[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]




 
                       FULL COMMITTEE HEARING ON
                        RESPA AND ITS IMPACT ON
                             SMALL BUSINESS

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

                      COMMITTEE ON SMALL BUSINESS
                 UNITED STATES HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             SECOND SESSION

                               __________

                              MAY 22, 2008

                               __________

                          Serial Number 110-96

                               __________

         Printed for the use of the Committee on Small Business


 Available via the World Wide Web: http://www.access.gpo.gov/congress/
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                   HOUSE COMMITTEE ON SMALL BUSINESS

                NYDIA M. VELAZQUEZ, New York, Chairwoman


HEATH SHULER, North Carolina         STEVE CHABOT, Ohio, Ranking Member
CHARLES GONZALEZ, Texas              ROSCOE BARTLETT, Maryland
RICK LARSEN, Washington              SAM GRAVES, Missouri
RAUL GRIJALVA, Arizona               TODD AKIN, Missouri
MICHAEL MICHAUD, Maine               BILL SHUSTER, Pennsylvania
MELISSA BEAN, Illinois               MARILYN MUSGRAVE, Colorado
HENRY CUELLAR, Texas                 STEVE KING, Iowa
DAN LIPINSKI, Illinois               JEFF FORTENBERRY, Nebraska
GWEN MOORE, Wisconsin                LYNN WESTMORELAND, Georgia
JASON ALTMIRE, Pennsylvania          LOUIE GOHMERT, Texas
BRUCE BRALEY, Iowa                   DAVID DAVIS, Tennessee
YVETTE CLARKE, New York              MARY FALLIN, Oklahoma
BRAD ELLSWORTH, Indiana              VERN BUCHANAN, Florida
HANK JOHNSON, Georgia
JOE SESTAK, Pennsylvania
BRIAN HIGGINS, New York
MAZIE HIRONO, Hawaii

                  Michael Day, Majority Staff Director

                 Adam Minehardt, Deputy Staff Director

                      Tim Slattery, Chief Counsel

               Kevin Fitzpatrick, Minority Staff Director

                                 ______

                         STANDING SUBCOMMITTEES

                    Subcommittee on Finance and Tax

                   MELISSA BEAN, Illinois, Chairwoman


RAUL GRIJALVA, Arizona               VERN BUCHANAN, Florida, Ranking
MICHAEL MICHAUD, Maine               BILL SHUSTER, Pennsylvania
BRAD ELLSWORTH, Indiana              STEVE KING, Iowa
HANK JOHNSON, Georgia
JOE SESTAK, Pennsylvania

                                 ______

               Subcommittee on Contracting and Technology

                      BRUCE BRALEY, IOWA, Chairman


HENRY CUELLAR, Texas                 DAVID DAVIS, Tennessee, Ranking
GWEN MOORE, Wisconsin                ROSCOE BARTLETT, Maryland
YVETTE CLARKE, New York              SAM GRAVES, Missouri
JOE SESTAK, Pennsylvania             TODD AKIN, Missouri
                                     MARY FALLIN, Oklahoma

        .........................................................

                                  (ii)

  
?

           Subcommittee on Regulations, Health Care and Trade

                   CHARLES GONZALEZ, Texas, Chairman


RICK LARSEN, Washington              LYNN WESTMORELAND, Georgia, 
DAN LIPINSKI, Illinois               Ranking
MELISSA BEAN, Illinois               BILL SHUSTER, Pennsylvania
GWEN MOORE, Wisconsin                STEVE KING, Iowa
JASON ALTMIRE, Pennsylvania          MARILYN MUSGRAVE, Colorado
JOE SESTAK, Pennsylvania             MARY FALLIN, Oklahoma
                                     VERN BUCHANAN, Florida

                                 ______

            Subcommittee on Rural and Urban Entrepreneurship

                 HEATH SHULER, North Carolina, Chairman


RICK LARSEN, Washington              JEFF FORTENBERRY, Nebraska, 
MICHAEL MICHAUD, Maine               Ranking
GWEN MOORE, Wisconsin                ROSCOE BARTLETT, Maryland
YVETTE CLARKE, New York              MARILYN MUSGRAVE, Colorado
BRAD ELLSWORTH, Indiana              DAVID DAVIS, Tennessee
HANK JOHNSON, Georgia

                                 ______

              Subcommittee on Investigations and Oversight

                 JASON ALTMIRE, PENNSYLVANIA, Chairman


CHARLES GONZALEZ, Texas              MARY FALLIN, Oklahoma, Ranking
RAUL GRIJALVA, Arizona               LYNN WESTMORELAND, Georgia

                                 (iii)

  
?

                            C O N T E N T S

                              ----------                              

                           OPENING STATEMENTS

                                                                   Page

Velazquez, Hon. Nydia M..........................................     1
Chabot, Hon. Steve...............................................     2
Lipinski, Hon. Dan...............................................     3

                               WITNESSES


PANEL I:
Jackson, Ms. Ivy, Director of the Office of RESPA and Interstate 
  Land Sales, U.S. Department of Housing and Urban Development...     4

PANEL II:
Kermott, Mr. Gary L., Vice Chairman, First American Title 
  Insurance Company, Executive Vice President, The First American 
  Corporation, On behalf of the American Land Title Association..    20
Cockey, Mr. Adam D., Senior Vice President, Prudential Carruthers 
  Realtors, On behalf of the National Association of Realtors...    21
Kittle, Mr. David G., CMB, Chairman-Elect, Mortgage Bankers 
  Association....................................................    23
Savitt, Mr. Marc, President-elect, The National Association of 
  Mortgage Brokers...............................................    25
Gordon, Ms. Julia, Policy Counsel, Center for Responsible Lending    27

                                APPENDIX


Prepared Statements:
Velazquez, Hon. Nydia M..........................................    35
Chabot, Hon. Steve...............................................    37
Altmire, Hon. Jason..............................................    38
Jackson, Ms. Ivy, Director of the Office of RESPA and Interstate 
  Land Sales, U.S. Department of Housing and Urban Development...    39
Kermott, Mr. Gary L., Vice Chairman, First American Title 
  Insurance Company, Executive Vice President, The First American 
  Corporation, On behalf of the American Land Title Association..    53
Cockey, Mr. Adam D., Senior Vice President, Prudential Carruthers 
  Realtors, On behalf of the National Association of Realtors...    81
Kittle, Mr. David G., CMB, Chairman-Elect, Mortgage Bankers 
  Association....................................................    89
Savitt, Mr. Marc, President-elect, The National Association of 
  Mortgage Brokers...............................................   144
Gordon, Ms. Julia, Policy Counsel, Center for Responsible Lending   158

Statements for the Record:
Attorneys' Title Guaranty Fund, Inc..............................   172
Independent Community Bankers of America.........................   175
National Association of Federal Credit Unions....................   180

                                  (v)

  


                    FULL COMMITTEE HEARING ON RESPA
                    AND ITS IMPACT ON SMALL BUSINESS

                              ----------                              


                         Thursday, May 22, 2008

                     U.S. House of Representatives,
                               Committee on Small Business,
                                                    Washington, DC.
    The Committee met, pursuant to call, at 10:07 a.m., in Room 
1539, Longworth House Office Building, Hon. Nydia M. Velazquez 
[Chair of the Committee] Presiding.
    Present: Representatives Velazquez, Cuellar, Lipinski, 
Altmire, Clarke, Johnson, Chabot, Bartlett, and Fallin.

           OPENING STATEMENT OF CHAIRWOMAN VELAZQUEZ

    Chairwoman Velazquez. Good morning. I call this hearing to 
order.
    Today, we will examine the Department of Housing and Urban 
Development's proposed rule on the Real Estate Settlement 
Procedures Act.
    The recent housing crisis has revealed that predatory 
lending remains much a problem. It has also demonstrated the 
importance of providing quality information to home buyers. 
Over time, the closing process has become more complex, making 
these consumer disclosures even more critical.
    The recent abuses we have seen in the mortgage market have, 
in part, been exacerbated by a lack of such protections. RESPA 
was initially established to provide these very safeguards, but 
clearly, they are not working in today's housing market. At its 
very foundation are the Good Faith Estimate and the HUD-1 
forms, which provide home buyers with basic information 
concerning the costs of their purchases.
    Unfortunately, HUD's recent proposal to update these forms 
as well as the settlement process is not the cure-all that home 
buyers need. The rule creates additional paperwork and 
complexity, potentially adding to the confusion of an already 
stressful purchase. This could lead to information overload and 
could ultimately result in more uncertainty for consumers. In 
addition to these problems, it will create chaos for small 
settlement service providers. These firms play a key role in 
the home-buying process, and they stand to incur billions of 
dollars in costs due to the implementation of the RESPA 
regulation.
    Aside from the enormous costs posed to small businesses, it 
also creates an environment in which they are placed on an 
unlevel playing field. While HUD asserts that volume discounts 
will provide consumers with savings, we know better. It will 
lead to the bundling of services and will reduce competition by 
forcing small firms out of business. As a result, consumers 
will ultimately face higher prices.
    It is my expectation that Steven Preston, who President 
Bush recently nominated to be Secretary of HUD, will help 
address these problems. We know Mr. Preston well on this 
Committee, and I am hopeful that he will utilize his experience 
as head of the SBA to ensure that the RESPA rule does not 
unnecessarily burden small firms.
    The changes the proposed rule makes to the settlement and 
closing costs have come at a challenging time in the housing 
market. It is important that we closely examine this 
modification so its recovery is not undermined. We also have 
the responsibility to protect home buyers by ensuring that they 
are given information about loan terms and closing fees in a 
clear, easy-to-understand manner. At today's hearing, we will 
begin to answer these questions and will make sure that we are 
not doing more harm than good to the home-buying process.
    I look forward to today's testimony, and I thank all of the 
witnesses again for coming here to share their views.
    I now yield to Ranking Member Chabot for his opening 
statement.

                OPENING STATEMENT OF MR. CHABOT

    Mr. Chabot. I thank the chairwoman for yielding.
    I want to thank her once again for holding this important 
hearing on the Department of Housing and Urban Development's 
proposed changes to rules implementing the Real Estate 
Settlement Procedures Act, or RESPA.
    This is the committee's third hearing on HUD's plan to 
modify regulations governing the real estate settlement 
process. Although HUD has made significant strides since the 
Committee last examined this issue back in January of 2004, I 
remain concerned about the procedures used to assess the 
economic impact that the proposal will have on small businesses 
operating in the residential real estate market.
    I certainly concur with the idea that the complex process 
associated with the purchase of a home can and should be 
simplified given the state of the housing market in certain 
areas of the country, including my home State of Ohio, and we 
just happened to have the Governor of Ohio in for a meeting 
this morning. The Ohio delegation did. There is no doubt that a 
more transparent process on the front end may ameliorate 
problems on the back end, thereby potentially reducing the 
number of foreclosures.
    The effort to reduce confusion and to increase transparency 
in the real estate process should not be borne solely by small 
businesses. The Regulatory Flexibility Act, or RFA, requires 
Federal agencies to consider the impact of their proposed rules 
on small businesses and to determine whether there are any 
practical alternatives that would reduce the adverse effects on 
small business while still achieving the Agency's regulatory 
objectives.
    In the case of the proposed RESPA rules, HUD must assess 
alternatives that increase transparency and that assist 
consumers but that do not necessarily pose undue burdens on 
small businesses that play a vital role in the operation of the 
residential real estate market. In particular, the Department's 
initial Regulatory Flexibility and Analysis and Regulatory 
Impact Study used data from 2002 and 2004. The data may be 
accurate, but they clearly do not reflect the current 
turbulence in the residence real estate market. An accurate 
analysis under the RFA requires an assessment of the regulation 
in the context of the current economy, not in the economy of 5 
years ago.
    I will be interested in hearing from HUD how it plans to 
update this data to reflect current economic conditions. I also 
will be interested in hearing from our other witnesses how 
changes in the marketplace affect their capacity to implement 
regulatory changes. I am also concerned that HUD did not 
perform a detailed assessment of the consequences of volume 
pricing on the future viability of small businesses. There is 
no doubt that volume discounts will benefit consumers and may 
provide marginal assistance in improving the residence real 
estate market. However, the long-term consequences of reduced 
competition may argue against making changes that will further 
shrink an already troubled sector of our small business 
economy.
    Finally, I also would like to hear from our witnesses as to 
whether this is an appropriate time to commence this type of 
significant rulemaking change. The focus of the Department's 
resources should be on helping the ailing housing sector, not 
implementing new regulations that might divert some of these 
resources away from the more critical mission of restoring 
health to our housing sector. Once that is done, the Department 
could turn its attention to its modification of rules to 
implement RESPA.
    I want to thank the witnesses for taking the time to come 
here to testify this morning.
    I will conclude by just noting that I am also the ranking 
member of the Antitrust Task Force of the Judiciary Committee, 
and we are holding a hearing at 11:00 o'clock. All the five 
heads of the oil companies are being hauled in. They have been 
thrashed over in the Senate, and now they will be thrashed here 
in the House, and so I have to attend that particular 
thrashing. Mary Fallin from Oklahoma will be sitting in for me, 
and she will be here shortly.
    I want to, again, thank the chairwoman for holding this 
hearing. I yield back.
    Chairwoman Velazquez. Thank you, Mr. Chabot.
    I would like to recognize Mr. Lipinski for the purpose of 
making an opening statement.

