Segment 1 Of 2     Next Hearing Segment(2)

 Page 1       TOP OF DOC    Segment 1 Of 2  

U.S. House of Representatives,
Subcommittee on Financial Institutions
and Consumer Credit, and
Subcommittee on Housing and
Community Opportunity,
Committee on Banking and Financial Services,
Washington, DC.

    The subcommittees met, pursuant to notice, at 2:06 p.m., in room 2128, Rayburn House Office Building, Hon. Marge Roukema, [chairwoman of the Subcommittee on Financial Institutions and Consumer Credit] and Hon. Rick Lazio [chairman of the Subcommittee on Housing and Community Opportunity] presiding.

    Present: Chairpersons Roukema and Lazio; Representatives Metcalf, Ehrlich, Weldon, Sessions, Vento, Kanjorski, Gutierrez, Velázquez, Watt, Bentsen, Kilpatrick, J. Maloney of Connecticut, Weygand, and Sherman.

    Chairwoman ROUKEMA. I think we are ready to begin now. We will make a few brief opening statements and then introduce our panel.

 Page 2       PREV PAGE       TOP OF DOC    Segment 1 Of 2  
    We are here today on the subcommittee having a joint hearing with our colleague, Mr. Lazio, Chairman of the Housing Subcommittee, as well as our Financial Institutions Subcommittee. We are here today to hear testimony from the Federal Reserve Board and the Department of Housing and Urban Development about the results of their year-long study on mortgage disclosure reform.

    This study was required by the Economic Growth and Regulatory Paperwork Act of 1996. The Act, as part of its provisions, directed the Federal Reserve and HUD to simplify and improve the disclosure requirements under Federal laws by revamping the regulations. Or, if regulatory reform proved insufficient, they were expected to make recommendations for reform to the Congress.

    After consideration of public comments, Chairman Greenspan and Secretary Cuomo determined that regulatory changes alone would be inadequate to achieve the Congressional goals, and in an effort to ensure all views be represented in any proposed legislation, on July 22, 1997, Mr. Lazio and I, because of the delays there, called for Chairman Greenspan and Secretary Cuomo to open a dialogue between the Federal regulators, industry and consumer groups on the outdated, complex mortgage lending disclosure requirements that were contained in the regulations. That was a reflection of the fact that things did not seem to be moving.

    I think I speak for all of us when I say that we look forward with great expectation to your reports today, and to hear the rationalization for reforms or for continuing the regulations. Contrary to popular belief—I hope I don't stand alone in making this statement—but contrary to popular belief, this reform effort is not, in my opinion, about the paperwork reduction per se.
 Page 3       PREV PAGE       TOP OF DOC    Segment 1 Of 2  

    As I understand it, the typical home buyer is required to sign up to upward of 50 documents at settlement. Unfortunately, only five or six of these reforms are related to the Federal statutes that we are discussing here today. So it doesn't seem that the Federal Government will be able to do much to reduce the current paperwork deluge, however, this reform, in my opinion again, is about improving the Federal statutes governing the home finance process so that they truly provide meaningful information and protection to the home buying public, as well as clear instruction to the industry.

    When the current laws were enacted, the mortgage lending process was fairly simple. A home buyer approached his local lending institution for a mortgage, and that entity managed the process from the application to the actual funding. The funded loan was then held in the lender's portfolio, and the lender collected and applied the monthly payments.

    Today, however, the market is quite different. And speaking now on a personal basis, I guess my husband and I who bought our home, or homes, some time ago, would say at this point in time, ''Whatever happened to the good old days?''

    Different parties in today's market originate, hold and service the funded mortgage and intermediaries have come about to join the parties together. Because the Federal mortgage laws have not been updated to reflect these changes in the marketplace, they may not be doing the job of meeting either industry or consumer objectives.

    I personally hope to learn more about the industry objectives. I certainly think I have some understanding of the inadequacy in terms of consumer information.
 Page 4       PREV PAGE       TOP OF DOC    Segment 1 Of 2  

    Nevertheless, more and more Americans are realizing the American dream of home ownership. In fact, last month, Fannie Mae said it expects total home sales to resurge in 1998 to their third consecutive record, helping to drive single family mortgage originations to an all-time record high of $1.7 trillion. We are used to talking about billions, but this is trillions.

