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FRIDAY, MARCH 27, 1998
U.S. House of Representatives,
Subcommittee on Housing and Community Opportunity,
Committee on Banking and Financial Services,
Washington, DC.

    The subcommittee met, pursuant to call, at 10:05 a.m., in room 2128, Rayburn House Office Building, Hon. Rick Lazio, [chairman of the subcommittee], presiding.

    Present: Chairman Lazio; Representatives Ney, Velazquez, Bentsen, Kennedy, Hooley, Metcalf, Kelly, Fox, and Castle.

    Chairman LAZIO. Good morning. I just want to make a brief announcement. We have a conference that was called about half-an-hour ago for H.R. 10, the modernization bill, in which virtually all of the Republican Members of this subcommittee will be attending, so I am going to start this hearing in about one hour. That conference will not be over with. We should have enough Members back so we will have some better participation. I apologize for the inconvenience. We just got notified of it about half an hour ago. It will make for a better hearing.

    I will gavel down at about 11 o'clock. Thank you.

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    Chairman LAZIO. This hearing shall come to order. Before I begin with my opening statement, I have to say, because this is the first chance I have been able to talk publicly about the fellow on my right, Mr. Kennedy, and his decision not to seek reelection, that obviously we will have a significant loss in the House when you leave, and I greatly admire the work you have done.

    Mr. KENNEDY. Did you just say significant loss in the House and relief?

    Chairman LAZIO. No. You have dedicated most of your public career to helping people who are underserved and haven't had a voice to try to help empower them. I always admire that, and you have earned a great deal of respect on both sides of the aisle. You will be missed when you leave. The next few months when we work together, I look forward to, both as a friend and colleague, and I certainly wish you well as you move on to—I was going to say chapter 2, but maybe it is chapter 3.

    Mr. KENNEDY. Mr. Chairman, first of all, if I might very briefly thank you for your kind remarks and let you know how much I appreciate the working relationship that we have been able to develop, particularly in the last year or so. I think the work you have done on the homeless issue, some of the work that we can do together on issues pertaining to rehab, and I hope even the issue we are facing here this morning, in terms of cleaning up some of these fees and the like, are a demonstration of the fact that when people want to get something done in the House, it is very possible.
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    So I appreciate very much your kind remarks. When people come up to me and say ''You are retiring?'', it feels like I am going to buy a swing and move to Florida. It is not quite that. Anyway, I am looking forward to staying involved in some of the issues we have under discussion in this subcommittee, and look forward to continuing to work with you.

    Thank you very much.

    Chairman LAZIO. Thank you.

    Today the subcommittee meets to hear testimony regarding the role of the mortgage broker in the home buying experience within the context of the mortgage financing system.

    Twenty years ago, most home buyers approached their local bank, filled out an application, and then waited for a bank representative to tell them their interest rate, usually on a 30-year fixed mortgage, and any fees. In most smaller communities, one bank may have been the only opportunity, or stumbling block between home ownership or perpetual renting. Even in larger communities, home buyers tended to shop at one local neighborhood bank.

    Twenty years later, the mortgage finance system has grown up and become much more sophisticated, offering a variety of products and services unimaginable before. Home buyers in urban and rural communities have a variety of options, not only of fixed and adjustable interest rates, but also of the selection of points, mortgage terms and other services, regardless of their financial status or creditworthiness.

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    These home buying options are in part due to the increased competition fostered by the growth and maturity of mortgage brokers. A home buyer in Babylon, New York, can have access to the financial markets in Massachusetts, California, or North Carolina, without ever having to leave their community. That access is due to the proliferation of mortgage brokers, trained and capable of assisting and of brokering mortgages between capital markets and consumers.

    This hearing is designed to introduce and educate subcommittee Members on a facet of mortgage finance that accounts for over half of all mortgage transactions in this Nation. In reality, mortgage brokers are now responsible for bridging the gap between billions of dollars in capital and homeowners.

    Unfortunately, an expansion of home ownership capital may be threatened by lawsuits that take advantage of an antiquated law, the Real Estate Settlement Procedures Act of 1974, and of a lack of definitive interpretation by HUD to clarify and acknowledge what has been happening, mortgage brokers receiving compensation for services to bring lenders and consumers together.

    Although this hearing does not address any specific legislation, I do want to recognize the efforts of my colleague and friend, Mr. Robert Ehrlich of Maryland, who introduced H.R. 1283, the RESPA Class Act Moratorium Act of 1997. That legislation, cosponsored by 100 Members, would impose a moratorium on certifying class action suits based on a violation of RESPA. There are now over 112 class action suits because of a lack of clarity regarding the broker's eligibility to receive compensation for services under RESPA.

    On October 27 of last year, Mr. Ehrlich and I sent a letter cosigned by 33 Banking Committee Members requesting HUD to consider delaying implementation of a final rule on mortgage brokers until the mortgage review working group provided recommendations on more comprehensive RESPA reform.
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    I am very pleased that Secretary Cuomo is working with Congress to consider comprehensive reform. In the meantime, it would be unfair for mortgage brokers to lose their livelihood as well as deny homeowners access to capital markets. While we don't want to revert to the dark ages, we also want to ensure that consumers are adequately protected and educated in the process.

    This hearing is an important first step. Our Members may be asked by the end of the session to deliberate on the issue of temporary relief to mortgage brokers and the mortgage industry from capricious class action lawsuits.

    Finally, while we have attempted to involve different perspectives, we were unable to find a wholesale lender, one responsible for providing capital for these brokered mortgages, due to the pending lawsuits and the fear that anything stated here would be used in court against them.

    Also, we invited several consumer groups to participate, and, because of time conflicts, they were unable to participate. I anticipate future hearings on comprehensive reform to the Truth in Lending Act and RESPA, and will ensure that the consumer advocacy groups are represented.

    Today, however, we are fortunate to have a real consumer who recently went through the home buying experience, Ms. Cook. We also have the President of the National Association of Mortgage Brokers, Ms. Hix; Tom LaMalfa, an economist, who will help us understand the financial advantages of using mortgage brokers; Mark Thomson, President of the American Association of Residential Mortgage Regulators, who will give us the State's perspective on regulation, enforcement and other consumer concerns; and, finally, Jim McCabe on behalf of the Mortgage Bankers Association of America.
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    Let me state that all your written testimony will be submitted for the hearing record. Please limit your oral presentation to five minutes so that Members can have more of an opportunity to discuss with you the issues.

    I will now turn to Mr. Kennedy for his opening statement.

    Mr. KENNEDY. Thank you very much, Mr. Chairman. I want to welcome Mr. Ehrlich and the witnesses before us this morning.

    I appreciate the Chairman calling this hearing today. Mortgage brokers, I believe, perform a very important and legitimate purpose, that of arranging mortgage loans. No one on this subcommittee wants to take action which would interfere with that legitimate purpose.

    Moreover, regarding the basic issue of this hearing, lender-paid broker fees, there is clearly a benefit in permitting borrowers with their approval to trade off for a lower loan fee for a higher interest rate in order to reduce closing costs. But there are a number of problems with this hearing and its subject that should be acknowledged.

    First, there is the issue of subcommittee process. The selection of the witnesses today is one-sided and biased, excluding consumer groups who have raised serious and legitimate concerns about the practices of mortgage brokers. The minority staff has made a request that the National Consumer Law Center be allowed to testify, but was rebuffed. The result is that this hearing is somewhat of a charade, puffing up the industry and completly ignoring the serious concerns raised by court cases and the proposed HUD rule and other consumer groups.
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    The heart of this issue before the subcommittee today is true competition or the lack thereof. The problem with lender-paid broker fees is the borrowers are generally not aware they are paying those fees and generally receive no benefit from them.

    In some cases, which have been borne out by lawsuits, brokers steer borrowers away from the best rates available or the best available loan simply because another lender pays the broker a higher fee. Now the industry is coming before Congress and asking for relief from lawsuits, asking for relief from egregious and anti-consumer practices.

    The other troubling issue is the lack of disclosure of mortgage brokers with regard to whom they represent. All too often, mortgage brokers give the impression that they exist to help the borrower find the best mortgage rate available amongst different lenders, when in fact they represent one or a number of these same lenders.

    Congress and HUD should resolve these issues by taking a number of important steps. First, mortgage brokers should clearly and prominently disclose who they represent, either the borrower or the lender. If the industry does not do so voluntarily, then we have a duty to act to make sure that proper disclosures are required by law and mortgage brokers should not imply that they serve the interests of the borrower when they actually serve the interests of the lender.

    Second, lender-paid brokers fees should not be legal unless they accrue to the benefit of the borrower. For this to happen, such fees should be disclosed and approved up front by the borrower.
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    Finally, mortgage brokers should not get legislative relief from lawsuits which have been legitimately filed in response to abusive broker practices. Instead, legislation and regulations should be put into place to ensure that such actions do not reoccur.

    I appreciate the opportunity to make these observations, and I am sure you want to repeat your opening remarks about how delighted you are and how much you are going to miss me on this subcommittee, but I do appreciate those kind things you had to say about me, Mr. Chairman, and I yield back the balance of my time.

    Chairman LAZIO. I thank the gentleman.

    Mr. KENNEDY. Mr. Chairman, although they couldn't be allowed to talk here in person, if you would accept for the record the National Consumer Law Center's statement.

    Chairman LAZIO. The unanimous consent request is approved without objection.

    Chairman LAZIO. Mr. Ney.

    Mr. NEY. Mr. Chairman, I am not going to hold the proceedings up. I want to welcome some mortgage brokers from Ohio that I want to welcome.

    Chairman LAZIO. Ms. Velazquez.
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    Ms. VELAZQUEZ. Thank you, Mr. Chairman. I would like to thank the distinguished Chairman for holding this hearing. Today we will learn more information about—I am sorry, Mr. Kennedy, I want to recall the words made by our Chairman, echo the words made by our Chairman. In fact we will miss you. People throughout this country, especially low income and moderate income people, will really miss the fine work that you did on behalf of them.