               OPENING STATEMENT OF MR. LIPINSKI

    Mr. Lipinski. Thank you, Madam Chairwoman.
    I would like to, first of all, thank Chairwoman Velazquez 
and Ranking Member Chabot for holding this hearing today and 
for their continued leadership on this and on other small 
business issues.
    I also would like to thank all of our witnesses today for 
their participation and input on this issue that we all know, 
with all of the turmoil going on in the housing market today, 
is very critical.
    As the housing foreclosure crisis worsens, I think all of 
us want to do all we can to help homeowners while taking action 
to prevent future crises. However, we must not rush to 
solutions that will significantly increase costs to consumers, 
that will reduce choices, and that will shut out small 
businesses from providing settlement or mortgage origination 
services. Unfortunately, I am concerned that HUD's proposed 
rule may have some of these negative impacts. At a time when 
our economy is already suffering, we should not be sacrificing 
the jobs and economic growth created by small businesses while 
we make an effort to address the housing crisis.
    I look forward to listening to testimony, and I am hopeful 
that we can find an alternative solution that helps consumers 
without burdening small businesses. I will also be submitting 
for the record testimony provided by Attorneys' Title Guaranty 
Fund, a lawyer's service that represents more than 3,500 law 
firms throughout the Midwest, many of which are small 
businesses. I urge my colleagues to take a look at this 
thoughtful testimony they have provided regarding this proposed 
rule.
    Again, I thank the chairwoman and ranking member for 
holding this hearing. I yield back the balance of my time.

    Chairwoman Velazquez. Thank you.
    Now I welcome Ms. Ivy Jackson, Director of the Office of 
RESPA and Interstate Land Sales in the U.S. Department of 
Housing and Urban Development. Her office is responsible for 
administering the Real Estate Settlement Procedures Act and the 
Interstate Land Sales Full Disclosure Act. Ms. Jackson has a 
Master's of Science in Consumer Economics from Auburn 
University.
    Welcome.

 STATEMENT OF MS. IVY JACKSON, DIRECTOR OF THE OFFICE OF RESPA 
AND INTERSTATE LAND SALES, U.S. DEPARTMENT OF HOUSING AND URBAN 
                          DEVELOPMENT

    Ms. Jackson. Chairwoman Velazquez, Ranking Member Chabot, 
on behalf of the Department, I appreciate the opportunity to 
discuss important issues related to the Real Estate Settlement 
Procedures Act, known as RESPA, and to highlight aspects of the 
proposed rule as part of HUD's RESPA reform.
    Today, in the midst of a housing downturn when thousands of 
Americans are faced with the prospect of losing their homes 
through foreclosure, there is no doubt that the process of 
buying a house, itself, has been part of the problem. Many 
homeowners went to the settlement table, paid thousands of 
dollars in closing costs and entered into loans they did not 
fully understand. Consumers need to know: What type of loan are 
they getting? How much will it cost per month? What is included 
in their monthly payment? Will it go up? Today, consumers have 
no assurance that the loan terms and closing costs they are 
offered will be what they will be faced with at the settlement 
table.
    RESPA was enacted to protect consumers during the home-
buying process, requiring certain disclosures and prohibiting 
practices such as kickbacks and referral fees that increase the 
cost of settlement. RESPA requires the lender or mortgage 
broker to give a good faith estimate of charges the consumers 
will expect to pay to close the loan. The HUD-1 settlement 
statement itemizes the charges actually imposed.
    RESPA covers millions of transactions each year involving 
virtually all loans by one-to-four family residential 
properties. It extends to providers settlement services such as 
appraisals, credit reporting, loan origination, and title and 
closing services.
    The RESPA reform process has been thorough and inclusive. 
HUD has sought input from consumers, industry and Congress 
about how to update and improve the settlement process. In 
2005, HUD held seven roundtable discussions with consumer and 
industry groups. Three roundtables conducted in Chicago, Fort 
Worth and Los Angeles were in conjunction with the Small 
Business Administration. HUD has thoroughly considered various 
options and opinions arising from these meetings in developing 
the current proposed rule, which includes a standardized GFE to 
improve the disclosure of loan terms and settlement costs, 
making it easier for consumers to shop, limitations on how much 
final settlement charges can vary from the estimated charges, 
and modification of the HUD-1, including a closing script, that 
will compare the final HUD-1 charges with the GFE and will 
describe to the consumer the terms of the loan he is receiving.
    Finally, the proposal requires indirect fees paid to the 
mortgage broker by the lender and charged to the borrower 
through the interest rate to be applied to reduce the 
consumer's direct costs at closing.
    HUD believes clear presentation of loan terms will improve 
borrower understanding of risky mortgage features, such as 
teaser rates, interest-only loans and balloon payments. 
Improved consumer shopping will lead to lower settlement costs 
of an estimated $500 to $700 per loan or over $8 billion 
annually. These savings, we believe, will come from competition 
and high-priced producers.
    Since there is no evidence small businesses have been 
disproportionately charging high prices, there is no 
expectation of a disproportionate impact on small businesses.
    Industry costs for the rule include one-time adjustment 
costs for training, software upgrades and legal advice related 
to the proposed GFE and HUD-1. These costs are estimated to be 
$570 million and $390 million from small business but at $5,000 
to $6,000 per business. Recurring GFE costs include time 
processing the new forms and in calculating third-party charges 
to meet the tolerances. HUD-1 recurring costs include preparing 
the closing script and in reading it to the borrower. Total 
recurring costs are estimated to be $98 per loan. Even if all 
costs were passed on to the consumer, there would be a positive 
net effect of approximately $700 per loan. There are other 
economic effects that are important but difficult to quantify.
    As a result of the proposed reform, consumers are less 
likely to engage in risky and uninformed borrowing, which could 
have positive impacts on the housing market, on the financial 
system and on the national economy. HUD would like to work with 
Congress to enact legislative changes to RESPA, such as 
requiring the delivery of the HUD-1 to the borrower 3 days 
prior to closing and providing for civil money penalties to 
bolster consumer protection and to ensure uniform enforcement.
    Given the recent increase in home foreclosures, HUD remains 
committed to improving the complicated, unclear and costly 
home-buying process. Under this proposal, home buyers would be 
presented for the first time ever with the standard form 
disclosing important aspects of the loan.
    Thank you for the opportunity to appear here today. I look 
forward to your questions.
    [The prepared statement of Ms. Jackson may be found in the 
Appendix on page 39.]

