[Congressional Record Volume 148, Number 68 (Thursday, May 23, 2002)]
[Extensions of Remarks]
[Pages E897-E898]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




                 MORTGAGE LOAN CONSUMER PROTECTION ACT

                                 ______
                                 

                          HON. JOHN J. LaFALCE

                              of new york

                    in the house of representatives

                        Wednesday, May 22, 2002

  Mr. LaFALCE. Mr. Speaker, today, I will be introducing the ``Mortgage 
Loan Consumer Protection Act.'' This legislation will complement a bill 
I introduced last year, the Predatory Lending Consumer Protection Act 
(H.R. 1051), as well as the proposal I outlined in my March 26th letter 
to the HUD Secretary to end abusive practices in conjunction with the 
use of yield spread premiums. Combined, these initiatives are designed 
to establish a pro-consumer benchmark for mortgage reform, either with 
respect to any possible HUD regulatory action, or to legislation that 
may be enacted by Congress.
  For most Americans, obtaining a mortgage loan is the single biggest 
financial transaction of their life. Typically, mortgage loan closing 
costs total thousands of dollars, and the loan itself represents a 
commitment to repay hundreds of thousands of dollars.
  The majority of mortgage lenders, brokers, and settlement service 
providers do a commendable job in helping borrowers through the 
mortgage loan process, and in providing a good mortgage product. Yet, 
by loan closing, too many borrowers conclude that the mortgage process 
is far too confusing than it needs to be. And, too many borrowers close 
mortgage loans without any clear sense of whether their fees and rates 
are truly competitive.
  The basic Federal law governing mortgage loan settlements is the Real 
Estate Settlement Procedures Act, also known as RESPA, first enacted in 
1974. The ``Mortgage Loan Consumer Protection Act'' being introduced 
today modernizes RESPA, in a manner designed to make the mortgage loan 
process more understandable, more fair, and more competitive.
  This legislation would improve and update RESPA by: simplifying and 
improving the accuracy of mortgage loan disclosures; expanding 
protections against junk fees and unearned closing costs; enhancing 
escrow account protections; and creating critically needed enforcement 
provisions for existing RESPA requirements. A number of provisions in 
this bill are identical to or derived from recommendations made in a 
1998 joint report by HUD and the Federal Reserve Board on reform of the 
mortgage loan process.
  First, the bill simplifies and improves the accuracy of mortgage loan 
disclosures. A near universal complaint about the current HUD mortgage 
disclosure forms is that they are far too confusing. Section 2(b) of my 
legislation would address this problem by directing HUD to revise the 
HUD-1 Settlement Statement to clearly segregate and provide totals for 
the following three different types of costs that are paid at 
settlement: ``Closing Costs'' (defined as all costs necessary to obtain 
the loan), ``Prepaid Costs'' (such as prepaid interest and escrow 
items), and ``All Other Costs Paid at Closing''--that is, everything 
else.
  This would be a dramatic improvement over the current HUD-1 
statement, which neither arranges items in a logical order, nor 
provides totals for these three key types of costs. A clear delineation 
and a single total for all Closing Costs would be particularly helpful 
to borrowers analyzing loans, e.g., for the purpose of evaluating 
whether or not to refinance.
  Section 2(c) of the bill directs HUD to harmonize the terms and forms 
used in the HUD-1 Statement and the Good Faith Estimate (GFE). As a 
result, the same three types of costs and totals as provided in the 
HUD-1 would be presented in the GFE. More importantly, harmonization 
would allow borrowers to track costs throughout the loan process. This 
is a critical tool to help borrowers evaluate how actual costs compare 
to preliminary estimates, and to help borrowers hold service providers 
accountable with respect to any cost increases.
  And, Section 2(a) revises the Truth In Lending Act (TILA) to improve 
the accuracy of the ``Finance Charge'' for the purpose of calculating 
the Annual Percentage Rate (APR) for a mortgage loan. Specifically, it 
requires that the APR calculation include all of the costs that are 
required to be paid in order to obtain the loan. Currently, a number of 
charges are excluded by statute from the APR calculation for mortgage 
loans, an anomaly that creates a misleading APR calculation that was 
singled out for criticism in the 1998 HUD-Fed report. I would also note 
that with this change the Finance Charge would equal the sum of loan 
interest payments, plus ``Closing Costs'' as identified under Section 
2(b) of my legislation.
  Secondly, the bill would expand protections against unwarranted 
mortgage closing costs, including markups and junk fees. A common 
complaint by borrowers is that the final settlement statement is not 
made available until the borrower sits down at closing. Under current 
law, borrowers may request this statement one day prior to closing, but 
most borrowers are not even aware that this right exists. As a result, 
it is not uncommon for borrowers to discover additional fees and 
charges that they were not previously aware of until the very last 
minute. With pressures or even deadlines to close, the borrower often 
has no option but to complain, but ultimately accept, such costs, 
whether warranted or not.
  Section 3 of my legislation addresses this problem by requiring 
lenders to make available the HUD-1 Settlement Statement at least 2 
calendar days before closing. This gives borrowers an opportunity to 
challenge fees and charges, at a time in the process when they can be 
reasonably challenged. This is crafted in a flexible way that should 
not hold up loan closings.
  Section 4 deals with the practice of markups of closing costs, also 
sometimes referred to as ``upcharges.'' Section 8 of RESPA generally 
prohibits the payment or receipt of a portion or split of a settlement 
service charge other than for services rendered. Historically, HUD has 
interpreted this to apply to markups of third party services. However, 
a recent court case, Echeverria v. Chicago Title & Trust Co., concluded 
that Section 8 does not apply in cases where the third party has no 
involvement in the unearned fee. In October, 2001, HUD responded by 
issuing a Policy Statement, ``clarifying'' that Section 8 does apply to 
markups.
  Section 4 of my bill explicitly reaffirms the HUD position that 
Section 8 applies to markups of the cost of services provided by a 
separate service provider, even if that separate provider has no 
involvement in the markup. Section 4 goes further than the HUD Policy 
Statement, by amending Section 4 of RESPA to require that all fees 
collected by a lender be disclosed clearly on the HUD-1 as being 
collected by such lender. This provides additional protections against 
the practice of disguising markups by rolling them into one single 
disclosure item.
  Section 4 of my bill also addresses the problem of junk fees. 
Specifically, it provides that Section 8 applies to fees collected by 
one settlement service provider where ``no, nominal, or duplicative'' 
work is done. In this context, duplicative refers to situations where a 
service provider is collecting a fee that is itemized separately from a 
fee charged for services by a third party--allegedly for the same type 
of service, but without any additional goods or services being 
provided. The purpose of the prohibition of charges where no services 
are provided is obvious; the inclusion of the phrase ``nominal'' in 
addition to ``no'' services is intended to circumvent a defense against 
a Section 8 violation that the service

