, exactly the same cost, exactly the same terms. That 
doesn't accomplish any intended objective.
    One last comment with what Mr. Acosta had to say with 
enforcement. We have talked about enforcement for a long time. 
I also was privy to the hearing that you held a little over a 
year ago on yield spread premiums. You had three borrowers in 
here that were abused terribly. The laws were broken. There was 
absolutely no doubt about it. They were violated. Current 
statutes were violated.
    As of 4:00 yesterday afternoon, all three of those 
companies are still in business, despite numerous complaints 
today. And I find that absolutely atrocious.
    Senator Sarbanes. Mr. Rheingold.
    Mr. Rheingold. I am not sure where to start, maybe, the 
yield spread premiums.
    Take a look at what HUD is offering here and why it makes 
sense. The HUD proposal basically says--and the broker industry 
wants it both ways--there is a disclosure up-front. We are 
going to charge you $3,000. We are going to charge you $2,000. 
We are going to charge you this amount of money.
    Now, consumer, you choose how you want to pay us that 
compensation. They can still use a yield spread premium. The 
consumer can say, you know what, I will take the higher 
interest rate and you can get your yield spread premium and 
that is how you will be compensated that $3,000.
    Or they can take half of it as an up-front fee and half of 
it in the form of a higher interest rate that will allow the 
broker to take the yield spread premium. Or the full amount 
could be paid up-front and they will get the lower interest 
rate.
    It really is fairly simple and I am still not understanding 
why that is not fair. The broker up-front explains to the 
consumer what their compensation is and then the consumer has 
the opportunity to choose the method by which the broker gets 
paid--yield spread premium, part yield spread premium, or fee. 
That to me is so fundamentally fair and so fundamentally right, 
I fail to understand anything else.
    As to the enforcement piece, I find it interesting that 
those three companies are still in business. As somebody who 
spent a lot of time trying to litigate cases against mortgage 
brokers and people who are doing yield spread premium stuff, of 
course they are still in place, because, in fact, it is almost 
impossible--because of what HUD did in 2001, taking away real 
enforcement as to the class action protection for people, there 
is no real enforcement of the yield spread premium violations 
that are going on today. There simply isn't. The fact is that 
trying to bring an action against a mortgage broker company is 
extremely difficult.
    So, yes, we believe in private enforcement. We think that 
they need to reform it in a way that class action litigation 
can be brought against those companies that are engaging in 
these illegal practices.
    Senator Sarbanes. Good.
    Thank you, Mr. Chairman.
    Chairman Shelby. Senator Reed.

                 COMMENTS OF SENATOR JACK REED

    Senator Reed. Thank you very much, Mr. Chairman. And thank 
you all for your testimony.
    We seem to be circling around the same very important 
issues, so if I am a bit redundant, I apologize.
    The whole premise here is that if the process is 
transparent to the consumer, they will make wise choices. The 
question is, how do you get transparency?
    The current system does not provide that transparency. 
Would you agree with that, Mr. Fendly, in terms of yield spread 
premiums and in terms of how brokers are compensated?
    Mr. Fendly. I think it would be definitely improved. And 
again, the disclosure that we propose would do that.
    Senator Reed. Now, Mr. Rheingold, with respect to the 
disclosure that they have proposed, would you comment upon 
that?
    Mr. Rheingold. Actually, I cannot because I do not have it 
in front of me. But I would highly doubt that we would be in 
favor.
    Senator Reed. But the issue----
    [Laughter.]
    Senator Sarbanes. No, you cannot say that.
    Senator Reed. We cannot say that.
    [Laughter.]
    Mr. Rheingold. I have seen other proposals from the 
mortgage broker industry and if it is anything like what I have 
seen before, I do not remotely----
    Senator Reed. No comment, I think. That is a no comment.
    [Laughter.]
    Thank you. We usually do that, Mr. Rheingold. You cannot do 
that. We do that.
    [Laughter.]
    You have to actually look at the material before you 
comment.
    [Laughter.]
    So, we all agree that the disclosure now is inadequate and 
we have to do something. And the question is, what do we do?
    It seems to me that to get at this problem, there is a 
couple of things that we can do. One is that we can improve the 
disclosure, and we are having a debate about whether the HUD 
proposal is an improvement or it is a retrograde. The other 
would be to prohibit the use of yield spread premiums to 
compensate brokers. That is a possibility.
    Mr. Fendly, what would your position be on that?
    Mr. Fendly. Obviously, I would be in favor of that. It is 
used properly in a multitude of transactions, the high 
percentages of transactions. And I think a definite direct 
result of that would be a reduction in homeownership, 
specifically with first-time homebuyers and minorities.
    Senator Reed. A third way to get at, maybe not directly 
this problem, but to respond to some of the discussions. Ms. 
Saunders read some of the Internet postings about the broker's 
role. And there seems to be, as Mr. Rheingold said, that you 
want it both ways. You want to suggest to the homeowner or the 
prospective homeowner that you are working for that person. You 
are getting them the best rates. You are doing everything on 
their behalf.
    And yet, when it comes down in certain cases, that there is 
not a proper disclosure, would it be appropriate--and I say 
this, and I am not being facetious, to require much more 
dramatic warnings to consumers that, in fact, you are not 
operating on their behalf, you are not out for them, you are 
not giving the best rates to them?
    Mr. Fendly. Actually, in our own disclosure that we used 
here, and I would just read a little piece of language to you, 
right up-front, we tell them, we cannot guarantee the lowest 
price or best terms available in the market. And we, as with 
all originators, may not offer all the products that are 
available in the marketplace.
    Senator Reed. I think that that would have to go, not just 
in your disclosure form, but in your advertising.
    Mr. Rheingold.
    Mr. Rheingold. I think that is a good point. I think there 
is a real problem here because of what we are dealing with, and 
we have to look at the whole settlement process in total. What 
we have is a process where there are a lot of documents. Having 
another document that provides a disclosure that says, I am 
your agent, or I am not your agent, or I am an independent 
contractor, simply cannot mitigate what happens in that 
relationship.
    I have never had a client who did not believe that the 
mortgage broker was their agent, despite a document that may be 
in the settlement package that says something very different.
    Senator Reed. Yes. Mr. Fendly.
    Mr. Fendly. Yes, if I could just comment. What we are 
looking for is something that is equitable and fair for all. I 
am aware of what I see on the Internet. Ms. Saunders is exactly 
correct. I can also pull up direct lenders on there that claim 
that they have the best rates, also. That is an issue that is 
in the marketplace. If it is fair for everybody, if it applies 
for everybody, I do not think we would have a problem with it.
    Senator Reed. Well, I go back to Mr. Rheingold's point 
because I think the perception of most people looking for a 
loan, when they go to a broker, is that the broker is working 
to get the best deal for them. It is their broker, even though 
a broker is a middleman, a classic middleman between the two 
sides of the transaction.
    So, I think it goes back to the point that the disclosure 
forms, as you go through these different options, and I have 
exhausted my real of options, we have to go back to the first 
point, which is accurate transparent disclosure of the fees.
    As I understand the proposal that HUD has suggested, is 
that disclosure is made up-front. The borrower can decide, 
given the knowledge of the yield spread premium, how that is 
going to be applied. Is that your understanding of the HUD 
proposal?
    Mr. Fendly. I think it is very flawed. As I explained 
earlier, it just simply makes mortgage brokers look terribly 
more expensive. I think that is a terrible price to pay.
    Senator Reed. One mortgage broker will try to get it 
cheaper than the other mortgage broker. That is the nature of 
the market, to get business.
    Well, let me just change the subject for one last question. 
Mr. Acosta made a very important point about access to the 
minority community to loans for homeownership.
    One of the things that strikes me is that it seems from 
some of the studies that have been done, that this allocation 
of yield spread premiums disadvantages low-income purchases 
much more than sophisticated high-income purchasers who have 
both perhaps the legal advice and also the time to delve into 
it. And so, by addressing the yield spread premium, we could on 
one end at least lower the costs or potentially lower the costs 
for low-income consumers. Is that your sense, Mr. Acosta?
    Mr. Acosta. I believe that it is a lack of liquidity in our 
communities that has created the opportunity for predators to 
come into those markets and take advantage of consumers. That 
is something that we are very cognizant of when we try to make 
our policy.
    We do understand the role that yield spread premiums have 
and we know they have been abused in the past. So disclosure is 
not an issue with us. What is an issue with us is an 
inequitable situation between competitors. We think that if you 
eliminate small business professionals from our communities, 
that will result in less homeownership opportunities for our 
consumers.
    Senator Reed. One more quick question, Mr. Chairman.
    Mr. Courson, I presume that, as Mr. Acosta suggests in his 
testimony, to truly access the low-income communities, the 
Hispanic community, the African-American community, it helps 
very much to have Hispanic, African-American agents, whatever. 
Is that going to change in a business sense for mortgage 
bankers if these Rules are adopted? Are you suddenly going to 
be able to, because you can package these and you can squeeze 
out, of course, not have to use that wonderful resource to 
reach these consumers?
    Mr. Courson. I think that is accurate. Competition--the key 
is that we are talking about first-time homebuyer, minority 
homebuyer, those who are probably the most aggrieved today in 
the system we have of getting an estimate up-front, a shopping 
list of costs that they do not understand anyway, having no 
viability to what the real costs are in the end.
    So to access that marketplace, I am going to say, here is 
the cash. They want to know how much cash do I have to bring? 
They are wonderful savers. They are wonderful family units.
    How much cash do I have to bring to closing? That is the 
number they want. And then it is simple. Now rather than have 
to worry about 15 items on a statement they have to shop, they 
can call and know that it is a rock-solid guarantee, my cash 
versus my competitor's cash.
    Senator Reed. Thank you.
    Thank you, Mr. Chairman.
    Chairman Shelby. Senator Crapo.
    Senator Crapo. Thank you, Mr. Chairman. I will withhold 
questions at this point.
    Chairman Shelby. Senator Carper.

              COMMENTS OF SENATOR THOMAS R. CARPER

    Senator Carper. Thank you, Mr. Chairman.
    To each of our witnesses, welcome. We are glad to see some 
of you again and to welcome others of you for the first time.
    Mr. Chairman, I am struck by this panel. We have a lot of 
panels that come before us in our various Committees. Usually, 
you have within a panel that is this large, you have some 
people who are just very thoughtful and some people who are 
very well-spoken. In this case, I think every witness here is 
thoughtful and well-spoken. And I have never seen a panel that 
has more diverse opinions or more at odds with one another.
    [Laughter.]
    I want to ask a couple of you to tell me, why do you think 
that is? I will start with Ms. Saunders. Why do we see such a 
sharp 
divergence of opinion here from, obviously, very thoughtful 
people?
    Ms. Saunders. I think that is a very interesting question. 
And if we were to go through the panel item by item, you would 
find more agreement than has perhaps been evident. For example, 
I think that many of us agree that the Good Faith Estimate 
disclosure, the third prong of the HUD proposal, should be 
appropriately tightened. And I think I heard that from Ms. 
Whatley and Mr. Acosta, and I know from Mr. Rheingold.
    I am not quite sure where Mr. Courson is on that.
    Senator Carper. Let me see a show of hands. Is there anyone 
who disagrees with that premise?
    [No response.]
    Thank you. Go ahead.
    Ms. Saunders. All right. So on the yield spread premium 
part of the proposal, the discussion that Senator Sarbanes was 
leading, I think that Ms. Whatley agrees. I think that Mr. 
Acosta agrees. I am not quite sure. I know that Mr. Rheingold 
and I agree, and I think that Mr. Courson agrees. I do not mean 
to put words in anyone's mouth, but I am not quite sure what 
Mr. Kovaleski's position is on that. And I know Mr. Fendly 
doesn't agree.
    Now on the guaranteed----
    Senator Carper. Will you stop again?
    Ms. Saunders. Yes, sure.
    Senator Carper. On that point, Mr. Acosta, Ms. Whatley, Mr. 
Rheingold, Mr. Courson, certain things have been attributed to 
you. Do you concur with Ms. Saunders' representation?
    Mr. Courson. On that issue.
    Senator Carper. All right. Fair enough.
    [Laughter.]
    Good. Please proceed.
    Ms. Saunders. Now, I think the second part of that issue 
which needs to be focused on, before I go on to the third, 
which is to improve the value of the yield spread premium 
regulation, Mr. Rheingold and I, I know agree that it must be 
put in a different part of the regulation so as to make it 
enforceable. But I do not know if anyone but Mr. Rheingold and 
I agree on that, it has not been a high-profile issue.
    Senator Carper. Does anyone at the table have a concern 
with putting in another portion of the proposal?
    Mr. Courson. Senator, we really have not explored that, so 
I would not want to represent the MBA position.
    Senator Carper. All right.
    Ms. Whatley. Nor have we.
    Senator Carper. All right. Fair enough.
    Ms. Saunders. On the Guaranteed Mortgage Package, I think 
that is the issue that has clearly drawn the most fire, the 
consumer groups, Mr. Rheingold, Mr. Courson, and I are all in 
general agreement that the idea is good. I think once you get 
much beyond that, we split off a little bit.
    But we were, along with Mr. Fendly's predecessors, part of 
a long, ongoing effort at HUD to come up with a way of 
resolving the yield spread premium problem. And the Guaranteed 
Mortgage Package was the result of that joint effort.
    The idea was that mortgage brokers did not want to have to 
tell anyone what their compensation, full compensation, would 
be. So the consumer groups said, okay. We do not care what your 
compensation is, so long as the consumer knows on the day that 
he is applying for the loan exactly what all the costs and the 
interest rate will be. We do not care if there is a payment, a 
kickback, as long as the consumer, before he plunks down any 
money, gets the value of his bargain.
    Now what is somewhat misunderstood is the value to the 
consumer of all of these different closing services. Many of 
the services that the consumer gets in the closing of the loan 
have no value whatsoever to the consumer. The consumer--and in 
fact, the fact that the consumer pays for them is just because 
the lenders have figured out that they can get the consumer to 
pay.
    The appraisal, the title insurance for the lender, very 
often the survey, certainly many of the other closing services, 
are all services and fees that are required by the lender and 
have no value to the consumer.
    Consumers, in fact, make a mistake if they rely on a 
lender's appraisal as being of value to them to determine 
whether or not they have paid the right price for the home. 
They should get their own appraisal. And I think even 
appraisers will agree with that, that the appraisal done for 
the purpose of buying a home, is a different kind of analysis 
than the appraisal done for the purpose of getting a loan.
    So on the Guaranteed Mortgage Package, I think that is 
where you are going to find the greatest degree of diversity, 
although Ms. Whatley and Mr. Acosta, I believe, said that if 
HUD were to simply say that volume-based discounts must be 
passed along to the borrower, I think we all agree with that 
point, that that might be a better, easier, less complex method 
of achieving much of the goals of the Guaranteed Mortgage 
Package. I do not mean to put words in anyone's mouth, but that 
is what I think I heard.
    Senator Carper. Well, I wish we had time to get a reaction 
to that last comment, but my time has expired, and I thank you 
for your observations. It is nice to have witnesses who are 
interested in looking for common ground, as opposed to just 
looking at the 
differences.
    Thank you.
    Chairman Shelby. Thank you, Senator.
    Mr. Fendly, in your testimony, you say that the Rule 
proposes to change the way mortgage brokered compensation is 
characterized, and that the result in impact would be that a 
loan from a broker--we talked about it already here, but 
again--appear to be more expensive. Why do you think that HUD 
thought that this was necessary? Don't brokers already disclose 
their fees? Why don't other originators of loans have to 
disclose their fees?
    Mr. Fendly. Obviously, mortgage brokers do disclose their 
fees. We have already discussed that a better Good Faith 
Estimate would be of value in the process.
    The recharacterizations that I explained earlier clearly 
turns this playing field upside down and makes us appear more 
expensive for the exact same loan, exact same costs, when 
compared with a mortgage lender. I do not consider that to be a 
solution.
    What I find interesting is, I have been both a mortgage 
banker and a mortgage broker. I have been in this industry 20 
years and I understand how both sides of this industry work.
    I have rate sheets with me that I find very, very 
interesting that are put out by retail direct lenders that 
include overages that they give to their loan officers that 
show them how much they will get for a higher rate. It is no 
different on both sides of the coin. We are not necessarily 
advocating that that go away. All we are advocating is we need 
an equal, level, equitable playing field that doesn't place us 
at a disadvantage.
    I do not think anybody will disagree with the fact, if you 
must appear more expensive on an identical product with your 
competition, you are not going to get the business.
    Chairman Shelby. Okay. On a final note here, it is these 
kinds of disclosures and competitiveness issues that we have 
discussed that I believe must be thoughtfully addressed in 
light of the importance of our real estate market to the 
economy, billions of dollars. It continues to be my interest 
that HUD proceed prudently and in a way that allows these 
concerns to be openly addressed.
    I think the Secretary has some good ideas here. I think it 
is in some of the details that causes some concern. And I 
believe that this could be best addressed by a revised economic 
analysis as part of a revised Proposed Rule.
    Again, I want to mention that the Federal Trade Commission 
has commented that the current HUD proposal on broker 
disclosure could actually cause confusion and harm the 
consumer. We have to work this out. I hope the Secretary will 
do it with us.
    Do you have a comment, Ms. Whatley?
    Ms. Whatley. Mr. Chairman, responding back to Ms. Saunders, 
real estate has sustained this economy the last couple of 
years. And the fact that she has highlighted fairly succinctly 
that all of us sitting at this table believe that the Good 
Faith Estimate modified might resolve some of the solutions, I 
would hope that you as Senators might send back to HUD that 
taking that as a proposed first step, to look at something, 
might be the appropriate approach.
    We fear that taking and trying to implement all of this at 
one time could be extremely disruptive to the industry and to 
the consumer. And I would hope that if we were all in agreement 
that the Good Faith Estimate was an appropriate approach, that 
HUD might work on that first and see if that did not resolve 
the concerns that they have, and ultimately achieve their 
goals.
    Chairman Shelby. I am going to reiterate that full 
disclosure is very important to me, and I think to most 
consumers and most Americans.
    I have a little queasy feeling when you start talking about 
kickbacks or creating an opportunity for kickbacks. Those two 
things are deeply troubling.
    But I want to work, and I know that the Committee as a 
whole wants to work with the Secretary to have a Rule that 
works for everybody. We will see what we can come up with.
    Senator Carper.
    Senator Carper. Could I ask just a couple of quick 
questions of Mr. Courson, please?
    Chairman Shelby. Surely.
    Senator Carper. Thank you again, all of you, for being here 
and helping us to address an issue that actually enters into 
the lives of most Americans, not once, but any number of times.
    Mr. Courson, first, what do you see as the major advantages 
for consumers of the Guaranteed Mortgage Package? And second, 
do you have any I guess consumer research that indicates that 
consumers really want this kind of option?
    Mr. Courson. Thank you for the question, Senator. Let me 
just answer the second question first, if I may.
    There has been research done. We have done focus groups at 
the Mortgage Bankers Association over the last 2 or 3 years. I 
believe I am correct in saying that the Federal Reserve did a 
study also that talked to consumers. And those surveys show 
that, as important as the survey is, what I see in the 
customers that come into one of our retail branch offices, and 
one alone, is that they want that certainty, they want 
simplification, and that is what the package brings.
    In due respect to those who are talking about a good faith, 
they want a guarantee. They want a number. They want to know 
how much cash to bring to closing.
    Frankly, I think that there may be a question on the Good 
Faith Estimate as it is proposed in the Rule in terms of HUD's 
authority to do the Good Faith Estimate under the RESPA 
statute.
    So, we may have to come to the Hill, as opposed to 
regulatory, if you were going to proceed in that fashion.
    Again, while we go through all of that, and we have been, 
as Ms. Saunders said, we have been at this for 6 years, and 
many of us have become, although we have different positions, 
we have become also associates and friends.
    Meanwhile, what happens, the consumer waits. The consumer 
waits for the certainty. And we would urge and have urged HUD 
in our comments, let's see if the marketplace works. Let's let 
the package work. Let's see if consumers want what research 
says and what we think they want, but at the same time, keep a 
system that lets us do business, by retaining the Good Faith 
Estimate with the yield spread disclosure, very specifically, 
as opposed to the way it is today.
    Senator Carper. Thanks, Mr. Courson.
    Thank you, Mr. Chairman.
    Chairman Shelby. Senator Sarbanes.
    Senator Sarbanes. Can I pursue this?
    Chairman Shelby. Certainly.
    Senator Sarbanes. All these providers are asserting that if 
you do the Guaranteed Mortgage Package, we are going to ``drive 
small business out.'' That is what Congressman Manzullo came 
over here to testify to this morning. And that it will then be 
concentrated all in the hands of the lender, would totally 
dominate the field. And that once they do that, then they will 
turn on the consumer and stick the consumer with high fees and 
charges. So, in the end, the consumer will end up being the 
loser. Am I putting that----
    Mr. Kovaleski. I think that is right. I think the example 
that Senator----
    Senator Sarbanes. Now what is your response to that?
    Mr. Courson. Senator, if I may respond. We have to 
understand that, today in business, and those of us who are in 
business, there are big lenders, medium-size lenders, and small 
lenders today. And I have been around this business too long, 
40 years, and that has always been the case. There are large, 
medium, and small settlement service providers.
    I have always been part of a small- or a medium-sized 
company. And I have competed against large lenders and 
financial institutions that have more capital, lower cost of 
funds, better technology, more resources, but I compete.
    I think that the key is that, in this particular case, 
frankly, many of them can offer things that I cannot offer 
because of their wherewithal inside their corporate 
environment.
    The Rule under the Guaranteed Fee Agreement allows me the 
ability to go out and now compete, to negotiate the types of 
things that they can do with their own subsidiaries or 
affiliated businesses, to be able to compete at the street 
level.
    Because we have to remember, we talk about large lenders. 
Large lenders really are aggregated. Mr. Fendly and I will tell 
you that over 60 percent of the loans that are originated are 
originated by small- or medium-size originators.
    And so, on the street level, we are still going to be 
there. We have been there 40 years. There were big banks--not 
the same banks that are around today--40 years ago, but there 
were big banks then, and we got loans, and there are going to 
be big banks around. But what they are doing is relying on us 
to originate their loans so they can aggregate them into large 
pools and service them.
    So, we are going to be the ones on the street. And real 
estate is local. When I get a loan transaction, the title 
company, the title agent, the escrow company is selected in 
most cases when the purchase transaction takes place. It is 
brought to me. That is not going to change. When I do business 
in one of the small towns, that is the way that business is 
still going to come to me.
    Now that cost will be part--I will have to talk to that 
group--of the guarantee that I give the customer. But my 
business relationships are the same. I cannot close loans from 
California in Alabama, where we have offices. And so, we do it 
with local closing attorneys, local title companies.
    Chairman Shelby. Anything else?
    Ms. Whatley.
    Ms. Whatley. Senator, I think I recall when Congressman 
Manzullo held his hearing, that the Colorado small bankers and 
lenders actually were opposed to the Guaranteed Mortgage 
Package. They felt like their ability to compete with some of 
the smaller service providers would actually hamper their 
ability to compete against the larger lenders.
    So, I think that is why you see some real difference, 
philosophical differences about what is the impact of going to 
a Guaranteed Mortgage Package where, under its current 
proposal, there is no transparency. And part of the challenge 
for HUD is that they are unable to communicate back to us to 
say, here is what we are thinking. Here is where we might be 
going. Here is what we might be putting in.
    All they can do is hear from us. They cannot respond to us, 
which is why I think it is critical that they would actually 
put out a new Proposed Rule that all of us at this table could 
look at and say, that might possibly respond to some of these 
concerns that we have in this particular area, or, no, we still 
think you are very far off-base in this area. But you might get 
a better sense, because you can tell that there are true 
philosophical differences on some of these key points across 
the industry. When that happens, it tends to not be in the best 
interests of the consumer.
    Chairman Shelby. Why would someone be against disclosure 
even in a packaging operation?
    Ms. Whatley. I cannot think of a reason.
    Chairman Shelby. Mr. Acosta.
    Mr. Acosta. I cannot think of a reason, either.
    Chairman Shelby. You cannot think of a good reason, anyway.
    [Laughter.]
    Mr. Acosta. I cannot think of a good reason, that is right. 
I think that I want to agree with Ms. Whatley's comments 
earlier with regards to the Good Faith Estimate. But I want to 
add to that that it is not just a matter of modifying it. It is 
also a matter of putting some teeth to it, holding the lenders 
accountable for what they put on paper.
    I agree with Mr. Rheingold when he says that the lenders 
know what those fees are going to be, generally. I agree with 
that completely. There are cases when things change, but I do 
think that we can put some safeguards in to protect the 
consumers from abuse in that regard.
    I think the spirit of everything that we have heard today, 
and I think that we are all in agreement here, it is all about 
disclosure and it is all about accountability. And I think we 
all agree that both of those things are good.
    The question I have is why is there one member of this 
panel here that is not accountable? Why do the mortgage 
bankers, why are they the only ones at this table that are not 
accountable with regards to disclosure?
    Chairman Shelby. Well, that is inexplicable.
    Mr. Acosta. That is the problem that we have. I am also 
questioning why the consumer groups here do not let them off 
the hook. Let's put it that way. Why all the energy is focused 
at the broker community and the small business professionals 
and not the major players? That is the question that I have.
    Chairman Shelby. Go ahead, Ms. Saunders.
    Ms. Saunders. May I briefly respond? I want to explain two 
things. One is we like the idea, in answer to the question why 
we are letting the mortgage bankers off the hook, which I 
haven't been accused of doing very often.
    [Laughter.]
    Senator Sarbanes. If ever.
    [Laughter.]
    Chairman Shelby. Don't let anybody off the hook.
    [Laughter.]
    Ms. Saunders. And we like the idea of simplifying the 
mortgage process.
    Chairman Shelby. So do we.
    Ms. Saunders. That is why we like the idea of the 
Guaranteed Mortgage Package. In fact, many consumer groups take 
credit for the original idea, although it was originally 
proposed in the context of statutory reform of RESPA and Truth 
in Lending and a lot else was supposed to accompany it.
    But we also need to add our concern to yours, Mr. Chairman, 
about the lack of disclosure. Not only are we losing 
transparency, but also if the mortgage package goes through as 
proposed by HUD at this point, regulators and consumers will be 
unable to determine current compliance with Truth in Lending 
and the Home Ownership and Equity Protection Acts.
    So while we like the general idea of the package, 
disclosure is 
essential to maintain the enforcement of another very important 
consumer protection act, the Truth in Lending Act.
    Chairman Shelby. Thank you all for appearing here today.
    The hearing is adjourned.
    [Whereupon, at 12:20 p.m., the hearing was adjourned.]
    [Prepared statements, response to written questions, and 
additional material supplied for the record follow:]

             PREPARED STATEMENT OF SENATOR DEBBIE STABENOW

    Chairman Shelby, thank you for calling this second hearing looking 
at HUD's 
proposed reforms to the Real Estate Settlement Procedures Act. I know 
that the proposal HUD has been working on is of great importance to 
consumers, as well as those involved in the lending process; this 
oversight hearing provides an opportunity to examine carefully the 
likely impacts of the proposal.
    I have argued for quite some time that consumers need more 
certainty and more transparency in the homebuying process. Any sound 
and balanced effort that accomplishes these goals is one to which I 
could lend my support.
    Buying a home is the single most complicated financial transaction 
that most Americans will ever undertake. It can be extremely confusing 
and consumers often have a difficult time shopping for different loan 
products. Even people who consider themselves relatively financially-
savvy can get bogged down in the process.
    Mr. Chairman, one of the things that I am particularly glad to see 
is that there is interest in addressing the shortcomings of the Good 
Faith Estimate. As you know, there are no penalties if the GFE is 
grossly inaccurate and, in some cases, it is of only very limited use 
to homebuyers. We would do the public a great service if they had more 
concrete information prior to closing about how much they need to bring 
to the table.
    I also see promise in the idea of a Guaranteed Mortgage Package. I 
believe that a guarantee makes a lot of sense as long as these packages 
have uniformity and can be easily compared.
    I welcome our witnesses today. I know that several of them have 
serious concerns about HUD's proposal. I am anxious to learn more about 
what they have to say and I hope that HUD is listening closely to their 
concerns.
    It is important that as we proceed with this reform process, that 
we balance a number of concerns. We should ask ourselves: How can we 
promote competition in the homebuying process? How can we look out for 
small businesses involved in the lending process and ensure that they 
can compete fairly? What steps should be taken to protect potentially 
more vulnerable borrowers in the subprime markets? And how can we 
eliminate the confusing aspects of this process and enhance 
transparency and certainty?
    Therefore, with all of this in mind, I believe that all concerned 
parties, working together, could ultimately come up with a reform 
proposal that would have widespread support. Thank you.

                               ----------
                PREPARED STATEMENT OF SENATOR JACK REED

    Secretary Mel Martinez should be commended for his effort to 
streamline the homebuying process. If implemented correctly, the 
Proposed Rule reforming the Real Estate Settlement Procedures Act 
(RESPA) regulations could help make the homebuying process both easier 
to understand and less expensive.
    As the Secretary has been learning during the rulemaking process, 
this Rule means real change in the real estate industry, and as such, 
it has created much controversy. However, I think there is much good 
the Final Rule might accomplish if it includes the following points.
    First, according to a recent study by Freddie Mac and HUD's own 
analysis, 50 cents of every yield spread premium dollar does not go for 
closing costs, and this practice must stop. Yield spread premiums, the 
difference between the underlying interest rate of the loan and the 
rate charged to the consumer, are for closing costs and should not be 
used for anything else. Any other purpose should be classified as an 
illegal referral under RESPA law.
    Second, the proposed Guaranteed Mortgage Package (GMP) should be 
limited to the prime market only. The exemptions provided by the 
Proposed Rule would make it too easy for subprime lenders to engage in 
predatory practices, which this Committee has been working very hard to 
prevent. I believe HUD can ensure that GMP's are only offered in the 
prime market and should do so.
    Finally, I believe HUD does not have, nor will it ever have, 
sufficient resources to patrol every real estate transaction. 
Therefore, HUD's regulations need to include stiffer penalties for 
breaking the rules, such as a private right of action for the 
consumers.
    I appreciate the time and thought today's witnesses are giving to 
this important issue, and I look forward to working with them to ensure 
that HUD considers their viewpoints while formulating a Final Rule. If 
done appropriately, I believe the proposed reforms would help more 
Americans achieve the dream of homeownership.