    Mr. KENNEDY. Thank you.

    Ms. VELAZQUEZ. Today we will learn more information about an issue that has a significant impact on both prospective homeowners and an important sector of our financial services community. Buying a home can be a difficult task, especially for first-time home buyers unfamiliar with the many options available to them. Mortgage brokers have been able to find a niche in the market by being creative and flexible and by providing a valuable service to borrowers and lenders alike.

    The benefit of their services to the community has been substantial. In recent years, we have seen more and more potential borrowers taking advantage of expanded access to lending, allowing many to purchase their first home and plant roots in their community.

    As the Ranking Member of the Small Business Committee, I am working to ensure that small businesses like these are given every opportunity to succeed. I am very interested in hearing from today's witnesses who will describe for this subcommittee their concerns about issues affecting their industry.
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    I would like to thank the witnesses for being here today, and, again, I would like to thank the Chairman for holding this hearing.

    Chairman LAZIO. I thank the gentlewoman.

    The gentlelady from New York.

    Mrs. KELLY. Thank you, Mr. Chairman. I would like to begin by thanking you and for agreeing to hold today's hearing. The role of the mortgage broker in the mortgage finance market has been surrounded by a great deal of uncertainty recently. It was for this reason that I joined many of my colleagues in requesting HUD to take prompt action to resolve the problems. Unfortunately, HUD has proposed a new rule that raises a great many new questions and may very well harm the mortgage brokers.

    To bring some much needed relief to mortgage brokers in these days of uncertainty, I joined my friend from Maryland, Mr. Ehrlich, in introducing H.R. 1283, the Real Estate Settlement Procedures Act Class Action Relief Act of 1997. H.R. 1283 will give the mortgage broker industry a much-needed time out while we try to fix the problems that have hurt the industry.

    We are here today to learn more from the witnesses that have agreed to join us here. I thank you all for coming and look forward to listening to your testimony and then working with my colleagues on both sides of the aisle to resolve the problems that currently affect the mortgage finance market.
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    Thank you very much, Mr. Chairman.

    Chairman LAZIO. I thank the gentlewoman. Are there any other opening statements?

    There being none, we will now turn to the first witness, our colleague, Mr. Ehrlich, from Maryland. I want to say at the outset that we greatly appreciate your work on mortgage financing and real estate and your helping to bring the promise of home ownership to so many people.

    With that being said, I turn it over to the gentleman.


    Mr. EHRLICH. Thank you, Mr. Chairman. I also had some nice comments about Mr. Kennedy prepared, but since he is not here, I will certainly hold them.

    What really worried me yesterday was I was in the elevator with Congressman Kennedy and he looked so happy. Most folks I know who have left politics from the Congress look happier after they leave. So I will have to discuss that with him privately. But we will miss him and he has been a good friend. I will redirect those compliments to him should he reappear.

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    I appreciate the bipartisan nature of the comments as well with respect to this bill. I will not read my statement. I will, however, Mr. Chairman, make just a few brief comments concerning this bill.

    Everybody here is very familiar with the issue and also the issue with respect to a broader context, which is the mortgage reform working group that has already been alluded to. However, Mr. Chairman, I want to compliment you and your staff, and I mean it, for how great they have been to work with. I hope they all get raises next year. I was asked to say that.

    They are a terrific group of people and first rate staffers. As we all know, this place runs on expertise at the staff level, and I appreciate the fact that you have been so good with them in allowing us to use them with respect to that bill.

    Chairman LAZIO. I will be happy to reciprocate that message to your personal staff.

    Mr. EHRLICH. I would also like to thank Congresswoman Hooley for her cosponsorship of this bill as well and Senator Faircloth in the Senate, who is the lead sponsor on the other side of the Hill.

    I will not repeat the points that have already been made today. The mortgage brokers and the mortgage broker industry is a relatively new profession in this country, folks, entrepreneurs who found a niche in the market and who perform very valuable services, particularly for the underserved in this country.

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    As a result, I think it is incumbent upon this Congress to protect them and give them legitimate protections, particularly in view of the sometimes sue-crazy society in which we live.

    Mr. Chairman, I practiced law for eleven years and was involved in various tort reform fights in the State legislature in Maryland. However, I did not always sign on to a tort reform bill simply because it was a tort reform bill. I also represented plaintiffs at times. Simply labeling a legislative initiative as tort reform was never enough to generate my sponsorship or support of a particular bill.

    When mortgage brokers presented this particular problem to me and to you, I thought the cause was legitimate and the bottom line—Joe, you missed those compliments.

    Mr. KENNEDY. I heard them in the other room. They were great. If you want to say them again, go ahead.

    Mr. EHRLICH. It was meant.

    In any event, the bottom line is folks who are doing their job should have some safe harbor when they perform that job, particularly in view of the markets today, particularly in view of the importance of what these folks have done; as I said, the increasing importance of the niche market. You said it very well, Mr. Chairman. In today's housing market, over half of the Nation's residential mortgages originate from mortgage brokers. My bill is not a panacea, it is not an end all, it is part of a process that you and other leaders in this Congress have been working on with respect to the fact that RESPA is broken, we know it, it is bipartisanly broken, and we should fix it in a bipartisan manner.
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    My bill is a temporary bill. It is a partial solution with respect to one segment of the industry, mortgage brokers, who should not face basically a couple boutique law firms who have engaged in at times successful litigation against folks simply doing their jobs.

    As we all know, in this society today there are some attorneys who will look for a niche and use it and in the process end up hurting a lot of folks simply doing their jobs. That is what this bill is all about. I look forward to working on both sides of the aisle as we try to fix RESPA. I appreciate the support from Members of this subcommittee. I think we have 112 Members on both sides of the aisle who have cosponsored this bill. I appreciate mortgage brokers from around the country who have communicated with me, the Ranking Member, the Chairman, other Members of Congress with respect to the importance of this bill. I really thank everybody on the subcommittee for bringing this very important bill to the attention of the American public today, and I look forward to a successful conclusion as we work together, Mr. Chairman, on what is a very real and very legitimate issue.

    Chairman LAZIO. I thank the gentleman. I had a question that was given to me by staff. The question was, could you explain in technical detail the mathematical regression analysis formula developed by the Maryland mortgage brokers to determine yield spread premiums?

    Mr. EHRLICH. I will provide a memo on that. After that raise thing too, it is unbelievable.

    Chairman LAZIO. I will ask you instead though simply whether, if your legislation is adopted, can personal lawsuits go forward?
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    Mr. EHRLICH. Go forward. Simply certification at the Federal level with respect to class actions.

    Chairman LAZIO. And how long will this time-out be in terms of class actions?

    Mr. EHRLICH. We have it, I believe until the end of 1998, but that is certainly a very flexible part of it. I am just trying to come up with a time-out for class action lawsuits so HUD actually does what we asked them to do. As we know, and Representative Kelly alluded to and the Chairman alluded to, the letter we all signed asking HUD to hold off on the final rule, because the rule did not provide the appropriate safe harbors in the view of most of us that they should provide so that people can actually do their jobs and not worry about class action lawsuits.

    As I said, Mr. Chairman, it only goes to a class action at the Federal level where causes of the action allege that these fees violate the anti-kickback provisions of RESPA.

    HUD will come forward with something we can all live with that will address Congressman Kennedy's concerns, and certainly address the concerns that we have and folks who actually do this every day have. It is a very legitimate concern.

    As I said, I don't sign on to tort reform bills because they are labeled a tort reform bill, but this is a remedy for folks trying to do their job. That is why I am anxious to get them up here today to have you hear what they do every day and how they go about their business.
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    Chairman LAZIO. The gentleman from Massachusetts.

    Mr. KENNEDY. I am trying to understand why you feel that it is necessary to create this moratorium. It seems to me that the court in Alabama, as I am sure you are aware, ruled that yield spreads were impermissible. You have a situation where there has been, as I understand it, a court ruling in Virginia where an individual goes in to get a home mortgage and they are steered to a particular company that has a relationship with the mortgage broker, and there was a cheaper mortgage available from someone else, and the homeowner finds out about that opportunity and then took action against a mortgage broker for such a practice. Bob, I guess my sense is that the actual value to any particular homeowner is going to be relatively small. But in order——

    Mr. EHRLICH. What do you mean by that comment? I am sorry?

    Mr. KENNEDY. Because the differences between these interest rates is going to be relatively small, it seems to me that these are exactly what class action lawsuits are designed to try to fix. Where there are a number of small consumers that have a joint action against a particular industry or company or something like that that has an abusive practice, that the fact is that these class action lawsuits have probably triggered the necessity for us to deal with this issue. If those class action lawsuits had not taken place, we wouldn't probably be having the hearing, we wouldn't be cleaning this industry up. So I don't know why, just because there are a whole stack of class action lawsuits against a few firms, that in and of itself doesn't seem to be wrong.

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    Mr. EHRLICH. It is not.

    Mr. KENNEDY. Why do we want to put a moratorium on it?

    Mr. EHRLICH. Your observation presupposes the actions alleged in these class action lawsuits are illegal.

    Mr. KENNEDY. Isn't that what the Alabama case said?

    Mr. EHRLICH. We have a split, as you know. We have a split in—I was going to say in the circuits, we have a split in the courts. That is the basic problem, Joe. That is why we have gone back to HUD and asked HUD, and I don't disagree with a lot of what you said this morning, but the bottom line is you have people out there trying to find the best deal for the consumer, particularly the underserved population, as you correctly stated in your opening statement, but the fact is that they need to know, they need to have the Federal Government, in this case an executive agency, HUD, tell them exactly what they can and cannot do. We have asked them for a couple of years now and I know you have too, to provide specific guidelines with respect to what they can and cannot do and say. All they are coming to the Congress and asking—and to the Executive Branch and saying is, ''Look, let us know what we can do so we can do our thing.''