    Chairwoman Velazquez. Thank you, Ms. Jackson.
    Ms. Jackson, the RESPA rule requires settlement agents to 
explain the terms of a mortgage at closing. It seems to me that 
the lender is in the best position to explain these terms, not 
the settlement agent.
    Do you anticipate that settlement agents will be able to 
answer most mortgage-related questions at closing?
    Ms. Jackson. We believe that they would. It is merely 
taking the information that we believe would be transmitted 
with closing instructions from the lender to the settlement 
agent and going over the documents. Many settlement agents go 
over these documents today. I have been lucky in all of my 
closings to have that done.
    Chairwoman Velazquez. Does that mean that HUD is putting 
the settlement agent in a position of speaking for the lender?
    Ms. Jackson. We are only asking that the--just as the 
information about the other loans and charges are transmitted 
from the lender to the title agent or to the closing agent to 
prepare the HUD-1, then this information would be transmitted 
to the disclosures on the script to be read to the borrower.
    Chairwoman Velazquez. If an agent tried to explain the 
mortgage and tried to answer questions that should be answered 
by the lender, doesn't that put an agent in the position of 
providing the unauthorized practice of law under many State 
laws?
    Ms. Jackson. Well, we have heard there is some concern out 
about that in different States, and that would certainly be 
something we would be looking at in the final rule into what 
would be appropriate for the closing agent to communicate to 
the borrower.
    Chairwoman Velazquez. So you are telling us that you are 
revisiting that issue?
    Ms. Jackson. Well, we certainly would be looking at it. 
This is, of course, a proposed rule. Anything is open to, you 
know, comment or to other ideas, certainly.
    Chairwoman Velazquez. I know HUD intended for the longer 
Good Faith Estimate format to provide more transparency to 
consumers. However, in some respects, the form decreases 
transparency. Unlike the existing format, the new GFE fails to 
itemize the fees.
    Why did you or why did HUD reduce this level of detail in 
the new GFE?
    Ms. Jackson. We are trying to stop the proliferation of 
fees. I have had title agents or lenders call and say they have 
run out of lines on the HUD-1 and on the GFE. They had so many 
different types of fees that they were charging the borrower, 
and it is difficult to compare what one lender calls an "admin 
fee" and what the other calls a "processing fee." Even in 
negotiating on your loan costs, you may find you get one of the 
charges--the processing fee--off only to find, at closing, 
there is an admin fee for approximately the same amount of 
money. So we have tried to compress cost categories.
    Chairwoman Velazquez. Ms. Jackson, I understand all of 
that. I have the two forms here--the old format and the new 
one. This one is four pages. This one has all of the items. It 
itemizes all the fees so the borrower is able to look at it and 
see what he is paying for at closing. On this one, I think it 
is much easier for someone to hide some of the fees, don't you 
think?
    Ms. Jackson. Well, in the good faith estimate stage, we are 
trying to get the borrower to concentrate more on the bottom 
line of what his costs are going to be and the loan terms. Now, 
it is true that we have compressed certain categories on page 2 
of the GFE. Of course, that is also open to comment. If there 
are specific items that others believe that should be required 
to be itemized, we will certainly take that into consideration.
    Chairwoman Velazquez. Ms. Jackson, the RESPA rules require 
settlement agents to determine whether certain charges 
estimated on the GFE exceed a 10 percent tolerance at closing. 
I know some members of the real estate industry are concerned 
that the rules do not give them enough guidance on what to do 
if the tolerance is exceeded.
    Can you clarify to us what a settlement agent is supposed 
to do if the tolerance is exceeded?
    Ms. Jackson. We would just expect the settlement agent to 
highlight that to the borrower. If it is a refinance 
transaction and the borrower has the ability to rescind the 
transaction--
    Chairwoman Velazquez. I understand the concern from some of 
the people in real estate that you do not provide enough 
guidance.
    Ms. Jackson. Well, we would certainly take that into 
consideration in going forward.
    Chairwoman Velazquez. Let me ask you: Is a settlement agent 
supposed to stop a sale when the tolerance is exceeded by a 
mere $10 or $20?
    Ms. Jackson. No, that was not our intention. It was only to 
highlight it to the borrower. Also, because we intend to ask 
Congress to give us the authority to require that the HUD-1 be 
given to the borrower 3 days in advance, then we believe that 
the borrower would then have enough time to compare the GFE and 
the HUD-1 and to contact the lender and make a determination if 
there was a mistake or it would be the borrower's choice then 
what they would like to do with that.
    Chairwoman Velazquez. Okay. Mr. Chabot alluded in his 
opening statement to the fact of the regulatory flexibility 
analysis that HUD conducted for the RESPA rule, which was 
extensive. However, some firms in the real estate industry are 
concerned that it underestimated the economic effect on them 
given the fact that, when the regulatory flexibility analysis 
was conducted, the economic climate was totally different from 
what we are in today.
    So what kind of outreach did you conduct with the small 
business community to determine the economic impact of the 
rule?
    Ms. Jackson. Well, we did hold the roundtables. That was, 
you know, back in 2005. We have been, you know, listening, 
talking to people. During this comment period, we have offered 
to meet with any group or individual who would like to come in 
and talk with us about it. We will also be going back to see at 
the time of the final rule if there have been any changes in 
our figures that we would be updating that at that time.
    Chairwoman Velazquez. Let me ask you: Can you give us any 
example of where HUD makes changes to the rule based on 
feedback from small businesses?
    Ms. Jackson. Well, packaging is no longer a part of this 
rule. We certainly heard about that in the proposed rule in 
2002. As you know, a former rule was withdrawn in 2004, and 
that has been part of this whole reform process.
    Chairwoman Velazquez. Is that one example or do you have 
more examples?
    Ms. Jackson. I would think that that is probably the, you 
know, major example.
    Chairwoman Velazquez. I have other questions. I will come 
back to you.
    Now I will recognize the ranking member.
    Mr. Chabot. Thank you, Madam Chair.
    Ms. Jackson, does the Department plan on updating the 2002 
and 2004 data that it used to prepare the initial regulatory 
flexibility analysis?
    Ms. Jackson. Well, HUD used the latest census data 
available. So, if there is other data available by another 
source, then we would consider looking at it.
    Mr. Chabot. But that was data from back a number of years 
ago.
    Ms. Jackson. Right, it was.
    Mr. Chabot. Would you concede that the situation in the 
real estate industry has been pretty tumultuous in recent 
years? With the market's having tanked and just the home-
building market and everything that is going on out there, 
wouldn't you agree that we have very different circumstances 
now than we did from the time of that data?
    Ms. Jackson. Well, circumstances in the market have 
certainly changed. I am not sure whether that would affect our 
cost analysis or not.
    Mr. Chabot. So, at this point, you do not have any plans on 
doing it. Would you be open to--
    Ms. Jackson. We would certainly be open to looking at more 
recent data--
    Mr. Chabot. Okay.
    Ms. Jackson. --and in looking at and in calculating what 
the costs would be.
    Mr. Chabot. Okay. Thank you.
    Is HUD planning to hold any more public forums after the 
comment period closes?
    Ms. Jackson. At this time, we do not have plans to hold 
any.
    Mr. Chabot. Is that something else that might be considered 
if you determine there was reason to do that?
    Ms. Jackson. Well, we would be in the rulemaking process, 
and I am afraid I would have to check to make sure that that 
was something that would be appropriate during the comment 
period.
    Mr. Chabot. I am going to yield back at this time, Madam 
Chair.
    Chairwoman Velazquez. Ms. Clarke.
    Ms. Clarke. Thank you, Madam Chairwoman and Ranking Member 
Chabot, for holding this very important hearing.
    The Real Estate Settlement Procedures Act is a vital tool 
in the American home-buying process. Most importantly, small 
businesses, such as title insurance companies and title agents, 
are important in the settlement and closing costs of 
residential mortgages. I believe that more transparent 
information could enhance consumer shopping and could 
discourage predatory, discriminatory and fraudulent lending 
processes.
    So it is my hope that this concern is at the center of all 
that we understand the impact of HUD's proposed rule on small 
entities will address as this is a very important component of 
the subprime mortgage crisis and its predatory lending.
    Ms. Jackson, I just have a couple of questions for you. 
First, can you explain to me how the proposed Good Faith 
Estimate is shorter or less complicated?
    Ms. Jackson. Well, borrowers would be able, if they wished, 
to just take the first page and to use that to compare costs 
and loan terms from different lenders since the loan terms are 
all on this first page, the important ones that we believe, 
like "Is there a prepayment penalty?" "Can the interest rate go 
up?" "What is the beginning interest rate?" Then at the bottom, 
there is a total of their costs.
    Page 2, of course, then goes into more detail about the 
different types of costs and the different services that the 
borrower is paying for.
    Pages 3 and 4 are merely more of an informational type for 
borrowers to explain to them what are some other charges that 
they may encounter in the home purchase and ownership. It also 
talks about whether the borrower would--if they do not have the 
money to bring $10,000 to closing, maybe through the trade-off 
table, they could see if there is a loan product that has a 
little bit higher interest rate where they would only have to 
bring $3,000 or $4,000 to close. So it is more of an 
educational tool for consumers, pages 3 and 4.
    Ms. Clarke. Would the Good Faith Estimate allow for an easy 
comparison to the HUD-1 settlement statement?
    Ms. Jackson. We have made some changes to the HUD-1 so that 
you can look back from the HUD-1 to the cost categories on the 
Good Faith Estimate. The closing script also--currently, we had 
proposed to have what we call a "crosswalk" where the fees on 
the GFE are listed and the fees on the HUD-1 so that the 
borrower can easily see if there is any difference.
    Chairwoman Velazquez. Would the gentlelady yield?
    Do you think that, for the consumer, it is much easier and 
that they will be able to detect and to compare apples with 
oranges here?
    Ms. Jackson. Well, yes, because what we are trying to do is 
to come to, for example, a total of all lender fees so they can 
compare the lender fees of one loan to the lender fees of 
another. Like I said, borrowers become confused when the 
different fees have different names, whether it is an admin or 
a processing fee or a fee to sell their loan in the secondary 
market or miscellaneous fees, those types of categories that we 
see.
    Chairwoman Velazquez. I will yield back, but I have to tell 
you, if I am in the process of reviewing this for my own sake, 
it will be quite difficult for me as a consumer to be able to 
compare the fees in this format, the HUD-1, with the Good Faith 
Estimate. My concern is we are doing this to protect consumers. 
Do you test these forms? What type of outreach do you do with 
consumers?
    Ms. Jackson. Yes, we did extensive different rounds of 
testing. I believe we had at least six rounds of testing 
beginning in 2002 through November 2007. We have been in 
Atlanta; Boston; Denver; Seattle; Tulsa; Los Angeles; 
Minneapolis; Austin, Texas; Portland, Oregon; Birmingham, 
Alabama.
    Chairwoman Velazquez. Okay. Okay. So you showed these two 
forms to them, to the consumers?
    Ms. Jackson. We showed them different forms. First, the 
company that was developing the form talked to the consumers 
and found out what they felt that they needed and developed the 
form, and then we did test something that was very similar to 
the HUD-1, and the consumers liked the form better that we have 
now.
    Chairwoman Velazquez. So you are telling me--and I will 
yield back and give you more time.
    You are telling me that it is not much easier for some 
people to hide fees that are not itemized? Because they are not 
itemized here. It is not easier to hide those fees?
    Ms. Jackson. Well, it would be in the--they would see the 
totals of which category was higher than another category.
    Chairwoman Velazquez. I yield back. Thank you.
    Ms. Clarke. Thank you, Madam Chair. I just have one final 
question.
    Ms. Jackson, as you know, hidden costs can act as a payment 
shock to a borrower, causing financial distress, which could 
possibly lead to rising foreclosure rates. Borrowers may have 
entered into high-cost loans as a result of discrimination.
    Can you explain to me how this proposed rule will address 
this issue and, yet, not adversely affect small businesses?
    Ms. Jackson. Well, what we are trying to get borrowers to 
do is to shop. By holding lenders and brokers who are loan 
originators to a zero tolerance as we have proposed, then what 
they propose on the GFE is what the borrower would actually be 
charged at settlement. We have calls in my office every day 
from people who are at settlement who find out they need $900 
more to close or that there was a fee that they did not 
anticipate. So what we are trying to do is, really, put the 
faith back into good faith estimate.
    Ms. Clarke. You spoke about the zero tolerance.
    How was that enforced or how is oversight given to that?
    Ms. Jackson. Unfortunately, we do not have penalty 
provisions, civil money penalty authority, under RESPA. My 
staff is very pro consumer and has been able to call on behalf 
of consumers and, in most cases, get those fees reduced or 
taken off. Sometimes just HUD's calling gets their attention, 
and they offer to do that. We have returned hundreds of 
thousands of dollars to borrowers that way, but we do believe 
that we need civil money penalty authority to make certain that 
we can enforce what is put on the GFE and then what is charged 
at the HUD-1 or closing stage.
    Ms. Clarke. Just in closing, Madam Chair, I think part of 
the run on the mortgage foreclosure piece has been a lack of 
real oversight and penalty. The practice has become sort of, I 
think, a way of doing business. Unfortunately, as a result of 
that, so many people have been adversely impacted.
    So it is my hope that as you look at this and as you speak 
to the value of zero tolerance that some sort of provision is 
made to really enforce that so that we change that behavior and 
so that people do not see our sort of new paradigm of lending 
as a way of continuing a practice that has been really 
injurious to our economy.
    I yield back. Thank you very much, Madam Chair.
    Chairwoman Velazquez. Sure.
    Mr. Bartlett.
    Mr. Bartlett. Thank you very much.
    Among other pursuits in a former life, I was a land 
developer and a home builder, so I have sat many times at the 
settlement table. I am not a big fan of regulation, but I am a 
huge fan of truth in advertising.
    I gather what you are doing comes closer to truth in 
advertising than it does to regulation?
    Ms. Jackson. Well, we do believe that what borrowers are 
told on the phone or what is put on a Good Faith Estimate 
should be what they will receive at the closing table, and so 
we do want to see that. It has impacted--we do believe that 
borrowers have paid higher origination charges. HUD will soon 
come out with a study done with the Urban Institute where we 
believe, based on the study, that African Americans paid $315 
to $532 more than non-minorities after controlling for other 
relevant factors and that Latinos paid $290 to $450 more than 
non minorities after controlling for all other factors. We 
believe that, in making the Good Faith Estimate actually be 
what the borrower will finally see, that they will have the 
confidence to shop and to obtain the best loan.
    Mr. Bartlett. When the real costs exceed by more than 10 
percent the Good Faith Estimate, who pays that?
    Ms. Jackson. On the 10 percent--on the tolerance?
    Mr. Bartlett. You have gotten a Good Faith Estimate of what 
it was going to cost. You come to the settlement table, and it 
costs more than that. Your regulations say that if it, in fact, 
exceeds that by more than 10 percent somebody has to pay that 
difference. Who pays the difference?
    Ms. Jackson. If the borrower wants to go ahead and close 
through the transaction, then they would go ahead and pay the 
additional amount of money. We hoped by having the HUD-1 
delivered 3 days in advance that there would be a dialogue 
between the borrower and the lender to either reduce the cost 
back under the 10 percent tolerance or less. We also, if given 
civil money penalties, would look to see whether there was a 
pattern or a practice with that lender or, perhaps, report that 
lender to Federal and State regulators also.
    Mr. Bartlett. But there is no leverage at the settlement 
table to get those costs reduced if they, in fact, exceed the 
Good Faith Estimate?
    Ms. Jackson. Well, I think some people probably have the 
leverage to do that, particularly on--
    Mr. Bartlett. But you do not? You do not have any leverage? 
Today, no one is compelled to make up the difference. The buyer 
either goes through with it or--
    Ms. Jackson. He does. He goes through and pays. We have 
looked at asking the rule about the possibility of a time limit 
to cure so that the lender, whether it is 15 days or 30 days or 
some other time frame, would go back to reimburse the borrower 
for the overcharges during that cure period. If they did not, 
if we were given penalty provisions, then we would start an 
action, an action against the lender.
    Mr. Bartlett. Do you think the borrowers who are now in 
distress did not go to the settlement table with their eyes 
wide open?
    Ms. Jackson. I think that some did not. I know that 
sometimes borrowers are brought--we had an example in our 
office where the documents were sent to the consumer's home to 
sign. It was, you know, in the evening. She signed them without 
really looking at them. She ended up with an $8,000 prepayment 
penalty and an adjustable rate interest that was a lot higher 
and additional charges, I believe, around $12,000. Now, we were 
able to use just our influence to get her out of that, but 
there are millions of borrowers who are ripped off every day.
    Mr. Bartlett. I would like to note in closing, Madam 
Chairman, of the many times I sat at the settlement table, I 
never read the documents because there were too darned many of 
them. As a result of regulations, there is a huge pile of 
documents. I paid a lawyer to sit at the table with me, and I 
trusted that he had read the documents and that he gave me good 
advice.
    You cannot, Ms. Jackson, count on the consumer to read 
these documents. They are too technical. There are too darned 
many of them. There is a huge pile of them at the usual 
settlement. Somehow we have got to cut through this so that the 
buyer really knows what he is signing. I trusted the lawyer who 
sat with me at the table. I do not know who they trust. Is it 
their agents?
    Ms. Jackson. I do not know, sir. That is exactly what we 
are trying to do because there are so many documents, and 
different terms of the loan are in different places, and there 
is different information. So that is why on the first page we 
put what we thought was most important.
    Mr. Bartlett. Thank you very much, Madam Chairman.
    Chairwoman Velazquez. Mr. Cuellar.
    Mr. Cuellar. Thank you, Madam Chair.
    Ms. Jackson, I am an attorney. In the past, I have done 
closings, so I think we know exactly what we are talking about. 
Even as an attorney, I think it is complicated. Even as an 
attorney, I think it is too much paperwork, and I do understand 
the reason you are trying to do this, but we have to be careful 
about the solution that we want to use to address the problem. 
I always believe that the solution should be better than what 
it was before.
    In hearing from my Texas folks, they seem to have big 