              PREPARED STATEMENT OF SENATOR ELIZABETH DOLE

    Mr. Chairman, I would like to express my appreciation to you and to 
Ranking Member Sarbanes for agreeing to hold this hearing on the impact 
of the Proposed RESPA Rule on small businesses and consumers. While 
this Proposed Rule seeks to make it easier for consumers to compare 
prices and to get the best loan possible, some believe that the 
Proposed Rule could harm the smaller businesses in the 
mortgage industry.
    Increasing homeownership, especially for lower income and minority 
families, is one of my top priorities. Families who own their own homes 
are more involved in their communities; they build wealth; their 
children do better in school; and they are all better equipped to climb 
the economic ladder of success. Unfortunately, the current costs and 
complexities of the mortgage settlement process have created a barrier 
to homeownership for many Americans. Efforts to create greater 
opportunities for homeownership should include an initiative to 
simplify and lower the costs of the mortgage settlement process.
    In recent weeks my office has heard from a number of smaller North 
Carolina businesses in the mortgage industry who are very concerned 
about how this Proposed Rule may affect consumers and the industry. 
They believe that in their effort to give consumers more options, 
greater transparency, and lower costs, HUD may actually be 
accomplishing the exact opposite. Unfortunately, the mortgage 
settlement process is very complex, making it difficult to fully grasp 
the potential impact of this initiative.
    I want to thank Secretary Martinez for joining us here on March 20, 
to discuss these issues. One point he was very clear on was his 
willingness to work with all parties concerned on this Proposed Rule. 
In addition, he was clear that all views would be taken into 
consideration before a Final Rule is contemplated.
    I hope that this hearing allows all of us to gain a better 
understanding of how this new RESPA proposal will affect our housing 
and mortgage markets as we work together to ensure that more Americans 
can realize the dream of homeownership.
    Thank you.

                               ----------

                PREPARED STATEMENT OF DONALD A. MANZULLO

      A U.S. Representative in Congress from the State of Illinois
              Chairman, House Committee on Small Business
                             April 8, 2003

    Chairman Shelby, Ranking Member Sarbanes, and Members of the 
Committee, thank you for inviting me to testify on the effects on the 
small business community of the Department of Housing and Urban 
Development's (HUD) proposal to revise the regulations implementing the 
Real Estate Settlement Procedures Act (RESPA). I come before you today 
not just as the Chairman of the House Small Business Committee but also 
as a Member of the House Financial Services Committee. In addition, 
prior to being elected to Congress, I was an attorney in private 
practice for 22 years and I have personally closed more than 1,000 real 
estate transactions.
    The question before us today could be, ``Why is HUD taking a 
position that essentially legitimizes kickbacks to large lenders that 
enter into agreements with settlement service providers and allow those 
relationships to be hidden from consumers?'' The proposal should focus 
on better disclosure of the various settlement fees so that consumers 
are fully advised of all of the fees going into a settlement 
transaction rather than permitting large mortgage lenders to hide their 
fees charged to consumers and the monies received from settlement 
providers.
    I fully support simplifying and clarifying the settlement process 
so that more first-time homebuyers can enter the market, however, I 
believe that HUD's RESPA proposal will make fundamental, and most 
likely, irreversible changes to our residential real estate market. In 
the short-term, the proposal may jeopardize our robust real estate 
market. In the long-term, the proposed changes may undermine the goals 
of providing affordable housing and enhanced protections for consumers. 
In my opinion, the proposal is bad for small business and it is bad for 
consumers.
    On March 11, I chaired a hearing of the House Small Business 
Committee to hear testimony from Secretary Martinez and the small 
business community on the impact of the proposal on small entities. The 
hearing was a bipartisan effort with Members of both sides of the aisle 
expressing strong concerns about the proposal, including Ranking Member 
Nydia Velazquez who also wrote a comment letter to HUD about her 
concerns. Several of the Members, including Ms. Velazquez, are Members 
of the House Financial Services Committee and several other Members 
have had broad experience with real estate transactions prior to being 
elected to Congress.
    In addition, there are bipartisan Members of the House Financial 
Services Committee who share our concerns. Congressman Mel Watt of 
North Carolina is a Democratic Member of the Financial Services 
Committee. We have very similar backgrounds and were elected to 
Congress the same year. The Congressman and I have the same view of the 
RESPA proposal and believe that it would significantly harm our real 
estate market.

    While the small business community has many concerns about HUD's 
RESPA proposal, the two primary concerns are that the proposal is 
tilted unfairly toward the mortgage lending community and against small 
business real estate professionals and that HUD did not fulfill its 
obligations pursuant to the Regulatory Flexibility Act to demonstrate 
the anticipated burdens to be faced by the small 
businesses.
    The overwhelming majority of the small business community that have 
contacted the Committee, including virtually all of the small 
settlement providers and a 
significant proportion of the community banks, believes that the 
proposal would unfairly give significant power to the mortgage lending 
community, especially large lenders, to put together Guaranteed 
Mortgage Packages. HUD's proposal would permit mortgage lenders to 
determine what real estate settlement professionals may participate as 
a part of a package, to negotiate ``bulk pricing'' with the settlement 
providers, and to minimize the disclosure requirements to consumers on 
the costs of the package contents.

    In addition, packagers would be allowed a safe harbor from 
liability under Section 8 to permit payments between package 
participants without any disclosure to the consumer. Small businesses, 
that are unable to participate in package arrangements, must attempt to 
compete using the detailed itemized listings under the proposed Good 
Faith Estimate reforms. Those small businesses also would be ineligible 
for safe harbor relief.

    A significant fear is that large mortgage lenders may use the 
package of settlement services as a ``loss leader'' in order to obtain 
the more lucrative servicing and secondary market fees associated with 
the administration of a residential real estate loan. Once competition 
in the marketplace is reduced, the packagers may attempt to bulk price 
other products, services, and items for the purchase of a home.

    For example, a lender may suggest that all homes built prior to 
1990 must be 
installed with energy efficient windows. The lender may have entered 
into a bulk pricing agreement with the window manufacturer for the 
windows and a contractor to install the windows. If faced with such a 
situation, a consumer may be unable to discern whether being able to 
obtain a settlement and loan package is predicated upon other packages 
being offered by the lender. If competition for lending is reduced, 
some consumers may find it unclear as to how many financing 
alternatives the consumers really has and what may be necessary to 
secure a loan.

    So in October 2002, the Administration, through the Office of 
Management and 
Budget, undertook a Government-wide initiative to end all Federal 
agencies from bundling Federal contracts to large businesses. The 
Administration believes that contract bundling is not good for our 
economy as it reduces long-term competition in the marketplace.
    HUD appears to be taking the opposite position with the Guaranteed 
Mortgage Package Agreements. According to the American Banker, the top 
10 mortgage originators account for more than 53 percent of the 
industry. With Guaranteed Mortgage Package Agreements, it is 
anticipated that that figure will climb quickly. In my opinion, HUD 
needs to further explore the long-term economic ramifications of its 
proposal prior to adopting Guaranteed Mortgage Package Agreements with 
a safe harbor from Section 8 liability.
    With regard to its economic analysis conducted pursuant to the 
Regulatory Flexibility Act and Executive Order 12866, HUD acknowledged 
that the proposal would place a $9.4 billion burden on small 
businesses. Of this $9.4 billion figure, $3.5 
billion comes from the revised Good Faith Estimate proposal and $5.9 
billion 
comes from the initiative to allow the packaging of settlement 
services. However, HUD does not break down the costs in its economic 
analysis for each segment of the industry.
    HUD did not provide a detailed economic analysis for the community 
banks--small realtors--small title agencies--small appraisers--small 
pest management companies, just to name a few among the many other 
small businesses not specified in the analysis. It also should be noted 
that the economic analysis does not contain any analysis of the 
additional 2.5 million hour burden that HUD disclosed in its 
Paperwork Reduction Act filing with the Office of Management and 
Budget. The $9.4 billion burden may, in fact, be significantly higher.
    In addition, on pages 73 through 75 of the Regulatory Flexibility 
Analysis, HUD insists that small loan originators and small third-party 
service providers can compete effectively against large lenders and 
service providers in packing settlement services. Unfortunately, HUD 
offers no economic analysis to support such claims. Without such 
analysis it was extremely difficult for small businesses to comment on 
that section of the proposal.
    In fact, HUD was so deficient in its small business regulatory 
economic analysis that the Federal Government's small business 
watchdog, the Office of Advocacy of the Small Business Administration, 
requested that HUD issue a supplemental regulatory analysis in order 
``. . . to provide small businesses with sufficient information to 
determine what impact, if any, the particular proposal will have on 
[the small businesses'] operations.''
    HUD added even more confusion to the RESPA proposal by asking 30 
specific questions that would have been more appropriate as part of an 
Advanced Notice of Proposed Rulemaking. The questions were designed to 
elicit detailed concerns on how the Good Faith Estimate and the 
Guaranteed Mortgage Package Agreements should be implemented. However, 
it was unclear as to whether the answers to the questions would be made 
part of any Final RESPA Rule.
    For example, question 22 on the Guaranteed Mortgage Package 
Agreement proposal requests whether State laws that are inconsistent 
with the proposed package arrangements should be preempted. Without 
knowing whether HUD intends to 
include State law preemption in the Final Rule, it is extremely 
difficult for small businesses to adequately comment on the regulatory 
burdens of the proposal.
    Congress passed RESPA in 1974 with the intention of providing 
greater clarity to the homebuying settlement process for consumers. 
Congress passed the Regulatory Flexibility Act in 1980 with the 
intention of providing greater clarity to Federal regulatory process 
for small businesses. Ironically, the question before us is whether 
HUD, in its efforts to improve the clarity in the homebuying process 
for consumers, has provided the adequate and necessary disclosures to 
small businesses for clarity in the Federal regulatory process. I 
believe that HUD has not.
    In the same way that HUD proposes to require the real estate 
industry to put forth a firm Good Faith Estimate to consumers on the 
costs of settlement, the Regulatory Flexibility Act requires Federal 
agencies to put forth a ``Good Faith Estimate'' known as an Initial 
Regulatory Flexibility Analysis to let small businesses know the cost 
of regulations up-front. In either case, there should be no surprise 
costs or added charges by the time a real estate settlement reaches the 
table or by the time an agency's final regulation reaches the table.
    Originally, I had believed that HUD, at a minimum, should issue a 
supplemental Regulatory Flexibility Analysis to clarify the exact 
burdens to be faced by small business. However, after careful 
consideration, I do not believe that this would 
answer the many questions of the proposal being asked by small 
businesses. In addition, I do not believe that HUD can cure the 
deficiencies in the Final Rule as it would deprive small businesses the 
ability to comment on any major revisions or changes in economic 
assumptions. I strongly believe that HUD should issue a revised 
proposed rulemaking incorporating the answers to the pertinent 
questions and seek public comment.
    If HUD does finalize its Proposed Rule, HUD may find itself in an 
uphill battle in the court system. I believe that small businesses have 
a legitimate claim to set aside the Rule until a sufficient small 
business economic analysis is conducted. I am not sure why HUD is 
risking the uncertainty that will be caused by the litigation or the 
thousands of hours and dollars to be spent defending such a legal 
challenge.
    Before we tinker with the successful formula that has created our 
very strong residential real estate market, we should carefully and 
deliberately consider the reform proposals before us. Rushing to 
finalize the proposal may cause unintended, and perhaps, irreversible 
harm to competition in residential real estate market and prevent us 
from achieving meaningful consumer benefits.
    Just as HUD does not want consumers to face surprises at the real 
estate settlement table, HUD should not provide surprises to the small 
business community and consumers in a Final RESPA Rule and its Final 
Regulatory Flexibility Analysis. I strongly believe that the proposal, 
as drafted, is bad for small businesses and it is bad for consumers.

               PREPARED STATEMENT OF CHARLES J. KOVALESKI
            President-Elect, American Land Title Association
                             April 8, 2003

    My name is Charles Kovaleski and I am the President of Attorneys' 
Title Insurance located in Orlando, Florida. I am appearing today as 
President-Elect of the American Land Title Association,\1\ which 
represents both title insurance companies and over 1,750 title 
insurance agents, most of which are small businesses. With me today is 
Ann vom Eigen, ALTA's Legislative and Regulatory Counsel.
---------------------------------------------------------------------------
    \1\ The American Land Title Association membership is composed of 
2,300 title insurance companies, their agents, independent abstracters, 
and attorneys who search, examine, and insure land titles to protect 
owners and mortgage lenders against losses from defects in titles. Many 
of these companies also provide additional real estate information 
services, such as tax search, flood certification, tax filing, and 
credit reporting services. These firms and individuals employ nearly 
100,000 individuals and operate in every county in the country.
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    ALTA, and I personally, would like to thank the Chairman for 
holding these hearings. The HUD proposals may not only have a very 
significant and adverse impact on our industry, on our customers, and 
our insureds. They could also have a very negative impact on what has 
been the one healthy area of the American economy in recent years--the 
residential real estate market.
    RESPA is the guiding Federal regulatory program for our industry. 
It affects the activities of our industry, our relationships with our 
customers, and our relationships with lenders, real estate brokers, and 
other settlement service providers. Indeed, no other Federal statute or 
regulatory program has such a pervasive impact on how we do business 
and how we compete for business. Accordingly, ALTA and its members have 
been deeply involved in RESPA issues since Congress debated its 
enactment in the early 1970's. Over the years, we have participated 
extensively in every legislative and HUD regulatory forum to ensure 
that the RESPA Rules serve the interests of consumers while providing 
fair and reasonable Rules from the standpoint of our members.
    We understand the concerns that may have prompted the HUD proposed 
regulations that were published in July 2002, and believe that the 
Secretary and the Department deserve credit for the boldness of their 
initiative. However, our Association and its members are deeply 
concerned about how these proposals, if promulgated in final form, will 
impact our customers, our industry, and the real estate and mortgage 
lending markets throughout the country. Accordingly, we filed detailed 
comments on the Proposed Rule with HUD in its rulemaking proceeding. We 
also participated in an SBA roundtable on the effect of the proposal on 
small businesses.
    What I would like to do today is highlight why we believe the 
proposals do not serve the interests of the consumers of our products 
and services, and why they would adversely affect competition in our 
business, particularly hurting small businesses that are the 
cornerstone of our industry. Please note that the Proposed Rule is 
likely to have such a dramatic effect on our industry that the ALTA 
board has authorized the Association to explore litigation should a 
Final Rule be substantially similar to the Proposed Rule. 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 these 
alternatives.

HUD Should Proceed Slowly

    We, as well as other groups affected by the proposed regulations, 
are concerned that any reforms along the lines proposed by HUD--or even 
our own two-package alternative--which would so radically affect the 
mortgage lending and settlement services markets throughout the United 
States, should not be undertaken without appropriate statutory 
authorization.
    The revised GFE and packaging regimes constitute complex and far-
ranging regulatory superstructures for which the only statutory 
foundation is a single sentence in Section 5(c) of RESPA, enacted in 
the RESPA amendments adopted 1 year after the original statute was 
enacted, that requires a mortgage lender, within three business days of 
receiving a loan application, to provide to the applicant a ``Good 
Faith Estimate of the amount or range of charges for specific 
settlement services the borrower is likely to incur.'' That slim 
statutory foundation will not support such weighty regulatory measures 
as HUD is proposing, no matter how well-intentioned they may be. 
Moreover, the original RESPA statute contained provisions for the kind 
of firm estimates of closing costs that HUD has proposed, but these 
provisions were repealed in the 1975 amendments in which the ``Good 
Faith Estimate'' language was adopted. We believe that, irrespective of 
whether one believes that the HUD proposals are good or bad, or 
workable or unworkable, this Committee and the Congress should be 
concerned about HUD's implementing such changes without clear 
legislative authority.
    First, there is a very significant question of public policy at 
issue here--whether modifications of such proportion that will so 
fundamentally affect a major segment of the American economy should be 
implemented without legislative direction and authorization.
    Second, the HUD regulations could well be challenged in the courts 
and the legal uncertainty regarding whether they will be upheld or 
struck down will, by itself, cause significant disruption in the real 
estate and mortgage lending markets. I have enclosed, as appendices to 
our testimony, not only our comments to HUD on the 
Proposed Rule, but a legal memorandum describing the legal issues. The 
HUD proposals, if adopted, will require massive and costly efforts by 
all parties in the residential real estate and mortgage lending 
industries to restructure their business 
arrangements, modify their forms and software, retrain personnel, etc. 
Much of that effort and costs to accommodate to the new regulations 
would be rendered useless if, after the regulations are promulgated in 
final form, the courts find--as our lawyers tell us is likely--that the 
regulations are unauthorized and cannot be enforced. Many Federal 
agencies, faced with this type of situation issue reproposed rules. 
This process would allow the Agency to address concerns expressed in 
comments on the original rule, modify their original proposal, and 
allow industries and affected parties to further analyze a revised 
proposal. This would provide substantial benefits.
    In short, this is not an issue where we--or the Congress--can 
afford to say ``let's see how the courts come out on this.'' Our 
members and the real estate and mortgage markets need greater certainty 
that any final regulations adopted by HUD will not be found to be 
unauthorized. We urge this Committee and the Congress not to allow such 
uncertainty to be created.

The Impact on Consumers of Title Insurance and Title-Related Services

    Under the current RESPA statute and regulations, lenders must 
provide consumers, within three business days of receiving an 
application, a ``Good Faith Estimate'' of the closing costs the 
borrower ``is likely to incur'' in connection with the transaction. HUD 
is proposing to replace that regime with two alternative new regimes. 
The first, which is a revision of the current GFE regime, would require 
lenders to give less detailed estimates by category of costs, with 
limited or no tolerances for the accuracy of those estimates. The 
second regime 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.
    It appears to us that these proposals were developed with the 
refinance market in mind. However, it is clear that the two regimes 
would pose problems for consumers in purchase/sale transactions where 
the current homeowner is not merely refinancing an existing loan. The 
proposals are based on the faulty proposition that whatever services 
are needed by, and are good enough for the lender, will also meet the 
needs of the consumer. This may well be true in refinance transactions, 
where the settlement services obtained by the lender are intended 
solely to protect the lender's interest, and the borrower cares only 
about the total charges he or she may have to pay to obtain the loan. 
But it is not true in purchase/sale transactions, where the buyer and 
the seller have their own interests in the nature and quality of the 
title and closing services that are provided with regard to the 
conveyance of title from the seller to the buyer. HUD's proposals, 
particularly the GMP proposal, do not take those interests into 
account.
    For example, the HUD proposals do not require the lender to specify 
what title-related services are included in the revised GFE estimate or 
in the GMP price, or how much of the GFE estimate or GMP price is 
attributable to those services. Accordingly, if the lender has decided 
to accept a reduced form of title protection because it believes the 
additional profit it will realize on the GMP as a result of the cost 
savings will offset the additional risk it is taking, the buyer/
borrower may not appreciate that the protection the lender has decided 
to accept on the mortgage loan may not meet the buyer's needs with 
regard to the purchase transaction.
    Second, because the consumer will not know what services at what 
costs are included in the GFE or in the GMP price, it may be impossible 
for the consumer to do an apples-to-apples comparison of offers from 
different lenders.
    Third, the buyer and the seller may have agreed on the selection of 
the provider of certain title or closing services (such as the escrow 
company in States where escrow closings are customary, or a title 
company that will provide the title and closing services) in connection 
with the execution of the purchase contract and before the buyer has 
begun to shop for a mortgage loan. In these situations, the price of 
the GMP package will also include those services and the borrower could 
end up paying twice for the same service.
    Finally, in most areas of the country the seller generally pays 
half of the costs for the handling of the closing and will pay for all 
or a significant portion of the title insurance charges for the owner's 
policy. In addition, it is customary in most areas for the seller to 
pay for the governmental charges relating to the recording of the deed 
(with the buyer paying the charges for the mortgage). The GMP proposal, 
which assumes that the buyer/borrower pays for all closing costs, 
completely fails to reflect these widespread seller-pay practices.

The Impact on the Title Industry and Small Businesses in the Industry

    The HUD proposals tilt heavily in favor of the packaging 
alternative, because packagers are provided an exemption from RESPA 
Section 8 for any discounts or things of value they may receive in 
connection with the selection of service providers for their packages. 
Because a mortgage loan at a guaranteed interest rate must be part of 
any GMP, everyone recognizes that only lenders will effectively be able 
to offer packages under the HUD proposal. Accordingly, title companies 
and other providers of settlement services will be placed in a position 
where they will effectively be deprived of market access to consumers 
and will only be able to effectively compete by becoming part of a 
lender's package. This will have adverse consequences for all ALTA 
members, but particularly for our small business members.
    Major lenders will, of course, be aware that inclusion in their 
GMP's may be the only effective means by which providers of title and 
closing services will be able to obtain any significant amount of 
business in residential mortgage loan transactions--or, indeed, to 
survive. Moreover, HUD has structured its GMP proposal in a way that 
mortgage lenders are in a position to realize greater profits on their 
GMP prices by negotiating lower prices from the providers of the 
services in the package. The combination of these two factors means 
that providers of title/closing services will face enormous economic 
pressure to offer cut-rate prices and/or cut-rate services in order to 
be selected for inclusion in lender-created GMP's.
    The backbone of our industry--the smaller abstractors and title 
agencies--will not have the resources to be able to offer substantial 
discounts. Based on a survey conducted by ALTA in 2002, which was a 
boom year for the real estate industry, 51 percent of the title 
insurance agents and abstractors in the country had less than $500,000 
in gross revenue in 2001, and 72 percent had less than $1 million. 
Sixty-eight percent had 10 or fewer employees, and 42 percent had less 
than 5. These 
individuals and companies have demonstrated that they can effectively 
compete with anyone for the consumer's business, but in a world in 
which major lenders are able to use the clout derived from the volume 
of transactions they handle to extract discounts from major providers, 
these small businesses will simply be unable to compete on that basis. 
Equally important, we believe that the proposals, if implemented in 
their present form, would effectively close the door to future entry 
into this business by small businesses.
    Second, while HUD maintains that ``anyone can provide packages'' 
under its proposed Guaranteed Mortgage Package regime, because the GMP 
Agreement offered to consumers must include a loan at a guaranteed 
interest rate it is highly unlikely that anyone other than lenders will 
be in a position to effectively offer GMPA's. The mortgage lending 
industry has become increasingly concentrated. In the last 5 years the 
top 10 mortgage originators have doubled their market share from 25 
percent to 50 percent.\2\ The HUD packaging proposal will also have the 
effect of increasing the concentration in the title and settlement 
services industry.
---------------------------------------------------------------------------
    \2\ ``Consortium Approach Gains in Home Loans,'' American Banker, 
July 12, 2002, at 1, 10.
---------------------------------------------------------------------------
    It is clear that HUD is aware of the potential negative 
consequences of their proposals, but believes that the adverse impact 
on small business is outweighed by: (a) the likelihood that major 
lenders will be able to obtain deep discounts from major settlement 
service companies who will want to be part of their packages, and (b) 
the prospect that mortgage lenders will pass through to their borrowers 
the benefits of such discounts. HUD estimates that small businesses 
will lose somewhere 
between $3.5 billion and $5.9 billion in annual revenues if their 
proposals are implemented. Whether these estimates are accurate--or too 
low--is not the critical issue. The critical issues are:

 What assurances are there that lenders will pass any savings 
    along to consumers?

 Why is HUD so willing to tilt the playing field in favor of 
    large lenders and large providers?

 Why is HUD so cavalier about the adverse impact on small 
    businesses, which have been a mainstay of this industry?

    We have been unable to get answers on these questions from HUD, but 
we hope you will.
    If the packaging regime becomes widespread, as is likely to happen 
because it has the backing of the major mortgage lenders in the 
country, providers of title and settlement services will only be able 
to market their services to and through lenders. Lawyers and title 
companies that today are able to obtain business by direct contacts 
with the consumer will be faced with the situation where the lender, 
and only the lender, decides which attorney or which title company will 
be part of its package, and the consumer will have to accept that 
selection if it wants a loan from that lender. These adverse effects 
will be particularly severe in rural areas of the country where local 
attorneys and title companies will inevitably find that they cannot 
gain entry to the packages of the major lenders operating in that area.
    The competitive advantage of small businesses--service to the 
consumer--will be undermined because the only successful marketing 
approaches will be those that enhance the profitability of the packages 
sold by the lenders. Likewise, there will be fewer competitive 
opportunities for new small businesses to enter this market since the 
only way they will be able break into the market will be to offer even 
greater discounts to lenders than those lenders can obtain from the 
major settlement service companies. This is unlikely to happen.
    A review of the economic analysis on which HUD has based its 
evaluation of the savings associated with the changes proposed in their 
Rule raises many questions. HUD appears to have relied heavily, in 
their assumptions, on an extrapolation of data from FHA loans, which 
represent a small portion of the mortgage market. These are typically 
lower priced homes, not true examples of the residential housing 
market. Consequently, the sample on which the analysis is based is not 
typical.
    In essence, the HUD packaging proposal is predicated on the 
expectation that there will be a substantial shift of revenue from 
settlement services providers to the major mortgage lenders, who will 
have the economic clout to obtain discounts as the price of entry into 
their packages, and that most or all of this revenue shift will be 
passed on to consumers. Apart from the fact that this is an artificial 
shift in revenues for which there is no significant justification, it 
is questionable how much of these discounts and rebates will trickle 
down to the consumer. The fact that so many major mortgage lenders are 
so strongly in favor of packaging suggests that they believe the 
profits from packaging are likely to be significant.
    HUD's economic analyses concludes that lower prices for originators 
and third-party settlement service providers will drive out the less 
efficient firms, with the more efficient firms surviving and doing the 
work. This fails to recognize the current reality of the local 
marketplace and its potential evolution. Many counties in this country 
currently have only one closing or title agent. Some of these firms may 
be inefficient. However, particularly in rural areas, implementation of 
packaging could eliminate some of those providers, and consumers may 
not have any access to those services.
    HUD has even posed questions in its Proposed Rule on the validity 
of State law. Specifically, HUD has asked what State laws merit 
preemption. Many State laws relating to title insurance, such as rate 
regulation, are designed as consumer protection measures which ensure 
adequate access to these services at a reasonable price.
    Mr. Chairman, if small businesses cannot compete effectively with 
their larger competitors for the consumer's business, then, in the long 
run, they are not going to survive. But HUD's proposals do not create a 
playing field in which the most efficient, or the best, competitors end 
up winning the race. Rather, HUD's proposals create a playing field in 
which those lenders with the most clout, or those service providers who 
are best able to offer significant inducements to lenders to get into 
their packages, will end up winning the race. Small lenders may be very 
efficient at making mortgage loans, but if they lack the clout to 
obtain the kind of discounts that their larger lender competitors can 
squeeze out of service providers, they will not be able to compete 
effectively. In other words, they will lose market share not because 
they are inefficient lenders, but because they cannot command the kind 
of discounts from third-party providers that their larger competitors 
can command.
    Similarly, smaller title companies or smaller providers of 
settlement services have demonstrated that they can compete effectively 
with their larger competitors in providing title and settlement 
services. But in the competitive world that HUD wants to create, these 
companies could well lose market share to their larger competitors who 
are in a better position to offer discounts or other things of value to 
lender-packagers. This would enable those lenders to realize greater 
profits on their packages than by including smaller providers in their 
packages. Again, smaller title companies and other settlement service 
providers will lose market share not because they are inefficient 
providers of settlement services, but because they cannot provide the 
kind of discounts that their larger competitors can offer.
    The bottom line is that consumers will effectively have fewer 
choices in their 
selection of providers of legal and title-related services for their 
real estate transactions. Under HUD's approach, the consumer selects 
the lender and must accept whatever service providers are in that 
lender's package. This is a problem with regard to services, such as 
those provided by lawyers and title companies and agencies that are 
provided for the benefit of the purchaser and seller of the real 
estate.
    Consumers should have choice in the selection of their service 
providers, and this will not be possible under the Guaranteed Mortgage 
Package Agreement. In addition, HUD has estimated that some of the 
economic benefits of packaging will be time savings because consumers 
will not shop for settlement services, and lenders and settlement 
service providers will not have to answer questions. Achieving savings 
through reduced knowledge and understanding by consumers of their 
personal financial investments is not a good result.
    HUD also estimates substantial savings to both consumers and 
service providers through reduced time spent in shopping for services 
and responding to consumer concerns. While we believe that the source 
and estimate of these savings is very uncertain, we also question 
whether elimination of time spent with consumers is a worthwhile goal. 
Consumers deserve to make informed decisions about the financial 
products and the services they choose.

ALTA's Proposal for a Two-Package Approach

    ALTA's written comments to HUD did not merely criticize the HUD 
proposals. We offered a realistic alternative that we believe would 
achieve HUD's objectives while avoiding many of the consumer and 
competitive problems I have just discussed.
    Our alternative is that there should be two packages:

 a ``Guaranteed Mortgage Package'' that would be offered by 
    lenders along the lines of the current HUD proposal (or as it may 
    be modified after the public comment period) and that would consist 
    of: (i) a loan at a guaranteed interest rate in accordance with 
    whatever requirements HUD ultimately determines is appropriate; and 
    (ii) all lender-related services and charges (basically the 800 
    series charges on the HUD-1 form).

 a ``Guaranteed Settlement Package'' that could be offered by 
    any party--title insurers and title insurance agents, real estate 
    brokers, lenders, escrow companies, or attorneys--and that would 
    provide a guaranteed single price for all of the 1100 series 
    services and charges (the title and related charges), the 1200 
    series charges (Government recording and transfer charges), and 
    those charges required for title assurance or closing purposes that 
    may be listed in the 1300 series (miscellaneous settlement 
    charges).