    As you know, the best ''deal'', is a very subjective determination in the context of mortgages, whether it is closing costs, points, the whole nine yards. What looks like a good deal in the short run may not be such in the long run. So the problem here is we have put these folks behind the eight ball because they literally do not know and they are scared to go about their business, which is performing for a very underserved class of consumer.
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    Mr. KENNEDY. In fairness though, before I ever got my first mortgage, I always thought that a mortgage broker was someone who was essentially working for me, the consumer, who was going to go out and broker my mortgage to a number of different banks or lending institutions and get me the best rate.

    That principle is what is at stake here. I think that mortgage brokers play a very important role, and I don't think we should be putting all mortgage brokers into this category. There are some mortgage brokers that have a hidden relationship that is not being disclosed to the homeowner, where they are not doing what you suggest by completely being free to steer and provide that best deal to the consumer.

    Mr. EHRLICH. If I can, you have made that point twice, and I agree with you. The folks I have talked to and I am sure the folks that talked to you will say notification, disclosure, is not a problem. Full disclosure certainly is not a problem. These folks are just going out there and doing their job. You have made this point twice and I agree with you. I suspect the folks you discussed this with agree with you as well. So full disclosure is really not the problem.

    Mr. KENNEDY. What is the problem?

    Mr. EHRLICH. The problem is they literally can't go about their job because HUD has told them what they can and cannot do and say. As you said, as we have discussed here, this is a very subjective area. What may be the best deal, you used the term ''best deal'', for one person, it may be a very subjective determination. Why should we put these people behind the eight ball when that is a subjective determination, and there is some guy out there waiting to file a lawsuit on the basis of what is a very close call and a very subjective call, given the subjective nature of the market.
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    Mr. KENNEDY. Thank you. I don't think I agree with you, but OK, that is fine. Thank you very much.

    Mr. EHRLICH. I still meant what I said, Joe.

    Mr. KENNEDY. Thank you.

    Chairman LAZIO. Mr. Ney.

    Mr. NEY. Mr. Chairman, just kind of a reaction, just following up a little bit, I guess, or maybe an observation, and you may want to react to it, but, you know, if we look at what really has been going on, if you look at class action suits, if that is the answer then the only ones that are going to make any type of money off of that are going to be the lawyers participating in the class action suits that will go on and eventually put more of the brokers out of business, which in fact leads to less choices for consumers. That seems to me if we just look at class action, and if that seems to be the answer, then no one benefits out of that.

    Mr. EHRLICH. Bob, you not only limit the options that an underserved population has, but you also take more money out of the market, and that money should be available to give to, at least to provide for folks who have not traditionally had access to the mortgage market. So your point is well taken. There are really two reasons to be concerned about it.

    Mr. NEY. And I support the measure, of course. I have supported the letters and the bill.
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    Mr. Chairman, I have got for the record an article, series of articles, by Thomas LaMalfa. Without objection, I would like to enter them into the record.

    Chairman LAZIO. Without objection, so ordered.

    Mr. NEY. These articles are basically on the financial advantages of using mortgage brokers. These are some real tremendous articles that Mr. LaMalfa has written. Also, I think it starts to point out changes in the mortgage business, period, and how we view the mortgage business and the competition and the choice for consumers. So I think some pretty well thought articles on it. I just wanted to enter them. Thank you for your bill.

    Mr. EHRLICH. Thank you, Bob. Given the increasing complexity of the market, obviously people that do this for a living and know what they are doing become all the more important.

    Chairman LAZIO. Mr. Bentsen.

    Mr. BENTSEN. Thank you, Mr. Chairman. I appreciate you allowing me to sit with your subcommittee today since I don't actually officially sit on it.

    Mr. Ehrlich, I have a couple of questions about your legislation, but I do want to follow up for just a second with the discussion you had with Mr. Kennedy. Normally I would agree with Mr. Kennedy, and I am very concerned about congressional efforts or other efforts to curtail any individual's, or a class for that matter, ability to have a right to redress. I think it is a very serious constitutional issue that we sometimes lose sight of.
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    The situation here though, as both you and Mr. Kennedy pointed out, is you have, first of all, conflicting court opinions that may ultimately have to be resolved at the Supreme Court level. But you also have a situation, as you pointed out, that HUD has failed to act on this issue, and it has created what we would call in the tax world something of an artifice, where there is a discrepancy in the law, in this case it is not just statute, but rulings as well as it relates to statute, which has created a situation for lawsuits which may or may not be real once this is resolved. And as a result, I have come around—after avoiding this position, I have come around to thinking that a moratorium is a good idea.

    What I would ask is with respect to your bill, my understanding is your bill runs through December 31, 1998.

    Mr. EHRLICH. Correct.

    Mr. BENTSEN. My understanding is Faircloth was introducing a bill which would run to December 31, 1998, or such time as there is a statutory resolution to RESPA as it relates to this. I don't—you have your bill and I don't want to sit here and tell you what you ought to do with your bill, but I wonder whether or not it might be something where you might consider at some point modifying your bill to match Faircloth's bill, and perhaps even going further if this issue is ultimately resolved by HUD.

    There are a number of Members on my side of the aisle who have written to HUD repeatedly asking them just to get to a final answer on this issue and let's resolve it. It may be something that the mortgage broker industry disagrees with, but the indecision and uncertainty has created a legal artifice that has resulted in these class action suits, which may or may not be real in the long run. I think that is the problem.
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    Mr. EHRLICH. I sincerely appreciate your comments particularly, because I know you know this industry very well, I know you know this business very well, and I know you have been troubled and been very thoughtful concerning my bill and the whole issue of RESPA reform. You have a lot of folks that talk to you. So your points are very well taken and appreciated by me. The answer to your question is I would be very, very open to changing my bill in order to comport with Senator Faircloth's version on the Senate side. It makes all the sense if the world.

    Mr. BENTSEN. Thank you.

    Chairman LAZIO. I thank the gentleman from Texas.

    The gentlewoman from New York.

    Mrs. KELLY. No questions.

    Chairman LAZIO. The gentleman from Washington.

    Mr. METCALF. In the interest of time, I have no questions.

    Chairman LAZIO. The gentleman from Pennsylvania.

    Mr. FOX. A brief question.

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    Thank you, Mr. Chairman. Thank you, Mr. Ehrlich, for your leadership on this issue and trying to resolve what is very important to our consumers.

    Let me ask you this question: Do brokers have any risk in the loan transaction or do lenders have all the risk?

    Mr. EHRLICH. They both have the risk, obviously.

    Mr. FOX. Do you think that your bill will address the problem in a long-term range or just for short-term?

    Mr. EHRLICH. Well, Jon, the bottom line is this, and I think our colleague from Texas put it very well: These are folks who have found a niche in the market. They are very entrepreneurial. They have not only found a niche in the market, but they found a target audience, an audience typically underrepresented in this industry. So there is a demand out there. They fulfill the demand. They go about their business. They try to find the best deal for, many times, at-risk consumers, the underserved population. And where do they find themselves? They find themselves in this court increasingly, and they find themselves stuck between interpretations of the anti-kickback statute, differing interpretations that different courts have given.

    They come to the Congress—first of all, they go to HUD and say ''help us.'' They don't get any immediate relief. They come to the Congress, their elected representatives and say ''help us.'' We say, ''Well, we will ask HUD to help you.''

    Now, we have written numerous times, as recently as a couple of months ago, both sides of the aisle, Members have said, ''Please, HUD, clarify what is and is not appropriate so these people can just go about their business and not be at risk for very entrepreneurial attorneys out there who can make a lot of money quickly in filing class action lawsuits.''
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    Mr. FOX. I believe your bill is a forward step and is positive, and I appreciate your leadership on it.

    Mr. EHRLICH. Thank you, Jon.

    Chairman LAZIO. I want to thank the gentleman.

    Mr. KENNEDY. Mr. Chairman, if I might, I just want to try to understand one last aspect of Mr. Ehrlich's point. I asked the staff to just try to draw up an example——

    Chairman LAZIO. I recognize the gentleman for two minutes.

    Mr. KENNEDY. Thank you. Let me just read the example that the staff drew up. Let's say a borrower signs an agreement with a broker that he will pay $1,500 to the broker on a $100,000 loan or 1.5 percent for services rendered. The day of closing, when the borrower has no option but to accept the loan, the borrower learns the broker is getting an additional $1,500 fee from the lender, paid for at a higher interest rate. The borrower gets no benefit from the second $1,500 fee. Now, what I understand the point that Mr. Bentsen and that you have made, Bob, is because there are conflicting court rulings on whether or not the yield spread premium can be charged, and because HUD has not perhaps done its job as quickly, although they have a rule out, as quickly as we would like, that we should stop the lawsuits.

    But it seems to me that the reason why you shouldn't stop the lawsuits is the suits are only going to prevail if there are in fact damages done. I don't think anyone, I don't think any one of us on either side of the aisle would think the second $1,500 fee, if it is being kept secret from the borrower, is the right or proper thing to do.
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    So I think that the point is that these class action suits ought to be allowed to go forward to be able to weed out these situations where there really is an abuse. And where there is no abuse, they might win, they might lose, but it is not going to have any serious damages.

    I guess that is the essence of what I am missing about what you are trying to accomplish.

    Mr. EHRLICH. Let me make a couple of points. First of all, it is very difficult to give an opinion on a hypothetical, because in many cases these situations are very complex with respect to the personal financial situation of a person out there. We all know that, particularly the kind of population we are dealing with.

    Second, this person went out and got a good deal usually, and in my belief system, they should be paid for it.

    Third, with respect to somebody who really does go about in a secretive way, the kind of actions that you have described, there is the opportunity to sue, bring a tort case in State court. This is a certification, freezing class actions at the Federal level.

    Fourth, you also made the statement there is no damage done. But, Joe, you are very well aware of the fact there is an opportunity cost with litigation generally.