concerns, and I do not know if you have seen that there is a 
huge amount of questions on this side. I am talking about this 
side of the table.
    The first thing is I think your own estimates say that the 
cost of the real estate industry would be $570 million up front 
and then about $1.2 billion annually; is that correct? Is that 
what your estimates are?
    Ms. Jackson. Our estimates would be that it would be about 
that amount up front, the $585 million to $590 million, and we 
believe that works out to be about $5,000 to $6,000 per small 
business
    Mr. Cuellar. Okay. Who do you think the small business is 
going to transfer that cost to?
    Ms. Jackson. To the consumer.
    Mr. Cuellar. Okay.
    Ms. Jackson. However, we believe that there are substantial 
consumer savings. Even if you pass all of the costs on to the 
consumer, our estimate is that the consumer would still be 
saving around an average of $600 per loan transaction.
    Mr. Cuellar. So, if you transfer $5,000 and take another 
savings, you say, at the end it will save the consumer money?
    Ms. Jackson. Yes. We believe, in the end it would save the 
consumer money.
    Mr. Cuellar. Okay. You do know that there are so many folks 
who disagree with your opinion on this.
    Ms. Jackson. Yes.
    Mr. Cuellar. Okay. Second of all, paperwork. Some attorneys 
charge by page. No, I am just kidding. There is a lot of 
paperwork. I am a big believer--in Texas, I had legislation to 
reduce paperwork for all of the agencies. One is, if you can 
put it on one page instead of on 10 pages, let us try to reduce 
it. Nothing against attorneys--I am also an attorney--but if 
you can put it in plain English, put it in plain English.
    Does this reduce paperwork or does this add paperwork to a 
process--and I know this process because I have done it in the 
past. Does this reduce or does this add to a process that 
already has a lot of paperwork?
    Ms. Jackson. Well, it does add more pieces of paper to the 
process, which does have a lot of paper now, but at the same 
time we believe that it is important information to keep 
borrowers from getting into the messes that they are in now. We 
believe that a lot of borrowers did not understand the loans 
that they were getting. So, if it takes another sheet of paper 
or, you know, another line of disclosure, then we believe that 
that is worth it.
    Mr. Cuellar. Is it possible to save money and save 
paperwork--well, is it possible to help the consumer by doing 
it in such a way that you actually save him money and actually 
reduce the paperwork or are you saying the only way we can help 
consumers is by adding more paperwork and by adding another 
$5,000 to the real estate industry that will be passed on to 
the consumer?
    Ms. Jackson. Well, we only control the Good Faith Estimate 
and the HUD-1 and a couple of other disclosures in the process. 
So we do not--you know, HUD does not necessarily have the 
control to reduce other paperwork that may be required by the 
State. Oftentimes, borrowers are asked to re-sign disclosures.
    Mr. Cuellar. So you are saying that you have the power to 
increase paperwork but not to reduce paperwork?
    Ms. Jackson. We have the power to control what is on the 
GFE and on the HUD-1 and on a few other disclosures but that 
anything else would be outside of our jurisdiction.
    Mr. Cuellar. I know my time is almost up. Let me just ask 
my last question.
    I can understand the intent. I do not have a problem with 
that. I want to protect the folks whom you mentioned--the 
Hispanics, the blacks--anybody who might be taken advantage of, 
okay? I just want to see a solution that will make it easier 
and simpler for the folks we are trying to protect and not make 
it expensive. The last question that I want to ask is:
    Did you all do a cost-benefit analysis to this? In other 
words, in order to help somebody, is it going to cost more to 
help that person? Does it cost more than the benefit we are 
trying to provide?
    Ms. Jackson. We do not believe so. We believe that it will 
cost--add--an additional approximately $98 per loan closing, 
but we believe that consumers will still reap substantial 
benefits in hundreds of dollars more.
    Mr. Cuellar. So we are adding to the costs to help the 
benefit to the consumer?
    Ms. Jackson. Well, we are adding to the--perhaps it will be 
more costly to explain a little more to the consumer what they 
are actually getting, but at the end of the day, then, you 
know, maybe they would not get a loan with a prepayment penalty 
where they cannot get out of that.
    Mr. Cuellar. I am with you, but my question is, if you can 
just answer this: In terms of paperwork and cost to the 
consumer, does the cost-benefit analysis mean we are adding 
more to the cost to benefit the consumer? Just a "yes" or "no."
    Ms. Jackson. Yes.
    Mr. Cuellar. Okay. Thank you.
    Chairwoman Velazquez. Mr. Johnson.
    Mr. Johnson. Thank you.
    I am coming in on the tail end of this discussion, so I 
must apologize. I hope I will not ask anything that has already 
been asked.
    I will say that, you know, there is some cost in 
implementing these new regulations that have been proposed, but 
the regulations and the costs will be passed on to the 
consumer. Is that what I am hearing you say? It will be 
approximately how much per closing?
    Ms. Jackson. $98 per closing.
    Mr. Johnson. $98 per closing.
    But now the purpose of these new regulations is to enable 
the borrower to understand precisely the kind of loan product 
that is being offered in advance, prior to the borrower's 
coming to the closing table, correct?
    Ms. Jackson. Correct.
    Mr. Johnson. Then once the borrower is at the closing 
table, the regulations, the proposed regulations, will result 
in the borrower's having a better understanding of the product 
that is being closed on their behalf, correct?
    Ms. Jackson. Correct.
    Mr. Johnson. So it will tend to help people avoid getting 
locked into situations that they never intended, and it just 
comes up at the closing, such as the fact that this mortgage 
has a balloon payment feature, correct?
    Ms. Jackson. Correct.
    Mr. Johnson. Or it has got an adjustable rate and the rate 
can adjust every 6 months or every year or every 2 years or 
after 2 years or 3 years or 5 years have gone by, that kind of 
thing, correct?
    Ms. Jackson. That is absolutely correct, sir.
    Mr. Johnson. And that is not a 30-year fixed rate mortgage. 
There is even a prepayment penalty. There is or is not a 
prepayment penalty.
    Ms. Jackson. That is correct.
    Mr. Johnson. And your yield spread premium, which most 
people have no idea of what that means, they get an 
understanding of what the yield spread premium is and how much 
it is actually going to cost them, correct?
    Ms. Jackson. Yes.
    Mr. Johnson. So these kinds of regulations would result in, 
probably, a savings as far as any equity that may be in a home 
that is being refinanced?
    Ms. Jackson. That is correct.
    Mr. Johnson. And it probably even has the potential to cut 
down on some of the up-front costs on a new mortgage that the 
borrower would be expected to produce at the closing table?
    Ms. Jackson. That is what we expect, to the tune of about 
$600 per loan.
    Mr. Johnson. So this $98 that it would cost the borrower 
would have to be weighed against the potential savings that 
would accrue to the borrower. Then a net result, in your humble 
estimation, would be what in terms of dollars to the borrower?
    Ms. Jackson. Well, we believe that the savings would be 
around--almost $700 to start. Then there could be additional 
savings for time efficiencies to the borrower. Then after 
subtracting the $98, we still believe that the consumer would 
have a net benefit of $600 to $700.
    Mr. Johnson. What would that savings be derived from?
    Ms. Jackson. It would be derived from the fact that we 
believe that borrowers could take the first page and shop from 
lender to lender and have everything on the first page so that 
they could compare apples to apples so that you know that you 
are comparing loan features--if they are fixed rate to fixed 
rate, no prepayment penalty to no prepayment penalty--and 
derive the best loan for you. Then once you accept that loan, 
what you believe you will pay at the GFE stage is what you will 
actually see at settlement.
    Mr. Johnson. Okay. All of this has been precipitated by the 
alarming increase in the number of home foreclosures that were 
brought on by people being steered into the subprime market who 
could have afforded a prime loan, but yet they ended up with a 
subprime loan unbeknownst to them?
    Ms. Jackson. That has certainly--we believe that the fact 
that they did not know what terms they were getting and that 
their costs were greatly increased has helped lead to the 
current crisis.
    Mr. Johnson. All right. Thank you.
    Chairwoman Velazquez. Ms. Fallin, do you have any 
questions?
    Ms. Fallin. Thank you, Ms. Chairman.
    Sorry I missed getting to hear some of your testimony, but 
we appreciate your coming today and helping us with this very 
important issue. I had something I wanted to ask you about on 
the volume price discounts. That is:
    Does the HUD plan on assessing in its final regulatory 
flexibility analysis the viability of small business in the 
residential real estate settlement industry due to the 
implementation of the volume price discounts? What effect will 
it have on small businesses, and will it be able to compete?
    Ms. Jackson. Well, we do not really think that it would 
have an effect on small business.
    First, volume-based discounting is allowed now under RESPA. 
What we have tried to do in the rule is to clarify to all of 
the different jurisdictions across the country that HUD 
interprets that it is not a violation of RESPA for volume-based 
discounts as long as any savings derived from it is passed on 
to the consumer. So, if there were some negotiation to lower 
appraisals or the cost of appraisals, as long as that savings 
was passed to the consumer, then we would not consider it to be 
a violation.
    Ms. Fallin. Well, do you think the same amount of small 
businesses will be able to compete for this program to be able 
to offer the discount?
    Ms. Jackson. We do think that small businesses will also be 
able to take advantage of volume-based discount.
    Ms. Fallin. All right. Thank you.
    Thank you, Ms. Chair.
    Chairwoman Velazquez. Ms. Jackson, I understand that HUD 
requires for settlement agents to draw up a script and to read 
it aloud. My understanding is that HUD estimates that that 
requirement will add up to 45 minutes to the time it takes to 
close a transaction.
    How did you arrive at this figure? How much will this new 
requirement cost small businesses in the real estate industry?
    Ms. Jackson. Well, we believe that, as we said, it would 
add, probably, I think it was, around $54 per loan for the 
recurring cost on the HUD-1.
    Chairwoman Velazquez. The 45 minutes will represent $54?
    Ms. Jackson. Well, it was 30 minutes. That was for the 
preparation of the script, then an additional 15 minutes would 
be--reading the script about 5 minutes, and we allowed about 10 
minutes per question, and so we used a loaded salary figure of 
about $150,000 and came up with the $54 for the 45 minutes. Now 
that is assuming--we thought that that was the worst-case 
scenario, that that would be going from additional costs to a 
settlement agent who did not go over any documents with 
consumers at all now, who just basically said, "Here, sign 
these documents." As we know, many settlement agents go through 
the documents with the consumer now, so we tried to come--we do 
not believe that it will be $54 per loan for all transactions, 
but we tried to use the worst-case scenario.
    Chairwoman Velazquez. So 45 minutes. That means that agents 
will be doing fewer closings because they have to go through 
this process. So how are they going to make up for the closings 
that they will not be able to do given the fact that they are 
going to be spending 45 minutes?
    Ms. Jackson. Well, we do believe that these costs probably 
will be passed on to the consumer, but we do believe that the 
consumer will still save in the long run.
    Chairwoman Velazquez. You mentioned that it will represent 
$600 more per consumer.
    Ms. Jackson. Right. A net cost benefit after $98 of 
approximate costs for the new rule per loan was subtracted.
    Chairwoman Velazquez. RESPA, if done properly but without 
enforcement and oversight, will take us nowhere.
    So how do you intend to have in place the type of oversight 
that will make it work?
    Ms. Jackson. Currently, we depend on other Federal banking 
regulators and State regulators. When they go in and do 
examinations, they check to see that RESPA is followed. If not, 
it is sometimes referred to us or sometimes they take action 
themselves. As I said--
    Chairwoman Velazquez. What happened? What happened? We have 
almost 3 million homeowners in this country who are going 
through foreclosure or who will be going through foreclosure. 
Where were the regulators? Were they sleeping at the switch?
    Ms. Jackson. Well, I cannot speak for all of the different 
regulators, but that is our concern. That is why we have asked 
for penalty provisions so that we can also enforce and try to 
make certain that borrowers, at the closing, do get the deal 
that they were promised. We want transparency in the 
transaction.
    Chairwoman Velazquez. And simplicity, too, because if there 
is transparency without simplicity, we might not achieve the 
goal for the consumer to know every fee that they are supposed 
to pay at closing.
    I have to go back to these pages of this format. You know, 
when I compare it to the old one, you can match them up line by 
line, and you can find the fees on the settlement statement 
with the Good Faith Estimate. When I tried to do this here--
believe me, I do not know what test you do with consumers to 
come up with the conclusion that this four-page format is 
better suited to achieve the goal of protecting consumers and 
to have transparency in the process.
    Ms. Jackson. Well, we are in the comment period, and we 
will be, you know, re-looking at all of the comments that come 
in, and we will be re testing.
    Chairwoman Velazquez. Well, for whatever it is worth, this 
almost Ph.D. candidate here will tell you that I just--I do not 
get it. I just--I do not get it. I do not get it. If I am going 
to close and have this--believe me, I went through this. I did 
not read it. My husband did. If I have to go in a room by 
myself, it is going to take me I do not know how long to 
compare the fees that are, one, on the good faith and on the 
settlement statement. So I do not get it. I hope that you will 
go back and revisit that just because it is four pages. 
Sometimes--like some of the members from the administration 
come and say that they do more with less. Maybe consumers will 
be able to get better with less in terms of the pages that you 
are putting together.
    Ms. Jackson. We do think that that first page is very 
important, though, that consumers know whether they have a 
prepayment penalty or whether their interest rate can go up.
    Chairwoman Velazquez. Okay. Does any other member have any 
more questions? Yes.
    Ms. Clarke. Madam Chair, I have one final question.
    As it stands, the GFE would become a binding or a final 
quote, which would be difficult to provide without 
underwriting. Loan pricing depends on having information about 
borrower credit history and ability to pay. Also, loan 
originators need to assess borrower risk to generate a binding 
quote, especially high-risk borrowers, which takes time and 
money.
    Wouldn't your proposed GFE disclosure requirements create 
some controversy?
    Ms. Jackson. Well, it has certainly created controversy. 
What we believe is that you do make certain assumptions. The 
GFE is generated after certain information is obtained from the 
borrower--a property address, their Social Security number--so 
that a credit report can be pulled. Then based on certain types 
of information, that is what the quote would be based on. If, 
once you get into the loan processing you find that the 
borrower went out and bought a new car or that something 
changed his financial picture--if you found a bankruptcy that 
did not show up in the filed credit report--well, those types 
of things, of course, would be a reason to change the loan 
product. So it is not that once you get the GFE and you find 
out something is different in the borrower's financial picture 
that you would have to go through with that quote.
    Ms. Clarke. So does the process begin again? I mean what 
happens to that borrower? Most of these borrowers are coming to 
the table, and they are not as sophisticated about their 
financial standing with respect to credit reports and things of 
that nature. If, in fact, you come upon a case like that, do 
they have an opportunity to revisit the GFE? What exactly 
happens at that point? What do you think would happen at that 
point? Because this is all theoretical at this point.
    Ms. Jackson. This is what we envision would happen, that if 
something comes up in the borrower's credit or in his financial 
situation that the lender did not know about at the time, then 
they would say that they could not offer that loan product. If 
they had another loan product that the borrower would fit, they 
would then issue a new GFE for that new loan product.
    Ms. Clarke. Thank you, Madam Chair. I yield back.
    Chairwoman Velazquez. Ms. Fallin, do you have any other 
questions?
    Ms. Fallin. Ms. Chairman, I have just one more question.
    Do you have any suggestions on how we can protect the 
consumers and give them the information that they need to have 
full disclosure of all of the fees and costs to reduce the 
paperwork? Is there anything that we, as Congress, mandate, 
which I know there is a lot of stuff, that you see that might 
be unnecessary as far as the protection, the disclosure and the 
loan process itself, that we could consider doing away with?
    I was looking at these forms also, like the chairwoman. By 
the way, she mentioned that she had her husband look at the 
forms because she did not understand them. She is a very smart 
woman. She just has less time than her husband, so I just 
wanted to clarify that. Her husband is very smart, too. I just 
think she has less time to understand all this stuff.
    In looking at the forms, when you can look side by side, it 
does appear to be easier to understand, and I have had many 
loans myself and kind of prefer that information, but I thought 
I would just ask if you have any recommendations for us as to 
how the government can help the government.
    Ms. Jackson. Well, not at this time. We will be glad to 
look at that and maybe get back to you, you know, and respond 
to that. The form is--you know, four pages is long, but like I 
said, the last two are more educational information for the 
borrower. We have, you know, struggled with that. Do we put the 
information in the settlement cost booklet? However, if we do 
that, then the information, such as the tradeoff table, is not 
loan-specific. So, you know, we are struggling with that. You 
know, we will certainly take your comments into consideration.
    Ms. Fallin. I always like to provide full disclosure to 
people when they are buying stuff, but sometimes we get too 
wordy and too complicated in our forms, and it confuses us 
more. I wonder sometimes if the government does not want to 
just confuse people.
    Thank you.
    Chairwoman Velazquez. Ms. Jackson, you are excused. Thank 
you so much for being here today.
    I will ask the second panel, please, to come forward.
    Ms. Jackson, I would like also to know if there is a staff 
person who will remain in the hearing room.
    Ms. Jackson. Yes, there is.
    Chairwoman Velazquez. Can we have his or her name?
    Ms. Jackson. Andrew Faye.
    Chairwoman Velazquez. Thank you.
    Sorry for the inconvenience of the room, but our Small 
Business Committee room is under renovation, so hopefully--this 
is the government, you understand. It can take one more month 
or maybe three or four, so who knows.
    Anyway, I would like to welcome our first witness, Mr. Gary 
L. Kermott. Mr. Kermott is Vice Chairman of First American 
Title Insurance Company and also serves as Executive Vice 
President of the First American Corporation. He will be 
testifying on behalf of the American Land Title Association.
    ALTA, founded in 1907 is the national trade association and 
voice of the abstract and title insurance industry. Nearly 
3,000 title agents, abstractors and title insurance companies 
are active members and conduct business internationally in 
almost 100 countries worldwide.
    Welcome. You will have 5 minutes to make your opening 
statement.