    We believe this ``two-package'' approach would better achieve HUD's 
goals of: (1) ensuring price certainty in the settlement process for 
consumers, and (2) injecting significant, ``shoppable'' price 
competition into both the lending and the settlement industries. It 
will help ameliorate the effects on small business because it will 
allow lenders and others to package on a local level. This packaging 
alternative will take into account the unique costs, needs, and 
allocation of responsibilities that exist in a local jurisdiction, and 
allow customization to meet consumer needs. It would also serve other 
important goals, such as allowing for the development of Settlement 
Packages in purchase/sale transactions that differ from those in 
refinance transactions, that would accommodate regional differences in 
practices, and, most importantly, would permit settlement service 
providers to market directly to consumers, thus preserving the 
competitive access of the diverse and vibrant small businesses that 
make up a significant part of the American settlement industry.
    We also have expressed concern that the HUD proposal might freeze 
the way in which settlement services are delivered, and prevent the 
evolution of new forms of service delivery. We believe the HUD proposal 
would channel settlement services primarily through large lenders, thus 
inhibiting the development of technological and market improvements 
that could lead in different directions. We expressed these concerns in 
the Mortgage Reform Working Group in the late 1990's. Since that time, 
technological advances have led to dramatic improvements in consumers' 
access to loan and settlement services information. Many consumers now 
shop online for both loan and settlement services, and some even close 
online. We believe that consumers would like to continue to take 
advantage of these opportunities.
    It is particularly ironic that, at the same time HUD is pursuing a 
``packaging'' approach that so clearly favors large companies over 
smaller business entities, the Bush Administration has proposed a 
strategy to all Federal agencies calling on them to reduce the adverse 
impact on small business resulting from the ``bundling'' of Federal 
contracts. As discussed in the October 2002 OMB report entitled 
``Contract Bundling: A Strategy for Increasing Federal Contracting 
Opportunities for Small Business,'' bundling of Federal contracts has 
been an increasing practice in recent years so that fewer, larger 
groupings of contracts are put out for bid. While such bundling has 
made things easier for Federal contracting officers and their agencies, 
it has had the effect of eliminating competitive opportunities for 
small businesses which want to compete for Government contracts. To 
counteract that trend, OMB has urged Executive Branch agencies to 
revise their regulations to eliminate unnecessary contract bundling 
and, in the words of the Administrator of OMB's Office of Federal 
Procurement Policy, to make ``a significant step forward toward 
ensuring that small businesses and entrepreneurs have access to Federal 
contracting opportunities.'' It seems to us that HUD's packaging 
proposal is completely out of step with the thrust of OMB's 
``unbundling'' approach to Government contracts.
    The loss of these small businesses will eliminate the local 
companies that support the community, provide jobs, and pay taxes.
    We thank you for holding this hearing to address this most 
important issue.

                               ----------

                  PREPARED STATEMENT OF GARY E. ACOSTA
  Chairman, National Association of Hispanic Real Estate Professionals
                             April 8, 2003

    Chairman Shelby, Ranking Member Sarbanes, Members of this 
Committee, I am Gary Acosta, the President of SDF Realty in San Diego 
California and the Chairman of the National Association of Hispanic 
Real Estate Professionals (NAHREP), a nonprofit trade association 
dedicated to increasing the Hispanic homeownership rate. NAHREP is the 
Nation's fastest growing real estate trade organization and is a 
partner in President Bush's ``Blueprint for the American Dream'' 
minority homeownership initiative. We appreciate the opportunity to 
address the Committee today on the views and planned actions of the 
Department of Housing and Urban Development (HUD) on the proposed 
amendments to the regulations implementing the Real Estate Settlement 
Procedures Act (RESPA).
    The NAHREP has over 10,000 members in 43 States. Our members come 
from all segments of the housing industry including but not limited to 
real estate agents and mortgage professionals. NAHREP provides 
professional education, industry representation, publications and 
technology solutions for those real estate professionals primarily 
dedicated to serving Hispanic homebuyers.

Hispanic Homebuyers are Underserved

    Today, the homeownership rate in the United States stands at 68 
percent; however, for Hispanic Americans it is about 47 percent. This 
disparity is driven by a number of factors including the lack of 
competitive mortgage financing in those markets. In addition, NAHREP 
estimates that approximately 80 percent of Hispanic homebuyers are 
first-time buyers--double the percentage of the overall market. 
Particularly for the first-time buyer, the purchase of a home is both a 
complicated and emotional experience, which often creates a more labor-
intensive real estate transaction for the professional.
    According to a recent study produced by Pepperdine University and 
the La Jolla Institute, up to 65 percent of Hispanic homebuyers prefer 
to communicate in Spanish, a skill possessed by a small percentage of 
real estate professionals. Additionally, many Hispanic consumers have 
thin credit files, little money for down payment, and multiple sources 
of income. In order to serve this market effectively, mortgage and real 
estate professionals must have specialized skills and have keen 
understanding of this market.
    Accordingly, NAHREP supports policy and legislation that increases 
awareness, reduces cost, and simplifies the process of buying a home. 
In this regard, NAHREP applauds President Bush, and Secretary Mel 
Martinez for their demonstrated commitment to make homeownership 
attainable for more Hispanics, minorities, and other underserved 
Americans. In particular, we strongly support Secretary Mel Martinez's 
effort to simplify and improve the process of obtaining home mortgages, 
and to reduce the costs for future homebuyers.

Hispanic Consumers are Primarily Served by Small Business Professionals

    A recent NAHREP member survey indicated that 81 percent of our 
members who are real estate agents ``regularly use the services of a 
mortgage broker to arrange financing for their clients.'' Latinos are 
more likely to use mortgage brokers and other small business 
professionals because they tend to live and work in the communities 
they serve and have strong language skills and cultural understanding. 
Today's mortgage industry is increasingly a formula-driven, high-
volume, low-margin business. Larger players generally lack the 
flexibility and diverse personnel necessary to adequately serve 
homebuyers that do not always ``fit in the box.'' For this reason, 
NAHREP believes that the growth in Hispanic homeownership will depend 
on Hispanic-owned small businesses in those communities.

HUD's Proposed Rules May Have an Unintended Impact on
Small Real Estate and Mortgage Companies

    NAHREP recognizes that HUD's Proposed Rules are designed to 
simplify the mortgage finance process and eliminate opportunities for 
predatory lending practices. NAHREP shares HUD's conviction that 
consumers should receive accurate information when choosing a mortgage 
originator in order to make an educated decision regarding mortgage 
products and services. We also believe that this outcome for the 
consumer could not be possible without real competition in the mortgage 
market. However, we see the potential for both the Enhanced Good Faith 
Estimate and the Guaranteed Mortgage Package to have unintended and 
detrimental effects on small real estate and mortgage companies that 
may prove to undermine the intended benefits to some consumers. As 
mentioned, it is the small real estate companies and mortgage brokers 
who often are committed to serving the Hispanic members of their 
communities and will be the drivers of increased homeownership for 
Hispanics. Placing small business owners at a disadvantage will 
ultimately hurt homeownership opportunities for the minorities NAHREP 
and others want to reach.

NAHREP Concerns With the Proposed Enhanced Good Faith Estimate

    This Proposed Rule in connection with the Enhanced Good Faith 
Estimate (GFE) results in ``different treatment of compensation in 
loans originated by lenders and those originated by mortgage brokers.'' 
This unequal treatment will create an uneven playing field among 
mortgage originators and disadvantage mortgage brokers compared to 
mortgage banks and lenders. In effect, a mortgage loan originated by a 
mortgage broker--who already has additional disclosure requirements--
may look more expensive to the consumer than an identical loan 
originated through a direct lender. Even though mortgage bankers and 
national banks do compensate staff for mortgage originations, under the 
Proposed Rule neither are required to disclosure this compensation. In 
some cases, a consumer could select a more expensive product by 
assuming that the loan with no disclosed compensation to the originator 
is always a better deal.
    The proposed changes to the GFE include a mandate to guarantee 
third-party costs within a ``10 percent'' or ``zero'' tolerance. NAHREP 
believes this is critical to helping consumers identify the best 
mortgage possible. Holding mortgage originators responsible for making 
accurate disclosures to consumers within 3 days of application is 
appropriate and reasonable and will eliminate abuse of the GFE. 
However, loan originators do not have control over certain third-party 
costs. There are many examples of legitimate, unexpected costs that 
arise between application and closing. To require the originator to 
absorb all unanticipated expenses would almost certainly pose a greater 
burden on a small broker than on a larger mortgage lender.
    NAHREP recommends that when a price increases or a fee is added 
that changes the original GFE, a new GFE should be provided to the 
consumer within a reasonable timeframe along with an explanation of the 
change. This must take place 
before the consumer is at the settlement table.

NAHREP Concerns With the Guaranteed Mortgage Package

    NAHREP also cautions HUD to consider the impact to small businesses 
of the proposed Guaranteed Mortgage Package (GMP). While we cannot know 
the exact impact to the marketplace of a GMP, we believe the packaging 
of settlement services offers a much greater business opportunity for 
large lenders than for small mortgage brokers or small real estate 
services providers and could ultimately hurt the consumers served by 
the small businesses. It is also possible that the GMP may eliminate 
the choice of Hispanic consumers to select settlement services that 
specialize in working with Spanish-speaking consumers.

NAHREP Appreciates the Opportunity to Share Our Views

    The housing sector has been one of the few bright spots in our 
economy and Hispanic homebuyers have fueled the strength of our housing 
industry. Over the next two decades, nearly 80 percent of all new 
homebuyers will be minorities and/or immigrants. Again, I appreciate 
the opportunity to be here today to express NAHREP's support for 
Secretary Martinez's effort to improve the process and reduce the cost 
of mortgage finance. The cautions I have expressed today are intended 
to ensure this effort results in the best possible outcome for 
consumers and the mortgage finance industry. I look forward to working 
with this Committee and HUD to ensure that a Final Rule will encourage 
more minority-owned small businesses to enter the real estate and real 
estate finance market and thereby help to increase homeownership 
opportunities particularly for minority families.
    Thank you.
                               ----------

               PREPARED STATEMENT OF CATHERINE B. WHATLEY
        President, National Association of REALTORS '
                             April 8, 2003
---------------------------------------------------------------------------
    REALTORS ' is a registered collective membership mark 
which may be used only by real estate professionals who are members of 
the NATIONAL ASSOCIATION OF REALTORS ' and subscribe to its 
strict Code of Ethics.
---------------------------------------------------------------------------

    Good morning, Chairman Shelby, Senator Sarbanes, and Members of the 
Committee, I am Cathy Whatley and I am the 2003 President of the 
National Association of REALTORS '. I appreciate the 
opportunity to present to the Senate Banking Committee our thoughts on 
HUD's Proposed Rule to reform the Real Estate Settlement Procedures Act 
(RESPA). NAR is America's largest trade association, representing more 
than 860,000 members involved in all aspects of the residential and 
commercial real estate industries. When it comes to the home purchase 
transaction, REALTORS ' hold the position closest to the 
consumer. From the very early stages of the home search to closing day, 
the REALTOR ' is involved and acts as an adviser in the 
process. It is because of this very important role that we feel we can 
offer valuable insight into how these proposed changes may impact the 
consumer, as well as the industry.
    NAR supports efforts to improve RESPA and the home mortgage 
transaction experience for consumers. We admire Secretary Martinez's 
dedication to this initiative and we appreciate and agree with the 
stated goals of reform as set forth by the Department: (1) to simplify 
and improve the process of obtaining home mortgages, and (2) to reduce 
settlement costs for consumers. However, I will state up-front, we have 
serious reservations as to whether the proposal as written meets these 
goals.
    As you know, this proposal has generated significant response from 
all segments of the industry and consumer groups. In fact, only now 
that the comments are in can we truly appreciate the complexity of this 
proposal. While some may endorse the concept of the GMP, support is 
conditioned on the adoption of recommended changes and these changes 
are as numerous as the number of groups making them. How HUD responds 
to these recommendations will determine the level of future support or 
opposition. Unfortunately, the current process does not permit the 
industry to reassess the proposal relative to any changes HUD might 
consider upon 
review of the 45,000 comment letters. Therefore, we think HUD should 
amend the original proposal based on industry and consumer comments and 
reissue a revised proposal for additional comment.

NAR Position

    I will summarize our overall reaction to this proposal, which we 
submitted in our comments to HUD.

 HUD proposes two new disclosure methods, the Guaranteed 
    Mortgage Package (GMP) and the Enhanced Good Faith Estimate (GFE). 
    We believe the goals of reform can be achieved by improving the 
    current Good Faith Estimate (GFE). While the proposal before us 
    must be more carefully constructed, we support the concept and 
    recommend that further analysis and development of this concept be 
    conducted. It makes more sense to build on a model that we know 
    rather than one that is untested relative to consumer and/or 
    industry benefit.

 The Guaranteed Mortgage Package (GMP) represents a radical 
    departure from today's rules. There is not enough evidence of 
    consumer and industry benefit to move forward with this at this 
    time. Additional data collection, research, and analysis need to be 
    conducted to provide evidence of significant benefits. There are 
    risks inherent in this proposal and until more is known about the 
    likely impacts, HUD should postpone advancing this kind of 
    significant regulatory change.

 Congress should address many of the changes to RESPA in this 
    proposal. To 
    propose a repeal of Section 8 or to require providers to fix their 
    fees requires oversight by the body that created RESPA.

The Enhanced Good Faith Estimate (GFE)

    The goals of reform, certainty, and simplicity can be achieved 
without sacrificing the important consumer protections of Section 8. 
The enhanced GFE imposes pricing discipline on lenders thus providing 
borrowers more certainty early in the process enabling them to shop and 
compare loans. It also clarifies that volume discounts are permissible, 
thereby encouraging lenders to seek discounts that can be passed on to 
consumers.
    This incremental approach will reduce the potential for any market 
disruption and will pave the way for future changes as appropriate. 
Specifics of this approach need to be carefully studied to minimize 
burdens on the industry, such as the tolerances for those services not 
within the control of the lender. Clarifying that volume discounts are 
not a violation under RESPA should go a long way toward providing 
lenders who otherwise would not be inclined to seek these discounts for 
their customers. Additional thought on the mortgage broker compensation 
disclosure should also be more fully analyzed so the consumer is not 
further confused and the broker is not unfairly placed at a competitive 
disadvantage to a retail lender. There could also be small business 
implications that require additional scrutiny. The GFE form should be 
further reviewed and amended so borrowers can more easily reconcile it 
with the HUD-1 at closing. Additional thought must be given to the 
proposed penalties for noncompliance. To simply permit the borrower to 
walk away at closing is a disservice to everyone in the transaction 
including the borrower. Penalties must be stiff enough to discourage 
noncompliance and rational to ensure innocent parties to the 
transaction are not penalized. These improvements to the GFE will go a 
long way toward achieving the stated goals of the Department and are 
consistent with the original purpose of RESPA.

The Guaranteed Mortgage Package (GMP)

    While being characterized as an improvement to the process, the GMP 
could produce unintended consequences for the consumer, the lending and 
entire settlement service industry. It could also negatively impact the 
overall economy. The proposal assumes an increase in competition will 
result from the packaging scheme and this competition will drive down 
prices and benefit consumers. However, we believe there is also the 
possibility that this proposal could increase concentration, reduce 
transparency, reduce the quality of services, and ultimately lead to 
higher closing costs. This will undoubtedly alter the lending and 
settlement services industries. We come to this conclusion after 
carefully weighing the benefits of the available reform options against 
the potential for negative market consequences due to the loss of 
RESPA's Section 8 consumer protections. What amounts to broad relief 
for one segment of the industry without evidence of consumer benefit or 
continued consumer protections represents a flawed approach to reform 
and should be revisited.
    At first glance, the prospect of creating a simplified disclosure 
that includes an interest rate and lump sum closing costs at no cost to 
the consumer is appealing. However, upon further review, we find there 
are too many unanswered questions and concerns about this approach. The 
following is a summary of some of these concerns in the proposal.

The GMP Will Hurt Small Business

    HUD's GMP proposal provides lenders with the very strong incentive 
of a Section 8 safe harbor for the packaging of settlement services. 
Therefore, it is likely the market will move in this direction. This 
proposal thus poses a serious threat to the settlement service 
industries that may already be offering a form of bundling or one-stop-
shopping to their customers. These companies will not be able to 
compete with the large lenders who will now be offered a huge incentive 
to package.
    HUD assumes a savings of $1.8 billion in third-party settlement 
costs. NAR believes HUD should conduct additional analysis to more 
fully quantify and qualify this benefit relative to the loss in the 
marketplace of third-party settlement providers. Ensuring an abundance 
of providers creates a healthy and competitive market where the 
consumer has choices and can base their choices on both price and 
quality. To create incentives that merely encourage consolidation 
without regard for the quality of services being provided by the small 
businesses in today's competitive environment should be reviewed more 
closely.

The GMP Limits Packaging to Lenders

    The proposal states, ``anyone can package.'' This is a misleading 
statement because HUD's requirements for the safe harbor under the GMP 
are that the package must be advertised with a guaranteed interest 
rate. The only players in the marketplace that can offer a guaranteed 
interest rate are the lenders. This is confirmed in another provision 
that requires the GMP to be signed by a lender. Therefore, real estate 
brokers will only be able to offer packages if they form a relationship 
with a lender. Even then, the terms of the relationship and the package 
arrangements will be subject to the specific lender requirements. They 
will not be able to market their services directly to consumers. 
Packagers will always be under the control of the lender. Therefore, 
the rest of my comments will reflect the lender as the intended 
packager.

Simplification

    The proposed GMP disclosure includes the interest rate, APR, and a 
lump sum package price for settlement services. However, there are 
three other required settlement costs that are not included in the 
package and disclosed separately. They are per diem interest, reserves/
escrow, and hazard insurance. In addition, there is an optional owner's 
title insurance disclosure. While it may be easy enough to add these 
costs to the lump sum GMP, we must not assume how the Final Rule will 
reflect these disclosures. In public comments to HUD, several lender 
groups have advocated the removal of some of the services within HUD's 
GMP and to disclose them separately. Some of the services they 
recommend to exclude from the package are flood insurance, mortgage 
insurance, Government fees, and points. If HUD agrees with this 
assessment, the disclosure becomes very complicated. So the new 
disclosure would include the cost disclosures for the interest rate, 
points, the guaranteed package, per diem interest, reserves, hazard 
insurance, mortgage insurance, and flood insurance. Under this 
scenario, there may be more services outside than inside the guaranteed 
package.

Interest Rate Guarantee

    The HUD GMP proposal requires an interest rate guarantee, subject 
to change resulting only from a change in an observable and verifiable 
index and it must remain open to the potential borrower for 30 days. 
The reason for linking the two is to prevent a lender from increasing 
the interest rate to make up for any losses on the guaranteed package. 
While lenders may find the interest rate guarantee unworkable, to 
deviate from this requirement will undermine the rationale for the GMP 
in the first place. To guarantee one piece of the offer and not the 
other can lead to bait and switch tactics and other abusive practices. 
Therefore, additional analysis is required to assess the impact of both 
guaranteeing the interest rate and removing the guaranteed interest 
rate from the GMP.

Certainty of Costs

    HUD has indicated one of its goals in this proposal is to protect 
consumers by providing some cost certainties in the mortgage 
transaction, hence the ``guarantee'' in the GMP. The Rule, however, 
appears to have a loophole that negates the contractual ``guarantee,'' 
specifically, the condition of ``pending final underwriting and 
appraisal.'' Under this proposal, there is nothing to prevent a lender 
from trying to lure consumers with a below-market GMP, and then 
increase the interest rate or costs following final underwriting, which 
can take place right up to the closing. Therefore, it is questionable 
as to whether the consumer is truly getting a guarantee. It sounds more 
like a conditional guarantee of interest rate and costs.

Transparency in the Process

    In the HUD proposal there is much emphasis placed on creating a 
transparent process. However, the GMP will result in quite the 
opposite. Borrowers will shop for a loan based on an interest rate and 
a ``black box'' of settlement costs. To move from a process today where 
borrowers are fully informed of the various services required to close 
the transaction to one in which the borrower is assumed to only be 
interested in the lump price of the package is taking a step backwards 
in the area of consumer education. Despite claims to the contrary, 
consumers want to know what they are getting for their money. If 
services are not disclosed to the borrower, true comparisons cannot be 
made. Even in the 1998 HUD/Fed Report, they recommended that 
``consumers want to know what services they are purchasing, . . .'' and 
so they suggested the services in the package be itemized.
    If nothing else, HUD needs to recognize this flaw in the proposal. 
Both services and quality of services matter to consumers. While 
lenders contend that these services are for their use, the borrower 
pays for them and is directly impacted by the quality of the service 
providers. For example, a lender may have a contract with a certain 
pest control company and includes this service in its package. The pest 
control company may not be very reputable yet meets the minimal needs 
of the lender. Substandard work could mean problems in the future that 
may result in thousands of dollars for the homeowner.
    In the home purchase market, most borrowers rely on trusted 
advisers, such as real estate agents in the selection of settlement 
services. Under today's Rules that prohibit settlement providers from 
paying or accepting fees for the referral of business, the only driving 
force behind a referral of business from a real estate agent to another 
provider is continued customer satisfaction from trusted providers in 
the marketplace. It is widely acknowledged that if a borrower is not 
satisfied or has a negative experience with a certain provider in the 
transaction, it is the real estate agent who makes things right. Under 
HUD's GMP proposal, the ability to guide the borrower through the 
transaction is restricted by these prearranged packages where services 
are not disclosed and service quality may be at risk. As pressure 
mounts on settlement providers such as appraisers, title companies, 
pest inspectors to drastically cut their prices to ensure inclusion in 
a lender package, quality of service could deteriorate. This scenario 
further underscores the need for full disclosure of services in a 
package.

Increased Competition or Increased Concentration

    There is the likelihood that HUD's packaging proposal can lead to 
increased concentration within the industry and reduce competition. 
Lenders will be provided a financial incentive (Section 8 exemption) to 
package with no obligation to pass along discounts to borrowers and as 
a result will control the entire mortgage transaction. This will most 
likely lead to increased market share of the large lenders who already 
control the lion's share of the mortgage origination and servicing 
market. Small service providers including real estate brokerages with 
ancillary services will be at risk. Today, the real estate transaction 
is still very much locally based. Small and mid-size service providers 
offer competitive choices to borrowers.
    Any regulation that moves an industry toward a more concentrated 
market structure should be viewed with considerable caution. An 
increased concentration of powers into the hands of a smaller number of 
large lenders and service providers could lead to higher closing 
costs--the exact opposite of HUD's stated goals for reform. Until the 
impact of this proposal is more fully understood, HUD should conduct 
the appropriate analysis and postpone any further action.

Alternative to the GMP

    We strongly believe there are serious flaws in the GMP proposal and 
believe they should instead pursue changes to the GFE that will provide 
some certainty about costs and simplify the process. However, if HUD is 
committed to moving forward with a Guaranteed Packaging Rule as 
outlined in their proposal, we recommend a restructuring of the GMP. If 
the intent is to promote competition among nonlender packagers, a 
mechanism must be designed that will truly allow anyone to package 
independent of the loan. If designed correctly, it may offer 
opportunities for nonlender packagers, such as real estate brokers, 
title companies, and others to provide alternative choices for the 
consumer, which do not exist under this proposal.
    To date it appears the only alternative that would meet this 
objective is to split HUD's GMP into two independent guaranteed 
packages:

 Lender Service Package: This package would include the lender 
    services and perhaps the appraisal and credit report (800 series 
    services on the HUD-1).

 Closing Package: This package would include all of the other 
    services such as title, inspections, surveys, Government fees, etc. 
    (1100, 1200, 1300 series services on the HUD-1).

    Under the two-package system, a lender could offer a lender package 
along with a guaranteed interest rate. Anyone, including nonlenders, 
such as real estate professionals could offer the closing package. The 
conditions for receiving the Section 8 safe harbor would have to be 
carefully defined but would be available to both packages. Packagers 
will be eligible for compensation within the package for services 
rendered and do not necessarily have to provide a specific settlement 
service. Some minimal requirements would include:

 A lender could not require a borrower who is obtaining the 
    lender's loan and the lender package to also purchase the lender-
    closing package. In other words, the lender cannot tie their loan 
    to a particular closing package.

 The services within the packages, both the lender and closing 
    cost packages, would be itemized. Upon request of the borrower, the 
    service providers should also be disclosed.

 Lenders should provide copies of all reports to borrowers, for 
    example, the credit report, appraisal, etc. Lenders should also 
    disclose to borrowers the type of appraisal used by the lender, for 
    example Automated Valuation Model (AVM), a drive-by, or a full 
    appraisal.

 HUD should move toward adopting and requiring uniform service 
    fee descriptions so borrowers can make apples-to-apples 
    comparisons.

    Under this proposal, large lenders will still have a competitive 
advantage with the Section 8 exemption. However, it is anticipated that 
the lender tying prohibition of the closing package will provide a 
nonlender some opportunity to compete in this market by offering these 
services directly to the consumer. The details of such a proposal 
requires further development and analysis to ensure it creates adequate 
opportunity for other market players to compete. Further, if HUD 
pursues this disclosure track, then it would be appropriate to delay 
implementation of the Enhanced Good Faith Estimate.

Additional Research and Analysis by HUD is Imperative Before
Advancing this Proposal

    The above issues argue the need for additional study on this 
proposal, the need for alternative approaches to the GMP, and its 
impact on the consumer, as well as the industry. Not enough is known 
about the likely impact of the GMP to support advancing this concept at 
this time. An incremental approach, such as the improved GFE is a more 
attractive option for satisfying HUD's stated goals for reform. By 
simplifying the GFE and clarifying that volume discounts are not 
violations of RESPA, HUD has created the necessary environment for 
packaging to occur.
    Regardless of which approach to reform HUD endorses, Congress 
should be consulted before any final action is taken. We are very 
supportive of these Congressional hearings and would like to serve as a 
resource as the Committee continues to review this proposal. There is 
too much at risk to move forward in a less than thoughtful and 
deliberative manner. While we support the concept of the Enhanced GFE, 
we question whether HUD has the authority to require lenders to 
guarantee their fees. Similarly, repealing Section 8, a core provision 
of RESPA, should receive considerable debate on Capitol Hill by the 
body that created it in the first place. What Congress deemed a 
prohibited practice, HUD recommends looking the other way as long as 
the prices are guaranteed.
    As you know, the Small Business Administration's (SBA) Office of 
Advocacy has 
submitted comments to HUD. They encouraged HUD to issue a revised 
Initial Regulatory Flexibility Analysis (IRFA) 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. They 
are of the opinion that further economic analysis prepared by HUD, in a 
revised IRFA, would improve the Final Rule. This is consistent with our 
belief that additional analysis is needed before moving forward with 
this proposal.

Conclusion

    Let me conclude by calling to your attention HUD's statements in 
the Proposed Rule under the Supplementary Information Section.

    ``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 homeownership rate in 
the Nation's history.''

    This statement should serve as a reminder that before HUD moves 
forward with an untested model, it must be sure it does not jeopardize 
a system that despite its flaws is still working well for most 
Americans.
    In light of this, we encourage further development of the Enhanced 
GFE concept as a means to make incremental changes to a system that we 
know and understand. If this were not a viable option, then we would 
strongly recommend further analysis and development of a two-package 
approach to the GMP. Unless there is a real opportunity for providers 
other than lenders to offer packaged settlement services to consumers, 
the negative consequences of HUD's proposed GMP will far outweigh any 
potential benefits to consumers.
    I thank you for the opportunity to express the views of the 
National Association of REALTORS ' and stand eager to work 
with Congress to address these issues.

                 PREPARED STATEMENT OF MARGOT SAUNDERS
            Managing Attorney, National Consumer Law Center
                            on behalf of the
          Consumer Federation of America, Consumers Union, and
                  U.S. Public Interest Research Group
                             April 8, 2003

    Mr. Chairman, Senator Sarbanes, and Members of the Committee, the 
National Consumer Law Center \1\ thanks you for inviting us to testify 
today regarding HUD's proposal to rewrite the RESPA Rules. We offer our 
testimony here on behalf of our low-income clients, as well as the 
Consumer Federation of America, Consumers Union, and the U.S. Public 
Interest Research Group.\2\
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    \1\ The National Consumer Law Center is a nonprofit organization 
specializing in consumer issues on behalf of low-income people. We work 
with thousands of legal services, Government, and private attorneys, as 
well as community groups and organizations, from all States who 
represent low-income and elderly individuals on consumer issues. As a 
result of our daily contact with these advocates, we have seen examples 
of predatory practices against low-income people in almost every State 
in the Union. It is from this vantage point--many years of dealing with 
the abusive transactions thrust upon the less sophisticated and the 
less powerful in our communities--that we supply these comments. We 
have led the effort to ensure that electronic 
transactions subject to both Federal and State laws provide an 
appropriate level of consumer protections. We publish and annually 
supplement twelve practice treatises which describe the law currently 
applicable to all types of consumer transactions.
    \2\ The Consumer Federation of America is a nonprofit association 
of over 280 pro-consumer groups, with a combined membership of 50 
million people. CFA was founded in 1968 to advance consumers' interests 
through advocacy and education.
    Consumers Union is the nonprofit publisher of Consumer Reports 
magazine, is an organization created to provide consumers with 
information, education, and counsel about goods, 
services, health, and personal finance; and to initiate and cooperate 
with individual and group efforts to maintain and enhance the quality 
of life for consumers. Consumers Union's income is solely derived from 
the sale of Consumer Reports, its other publications and from 
noncommercial contributions, grants, and fees. Consumers Union's 
publications carry no advertising and receive no commercial support.
    The U.S. Public Interest Research Group is the national lobbying 
office for State PIRG's, which are nonprofit, nonpartisan consumer 
advocacy groups with half a million citizen members around the country.
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    We wish to commend Secretary Martinez for the dramatic approach to 
RESPA \3\ reform advocated in these Proposed Rules. Clearly, the 
Department has recognized that the current state of RESPA's consumer 
protection is a murky mess. The stated goals and orientation of the 
Proposed Rule are wonderful--to protect consumers. We credit the hard 
work and creativity of HUD staff in the conception of this Rule. We 
applaud the many positive features of these proposals, and we commend 
HUD's steadfast commitment to ensuring that consumers benefit from 
these changes.
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    \3\ The Real Estate Settlement and Procedures Act (RESPA), 12 
U.S.C. Sec. 2601, et seq.
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    There are real complexities in these new proposals for RESPA 
compliance, with dramatic impact on determining compliance with the 
Truth in Lending Act and the Home Ownership and Equity Protection Act. 
In this testimony, we strive to make clear our support for HUD's 
efforts to protect consumers through the Proposed RESPA Rules. While we 
have concerns \4\ regarding a number of important details, this should 
not be regarded as diminishing our overall support for the basics of 
HUD's proposals:
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    \4\ As this testimony can only provide a summary of the many issues 
which must be addressed in the Proposed Rules, we point you to the 
comprehensive comments that we filed with HUD, available on our website 
at www.consumerlaw.org. Our comments to HUD were provided on behalf of 
our low-income clients, five national consumer advocacy groups, as well 
as the clients of 17 legal services programs in urban and rural areas 
throughout the Nation. Portions of our comments to HUD are reiterated 
in this written testimony.

 Yield Spread Premiums. Consumers need better protections from 
    overcharges resulting from improper payments of yield spread 
    premiums (YSP) from lenders to brokers. The Proposed Rule on new 
    disclosures for yield spread premiums does give consumers important 
    information to assist them in ensuring that yield spread premiums 
    are used as they direct. However, the Rule, as currently proposed, 
    lacks an effective enforcement mechanism.
 More Meaningful Good Faith Estimate. Currently the GFE 
    provides no information upon which a borrower can rely. HUD's 
    proposal appropriately requires that the loan originator--who is in 
    the best position to know the prices for the required services--
    provide estimates for closing costs that are reasonably close to 
    what actually will be charged to the consumer.
 Guarantee of Costs and Interest. The innovative proposal for a 
    Guarantee Mortgage Package Agreement (GMPA) will help simplify the 
    mortgage shopping process for those consumers in the prime mortgage 
    who carefully evaluate their mortgage options. Because the GMPA 
    will effectively mask many of the initial disbursements, we are 
    concerned that the package not be allowed to be used by lenders to 
    shield predatory loans from legal scrutiny.