    But as the laws and regulations governing the mortgage process have become increasingly complex, the act of financing a home has become more difficult for the consumer to understand and more onerous or more complex for the industry to lawfully carry out.

    We don't know how many Americans avoid the process or think they can't qualify for a loan because of this confusion. I think that may be a little bit beside the point, but maybe it is more important than I realize. I am willing to keep an open mind on that.

    Consumers obviously, for one thing, don't understand the meaning of the APR, the annual percentage rate, or the role of mortgage brokers. They are not getting federally-mandated disclosures early enough in the process to use them as a shopping tool. And they hear stories about other consumers learning that their closing costs suddenly escalated by thousands of dollars or more when they got to the settlement table.

    Now, I understand that our panelists here today will be addressing these issues. I understand notably that your Report reflects the differences of opinion as to how far the statute should go in speeding the availability of disclosures and prohibiting so-called predatory lending practices. I understand that the differences between the Fed and HUD stem from a desire to protect consumers weighed against—and this I ask in a question mark form—weighed against a responsibility to keep the economy on course. Obviously, there are some economic consequences to whatever changes we discuss today, whether it be a credit crunch or some other form.
 Page 5       PREV PAGE       TOP OF DOC    Segment 1 Of 2  

    I look forward to hearing more about these positions and we have some relevant questions, I am sure, and I hope they are very much to the point so that we can speed up this process. But I guess in referring again to my question about whatever happened to the good old days, if we can't go back to the good old days, maybe we can go back to the future as a result of these hearings, and pick up the best of all worlds and reach out both for the consumers, as well as the industry.

    And with that, I will turn over to my Ranking Member, Mr. Vento.

    [The prepared statement of Hon. Marge Roukema can be found on page 85 in the appendix.]

    Mr. VENTO. Well, thank you, Madam Chairwoman Roukema and Chairman Lazio, for holding this important hearing. It has been a long road to get to this day for many of us. It will be a long road to complete the task.

    I want to thank the Department of Housing and Urban Development and the Federal Reserve Board staff for their work. It has been a significant and important undertaking. Congress asked the regulators in 1996 to report back to us whether they could harmonize these statutes that intersect in the home purchase by regulation and changes in required form.

    Of course, you told us that you could not by regulation, and this Report posts the road signs for statutorily harmonizing TILA and RESPA Acts. Every home owner who goes through the process of purchasing or even refinancing their own home does so in their own way. There is no right or normal order of things. You may see a house come up for sale in the neighborhood, you may first work with a real estate agent, you could get pre-qualified for a loan and then start looking, you might be building your own home from scratch.
 Page 6       PREV PAGE       TOP OF DOC    Segment 1 Of 2  

    What is universal is the need for clear and concise disclosures on prices and protections in all of those unusual and special instances.

    Consumers are looking for disclosure information that actually has meaning, that will retain that meaning through the buyer-seller transaction process that can be compared as apple-to-apple among the various providers. It sounds like common sense, but as is indicated when you start getting into the specifics, it becomes very, very complicated.

    Ultimately, a system with those features also will prove the most advantageous for the mortgage business players whose life blood can be the word of mouth or happy consumers of their products. From their perspective, the mortgage industry players are looking for certainty in the process and for some relief from paperwork, a noble task; the incursion of duplicate disclosures and costs and the potential for future legal problems or avoidance of legal problems because of technical mistakes in a very complex loan process.

    In addition to these goals, many of us are also seeking ways to shut down the scams and the overpriced equity or refinance loans which are designed to basically steal homes from vulnerable house-rich, yet cash-poor, citizens. These loans are, in the main, indefensible and should be stopped, and disclosure should help prevent, not confuse, the process.

    This Joint Report today from HUD and from the Fed is a solid and reasonably simple outline of how we might find what everyone is looking for, summed up in the four basic questions that the agencies have identified. What should be the future of the APR? Should firmer closing costs be required to be disclosed under RESPA? Should the timing of disclosure be changed? And should additional substantive consumer protections be added to the statutes?
 Page 7       PREV PAGE       TOP OF DOC    Segment 1 Of 2  

    The Report can serve as a catalyst for finding consensus. I hope that the recommendations of these two entities, the Fed and HUD, will inspire the Mortgage Reform Working Group to get back to the table so that when we reconvene in September to hear from consumers in the mortgage industry, we'll have the best road signs possible for future action on the statutes.