STATEMENT OF MR. GARY L. KERMOTT, VICE CHAIRMAN, FIRST AMERICAN 
 TITLE INSURANCE COMPANY, EXECUTIVE VICE PRESIDENT, THE FIRST 
  AMERICAN CORPORATION, ON BEHALF OF THE AMERICAN LAND TITLE 
                          ASSOCIATION

    Mr. Kermott. Thank you, Chairwoman Velazquez, and thank 
you, members of the committee, for this opportunity to testify 
on HUD's proposal to amend RESPA.
    As Madam Chairman mentioned, my name is Gary Kermott, and I 
am serving as the 2008 President of the American Land Title 
Association. As such, I am speaking on behalf of our nearly 
3,000 title insurance companies, agents, abstractors, escrow 
officers and attorneys who search, examine, insure land titles, 
and perform real estate closings. A majority of our members are 
small businesses with between 2 and 16 employees.
    Although we agree with HUD on its goals, we are concerned 
that the proposal will not achieve them and may, indeed, create 
problems that undermine HUD's efforts. In addition, the 
association believes the Department is attempting, by 
regulation, to convert a statutory disclosure regime into a new 
pricing regime that was not intended by Congress and is not 
authorized by the statute. We address that in our written 
statement.
    My remarks today will focus on three areas of the rule that 
would be most harmful to our small business members and 
consumers: First, the closing script; second, how fees are 
disclosed and, third, volume discounts and tolerances.
    First, the closing script: The closing script will lead to 
longer and postponed closings, to the loss of down payments and 
increased litigation while failing to provide any real benefit 
to consumers. Why? First, it is too late at closing for 
consumers to change the terms of their loan. The moving van is 
parked outside. Second, the settlement agent does not have the 
information or the knowledge to answer questions raised by the 
closing script. Third, the increased costs for longer closings 
will fall on the consumer. In some States, it will raise the 
issue, as mentioned earlier, of the unauthorized practice of 
law, but more importantly for our small business members, HUD 
fails to recognize that over 50 percent of closings occur at 
the end of the month. This increased time to complete, read and 
explain the closing script will definitely and 
disproportionately harm smaller settlement companies because 
they lack the resources to add personnel and physical space to 
accommodate these extended closings. The script should be 
completed and delivered by the lender earlier in the process so 
that the consumer understands their loan terms and has the 
opportunity to negotiate changes.
    Title and closing fee disclosures: Although one of HUD's 
key objectives is to simplify and to improve consumer 
disclosures, how our fees are disclosed on the new forms is 
misleading and will discourage consumer shopping for services 
that are in their best interests. Why? Because the new GFE only 
discloses an aggregate figure for a range of services. That 
makes it more difficult for the consumer to shop for individual 
title or closing services at a lower price. They will not know 
what is included in the package. Similarly, by lumping together 
so many different charges into the category of Primary Title 
Services on the new HUD-1, the buyer and seller will not know 
how their funds were actually disbursed and to which providers. 
This defeats a primary purpose of the HUD-1 as a record of the 
transaction. This will also hide what fees the seller may have 
negotiated or be required to pay under State law, practice or 
contract.
    Volume discounts and tolerances: Volume discounts are anti-
competitive and will harm small title insurance companies, 
small banks, mortgage brokers, appraisers, and other small 
settlement providers. The largest companies have the resources 
to either favor their own affiliated companies or to create a 
network of preferred providers that could offer services below 
cost. This will push small, independent providers out of 
business, resulting in less competition and higher prices. Our 
members do not believe HUD should dictate such changes. Because 
lender recommended services are subject to a 10 percent 
tolerance, the message to the borrower will be "Go with me. You 
will get a better deal." By emphasizing these guaranteed prices 
to consumers, lenders would encourage a borrower selection of 
the recommended provider and end shopping. HUD even recognizes 
this in their economic analysis. Yet, there is no guarantee 
that these recommended service providers are the least 
expensive or the best. This is a disguised form of packaging 
that was uniformly rejected in 2002.
    Based on these concerns, ALTA suggests that HUD limit its 
efforts to simplifying only the GFE and the HUD-1 so the 
comparisons can be more easily made between the documents. This 
would be a huge improvement for consumers without imposing 
extraordinary costs on small businesses.
    Thank you.
    [The prepared statement of Mr. Kermott may be found in the 
Appendix on page 53.]