    Mr. KENNEDY. That is my point. I am trying to give a real example, I wasn't trying to say this is the only example, but a real example, where the total damages in that example are $1,500. To go out and get a lawyer and go to court for $1,500, that is a tough deal. That is why we have class actions.
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    Chairman LAZIO. If the gentleman will yield, I think one of the points is that this uncertainty has been going on for years, and the potential aggregate liability is what is so threatening to the entire industry. So it is not just about one transaction, but about many, many, many transactions, where some players will argue that they have been operating in good faith with, at the very least, a wink and a nod that this is appropriate.

    Mr. KENNEDY. Thank you, Mr. Chairman.

    Mr. EHRLICH. I will just add, as we all know, and then be quiet, Mr. Chairman, the opportunity costs associated with litigation is well-known to us. A defendant's verdict usually means tens of thousands of dollars in court costs and attorneys' fees in some of these cases where the brokers have one. That is money that is not going into the market to serve this particular target audience. I think that is unfortunate. Joe, that is really the genesis of this bill.

    Chairman LAZIO. I thank the gentleman. I would ask that panel two please come forward.

    I want to thank the second panel, and I want to begin by thanking one individual who is in the audience, Terry Runewicz, who agreed to testify, but Terri Cook will be speaking for both of you. I appreciate your coming here.

    We have an excellent panel. Jan Hix, Terri Cook, Mark Thomson, not necessarily in this order, Jim McCabe, Tom LaMalfa. I am going to provide individual introductions as we go along and then open it up to questions.
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    As I mentioned before, your statements will all be included in the record, and you will be asked to summarize your comments. To the extent you can do that, we will have more time for questions and answers. I know Mr. Metcalf wanted to provide at least one introduction.

    Mr. METCALF. Thank you, Mr. Chairman.

    Washington State is a long way away. We don't get as many visitors from Washington as from Delaware or Virginia, so it is my real pleasure to introduce Mark Thomson, who is the President of the American Association of Residential Mortgage Regulators, from Olympia, Washington. It is good to have you here.

    Chairman LAZIO. Let me begin by introducing, if I can, Jan Hix. Thank you very much for making it this morning. I apologize for the delay to all of you.

    Jan Hix currently serves as the President of the National Association of Mortgage Brokers Board of Directors. She has worked in the real estate industry since 1977, and in July of 1989, she organized River Crest Mortgage, a small broker company in Atlanta, Georgia.

    Since 1993, Jan has served in several board of director positions for NAMB, including Director of the Educational Foundation, Chair of the Legislative Committee, Vice Chair of the National Mortgage Reform Act Task Force, and Chair of the Education Committee. She was awarded broker of the year for Georgia in 1994 and 1996, and eastern region broker of the year for NAMB in 1995. In January of 1997, she was appointed by Chairman Jim Johnson to Fannie Mae's National Advisory Council for a two-year term.
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    I want to welcome you here and thank you for your testimony in advance.


    Ms. HIX. Thank you. Good morning, Mr. Chairman and Members of the subcommittee and distinguished panelists.

    Again, my name is Jan Hix, and I am the President of the National Association of Mortgage Brokers. On behalf of the National Association of Mortgage Brokers, I want to sincerely thank Chairman Lazio for his continued leadership in housing affairs, particularly for his formation of the Ad Hoc Mortgage Reform Working Group, and to thank the Chairman and Members of this subcommittee for their interest and commitment to examining the many important public policy questions now facing the mortgage finance industry.

    I also wish to express a personal note of appreciation to Congressman Robert Ehrlich, who took the initiative to introduce House Bill 1283, the RESPA Class Action Relief Act of 1997 early last year. This bill now enjoys 112 bipartisan cosponsors, including many Members of this subcommittee.

    NAMB is the Nation's largest organization exclusively representing the interests of the mortgage brokers. NAMB has 39 State-affiliated associations which represent a little over 6,000 members. The NAMB provides education, certification, industry representation and publications for the mortgage broker.
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    Our members subscribe to a code of ethics and a new set of best business guidelines which promote integrity, professionalism, service to the consumer and confidentiality.

    My purpose here today is to provide you with some insight on the role of the mortgage broker, their value in the marketplace, and to ask for your support on implementing a moratorium on future class action lawsuits which will give the industry and consumers sufficient time to work through issues relating to mortgage reform.

    Up until the late 1980's, the majority of home loans in America were obtained through small savings and loans, community banks and finance companies. During that time, interest rates were high and mortgages were not always available in all parts of the country and to all consumers of all income levels.

    Since that time, the decline of the savings and loans, the expansion of efficient secondary markets, and the securitization of mortgages, have put an end to the credit crunch. But it has been the rise of wholesale lending through mortgage brokers that has made the greatest impact on the home buyer's ability to obtain a home loan.

    Mortgage brokers have brought consumers more choices in loan programs that they could not obtain from some of the local retail lenders. The brokers also offer the consumer superior expertise and assistance in getting through the tedious and complicated loan process and in finding loans for borrowers who may have been turned down by other lenders. Because of the increased competition and specialization offered by mortgage brokers, today's consumers enjoy mortgage choices that were inconceivable only a few years ago.
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    A homeowner or buyer can now obtain a mortgage even if he or she has had a recent bankruptcy, is facing foreclosure, has limited cash available or is self-employed.

    It is no surprise then that consumers have increasingly turned to mortgage brokers to help them with their financing needs. I have here today over 1,000 letters from borrowers thanking their mortgage brokers for helping them through the loan process.

    Today about 23,000 mortgage brokers originate over half of all mortgages in America and employ nearly 130,000 people. The rise of the mortgage broker has been accompanied by a decline in mortgage interest rates and closing costs and an increase in the home ownership rate. Mortgage brokers have dramatically increased competition in almost every region and community in the country. While the number of mortgage lenders is continually declining through mergers and consolidation, the number of mortgage brokers is growing.

    This increased competition at the origination level is continually producing lower costs, a greater variety of mortgage products and improved service to the consumer. A professional mortgage broker can find an affordable loan for almost any borrower with almost any kind of financial background.

    I have to express that when I began my career in the mortgage brokerage industry back in 1984, I went to work as a loan processor for a small brokerage company in Atlanta, Georgia, that employed five other people. After the loan officer met with the borrower to fill out the loan application and discuss the different financing options available, it was my responsibility to obtain a credit report, order an appraisal, obtain written verification of employment covering a two-year period, work with the borrower to clear up any derogatory credit information, verify that they had sufficient funds to close, obtain any additional documents that were required by the lender, schedule and coordinate the closing with all parties involved in the transaction, and assist the lender with any follow-up paperwork after closing.
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    Those same tasks, and more, continue to be performed in today's market by most mortgage brokers. The fees that the company charged on each loan transaction was typically 3.5 percent of the loan amount. That was basically the minimum in the marketplace, which the borrower had to pay out of pocket at the time of closing. 3.5 percent was typical in my marketplace at that time, and there were no yield spread premiums being paid to the broker.

    Around 1988, retail lenders started to decrease their closing costs to the consumer as a way to compete for business. It became difficult for the mortgage broker to compete with them because the only cost we could lower was our own compensation, and by doing so we would have to operate at a loss.

    In 1989, the company I worked for decided to close its Atlanta office because it could not continue to operate on that basis. It was at that time I decided to open my own brokerage company and, believe me, it was a struggle in that market.

    Shortly thereafter, wholesalers in my marketplace started to offer premium pricing, which enabled me to lower the consumer's up front cost and become competitive again in the marketplace.

    Chairman LAZIO. I would ask you to try to summarize.

    Ms. HIX. As interest rates started declining—I am actually almost through. As interest rates started declining, I saw an increase in wholesalers entering the market, along with an increase in business and competition. Wholesalers also started to increase the yield spread premiums because the new gimmick by the retail lender was to offer a no closing cost loan. In order for the broker to compete, we had to offer the same option.
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    I hope this bit of history provided you with a better understanding of why it would be devastating if the mortgage broker were not able to receive yield spread premiums. In order for me to compete right now in my marketplace, I have to keep the consumer cost lower up front, but at the same time, I need to make enough money to cover my overhead. I believe this practice is helping to keep competition alive in the market, while keeping options available to the consumer who may not have all the necessary funds to close the transaction.

    If I were faced with a class action lawsuit today, I would have to increase my prices in order to cover my legal expenses, which would also render me uncompetitive in the marketplace. I would probably make the choice to close my company and find employment with a lender who may not offer creative financing to the less than perfect borrower. Many brokers would be faced with the same dilemma.

    Less competition in the marketplace would ultimately mean increased costs and a decline in the opportunity to achieve home ownership to the consumer, and I hope you will not allow that to occur.

    I would like to thank you, Mr. Chairman, and the subcommittee, for giving me the opportunity to speak on behalf of the many small business owners across the country who believe in helping people achieve and maintain home ownership, and I will be happy to answer any questions you may have.

    Chairman LAZIO. Thank you very much.

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    We will next hear from Terri Cook. Ms. Cook is a retired military veteran who was awarded the Navy and Marine Corps Overseas Ribbon with three Bronze Stars and five Good Conduct Medals. She is working on her Master's Degree and caring for her two children. Terri is the winner of the Fannie Mae Foundation's ''What it Means to be a Homeowner'' essay contest. She is currently buying a home and is waiting for the house to finish construction in order to close.

    Let me welcome you and thank you for your service to the Nation.


    Ms. COOK. Thank you. Good Friday morning, everybody.

    My name is Terri R. Cook, ''R'' meaning for Renee, and for the last six months I feel like I have been in a financial jungle, looking for someone who would make a mortgage for my first home.

    The purchase of a home is the largest transaction I probably will ever make. That in itself makes it a frightening endeavor. The sheer amount of paperwork that I have seen is enough to confuse and frustrate anyone. I know all these disclosures are supposed to help me, but how am I supposed to digest all that material about a subject as foreign to me as a mortgage?