    There are several overarching concerns and a myriad of important 
details which must be worked through to ensure that the Rule does, in 
fact, protect consumers, instead of simply providing a shield behind 
which mortgage originators can hide inappropriate, unfair, and illegal 
activities. While the overall concepts are excellent, we have been 
advocating some significant changes in the details of the Rules to 
prevent substantial harm to consumers. However, we want to be 
absolutely clear that our most important concern has to do with the 
Rule's potential to facilitate predatory lending.
    The single most critical point for the representatives of low- and 
middle-income consumers providing these comments is that HUD limit the 
Guaranteed Mortgage Package Agreement (GMPA) to prime loans. If 
subprime loans are permitted to be made through the GMPA structure, 
predatory lending will be facilitated and protected by the GMPA 
exemption. This means that HUD must go beyond its current proposal to 
exclude only HOEPA loans from the GMPA exemption, and exclude all loans 
with subprime characteristics.

                          SUMMARY OF CONCERNS

To Avoid Facilitating Predatory Lending,
The GMPA Should Be Limited To Prime Loans
    The idea behind the Guaranteed Mortgage Package Agreement is to 
simplify the mortgage shopping process by both bundling the loan 
closing costs with the loan points, and providing an interest rate 
guarantee based on the borrower's credit qualifications. This would 
accomplish two important goals: (1) it would allow borrowers to shop 
for loans based simply on the interest rate and the money required to 
obtain the loan; and (2) it would permit borrowers to apply to numerous 
lenders and receive guarantees of the loans for which they actually 
qualify, subject only to verification of the information the consumer 
has provided about the value of the home, the borrower's income, and 
other assets. The most important aspect of the GMPA is that it allows 
borrowers to obtain loan guarantees based on their actual credit rating 
very early in the process. This will prevent tremendous 
misunderstanding and allow borrowers with less than perfect credit to 
participate fully in the shopping process.
    The GMPA is a creative and novel proposal which, if implemented 
properly, will enable borrowers in certain mortgage markets to shop 
more effectively. However, HUD must keep in mind that this shopping 
does not occur among all consumers--those who are today already the 
victims of predatory mortgages and those who will be targeted in the 
future. Predatory lending in the subprime market thrives in an 
atmosphere in which lenders and brokers target homeowners and 
experience little pressure to provide the best products. Indeed, the 
incentives run in the other direction--borrowers are steered to the 
worst products. The GMPA must not provide a new means for lenders in 
the subprime market to avoid liability for noncompliance with consumer 
protection laws in that segment of the marketplace which most needs 
more substantive consumer protection.\5\
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    \5\ We have supported the concept of the GMPA in the past in the 
context of statutory change in the law. Amending the RESPA and TILA 
statutes would allow all the overlapping issues of disclosures under 
both statutes, enforcement, and protections against predatory lending, 
to be addressed together. Attempting to address the disclosure problems 
of RESPA only through regulation unfortunately creates serious 
implications for enforcing TILA requirements and removes existing 
protections against predatory lending. See Margot Saunders, Testimony 
Regarding the Rewrite of the Truth in Lending Act and Real Estate 
Settlement Procedures Act (September 16, 1998), available online at 
http://www.consumerlaw.org/initiatives/predatory_mortgage/sen_ 
mortg.shtml.
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    As the GMPA streamlines disclosure of specific charges and services 
it will allow mortgage originators to hide illegal fees and insulate 
lenders from legal challenges under both RESPA and the Truth in Lending 
Act (TILA).\6\ It was HUD's intent to encourage packaging by trading 
compliance with the specific requirements of RESPA's Section 8.\7\ 
However, an inadvertent result of the GMPA will be to conceal 
information needed to determine the accuracy of TILA disclosures as 
well, providing legal insulation from both Federal laws. One of the 
effects of the bundling of loan fees under the Guaranteed Mortgage 
Package will be that TILA compliance will no longer be discernable by a 
comparison of the TILA disclosure and the HUD-1.\8\ High cost loans may 
be successfully camouflaged from challenge under TILA regulations, or 
even HOEPA compliance, as a result. Neither bank regulators nor others 
reviewing mortgage loans will be able to perform accurate compliance 
reviews.
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    \6\ 15 U.S.C. Sec. 1601 et seq. Currently, compliance with TILA's 
required allocation of fees between amount financed and finance charge 
can be tested only by comparing the disclosure of specific fees 
provided on the RESPA HUD-1 with the statements of the disclosures 
provided on the TILA form. Though TILA generally requires the lender to 
provide the borrower with an itemization of the amount financed unless 
the consumer opts out, lenders need not give this itemization if they 
provide both the GFE and HUD-1. Official Staff Commentary 
Sec. 226.18(c)-4.
    \7\ 12 U.S.C. Sec. 2607.
    \8\ This situation may change if the Federal Reserve Board issues 
new regulations or new comments under TILA requiring otherwise. These 
comments evaluate the effect of the Proposed RESPA Rule on existing 
interpretations of TILA Rules.
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    As the purpose of the GMPA is to encourage shopping in the open 
marketplace of competitive mortgage lending, the GMPA should only be 
provided to that section of the market which is most capable of using 
competitive pressures in the open marketplace to protect themselves--
the prime market. This is essential. To ensure that HUD's new GMPA does 
not facilitate and protect predatory loans from legal scrutiny, any 
loan that meets any one of the following triggers should not be 
permitted to be made as a GMPA:

 Any HOEPA loan.

 Any loan with a prepayment penalty.

 Any loan with a Guaranteed Mortgage Package price (the single 
    fee)--which equals or exceeds 5 percent of the principal of the 
    loan.

HOEPA Loans Can Be Mischaracterized, Yet Protected From
Challenge In A GMPA
    The Home Ownership and Equity Protection Act, passed in 1994,\9\ 
does not cure the problem of abusive home equity lending. The law 
continues to allow high rate home equity loans to be made and does not 
regulate excessive interest rates or fees per se. Its coverage is 
limited, excluding loans with high rates and fees just under the 
trigger amounts, open-end home equity credit, and reverse 
mortgages.\10\ Extraordinarily abusive loans can continue to be made 
without triggering HOEPA protections because lenders can easily 
circumvent HOEPA by charging rates and fees just under the HOEPA 
trigger amounts.
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    \9\ Codified at Section 129 (15 U.S.C. Sec. 1639) and in Sections 
31 and 32 of Regulation Z (12 CFR Sec. Sec. 226.31 and 226.32).
    \10\ 15 U.S.C. Sec. 1602(aa)(1).
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    As a result, in many high cost loans, there is litigation regarding 
whether the fees charged by the lender have been properly allocated to 
the HOEPA points and fees trigger. Many loans are treated by lenders as 
non-HOEPA loans, only to be determined later by regulators or attorneys 
for consumers to have been wrongly excluded from HOEPA. Once it is 
shown that a loan should have been covered by HOEPA, but was not, 
considerable consumer protections then apply.\11\ A lender who violates 
the requirements of HOEPA faces enhanced statutory penalties, as well 
as rescission of the loan.\12\ The protections of HOEPA are thus most 
often helpful to consumers when they have been breached--because they 
provide substantial assistance in avoiding foreclosure on loans which 
included abusive terms.
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    \11\ For example, only HOEPA loans require the extra disclosure 
required 3 days before closing, as well as limitations of the 
circumstances in which prepayment penalties can be charged (15 U.S.C. 
Sec. 1639(c)), special requirements for payments made to home 
improvement contractors (15 U.S.C. Sec. 1639(i)), and prohibitions on 
extending credit without regard to the consumer's payment ability (15 
U.S.C. Sec. 1639(h)).
    \12\ 15 U.S.C. Sec. 1640(a) and 15 U.S.C. Sec. 1635.
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    The HUD-1 required by RESPA satisfies the requirement under TILA 
that an itemization of the amount financed be made available to the 
borrower. This itemization is critical for determining not just TILA 
compliance but also whether the loan is covered by HOEPA. The GMPA 
would make it impossible for consumers--or regulators--to determine 
whether a loan presented as a non-HOEPA loan was actually a HOEPA loan.
    This is why the GMPA cannot be permitted to mask the fees of loans 
which are anywhere in the neighborhood of HOEPA loans--else 
substantially abusive loans will be made under the rubric of the GMPA, 
thus denying to consumers the ability to test these loans for 
compliance with the Truth in Lending Act and appropriate exclusion from 
HOEPA.

All Subprime Loans Should Be Excluded From The GMPA
    We know the characteristics of predatory loans. HOEPA only covers a 
small percentage of subprime loans.\13\ HUD has proposed only to 
exclude HOEPA loans from the GMPA. This does not provide nearly enough 
protection. Currently advocates 
estimate the bulk of predatory loans finance between 5 to 8 percent of 
the principal of the loan as points, fees, and closing costs.\14\ HUD 
has already stated that financing more than 3 percent of points and 
fees is a sign of a predatory loan.\15\ Further, in its regulations of 
the GSE's, HUD has prohibited the provision of housing credits for 
loans in which more than 5 percent of the principal has been 
charged.\16\ It is also important to note that many of the new anti-
predatory lending laws passed by the States have used 5 percent points 
and fees as a trigger for coverage.\17\
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    \13\ Federal Reserve Board, Final Rule, Statement of Basis and 
Purpose, 66 Fed. Reg. 65604, 65607 (December 20, 2001).
    \14\ This information is gleaned from the hundreds of loan 
documents reviewed each year by the attorneys providing these comments. 
See also Washington Department of Financial Institutions, Expanded 
Report of Examination for Household Financial Corporation III as of 
April 30, 2002, at 48 (finding that Household charged 7.4 percent in 
up-front costs on most loans), available from the National Center on 
Poverty Law as Clearinghouse No. 54,580.
    \15\ See Joint HUD-TREASURY Report on Recommendations to Curb 
Predatory Home Mortgage Lending, June 20, 2000, at page 11. http://
www.hud.gov/library/bookshelf18/pressrel/pr00 -142.html. The agencies 
noted the dangers to homeowners of financing high fees:
    Financing points and fees may disguise the true cost of credit to 
the borrower, especially for high interest rate loans. Restricting the 
financing of points and fees for HOEPA loans would cause these costs to 
be reflected in the interest rate, enabling borrowers to better 
understand the cost of the loan, and to shop for better terms.
    \16\ See 24 CFR 81.16(b)(12) and 24 CFR 81.2. These regulations do 
allow third-party fees paid for closing costs to be excluded from the 5 
percent calculation. However, as these third-party fees would not be 
itemized on the GMPA, excluding some fees would not be possible. It is 
also far better, at this point of the development of this new product 
to exclude too many loans, rather than to include too many, which would 
have the effect of limiting enforcement of existing law on predatory 
mortgages.
    \17\ See, e.g., N.C.G.S. S.L. 1999-332; Ga. Code Section 7-6A-1 et 
seq.; 2001 N.Y. A.B. 11856 (SN) (October 3, 2002).
---------------------------------------------------------------------------
    Thus, to ensure that HUD's new GMPA does not facilitate and protect 
predatory loans from legal scrutiny, any loan that meets any one of the 
following triggers should not be permitted to be made as a GMPA: Any 
HOEPA loan, any loan with a prepayment penalty, and any loan with a 
Guaranteed Mortgage Package price (the single fee)--which equals or 
exceeds 5 percent of the principal of the loan.
    In other words, in addition to HOEPA loans, any loan which has 
either a prepayment penalty, or the price for the GMPA is equal to or 
more than the 5 percent of the loan principal must not be eligible for 
the exemption outlined in the Proposed Rule. Any lender making a loan 
with either of these criteria would still be required to itemize the 
fees paid to settlement service providers pursuant to the Rules for the 
Good Faith Estimate.

GMPA Should Not Be Permitted For Loans With High Points And Fees
    As predatory loans generally charge high points and fees it is 
essential that the GMPA not be permitted to be provided for these 
loans. The most meaningful mark of a predatory loan is in the high 
amount of points and fees \18\ financed by the borrower. The more the 
borrower is charged up-front, the more the immediate financial gain 
achieved by the lender. This is why many of these loans are not 
affordable to the homeowner--the lender has an incentive to make them 
nonperforming loans. If that loan does not perform such that the 
homeowner is forced to refinance, it just means more profit for the 
lender at each refinancing. For the homeowner, it means more equity is 
stripped from the home each time.
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    \18\ We include in our definition of fees, the high costs of single 
premium credit insurance.
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    Using 5 percent of the principal as the trigger for exclusion from 
the GMPA eligibility will still allow loans with very high up-front 
costs to be made with a GMPA. According to various studies, closing 
costs on conventional mortgages rarely exceed 2 percent of the loan 
amount.\19\ Using 5 percent as the trigger allows ample (perhaps too 
much?) room to ensure that all prime loans for which a GMPA might be 
appropriate would be eligible for the competitive benefits of the GMPA. 
However, this figure also ensures that loans which are not truly 
competitive are excluded from the exemption.\20\
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    \19\ According to the Federal Housing Finance Board's ``Monthly 
Interest Rate Survey,'' Table 1: Terms on Conventional Single-Family 
Mortgages, Annual National Averages, All Homes, available at 
www.fhfb.gov/MIRS/mirs_t1.xls, initial fees and charges average less 
than one point from 1995 through 2000 on conventional residential 
mortgages.
    \20\ For example, a loan of $150,000 would be permitted to have a 
GMPA package cost of $7,499. A $200,000 loan could have a GMPA price of 
$9,999. These up-front costs are actually much higher than most 
competitive, prime loans would ever charge for up-front closing costs. 
To the extent that the figure of 5 percent may represent too small a 
sum to compensate lenders for their up-front costs when making small 
loans (for example, loans of less than $75,000), the 5 percent trigger 
could be adjusted upward. However, just as this figure is adjusted 
upward for smaller loans, the 5 percent trigger should also be adjusted 
lower for loans of larger amounts.
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GMPA Should Not Be Permitted For Loans With Prepayment Penalties
    Prepayment penalties also are the mark of a predatory loan, and 
lenders providing GMPA's should not be permitted to include prepayment 
penalties.
    When a lender extends considerable expenses in the making of a 
loan, the lender does risk loss if the loan is prepaid before the 
regular payments on the loan allow the recoupment of these expenses. In 
the prime mortgage market, the effect of 
competition protects lenders: The low-interest rate the borrower 
currently has discourages the borrower from prepaying the loan. Typical 
prime mortgage loans stay on the books for an average of 5 years. Thus, 
only 2 percent of prime loans have a prepayment penalty.\21\
---------------------------------------------------------------------------
    \21\ See Freddie Mac, Frequently Asked Questions on Prepayment 
Penalties, available at http://www.freddiemac.com/singlefamily/
ppmqanda.html.
---------------------------------------------------------------------------
    However, fully 70 percent of subprime loans have prepayment 
penalties because of lack of perceived options on the part of the 
borrowers.\22\ In the subprime mortgage market, the brokers are 
generally the gatekeepers for the loans, and they operate on the 
reverse competition method of yield spread premiums. The higher the 
premium paid to a broker, the more likely the broker will match a 
lender up with an unwitting borrower. The hefty price paid to the 
broker in the yield spread premium is an expense that the lender must 
recoup in order to avoid a loss, especially considering that the same 
broker has an incentive to market aggressively another loan to the same 
borrower. Thus, the lender must charge prepayment penalties to protect 
itself from the costs incurred by yield spread premiums.
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    \22\ See Gail McDermott, Leslie Albergo, Natalie Abrams, Esq., NIMS 
Analysis: Valuing Prepayment Penalty Fee Income Standard & Poor's, News 
Release, January 4, 2001. Also see, North Carolina Coalition for 
Responsible Lending, Prevalence of Prepayment Penalties, available at 
http://www.responsiblelending.org/PL%20-%20Coalition%20Studies.htm 
citing data obtained in an interview with the Mortgage Information 
Corporation and the industry newsletter, Inside Mortgage Finance, and 
the following articles on conforming mortgages: ``Freddie offers a new 
A-, prepay-penalty program,'' Mortgage Marketplace, May 24, 1999; 
Joshua Brockman, ``Fannie revamps prepayment-penalty bonds,'' American 
Banker, July 20, 1999.
---------------------------------------------------------------------------
    If prepayment penalties were disallowed, unreasonable yield spread 
premiums would not be paid by lenders, because they could not afford 
the risk. This would not mean that loans would not be made--they are 
made every day in the prime market without hefty premiums and 
prepayment penalties. As yield spread premiums are completely masked in 
the GMPA--unreasonable yield spread premiums should not be encouraged 
by allowing loans with prepayment penalties to be included in the 
exemptions offered by the GMPA.\23\
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    \23\ Subprime lenders claim that borrowers voluntarily choose 
prepayment penalties to reduce their interest rates. Borrower choice 
cannot explain, however, why some 70 percent of subprime loans 
currently charge prepayment penalties and only 2 percent of 
conventional loans do (almost all in California). The real reason is 
that conventional mortgage markets are competitive and sophisticated 
borrowers have the bargaining power to avoid these fees; borrowers in 
subprime markets often lack sophistication or are desperate for funds 
and simply accept the penalty that lenders insist that they take. In 
addition, predatory lenders favor prepayment penalties as a way of 
preventing borrowers from seeking more competitive rates and terms once 
they realize what has happened.
---------------------------------------------------------------------------
    It is clear to many that prepayment penalties on subprime loans 
have virtually nothing to do with lowered interest rates.\24\ It 
therefore cannot be argued that precluding loans with prepayment 
penalties will deprive most borrowers of a viable way to decrease 
interest rates.
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    \24\ See e.g., Amy Crew Cutts, On the Economics of Subprime 
Lending, The FTC Roundtable: Economic Perspectives on the Home Mortgage 
Market, Washington, DC, October 16, 2002, Slide 2.
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The GMPA Should Not Be Implemented Without Resolving
Its Effect On TILA Compliance
    To ensure that the GMPA does not create havoc with compliance and 
enforcement of TILA, HUD should move forward on the GMPA portion of the 
Proposed Rule only after coordinating with the Federal Reserve Board to 
ensure that compliance with TILA maintains the current degree of 
transparency in home mortgage loans. TILA and RESPA are connected in 
several ways. Overhauling RESPA as suggested will create havoc to the 
balance currently struck between RESPA and TILA.\25\
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    \25\ Of relevance to this discussion, TILA requires the lender to 
give the consumer an itemization of the amount financed, including the 
sum of the prepaid finance charges. However, the lender need not give 
the itemization if the consumer opts out of receiving it. 15 U.S.C. 
Sec. 1638(a)(2)(B); Reg. Z Sec. 226.18(c).
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    In transactions to which RESPA applies, TILA Rules say that the 
lender need not give an itemization of the amount financed if it 
provides both the GFE and HUD-1.\26\ Mortgage lenders have consistently 
used the GFE and HUD-1 as a replacement for the itemization of the 
amount financed.\27\
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    \26\ Official Staff Commentary on Regulation Z, Sec. 226.18(c)- 4.
    \27\ TILA and RESPA also intersect when the mortgage transaction 
involves the purchase, acquisition, or construction of the home 
securing the mortgage. In the purchase-money context where the mortgage 
loan is subject to RESPA, TILA requires that a Good Faith Estimate of 
the TILA disclosures be given within 3 days of application (in effect, 
concurrently with the GFE). 15 U.S.C. Sec. 1638(b)(2); Reg. Z 
Sec. 226.19(a)(2).
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    The importance of the consumer receiving an itemization of the 
closing costs for TILA compliance purposes cannot be overstated. This 
is the only way that both regulators and consumers can determine if the 
APR, finance charge, and amount financed disclosures are accurate. The 
effect of the proposed GMPA disclosure is to eliminate the itemization 
of the closing charges, at least on any form provided under RESPA. 
Since the HUD-1 substitutes for the TILA itemization, the effect of 
using the proposed truncated HUD-1 will be that neither consumers nor 
regulators will be able to review the TILA cost of credit disclosures 
for accuracy.\28\
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    \28\ HUD proposes that the HUD-1 contain a list of the finance 
charges that the lender used to calculate the APR. This suggestion does 
not cure the problems just described. Whether a particular lender 
violates the finance charge disclosure rules requires an independent 
review of all of the closing costs, not just those that the lender 
treated as finance charges. Under the proposal, regulators and 
consumers would be unable to make that independent review.
---------------------------------------------------------------------------
    Given the interplay between TILA and RESPA, it is imperative that 
HUD not move forward on implementation of the GMPA unless TILA and 
HOEPA compliance can be enforced.

The GMPA Rules Must Be Tightened
    If designed properly, with all of the issues relating to compliance 
with TILA resolved, and limited to the prime market, the Guaranteed 
Mortgage Package should prove helpful for consumers who shop in a 
competitive marketplace for their mortgages. In such a market, the GMPA 
would facilitate the ability of consumers to 
compare mortgage products that are actually available to them. With 
automated underwriting, mortgage lenders can (and already do in some 
instances) easily provide consumers guaranteed information about 
closing costs, interest rate, and points early enough so that they can 
shop and make informed choices in a quick and timely manner. Only this 
type of inclusive disclosure would clearly meet the purposes of RESPA 
and offer American homeowners a real opportunity to choose the best 
loan available for their individual needs.
    Under the current scheme of mortgage financing, very few consumers 
know with certainty the interest rate or the total points and closing 
costs they will be charged for a mortgage loan before they have to pay 
the fees for application, credit report, appraisal, etc. Instead, 
consumers must generally pay a fairly sizable sum to apply for a 
mortgage loan, the full cost of which they will not know until some 
later time. The effect of the current industry practice is that even 
sophisticated consumers find it next to impossible to ensure that they 
are receiving the best loan that fits their needs. Moreover, 
unscrupulous brokers and lenders have a virtually free hand to increase 
the junk fees, points and/or interest rates on the loans.\29\ 
Essentially, mortgage borrowing today is like what some people call 
``buying a pig in a poke.'' You pay before you know what you are 
getting.
---------------------------------------------------------------------------
    \29\ The numerous class action lawsuits challenging the payment of 
yield spread premiums to mortgage brokers is a primary example of 
consumers who have found they received mortgage loans which were more 
expensive than they should have.
---------------------------------------------------------------------------
    The better system is one in which the consumer can apply, at little 
charge, to the several lenders receiving the credit report, answer any 
additional questions the lenders request, and then receive from each of 
the lenders a guarantee of a loan at a specific rate, with a fixed 
amount of points charged, and a guarantee of the full amount of closing 
costs to be charged.\30\ This guarantee should be subject only to two 
contingencies: (1) that the information supplied by the consumer 
regarding income and assets could be verified; and (2) that the value 
of the collateral--the consumers' residence--was sufficient to secure 
the loan. Under this method, consumers would actually know the full 
price for a mortgage loan before they paid for it.
---------------------------------------------------------------------------
    \30\ All closing costs charged by the lender to close the loan 
would be included in this guarantee. Some expenses would be excluded 
from the guaranteed closing costs package, such as certain truly 
optional expenses like owner's title insurance, as well as expenses 
unrelated to the loan itself like hazard insurance and property taxes.
---------------------------------------------------------------------------
    Assuming that HUD clarifies that ``final underwriting'' only means 
verification of information provided by the consumer--and requires that 
all of the credit qualifications of the consumer be approved prior to 
the offer of the GMPA--the GMPA should indicate the minimum 
requirements the consumer must meet. The GMPA will be based on 
information provided by the consumer on income, value of home, other 
assets, and similar information. The preliminary underwriting performed 
by the lender is based on the consumer's information and the consumer's 
actual credit status (as determined from credit reports). However, the 
GMPA will offer contingent of the consumer fitting certain 
preconditions. For example, rather than a precise statement of the 
consumer's exact income, a maximum debt-to-income should be 
sufficient.\31\
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    \31\ For example, if the consumer provides information indicating 
annual income of $70,000 a year, and the terms of the loan offered in 
the GMPA require annual income of $60,000, the GMPA should state this. 
So if this consumer actually had annual income of $69,000, the GMPA 
should still be valid. If the consumer's information turns out to be 
incorrect in a de minimus amount, that should not alleviate the 
lender's obligations under the GMPA.
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Section 8 Exemption Is Not Justified Without A Clear Guarantee
    Unfortunately, the Guaranteed Mortgage Package outlined by HUD in 
these Proposed Rules only seems to be describing a program like this, 
but the crucial elements of exactly what is promised, and what is left 
open to later decision--``final underwriting''--are not addressed.
    We have long recommended to HUD that it design a form for consumers 
to use when applying to lenders. Consumers could fill out this form 
once, and send it along with any other information a particular lender 
requires to a number of lenders. Each lender would then conduct a 
credit underwriting of the consumer's application, based on the 
consumer's actual credit, and the information provided by the consumer 
about income, value of the home, other assets, etc. The GMPA must then 
be offered to the consumer contingent only upon the lender's 
verification of the information provided by the consumer. Unless HUD 
clarifies the meaning of ``final underwriting'' to mean just this, the 
entire GMPA has minimal value for consumers--only offering lenders a 
way of avoiding compliance with Section 8 of RESPA, and virtually all 
of the important provisions of TILA.
    It may be completely unnecessary for HUD to provide an exemption 
from Section 8 liability to create the incentive in the marketplace to 
offer the guaranteed interest rate and guaranteed closing costs. There 
is little in current law that would stop a lender from providing these 
guarantees now. We do agree with HUD's principle that removing the 
barrier of Section 8's prohibition of volume-based discounts would 
allow lenders to shop for settlement services and thus reduce costs. 
However, HUD can remove the barrier this places on the marketplace 
without creating the problems that will result from the exemptions from 
RESPA and TILA. All HUD need do is remove the current regulatory 
barrier for volume-based discounts by requiring that the average value 
of volume-based discounts be passed along to consumers. This seems a 
far simpler solution than the current construct for the GMPA.\32\
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    \32\ Indeed, it seems quite likely that HUD need do nothing to 
facilitate this type of guarantee and fixed price or closing costs. At 
least one large lender--ABN AMRO--has been providing this product quite 
successfully for some time. This lender is providing the product, with 
all the guarantees that we advocate (guarantee of the interest rate, as 
well as points and closing costs) and is doing it without the exemption 
from Section 8 liability, and with full compliance with the Truth in 
Lending Act. See www.mortgage.com. Indeed, according to one 
commentator, several other large lenders are now providing the same 
type of guaranteed packages, also without requiring a change in the 
law. See, Ken Harney, Bundled Settlement Fees Attracting Rate Shoppers, 
The Washington Post, Real Estate Section, February 10, 2003. 
www.washingtonpost.com/wp-dyn/articles/A8995-2003Feb14.html.
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Lender's Breach Of The GMPA Promise Must Create A Presumption
That Section 8 Has Been Violated
    HUD must effectively hold lenders to the promises made in the GMPA. 
It is completely ineffective to provide that a lender's failure to keep 
the undertakings made in the GMPA simply causes the lender to lose the 
exemption from Section 8. If the GMPA is not abided by, the consumer 
has no way of determining whether a Section 8 violation has occurred, 
and no way of alleging one in a legal complaint. HUD must provide that 
a lender's failure to keep the promises made in the GMPA to the 
consumer results in a presumption of a violation of Section 8.

Requirements For Yield Spread Premiums Must Be Tighter
    HUD has made good recommendations on how to deal with the 
cantankerous issue of lender payments to mortgage brokers. The Proposed 
Rule would amend 24 CFR Sec. 3500.7, to add a new subsection (d)(5) 
requiring that all yield spread premiums paid by the lender must be 
disclosed in the GFE as a payment to the borrower. This is very helpful 
to consumers--as far as it goes. However, this Proposed Rule change is 
a significant benefit to the borrower which must be included, not only 
in that section of the Rules relating to disclosures, but also in the 
substantive protections of the regulations interpreting RESPA's Section 
8,\33\ that is, in 24 CFR Sec. 3500.14. Otherwise, there will be a 
change in form without any real enforcement, somewhat nullifying the 
value of the change.
---------------------------------------------------------------------------
    \33\ 12 U.S.C. Sec. 2607(a); 24 CFR Sec. 3500.14(b).
---------------------------------------------------------------------------
    HUD's Proposed Rule on the treatment of yield spread premiums would 
be far 
effective if it were not couched entirely in the context of a 
disclosure. There is no private right of action under RESPA for 
violating its disclosure provisions.
    Consumers who do business with mortgage brokers generally have the 
understanding that the brokers will provide them the loan at the lowest 
rate that the broker finds for them.\34\ Consumers have generally 
understood and agreed to a specific broker's fee to be paid directly by 
them--either in cash or by borrowing more--to the mortgage broker to 
compensate the broker for obtaining the loan. What consumers do not 
understand, and have not agreed to, is the mortgage broker receiving an 
additional fee from the lender. Extensive academic analysis has proven 
this observation to be true.\35\
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    \34\ The fact that mortgage brokers hold themselves out as 
representing the consumer to find the best loan for them, and to 
represent their best interest, should be beyond much dispute 
at this point. Consider for example, the illustrations published 
recently in a White Paper by a 
lender's group: [A] quick Internet search for the phrase ``why use a 
mortgage broker'' brings up numerous broker promotions on mortgage 
broker websites, including the following:
    ``[We] shop the market for you so you can be assured that you are 
receiving the best mortgage rates and terms available.''
    ``For us, nothing is more important than making sure you get the 
best loan in today's fast changing market.''
    ``We will select the best lender from our many sources to provide 
you with a loan that meets your individual needs.''
    ``Best of all, a mortgage broker can usually save you money because 
of a variety of loan programs and pricing available to them. A broker 
will do the `rate shopping' for you to find the best possible interest 
rate at the least cost.''
    Anne Canfield, The Lending Report--``Mortgage Brokers and Lenders: 
Understanding the Difference,'' April 1, 2003 at 2.
    \35\ See, e.g., Statement of Professor Howell E. Jackson, Harvard 
Law School, before the U.S. Senate Committee on Banking, Housing, and 
Urban Affairs, January 8, 2002, available at http://banking.senate.gov/
02 _ 01hrg/010802/jackson.htm.
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    To date, yield spread premiums are generally paid by the lender to 
the broker solely in compensation for the higher rate loan. In other 
words, because the broker brings to the lender a loan at a higher rate 
than the consumer would otherwise qualify the broker is paid a fee, or 
kickback. These fees are an extra fee that the broker is able to 
extract from the deal. In most cases, the borrower is not only paying 
an up-front broker fee, but is also paying a higher interest rate as a 
result of this kickback. As this practice clearly provides an incentive 
for brokers to obtain above par loans for consumers, the dynamics of 
the marketplace closely resemble the marketplace that Congress 
attempted to control with its passage of RESPA. This is what is going 
on in the marketplace today, and this is why the Proposed Rule by HUD 
is so sorely needed.
    As the Secretary has indicated, the goal is to change the current 
practices of allowing yield spread premiums to operate simply to 
increase the profit of mortgage brokers and lenders while providing 
little or no benefit to consumers. Given the statements of the 
Secretary, and the extensive testimony at the 2002 Senate hearings,\36\ 
the lack of correlation between the fees paid to a mortgage broker on a 
given loan and the amount of work performed by the mortgage brokers on 
that loan should be an accepted fact at this point. However, for HUD to 
make the Secretary's promise \37\ a reality, several more decisive 
steps must be taken.
---------------------------------------------------------------------------
    \36\ See Hearing on ``Predatory Mortgage Lending Practices: Abusive 
Uses of Yield Spread Premiums.'' January 8, 2002. http://
banking.senate.gov/02 _ 01hrg/010802/index.htm.
    \37\ Regarding this new Rule, the Secretary said: ``The new policy 
will make clear that it is illegal for a settlement service provider to 
mark-up fees when it is making a payment to another settlement service 
provider, unless it provides additional value to the homebuyer in the 
process, or when a provider does no work for the fee and charges an 
unreasonable amount.'' See HUD No. 01-105, October 15, 2002, ``Martinez 
Moves to Protect Homebuyers; Calls for Simplified Mortgage Process.''