[[Page E898]]

provider is doing something--but where that something is of no real 
value to the borrower.
  Finally, I would note that the October HUD Policy Statement also 
asserts that Section 8 applies to unearned fees where ``the fee is in 
excess of the reasonable value of goods or facilities provided or the 
services actually performed.'' A concern has been raised that such an 
open-ended application could potentially subject every settlement 
charge for every loan to a subjective determination of whether such a 
charge is excessive. The RESPA statute is not intended to be applied so 
broadly. Similarly, it is not the intent of Section 4 of my bill to 
subject charges where substantive services are provided by a single 
service provider to a test of merely whether they are excessive 
(provided there is no violation of 8(a) kickback or referral fee 
prohibitions).
  Similarly, it is not the intent of Section 4 of my bill to apply the 
``no, nominal, or duplicative'' test to commissions or fees charged by 
real estate brokers for services related to real estate sales, 
providing they are negotiated up-front in writing between a broker and 
the seller (or buyer), and provided that there is no violation of 8(a) 
kickback or referral fee prohibitions. The purpose of Section 4 of my 
bill with regard to charges by a single settlement provider is intended 
to address fees that are part of the mortgage loan process; thus, real 
estate fees agreed to voluntarily and explicitly by a seller months 
prior to a mortgage loan being made should not be subject to Section 8 
RESPA scrutiny, providing there is no kickback or referral, and the fee 
is not increased above the agreed-upon amount.
  Third, my bill strengthens consumer protections with respect to the 
administration of escrow accounts, which are commonly required by 
lenders for the payment of taxes and insurance. Section 6 makes loan 
servicers liable for fees and penalties arising from their failure to 
make timely payment of taxes, insurance premiums, and other charges. It 
also prohibits a servicer from profiting from the failure to make 
timely payment of insurance charges, by prohibiting such servicer from 
collecting any fees associated with force-placed hazard insurance.
  And, Section 6 deals with the timely return of escrow funds upon loan 
repayment. As the HUD-Fed report noted, current law does not require 
return of such funds; it merely requires a final statement be sent out 
within 60 days of loan payoff. This can be a particular hardship for 
certain borrowers, especially those who are refinancing or buying a 
different home.
  When a loan is prepaid in full, the borrower pays the lender all 
outstanding principal and interest. Accordingly, it is not unreasonable 
to ask the lender to return all escrow funds at the same time, e.g., as 
an offset. Therefore, Section 8 of my bill requires the lender to 
return all escrow funds at time of loan repayment, provided the 
borrower gives 7 calendar days notice of such intent to prepay. If 
notice is not given, the servicer must return escrow funds within 21 
days. Monetary damages are provided for failure to comply with this 
requirement.
  Fourth, the bill beefs up enforcement provisions. The HUD-Fed report 
noted that requirements relating to the Good Faith Estimate and the 
HUD-1 Settlement Statement are ``not supported by any enforcement 
authority under RESPA.'' Thus, while the details and scope of what 
enforcement provisions should be established is a matter for honest 
debate, it seems clear that the current lack of any enforcement 
mechanism is unacceptable.
  Therefore, Section 7 provides for a uniform enforcement provision 
that would apply to violations of Section 4 (HUD-1 Settlement 
Statement), Section 5 (Good Faith Estimate), Section 6 (loan servicing 
disclosure requirements), and Section 10 (Escrow Account Statements). 
Settlement service providers that violate these sections would be 
liable for actual damages, plus additional damages as the court may 
award, up to $2,000 per loan, plus court costs in the case of 
successful legal action. In addition, this section provides for a 
uniform statute of limitations of three years for all enforcement 
actions.
  Finally, Section 5 of the bill directs HUD to expand the Special 
Information Booklet required to be given to borrowers at the same time 
the Good Faith Estimate is provided, to include assistance in two 
common situations faced by borrowers. First, HUD is required to include 
an explanation of the issues involved in refinancing a mortgage loan, 
including the tradeoffs of lower interest rates and closing costs. 
Secondly, HUD is required to include an explanation that some lenders 
may offer the option that some loan fees may be paid up front, or in 
the form of a higher mortgage rate, including assistance in evaluating 
this type of option.
  The ``Mortgage Loan Consumer Protection Act'' represents a balanced, 
common-sense approach to beef up consumer protections in our mortgage 
disclosure laws. I urge its consideration and adoption.

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