    Chairwoman Velazquez. Thank you, Mr. Kermott.
    Our next witness is Mr. Adam D. Cockey. Mr. Cockey is the 
Senior Vice President of Prudential Carruthers Realtors, a real 
estate firm, with 25 offices located in the District of 
Columbia, Maryland and Virginia. He is here to testify on 
behalf of the National Association of Realtors. NAR was founded 
in 1908 in Chicago, Illinois. It is America's largest trade 
association with 1.2 million members.
    Welcome.

 STATEMENT OF MR. ADAM D. COCKEY, JR., SENIOR VICE PRESIDENT, 
   PRUDENTIAL CARRUTHERS REALTORS, ON BEHALF OF THE NATIONAL 
                    ASSOCIATION OF REALTORS

    Mr. Cockey. Thank you, Madam Chair Velazquez and members of 
the committee. Thank you for holding these hearings and for 
giving the National Association of Realtors the opportunity to 
share our 1.2 million members' concerns about HUD's proposed 
RESPA rule.
    My name is Adam Cockey. I am the Senior Vice President for 
Prudential Carruthers, which is a full-service real estate 
firm, located in Washington, Maryland and Virginia. I started 
in the real estate profession 33 years ago, the same year 
Congress passed RESPA, so RESPA and I have sort of gone through 
this industry together.
    RESPA reform is important to NAR members because it is an 
essential component of any home purchase. Real estate agents 
develop working relationships with clients and stay with them 
throughout the closing process. As a result, consumers look to 
their real estate professional to help them understand the 
process from beginning to end.
    In 1974, the key congressional objectives of RESPA were to 
reduce settlement costs, to eliminate referral fees and 
kickbacks, and to require disclosure to consumers so that they 
could better understand the terms and costs of their 
transactions. One thing Congress made very clear when it passed 
this law was that RESPA was not designed to be a rate-setting 
statute. NAR believes that HUD's extensive changes to the Good 
Faith Estimate and to the HUD-1 disclosure forms fall short of 
the mark and need additional work.
    HUD's changes, though well-intended, could have been much 
improved if HUD had tested some of these ideas with those who 
must implement them. We believe that the proposed rules err by, 
one, expanding the current two-page Good Faith Estimate to have 
four pages, by eliminating the disclosure of a number of 
settlement costs and by requiring a 45-minute closing script. 
This is not simplification. Despite the suggestion of its own 
design consultant, HUD did not reformat the GFE to more closely 
match the HUD-1. Marrying the two forms in a common sense 
solution would greatly have helped the consumer decide whether 
the terms of expenses that were disclosed to them at loan 
application are those that are governing the loan terms and 
costs at closing.
    NAR also believes it is imperative that the consumer has 
information of all relevant costs. HUD's failure to include all 
of the standard costs in its revised GFE will give consumers 
less than full disclosure, which Congress intended. While 
Congress never intended RESPA to be a rate-setting statute, 
that is where HUD has chosen to focus. The proposal includes 
anti-kickback exemptions for volume discounts and tolerances 
for some costs that will tip the balance in favor of the 
largest lenders and will hurt small, independent settlement 
service providers.
    The proposed rule permits lenders to offer borrowers a 
package of third-party settlement services. Clearly, the 
largest lenders will be most successful in exerting their 
sizable market strength on providers to create the lowest cost 
package of settlement services to the detriment of small 
businesses.
    While the idea of creating a mechanism to reduce prices is 
appealing, HUD has ignored the impact that this will have on 
service quality. As we have seen in the current market mortgage 
crisis, quality loan products and appraisals do matter. If 
recent experience has not taught us anything, it is that 
cutting corners in this business only results in broken dreams. 
Now we are all paying for it.
    Finally, HUD's proposed closing script will add far more 
costs than HUD anticipates and will provide little benefit. HUD 
estimates the closing script will add 45 minutes and little 
cost. It is hard to imagine closing attorneys will donate that 
extra three-quarters of an hour or that a closing agent will 
not need to be compensated for the reduced number of 
transactions that can be handled. In the end, buyers and 
sellers will pay the added cost. In my practical experience, 
the information, including in the closing script, comes too 
late. Disclosure could be better achieved by a clearer Good 
Faith Estimate at the beginning of the process.
    In conclusion, NAR strongly supports better disclosure of 
mortgage terms and settlement costs. HUD's RESPA reform 
proposal, however, should be reworked to focus on common sense 
disclosure while eliminating the volume discounts, closing 
script and tolerance provision. NAR believes that we need to 
put aside the political calendar and work on a practical and 
effective reform focused on simple disclosure. We have the 
ability to do RESPA reform right. We cannot afford just a good 
enough approach.
    Thank you.
    [The prepared statement of Mr. Cockey may be found in the 
Appendix on page 81.]

    Chairwoman Velazquez. Thank you, Mr. Cockey.
    Our next witness is Mr. David G. Kittle. Mr. Kittle is 
Chairman-Elect of the Mortgage Bankers Association and is 
President and Chief Executive of Principal Wholesale Lending, 
Inc., in Louisville, Kentucky. Mr. Kittle has been active in 
the mortgage banking industry since 1978. The Mortgage Bankers 
Association is the national association representing the real 
estate finance industry, an industry that employs more than 
500,000 people in virtually every community in the country.
    Welcome.

STATEMENT OF MR. DAVID G. KITTLE, CMB, CHAIRMAN-ELECT, MORTGAGE 
                      BANKERS ASSOCIATION

    Mr. Kittle. Madam Chairwoman, thank you for the opportunity 
to appear before you as a mortgage banker and as a small 
businessman. I am pleased to discuss the changes HUD has 
proposed to the RESPA regulations.
    Since HUD last issued a RESPA rule in 2004, the real estate 
market has experienced an unprecedented crisis, resulting in 
severe hardship for consumers and businesses alike. This crisis 
has many causes and victims. The causes range from economic 
conditions to real estate prices, to outsized investor and 
borrower appetites. The victims include borrowers--but more 
than that, future borrowers--communities and the economy at 
large. While MBA does not believe that the lack of transparency 
in the mortgage process is the main cause of borrower 
difficulties or that its improvement is the only solution, 
greater transparency could help stem abuses. The sheer volume 
and complexity of disclosures today allow abusers to hide in 
plain sight.
    Long before the current market crisis, MBA supported 
simplification and greater financial literacy. MBA believes 
that the problems in the industry are a good reason to redouble 
efforts in both of these areas. Greater transparency would 
better empower consumers to make smart choices based on their 
own individual needs. It would also empower borrowers to 
compare their initial loan offers to the final cost of the 
loan, which would help protect against abuse. In today's 
market, people shop more effectively for a new flat screen TV 
than they do for a mortgage. We all need to do a better job to 
encourage increased shopping by consumers and clearer loan 
information.
    The forms that borrowers confront today include the truth 
in lending disclosures, which detail the cost of credit, and 
the Good Faith and HUD-1, both of which detail settlement 
costs. These forms are required under TILA and RESPA. Consumers 
need to get a clearer, simpler set of forms than these. So any 
changes to TILA forms, which are the Federal Reserve's 
responsibility, and to RESPA forms, which are HUD's, should 
happen together. Otherwise, additional costs associated with 
implementing new forms and procedures will fall on consumers 
and small businesses. In other words, reform should happen 
comprehensively rather than piecemeal.
    HUD has issued its rule, and the Federal Reserve has 
announced that it will work on a new TILA rule. HUD and the Fed 
should work together on these forms. If they are unable to do 
that, at the very least, HUD should delay the implementation of 
its rules until the Fed implements its TILA changes. Most 
importantly, the disclosures must work together. It makes no 
sense to have TILA, GFE and HUD-1 forms that do not.
    While we have many issues that are detailed in our 
testimony, actually improving transparency is the most 
important. The HUD-1 and the GFE should work hand in hand. If 
nothing else, failing to ensure that they do will be a missed 
opportunity that will result in continued confusion among 
consumers. While simplification of the mortgage process is a 
high priority for MBA, we do not believe improvements should 
unduly harm small businesses. We believe that small businesses 
operate effectively in all aspects of the mortgage process and 
should continue to do so.
    The rule as proposed by HUD will have significant effects 
on both small and large businesses. The effects of the proposed 
rule would include onetime and ongoing costs of the new rule, 
including increased time and money spent in closing and 
possibly increased legal liability for everyone involved. My 
written statement goes on to further detail on these points.
    The Mortgage Bankers Association supports efforts to make 
the mortgage process simpler, clearer and more transparent for 
consumers. Doing so will empower consumers and will help fight 
predatory lending. The RESPA rule released by HUD is not 
simplification. Consumers need a full reform of the disclosures 
they see, including RESPA and TILA, that help them quickly and 
effectively navigate the mortgage process. Public policy should 
help ensure that the problems we see in the market today do not 
happen again. Reforming the mortgage process is an important 
but difficult task, and it is imperative that we get this 
right.
    One more quick point. I appreciate the 5 minutes you have 
given me today. Just imagine if I had to read the entire 
closing script that HUD proposes. It would have taken me nine 
times as long as this statement took me to read.
    Thank you. I look forward to answering your questions.
    [The prepared statement of Mr. Kittle may be found in the 
Appendix on page 89.]

    Chairwoman Velazquez. Thank you, Mr. Kittle.
    Our next witness is Mr. Marc Savitt. Mr. Savitt is the 
President-Elect to the National Association of Mortgage 
Brokers. The national association is the voice of the mortgage 
broker industry, representing the interests of mortgage brokers 
and home buyers since 1973.
    Welcome, sir.