    First, I would like to tell you a little bit about me. I am a single mother of three who retired from the U.S. Navy September 30, 1994. I have never owned a house I could call my own because I have been shipped around the world by the Navy. I was happy to serve my country, and I am not complaining about the times I had in the military.
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    But when I retired, I was amazed to find that years of computer training had either made me overqualified for career jobs or I was not properly certified for other types of jobs. The only job I could find upon leaving the Navy, remember here, after 20 years, was a cashier at a grocery store called Cub Foods. I must say it was a challenge to live on $5.10 an hour and the $12,000 a year of my military retirement, with my three children; age 16, in braces; 14, and 2 1/2 with constant ear problems. I tried a job at the IRS, but it was just a seasonal job.

    From July 1995 to November 1995, I was totally unemployed and living solely on my retirement pay. This was a very difficult time, but I was able to pay my rent, feed my children, and stay out of bankruptcy. Finally, in November of 1995, I found a job at ASCAP, the American Society of Composers, Authors and Publishers, making $9.50 an hour. Things still were not great, but I could at least survive.

    God was good to us, and in June of 1996, I was able to get a good job at Interim Technologies, a contractual company working at IBM.

    Chairman LAZIO. Can we suspend for a minute, if I can. I want to turn to the gentlewoman from New York, who will be recognized because I know she needs to leave. She wanted to address the subcommittee.

    Mrs. KELLY. I simply wonder, Mr. Chairman, if you will hold the hearing open for a few days afterwards so I can submit questions in writing to the witnesses.

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    Chairman LAZIO. Without objection, so ordered.

    Mrs. KELLY. This is important, this hearing, and I really appreciate all of you coming here today. Thank you.

    Chairman LAZIO. I thank the gentlewoman.

    Excuse us. Continue.

    Ms. COOK. It is OK. I understand.

    Finally, I was able to pay my bills and catch up on all the things I was behind on. I have since been hired away by an even better job that pays me around $30,000 a year. Now I want to fulfill my lifelong dream of owning a home.

    I entered the Fannie Mae contest by writing an essay about what it means to own a home. I was pleased when I won and was awarded $1,000 toward the closing costs upon the purchase of my new home. I was horrified to find out when I went to Home Bank to get a loan I could not get financing. I soon found out that the greater bulk of institutions today have a stringent set of rules, a sort of ''in the box'' mentality, that is what I call it.

    When the average person comes to these types of organizations seeking a mortgage, they better line up exactly in the box or they will go home empty-handed. I tried again and again. Pulte Mortgage turned me down with even my VA eligibility backing me up.

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    I was ready to give up on my dream of home ownership. Then I was referred to the mortgage broker by the realtor at the subdivision where I wanted to buy the home. Promethean Finance Incorporated is a small mortgage brokerage firm in Marietta, Georgia. John Harris took on my loan and amazed me with his dedication. Nowhere else would anyone really consider the tough times I had gone through. John's first comment was it would be tough, but he believed he would be able to get me a loan.

    From that point, John has helped me settle out the remainder of my small collections accounts, helped me correct the inaccurate information on my credit report that adversely was affecting my credit score, and he has been an overall support and information source throughout this whole process.

    I realize that I may not be able to get the very best rate that is available today. John is fighting for me to have the best deal. I know that both some of the money from the closing costs and money from the lender will help pay for all the work John is doing on my behalf.

    If John cannot get me what he calls an ''A'' paper mortgage for me at 7.5 percent or better, he has promised there is a combination 8.5 percent ''B'' paper mortgage, and a small second mortgage that I can have for a year while my credit situation strengthens. I can honestly say without John at Promethean Finance, I would not be moving into my home next month. But because of the hard work he has done, I will be a new homeowner very soon.

    I don't fully understand what this subcommittee is here to do today, but whatever you do, don't do anything that will take the people like John Harris and Promethean Finance away from people like me. A mortgage broker was the only avenue for me because of the survival decisions I had to make for my family and myself. I am one of the ''in the box'' casualties. My life did not line up with the financial institutions' guidelines. I am sure there are many other Americans out there also like me that are ''in the box'' casualties that also want that American dream, home ownership.
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    Thank you for the opportunity to be heard by this subcommittee, and I will answer any questions you have.

    Chairman LAZIO. I thank you.

    Jim McCabe is testifying on behalf of the Mortgage Bankers of America. He is a partner at Morrison & Foerster and has participated in and tried a variety of cases involving mortgage brokers and financial institutions.

    In 1997, Jim was named project leader in connection with Morrison & Foerster's retention by the Mortgage Bankers Association of America's National Coordinating Council for Suits against Mortgage Bankers under Section 8 of the Real Estate Settlement Procedures Act, otherwise known as RESPA. Jim, thank you for being here.


    Mr. MCCABE. Thank you, Mr. Chairman. I will just introduce myself. I am Jim McCabe, a partner in the law firm of Morrison & Foerster LLP, and I practice in the firm's San Francisco office.

    For the last year, Morrison & Foerster has been engaged by the Mortgage Bankers Association of America to monitor a wave of class action lawsuits against mortgage bankers and brokers concerning lender paid broker compensation and to act as an information clearinghouse for mortgage bankers that have been sued. At latest count, more than 100 such class action lawsuits have been filed around the country. About 60 of these class action suits have been filed in the last two months alone.
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    The U.S. mortgage finance industry is highly competitive and is diversified. There is fierce competition among mortgage brokers and among mortgage bankers. In the last 20 years or so, we have also seen the development of new products, distinctive combinations of loan terms. A borrower no longer needs to take or leave the limited set of loan financing options that would be offered by the local lender. A borrower can now select from a wide range of loan terms to tailor a loan to meet his or her needs and objectives.

    It is not surprising then that the growth in the number of lenders and loan products has coincided in a dramatic increase in the percentage of residential loan transactions in which mortgage bankers are involved. The more products there are to choose from, the more useful an experienced guide can be.

    Mortgage brokers were almost unheard of 25 years ago, and yet in 1996 they were involved in over half of the residential loans made in this country. Most of the loans in which brokers were involved were funded by mortgage bankers.

    The steady and substantial increase in the use of mortgage brokers over the last two decades clearly indicates that borrowers find brokers provide valuable services in selecting among myriad competing products and providers. Consumers use and reuse only those services that they find give them value.

    Now, you asked, Mr. Chairman, for a comment on the way in which existing laws and regulations affect the residential mortgage finance industry. Last year, Ron McCord, who was then the president of the MBA, appeared before the Subcommittee on Financial Institutions and Regulatory Relief of the Senate Committee on Banking, Housing and Urban Affairs. Mr. McCord testified that in the MBA's view, ''the current regulatory framework affecting the home buying process is dysfunctional.'' Mr. Chairman, that remains the MBA's view.
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    MBA supports a long term solution in which the present RESPA-TILA regulatory framework is not simply repaired, but is replaced. The MBA is ready to work with this subcommittee and others in order to overhaul and modernize the Federal laws that govern the sale, purchase and financing of a home.

    That reform should result not only in the availability of adequate and reliable information that will allow consumers to make informed decisions today and tomorrow, but should also provide clear and concise rules for compliance by lenders and brokers. MBA has supported and continues to support the efforts of the groups that are working toward a solution.

    MBA also supports short-term relief until such time as long-term solutions may be developed and implemented. In the last few years, mortgage bankers and mortgage brokers have been faced with an onslaught of class action lawsuits brought by a small number of law firms challenging the payment of yield spread premiums as a violation of RESPA. Many lenders have been sued on the same theory on behalf of the same proposed class in 3, 4, 7, 8 lawsuits. One lender has been sued in 6 different suits in 6 different judicial districts by the same law firm.

    Now, although district courts to date have denied class action certification in many RESPA cases, the cost of defending these cases often in multiple jurisdictions, until a decision on class certification is reached, is typically enormous. Congressman Ehrlich estimated it might be in the tens of thousands of dollars. I don't know what he charged when he was a lawyer, but he made a good decision to come to Congress, because in fact many lenders have faced legal bills running into the millions of dollars to defend these suits, and typically to get to the class certification decision in these suits will cost into the hundreds of thousands of dollars. It is a very substantial cost imposed upon the lenders.
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    Worse is the cost that can be imposed upon the mortgage brokers. While lenders may be substantial, many mortgage brokers are small, modestly capitalized businesses. They simply cannot stand the transactions costs of surviving through a Section 8 lawsuit until such time as they can have their case join the string of 10 successive denials of class certifications that have been rendered in the Section 8 cases.

    To respond in part to Congressman Kennedy's question, why should H.R. 1283 be adopted, why should a moratorium be placed upon class certification? It is for two reasons.

    One, there is in fact no conflict in the courts,. No court has held that yield spread premiums are per se illegal. The only court that made that comment in January 1997 later retracted it. The recent decision in the 11th Circuit does not say that yield spread premiums are per se illegal. It says that the question about whether any particular yield spread premium violates RESPA is a fact-intensive inquiry that must be addressed in each case.

    We have had class certification denials before the Culpepper decision, and we have had class certification denials after the Culpepper decision. If mortgage brokers and mortgage bankers are forced to continue to defend these lawsuits, and there have been 60 of them filed since Culpepper came down, they are going to continue to incur really wasted legal expense in order to do and continue providing a very legitimate service for lenders and borrowers.

    Thank you, Mr. Chairman. I see my time has expired.

    Chairman LAZIO. I thank the gentleman for his testimony.
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    We will next hear from Tom LaMalfa. Mr. LaMalfa manages TSL Consulting and Wholesale Limited, two companies he formed in 1990. He also partners with David Olson in a third company called Wholesale Access. The companies are built around mortgage finance and provide research on wholesale mortgage companies. Tom has tracked and studied the development of wholesaling in the 1980's, specializing, among other things, in mortgage brokers. He writes several monthly columns and contributes columns regularly to Mortgage Banking.

    Thank you for appearing before us. Thank you for your patience. I know we look forward to your testimony.


    Mr. LAMALFA. Good afternoon. Thank you, Mr. Chairman. I appreciate the opportunity to be here. As you know, my name is Tom LaMalfa. I have worked as a mortgage market analyst, a money market economist, a journalist, and a consultant for the past 22 years.