 HUD must substantively change the regulations regarding 
    payments of the yield spread premium, not just the sections 
---------------------------------------------------------------------------
    relating to disclosures.

 Before any payment is made to the broker, the borrower and the 
    mortgage broker must enter into a binding fee agreement regarding 
    the total compensation, however denominated, to be paid to the 
    broker.

 The borrower must be offered a choice of how to pay the broker 
    fee, whether in cash, by borrowing more, or by increasing the 
    interest rate and having the lender pay the broker fee.

 This choice should be offered after loan approval but before 
    the settlement.

 The amount the broker is paid must be the same whether paid by 
    the borrower or the lender. The amount paid the broker by the 
    lender reduces, by the exact amount, the amount owed by the 
    borrower to the mortgage broker.

 The total amount paid by borrower and lender must be 
    reasonable compensation for goods, services, and facilities 
    actually provided.

    These principles accomplish several things. First, the consumer 
knows up-front how much the mortgage broker will charge. Second, the 
consumer is given the opportunity to choose how this payment will be 
paid. Third, and most importantly, the broker compensation remains the 
same regardless of method of payment. This point is crucial, because it 
eliminates any anti-competitive incentive the broker has to place the 
borrower in a loan with an interest rate greater than that for which 
the borrower would otherwise qualify. In other words, whether the 
borrower chooses a below par loan, a par loan, or an above par loan 
with a yield spread premium, the broker compensation will remain the 
same. This is not how the system works today and it must be changed.
    HUD's current proposal on how to treat yield spread premiums is a 
variation of these principles. However, as currently configured, they 
are neither clear enough to offer real protections to consumers, nor 
are they enforceable by consumers. For example, under the new proposal 
it is not at all clear how and when the consumer actually exercises the 
choice of whether to use the yield spread premium. The proposed 
information to be included in the GFE does not necessarily include loan 
terms which are actually available to the consumer. It is not clear how 
the consumer should indicate the choice actually made.
    We strongly recommend that HUD make good on the Secretary's 
promises and make the yield spread premium a useable--and enforceable--
credit for the consumer. This can best be done by requiring two 
separate agreements to be executed between the consumer and the broker, 
one at the beginning of the relationship in which the broker states the 
total amount of compensation to be received for the loan, and another 
when the loan has been approved in which the consumer is informed of 
the various options by which he/she can pay the broker's fee and other 
closing costs, and the consumer exercises that option.
    Because of extensive litigation flowing from the industry's 
continued refusal to comply with the mandate of RESPA, in 1998, 
Congress issued a directive to HUD to write a Statement of Policy.\38\ 
Despite the issuance of the 1999 Policy Statement, the industry 
continued as before--lenders continued to pay broker fees without 
evaluating either the services provided by the broker or whether the 
payment of the lender fee reduced the fees otherwise owed by the 
borrower. Because the benefit to the brokers and lenders was so great 
(higher fees for brokers, higher interest rates for lenders), the 
mortgage industry's strategy was to continue its illegal practice, pay 
off the few individual actions brought against it and mount a massive 
effort to fight class action cases challenging the payment of these 
fees, which might actually cost the industry real money and cause the 
industry to change its behavior.
---------------------------------------------------------------------------
    \38\ ``The conferees expect HUD to work with representatives of 
industry, Federal agencies, consumer groups, and other interested 
parties on this policy statement.'' See the Conference Report on the 
Departments of Veterans Affairs and Housing and Urban Development, and 
Independent Agencies Appropriations Act, 1999, H.R. Conf. Rep. No. 
1050769 at 260 (1998).
---------------------------------------------------------------------------
    Despite industry's plan, the Eleventh Circuit ultimately held that 
consumers could join together in class actions and challenge this 
activity.\39\ The industry reacted strongly to this case (Culpepper II) 
and pushed HUD to save it from class action liability by ``clarifying'' 
its policy statement. HUD accepted the invitation and issued its second 
policy statement on the subject on October 18, 2001. The crux of HUD's 
``clarification'' comes on page 11, with the statement:
---------------------------------------------------------------------------
    \39\ Culpepper v. Irwin Mortgage Corp., 253 F.3d 1324 (11th Cir. 
2001).

          HUD's position is that in order to discern whether a yield 
        spread premium was for goods, facilities, or services under the 
        first part of the HUD test, it is necessary to look at each 
---------------------------------------------------------------------------
        transaction individually. . . . [21]

    In addition, HUD explicitly repudiated the decision in Culpepper II 
and stated its standard to be: The total compensation paid to the 
broker from any source (not just the lender-paid fee) must be for 
goods, services, or facilities. Unfortunately, the 
effect of HUD's 2001 Policy Statement had the intended impact on the 
payment of lender paid broker fees. Providing the ``clarification'' of 
the 1999 Statement as sought by the mortgage industry has had the 
effect of completely eliminating class actions as a form of redress for 
illegal lender paid broker fees.\40\ Now without class actions as a 
means to litigate the legality of these fees, the industry has no 
incentive to change its practices or even to comply with a new 
regulation--because there are insufficient legal resources in this 
Nation to represent consumers in individual actions involving claims of 
only a few thousand dollars.
---------------------------------------------------------------------------
    \40\ This has been the exact decision of several courts, including 
Glover v. Standard Fed. Bank, 283 F.3d 953 (8th Cir. 2002); Shuetz v. 
Banc One Mortgage Corp., 292 F.3d 1004 (9th Cir. 2002); Heimmermann v. 
First Union Mortgage Corp., __ F.3d __, 2002 WL 31067330 (11th Cir. 
September 18, 2002).
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The New Rules For The GFE, While Basically Good, Must Be Tweaked
To Be Fully Protective Of Consumers
    We applaud the bright line Proposed Rules by HUD to severely limit 
the gaming currently rampant in the marketplace on closing costs. The 
GFE should be a true reflection of actually anticipated costs, not an 
opportunity for lenders to mislead consumers--as it is currently. 
Lenders who make numerous loans do have the capacity to determine their 
own charges and those of settlement service providers that they choose 
and require.
    There are a number of significant changes, however, which must be 
made to the construct of the proposed GFE, for example:

 The language regarding the broker's relationship to the 
    consumer is incorrect in many States and must be deleted.

 The comparison chart on the GFE form should be uniform and 
    reflect actual terms available to the consumer.

 There is no longer any justification to exclude home equity 
    lines from RESPA coverage, so the Rules should require they be 
    covered.

 The disclosures in Section II of the GFE should include 
    critical loan terms such as prepayment penalties and balloon terms.

 The credit from the lender must not appear simply as a credit 
    against closing costs, rather it should appear as a cash credit in 
    the 200 series of the HUD-1.

    We have provided more detailed information about our 
recommendations in the comments submitted to HUD.

There Must Be Effective Enforcement Mechanisms For An Originator's
Failure To Comply With All Aspects Of These New Rules
    Even perfect consumer protection rules will only work in the 
marketplace if they are enforced in a meaningful way. Lenders must have 
incentives to comply with the rules. The potential cost of lack of 
compliance must be greater than the profit. The Proposed Rule does not 
currently include any mechanisms to punish transgressors. The proposal 
only provides that once the transgression is caught, the remedy is for 
the lender to provide what was promised all along. This rewards lack of 
compliance because the cost of being caught breaking the rules is the 
same as compliance. This is frankly absurd. HUD must provide a means to 
make it cost originators if they violate these rules--or else the rules 
are virtually meaningless. We propose several specific measures to make 
the new RESPA Rules meaningful:

 Civil enforcement of each element under the Rule is essential. 
    This includes the requirements for treatment of the yield spread 
    premium, the new Rules for the Good Faith Estimate, as well as for 
    a lender's failure to keep the promises in the GMPA.

 HUD must remove its stated prohibition against enforcing 
    violations of Section 8 through class actions. The 2001 Statement 
    of Policy explicitly requires a court's individual review of each 
    transaction, eliminating the efficient enforcement mechanism of 
    class actions. Once HUD's Proposed Rules provide the new Rules of 
    the road, there is no reason a court cannot evaluate and enforce 
    the yield spread requirements in class reviews--as the only issue 
    will be whether the mortgage broker actually gave the consumer the 
    full benefit of the payment from the lender.

 A lender's failure to follow the Rules for the new Good Faith 
    Estimate must be actionable in some manner, other than merely 
    regulatory enforcement, as regulatory enforcement has shown that it 
    is not sufficient to encourage the industry to comply with the law. 
    As RESPA does not provide a private right of action, HUD can and 
    should articulate that the failure to comply with these Rules is 
    unfair and deceptive. This will enable some private enforcement 
    under State and Federal prohibitions against unfair and deceptive 
    acts and practices.

 A lender's failure to follow the Rules when offering a GMPA or 
    to close on a loan that does not conform to the GMPA must 
    presumptively violate RESPA's Section 8. The current proposal 
    results in the lender losing its exemption from Section 8 coverage 
    and only allows the consumer a potential contract action against 
    the lender for not keeping the promises in the GMPA. This is 
    completely ineffective. Few consumers will have the means to bring 
    a case to court for the few thousand dollars which would be 
    obtained in a contract action on most failed GMPA's. Also, 
    consumers will not have the means to allege a prima facie case of a 
    violation of Section 8 as the GMPA scenario dictates that neither 
    the initial estimate, nor the HUD-1 will provide details on the 
    payments of fees for services provided by third parties. HUD must 
    state that if a lender fails to comply with the promises made in 
    the GMPA, there is a presumption that the lender has violated 
    Section 8.

Conclusion
    Given the complexities of the mortgage closing process, the 
potential effect of the changes in RESPA's Rules on predatory lending, 
we have extensive and detailed concerns on every aspect of HUD's 
Proposed Rules on RESPA. For a full explanation of all these concerns 
we respectfully refer you to our comprehensive comments filed with 
HUD.\41\
---------------------------------------------------------------------------
    \41\ These comments are available on NCLC's website at 
www.consumerlaw.org.
---------------------------------------------------------------------------
    We have met several times with the officials from HUD and we 
appreciate their willingness to hear our concerns and proposals. We 
remain seriously concerned, however, about the effect of the final 
changes in the RESPA Rules on the low- and moderate-income homeowners 
who are already facing massive problems in the mortgage marketplace. We 
are hopeful, however, that HUD will attend to these issues and not 
exacerbate the crisis situation facing this Nation's communities.
    Thank you for the opportunity to testify today.

                               ----------
                 PREPARED STATEMENT OF JOHN A. COURSON
                  President & Chief Executive Officer
          Central Pacific Mortgage Company, Folsom, California
                            on behalf of the
                Mortgage Bankers Association of America
                             April 8, 2003

    Good morning, Mr. Chairman and Members of the Committee. My name is 
John Courson, and I am President and Chief Executive Officer of Central 
Pacific Mortgage Company, headquartered in Folsom, California. I am 
also Chairman of the Mortgage Bankers Association of America (MBA),\1\ 
and it is in that capacity that I appear before you today.
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    \1\ MBA is the premier trade association representing the real 
estate finance industry. Headquartered in Washington, DC, the 
Association works to ensure the continued strength of the Nation's 
residential and commercial real estate markets, to expand homeownership 
prospects through increased affordability, and to extend access to 
affordable housing to all Americans. MBA promotes fair and ethical 
lending practices and fosters excellence and technical know-how among 
real estate professionals through a wide range of educational programs 
and technical publications. Its membership of approximately 2,600 
companies includes all elements of real estate finance: Mortgage 
companies, mortgage brokers, commercial banks, thrifts, life insurance 
companies, and others in the mortgage lending field.
---------------------------------------------------------------------------
    I thank you for inviting MBA to participate in the important 
discussions regarding regulatory reform of the Real Estate Settlement 
Procedures Act (RESPA). This regulatory reform initiative, as set forth 
in HUD's recently issued Proposed Rule 
entitled ``Simplifying and Improving the Process of Obtaining Mortgages 
to Reduce Settlement Costs to Consumers,'' \2\ will have far-reaching 
import for our industry and on the American consumer.
---------------------------------------------------------------------------
    \2\ 67 F.R. 49134 (Proposed Rule).
---------------------------------------------------------------------------
    I begin my presentation by stating that MBA supports Secretary 
Martinez in his initiatives to simplify and improve the mortgage 
process, and we believe that the Proposed Rule is a step forward for 
both consumers and the industry. MBA commends the Secretary on issuing 
this sweeping proposal. I want to emphasize, however, that although 
HUD's proposal is bold and far-reaching, it is neither sudden nor 
rushed. Rather, it is the logical continuation of a mortgage reform 
initiative that has proceeded, with the involvement of consumer 
advocates, industry groups, and Government representatives, for over 6 
years. And it advances ideas that were well-tested and proven by that 
process. Moreover, the proposal is critically necessary. Secretary 
Martinez has taken on this very complex and politically controversial 
issue because he recognizes that there is a dire need to modernize a 
mortgage shopping system based on laws written 30 years ago. Simply 
put, the act of obtaining home finance has become much too confusing 
and complex. There is a real need to thoroughly reform this process in 
order to ensure the objectives of clear disclosures and consumer 
protection in the settlement process.
    The sheer scope of HUD's proposal demonstrates a great deal of 
leadership and courage by the Secretary. This reform initiative also 
demonstrates foresight on the part of HUD, as it brings real solutions 
to the table, and challenges us all to come together and reach 
agreement on fixing a mortgage disclosure system that has become 
increasingly complex and burdensome for all the parties involved.

MBA Position
    The MBA has consistently supported fundamental reforms to the 
bewildering and confusing mortgage shopping process. In this respect, 
this Association has been a constant partner in discussions with 
Government and consumer groups to craft workable methods to simplify 
and improve the mortgage process.
    MBA sees HUD's Proposed Rule as a unique opportunity to effect 
large portions of long-discussed improvements to the mortgage process. 
As can be expected with any far-reaching project to improve existing 
systems, we believe that there are issues that require significant 
attention and discussion before the Rule is finalized. Notwithstanding 
these details, we want to make clear to the Senate Banking Committee 
that MBA fully embraces the more important concepts of reform advanced 
by HUD's Proposed Rule. MBA believes that, if properly structured, 
HUD's ``Guaranteed Mortgage Package'' system will improve and simplify 
disclosures, foster market competition, and strongly enhance 
protections for all consumers.

The Current System
    To properly appreciate the benefits of the reform proposals now 
advanced by Secretary Mel Martinez, it is necessary to understand how 
the current home mortgage disclosure system operates and why it has 
been criticized as flawed and ineffective in adequately protecting 
mortgage shoppers.

Disclosures
    The Congressional intent in enacting RESPA was to protect consumers 
from unnecessarily high settlement costs by affording them with greater 
and more timely information regarding the nature and costs of the 
settlement process, and by prohibiting certain business practices. The 
statute sets out to achieve these goals through two principal 
disclosures--the Good Faith Estimate of settlement costs (GFE) and the 
settlement statement (HUD-1). The GFE provides consumers with an 
itemized estimate of the costs the consumer will be required to pay at 
closing. This disclosure, containing such items as fees for 
origination, surveys, appraisal, credit report, etc., must be given to 
consumers within three business days of application for a mortgage 
loan. The second key disclosure, the HUD-1, is provided to the consumer 
at closing, and lists all actual costs paid at, or in connection with, 
the settlement.
    From a consumer's perspective, these forms may be effective in 
alerting them to the generally anticipated costs they will have to 
incur at settlement, but the disclosures fall well short of providing 
them with reliable figures that they need in order to effectively shop 
the market. As its name implies, the ``Good Faith Estimate'' requires 
that cost disclosures to consumers be made in good faith, and that they 
bear a ``reasonable relationship'' to actual charges. RESPA does not 
impose any liability on the creditor for an inaccurate or incomplete 
estimate, nor for failing to provide one at all. It is important to 
understand the reality of the current law--the figures disclosed on the 
GFE, the key disclosure that consumers use to shop for settlement 
services, are neither firm nor guaranteed. If a consumer discovers that 
the cost estimates they received at application differ significantly 
from the final HUD-1 figures, they have no redress or Federal remedy to 
address the inaccuracies.
    MBA believes that this legal structure is entirely inappropriate 
for both consumers and industry. Consumers who shop the market for the 
best prices available can never be assured of the actual costs at 
settlement. This system also provides little incentive for creditors 
and others to increase accuracy or incur risks in order to ensure such 
accuracy. In fact, it is unscrupulous actors who benefit, as bait and 
switch tactics cannot be detected, and the intentional underestimating 
of costs and fees actually bears rewards in the current marketplace.
    A further criticism of current disclosures centers on their 
complexity. Under existing regulations, the GFE and HUD-1 forms must 
separately itemize every single charge associated with closing. Though 
the intent is noble, this requirement creates a massively complex form 
that hurls disparate and obscure figures at consumers in a way that 
they cannot comprehend or effectively use to shop.\3\
---------------------------------------------------------------------------
    \3\ For example, some of the fees required to be listed on the GFE 
may constitute costs that are already included and built into the 
loan's interest rate. Others may be fees that are dependent on the loan 
amount or price of the property.
---------------------------------------------------------------------------
    From the industry's perspective, these disclosures are burdensome 
and expensive to administer. Not only are the forms costly to produce, 
but more importantly, they are subject to varying interpretations by 
different jurisdictions and regulatory entities. Creditors are always 
uncertain as to what degree of itemization is required, how certain 
costs are to be disclosed in instances where the services are 
outsourced, and what line items to use in instances of nontraditional 
transactions that require special services. This is exacerbated by the 
fact that closing requirements vary across State lines, thereby causing 
disclosure requirements to vary in order to accommodate for such 
differences. Often, local jurisdictions create disclosure requirements 
that are in direct contradiction to Federal guidelines.

Section 8
    There are further difficulties that arise in connection with the 
restrictions found under Section 8 of RESPA. This portion of the 
statute prohibits kickbacks, fee-splitting, fees for referrals of 
``settlement service business,'' and unearned fees, and imposes very 
heavy monetary and criminal penalties for violations of strictures. MBA 
believes the anti-steering and anti-referral fee provisions of Section 
8 of RESPA serve very legitimate consumer protection purposes, because 
they shield home shoppers from improper influences that hamper shopping 
and competition, and serve only to inflate settlement prices. As such, 
the fee provisions should not be eliminated or watered down 
unnecessarily. However, RESPA's Section 8 provisions are also vague and 
subject to varying interpretations that impose barriers to cost-saving 
arrangements. For example, any attempt by lenders to negotiate for 
better prices with third-party settlement service providers, or efforts 
to regularize costs through average-cost pricing, could be deemed to 
constitute violations of Section 8.
    I must note that all of the disclosure and legal complexities I 
describe here frequently lead to expensive and baseless class action 
litigation. Conflicting advisory opinions emanating from regulators can 
create classes of plaintiffs based on one or another of the varying 
interpretations. Special mortgage products that lower costs and benefit 
consumers create uncertainties under the ambiguous application of the 
RESPA statute. The Internet is fast becoming the dominant medium for 
commerce, and yet the anti-kickback provisions of RESPA have not yet 
been clarified vis-a-vis online transactions. All these legal risks are 
menacing to industry, and generate massive legal and regulatory costs 
that, in the end, are passed on to consumers through higher prices.

Need For Change
    Although we can all agree that the American home finance system is 
recognized as the best and most efficient in the world, we cannot 
ignore the fact that consumer confusion persists and that the mortgage 
settlement process is bewildering to most home shoppers. The problems 
outlined above are real and have the effect of raising costs and 
stifling true competition in the marketplace. Worse still, in many 
instances, the confusion created by the current labyrinth of forms and 
disclosures allows unscrupulous actors to dupe and defraud even the 
most careful consumer. We believe, and repeat here today, that the 
scourge of ``predatory lending'' is in large part caused by the complex 
disclosure laws that allow dishonest players to deceive unwary 
consumers.
    Mr. Chairman, we can do better, and through this Proposed Rule, HUD 
has provided us with the blueprint from which to start our reform 
efforts. Perhaps HUD's proposal suffers from certain missing elements 
or requires certain tweaks and improvements. Overall, however, the 
proposal presents us with an enhanced consumer protection system that 
we should strive to perfect rather than destroy.

HUD's Proposal
    The Department's Proposed Rule, issued on July 19, 2002, contains 
far-reaching proposals that could fix virtually all the market and 
consumer problems I have identified above. The central element of HUD's 
proposal focuses on the creation of a carefully defined safe harbor 
that produces greater clarity and increased reliability for the 
shopping consumer. Under HUD's Proposed Rule, lenders and other 
settlement service providers would be allowed the option of offering 
applicants a ``guaranteed'' fee package in lieu of a GFE. This 
guarantee, dubbed the ``Guaranteed Mortgage Package'' (GMP) under the 
proposal, would require a single lump-sum amount that represents the 
total of those costs expected to be incurred in connection with the 
originating, processing, underwriting, and funding of that loan. As an 
important element of the GMP system, HUD is requiring that entities 
engaging in packaging offer to consumers, within 3 days of a loan 
application, an ``interest rate guarantee,'' subject to change 
resulting only from a change in an ``observable and verifiable index'' 
or based on other appropriate data or means to ensure the guarantee. To 
encourage shopping, the proposal would not allow lenders to collect any 
application fees (prior to consumer acceptance of the GMP offer). Under 
the proposal, any person who assembles and offers such a package or 
whose services are included in such a package would be exempt from the 
restrictions and prohibitions of Section 8 of RESPA relating to mark-
ups, volume discounts, and fee splitting.

The Concept of ``Packaging''
    MBA believes, and has long advocated, that the ``guaranteed fee 
package system'' of the type set forth by HUD is the most effective way 
to achieve accurate disclosures for consumers. The effectiveness of 
this system is premised on the reality that consumers do not generally 
shop for individual settlement services, such as appraisal and credit 
reporting services. Rather, consumers shop for the mortgage loan, which 
is the central element that in turn requires the purchase of the other 
ancillary services. Because each lender has different loan products, 
and because each lender has different investors that impose different 
requirements pertaining to such services, these ancillary services can 
rarely be purchased independently from the mortgage loan. As they 
advance through the mortgage shopping process, consumers tend to focus 
only on the mortgage loan, and are therefore interested in the overall 
``price'' of the loan itself rather than the individual price for those 
ancillary services performed for the benefit of the creditor or the 
ultimate investor.
    The ``packaging'' system recognizes this reality, and constructs a 
system whereby the consumer is presented with a single price that 
includes all items required to close the loan. The ``packaging'' system 
streamlines cost disclosures to consumers by assembling practically all 
required closing costs under one single figure, thereby allowing 
consumers to better understand the overall cost of the loan 
transaction. Unlike the estimates provided under the GFE, the 
``package'' price offered to consumers would be solid and guaranteed 
very early in the shopping process. This cost reliability allows 
consumers to shop the market and effectively compare total settlement 
service prices among various sources. In short, the ``packaging'' 
system engenders market competition by encouraging comparison-shopping, 
which in turn allows market forces to influence costs and reduce 
unnecessary fees and charges.
    Under a ``packaging'' system, consumers would receive an up-front 
disclosure guaranteeing costs relating to settlement. Packaging 
entities would therefore have an incentive to attain the best prices 
available in order to ensure the competitiveness of their packages. In 
a competitive environment, any price reduction achieved by the packager 
will surely be passed on to consumers.
    The ``packaging'' system envisions a system that is free from 
unnecessary legal entanglements in terms of deals and activities 
necessary to arrive at the lowest possible guaranteed fee package. For 
example, the concept of ``packaging'' would create market incentives 
whereby the lenders and other entities will seek out third-party 
settlement service providers in order to enter into volume-based 
contracts and otherwise secure discounts from providers in order to 
ultimately produce much lower settlement costs for consumers. It also 
envisions that lenders will be able to solidify prices for consumers by 
``averaging'' costs over a large number of transactions. As set forth 
above, today, these types of activities pose real risks under the hazy 
rules of Section 8 of RESPA. Average-cost pricing and volume-based 
compensation could be deemed to constitute improper referral schemes or 
``overcharges,'' which some would interpret as being in violation of 
current RESPA Rules.
    Not only do these current restrictions pose undue complexities and 
legal risk, but also more importantly, they are outdated and 
unnecessary under a guaranteed cost system. Within the package of 
guaranteed costs, consumers are fully protected because engaging in 
certain activities prohibited under Section 8 of RESPA would only serve 
to inflate the total ``package'' price, which in turn, would lead 
consumers to reject inflated-priced products for lesser-priced 
alternatives. The ``packaging'' system creates, therefore, a self-
enforcing disclosure regime that saves Government resources, promotes 
competition, and facilitates market innovation. The protections 
afforded by Section 8 should, however, remain fully applicable outside 
of the ``package'' arrangement, as the reality is that improper 
steering activities would continue to have deleterious effects on 
market competition and consumer choice.

The Proposed Rule
    Through the GMP proposal, HUD is attempting to incorporate this 
competitive ``packaging'' system, along with all of its benefits, into 
the current RESPA regulatory structure. As noted above, the Proposed 
Rule would afford a Section 8 exemption for entities that are willing 
to offer simplified disclosures to consumers. These improved 
disclosures must set forth a guaranteed cost for those services 
required to close a mortgage loan, along with an assured interest rate 
quote on the loan.
    MBA believes that HUD's proposed guaranteed fee package proposal 
goes a long way in resolving most of the shortcomings and market 
failures associated with RESPA's current disclosure system. Under the 
proposal, HUD would allow ``packagers'' to replace the current GFE 
forms with an alternative ``Guaranteed Mortgage Package Agreement'' 
disclosure that streamlines the cost disclosures and presents closing 
costs to consumers as a lump-sum, fixed number that can be easily 
compared with other packaged products. This disclosure is provided to 
the mortgage shopper free of charge and very early in the loan 
application process, thereby encouraging comparison-shopping.
    More importantly, HUD's proposal would require that the lump-sum 
package cost be absolutely guaranteed 3 days after application. For 
numerous reasons, this represents a very significant consumer 
protection provision. First, it allows consumers to shop the market 
with the confidence that they are comparing actual, final figures. 
Since the Guaranteed Mortgage Package price incorporates practically 
all costs required to close the loan, the consumer's comparison 
shopping will not be clouded or confused with meaningless numbers. In 
addition, the ``Guaranteed Mortgage Package Agreement'' empowers the 
consumer to easily detect misdisclosures and effectively enforce their 
rights and benefits in the bargain. Unlike the current system that 
allows for variances between the GFE and the HUD-1, HUD's proposed 
system imposes a ``zero'' tolerance on the initial and final 
disclosures; a mere inspection and comparison between the initial 
disclosure and the closing statement will suffice to clearly expose 
whether the costs were improperly inflated. The streamlining also eases 
enforcement for Government regulators, and will make it much tougher to 
defraud the public.
    MBA also believes that HUD's proposals are a step in the right 
direction in terms of clarifying confusing legal standards that breed 
pointless class action litigation. The convoluted rules of Section 8 of 
RESPA are rendered obsolete by using free market forces to compress 
prices and allowing firm and reliable disclosures to serve as the 
consumer's shield of protection. Likewise, disclosure difficulties are 
resolved through a straightforward lump-sum disclosure that 
incorporates practically all transaction fees, without the complex 
distinctions that exist today.
    We point out that HUD is now being inundated with a number of 
alternatives to the GMP system. In particular, some groups are 
advancing a novel ``dual'' package proposal. In short, this alternative 
purports to improve consumer shopping by subdividing the GMP into two 
separate bundles carrying separate timing requirements for the delivery 
of two, or perhaps three, varying disclosure forms. Under this 
proposal, ancillary mortgage services would be separated into 
settlement-related fees, and loan-related fees. In contrast to the 
much-discussed ``one-package'' system that HUD has adopted, this new 
proposal is mired by legal doubt and utterly fails to achieve the 
simplification objectives that form the basis for this regulatory 
effort. Under this new scheme, consumers would never see one full set 
of costs for shopping, and would depend on various sources and receive 
different disclosures to be able to engage in cost comparisons. We 
submit that these counter-proposals are an attempt to steer our focus 
away from the urgent task of reforming the mortgage shopping process 
for all consumers.
    Finally, as currently written, HUD's Proposed Rule goes to great 
lengths to foreclose the possibility of improper steering arrangements 
outside of the protective boundaries of the GMP system. Under the 
Proposed Rule, parties that are not providing services in the 
transaction would be prohibited from collecting fees or from receiving 
compensation for improperly steering consumers. MBA is in accord with 
these protective conditions, and believes that HUD should provide 
further clarity to the language of the Rule to make absolutely certain 
that consumer protections are not diluted through sham or fraudulent 
packaging arrangements that do not meet the spirit of the law.

Summary
    MBA believes that, with adjustments, HUD's guaranteed cost 
``packaging'' proposal is a viable system that will deliver broad 
consumer benefits. The certainty and reliability inherent in this 
system will provide sound consumer protections while sharply 
stimulating market competition. In terms of industry benefits, the 
proposed system will go a long way in clarifying difficult rules and 
regulations that pose unnecessary legal risks and serve to trump 
operational efficiencies that could streamline the mortgage process.