    I might say I am very pleased that there has been recognition of the importance of disclosure on the part of both entities and the necessity to harmonize in terms of eliminating confusion.

    I thank you, Madam Chairwoman, and look forward to the testimony and response to our questions.

    [The prepared statement of Hon. Bruce Vento can be found on page 87 in the appendix.]

    Chairwoman ROUKEMA. I thank you. And before I turn over to Mr. Lazio, I do want to observe an issue I neglected in my opening statement, but the fact that you mentioned, the need for more disclosure, as well as the timing of disclosure, reminded me that those are certainly two of the prominent goals here in terms of understanding how the agencies can help us and what their recommendations are.

    But also, in addition to that disclosure, there has to be more certainty for the consumers and, very importantly, in a competitive marketplace, without sacrificing the quality of services, we must also protect against conflicts of interest. And I am very hopeful that both the Fed as well as HUD can help us in that regard.
 Page 8       PREV PAGE       TOP OF DOC    Segment 1 Of 2  

    And now Mr. Lazio, the Chairman of the Housing Subcommittee.

    Chairman LAZIO. Thank you, Madam Chairwoman. I want to thank you for agreeing to hold this joint hearing. I thank the panelists and look forward to your testimony. I thank the staff for their work, and I acknowledge the work of Mr. Vento and the fact that I hope we proceed on this in a bipartisan fashion. I expect that we will.

    Today marks the first of a series of joint hearings that we will be having between the two subcommittees on the need to reform mortgage lending disclosure requirements with the emphasis on simplification and unity, as well as dealing with the consumer issues of clarity.

    The two laws we have had before us, we have had for at least 25 years. They provided protection for the consumer and the mortgage lending process. These laws, the Real Estate Settlement Procedures Act—RESPA—and the Truth in Lending Act—TILA—however, at this point are outdated. The economy and the financial systems, of course, have dramatically changed over the last 25 years, yet we have not revised the laws for the mortgage lending process.

    Changes in the mortgage lending industry such as consolidation and the Internet, for example, call for different measures to ensure that consumers are protected. Now is the time to learn about how best to continue to protect the consumer amid all these modern changes in the industry.

    In April of last year, we brought together both the industry and consumer groups involved in home buying and financial services, and I asked that they develop a consensus on a new statutory framework that would replace RESPA and TILA. That group later became known as the Mortgage Review Working Group.
 Page 9       PREV PAGE       TOP OF DOC    Segment 1 Of 2  

    Exactly a year ago today, Chairwoman Roukema and I sent letters to the Department of Housing and Urban Development and the Federal Reserve calling for a dialogue among Government, industry, and consumer interests. This dialogue was precipitated by Congress' directive for regulation of the disclosure process.

    While the regulators claim that they couldn't substantially make changes to the regulatory process, the Joint HUD-Fed Report submitted to Congress last Friday provides a basis for future statutory changes. Hopefully, these recommendations will contribute to meaningful reform.

    Let me illustrate several examples of why we need reform.

    First, the administration of RESPA is sloppy, ambiguous, excessive, and often irregular. Excessive, for example, because there are reams of disclosure documents required for every mortgage transaction. Any attorney, including this speaker, who has been through the closing process, realizes that there is such excessive documentation that it devalues the whole idea of disclosure.

    Ambiguous, for example, because in 1974 we passed legislation prohibiting referral fees in order to prevent potential abuses by real estate brokers. Today, however, the statute falls short, because it does not take into account mortgage brokers, who now account for all but 50 percent of the mortgage lending market, and the evolution of technology.

    Some in Congress are thoroughly confused by HUD's actions. The Department has traditionally allowed mortgage brokers to participate extensively in the lending process, and then abruptly, the Department waffles and ambiguously applies RESPA to the payment to mortgage brokers for their services.
 Page 10       PREV PAGE       TOP OF DOC    Segment 1 Of 2  

    We need to reform these outdated rules and regulations so American families will have more money for their families' needs and the personal security that goes along with financial well-being.