    I was asked here to address the role of the broker in the mortgage market. The mortgage broker is a key component in the existing mortgage delivery system. The broker links the consumer with the network of wholesalers who buy these mortgages.

    The system evolved from the old thrift-based, thrift-dominated delivery system. Brokers have now surpassed and supplanted thrifts as the preeminent mortgage originator and simultaneously replaced traditional retail originations.
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    Traditional retail was the system that produced mortgages in the 1950's, 1960's and 1970's. In the mid-1980's, as the savings & loan franchise was eroding, wholesale and brokers began supplanting traditional retailing. It began gradually, year after year.

    In 1989, after having informally monitored these market developments for several years, I launched a monthly journal on the topic and began building a database of all the participants. I have written or co-written the lion's share of articles in the existing literature on the topic of wholesale lending and mortgage brokers.

    I was asked to address four questions. Let me take up the first question, the role of the mortgage broker.

    The mortgage brokers are one of several different groups of originators that consumers, hereafter I would like to refer to consumers as ''mortgagors,'' can choose from in order to obtain a mortgage. Brokers are independent, small businesses, and they are also the predominant players in the primary market, originating approximately six out of every ten mortgage loans.

    The mortgage brokers did not earn this distinction overnight or without considerable effort, initiative and good fortune. The broker really serves two masters, the mortgagor and the wholesaler. For each master, a myriad of services are produced. A detailed roster of the functions the broker serves to the mortgagor was listed in my article, ''The Plaintiff's Adversary,'' published last year in Mortgage Banking magazine.

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    Mr. Chairman, I would ask that be part of the record.

    Chairman LAZIO. Without objection, so ordered.

    Mr. LAMALFA. Thank you. Twenty duties and responsibilities were cited in that article. I will refrain from reviewing all of them, but it may be appropriate later to do so. Performing these functions is what gets brokers compensated.

    Brokers have become the origination experts. They have stripped all the back room functions from the process to reduce the cost to the end users, mortgagors. This is truly a specialization and a division of labor and one that goes back to Adam Smith in terms of its chronology.

    The second question I was asked was why brokers have such large market share. There are several reasons. The most important one is their low cost expense structure. Brokers have less overhead, they have few fixed costs, they have no monumental office complex or signature skyscrapers and no bureaucracy. Mortgagors come to mortgage brokers attracted by their low fees and rates. They are also attractive for the level of services they provide, an array of programs and products and their specialized knowledge. Good service plus good price equals a good deal in the eyes of most mortgagors.

    Brokers are also salespeople. They must combine good interpersonal skills with the specialized knowledge of a reasonably complex business, and I would submit it is that.

    Mortgage brokers sell home ownership, they sell the American dream. Brokers know all the lending programs from one end of the spectrum to the other, from affordable housing to jumbo finance. They command over 50 percent market share because they know their stuff and they are willing to meet with you at your office in the afternoon or to make a home visit in the evening.
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    Question three asked if mortgage brokers were translating into higher market share. In a word, yes. They have increased home ownership by increasing affordability and growing aggregate demand. They offer a wide spectrum of programs and products. The sheer number of brokers and their universality means a wider array of consumers can be reached and served. To ascertain how good the Nation's mortgage banking system is and its delivery system, look at the affordability index. A score of 1.0 means that sufficient income exists to purchase a median income home. The index has now exceeded 1 for 12 straight years, and in the past 5 it has exceeded 1.3. This means there is 30 percent more income than is needed for a median price home. Indeed, affordability has never been better. I attribute some portion of this to wholesale and mortgage brokers.

    The last and final question was how outdated laws and regulations are hurting the mortgage market. There are two outdated concepts and structures with statutory roots that are harming the mortgage business. First are the secondary market behemoths, Fannie Mae and Freddie Mac. The second hurtful law is RESPA. Fannie and Freddie put the taxpayers at risk. Fannie and Freddie are at best mediocre mechanisms for directing subsidies to housing.

    There are five important reasons why Fannie and Freddie should be privatized. First, they are siphoning most of the economic value from the mortgage business. Second, their specialized privileges impede private sector growth and financial opportunities. Third, they raise interest rates and indirectly increase the cost of the national debt. Fourth, they repeatedly have abused their charters. Lastly, there is an almost inherent conflict in Fannie and Freddie's public and private roles.

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    RESPA is an outdated law that harms mortgagors, wholesalers and brokers. Here is just one example, and I will conclude my comments. RESPA hurts mortgagors by not giving them a uniform across the industry disclosure. Almost one-half of all originators are not required to make a full disclosure. In fact, only mortgage brokers are required to provide mortgagors with a complete inventory of settlement costs. Banks, thrifts and mortgage companies with warehouse lines are all exempt from making disclosure. This unlevel field puts consumers at a big disadvantage in shopping for mortgage services. They can't compare.

    I thank you for the opportunity. I appreciate your time.

    Chairman LAZIO. Thank you for your excellent testimony. The last person in our panel has been introduced by Congressman Metcalf. If I can, I just want to add to his comments.

    Mr. Thomson currently serves as President of the American Association of Residential Mortgage Regulators, a national association representing State regulatory agencies throughout the Nation. He is the Director of Consumer Services and Administration for the Washington State Department of Financial Institutions. Mark has worked in financial regulation with State governments since 1988 and was intricately involved in drafting the passage of the Washington State Mortgage Brokers Practices Act. He is also active in the National Association of Consumer Credit Administrators and serves as Vice Chairman of the group's Technology Committee.

    I want to welcome you here today and look forward to your testimony.

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    Mr. THOMSON. Thank you, Mr. Chairman, Members of the subcommittee. Thank you, Representative Metcalf, for your kind welcome.

    My name is Mark Thomson. I am here today representing the American Association of Residential Mortgage Regulators, or AARMR for short. AARMR is a nonprofit corporation established by State regulatory agencies. We currently have 26 member States out of the approximately 34 States that currently have mortgage laws.

    My experience in Washington State is that the large majority of mortgage brokers are honest business people who do their best to serve their customers and comply with both the spirit and the letter of the law. There is a small but significant fraction in the industry, however, that does not always operate in compliance with the law. In 1997, my office received over 120 consumer complaints against mortgage brokers. That represented 46 percent of the total complaints from roughly 25 percent of the licensees. But in fairness, I also have to note that 120 transactions is an extremely small proportion of the total number of transactions that were executed in our State that year, and most of those complaints get filed against a small number of companies.

    The experience of New Jersey is very similar to the experience in Washington, as is the experience in most of our member States.

    Complaints tend to come in in four main areas, the first being mortgage servicing issues—those generally are issues associated with lenders or servicers and not brokers; the second being bait and switch or the terms of the loan changing as the loan is processed; the third being a failure to refund third party fees or other such trust account violations; and the final one being failure to provide payoff information, which again is a servicing issue or lender issue most of the time.
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    AARMR believes that a strong program of licensure and regulation at the State level is the most effective way to combat unfair and deceptive acts and practices in the mortgage broker industry. States have devoted significant resources to the administration and enforcement of their mortgage laws. We stand ready to assist consumers when they believe they have been wronged, not as advocates, but as third party objective decisionmakers who can assist in mediating disputes, who can undertake investigations of alleged violations, and who can take up enforcement actions when appropriate.

    Finally, many of our members have incorporated Federal law, either RESPA or Truth in Lending, into our State laws. In addition, the increased use of technology in the lending process is forcing us to make interpretations in areas where we have never ventured before. It is really important that we have a strong and clear, I emphasize clear, regulatory framework, where we can protect consumers and also protect consumer confidence in the industry.

    We encourage Congress to strongly consider mortgage reform. We need a more effective framework in which to regulate the use of the new technologies and also to educate our licensees. In our State we have a continuing education requirement. We cooperate with our local mortgage brokers association to put on seminars, eight a year, throughout the State. Questions revolving around allowable fees and acceptable compensation come up all the time. That area of law is very unclear, and we need some guidance and so does the industry.

    We feel strongly that regulation is most effective at the State level, but we recognize that some uniformity may be necessary in some areas as the reform process goes forward. To the extent that Federal preemption is necessary, we ask that Congress accomplish it in an orderly manner, that our members have the opportunity to plan for budgetary impacts, and that we have time to ensure that we have adequate resources to continue to manage our regulatory missions in an effective and efficient way.
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    Thank you very much for the opportunity to be here today.

    Chairman LAZIO. I thank the gentleman. I have a few questions I would like to ask. We will have some time for the other Members to ask questions. Of course, I want to mention that Ms. Hooley was here, but she had to leave. There is another conference going on right now involving H.R. 10, which she had to attend. There will be an opportunity for Members to submit questions, and I hope that you all, for the Members not able to be here, would accommodate those questions.

    Let me begin by asking the fundamental question, which is if yield spread premiums are an appropriate mechanism for mortgage broker compensation, why is that? What is the compensation for? What services or overhead or costs are absorbed by the yield spread premium, or is it simply just a finder's fee for lack of a better word? Let me direct this question first to Mr. McCabe.

    Mr. MCCABE. Mr. Chairman, I believe there is frequent confusion in the discussion of yield spread premiums between the purpose for which it is paid, that is, what the premium compensates, and the reason the lender is willing to pay it.

    Generally what we see in the litigation is that the broker provides a lot of services, principally to the borrower, but also to the lender, and in some circumstances, the lender is willing to pay for a portion of those services, and at other times they are not willing to do so. That really depends on the interest rate they get on the note. It is really much like whether an airline is going to charge you for a meal, or charge you for a drink. If you are sitting in first class they are not, because the ticket price is so high. If you are sitting in coach, they will charge you. Some airlines, you have to bring your own lunch. In each case, what you will be paying for there is the lunch or the drink.
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    Here the lender is paying for the services rendered to the borrower or to the lender. Their willingness to make that payment though decreases when the coupon rate on notes that they are receiving goes down. It is really not a finder's fee.

    Chairman LAZIO. So in effect, what are they paying for? What is an originator or a wholesaler paying for when it agrees to pay a yield spread premium?