Addendum: Additional Recommendations
    Although the MBA embraces HUD's Guaranteed Mortgage Package 
proposals, we believe that HUD must clarify and revisit certain 
components of the Proposed Rule. The MBA has filed lengthy comments 
with HUD, setting out many of these recommendations in detail. For the 
benefit of the Committee, I summarize the more important ones below:
Interest Rate ``Guarantee''
    In the Proposed Rule, HUD is proposing that entities engaging in 
packaging offer to consumers, within 3 business days of a loan 
application, an ``interest rate guarantee, subject to change (prior to 
borrower lock-in) resulting only from a change in an observable and 
verifiable index or based on other appropriate data or means to ensure 
the guarantee.'' Through this requirement, HUD seeks to ensure that the 
rate of the loan does not vary after the borrower commits to a packager 
for reasons other than an increase in the cost of funds. The objective 
of the interest rate disclosure proposal, as articulated by HUD, is to 
protect against an increase in the 
packager's compensation through changes in the rate portion of the 
price quote.
    Although MBA fully supports the Department's objectives with regard 
to the ``Interest Rate Guarantee,'' we point out that any such 
regulatory plan must take into account that interest rate movements are 
set by open market forces that are not under any one lender's control. 
It must also be recognized that loan pricing is not exclusively 
influenced, nor fully measured, solely by the movement of any one 
index. Indeed, any index, even if applicable to pricing a mortgage 
product, may be only one in a number of components used to determine 
the ultimate price of a loan. Factors other than ``interest rate 
index'' fluctuations that would affect pricing include internal 
operating costs, product availability, capped investor commitments on 
particular loan programs, warehouse-line capacity and general capacity. 
In light of the unpredictability and shifting nature of the factors 
that affect loan pricing, our members believe that the protections 
sought by HUD can be afforded only under very specific conditions that 
allow financial institutions to effectively protect against financial 
risk. These carefully circumscribed conditions must be incorporated 
into any Final Rule. They are as follows:

 GMP interest rate ``guarantee'' should be renamed to reflect 
    more accurately the nature of the disclosure.

 Retain the current definition of ``application'' under the 
    RESPA regulations.

 Limit the post-disclosure shopping period to 5 days (or any 
    additional period as determined only by the individual lender).

 Once the consumer accepts the GMP offer and ``locks'' the 
    rate, the disclosed interest rate quote (subject to the index) is 
    good only for as long as the duration of the ``lock-in'' period.

 GMP disclosure must list the specific loan product, and the 
    ``guarantee'' would be applicable only to the specified product.

 Lenders must have full authority to select the appropriate 
    rate ``index.''

 Lenders must have full authority to select different 
    ``indices'' for different loan products.

 Lenders must have full authority in setting the ``spreads'' 
    applicable to the interest rate quotes.

 Lenders must be afforded the option of regularly publishing 
    their rates as an alternative means of complying with the GMP rate 
    quote requirement.

Modifications to Good Faith Estimate
    For numerous reasons, HUD should delay the implementation of the 
Revised Good Faith Estimate (GFE) proposals. As currently drafted, 
these proposals are extremely complex and in our opinion unnecessary in 
light of the extraordinary proconsumer reforms advanced under the GMPA 
proposal. We are, therefore, asking that changes to the GFE be delayed 
until after the market has had an opportunity to accommodate the 
packaging reforms. After a reasonable period of implementation, HUD 
should revisit the need for any additional changes to the current GFE 
system.
    Notwithstanding our position to delay the implementation of the 
Revised GFE, MBA agrees with HUD that confusion regarding mortgage 
broker compensation continues to be a vexing issue for consumers and 
that greater disclosure regarding broker fees may be necessary. MBA 
therefore recommends that HUD adopt the Mortgage Broker Fee Agreement 
Disclosure already introduced by a coalition of trade associations to 
HUD a few months ago, with the attendant exemption for brokers and 
lenders from Section 8 scrutiny. This additional disclosure would 
achieve HUD's goals of full disclosure and greater consumer education.

Preemption
    HUD should clearly announce its intent to seek preemption of State 
laws that conflicts with the provisions established by any Final Rule. HUD should also take immediate action to facilitate this preemption of State 
law.

Conflicts With Federal Laws
    MBA has recommended that HUD address the conflicts with other 
Federal laws that will result from this Proposed Rule. Particularly, 
HUD should engage the Federal Reserve Board on the implications this 
Proposed Rule will have with regard to the Truth in Lending Act (TILA) 
and Regulation Z. The technical requirements contained in TILA, give 
rise to several conflicts between that law and the proposed 
regulations. Since some of these requirements have a statutory basis, 
Congressional action may be required to ultimately resolve this matter.

Protecting Consumers From Improper Steering
    Certain HUD issuances regarding this Proposed Rule have given rise 
to concerns that the GMP proposal could result in the legitimizing of 
referral fee payments to entities outside of the Guaranteed Mortgage 
Package, thereby facilitating conflicts of interests, improper steering 
of consumers, and coercion for kickbacks. MBA believes that any Final 
Rule issued by HUD must provide further clarity regarding ``shell'' 
packaging arrangements in order to foreclose any possibility of 
improper arrangements that do not meet the spirit of the law.

                               ----------
                   PREPARED STATEMENT OF NEILL FENDLY
              Government Affairs Chairman & Past President
                National Association of Mortgage Brokers
                             April 8, 2003

    Chairman Shelby, Senator Sarbanes, and Members of the Committee, I 
am Neill Fendly, Government Affairs Committee Chairman and the Past 
President of the National Association of Mortgage Brokers (NAMB). I 
appreciate the opportunity to present to you today NAMB's views on the 
impact the Department of Housing and Urban Development's (HUD) Proposed 
Rule (the Proposed Rule) amending the implementing regulations of the 
Real Estate Settlement Procedures Act (RESPA) will have on small 
businesses, particularly mortgage brokers, as well as consumers.\1\ 
NAMB \2\ is the Nation's largest organization exclusively representing 
the interests of the mortgage brokerage industry and has more than 
15,000 members. NAMB also represents mortgage brokers in all 50 States, 
as well as the District of Columbia. NAMB provides education, 
certification, industry representation, and publications for the 
mortgage broker industry. NAMB has also created an education program 
for consumers on the homebuying process. NAMB members subscribe to a 
strict code of ethics and a set of best business practices that promote 
integrity, confidentiality, and above all, the highest levels of 
professional service to the consumer.
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    \1\ ``Real Estate Settlement Procedures Act (RESPA); Simplifying 
and Improving the Process for Obtaining Mortgages to Reduce Settlement 
Costs to Consumers,'' U.S. Department of Housing and Urban Development, 
Docket Number: FR-4727-P-01, July 29, 2002.
    \2\ NAMB is a member of the National Federation of Independent 
Business.
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    A mortgage broker is an independent real estate financing 
professional who specializes in the origination of residential and/or 
commercial mortgages. A mortgage broker is also an independent 
contractor who markets and originates loans offered by multiple 
wholesale lenders. As a result, mortgage brokers offer consumers more 
choices in loan programs and products than a traditional mortgage 
lender. Mortgage brokers offer consumers superior expertise and 
assistance in getting through the complicated loan process. Mortgage 
brokers also provide lenders a nationwide product distribution channel 
that is much less expensive than traditional lender retail branch 
operations (bricks and mortar).
    Today, mortgage brokers originate more than 60 percent of all 
residential mortgages.\3\ They are vital members of their communities, 
often operating in areas where traditional mortgage lenders do not, 
such as rural communities. The average mortgage broker shop consists of 
only one office and five employees, including the owner.\4\ Mortgage 
broker shops are typically small businesses, which remain a vibrant 
part of our Nation's economy.
---------------------------------------------------------------------------
    \3\ ``Economic Analysis and Initial Regulatory Flexibility Analysis 
for RESPA Proposed Rule to Simplify and Improve the Process of 
Obtaining Mortgages to Reduce Settlement Costs to Consumers,'' U.S. 
Department of Housing and Urban Development, Office of Policy 
Development and Research, July 2002, p. 12.
    \4\ Id.
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    Mortgage brokers are the key to bridging the gap in minority 
homeownership. A recent study performed by Wholesale Access, a 
research, advisory, and publishing company, on minority lending stated 
that two of the key findings of this research are: ``(i) brokers reach 
more minorities than lenders; and (ii) the explanation for this is 
found in their locations, products, and staffing.'' \5\
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    \5\ Press Release, Wholesale Access, Study of Minority Lending 
Completed, (September 24, 2002) (www.wholesaleaccess.com).
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HUD's Proposed Rule
    NAMB believes HUD's Proposed Rule will adversely impact 
homeownership and the economy. NAMB has serious concerns regarding this 
impact. NAMB finds the economic analysis HUD used to formulate the 
Proposed Rule and the regulatory burden documents prepared by HUD to be 
flawed, inconsistent, and dubious at best.\6\ NAMB believes the 
Proposed Rule creates an unlevel playing field in the marketplace for 
small businesses (particularly mortgage brokers), limits consumer 
choice and access to credit, and is unworkable in the real world. HUD's 
Proposed Rule would significantly reduce small business revenue while 
substantially increasing the regulatory burden on small business. If 
the Proposed Rule is finalized in its current form, many small 
businesses involved in the mortgage industry, will no longer be in 
business, including mortgage brokers. NAMB believes HUD's Proposed Rule 
will further confuse consumers while placing a disproportionate burden 
on small business--a fact that HUD even admits in their Economic 
Analysis.\7\ The burden on small business will not be without 
consequences--the impact will likely result in an increase in costs to 
consumers and limit consumer access to the range of mortgage products 
and choices available to them today.
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    \6\ See Attachment 1 [All submitted Attachments held in Committee 
files.], ``Discrepancies with HUD's Economic Analysis.''
    \7\ ``Economic Analysis'' at p. vii.
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    While HUD continues to assert that their Proposed Rule will 
simplify and improve the mortgage process, many market participants 
disagree. In fact, HUD received over 40,000 comment letters expressing 
concern about the merits of HUD's Proposed Rule--the most comment 
letters HUD has ever received on a Proposed Rule. Concerns about HUD's 
Proposed Rule are warranted considering the effect the Proposed Rule 
will have on small businesses and consumers.

NAMB's Concerns With HUD's Proposed Rule:
Enhanced Good Faith Estimate
    HUD's Proposed Rule recharacterizes a yield spread premium as a 
``lender payment to the borrower for a higher interest rate.'' This 
characterization creates 
unintended consequences and provides less clarity to consumers than as 
presently disclosed. The recharacterization is also inconsistent with 
two of HUD's Statements of Policy 1999-1 and 2001-1. In HUD's Statement 
of Policy 1999-1, HUD stated, ``The Department recognized that some of 
the goods or facilities actually furnished or services actually 
performed by the broker in originating a loan are `for' the lender 
[emphasis added] and other goods or facilities actually furnished or 
services actually performed are `for' the borrower.'' \8\ And HUD 
reemphasized these statements in 
its Statement of Policy 2001-1.\9\ Further, in the Proposed Rule, HUD 
stated that, 
``As retailers, brokers also provide the borrower and lender [emphasis 
added] with goods and facilities such as reports, equipment, and office 
space to carry out retail functions.'' \10\
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    \8\ Real Estate Settlement Procedures Act, Statement of Policy 
1999 -1, 64 Fed. Reg. 10,080, 10,086 (March 1, 1999).
    \9\ Real Estate Settlement Procedures Act, Statement of Policy 
2001-1, 66 Fed. Reg. 53,052, 53,055 (October 18, 2001).
    \10\ Real Estate Settlement Procedures Act, 67 Fed. Reg., 49,134, 
49,140 (July 29, 2002).
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    Yield spread premiums are used to pay the costs incurred in 
connection with a mortgage broker's business. Mortgage lenders save 
millions of dollars in facilities and employee costs by originating 
loans through mortgage brokers. However, these costs do not entirely 
disappear for the mortgage broker--a mortgage broker must pay for its 
employees, office facilities, and basic operations. By characterizing 
the yield spread premium as a ``lender payment to the borrower,'' HUD 
has discounted any payment to the broker by the lender for goods or 
facilities actually furnished or services actually performed for the 
lender and in effect, artificially trying to redefine a market reality.
    NAMB believes that HUD has provided no evidence that their 
recharacterization of a yield spread premium will benefit the consumer 
by simplifying the mortgage process. Rather, this recharacterization 
will further confuse consumers and potentially lead them to choose 
mortgage products because they ``appear'' less expensive. The Federal 
Trade Commission has expressed similar concerns. In their comment 
letter to HUD, the FTC states that the ``approach to the disclosure of 
broker compensation'' contained in the proposal could ``confuse 
consumers and lead them to misinterpret the overall cost of a 
transaction.'' \11\ Further, the FTC states in its comment letter that, 
``If the additional information or revised formats confuse consumers, 
the proposed changes may not increase consumer welfare as much as HUD 
intends and, in the worst case, may actually result in consumer harm.'' 
\12\ Consumers should not suffer the consequences of a proposal that 
will steer them to loans that appear less expensive but in reality are 
more expensive, thus increasing the costs for consumers for 
homeownership. If the homebuying process is complicated further, which 
will be the effect of HUD's Proposed Rule, families may be deterred 
from seeking the goal of homeownership--an outcome that neither the 
mortgage industry nor consumers want.
---------------------------------------------------------------------------
    \11\ Federal Trade Commission Press Release on their Comment 
Letter.
    \12\ Comment Letter submitted by the Federal Trade Commission, on 
the ``Real Estate Settlement Procedures Act, Simplifying and Improving 
the Process for Obtaining Mortgages to Reduce Settlement Costs to 
Consumers,'' U.S. Department of Housing and Urban Development, FR-4727-
P-01 (July 29, 2002), at p. 1.
---------------------------------------------------------------------------
    NAMB has a long history of supporting the reform of mortgage laws, 
as the laws are often complex for both consumers and industry. As such, 
NAMB has spent countless hours and resources to strengthen, simplify, 
and clarify the disclosure of costs provided to consumers in advance of 
settlement. NAMB submitted an alternative disclosure form set forth in 
its comment letter that satisfies HUD's objectives to simplify and 
clarify the disclosure of settlement costs, but not at the expense of 
small business or to the detriment of consumers.\13\ It will allow the 
consumer to perform a true ``apples-to-apples'' comparison of the cost 
of the mortgage while maintaining a more level playing field for 
mortgage originators.
---------------------------------------------------------------------------
    \13\ See Attachment 2, Alternative Disclosure Form submitted by the 
National Association of Mortgage Brokers, on the ``Real Estate 
Settlement Procedures Act, Simplifying and Improving the Process for 
Obtaining Mortgages to Reduce Settlement Costs to Consumers,'' U.S. 
Department of Housing and Urban Development, FR-4727-P-01 (July 29, 
2002).
---------------------------------------------------------------------------
The Proposed Rule is Anti-Competitive
    NAMB does not believe RESPA reform should create an unlevel playing 
field among originators or, in essence, pick winners or losers. 
Unfortunately, the Proposed Rule does just that. HUD even acknowledges 
that the Proposed Rule ``results in different treatment of compensation 
in loans originated by lenders and those originated by mortgage 
brokers.'' \14\ HUD's Proposed Rule requires that only mortgage brokers 
must include their indirect compensation in the calculation of Net Loan 
Origination Charge, but does not require the same of all originators. 
This will complicate a consumer's ability to shop because the consumer 
will be unable to perform a true ``apples-to-apples'' comparison of the 
cost of the mortgage. FTC also expressed concern about this disparity. 
In their comment letter, FTC states that HUD's prominent emphasis of 
the yield spread premium and the ``asymmetric disclosure'' of 
compensation for mortgage brokers might ``inadvertently burden 
consumers and competition.'' \15\ Competition fosters choice for 
consumers and helps to keep prices down for consumers. NAMB believes 
HUD's Proposed Rule will instead decrease competition, thereby forcing 
small businesses to close, leaving fewer choices, if any, for 
consumers.
---------------------------------------------------------------------------
    \14\ Real Estate Settlement Procedures Act, 67 Fed. Reg. 49,134, 
49,148 (July 29, 2002).
    \15\ FTC Comment Letter at p. 10.
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    The effect of the Proposed Rule prevents mortgage brokers from 
appearing competitive (such as no longer being able to advertise a ``no 
point'' loan).\16\ In addition, by including a mortgage broker's 
indirect compensation in the calculation of the Net Loan Origination 
Charge, consumers will suffer a loss of available credit as many 
mortgage brokers will no longer be able to originate FHA- and VA-
insured mortgage loans. This is because direct originator compensation 
on these loans is limited to 1 percent of the loan amount (cap) in 
connection with FHA-insured loans, and direct originator compensation 
on VA-insured mortgage loans is limited to 1 percent of the total loan 
amount or closing costs (cap). In characterizing yield spread premiums 
as a ``lender payment to the borrower,'' indirect compensation to a 
mortgage broker is artificially transformed into direct compensation 
and thus subject to the cap. This will impact many first-time 
homebuyers who rely on the FHA- and VA-insured 
mortgage loans as a viable financing alternative. Mortgage brokers will 
no longer be able to provide homebuyers with FHA- and VA-insured loans. 
This is significant as approximately 31 percent of all FHA-insured 
loans are originated by mortgage brokers.\17\
---------------------------------------------------------------------------
    \16\ If the proposed characterization of yield spread premiums is 
implemented, mortgage brokers will be placed at a competitive 
disadvantage. One example of this is that mortgage brokers will not be 
able to advertise certain mortgage loans and remain competitive. For 
example, a mortgage broker who makes a ``no point'' mortgage loan at 7 
percent interest rate on a $100,000 loan, but collects a $1,000 yield 
spread premium, must advertise that this is a one-point mortgage loan. 
A mortgage lender, who originates a $100,000 mortgage loan at a 7 
percent interest rate, but collects $1,000 in compensation when the 
loan is sold, can advertise a ``no-point'' mortgage loan. These are the 
exact same loans with the exact same costs to the consumer. However, 
due to a Federally-regulated mandate (i.e., artificial) the mortgage 
broker appears more expensive as he or she must advertise that this is 
a one-point mortgage loan.
    \17\ Letter from Engram A. Lloyd, Director, Philadelphia 
Homeownership Center, U.S. Department of Housing and Urban Development, 
to Paul H. Scheiber, Blank Rome Comiskey & McCauley LLP on August 12, 
2002.
---------------------------------------------------------------------------
    Further, under the Proposed Rule, HUD would no longer require a 
Good Faith Estimate of costs associated with the mortgage loan but 
rather a guarantee of many of the costs, including many third-party 
costs, associated with the mortgage loan. Many times during the 
processing of a mortgage loan, unforeseen costs arise. A good example 
of this is when the wholesale lender, after the review of the 
appraisal, requires additional comparables for the property in 
question. Another example is when, after an appraisal or inspection, 
damage to the property is discovered and a termite inspection or 
structural analysis is required. A mortgage broker cannot foresee every 
cost associated with a mortgage loan. While large lenders might be able 
to absorb these losses, small businesses like mortgage brokers cannot. 
Losses such as these can be enough to put mortgage brokers out of 
business.

NAMB's Concerns With HUD's Proposed Rule:
Guaranteed Mortgage Packages
    The Proposed Rule also sets up a new process for originating 
mortgages called the Guaranteed Mortgage Package Agreement (GMPA). 
Created by regulatory fiat, this regime requires an originator to offer 
a Guaranteed Mortgage Package (mortgage, third-party settlement 
services, and closing costs) for a set price. Mortgage brokers, and 
other small settlement service providers, as small businesses, do not 
have the bargaining power to enter into volume-based discounts with 
third-party settlement service providers, as do larger entities. The 
end result will be additional consolidation in the mortgage industry at 
the expense of small business and ultimately, the consumer.
    The economic burden associated with packaging, will fall 
disproportionately on small business, and although they understate the 
costs associated with this burden, even HUD concedes that--``$3.5 
billion of the $6.3 billion in transfers to borrowers comes from small 
originators ($2.2 billion) such as small brokers and small settlement 
service providers ($1.3 billion).'' \18\ Since the Proposed Rule 
significantly increases the regulatory burden for mortgage brokers, a 
burden that many will not be able to absorb, mortgage brokers will be 
forced out of the business of placing people in homes--a perverse, but 
very real effect of a proposal intended to actually help put people in 
homes. Given the mortgage broker's significant involvement in 
originating mortgages, we firmly believe this Proposed Rule cannot be 
finalized in its current form.
---------------------------------------------------------------------------
    \18\ ``Economic Analysis'' at p. vii.
---------------------------------------------------------------------------
    Under the Proposed Rule, many mortgage brokers will not be able to 
compete with the larger entities and will be forced out of business, or 
become a captive agent for only one lender or two utilizing their 
packages. The mortgage broker will therefore be left with the Enhanced 
Good Faith Estimate approach, which as stated herein, discriminates 
against the small business mortgage broker.
    Further, it is questionable whether the packaging of settlement 
services and a mortgage loan will benefit consumers. While some argue 
that it will create ease in the shopping process, consumers will not be 
getting a clear picture to enable them to make a sufficient comparison 
in the packaging world. Under HUD's Proposed Rule, the services 
performed in the package are not required to be itemized until 
settlement. Thus, when a consumer receives their GMPA, it will not 
contain a list of all services performed as part of the package.\19\ A 
consumer may have two or three GMPA's for comparison purposes but those 
same three GMPA's may not contain the same services. The ``black box'' 
of settlement services created by packaging will not benefit consumers; 
rather it will only make it more confusing and difficult for consumers 
to shop.
---------------------------------------------------------------------------
    \19\ HUD's Proposed Rule does provide that certain services (pest 
inspection, lender's title insurance, credit report, and/or appraisal) 
must be shown as ``anticipated'' if they so are. Real Estate Settlement 
Procedures Act, 67 Fed. Reg. 49,134, 49,160 (July 29, 2002).
---------------------------------------------------------------------------
HUD's Economic Analysis and NAMB's Economic Study
    NAMB believes that the Economic Analysis and Initial Regulatory 
Flexibility Analysis (Economic Analysis) prepared by HUD does not 
provide a clear picture of the potential impact on a market that is 
functioning effectively and does not accurately reflect the Proposed 
Rule's impact on small business. In fact, HUD's Economic Analysis is 
flawed, incomplete, and inaccurate.
    Basing a Proposed Rule on flawed economic analysis will result in a 
flawed Final Rule that harms consumers and could have devastating 
repercussions on a housing market that has been one of the only sectors 
sustaining our economy. NAMB believes that further analysis by HUD is 
necessary to ensure that any Proposed Rule impacting the housing market 
is based on a foundation of market realities and not just good 
intentions.
    HUD's failure to accurately analyze the economic impact on small 
business can be illustrated through their own reported inconsistencies. 
HUD's Paperwork Reduction Act Submissions to the Office of Management 
and Budget (OMB) states that annual responses for Good Faith Estimates 
(GFE's) is 11 million.\20\ However, HUD's Economic Analysis states that 
if the Rule applied in the year 2002, it would impact 19.7 million 
applications.\21\ This is significant because the submission to OMB 
underestimates the paperwork burden by at least 8.7 million GFE's and 
an additional $57 million.
---------------------------------------------------------------------------
    \20\ See Attachment 3, ``Supporting Statement for Paperwork 
Reduction Act Submissions,'' U.S. Department of Housing and Urban 
Development, August 2001, p. 5.
    \21\ ``Economic Analysis'' at p. 9.
---------------------------------------------------------------------------
    In addition, HUD's Economic Analysis states that ``originators and 
closing agents will have to expend some minimal effort in explaining to 
consumers the cross walk between the enhanced GFE and the more detailed 
HUD-1.'' \22\ However, HUD did not perform their due diligence to 
ascertain these costs since the costs were not 
included in HUD's submission to OMB. The cost associated with 
explaining to consumers the new streamlined GFE and the more detailed 
HUD-1 is not ``minimal.'' NAMB believes a detailed and accurate 
estimate should be provided.
---------------------------------------------------------------------------
    \22\ Id. at p. 25.
---------------------------------------------------------------------------
    HUD states that the program change being mandated by the Proposed 
Rule would increase the burden on the industry by 2,530,000 burden 
hours.\23\ HUD has testified that this is a one-time transition 
burden.\24\ NAMB believes that this one-time transition burden that is 
equal to 289 years will eradicate small businesses in the mortgage 
industry. The extreme burden HUD's Proposed Rule forces upon small 
business will not only dismantle small businesses, but it will also 
alienate consumers from the dream of homeownership.
---------------------------------------------------------------------------
    \23\ ``Supporting Statement,'' p. 7.
    \24\ Senate Banking Committee, ``Hearing on Issues Relating to 
HUD's Proposed Rule on the Real Estate Settlement Procedures Act,'' 
March 20, 2003.
---------------------------------------------------------------------------
    NAMB's review of the Economic Analysis and its obvious flaws led to 
NAMB's commission of an economic study on the underlying assumptions of 
HUD's Economic Analysis, and, among other things, the effect the 
Proposed Rule would have, if implemented as written, on small 
businesses.\25\ NAMB's study ``anticipates that small originators/
brokers and small third-party service providers will lose more than 60 
percent of their revenue.'' \26\ This is a tremendous loss and will 
cause many small businesses to close, ultimately resulting in a loss to 
consumers in their choice and access to credit.
---------------------------------------------------------------------------
    \25\ See Attachment 4, Blalock, Joseph and Tyler Yang, ``Analysis 
and Comments on HUD's RESPA Economic Analysis and Initial Regulatory 
Flexibility Analysis,'' IFE Group, February 24, 2003, p. 1.
    \26\ Blalock at p. 20-21.
---------------------------------------------------------------------------
    The study also explains ``this lost revenue will not go to 
consumers, however, but is likely to go to larger businesses.'' \27\ 
The study cites that ``on balance, smaller businesses will be driven 
from the market or driven to join in business or even ownership with 
larger firms, but the overall benefit to consumers from this 
concentration and reduction in competition is questionable.'' \28\ 
Unfortunately, when dealing with a housing market that is a driving 
factor for our economy, such questions should not go unanswered.
---------------------------------------------------------------------------
    \27\ Blalock at p. 2.
    \28\ Blalock at p. 2.
---------------------------------------------------------------------------
    The stark reality of business is that the more the mortgage 
marketplace condenses and consolidates as a result of the Proposed 
Rule's anti-competitive effect, both in the world of the enhanced GFE 
and the GMPA, a consumer's access to credit will contract. Consumers 
will lose the service small business is known for. The end result will 
be access to less credit for consumers--again, a perverse impact of a 
Rule that is being implemented to help consumers.
Regulatory Flexibility Act of 1980 \29\
---------------------------------------------------------------------------
    \29\ 5 U.S.C. Sec. 601 et seq.
---------------------------------------------------------------------------
    NAMB believes the Proposed Rule requires further analysis under the 
Regulatory Flexibility Act (RFA).\30\ When promulgating proposed and 
Final Rules, the RFA requires Federal agencies to review the Rules for 
their impact on small businesses and consider less burdensome 
alternatives. Pursuant to the RFA, if a Proposed Rule is expected to 
have a significant economic impact on a substantial number of small 
entities, an Initial Regulatory Flexibility Analysis (IRFA) must be 
prepared.\31\
---------------------------------------------------------------------------
    \30\ 5 U.S.C. Sec. 601 et seq.
    \31\ If the Proposed Rule will not significantly impact a 
substantial number of small entities, the head of an Agency must 
certify as such and provide factual determination. When an Agency 
issues a Final Rule, it must prepare a Final Regulatory Flexibility 
Analysis (FRFA). 5 U.S.C. Sec. 603.
---------------------------------------------------------------------------
    NAMB does not believe HUD sufficiently complied with the RFA when 
promulgating their Proposed Rule. HUD's IRFA \32\ did not contain a 
sufficient comparative analysis of alternatives to the Proposed Rule 
that would minimize the impact on small entities nor did it accurately 
describe the projected reporting and record keeping requirements and 
other compliance requirements of the Proposed Rule, including an 
accurate estimate of the classes of small entities which will be 
subject to the requirements as required by RFA.
---------------------------------------------------------------------------
    \32\ The IRFA must describe the economic impact of the Proposed 
Rule on small entities including a description of the projected 
reporting, record keeping and other compliance requirements of the 
Proposed Rule. It must also contain a comparative analysis of 
alternatives to the Proposed Rule, which would minimize the impact on 
small entities and document their effectiveness in achieving the 
regulatory purpose.
---------------------------------------------------------------------------
    The Small Business Administration Office of Advocacy (SBA), the 
voice for small business, even expressed concern to HUD regarding their 
IRFA. Pursuant to SBA's statutory duty to monitor, examine, and report 
Agency compliance with the RFA, as amended by the Small Business 
Enforcement Fairness Act of 1996 (SBREFA), the SBA submitted a comment 
letter encouraging HUD to issue a revised IRFA ``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.'' \33\ The SBA recommended that HUD 
publish a supplemental IRFA to provide small businesses with 
``sufficient information to determine what impact, if any, the 
particular proposal will have on its operations'' and ``provide a 
meaningful discussion of alternatives that may minimize that impact.'' 
\34\ NAMB believes it is imperative that HUD issue such an analysis 
before they issue a Final Rule so that small businesses could get a 
better understanding of how the Rule will impact their business and 
ultimately, their ability to serve consumers. Although HUD's Economic 
Analysis states that $3.5 billion of the $6.3 billion (55 percent) in 
transfers to consumers will come from small businesses,\35\ the SBA 
explained in their comment letter that HUD's Economic Analysis would be 
improved by a revised IRFA, which clearly defines the impact on small 
entities, instead of citing the mere overall cost to small 
business.\36\ Since HUD did not specifically compute the cost of 
compliance per small business, HUD could not and did not sufficiently 
analyze regulatory alternatives as required by RFA that would minimize 
the burden on small businesses. The National Federation of Independent 
Business (NFIB) also stated that the specifics of the impact on small 
businesses ``were missing from the initial regulatory flexibility 
analysis.'' \37\
---------------------------------------------------------------------------
    \33\ See Attachment 5, Comment Letter, Small Business 
Administration Office of Advocacy, ``RESPA: Department of Housing and 
Urban Development: Real Estate Settlement Procedures Act (RESPA); 
Simplifying and Improving the Process for Obtaining Mortgages to Reduce 
Settlement Costs for Consumers; Proposed Rule; Docket Number: FR- 4727-
P-01,'' p. 1, October 28, 2002.
    \34\ SBA Comment Letter at p. 4.
    \35\ ``Economic Analysis'' at p. 26.
    \36\ SBA Comment Letter at p. 3.
    \37\ Letter from the National Federation of Independent Business to 

Secretary Mel Martinez, U.S. Department of Housing and Urban 
Development, March 7, 2003.
---------------------------------------------------------------------------
    NAMB finds this very troubling in the sense that small business--
particularly in the housing industry today--is one of the few pillars 
in this economy that has not fallen. NAMB is concerned that arbitrarily 
reducing small business revenues while substantially increasing the 
regulatory burden on small business by 2.5 million burden hours will 
absolutely devastate small business. As a result, consumers will suffer 
an increase in the cost of credit and a reduction of choice and access 
to credit.