    For example, take Mary and Earl Ranson of Richmond, Virginia. The Ransons, who are elderly and faced with high medical bills, attempted to refinance their home. They were clearly confused and unsure about the process. These quite typical Americans didn't understand the meaning of terms like ''points,'' ''fees,'' ''good faith estimate,'' ''appraisal fees,'' and other charges before closing a deal. It was a cruel injustice when the Ransons ended up with a 15-year, fixed term mortgage at 19 percent. The Ransons could have saved $37,000 if the process had provided better access to information and real protection.

    We in Congress have to look out for the Ransons and for all Americans by providing simple and easily understood disclosures. The American dream of home ownership is only complete when the home is bought in a fair, honest, and affordable manner so families can live comfortably within their means. In this sense, though it falls outside the scope of this, moving toward universal inspections on the FHA front will help in this matter.

    I want to put in context the Joint Report given that some press releases are already touting overall and comprehensive reform. I am looking at one right now that I just circled moments before I was about to speak. One, two, three, four, five, six, seven, eight times there is a mention of a legislation that has been forwarded, the proposed legislation, the new legislation on the part of the Department of Housing and Urban Development. I hope that legislation and legislative language is available today so that we can take a look at it.
 Page 11       PREV PAGE       TOP OF DOC    Segment 1 Of 2  

    As stated in the Executive Summary, this Report and recommendations are a starting point for congressional consideration. These recommendations do not affect any existing regulatory requirements. Moreover, the summary specifically states that the Report does not explore all the details that must be addressed in making changes to TILA and RESPA.

    In that context, it is premature to tout that reform is ready to take off unless HUD and the Fed are prepared to provide legislative language that addresses all the details.

    I want to thank both witnesses for their participation this morning. I have reviewed the Joint Report and look forward to your testimony that highlights statutory reforms that this Congress can embrace so we can enhance the ability of Americans to achieve their dream of American home ownership. I yield back my time.

    [The prepared statement of Hon. Rick Lazio can be found on page 80 in the appendix.]

    Chairwoman ROUKEMA. I thank the Chairman.

    Do we have other opening statements?

    Ms. Kilpatrick.

    Ms. KILPATRICK. Thank you, Madam Chairwoman, and also to Mr. Lazio for calling this joint hearing. There have been several times sitting in this room where I always felt that we ought to have one, if not two, of the subcommittees of jurisdiction hearing these. So I am happy today that you have called this hearing.
 Page 12       PREV PAGE       TOP OF DOC    Segment 1 Of 2  

    I also wanted to thank the Fed, as well as HUD, for the work you have already done to help bring this to compliance, both TILA and RESPA into conformity. My constituents feel that many times there is duplication; there is information that they don't have, that they thought their closing costs were one amount and find out at closing it is something else. So I am looking forward to the discussion here today and want to commend the Fed as well as HUD, and Secretary Cuomo and others who have done work, and staff here at the table.

    Standardized cost information about mortgage loans, that it be standardized and that our consumers and Americans know what they are getting into with the best costs and rates, I think you have been working on that. And as we work through these two very important TILA and RESPA regulations and requirements, I want us always to keep in mind that it is the consumers of America for whom owning a home is the American dream, and we hope it will make it easier for them to get into their homes by making sure that both TILA and RESPA meet those needs.

    So thank you again for the work you have already done and I am looking forward to working with you.

    Chairwoman ROUKEMA. Thank you. I think with that, we are ready to introduce our panel today. I would certainly like to welcome them, all highly qualified. I will introduce them in the order in which they are going to speak and testify.

    Our first witness is the Honorable Edward Gramlich of the Board of Governors of the Federal Reserve System. Before becoming a member of the Board, Dr. Gramlich served as Dean of the School of Public Policy at the University of Michigan, after having served as both professor and department chair at the University.
 Page 13       PREV PAGE       TOP OF DOC    Segment 1 Of 2  

    Additionally, Dr. Gramlich has extensive governmental experience, serving in leadership positions at the Quadrennial Advisory Council on Social Security, the Congressional Budget Office and the Office of Economic Opportunity, as well as the Brookings Institution, before joining the Federal Reserve.

    Mr. Gramlich, I think we look forward with great anticipation to your well qualified testimony today. Excuse me, I should introduce the person who is accompanying you. Adrienne Hurt is not testifying today, but she is accompanying Dr. Gramlich as the Assistant Director for Regulations in the Board's Division of Consumer and Community Affairs. And she will have reference to any technical questions that are presented. Thank you very much.