    Mr. MCCABE. What it is agreeing to do is put money back into the transaction which the borrower and broker can agree to use in whatever way they see fit. Typically it is made payable to the broker, and it is contrary to the discussion that took place earlier, in the hypothetical. The fact of the payment is disclosed before the transaction is consummated. The fact of the payment of the yield spread premium is included in the good faith estimate which is given to the borrower in advance of the loan closing. So the fact the payment is made should be known to the borrower who just looks through the statement.

    Chairman LAZIO. Let me ask this to Mr. LaMalfa also. If there were not a mortgage broker, and you said that over half of the mortgage originations now flow through mortgage brokers, would the wholesaler be forced to provide any of those services, or would they not provide any of those services? How would the consumer interact with a wholesaler and why is it worthwhile for a wholesaler to pay the risk spread premium?

    Mr. LAMALFA. I certainly am glad you raised that question. The first point is that there really are yield spread premiums in every mortgage transaction. What is really occurring here is the originator is selling an asset, the servicing asset. Because that asset gives off cash flows, it has a quantifiable value. So in every mortgage transaction, whether you see one on a disclosure form or not, there is always a yield spread premium. It's not that all regulators don't receive YSPs. They do, but only mortgage brokers must identify those payments separate and independent from other costs.
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    So every company buying mortgages is paying them, and every originator, whether they work for a bank or savings and loan or credit union, is receiving YSP compensation. It is just under a different name, SRPs.

    Chairman LAZIO. Let me ask Ms. Hix, if I can, to just further build on that. You are a potential home buyer and a lender quoted you a rate and fees, but you then went directly to the lender as opposed to working through a mortgage broker, would you get the same offer in terms of yield, the interest rate on your mortgage? Or would there be a spread between the two?

    Ms. HIX. If I understand you correctly, you are asking me from a borrower perspective?

    Chairman LAZIO. Yes. Would you get the same rate and fees if you went to a broker as opposed to you going directly to a lender, wholesale lender, for example?

    Ms. HIX. OK. From a borrower perspective, and this happens all day long, with some of the lenders I do business with, they don't deal directly with the consumer, so if I was a borrower trying to go directly to that lender, I would not be able to do that.

    Chairman LAZIO. Let me stop you there. The idea would be then that the wholesalers make money available, but they don't really have as a part of their business operation store fronts for consumers to come in to explore options and process applications and things like that. That part of the business is done by mortgage brokers?
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    Ms. HIX. Right. But there are other wholesalers that I deal with that have a retail presence and retail offices in the marketplace. For example, if I were a consumer coming to myself as a broker and I was using a particular wholesaler that also has a retail office, the borrower may not necessarily get a better deal going directly to that wholesaler.

    Chairman LAZIO. Why not?

    Ms. HIX. Because they are in retail and they have to mark up the price in order to maintain that overhead and pay processors, receptionists, loan officers, closers, shippers and everything that is involved in the process. So they have to maintain that branch, and, therefore, they have to charge fees up front to the consumer in order to maintain that branch office.

    Chairman LAZIO. That is why some wholesalers don't open up branches?

    Ms. HIX. It is not cost effective for them to open up a branch in every marketplace across the country. It is a better utilization of their funds to allow the brokers to take on that responsibility.

    Chairman LAZIO. So when they pay a yield spread premium, they are effectively paying for those services. They don't have that part of the business and they are paying somebody to conduct that part of the business?
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    Ms. HIX. So they are able to lower their cost to us, and we market it on a retail basis.

    Chairman LAZIO. Does anybody on the panel think I have this wrong? I am just trying to work through this issue.

    Mr. LAMALFA. I think you have it right. From what I can tell of your understanding, I would add a further point. I would tell you in 7 out of 10 instances, mortgage brokers charge lower rates and fees. The major reason for that is because they have reduced overhead. On an annual basis, I do a study of all the major lenders in the United States, the Chases, the Norwests, the really big companies. I know exactly what their expense structures look like, and they are substantially higher than brokers. Brokers' expense structures are approximately 150 basis points. That is, they receive 1.5 percent in gross revenue per transaction on average. The expense structure of these larger companies on the retail side is twice that amount, it is 300 basis points or 3 percent. Therein lies the reason that wholesale mortgage banking and mortgage brokers have become so prominent. They really are the low cost producers, and mortgagors, consumers, have come to understand that and have moved their business to them.

    Chairman LAZIO. Thank you very much.

    Mr. Metcalf.

    Mr. METCALF. Thank you, Mr. Chairman. It just happens that one of my staff is closing on a house today. She used a mortgage broker throughout the process and she and her husband have been very well satisfied with the services that their mortgage broker provided. Throughout this home buying experience, her mortgage broker has helped to find the best loan for them. In fact, they have received a lower interest rate than some of the banks were offering. Their mortgage broker presented the fees and the process clearly to this young couple as they purchased their first home. When they faced problems with their loan, the mortgage broker acted as an advocate and closed the deal.
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    In many ways, this example represents the way we envision the home buying process, with all the parties satisfied. Unfortunately, some home buyers do not have this same experience. I have heard of some who have not had experiences that were positive. As we consider the new regulations proposed by HUD and even consider legislation, we need to keep in mind that the goal of the process is to make home ownership more available. Balancing the need for more disclosure with the changing mortgage services industry is always difficult, and I believe that this subcommittee better understands the complexity of purchasing a home.

    After that speech, I do have a couple of questions. Number one, for Mr. Thomson, in your testimony you mentioned the need for licensure programs in the State, at the State level. How does the licensure program in Washington State compare with other States?

    Mr. THOMSON. There is a tendency in the western part of the United States to have less invasive regulation. For example, in New York they conduct regular examinations of mortgage brokers and mortgage lenders. In our State we don't perform regular examinations, we investigate upon complaint. So it tends to be less formal, I would say, in the west.

    Mr. METCALF. In its proposed rules, published October 16, 1997, HUD proposed that borrowers and mortgage brokers sign a mortgage broker contract. What do you think of this approach?

    Mr. THOMSON. For me again?

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    Mr. METCALF. That could be for anyone. Why don't you start, if you have one, Mark.

    Mr. LAMALFA. I would like to start by telling you I think it is an anathema. The major reason is that this rule is going to open up still additional legal disputes within the industry, the major one being the fiduciary role. I don't know how a broker can assume either an agent or a fiduciary role without finding himself in conflict on an ongoing basis with every mortgage closing. No one has the best rate out there. So I think that rule was really not very well thought through.

    I would also like to add for the record that there really is no statistical data that supports that proposal in the first place. Essentially the market share figures were figures that HUD grabbed from the research that David Olson and I have done on this subject. HUD has done no independent research, they have no record of any kind of consumer complaints, and they have no database of rationale for that proposed rule.

    Mr. METCALF. Any other comments from the panel?

    Mr. THOMSON. AARMR participated in some meetings regarding that proposed rule. We did not take an official position. I think in general AARMR is in favor of disclosure, but we are pessimistic of ever coming up with a specific limitation on broker compensation. That is essentially an arbitrary choice. I think we have some sympathy for our colleagues at HUD who are trying to work with an unclear statute and implement something and give us all some guidance.

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    Ms. HIX. From a mortgage broker perspective, obviously we are opposed to that particular rule. We are in agreement that the broker has to do a better job in disclosing the relationship between the consumer and the broker up front at the get-go, but we have a problem with imposing income limitations by the rule, which would essentially only give us a safe harbor if we were to limit our fees. Yet the proposed rule doesn't tell us what that limitation of fees needs to be. So it is still very vague, and we would not welcome any type of pricing cap that this rule is presumed to have in it.

    Mr. METCALF. Thank you. I have one last question, which is for anybody, sort of repetitive perhaps. How do you ensure that mortgage brokers are going to help consumers without requiring greater disclosure and some fiduciary responsibility?

    Mr. LAMALFA. Again, I am going to go back to Adam Smith and say the invisible hand is going to be the protector, and I mean that in a very serious way. The market governs itself. There is plenty of competition out there, and Jan can't charge too much, because I am going to undercut her. In fact, that is precisely what we see. That is what is reducing these fees proportionately and has been the case for the last ten years. The level of competition within this industry is tremendous. There are probably now 25,000 mortgage brokerages across the country. They employ about 135,000 loan originators, and all of those loan originators are competing with the next guy in order to get that loan. So the market is serving itself, and the market is really minimizing the amount of abuses.

    I could not say 100 percent that there are no abuses. There are in every area. But the amount of abuse going on in mortgage finance today is minuscule. Another control factor, sir, is the fact that most wholesalers are watching these transactions because they don't want to be put into jeopardy. So they monitor the HUD-1s, they monitor the GFEs. If they see the broker is gouging, they will go back to them and say ''we are not closing this loan. You have to reduce the fee.'' I talk to wholesalers all the time doing exactly that. They say ''Three months points? You are not getting 3 points in this deal. You can get 2 points, 2.25 points for this deal.'' They cut them off. So there are at least two governors on the system.
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    Mr. THOMSON. I think many of the abuses we see are the result of a few companies who target high risk or unsophisticated borrowers. They do it through market research and telemarketing. I think the simple answer to your question is a lot of hard work by State regulatory agencies. On my way back tonight I will be reviewing a draft enforcement order that is 170 pages long and is the result of six months of work by one of our investigators. I think the really damaging abuses to consumers are the result of a few companies who are targeting them and using unfair and deceptive business practices.

    Mr. METCALF. OK. Thank you, Mr. Chairman.

    Chairman LAZIO. I thank the gentleman.

    The gentleman from Delaware, Mr. Castle.

    Mr. CASTLE. I thank the distinguished Chairman, and I thank Mr. Ehrlich for his legislation and his interest in this.

    I apologize for not being here. I always hesitate to ask questions when I haven't heard what any of you said. I have glanced at it, and I have heard the answers to a few questions. But the subject matter interests me.