  STATEMENT OF MR. MARC SAVITT, PRESIDENT-ELECT, THE NATIONAL 
                ASSOCIATION OF MORTGAGE BROKERS

    Mr. Savitt. Good morning, Chairwoman Velazquez and members 
of the committee. Thank you for the opportunity to testify 
today.
    Like most of my fellow NAMB members, I am a small business 
owner, living in the same community where I work. As a member 
of NAMB, I am required to adhere to a professional code of 
ethics and best lending practices. In addition to NAMB 
requirements, mortgage brokers are regulated in all 50 States 
and in the District of Columbia.
    HUD's proposed rule will make bold changes in the 
marketplace and in my business. In light of the current market 
situation, rising home foreclosures, the credit crunch and 
recent proposed changes to the FHA program, NAMB questions the 
appropriateness of the timing and implementation of the 
proposed rule.
    Today's mortgage market is significantly strained and 
continues to experience turmoil and change. At this time, NAMB 
believes HUD's efforts and the mortgage market in general may 
better be served by focusing on the market today and in 
providing support for consumers currently at risk of losing 
their homes to foreclosure. NAMB applauds HUD's RESPA reform 
efforts to date. However, we believe HUD should consider 
declaring the implementation of any new policies or procedures 
until the market is able to stabilize, to accommodate changes 
and to provide assistance to the high volume of borrowers 
currently in need of refinancing and/or foreclosure assistance 
through programs administered by HUD.
    NAMB believes HUD should continue to move forward with the 
RESPA reform process, focusing specifically on measures in the 
proposed rule that seek to protect consumers from unnecessarily 
high settlement costs and abusive practices and enhance 
transparency of the loan origination process, taking into 
consideration comments and suggestions received during the 
critical review period.
    NAMB has long advocated for high uniformed standards for 
all mortgage transactions as well as the creation of minimum 
standards for education, criminal background checks and the 
national registry for all originators. NAMB objects to 
components of the proposed rule that would not best serve the 
consumer either because they would impede competition, would 
treat direct competitors differently, would fail to reflect the 
most authoritative research or would not consider the most 
effective and least burdensome alternatives.
    Despite changes in the market since 1992, such as automated 
underwriting systems, Web-enabled credit scoring, software 
programs, et cetera, which have blurred the lines between 
broker and lender transactions, the proposed rule continues to 
promote artificial distinctions between broker and lender 
transactions.
    The proposed rule requires the disclosure of yield spread 
premiums, YSPs, only in broker transactions. In general, YSP 
represents the spread between the wholesale and retail rate of 
funds. This spread is not required to be disclosed in lender 
transactions. This artificial distinction places small business 
mortgage brokers at a competitive disadvantage by imposing 
asymmetrical disclosure obligations among the originators 
receiving the same competition.
    Exhaustive studies of the mortgage disclosures by the 
Federal Trade Commission--the government's principal consumer 
protection agency--in 2004 and again in 2007 showed that 
additional disclosures of YSP created confusion, caused 
consumers to choose more expensive loans, led to a bias against 
broker transactions, and impeded competition, thus hurting 
consumers. Requiring brokers but not other originators to make 
such disclosures enables our competitors to steer consumers 
away from brokers even if brokers offer more favorable loans.
    For these reasons, NAMB believes the FTC should conduct a 
thorough analysis and field testing of any proposed GFE forms 
to ensure the market remains competitive and that new 
disclosures do not lead to biases or fraudulent practices 
between the distribution channels. We are operating in a vastly 
different market where all originators act in the same 
capacity. Therefore, regulations must be based on function, not 
artificial distinctions based on license, classification. Even 
the MBA acknowledges this shift in the market towards an 
originate to distribute model. Due to this market change, it 
seems clear that HUD must broaden its definition of "mortgage 
broker" to capture everyone who originates to distribute.
    Additionally, for two reasons, NAMB believes that HUD has 
failed to adequately comply with the Regulatory Flexibility Act 
when promulgating its proposed rule.
    First, HUD's initial regulatory flexibility analysis relies 
upon outdated information when estimating the economic impact 
of the proposed rule on small entities, including mortgage 
brokers. Second, HUD's IRFA does not reflect sufficient 
comparative analysis of less burdensome alternatives to the 
proposed rule which would minimize the adverse impact on small 
entities.
    NAMB looks forward to continuing to work with this 
committee as well as with respective regulators on 
accomplishing solutions that are effective in helping consumers 
without hurting small business.
    Thank you. I would be happy to answer any questions.
    [The prepared statement of Mr. Savitt may be found in the 
Appendix on page 144.]

    Chairwoman Velazquez. Thank you, Mr. Savitt.
    Our next witness is Ms. Julia Gordon. Ms. Gordon is the 
Policy Counsel for the Center for Responsible Lending. Ms. 
Gordon works with Congress, Federal agencies, civil rights and 
consumer groups, housing counsel and agencies, industry groups, 
and others to ensure fairness in lending, especially with 
respect to mortgages.
    Welcome.

   STATEMENT OF MS. JULIA GORDON, POLICY COUNSEL, CENTER FOR 
                      RESPONSIBLE LENDING

    Ms. Gordon. Thank you.
    Good morning, Chairwoman Velazquez, Congresswoman Fallin 
and other members of the subcommittee who I know to be there 
even though I cannot see them.
    I am Policy Counsel at the Center for Responsible Lending, 
a nonprofit, nonpartisan research and policy organization 
dedicated to protecting homeownership and family wealth. We are 
affiliated with a lender self-help which makes responsible, 
fixed-rate home mortgage loans to people with blemished and 
nontraditional credit.
    As others on the committee and panel have noted, we do not 
consider inadequate disclosure to be the only or even the 
leading culprit in today's foreclosure crisis. Rather, the 
crisis was caused by lenders and brokers who are selling risky 
and unsustainable loans primarily in response to demand by the 
secondary market. Improved disclosures will not necessarily 
provide adequate protection to consumers who will be making one 
of the most important and complicated financial decisions they 
will ever make. It will take substantive laws to prevent 
discriminatory and predatory practices, to realign incentives 
and to restore health to the mortgage market.
    That said, even within the context of RESPA, we see an 
opportunity to prevent some of the abuses that have led to the 
current crisis.
    In our view, yield spread premiums have played a key role 
in causing the problems we see today. Under this practice, as 
it works in the subprime market, lenders pay brokers a premium 
for steering people into higher rate loans than those for which 
they qualify. Then often they pay those brokers an additional 
bonus for locking borrowers into those higher rates with 
prepayment penalties. RESPA has long prohibited compensation 
for services that simply deliver a loan with a higher interest 
rate, referring to such compensation as a "kickback."
    Although it may seem that all yield spread premiums might 
constitute kickbacks, HUD has opined that, since consumers can 
use yield spread premiums to buy down up-front loan origination 
costs, they are delivering value, and they are not prohibited. 
That is how the practice often works in the prime market. Yet, 
in the subprime market, this trade-off rarely, if ever, occurs. 
The lion's share of subprime loans carries significant up-front 
fees, closing costs, discount points, prepayment penalties 
along with the yield spread premium. Consumers end up 
compensating the broker at both the front and back ends, 
essentially buying the rate down and then buying it right back 
up.
    We would like to see HUD use its longstanding definition of 
a "kickback" to prohibit those yield spread premiums that are 
made in conjunction with up-front broker compensation or other 
rate-lowering payments. We believe this would help to reform 
the subprime market without impacting the prime market 
adversely.
    In the changes to RESPA before us today in the disclosure 
related to the yield spread premiums, while we are glad to see 
HUD acknowledge the importance of the issue, we think that the 
proposed disclosure has as its core assumption the existence of 
this price trade-off that we do not believe exists. Moreover, 
the new GFE characterizes this as a credit when in fact this 
results in an increase in cost. So, in any reworking of this 
GFE, we would like to see that more clear and accurately 
disclosed.
    We understand that brokers are concerned that they are not 
be being treated even-handedly, and I have great sympathy for 
Mr. Savitt's position on that. However, CRL's recent research 
shows a vast disparity between the cost of subprime loans 
originated by independent brokers versus retail lenders. We see 
that the cost over the life of the loan can be as much as 
$43,000 for every $100,000 borrowed. Even, you know, in the 
shorter time period, such as 5 years or 4 years, you know, it 
is close to $5,000.
    In our written testimony, we talk about some other aspects 
of today's RESPA reforms, but just to mention a few, we do 
believe any change to the GFE must ensure that the GFE includes 
the APR, which enables consumers to make an apples-to-apples 
comparison, and because most consumers shop mainly on total 
monthly payment rather than on comparing settlement costs, the 
GFE should include that number again.
    Finally, we strongly support HUD's request that Congress 
enhance RESPA's civil penalties and equitable relief. We 
further request that Congress add a private right of action for 
all elements of RESPA, particularly the GFE and HUD-1. In our 
work, we have often seen GFEs misused to lure people into 
abusive loans, and the lack of a private right of action means 
that such misuse often carries no consequences. If it is not 
enforceable, even the most perfectly designed disclosure form 
will not assist consumers.
    Thank you so much for the opportunity to testify, and I 
look forward to your questions.
    [The prepared statement of Ms. Gordon may be found in the 
Appendix on page 158.]