    Mr. GRAMLICH. Thank you, Madam Chairwoman. We are delighted to have the opportunity to testify on this important matter. As your opening statements have indicated, we have spent a long time working on this. We have worked very cooperatively with the Department of Housing and Urban Development and I would like to say at the outset that we've enjoyed that relationship very much, and I think the interaction has been very productive.

    The bottom line is that our Report does call for legislative action, and as the opening statements indicated, the topics can be grouped into four. So to speed things along, let me just dive into the four questions and say what they are and what we think ought to be done about them.
 Page 14       PREV PAGE       TOP OF DOC    Segment 1 Of 2  

    The first question: Should the finance charge and the APR disclosures be eliminated, or should they be modified and retained?

    The Board and HUD recommend that the APR and the finance charge concepts be retained and that the definition of the finance charge and the APR be expanded to include all costs the consumer is required to pay in order to close the loan. The agencies also recommend that the interest rate on the note and a more informative explanation of the APR be added as disclosures so that consumers can better understand the distinction between the two rates.

    Most of the attention given to TILA reform has focused on whether the APR should be retained as a measure of the overall cost of credit, and whether the definition of the finance charge should be revised. The same costs are included in both concepts, but the finance charge is expressed as a full dollar cost of borrowing over all years, while the APR is that dollar cost expressed as an annualized percentage rate, which is comparable to an interest rate.

    In principle, TILA defines the finance charge very broadly as any charge payable directly or indirectly by the consumer and imposed directly or indirectly by the creditor as a condition of getting the credit.

    Under this definition, the finance charge should include interest, points, transactions costs, and other such things. But in practice, what has happened is the finance charge and the corresponding APR have never disclosed the full cost of credit. Because of legislated exceptions, TILA does not include a number of charges in the finance charge, most notably, many closing costs associated with real estate secured loans, such as fees for appraisals and title insurance.
 Page 15       PREV PAGE       TOP OF DOC    Segment 1 Of 2  

    While some favor dropping the APR altogether, the Board believes in improving it. It is familiar to consumers even if they may not fully understand it. It is easier for consumers to evaluate competing products with a single figure than by using a number of different costs, such as interest, points and closing costs. If more costs were included in the finance charge and were reflected in the APR, the APR would become an even better measuring rod. Also, including the interest rate on the TILA disclosure along with the APR could help consumers better understand the difference between the two. Currently, the interest rate is not disclosed.

    Hence, the Board and HUD believe that the finance charge and the APR expressed in a different way should be defined as all costs that consumers are required to pay to get credit.

    Second question: Should creditors be required to provide firmer quotes for closing costs disclosed under RESPA?

    The Board and HUD recommend that creditors be required to give consumers more reliable closing cost information to promote shopping and competition. Creditors should be given a choice between guaranteeing settlement costs and providing a good faith estimate that is accurate within a specified tolerance.

    RESPA now requires creditors to list all costs they anticipate the consumer will have to pay to close a loan. A good faith estimate is provided at or soon after application, and a settlement statement concerning the actual cost is provided at closing.

 Page 16       PREV PAGE       TOP OF DOC    Segment 1 Of 2  
    The Board and HUD believe that an essential element of mortgage reform is to create incentives for creditors to provide firmer cost disclosures to consumers. The agencies are concerned, for example, that some costs in the good faith estimate are significantly lower than those actually charged at closing. Others are left off the good faith estimate altogether.

    The Board and HUD have considered a number of ways for ensuring that closing costs are estimated more accurately. We agree it would be appropriate to provide an incentive to creditors, such as giving an exemption for creditors from RESPA's Section 8, which prohibits certain fees and may be thought to prevent volume-based discounts.

    The agencies recommend a dual disclosure system in which creditors could choose between guaranteeing the closing costs, hence entitling creditors to an exemption under Section 8, and providing estimated closing costs that are accurate within a prescribed tolerance band.

    This system would provide an incentive to creditors and others to guarantee costs without forcing them to guarantee. We believe the dual approach also offers an opportunity for the market to test whether guaranteed cost arrangements offer economical and efficient means for consumers to obtain mortgage loans.

    Third question: Should the timing rules for providing cost disclosures to consumers be changed, and should creditors be required to provide disclosures before imposing substantial fees?