Conclusion
    The NAMB sincerely appreciates the opportunity to share its 
concerns with this 
Committee on the impact HUD's Proposed Rule will have on small business 
and consumers. We commend you, Chairman Shelby, for convening this 
hearing on this very important issue. NAMB is very concerned that if 
HUD proceeds to finalize the Proposed Rule in its current form, small 
businesses will be driven out of business, especially mortgage brokers. 
As a result, consumers will experience a reduction in the availability 
and access to credit and homeownership will likely decline as a result. 
We ask this Committee for its support to request HUD to revise their 
Proposed Rule so that it accomplishes HUD's stated goals and objectives 
to simplify the mortgage process and increase homeownership while not 
creating competitive disadvantages in the marketplace.

                               ----------
                  PREPARED STATEMENT OF IRA RHEINGOLD
                  Executive Director & General Counsel
               National Association of Consumer Advocates
                             April 8, 2003

Overview
    Mr. Chairman and Members of the Committee, the National Association 
of Consumer Advocates \1\ thanks you for inviting us to testify today 
about HUD's recent proposed rulemaking regarding the Real Estate 
Settlement Procedures Act. We offer our testimony here today on behalf 
of our members and the tens of thousands of consumers they represent.
---------------------------------------------------------------------------
    \1\ The National Association of Consumer Advocates is a nonprofit 
organization designed to promote justice for all consumers by 
maintaining a forum for information sharing among consumer advocates 
across the country. Our mission is to serve as a voice for consumers in 
the ongoing struggle to curb unfair and abusive business practices, 
especially in the areas of finance and 
of credit.
---------------------------------------------------------------------------
    Last July, the U.S. Department of Housing and Urban Development 
issued important proposed changes to RESPA regulations that attempt to 
dramatically alter the way the mortgage lending market operates. 
Initially, I would like to commend HUD for taking bold action to reform 
the current RESPA regime that undeniably provides little benefit for 
consumers. HUD has recognized that changes must be made, and that it is 
the Agency's responsibility to develop the necessary rules and 
regulations that will allow this important statute to achieve its 
purpose of protecting consumers in the mortgage settlement process.
    The stated goals and orientation of HUD's Proposed Rule are exactly 
on target--to protect consumers. We believe that the proposal offers 
some very positive features that if properly implemented would improve 
the prime mortgage marketplace for consumers. These positive features 
include:

Requiring An Interest Rate And Closing Cost Guarantee When
A Guaranteed Mortgage Package Agreement Is Offered
    Some parts of the mortgage industry are strongly pushing HUD to 
transform the GMPA into a package of closing costs instead of a package 
of all closing costs and points and interest rate. In its proposal, HUD 
has correctly refused to allow a Section 8 exemption for a lender's 
offer of merely a closing cost package. After all, as HUD has 
recognized, a lender who offers a guarantee for the closing cost 
package, without also guaranteeing the points and the rate, has no 
impediment to simply increasing the points or the rate after the 
consumer is locked into using the lender because the closing cost 
package has been purchased.

HUD's Attempt To Recharacterize 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 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 spreads are disclosed is an important first step 
(although much more is needed) in allowing consumers to have greater 
control in choosing the type and the structure of their loans and in 
the method to compensate their mortgage broker.

HUD's Bright Line Rules Attempt To Make The Good Faith
Estimate A Meaningful Binding Document That Provides Real
Information To Consumers
    Far too often, the Good Faith Estimate offered to consumers barely 
resembles the loan the borrower ultimately receives. HUD's Proposed 
Rule attempts to severely limit the bait and switch gaming rampant in 
the home mortgage marketplace involving closing costs. The GFE should 
be a true reflection of actually anticipated costs, not an opportunity 
for lenders to mislead consumers--as it is currently. Lenders who make 
numerous loans absolutely have the capacity to determine their own 
charges and those of settlement service providers that they choose and 
require.
    While we strongly appreciate HUD's positive efforts, we nonetheless 
have several overarching concerns about the Proposed Rule and believe a 
myriad of important details must be worked through to ensure that the 
Rule does, in fact, protect consumers, instead of simply providing a 
shield behind which mortgage originators can hide inappropriate, 
unfair, and illegal activities. We will use the remainder of our 
testimony to broadly describe these problems.

Problems With HUD's Proposed Rule
These Rules do not address predatory lending.
    As the Secretary has already noted in his testimony to the House 
Financial 
Services Committee on October 3, 2002, these Rules do not provide the 
answer to predatory lending. It is imperative that HUD clarify that 
this Rule is not designed to address the problem of predatory lending 
and that other reforms are still needed. Indeed, HUD does not have the 
authority under RESPA to address predatory lending by itself in a 
global way. The Rule is intended to facilitate shopping for mortgages 
and to promote competition. This laudable goal should be pursued. 
However, as victims of predatory mortgages are targeted by lenders who 
actively work to eliminate shopping opportunities, no amount of 
improvement to the RESPA Rules will protect them.
These Rules must avoid facilitating predatory lending.
    The Guaranteed Mortgage Package Agreement is a creative and novel 
proposal that, if implemented properly, will enable mortgage shoppers 
in certain markets to shop more effectively. However, we must keep in 
mind that shopping does not actually occur among all consumers--
particularly those who are today the victims of predatory mortgages and 
those who will be targeted in the future. The predatory lending market 
thrives in an atmosphere in which lenders and brokers target homeowners 
and experience little pressure to provide the best products. Indeed, 
the incentives run in the other direction--borrowers are steered to the 
worst products. The GMPA must not provide a new means for lenders in 
the subprime market to avoid liability for noncompliance with consumer 
protection law in that segment of the marketplace that most needs more 
substantive consumer protection.
    Because the GMPA proposal eliminates disclosures that otherwise 
make it possible for consumers and their advocates to evaluate 
compliance with both the Truth in Lending Act and the Home Ownership 
and Equity Protection Act, HUD must tread carefully in developing this 
RESPA Rule and follow two essential principles:

 Limit the GMPA to the prime market--As the purpose of the GMPA 
    is to encourage shopping in the open marketplace of competitive 
    mortgage lending, the GMPA should only be provided to that section 
    of the market that is most capable of using competitive pressures 
    in the open marketplace to protect themselves--to the prime market.

 The GMPA Rule should only be finalized after full coordination 
    with the Federal Reserve Board--It is crucial that both regulators 
    and consumers be able to determine compliance with TILA and HOEPA 
    simply by looking at the information provided on the documents 
    required by Federal law. Under the current proposal, it is unclear 
    that this will be the case and HUD must work with FRB to develop a 
    transparent GMPA that allows for this determination to be made.
The substantive change proposed regarding yield spread premiums must be
included in the regulations relating to RESPA's Section 8, not just as 
        disclosures.
    For yield spread premiums to be what the mortgage industry claims 
them to be, merely one of several methods consumers can choose to 
compensate their mortgage brokers (and not an illegal kickback), 
enforceable regulations must be created that require the following:

 The consumer must be informed up-front how much the mortgage 
    broker charges.
 The consumer must be provided the opportunity to choose how 
    this payment will be paid from choices actually available to the 
    consumer.
The Good Faith Estimate Proposal Rules, while good in concept, do not
sufficiently protect consumers.
    This is particularly true of HUD's language describing the mortgage 
broker's relationship to the consumer. Section I of the proposed GFE 
allows brokers to describe themselves like this: ``We do not offer 
loans from all funding sources and we cannot guarantee the lowest price 
or the best terms available in the market. You should compare the 
prices in the boxes below and shop for the loan originator, mortgage 
product, and settlement services that best meet your financing needs.'' 
Both of these statements must be deleted from the GFE.
    In many States, a broker can establish an agency relationship with 
a borrower through the broker's conduct or by written and oral 
representations.\2\ The broker may have the fiduciary duties of an 
agent to the borrower, which may include the duty to advise the 
borrower of disadvantageous loan terms in an offered loan or the duty 
of loyalty to the borrower that would require the broker to seek out a 
loan with favorable terms for the borrower. HUD's statement in the GFE 
therefore conflicts with obligations that may be imposed on brokers 
under State law. Moreover, this misguided statement will undoubtedly be 
used, by unscrupulous brokers, to defeat borrower claims that a 
fiduciary relationship was established or that the broker made 
misrepresentations about the loan terms or the broker's role.
---------------------------------------------------------------------------
    \2\ In addition, some States have passed legislation specifically 
regulating mortgage brokers and these laws may impose additional 
disclosure or substantive requirements.
---------------------------------------------------------------------------
There must be effective enforcement mechanisms for an originator's 
        failure to comply with all aspects of these new rules.
    Even perfect consumer protection rules will only work in the 
marketplace if they are enforced in a meaningful way. Lenders must have 
incentives to comply with the rules, because lack of compliance is too 
costly. The Proposed Rule does not currently include any mechanisms to 
punish transgressors. The proposal only provides that once the 
transgression is caught, the remedy is for the lender to provide what 
was promised all along. This rewards lack of compliance because the 
cost of being caught breaking the rules is the same as compliance. For 
the rules to be effective HUD must allow for civil enforcement of each 
element under the Rule including the requirements for treatment and 
disclosure of the yield spread premium, the new rules for the Good 
Faith Estimate, as well as for a lender's failure to keep the promises 
in the GMPA. This can be accomplished by:

 Removing HUD's stated prohibition against enforcing violations 
    of Section 8 through class actions. The 2001 Statement of Policy 
    explicitly requires a court's individual review of each 
    transaction, eliminating the efficient enforcement mechanism of 
    class actions. Once HUD's Proposed Rules provide the new Rules of 
    the road, there is no reason a court cannot evaluate and enforce 
    the yield spread requirements in class reviews--and the only issue 
    will be whether the mortgage broker actually gave the consumer the 
    full benefit of the payment from the lender.
 A Statement from HUD articulating its belief that the failure 
    to comply with proposed GFE rules is unfair and deceptive. This 
    should enable some private enforcement under State and Federal 
    prohibitions against unfair and deceptive acts and practices.
 Creating a presumption establishing a lender's failure to 
    follow the rules when offering a GMPA, or its failure to close on a 
    loan that conforms to the GMPA 
    violates RESPA's Section 8.

    In summary, while we applaud HUD's positive efforts to reform 
RESPA, the important detailed changes to their rulemaking must be 
implemented before HUD's stated goal of simplifying the mortgage market 
for the benefit of consumers can be achieved.

         RESPONSE TO WRITTEN QUESTIONS OF SENATOR REED

                   FROM CHARLES J. KOVALESKI

Q.1.a. You state that ``packaging'' as described in the 
Proposed Rule RESPA reform regulation will hurt consumers, 
because they will not be able to separately shop for title 
insurance and related services. To what extent does the title 
industry currently market its services and products directly to 
consumers?

A.1.a. Several of our member companies have recently engaged in 
education and advertising campaigns which are designed to reach 
the consumer, namely Connecticut Attorney's Title and 
Attorney's Title Insurance Fund, Inc. of Orlando, Florida. 
These education campaigns do show increased selection of 
attorneys after education efforts are undertaken. In addition, 
buyers and sellers of residential real estate may personally 
shop for these services--and are doing so with increasing 
frequency through the Internet. They also, in a sale 
transaction, will look to and rely upon the recommendations of 
their real estate agent, who is generally much more 
knowledgeable than the consumer about the services, 
reputations, and prices of the various providers of these 
services in the market. Accordingly, title companies also 
direct significant marketing efforts to bringing their products 
and services to the attention of these real estate 
professionals who, in essence, are surrogate shoppers for 
consumers in helping them to make decisions on providers of 
title, closing, and escrow services.
    The title industry markets extensively to consumers and to 
their representatives--real estate brokers and agents, 
attorneys, mortgage lenders, and others who help consumers 
select a provider of title, closing, and escrow services. (In 
California and other western States, the closing of a 
residential real estate transaction is handled through an 
escrow process, whereby an escrow company, acting under 
instructions from the seller and the buyer of the property, 
performs various steps necessary to effectuate the sale (that 
is, obtaining documents and signatures, receiving funds and 
making the appropriate payments, filing documents of record)). 
It must be kept in mind that in the majority of residential 
real estate transactions in the country, the seller of the 
property pays for a significant share of the title, closing, 
and escrow costs, and therefore has a direct interest in the 
selection of the providers of these services.

Q.1.b. Does the industry have any independently confirmed 
documentation on how frequently consumers shop for loans and 
then title services? And if so, please provide the 
documentation to the Committee.

A.1.b. ALTA does not have any current information on how 
frequently consumers shop for mortgages at present. Obviously, 
with the current low mortgage rates, it is common for consumers 
to refinance as rates decline. A 1997 Gallup poll included the 
following question which was shared with ALTA. ``Did you 
personally select the title insurance company providing your 
owner's title coverage?''
    Half (48 percent) of the respondents said they personally 
selected the title insurance company which provided their 
owner's title coverage. (See attached.)
    We expect that the number of consumers shopping for title 
insurance is now much higher as a result of consumer education 
and the fact that the recent refinancing boom has resulted in 
more sophisticated consumers. Also, we note that in many real 
estate transactions, the contract of sale reflects the 
agreement of the seller and the buyer as to who they will use 
for escrow/closing/title services, with the result that the 
selection of these providers will have been made before the 
buyer begins to look for a mortgage lender to help finance his 
or her purchase of the property. The assumption in your 
question is that borrowers first shop for lenders and then 
afterwards look for providers of escrow/closing/title services. 
While that will be the case in a refinance transaction (to the 
extent the consumers shop for title and closing services, 
rather than accept the choice of the refinancing lender), in 
transactions involving the purchase and the sale of a home that 
is not likely to be the order of events.
    Again, we reiterate that in purchase/sale transactions, the 
seller and the buyer have an interest in who is going to 
provide the escrow/closing/title services for their transaction 
that is quite separate from the interest of the lender in the 
loan transaction. HUD's packaging approach was based on the 
loan refinancing paradigm where: (a) the lender and the 
mortgage loan drives the transaction, (b) the borrower usually 
has little interest in who provides the services needed by the 
lender to make and close the loan, and (c) there is no seller 
in the transaction. Accordingly, HUD's packaging approach fails 
to recognize how sellers and buyers make decisions in their 
purchase/sale transaction and that the seller, who is 
frequently paying a significant portion of the costs for these 
services, has an interest in the selection of the provider of 
these services.

Q.1.c. If consumers do separately shop for title services, how 
frequently do consumers run into fees that cannot be shopped at 
all?

A.1.c. This topic expresses the concern that consumers 
frequently may find that fees for these services cannot be 
shopped. To our knowledge, consumers very seldom run into title 
fees that cannot be shopped. We believe it is inappropriate for 
us to address the wide variety of lender fees that may appear. 
Questions on their fees should be addressed to lender 
representatives. Our fees are in most instances regulated at 
the State level because we are regulated as insurance products. 
In addition, the APR does facilitate shopping of fees.
    It is true that in a few States, such as Texas, Florida, 
and Pennsylvania, the State establishes or approves rates for 
certain title and /or closing services that must be charged by 
all licensed providers of those services. In those States, 
there will be no price competition for the services covered by 
the promulgated or approved rate. However, these rates may not 
include all title and closing services. Moreover, even though 
most other States have regimes for the filing of title 
insurance rates, individual companies may file different rates, 
and not all title and closing charges are included in those 
rates. In short, for many of the services provided by title and 
escrow companies there is not a single, State established or 
approved rate, and competition will set the level of those 
charges.
    In areas where charges for title, closing, or escrow 
services are set by competition, shopping among different 
providers can frequently result in some savings. However, as is 
the case in highly competitive markets, providers whose prices 
are higher than the market must inevitably bring their prices 
down or risk a loss of business. Similarly, parties that seek 
to increase their market share by lowering their prices, 
inevitably face the situation that their competitors will meet 
their prices in order to avoid losing market share.
    Finally, in this regard, your question appears to suggest 
that the only kind of shopping that can be of benefit to 
consumers is shopping on price. There are, however, other 
aspects of competition--reliability, quality, and speed of 
service, convenience, efficiency in handling the closing 
smoothly--that are also of interest to sellers and buyers in 
selecting a provider. Because real estate salespersons are 
involved in so many closing transactions, they tend to be in a 
far better position than the individual seller or buyer (who 
has only isolated experiences with these matters) to recognize 
which escrow and title companies in the market rank high in 
these regards.

Q.2. I understand from your written testimony that you do not 
believe HUD should offer a Section 8 safe harbor for the 
Guaranteed Mortgage Package, because that will permit referral 
fees between settlement service providers. However, the RESPA 
statute, as it currently is constituted permits referral fees 
between title companies and settlement lawyers. Is that safe 
harbor currently being abused by title companies and settlement 
lawyers? If so, how is it abused and under what circumstances? 
If it is not being abused, why do you want to deny such a safe 
harbor to other settlement providers?

A.2. Your second series of questions appears to suggest that 
there is some discrepancy between: (a) ALTA's position that HUD 
should not provide an exemption from the anti-kickback and 
referral fee provisions of RESPA Section 8 for parties involved 
in a Guaranteed Mortgage Package, and (b) the provision of the 
current RESPA statute that you state ``permits referral fees 
between title companies and settlement lawyers.''
    At the outset, let me clear up a misconception reflected in 
your question. There is no provision of the RESPA statute that 
permits a title company to pay a referral fee to a settlement 
attorney, or vice versa. Indeed, the fact that there is no 
exemption or safe harbor for referral fees paid by title 
companies to settlement attorneys is vividly demonstrated by a 
very recent HUD press release (attached hereto) announcing that 
HUD had reached a settlement with 13 lawyers in New York 
settling an investigation in which HUD alleged that the lawyers 
had improperly referred business to title agencies in which 
they had ownership interests and from which they had received 
referral fees. As you can see from this HUD release, title 
companies and attorneys who are parties to referral agreements 
are clearly subject to RESPA sanctions.
    The ``safe harbor'' you may be referring to that addresses 
payments between title companies (or other parties) and 
attorneys is Section 8(c)(1)(A), which provides that nothing in 
Section 8 ``shall be construed as prohibiting . . . the payment 
of a fee to attorneys at law for services actually rendered.'' 
This is part of a broader safe harbor that Congress adopted in 
RESPA Section 8(c)(1)(B) to make clear that payments between 
settlement service providers that are reasonably related to 
goods provided or services performed are not prohibited by 
Section 8. Accordingly, there is no need for HUD to provide any 
exemption or safe harbor for payments made in the context of a 
Guaranteed Mortgage Package if the payments are for services 
rendered--which is the safe harbor that Congress provided for 
payments by title companies to attorneys--since such a safe 
harbor already exists in Section 8(c)(1)(B).
    There are two basic reasons why we do not believe there is 
any discrepancy between the safe harbor provided for payments 
to attorneys for services rendered and ALTA's position in 
opposition to the safe harbor that HUD is thinking of providing 
for payments and discounts within a Guaranteed Mortgage 
Package.
    First, there is a fundamental difference between a safe 
harbor from the anti-kickback prohibitions provided by Congress 
and a safe harbor provided by HUD under a regulatory approach 
that does not have express Congressional authorization. At the 
Senate hearing, I submitted for the record a memorandum 
prepared by ALTA's outside counsel that discusses HUD's lack of 
statutory authority for its packaging proposal and we urge you 
or your staff to review that memorandum.
    Second, the safe harbor HUD would provide has nothing to do 
with payments for services actually rendered, but is intended 
to permit the provision of kickbacks, referral fees, or 
discounts by providers of title, closing, and escrow services 
as a means of inducing a lender-packager to include the 
provider in the lender's package. Such payments are squarely at 
odds with the Section 8 prohibitions Congress adopted, and are 
only being offered by HUD as carrots to encourage lenders to 
engage in packaging.
    Accordingly, in response to your last question, we believe 
that our position opposing HUD's granting of an exemption (safe 
harbor) from the kickback prohibition of Section 8 to parties 
involved in HUD's proposed mortgage packaging has no 
relationship to, and is not inconsistent with, ALTA's continued 
support for the safe harbor Congress provided in Section 
8(c)(1) for payments to attorneys who actually render services.



NEWS RELEASE

May 8, 2003

                HUD ANNOUNCES SETTLEMENT IN CASE AGAINST
                   13 NEW YORK LAWYERS FOR VIOLATING
                 REAL ESTATE SETTLEMENT PROCEDURES ACT

Federal Coordination Signals Stepped Up RESPA Enforcement

    Washington--The Department of Housing and Urban Development today 
announced a settlement in a civil complaint brought against 13 
attorneys in New York for violating the Real Estate Settlement 
Procedures Act (RESPA). In a case filed in Federal Court in the Eastern 
District of New York, the United States alleged the lawyers improperly 
referred their clients to title companies they formed, earning payments 
based solely on the volume of business referred.
    As principle shareholders, the attorneys received referral fees 
from the title company that they established. As part of the agreement, 
the title company was required to file amended tax returns for the past 
3 years.
    First passed in 1974, RESPA prohibits certain practices that may 
artificially increase the cost of settlement services for consumers, 
thereby inflating the cost of buying or refinancing a home. For 
example, Section 8 of RESPA prohibits a person from giving or accepting 
any thing of value for referrals of settlement service business related 
to a Federally related mortgage loan. It also prohibits a person from 
giving or accepting any part of a charge for services that are not 
performed.
    ``We hope today's action will send a clear message to those who 
provide settlement services to consumers--basing your compensation 
exclusively on the volume of business referred violates RESPA,'' said 
John C. Weicher, HUD Assistant Secretary for Housing. ``This case is an 
example of the excellent cooperation among HUD, the U.S. Attorney's 
Office and the Internal Revenue Service in enforcing Federal law and 
protecting the rights of consumers.''
    Brian Bass, S. Charles Buschemi, Michael M. Capasso, Thomas A. 
Capasso, Ronald Davies, Ronald Farr, Michael Grundfast, Irwin Izen, 
William J. Porter, Eric Sackstein, Barry Segal, Gary Smith, and Alan 
Wolinsky established Covenant Abstract Company, Inc. and two affiliated 
title companies--Citation Abstract Company and Titlewaves Abstract. The 
attorneys agreed to pay $200,000 for the settlement of the RESPA 
allegations and to divest themselves of any interest in a title company 
for 3 years.
    Based on HUD's Homebuyer Bill of Rights, Secretary Mel Martinez 
last year proposed a sweeping reform of RESPA's regulatory requirements 
in an effort to greatly simplify and clarify the homebuying process for 
consumers. Get more information about this regulatory reform.
    HUD is the Nation's housing agency committed to increasing 
homeownership, particularly among minorities, creating affordable 
housing opportunities for low-income Americans, supporting the 
homeless, elderly, people with disabilities, and people living with 
AIDS. The Department also promotes economic and community development, 
as well as enforces the Nation's fair housing laws. More information 
about HUD and its programs is available on the Internet.




         RESPONSE TO WRITTEN QUESTIONS OF SENATOR REED

                   FROM CATHERINE B. WHATLEY

Q.1. In the prepared testimony of Russell K. Booth, for the 
July 9, 1997, Senate Banking Committee hearing on RESPA, TILA, 
and problems surrounding the mortgage origination process, NAR 
supported a reform to RESPA that would enable ``one-stop-
shopping,'' and quoted from a homebuyer survey from Hart-
Riehle-Hartwig Research that indicated that, ``Two in three (66 
percent) [recent homebuyers] say that if they had to do it all 
over again, they would choose a real estate company that offers 
one-stop-shopping.'' Furthermore, the survey indicates that the 
changes to RESPA to create one-stop-shopping will result in 
greater convenience and less expense to consumers.
    Most of the respondents endorse arguments in favor of the 
changes, saying there is a great deal of merit to the arguments 
that one-stop-shopping would be more convenient (53 percent), 
easier to manage with just one contact person (52 percent), and 
that some services might be cheaper when contracted through the 
real estate company (54 percent).
    However, in your written testimony on the Proposed Rule, 
you do not support the idea of a Guaranteed Mortgage Package 
(GMP) which appears to me to be one-stop-shopping. What has 
happened in the interim to change your mind about this approach 
to mortgage retailing? Have consumers become less interested in 
one-stop-shopping? Have you surveyed consumers recently 
indicating such a change in sentiment? If so, can you please 
provide the survey to the Committee?

A.1. First, let me clarify our position regarding the HUD 
Guaranteed Mortgage Package (GMP) proposal. NAR believes the 
GMP is a radical departure from today's rules and HUD has not 
provided solid evidence of consumer and industry benefit. 
Specifically, the GMP proposal removes Section 8, the core 
consumer protection provision of RESPA. It would be premature 
for HUD to move forward with this proposal without fully 
assessing the consumer and the industry risk associated with 
these changes. NAR believes making changes to improve the Good 
Faith Estimate (GFE) is a far better way to improve the 
mortgage process for consumers. Incremental changes that will 
not disrupt the marketplace are a more sound approach to 
reform. As for the GMP, it would be far more prudent to issue a 
revised Proposed Rule that includes a new economic analysis and 
introduces alternative options to the GMP. This process would 
promote a more balanced policy objective and increase HUD's 
chances for industry and consumer support for a Final Rule at a 
later date.
    Next allow me to clarify the events and circumstances that 
led to NAR's current position on RESPA reform. In June 1996 and 
in May 1997, HUD issued a couple of onerous amendments to RESPA 
that impacted the Affiliated Business Arrangement (AfBA) 
provisions. These actions were highly controversial at the time 
and many in the industry called for Congressional hearings, one 
of which is the referenced Senate Banking Committee hearing of 
July 9, 1997. During that time, NAR conducted a consumer survey 
to quantify the level of support among consumers for obtaining 
all of their homebuying services through one company or, one-
stop-shopping. NAR has always supported Affiliated Business 
Arrangements (AfBA's) as a means for offering one-stop-
shopping. Many of our members currently offer these services 
and abide by the strict RESPA Rules that apply to these 
business relationships including full disclosure, the 
prohibition against referral fees and the prohibition against 
requiring the use of these services.
    It wasn't until November 1997 that NAR considered and 
adopted a very narrowly defined concept of packaged settlement 
services. This was in response to a joint Congressional and 
industry effort to develop a consensus proposal to reform both 
RESPA and TILA. NAR's support for the concept was conditioned 
on three mandatory provisions:

 Anyone can offer the package, including 
    REALTORS '.

 The package could be offered directly to the consumer. 
    In other words, lenders could not reject a competing 
    package offered by REALTORS ' and lenders could 
    not require the use of their package in order for the 
    borrower to get the loan.

 The individual services in the package must be 
    itemized so the consumer can truly comparison shop.

    As you know, the HUD 2002 GMP proposal does not include any 
of these provisions. In fact, one of the key requirements of 
the HUD GMP is the inclusion of an interest rate guarantee. 
This clearly limits who can offer packages. While we believe 
this requirement should be maintained to prevent lenders from 
employing bait and switch tactics, it does preclude other 
entities such as real estate brokers from participating in a 
packaging world. The Section 8 exemption also gives the largest 
players in the lending industry a distinct competitive 
advantage. If smaller entities are driven from the market, the 
consumer will have fewer choices for loan products and 
settlement services. In addition, a Section 8 exemption is not 
necessary to offer packaged services. There are a growing 
number of lenders who are offering guaranteed products today 
without rule changes.
    That is why we have urged HUD to conduct the much needed 
economic analysis to assess the impact to those industry 
players who will not be able to package or will not be able to 
compete with the large national lenders. HUD should also seek 
input on alternative packaging proposals, such as the two-
package model and assess those impacts as well.
    In 1997, it may have appeared that RESPA was not keeping 
pace with the times. However in 2003, one-stop-shopping is 
available without sacrificing the consumer protections of 
Section 8. Many borrowers can take advantage of AfBA's that 
offer this capability, as well as shop among the many lenders 
who are already offering the guaranteed one-fee programs within 
the current regulatory guidelines.
    As for recent consumer research, our Research Department 
routinely conducts surveys of homebuyers and sellers to gather 
information about their most recent experience in the 
transaction. I am enclosing the NAR 2002 Profile of Homebuyers 
and Sellers* and will forward to you the 2003 Profile once it 
is complete.
---------------------------------------------------------------------------
    *Held in Committee files.
---------------------------------------------------------------------------

         RESPONSE TO WRITTEN QUESTIONS OF SENATOR REED

                      FROM MARGOT SAUNDERS

Summary

Q.1. In your testimony, you mention that the Proposed Rule does 
not include provisions to sufficiently address the need for 
better enforcement of RESPA regulations. Please provide this 
Committee with specific language that HUD could add to the 
Proposed Rule to assist consumers in enforcing both the 
Enhanced Good Faith Estimate (GFE) and Guaranteed Mortgage 
Package (GMP) provisions.
    Similarly, please suggest language to the Committee that 
HUD could add to the Proposed Rule to ensure that the GMP 
provision does not apply to loans in the subprime market.

A.1. Even perfect consumer protection rules will only work in 
the marketplace if they are enforced in a meaningful way. 
Lenders must have incentives to comply with the rules, because 
lack of compliance is too costly. The Proposed Rule does not 
currently include any mechanisms to punish transgressors. The 
proposal only provides that once the transgression is caught, 
the remedy is for the lender to provide what was promised all 
along. This rewards lack of compliance because the cost of 
being caught breaking the rules is the same as compliance. And 
this is frankly absurd. HUD must provide a means to make it 
cost originators if they violate these Proposed Rules--or else 
the Rules are virtually meaningless. We propose several 
specific measures to make the new RESPA Rules meaningful:

GMPA

 HUD must remove its stated prohibition against 
    enforcing violations of Section 8 through class actions. 
    The 2001 Statement of Policy explicitly requires a court's 
    individual review of each transaction, eliminating the 
    efficient enforcement mechanism of class actions. Once 
    HUD's Proposed Rules provide the new Rules of the road, 
    there is no reason a court cannot evaluate and enforce the 
    yield spread requirements in class reviews--as the only 
    issue will be whether the mortgage broker actually gave the 
    consumer the full benefit of the payment from the lender.

 A lender's failure to follow the rules for the new 
    Good Faith Estimate must be actionable in some manner, 
    other than merely regulatory enforcement--as regulatory 
    enforcement has shown that it is not sufficient to 
    encourage the industry to comply with the law. Although the 
    RESPA statute does not provide a private right of action in 
    this regard, HUD can and should articulate that it believes 
    the failure to comply with these rules is unfair and 
    deceptive. This should enable some private enforcement 
    under State and Federal prohibitions against unfair and 
    deceptive acts and practices.