    Chairwoman Velazquez. Thank you, Ms. Gordon.
    We are going to proceed with questions. We are going to 
have three votes. We will see. We will recess and then come 
back here, but I am going to start with Mr. Kermott.
    You heard me questioning Ms. Jackson regarding the burden 
that the rule puts the title agents in, in explaining loan 
terms at closings. I am asking you if you feel it is 
appropriate for the title agent to be responding to questions 
about loan documents or should that be the lender's 
responsibility.
    Mr. Kermott. It should absolutely be the lender's 
responsibility. The way the rule is written now, there are many 
problems with the closing script in explaining the loan terms 
and so forth. First, it is too late in the process, as I 
mentioned in my opening remarks. They are at the closing table. 
What is the borrower to do if there is a discrepancy between 
what they thought the terms of the loan were and what they 
actually are?
    Chairwoman Velazquez. Well, if I heard Ms. Jackson well, I 
believe that she mentioned that she is going to revisit this 
issue.
    Mr. Kermott. I hope she does revisit it because it should 
be provided by the lender earlier in the process.
    With regard to the time it takes a settlement agent to 
prepare the closing script, to read this closing script and to 
respond to questions, HUD estimates it would take 45 minutes. 
We have done a survey of our members, and that is a minimum. 
Most would expect it would take at least an hour to an hour and 
a half in additional time on top of what it already takes to 
perform a closing. So that is an added expense and added time 
tacked on to particularly our small business members.
    There is a UPL issue that we mentioned earlier, the 
unauthorized practice of law. In many States, a lay closing 
agent is precluded from explaining the terms of the loan 
because of unauthorized practice of law statutes. With regard 
to the economic analysis that HUD has done, it would cost our 
industry $2.5 billion in providing the closing script.
    Chairwoman Velazquez. Mr. Cockey, I would like to ask you: 
Can you explain if HUD's estimate of 45 minutes is accurate or 
will it take even longer?
    Mr. Cockey. In our estimate, it will take longer.
    Part of what I do every day is I run a title service for 
our company, and I have for the last 15 years been involved in 
it. There is not a settlement service person here who is going 
to be able to get through that process in 35 or 45 minutes.
    Chairwoman Velazquez. Okay. Mr. Kittle, it is crucial that 
borrowers be able to easily compare the Good Faith Estimate 
with the HUD-1 form, and you heard me asking Ms. Jackson about 
the two forms.
    Can you discuss the discrepancies between the new forms and 
how this may create confusion for borrowers?
    Mr. Kittle. I can, Madam Chairwoman.
    As somebody who owns a small business, a small mortgage 
company, and still meets regularly with customers to take the 
loan application--I still meet them face-to-face--this is an 
example of--it is not because of financial privacy, an actual 
FHA file. It is because, from application to closing, this is 
about how big a file is. Going from a one-page GFE to a four-
page only adds to that, first of all.
    We have proposed and have sent to HUD--the Mortgage Bankers 
Association--a new HUD-1 that actually matches the GFE together 
line for line. That way, the borrower does not have to look at 
a four-page GFE with references to go and try and look it up, 
which only delays the loan application and adds turmoil to the 
whole process.
    So we are against the reading of the document that we are 
talking about, and we are against the four-page GFE. It does 
not add simplification.
    Chairwoman Velazquez. Ms. Gordon, do you have any comments 
regarding the two forms?
    Ms. Gordon. We agree that we are a little bit mystified, if 
the effort was to make the GFE and HUD-1 easier to compare, why 
they are not more similar.
    Chairwoman Velazquez. Mr. Savitt, I understand that your 
industry is concerned about the RESPA rule's requiring yield 
spread premiums to be disclosed on the new GFE form.
    Is there a different way to get at the issue of 
transparency?
    Mr. Savitt. Well, first of all, mortgage brokers have been 
completely transparent in the disclosure of all of their 
compensation since 1992. Under a HUD mandate at that time, we 
were required to disclose, obviously, all of our up-front fees 
and any type of indirect compensation, which of course we call 
YSP, and others who receive it call it other things. I do not 
know how we can be any more transparent in what we are doing 
now. Every dime that we make is completely disclosed to the 
consumer at time of application and also again at time of 
settlement.
    Chairwoman Velazquez. I am going to recognize Ms. Fallin 
because she has some commitments, and will not be able to come 
back, but I will be coming back, and I hope the other two 
members will be able to come back.
    Go ahead.
    Ms. Fallin. Thank you, Madam Chair. I will make it quick, 
and maybe Ms. Clarke can get some questions in, too, if we can 
do some quick answers here because we are short on time.
    Mr. Johnson. And perhaps Mr. Johnson also.
    Ms. Fallin. Mr. Johnson, too.
    Mr. Johnson. Thank you.
    Ms. Fallin. Yes, sir. You bet.
    Mr. Johnson. All right. I feel like Ms. Gordon over there 
in the corner.
    Ms. Fallin. Nobody is paying attention to you.
    Mr. Johnson. Right.
    Ms. Fallin. If I could ask Mr. Kermott: Do you think that 
the new regulations will hurt small business lenders?
    Mr. Kermott. Yes.
    Ms. Fallin. All right. I think, Mr. Cockey, you talked 
about the failure to disclose all closing costs.
    Can you explain what some of those costs are that are not 
being disclosed?
    Mr. Cockey. Well, they are some of the settlement costs 
that they will really kind of be bundling. To me--
    Ms. Fallin. They are all bundled together?
    Mr. Cockey. Right. That is not the way to approach it. If 
we are trying to give full disclosure to the consumer, we are 
just hiding or have the opportunity that things can be hidden.
    Ms. Fallin. All right.
    Mr. Cockey. To me, that is what we are trying to fight 
against.
    Ms. Fallin. Mr. Kittle, you mentioned something about our 
needing to change the form so consumers can shop prices and 
different services that are available and different lenders. I 
think it might have been you. It may have been somebody else.
    Mr. Savitt?
    Mr. Savitt. No, I do not believe--
    Ms. Fallin. Is there any way that we can help consumers be 
able to compare prices?
    Mr. Savitt. Yes, absolutely.
    Just like the MBA, NAMB turned in to HUD an example of a 
Good Faith Estimate which was very close to your Good Faith 
Estimate. It was a mirror image of the settlement statement 
which we think would be the most effective for consumers to 
better understand the transaction. There is nothing easier when 
you go to closing than to have on the Good Faith Estimate the 
same numbers match up identically as they do with the HUD-1 
settlement statement. So, therefore, a consumer can compare 
line by line all the way across, and if there is a difference 
they would be able to easily spot it.
    Mr. Kittle. We totally agree with that line for line.
    Ms. Fallin. That is what I am trying to get at. Okay.
    Mr. Kittle. Absolutely.
    Ms. Fallin. Thank you.
    Madam Chairman, I will quit here so they can ask their 
questions. Thank you.
    Chairwoman Velazquez. Ms. Clarke.
    Ms. Clarke. Thank you, Madam Chair.
    My question is to Ms. Gordon. I know you are there.
    Can you tell this committee how the inadequate disclosure 
of incentives for brokers and lenders, also known as the yield 
spread premiums, adversely impacts the secondary market but, 
most importantly, the consumers?
    Ms. Gordon. Well, the reason they adversely affect the 
secondary market is because what has happened is borrowers have 
been sold loans that are unaffordable. They are steered into 
loans at higher rates than those for which they would qualify 
based just on their credit scores and income, and then they are 
locked into those rates with prepayment penalties.
    If you look at a subprime rate sheet, you will see the 
additional compensation that the broker receives from the 
creditor for putting somebody into a higher rate loan than that 
for which they qualify and then for also adding a prepayment 
penalty to that loan. Now, the consumers do not ever see these 
rate sheets. You know, you do not get to see that. So, for the 
most part, consumers have no idea that this practice occurs.
    To the extent that there is disclosure of fees to 
borrowers, our experience with vast numbers of consumers is 
they had no idea how this system was working and how they were 
compensating their brokers.
    Now, I have no doubt that there are excellent brokers out 
there who fully explain this to their customers, but a lot of 
the problems that we are seeing in the subprime market come 
from the fact that that largely did not happen, and this was a 
significant problem, especially in the African American and 
Latino communities.
    Ms. Clarke. Ms. Gordon, you believe that YSPs are kickbacks 
between brokers and lenders.
    What do you recommend today on how to strengthen the 
disclosure to YSPs, especially to subprime mortgages?
    Ms. Gordon. I think that you could probably write the 
disclosure form in an easier-to-understand way. We go into more 
details on that in our comments to HUD, but I think the 
important thing is, unless the yield spread premium is really a 
trade-off for closing costs, it should not be permissible. 
After that, all that is happening is somebody is being 
compensated for bumping up a rate, and that specifically is 
what is prohibited by RESPA.
    Ms. Clarke. I am sure you have some comments on that, Mr. 
Savitt. Would you like to respond as well?
    Mr. Savitt. Absolutely. Thank you for recognizing me.
    First of all, as I mentioned to the chairwoman, yield 
spread premiums are an indirect compensation that are 
completely disclosed by mortgage brokers twice--once on the 
Good Faith Estimate at time of application and the second at 
the settlement. Yield spread premiums are a very useful tool 
that consumers have been taking advantage of for many years. 
When consumers shop for a loan, the first question they ask is 
"What is your interest rate?" They compare lenders, brokers, 
other originators. Usually, the question of closing costs does 
not come into it until they actually, you know, drill down a 
little further, but the first question is they are comparing 
interest rate to interest rate.
    If a lender offers an interest rate, for example--and most 
consumers want usually a 30-year fixed rate with zero points. 
So, if I am at 6 percent for zero points and a lender or a bank 
is 6 percent at zero points, obviously the bank is receiving 
the same type of compensation. It is just that they do not have 
that requirement that we do to disclose it. Brokers are fully 
transparent.
    As far as subprime loans go and brokers taking advantage 
and the yield spread premium costing consumers more money, 
there was a study done a few years ago by Georgetown 
University. NAMB had nothing to do with that study whatsoever. 
They came to us after the fact and stated that by using a 
mortgage broker a consumer would save 1.13 percent on their 
annual percentage rate by using a broker over other types of 
originators. Also, there was a GAO study that was commissioned 
by Chairman Frank of the House Financial Services Committee on 
what caused the crisis that we are having today, the 
foreclosure crisis. That study not only vindicated mortgage 
brokers, but it also--because, of course, you know we were 
getting the blame for everything in the beginning, but it also 
did not mention yield spread premiums at all, let alone as the 
root or the cause of this.
    The final thing I would like to say is I get very 
frustrated for several reasons when I hear that a yield spread 
premium is a kickback. Number one, usually if you are getting a 
bribe or a kickback, you do not disclose it to the consumer. 
State housing agencies--one of the States that I am licensed in 
is West Virginia. The State housing agency, the West Virginia 
Housing Development Fund, has a bond program. As you know, it 
is a below-market interest rate that tries to help consumers--
first-time home buyers--get into a home for less money out of 
their pocket. I have been dealing with them for over 20 years. 
In the beginning, they used to charge up front 1.5--or they 
would charge the consumer 1.5 points up front. That would go to 
the broker. Everyone now--all of the lender-broker compensation 
and anyone who is a participating member of that State housing 
agency--is paid by either a yield spread premium or a service 
release fee.
    Ms. Clarke. Thank you, Madam Chair.
    Chairwoman Velazquez. Mr. Johnson.
    Mr. Johnson. Thank you. I just have one question.
    Has HUD reached out in an efficient way to you all in their 
composing of this new rule? If not, what could they do to 
improve the process?
    Mr. Cockey. It is my feeling that they think they have 
reached out, and they have listened, but I am not sure that 
they have been able to hear the messages that have been given. 
We have certainly had the opportunity to present information 
and thoughts and process, but I am not convinced that they have 
really heard--I listened to Ms. Jackson this morning, and it is 
almost like they were talking about something that was another 
industry, that they really had no practical knowledge of what 
we do as practitioners from the real estate side on a day-to-
day basis and how we move our clients through the process of 
getting a mortgage, of having the settlement services done and 
standing beside them. It just boggled my mind to listen to some 
of the comments. I was much more interested in what the 
committee has said because I thought you asked excellent 
questions and seemed to have a greater grasp on some of the 
things that were happening than HUD had.
    Mr. Kittle. I would agree with that, Mr. Johnson. The MBA 
has a great working relationship with HUD. We visit with them 
and talk with them and meet with them often, but I am not sure 
they hear. We are the professionals. We do it every day, and we 
present to them simplification--again, a GFE and a HUD-1, two 
pages total that match. Yet they come up with a four-page GFE 
that does not match with references. So at the end of the day I 
am not sure that they are hearing what the industry is having 
to say.
    Mr. Savitt. In the roundtables that Ms. Jackson spoke about 
during her testimony, HUD said they were looking for a 
consensus from industry and that they were going to also 
consult with Congress before they came out with a proposed 
rule. The roundtable that I attended was in Fort Worth. I 
believe there were about 35 or 40 people there from all over 
the industry. You had consumers. You had closing agents, 
bankers, brokers, title companies. Everybody was there.
    There was a real estate agent who mentioned that the Good 
Faith Estimate, the four-page Good Faith Estimate, was so 
confusing that as a realtor for 30 years she could not 
understand it. HUD received her consensus, but as far as I am 
concerned, they really did not take any of that information 
into consideration because they basically came up with the same 
rule that they had last time minus packaging.
    Mr. Johnson. Mr. Kermott, you are going to do--
    Chairwoman Velazquez. Mr. Johnson, you can see Ms. Gordon 
would like to make some comments.
    Mr. Johnson. Okay.
    Ms. Gordon. I just want to add that, a couple of years ago, 
the Center for Responsible Lending joined with the National 
Association of Realtors in developing a kind of consensus GFE. 
You know, HUD took that from us, but it was not what the final 
product was.
    Mr. Kermott. As was mentioned earlier, HUD had the 
roundtable discussions in 2005. Our membership was invited to 
participate in that. I would just like to echo what my fellow 
panel members have said.
    We emphasize simplifying the GFE and in getting it 
consistent with the HUD-1. If HUD would do that, it would make 
the transaction simpler and more efficient without adding what 
they are proposing here, which would add costs and complexity 
to the transaction.
    Chairwoman Velazquez. The time has expired. I just would 
like to ask a question to Ms. Gordon and to, maybe, any other 
member of the panel who might wish to comment.
    What kind of reforms do we need that the RESPA rules do not 
address?
    Ms. Gordon. A private right of action. I mean it would be 
great to have the perfect GFE, the most simple, clear GFE that 
lines up perfectly with the HUD-1, but if the GFE is only 
enforceable by regulatory agencies, we know that for the most 
part there will continue to be a lot of inaccurate and, in many 
cases, blatantly misleading or lying GFEs. Without the 
enforcement that comes from having a private right of action, I 
mean I think we could truly design the perfect form, and it 
would not matter.
    Chairwoman Velazquez. Does any member of the panel wish to 
speak? So you do not feel that we need any other thing--
    Mr. Kittle. Well, I will take one stab at it.
    We issued a paper on Monday, 33 pages, of which you have a 
copy, that gives a clear, definitive line between mortgage 
bankers and mortgage brokers. We think that will help 
transparency. Mortgage brokers are my clients, but at the end 
of the day, its clear, distinct difference is we lend and they 
do not, and we are required to report for HMDA and things like 
that, and they are not. So there are clear, distinct 
differences we can do.
    Chairwoman Velazquez. Unfortunately, we have run out of 
time, and we have votes on the House floor.
    Let me just thank all of you for being here. I know this is 
a complex issue, and we will continue to monitor it.
    I ask unanimous consent that members will have 5 days to 
submit a statement and supporting materials. For the record, 
without objection, so ordered.
    This hearing is now adjourned.
    [Whereupon, at 12:05 p.m., the committee was adjourned.]

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