    The Board and HUD recommend that consumers be given cost disclosures for home-secured loans as early as possible in the shopping process. The Board recommends that disclosure be provided not later than three days after application. HUD recommends even earlier disclosure.
 Page 17       PREV PAGE       TOP OF DOC    Segment 1 Of 2  

    The Board and HUD also recommend that three days prior to closing, creditors should be required to redisclose significant changes in the APR or in other material disclosures, and provide an accurate copy of the settlement statement. For nonpurchase, home-secured transactions in which the right of rescission currently applies, the Board recommends that consumers also receive a notice of preclosing right to a refund at that time to replace the existing rescission period in most cases.

    Currently, in home-secured transactions, consumers receive RESPA or TILA disclosures at several different times.

    Congress has asked the Board and HUD to simplify and improve the timing of the disclosures under the two laws. The disclosure process would be simplified if the timing of requirements for providing disclosures could be made more consistent. It would be further improved if disclosures were given when they could be of most help to consumers.

    The Board recommends that the initial cost disclosures be provided no later than three days after application. HUD recommends even earlier disclosure. The Board and HUD believe that rapid advances in technology, such as automated underwriting, will permit creditors to disclose firm costs at earlier stages of the loan origination process, and the Board believes that the marketplace may lead creditors to the standard contemplated by HUD.

    However, the Board believes that while some creditors can provide closing costs at first contact with consumers, others cannot. Even fewer creditors can fully underwrite the loan to determine the interest rates and points within a few days. The Board likes its more flexible approach and believes it strikes the appropriate balance of encouraging greater certainty in cost figures at an early stage without mandating a standard that is currently impossible for many creditors to meet.
 Page 18       PREV PAGE       TOP OF DOC    Segment 1 Of 2  

    With regard to subsequent disclosures, the Board and HUD both recommend that three days prior to closing, creditors be required to redisclose significant changes in the APR and to provide an accurate copy of the settlement statement. Consumers would receive final cost disclosures three days prior to closing, rather than at closing, as it is now, which will allow them to study the disclosures in an unpressured environment. Redisclosure at closing would be required if there were material changes from the disclosures provided three days before closing.

    Last question: Should additional substantive consumer protections be added to the statutes?

    The Board and HUD recommend that substantive protections be adopted that will target abusive lending practices without unduly interfering with the flow of credit or narrowing consumers' options in legitimate transactions.

    The agencies recommend restrictions on balloon payments and the advance collection of lump sum premiums for credit insurance for loans covered under HOEPA, which is the Home Owners Equity Protection Act. The Board and HUD also recommend requiring certain minimum standards for notice procedures creditors must follow in all home foreclosures.

    TILA was amended by HOEPA to address abusive practices. HOEPA applies to home-secured loans with rates or fees above a specified amount, such as 10 percentage points above Treasury securities of comparable maturity. While HOEPA was an important first step in curtailing abusive practices, unfortunately, these abusive practices persist.
 Page 19       PREV PAGE       TOP OF DOC    Segment 1 Of 2  

    The Report discusses various ways to deal with the abusive lending practices. For example, the Report discusses the problem of loan ''flipping,'' where loans are refinanced repeatedly and consumers' equity is stripped by excessive fees added to the loan amount. These loans are made to appear attractive by monthly payments that are kept low, but they are often accompanied by large balloon payments that consumers must then refinance.

    The Report discusses possible ways to control flipping, including additional limitations on balloon payments and the ability to finance closing costs for loans subject to HOEPA. While it is difficult to control abusive practices, the Board and HUD believe that protections against these practices should be a part of any legislation enacted to simplify and reform TILA and RESPA.

    The Board and HUD further believe that any new rule should be part of a multi-faceted approach that also includes counseling, education, and voluntary industry action.

    There are two recommendations we join in. One is to prevent balloon payments on HOEPA loans. The other is to deal with single premium credit insurance. Currently, balloon payments are prohibited for HOEPA-covered loans with maturities of less than five years. This prohibition was an important first step to curb the flipping that occurred before HOEPA was enacted.

    While most creditors believe low monthly payments and a balloon payment can be useful in some cases, the current less-than-five-year rule can still be criticized because it allows creditors to flip mortgages with balloon notes that mature in five years.
 Page 20       PREV PAGE       TOP OF DOC    Segment 1 Of 2  

    Hence, the Board believes that HOEPA balloon notes should be further restricted, either by lengthening that prohibition period, applying stronger prohibitions to a subset of HOEPA loans, or perhaps prohibiting HOEPA balloon notes altogether.