 A lender's failure to follow the rules when offering a 
    GMPA or to close on a loan thereafter that does not conform 
    to the GMPA must presumptively violate RESPA's Section 8. 
    The current proposal results in the lender losing its 
    exemption from Section 8 coverage and only allows the 
    consumer a potential contract action against the lender for 
    not keeping the promises in the GMPA. This is completely 
    ineffective. As attorney's fees are generally not available 
    for breach of contract, few consumers will have the means 
    to bring a case to court for the few thousand dollars which 
    would be obtained in a contract action on most failed 
    GMPA's. Further, consumers will not have the means to 
    allege a prima facie case of a violation of Section 8 as 
    the GMPA scenario dictates that neither the initial 
    estimate, nor the HUD-1 will provide details on the 
    payments of fees for services provided by third parties. 
    Therefore, HUD must state that if a lender fails to comply 
    with the promises made in the GMPA, there is a presumption 
    that the lender has violated Section 8.

Enhanced Good Faith Estimate

    Our recommendations for specific enforcement mechanisms of 
the Enhanced Good Faith Estimate are closely tied to our more 
specific recommendations for how to deal with the problems of 
yield spread premiums. We believe that there must be a separate 
contract established between the broker and the consumer.
    As the Secretary has indicated, the goal is to change the 
current practices of allowing yield spread premiums to operate 
simply to increase the profit of mortgage brokers and lenders 
while providing little or no benefit to consumers. Given the 
statements of the Secretary, and the extensive testimony at the 
recent Senate hearings,\1\ the lack of correlation between the 
fees paid to a mortgage broker on a given loan and the amount 
of work performed by the mortgage brokers on that loan should 
be an accepted fact at this point. However, for HUD to make the 
Secretary's promise \2\ a reality, several more decisive steps 
must be taken.
---------------------------------------------------------------------------
    \1\ See Predatory Mortgage Lending Practices: Abusive Uses of Yield 
Spread Premiums, Hearing Before the Senate Banking Committee (January 
8, 2002), http://www.senate.gov/banking/ _files/107-857.pdf.
    \2\ Regarding this new Rule, the Secretary said: ``The new policy 
will make clear that it is illegal for a settlement service provider to 
mark-up fees when it is making a payment to another settlement service 
provider, unless it provides additional value to the homebuyer in the 
process, or when a provider does no work for the fee and charges an 
unreasonable amount.'' See HUD No. 01-105, October 15, 2002, ``Martinez 
Moves to Protect Homebuyers; Calls for Simplified Mortgage Process.''

 HUD must substantively change the regulations 
    regarding the payments of the yield spread, not just the 
    sections relating to 
---------------------------------------------------------------------------
    disclosures.

 Before any payment is made to the broker, the borrower 
    and the mortgage broker must enter into a binding fee 
    agreement \3\ regarding the total compensation, however 
    denominated, to be paid to the broker.
---------------------------------------------------------------------------
    \3\ See attached Appendix 2, Model Broker Fee Agreement.

 The borrower must be offered a choice of how to pay 
    the broker fee, whether in cash, by borrowing more, or by 
    increasing the interest rate and having the lender pay the 
    broker fee.\4\
---------------------------------------------------------------------------
    \4\ See attached Appendix 3, Model Choice of Compensation 
Agreement.

 This choice should be offered after loan approval but 
---------------------------------------------------------------------------
    before the settlement.

 The amount the broker is paid must be the same whether 
    paid by the borrower or the lender. The amount paid the 
    broker by the lender reduces, by the exact amount, the 
    amount owed by the borrower to the mortgage broker.

 The total amount paid by the borrower and lender must 
    be reasonable compensation for goods, services, and 
    facilities actually provided.

    These principles accomplish several things. First, the 
consumer knows up-front how much the mortgage broker will 
charge. Second, the consumer is given the opportunity to choose 
how this payment will be paid. Third, and most importantly, the 
broker compensation remains the same regardless of method of 
payment. This point is crucial, because it eliminates any 
anticompetitive incentive the broker has to place the borrower 
in a loan with an interest rate greater than that for which the 
borrower would otherwise qualify. In other words, whether the 
borrower chooses a below-par loan, a par loan, or an above-par 
loan with a yield spread premium, the broker compensation will 
remain the same. This is not how the system works today and it 
must be changed.
    HUD's current proposal on how to treat yield spread 
premiums is a variation of these principles. However, as 
currently configured, they are neither clear enough to offer 
real protections to consumers, nor are they enforceable by 
consumers. For example, under the new proposal it is not at all 
clear how and when the consumer actually exercises the choice 
of whether to use the yield spread premium. The proposed 
information to be included in the GFE does not necessarily 
include loan terms which are actually available to the 
consumer. It is not clear how the consumer should indicate the 
choice actually made.
    We strongly recommend that HUD make good on the Secretary's 
promises and make the yield spread premium a useable--and 
enforceable--credit for the consumer. This can best be done by 
requiring two separate agreements to be executed between the 
consumer and the broker, one at the beginning of the 
relationship in which the broker states the total amount of 
compensation to be received for the loan, and another when the 
loan has been approved in which the consumer is informed of the 
various options by which he/she can pay the broker's fee and 
other closing costs, and the consumer exercises that option.
    Appendix 1 provides examples of how the regulations in 
Section 3500.14 should be rewritten to accomplish these 
principles. Appendices 2 and 3 are samples of both agreements 
to be required between brokers and consumers.

Guaranteed Mortgage Package

    As we have said previously, for the Guaranteed Mortgage 
Package Agreement to work in the marketplace, the promises made 
to the consumer must be binding. To be truly binding, the 
lender's failure to abide by the promises made in the GMPA must 
trigger sufficient penalties to provide incentives for lenders 
to comply with the contractual promises. Governmental 
enforcement of those requirements of RESPA which lack private 
enforcement has been notoriously weak. Private enforcement is 
essential. Providing that a lender loses its exemption from 
Section 8 \5\ is useless, because the consumer must still prove 
that an illegal referral has occurred. Only now, without the 
disclosures required by the HUD-1,\6\ the consumer will have no 
information on which to base even a prima facie case of a 
violation of the prohibition against referrals.
---------------------------------------------------------------------------
    \5\ 12 U.S.C. Sec. 2607.
    \6\ 12 U.S.C. Sec. 2603.
---------------------------------------------------------------------------
    Instead, consumers who claim that a lender has failed to 
comply with the promises made in the GMPA, should be able to 
allege a presumption that Section 8 has been violated. The 
lender will then have the opportunity to rebut the presumption, 
but the burden will be on the lender, not the consumer.
    The following change in HUD's Proposed Rules would be 
necessary to accomplish this:
    The proposed Regulation X, 24 CFR Sec. 3500.14(e), would 
need to be amended by adding the following new subsection at 
the end of the proposed regulation:

          ``(4) A consumer who proves by a preponderance of the 
        evidence that a lender has failed to provide a 
        Guaranteed Mortgage Package to a borrower as promised 
        by the Guaranteed Mortgage Package Agreement shall be 
        presumed to have violated the prohibitions of Section 8 
        of RESPA (12 U.S.C. Sec. 2607).''

Criteria for Excluding Subprime Loans from the GMPA

    While it may be difficult to define a subprime loan, we can 
define the characteristics of predatory loans. One thing we 
know is that HOEPA only covers a small percentage of subprime 
loans.\7\ The HOEPA triggers suggested by HUD in the Proposed 
Rule do not provide nearly enough protection. Currently 
advocates estimate the bulk of predatory loans finance in the 
range of 5 to 8 percent of the principle of the loan for 
points, fees, and closing costs.\8\ HUD has already stated that 
financing more than 3 percent of points and fees is a sign of a 
predatory loan.\9\ Further, in its regulations of the GSE's HUD 
has prohibited the provision of housing credits for loans in 
which more than 5 percent of the principal has been 
charged.\10\ It is also important to note that many of the new 
antipredatory lending laws passed by the States have used a 
points and fees trigger of 5 percent for coverage.\11\
---------------------------------------------------------------------------
    \7\ Federal Reserve Board, Final Rule, Statement of Basis and 
Purpose, 66 Fed. Reg. 65604, 65607 (December 20, 2001).
    \8\ This information is gleaned from the hundreds of loan documents 
reviewed each year by the attorneys at the National Consumer Law 
Center. See also Washington Department of Financial Institutions, 
Expanded Report of Examination for Household Financial Corporation III 
as of April 30, 2002, at 48 (finding that Household charged 7.4 percent 
in up-front costs on most loans), available at 
news.bellinghamherald.com.
    \9\ See U.S. Department of the Treasury and U.S. Department of 
Housing and Urban Development, Curbing Predatory Home Mortgage Lending 
(June 20, 2000) at 11. (For press release and the report, see http://
www.hud.gov/library/bookshelf18/pressrel/pr00-142.html.) The agencies 
noted the dangers of financing high fees on homeowners:
      Financing points and fees may disguise the true cost of credit to 
the borrower, especially for high interest rate loans. Restricting the 
financing of points and fees for HOEPA loans would cause these costs to 
be reflected in the interest rate, enabling borrowers to better 
understand the cost of the loan, and to shop for better terms.
    \10\ See 24 CFR Sec. 81.16(b)(12) and 24 CFR Sec. 81.2. These 
regulations do allow third-party fees paid for closing costs to be 
excluded from the 5 percent calculation. However, as these fees would 
not be itemized on the GMPA, excluding some fees would not be possible. 
It is also far better, at this point of the development of this new 
product, to exclude too many loans rather than to include too many and 
limit enforcement of existing law on predatory mortgages as a result.
    \11\ See, e.g., N.C.G.S. S.L. 1999-332; Ga. Code Section 7- 6A-1 et 
seq.; 2001 N.Y. A.B. 11856 (SN) (October 3, 2002).
---------------------------------------------------------------------------
    Thus, to ensure that HUD's new GMPA does not facilitate and 
protect predatory loans from legal scrutiny, any loan that 
meets any one of the following triggers should not be permitted 
to be made as a GMPA:

 Any HOEPA loan.
 Any loan with a prepayment penalty.
 Any loan with a Guaranteed Mortgage Package price 
    (single fee) --which equals or exceeds 5 percent of the 
    principal of the loan.

    The reasons for adopting these criteria are spelled out 
more fully in our comments provided to HUD on the RESPA 
Rule.\12\
---------------------------------------------------------------------------
    \12\ See Comments on RESPA Proposed Rule to Simplify and Improve 
the Process of Obtaining Mortgages to Reduce Settlement Costs to 
Consumers (to U.S. Department of Housing and Urban Development), filed 
on behalf of low-income clients of 14 legal services programs, at 
II(A)(1)(d) and (e). Available at http:www.consumerlaw.org/initiatives/
test_and_comm/content/final _ RESPA.pdf.
---------------------------------------------------------------------------
    In other words--in addition to HOEPA loans, any loan which 
has either a prepayment penalty, or where the price for the 
GMPA is equal to or more than the 5 percent of the loan 
principal, must not be eligible for the exemption outlined in 
the Proposed Rule. Any lender making a loan with either of 
these criteria would still be 
required to itemize the fees paid to settlement service 
providers 
pursuant to the rules for the Good Faith Estimate.
    Using 5 percent of the principal as the trigger for 
exclusion from GMPA eligibility will actually result in 
including loans with a very high up-front cost. And according 
to various studies, closing costs on conventional mortgages 
rarely exceed 2 percent of the loan amount.\13\ Using 5 percent 
as the trigger allows ample--perhaps too much--room to ensure 
that all prime loans for which a GMPA might be appropriate 
would be eligible for the competitive benefits of the GMPA. 
However, this figure also ensures that loans which are not 
truly competitive are excluded from the exemption.\14\
---------------------------------------------------------------------------
    \13\ See, e.g., Federal Housing Finance Board, Monthly Interest 
Rate Survey, (Table 1: Terms on Conventional Single-Family Mortgages, 
Annual National Averages, All Homes), available at www.fhfb.gov/MIRS/
mirs_t1.xls, initial fees and charges average less than one point from 
1995 through 2000 on conventional residential mortgages.
    \14\ For example, a loan of $150,000 would be permitted to have a 
GMPA package cost of $7,499. A $200,000 loan could have a GMPA price of 
$9,999. These up-front costs are actually much higher than most 
competitive, prime loans would ever charge for up-front closing costs. 
To the extent that the figure of 5 percent may represent too small a 
sum to compensate lenders for their up-front costs when making small 
loans (for example, loans of less than $75,000), the 5 percent trigger 
could be adjusted upwards. However, just as this figure is adjusted 
upwards for smaller loans, the 5 percent trigger should also be 
adjusted lower for loans of larger amounts.
---------------------------------------------------------------------------
    Appendix 4 includes our specific proposal for new language 
in the proposed regulation to accomplish these goals.




         RESPONSE TO WRITTEN QUESTIONS OF SENATOR REED

                      FROM JOHN A. COURSON

Q.1. Do you agree that Hispanic small businesses will be hurt 
by the Proposed Rule? Why or why not?

A.1. MBA disagrees with this forecast. For various reasons, MBA 
believes that small businesses will not be disadvantaged under 
this Rule. As a first observation, we note that small brokers 
and originators compete very effectively today, and capture a 
significant portion of the origination market, even though they 
are out-sized and out-capitalized by large multistate lenders. 
In effect, the nature of today's national mortgage market 
allows small originators access to many sources of capital, 
which empowers them to successfully compete on price and 
service. There is no reason to expect that this will change 
under a GMP system.
    Second, Mr. Acosta's grim predictions are premised on an 
assumption that the mortgage market is static and will not 
adapt to HUD's proconsumer proposals. MBA disagrees, and posits 
that there will be tremendous market movements to create 
national sources for settlement services that will allow small 
businesses to thrive and fully compete in the marketplace. In 
effect, we expect, and are already seeing movements toward, the 
formation of third-party ``packagers'' and ``co-op'' 
arrangements that will give rise to business alliances and 
opportunities for small businesses that are not possible today.
    On this point, we also note that our Association can speak 
with credibility, as the MBA's membership is largely composed 
of smaller businesses, with more than 50 percent of our members 
being small or moderate-sized players in the lending industry. 
Today, our smallest members are successful in competing against 
the large providers, and that will not change under HUD's new 
regulatory system.

Q.2. Do you agree that Hispanic and other minority homebuyers 
will be hurt by the Proposed Rule? Why or why not?

A.2. MBA disagrees with the statement that minority homebuyers 
will be hurt by the Proposed Rule. In fact, a central reason 
MBA is in full support of the concept of packaging is that we 
believe that it will provide a system of consumer protection 
that is superior to the confusing and unenforceable scheme that 
is in place today. Unlike the current system, the GMP rules 
would allow consumers to shop the market with the confidence 
that they are comparing actual, final, and enforceable cost 
figures. Since the Guaranteed Mortgage Package price 
incorporates practically all costs required to close the loan, 
the consumer's comparison shopping will not be clouded or 
confused by meaningless numbers.
    In addition, the ``Guaranteed Mortgage Package Agreement'' 
empowers a consumer to easily detect inaccurate disclosures and 
effectively enforce his or her rights and benefits in the 
bargain. Unlike the current system that allows for variances 
between the Good Faith Estimate and the HUD-1, HUD's proposed 
GMP system imposes a ``zero'' tolerance on the initial and 
final disclosures; a mere inspection and comparison between the 
initial disclosure and the closing statement will suffice to 
clearly expose whether the costs were improperly inflated. The 
streamlining also eases enforcement for Government regulators, 
and will make it much tougher to defraud the public.
    We note that MBA's assertions that ``packaging'' offers 
very real consumer benefits is, in part, confirmed by the 
statements of consumer advocates, including the National 
Consumer Law Center and the National Association of Consumer 
Advocates, in testimony before the Committee. In effect, these 
groups expressed a view that ``packaging'' will offer consumers 
a simpler and more effective shopping system.

          RESPONSE TO WRITTEN QUESTION OF SENATOR REED

                       FROM NEILL FENDLY

Q.1. Mortgage brokers are often compared to mortgage lenders in 
the homebuying process since they are both selling mortgages. 
While they are both selling mortgages, consumers understand 
that lenders are selling their own product and price 
accordingly. Unlike lenders, brokers are selling mortgages from 
other companies, just as realtors are selling houses from other 
realtors or owners. We all know how much realtors charge for 
their service, 3 percent of the value of the home from the 
seller's agent and 3 percent from the buyer's agent. Brokers 
are essentially providing a service to borrowers, and therefore 
their pricing should reflect that fact. Why shouldn't consumers 
have a right to know how much their brokers receive for their 
services, just as they know how much their realtors charge?

A.1. Currently, mortgage brokers disclose their compensation on 
the Good Faith Estimate and on the HUD-1 Settlement Statement 
as required under the Real Estate Settlement Procedures Act 
(RESPA) implementing regulation, Regulation X.\1\ NAMB is not 
proposing that this requirement be eliminated. However, NAMB 
does have serious concerns with HUD's characterization of a 
mortgage broker's compensation as explained in HUD's Proposed 
Rule,\2\ since it provides less clarity to consumers than as 
presently disclosed, is inconsistent with HUD's Statements of 
Policy 1999-1 and 2001-1, and places the mortgage broker at a 
serious disadvantage because it requires that mortgage brokers 
include their compensation in the calculation of Net Loan 
Origination Charge, but does not require the same of all 
originators. NAMB has spent countless hours and resources to 
strengthen, simplify, and clarify the disclosure of costs 
provided to consumers in advance of settlement. In fact, NAMB 
has submitted an alternative disclosure form set forth in its 
comment letter that satisfies HUD's objectives \3\ to simplify 
and clarify the disclosure of settlement costs, but not at the 
expense of small business or to the detriment of consumers. In 
this disclosure, a mortgage broker will disclose the maximum 
amount of compensation that it will receive, in a dollar 
amount, for the goods, facilities, and services it furnishes or 
provides to the lender and the borrower in connection with the 
mortgage loan. NAMB 
believes that its disclosure form levels the playing field 
between originators, as well as provides more clarity to 
consumers on the fees that the borrower will have to pay in 
connection with a mortgage loan, including broker compensation.
---------------------------------------------------------------------------
    \1\ 24 CFR part 3500, Appendix B.
    \2\ ``Real Estate Settlement Procedures Act (RESPA); Simplifying 
and Improving the Process for Obtaining Mortgages to Reduce Settlement 
Costs to Consumers,'' U.S. Department of Housing and Urban Development, 
Docket Number: FR- 4727-P-01, July 29, 2002.
    \3\ HUD states in the Proposed Rule that one of its objectives is 
that ``settlement cost disclosures need to be improved so that the 
information they provide is simpler, clearer, more reliable, and 
reasonably available to facilitate shopping, increase competition, and 
lower settlement costs.'' Real Estate Settlement Procedures Act, 67 
Fed. Reg., 49,134, 49,135 (July 29, 2002).

                STATEMENT OF AMERICA'S COMMUNITY BANKERS
                             April 8, 2003

    America's Community Bankers represents the Nation's community banks 
of all charter types and sizes. ACB's member banks originate more than 
25 percent of all mortgages in the United States, and significantly 
more than half of all mortgages originated by depository institutions. 
In addition, ACB members operate a large number of mortgage banking 
affiliates that originate a substantial part of the business from that 
segment of the industry.
    ACB believes that small- to medium-sized lenders are an integral 
part of the mortgage process and that it is imperative that they be 
able to be a part of the packaging option to the extent they wish. ACB 
believes that many community banks will be able to work with third 
parties in their local communities to offer an attractive package.
    However, it may be that the optimal way for smaller institutions to 
participate in the packaging option may be for a third party to 
coordinate, subcontract, or 
otherwise negotiate and arrange the Guaranteed Mortgage Package. ACB 
believes that the exemption from Section 8 liability should extend to 
the activities currently permitted pursuant to HUD's policy.

Summary of HUD's Proposed RESPA Rule

    On the three areas of the proposal, ACB generally supports the 
concept of the Guaranteed Mortgage Package and the concept of requiring 
mortgage broker disclosures. However, ACB strongly urges HUD to 
reconsider making changes to the Good Faith Estimate contemporaneously 
with introduction of the Guaranteed Mortgage Package. ACB believes that 
making all of these changes at the same time would unnecessarily 
disrupt the mortgage market.

Mortgage Broker Disclosures

    ACB believes that the addition of mortgage broker fee disclosures 
is an important element of mortgage reform. ACB supports HUD in its 
efforts to require this disclosure and ACB does not believe that 
potential delays in other elements of the proposal should result in a 
delay in requiring this disclosure. Fees charged by mortgage brokers 
are frequently misunderstood by consumers. ACB urges HUD to include an 
easy to understand mortgage broker disclosure requirement in any Final 
Rule that is issued.

The Guaranteed Mortgage Package and the Good Faith Estimate
of the Proposal Must Be Separated

    ACB supports the option of the Guaranteed Mortgage Package but 
strongly believes that the current Good Faith Estimate must remain an 
alternative for those lenders who do not wish to package or are unable 
to do so. As important as it is that consumers be able to comparison 
shop for mortgage credit, lenders must be able to offer an array of 
products to meet varying needs of the customer and to give consumers 
disclosures that are meaningful.
    If the Guaranteed Mortgage Package succeeds, it will be because the 
market is ready for such an alternative and it is found to be a 
meaningful shopping tool by consumers. The experiment also will succeed 
if lenders and other companies are able to put together packages in an 
efficient and cost-effective manner. However, given the vast array of 
mortgage products, even those lenders who package may not be able to 
provide all of the options that consumers need. Each of these concerns 
may limit the viability of the Guaranteed Mortgage Package. The only 
fair way to determine if it will work is to try the alternative, while 
allowing lenders who do not wish to package to use the current mortgage 
origination process.
    The proposed Guaranteed Mortgage Package arguably would provide 
consumers 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 not 
work. It should be clarified that the guarantee 
only applies to the relationship between the lending rate and an index 
rate, and 
the length of commitment should be shortened to industry norms. ACB 
suggests 
that HUD work with lenders to develop a methodology for establishing 
and adjusting rates.
    ACB strongly believes that implementing the Guaranteed Mortgage 
Package, while attempting to significantly change Good Faith Estimate 
procedures at the same time, would create undo stress on the mortgage 
markets.

Conclusion

    The ACB strongly supports mortgage reform. ACB urges HUD to 
implement in a timely manner mortgage broker fee disclosures, and 
separate the implementation of the Guaranteed Mortgage Package from the 
revised Good Faith Estimate. Mortgage broker fee disclosures are an 
integral part of making mortgage fees comprehensible to consumers. The 
Guaranteed Mortgage Package, with revisions, should take priority and 
be tested in the market as soon as practicable. Revisions to the Good 
Faith Estimate should be postponed, reexamined, and adjusted as the 
Guaranteed Mortgage Package is being tested.
    ACB members stand ready to work with Members of the Senate Banking 
Committee and HUD to complete the RESPA reform process in a way that is 
efficient and feasible.

                               ----------

                   STATEMENT OF THE SENIORS COALITION
                             April 8, 2003

    The Seniors Coalition respectfully submits the following statement 
for the written record of the Committee's hearing on the Department of 
Housing and Urban Development's (HUD) proposal to reform its 
regulations implementing the Real Estate Settlement Procedures Act 
(RESPA).
    The Seniors Coalition is a nonprofit, nonpartisan, education, and 
issue advocacy organization that represents the interests and concerns 
of America's senior citizens at both the State and Federal levels. Our 
mission is to protect the quality of life and economic well-being that 
older Americans have earned while supporting the common-sense solutions 
to the challenges of the future. With nearly four million members and 
supporters nationwide, the Seniors Coalition is the Nation's largest 
market-oriented senior advocacy group.
    The Seniors Coalition believes that HUD's proposal represents a 
major step toward meeting the promise of RESPA--simplifying and 
improving the process by which consumers obtain mortgage loans in this 
country. Seniors are active participants in the mortgage market, and 
we, like other consumers, would benefit from a more efficient and 
transparent marketplace for settlement costs.
    In its nearly 30-year history, RESPA has not delivered on its 
promise. Instead, consumers continue to be confused about the cost of 
settlement services and to suffer unwelcome surprises at the closing 
table. Moreover, the existing RESPA Rules effectively prohibit pro-
consumer practices that would lower consumer costs and simplify the 
mortgage loan process. In addition, the complexity and ambiguity of the 
existing rules have spawned a cottage industry of class action 
litigation against ``deep-pocket'' mortgage lenders, discouraging them 
from adopting innovations that would lower costs and simplify the 
process for consumers.
    For those reasons, we strongly support the central feature of HUD's 
proposal--the opportunity for loan originators and other settlement 
service providers to offer guaranteed closing cost packages (Guaranteed 
Mortgage Packages or GMP's) to consumers. With the GMP, key information 
will be made available to consumers in a comprehensible form, early in 
the loan shopping process so that the consumer can use it to comparison 
shop.
    The GMP offers a market-based solution to the problem of perceived 
overcharges and ``bait and switch'' tactics that have plagued certain 
segments of the mortgage industry. We are particularly concerned about 
these practices because they are often targeted at senior citizens. HUD 
comes at this problem with a fresh, new approach. Rather than 
maintaining strict regulatory restrictions on the way in which 
settlement services are priced and provided, the proposal opens up this 
process to negotiation and competition. As HUD stated in its economic 
analysis accompanying the proposal, ``[c]ompetition is substituted for 
regulation.''
    We believe that the GMP experiment will work, where traditional 
approaches have failed, for two reasons.
    First, the GMP gives consumers real, guaranteed information that 
they can use when they shop for a loan. This is in contrast to the 
current system, which provides unreliable estimates for a laundry list 
of charges that, experience has shown, are not useful for shopping. The 
current system is based on the unrealistic notion that consumers 
understand and are in a position to shop for the various components of 
closing costs. Conversely, the GMP would give them a single, 
understandable, and legally enforceable figure, at the beginning of the 
process, that they could use to compare the charges of various 
providers.
    Second, the GMP gives lenders an incentive to reduce the cost of 
ancillary services. The GMP would allow packagers to use their 
purchasing leverage to lower these costs--a practice that RESPA, to 
date, has effectively prohibited.
    Thus, we applaud HUD for proposing the GMP as an option that allows 
lenders or other packagers to reduce consumer costs. It should be noted 
that the GMP will remain optional, and consumers will retain the 
alternative of receiving a Good Faith Estimate (GFE) under current law. 
The Seniors Coalition believes, however, that consumers will quickly 
prefer the simplicity and lower costs of an appropriately structured 
GMP.
    Although the concept of the proposal is sound, there are several 
technical changes that are needed to make lower, understandable closing 
costs for consumers a reality:

 HUD should not require an interest rate guarantee as part of 
    the GMP. The interest rate cannot be a ``guaranteed rate'' until 
    the consumer locks in the rate and qualifies for the loan. It is 
    unrealistic for a lender to do all the underwriting necessary 
    within 3 days after application to give a definite approval or 
    disapproval on the loan, so any interest rate and discount points 
    combination will be conditional on final underwriting. Moreover, a 
    consumer who wants to shop for closing costs should not have to 
    give up the flexibility and lower cost of ``floating'' the rate 
    until he or she decides that it is time to lock-in a rate. Long-
    term rate lock-ins are expensive because the lender must hedge 
    against the possibility of an increase in the rate, and those costs 
    are passed on to consumers. If HUD is concerned that lenders or 
    other packagers will trade lower closing costs for higher rates and 
    points, there are mechanisms--such as requiring lenders to post 
    their prices on a daily basis--that would address those concerns 
    without forcing consumers to choose between saving on their 
    settlement charges and paying for a rate lock-in they don't want.

 Discount points should not be included in the guaranteed cost 
    amount. Discount points are part of the loan price, like the 
    interest rate. To give consumers the flexibility to choose among 
    various rate/point options, it is important that points be 
    disclosed separately with the interest rate, rather than included 
    with other fixed, closing costs in the guaranteed cost amount.

 The GMPA should be simplified. The beauty of the GMP concept 
    is that it provides more certain information to the consumer with 
    which he or she can comparison shop. It is critical, however, that 
    the information in the Guaranteed Mortgage Package Agreement be 
    provided in a simple and readable manner. A multi-page document 
    filled with detailed information and charts that requires a lot of 
    time to understand and digest is not likely to be used by a 
    majority of consumers. In addition, much of the information in the 
    proposed GMPA is duplicative of information provided in the Truth 
    in Lending Act (TILA) disclosures. There should be a way to combine 
    these disclosures so that the confusion of duplication is avoided 
    particularly if an item, such as the APR, that is disclosed in the 
    GMPA differs from the same item disclosed on the TILA, which may 
    readily occur, depending upon the timing of the delivery of these 
    two disclosures.

 Subprime customers should get the benefits of the GMP. The 
    proposal does not allow customers whose loans are subject to the 
    Home Ownership and Equity Protection Act (HOEPA) to benefit from 
    the simplicity and lower costs of the GMP. The Seniors Coalition 
    strongly disagrees with this position. Many alleged incidents of 
    predatory lending involve inflation of the ``hidden costs'' of the 
    loan. The GMP would clearly disclose the total closing costs, 
    allowing HOEPA borrowers to focus on obtaining the best loan rate, 
    discount points, and closing costs for the loan. While the RESPA 
    proposal is not a cure-all for predatory lending, we think that by 
    arming consumers with a better understanding of the total costs of 
    a loan, it will significantly help consumers avoid abusive loan 
    origination 
    practices.

 The benefits of HUD's proposal should not be frustrated by 
    conflicting State law limitations. There are many State laws that 
    conflict with the simplified approach of HUD's GMP proposal, 
    including laws that require itemization of fees or limits on fees. 
    At the Federal level, HUD is replacing this type of regulation with 
    competition, and letting market forces work to the benefit of 
    consumers. HUD should clarify--and if necessary Congress should 
    confirm by legislation--that a lender or other packager may offer 
    the GMP option without regard to State laws that prohibit the same 
    types of pro-consumer efficiencies that would be prevented under 
    the current Federal rules.

 HUD should delay the effective date of the changes to the GFE. 
    Although we support the concept of improving the comprehensibility 
    of the GFE, as a practical matter, requiring significant changes to 
    the GFE while at the same time introducing the GMP will not yield 
    benefits for consumers. Many lenders and other potential packagers 
    will defer implementing the optional GMP until they have completed 
    the expensive changes to the GFE, which would be mandatory in 
    transactions not involving a GMP. Therefore, we recommend that HUD 
    put the GMP in place first, to give it a chance to work in the 
    marketplace, and then go back and examine whether changes need to 
    be made to the GFE.

    The Seniors Coalition thanks the Committee for the opportunity to 
present its views on HUD's innovative and pro-consumer proposal.
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