    I settled on the house I am living in now when I first was running for Congress six years ago in October, about seven days before the election. And along about the 90-minute mark when I was still signing documents, I said, ''My God, there is something radically wrong with this system,'' and I have been a little bit concerned about it ever since. My hope is that what comes out of this hearing, if nothing else, that Terri gets a 5 percent mortgage or whatever level mortgage she needs for her house. I think that would be the single best thing anybody could do for good will.
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    Just a general question, because I really don't know the specifics and I am just learning about Mr. Ehrlich's legislation, so my question is a lot broader than his. It is the kind of question that each of you could take five minutes on. I will ask each of you to take 30 seconds on, if you can, and you may have said it in your testimony.

    I am curious about what exists in Federal statute or regulation you would most like to change with respect to the mortgage process? If I had my choice, it would be somehow to consolidate all paperwork. Maybe there are other things in these laws even beyond what we are discussing here today that you would like or you feel need to be examined or looked at. You may not have an opinion on that. I know it is a very broad question. I would be curious if anybody has a short statement to make on that.

    Ms. HIX. I will start off. We have been involved in the mortgage reform working group. Some of the issues as a broker we deal with are the confusion in the disclosures and the contradiction on when we are supposed to give the disclosures. It is pretty clear under RESPA we have to give those disclosures within three business days of application, but it doesn't hold true under Truth in Lending. In a non-table-funded transaction, I am not required to give a Truth in Lending disclosure. So how can the consumer go out and comparatively shop, if in reality I am not supposed to give that disclosure at the time of application? So the two statutes need to be mended together to make one statute.

    Mr. CASTLE. Anybody else? So everything is perfect?

    Mr. LAMALFA. Quite the contrary, Mr. Castle. There is one major thing you could do, of course, and that would be to remove the federal charters from Freddie Mac and Fannie Mae. They are distorting the market tremendously. The size of these corporations, the pull and leverage they have is increasing the cost, I believe, and also is jeopardizing the taxpayers, because they have $2 trillion worth of liability out there and almost no capital to support it. So to remove those charters would be the best thing you could do for the mortgage industry and consumer.
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    Mr. CASTLE. I was just at a press conference in which we sort of attacked the highway transportation bill. There is no chance we are going to influence it. I think you just did the same thing. It is very good you put it on the table, something to be discussed.

    Mr. MCCABE. Congressman Castle, if the MBA could submit a response, you may not have heard, I am just a litigator, and the MBA has testified about this before, particularly on RESPA reform. We could provide a more fulsome answer than I could give you right now.

    Mr. THOMSON. I think I would second your idea.

    Our experience, particularly with unsophisticated consumers, is that those are the folks that are most likely to benefit from the disclosures and are the least likely to read them and understand them, and oftentimes they become a trap and someone comes to us and has a 16 percent loan with 8 points, and we say ''OK, show us the paperwork,'' and it says at the bottom ''I have read these documents and understand them,'' and there is their signature. So the disclosures in some sense become a trap rather than assistance.

    Mr. CASTLE. For effect, I shortcut my story. I hate to admit this up here, but I am a lawyer too, and I actually did some real estate settlements, and I can't tell you that I totally understood all those documents. I certainly didn't understand why we were doing all of them, why somebody couldn't put six people in a room and say ''Consolidate this and make it simple so people do understand it.''
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    I would be shocked if the average person settling on a house like Mr. Metcalf's assistant settling today understands all the questions. They may not be important. You sign them hoping you will never hear about them again, you just want to get your money and get your house, but if they ever become important, good luck figuring out if somebody knew what they were signing when they did it.

    Thank you very much. I appreciate your answers.

    Ms. COOK. Sir, my only point is you said ''consolidate this paperwork.'' It seems to be this part of the industry nobody has looked at in years, all these forms you sign, you are never really sure. You just put them in a folder, say ''I will put that in a file, and if I need it, there it is.'' It is just too much.

    Mr. CASTLE. It is consolidate and simplify. They should be understandable. It is fine to have something in legal language, but somebody get it to the point where it is understandable.

    Ms. COOK. And say it in one breath.

    Chairman LAZIO. I just want to mention before I entertain questions from Mr. Ehrlich, that we have a working group that has been among the stakeholders working toward trying to find ways in which we can eliminate all the duplication, have a unified document, consolidate the disclosure laws, at the same time obviously simplify them. It has been moving along fairly productively for some time, although I have to say that there are some stumbling blocks, some serious stumbling blocks, we are now involved in.
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    One of the problems is it would have been my preference for HUD and the Federal Reserve to all be working together, as opposed to what is now the case, which is we have three different groups effectively working on this. But our hope is to come up with a good consensus document that does the job of disclosure for consumers, but doesn't add additional transactional costs and makes a lot more sense.

    We are trying to deal with that.

    Mr. CASTLE. Thank you, Mr. Chairman. I have all the faith in the world that you will get it done properly. I thank you for undertaking that difficult task.

    Chairman LAZIO. I would be happy to appoint you to that.

    Mr. CASTLE. No, thank you.

    Chairman LAZIO. Mr. Ehrlich.

    Mr. EHRLICH. You understand how difficult a district Congressman Castle has if he is closing on his house seven days before the election.

    In any event, I want to thank you all very much for coming. Just a couple of miscellaneous observations, if you will indulge me.

    Mr. McCabe, I am sorry I low-balled the legal fees. I was embarrassed, some of the firms I practiced mass tort litigation, toxic tort, product liability, and I would be embarrassed about the fees my firm was sending out. Not because the work wasn't done, but on defendant's verdicts, having to send those bills out for no good reason. That is, of course, the opportunity costs associated with litigation, and nobody ever talks about it. Nobody ever talks about it in the context of tort reform and the fact that frivolous litigation may end up in the right decision many times, but ends up costing everybody, including mostly consumers in the end, and particularly in this case. So your points are very well taken. Tom, as well as yours, very well taken. I appreciate everybody's comments today.
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    Ms. Cook, good luck. I love your story.

    Ms. COOK. Thank you.

    Mr. EHRLICH. Great, great story. I also appreciate the comments concerning yield spread premium and the fact that overhead exists and a service is being performed. It is not that complicated. It is just not that complicated. And the fact that your profession has grown so in response to changes in the market. That is how it is supposed to works. It is a nice story, and the fact you are out there trying to make a buck and performing a very valuable service for a particular population generally that has been underserved is wonderful.

    Just to kind of wrap it up, my friend here, Jan, how are you doing?

    Ms. HIX. Fine.

    Mr. EHRLICH. Can you just for the benefit of folks here give me your typical day? I don't want to hear about breakfast, but the person that walks into your office, give me a profile, income, educational level, sophistication, generally. When you go home tomorrow, somebody that calls you or walks into your office, give me a profile, what they are bringing to the table and what you do immediately.

    Ms. HIX. The profile of the borrower I deal with, and I deal with mostly first-time home buyers who have credit problems that they haven't ironed out yet, but they put the cart before the horse and they have already put a house under contract. Then they come into me and hope I will work a miracle to try to get the credit issues squared away. They may not have enough income to qualify for the house that they put under contract and now I have got to work to try to make the deal work.
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    So it takes some time in helping the borrower resolve the credit issues, the credit report straightened out, help them with their letter of explanation on why the credit issues came about, and try to document that file and put it in the best possible light to an underwriter so that that underwriter is going to approve that loan.

    So it is more than just a one-hour conversation or one-and-a-half-hour conversation. On that type of a borrower, it may take anywhere from five 8-hour days to really put that package together. If you were working on a limited timeframe, overall, that type of process for that borrower may take a good 30 to 60 days to try to get all the issues resolved, sometimes even longer.

    Mr. EHRLICH. You do find that there is certainly lack of sophistication and a lack of knowledge with respect to credit history, reporting requirements, and folks are looking at you and you are saying, ''Hey, you got problems.'' They are saying ''what?''

    Ms. HIX. Yes. Because in their mind a lot of times, you know, the people that have slow pay on their credit, most of them are aware of the slow pay. Sometimes they are not aware of certain credit situations, but they are aware of it, and in their mind, they are still paying their bills. They have never defaulted, they pay them. They may not be able to pay them on time, and they really don't have an idea of how that impacts their credit and how that is looked at when you are trying to borrow money to buy a house.

    The other thing too is that when we try to explain the disclosures and the costs involved, they are getting so much information at the time of application, it becomes very confusing. In almost every case, when they finally take the disclosures back with them and start reading them, they start asking more questions and you have to spend a little bit more time trying to make them understand what it is they just signed.
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    So it is not just we take the loan application and we are kind of done with it. I still communicate with those consumers and try to help them understand the process, what it is I am doing, why I am doing it, and why they are having to provide this necessary documentation.

    Mr. EHRLICH. I think you very appropriately described the importance of what you do every day.

    Mr. LaMalfa, I wanted to conclude my comments with your suggestion. I think the Chairman is ready to put that bill in you suggested. It is a very interesting idea, worthy of a lot of discussion. But obviously these entities have a tremendous amount of power in this town, and it has been a very interesting education for me being here three years and observing that fact. Thank you all very much.

    Chairman LAZIO. I want to thank the panel. I ask unanimous consent to include certain letters from consumers in the record. Without objection, that is so ordered.

    Chairman LAZIO. Let me just finally note the fact that I appreciate your patience in your testimony and the time you spent in preparing your testimony. All of you have made very important points and one of the striking points was made by Ms. Cook, not just about the frustration of having the reams of paper run pass you, but also the need for services in this technological era where so many things come on-line and are available to people in their homes, the continuing need for counseling and help to work through individual problems, whether it is credit counseling, avoiding foreclosures or up-front help before an origination is done. I think we need to keep that in mind as we move to this new model of mortgage financing.
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    I thank Mr. Ehrlich for all his work on this and the Members who were here and those who couldn't be here because they were at conflicting hearings, markups, floor schedules, conferences. Thank you very much.

    This hearing is now in recess.

    [Whereupon, at 1:10 p.m., the hearing was adjourned.]