    We also recommend limiting creditors' ability to collect up-front credit insurance premiums on HOEPA-covered loans. Currently, TILA permits creditors to exclude the cost of premiums for optional insurance from the disclosed finance charge and APR if it is truly optional and if the premium amount is disclosed.

    But what happens is that credit insurance is sometimes sold with the single premium collected up front. If, for some reason, the mortgage loan is closed prematurely, it is often difficult for consumers to get back the unused portion of their premium.

    So we believe that some abusive practices could be eliminated by prohibiting the advance collection of premiums on HOEPA-covered loans, so that consumers would pay for insurance periodically and only for the time the loan is actually outstanding. This means the termination of the loan automatically would cancel both the coverage and any liability for future payments.

    The final recommendation addressing abusive lending practices concerns notices that should be provided to consumers in general prior to foreclosure. The Board and HUD believe that consumers who have been victims of abusive practices must be provided adequate opportunity to assert their rights in order to avoid unwarranted foreclosures.

 Page 21       PREV PAGE       TOP OF DOC    Segment 1 Of 2  
    We recommend that prior to any foreclosure sale, creditors must first provide a written explanation of any rights the consumer may have to cure the delinquency or redeem the property. Consumers should also be notified of steps they must take to exercise their rights, the process that will be followed in any foreclosure, and information about the availability of third-party credit counseling.

    This concludes my report on these four key issues in reforming TILA and RESPA, and as I said at the outset, we look forward to working further with HUD on refining these recommendations. And also we look forward to working with the Congress to make the recommended changes. Thank you very much.

    [The prepared statement of Hon. Edward M. Gramlich can be found on page 88 in the appendix.]

    Chairwoman ROUKEMA. Thank you.

    We will now hear from our second witness, Gail Laster, General Counsel for HUD. Ms. Laster is a graduate of Yale University and the New York University School of Law. After clerkships with judges who sat on the U.S. District Court of Appeals, Ms. Laster served as a staff attorney with the Public Defenders' Service in Washington, DC., and as counsel to the Senate Committees on the Judiciary and Labor and Human Resources.

    I welcome Ms. Laster here today and look forward to hearing her testimony. Accompanying her is also a gentleman, Mr. Kenneth Markison, who is eminently qualified on this subject as well. He is Assistant General Counsel for Government Sponsored Enterprises and RESPA Division of HUD, so you bring some practical experience with you.
 Page 22       PREV PAGE       TOP OF DOC    Segment 1 Of 2  

    Thank you very much.

    Ms. Laster.


    Ms. LASTER. Thank you, Chairwoman and Chairman, and Mr. Vento and others. It is a pleasure. If I could just correct the record from the outset, I am not the expert here, but Mr. Markison is. There are many fine people here from HUD who helped prepare this Report. I am new to RESPA, so some answers I may have to get back to you for the record, but I appreciate your indulgence.

    Thank you, Chairwoman Roukema and Chairman Lazio, for the opportunity to testify today before this joint hearing of your respective subcommittees. The Joint Report on RESPA/TILA reform that Governor Gramlich discussed represents an unprecedented cooperative effort between HUD and the Board.

    We at HUD believe it carefully identifies problems under the current RESPA and TILA statutes, explores alternative solutions, and then offers substantial recommendations for legislative change. We are particularly grateful to the Board's dedication to the development of the Report and the fine cooperation between our respective staffs in that effort. The interplay between those two staffs and the advice from outside interested parties such as the Mortgage Reform Working Group has given this Report a vitality which it would not otherwise have achieved.
 Page 23       PREV PAGE       TOP OF DOC    Segment 1 Of 2  

    I also want to personally commend the staffs of your subcommittees who have been most attentive and helpful in dealing with both agencies.

    As Governor Gramlich indicated, the proposals in our Joint Report would solve several problems under RESPA and TILA, protect consumers and provide clearer, less burdensome rules for the industry. If enacted into law, these proposals would: enable consumers to be better able to shop for home mortgages, increase competition among settlement service providers to lower settlement costs; provide lenders and other settlement service providers the choice of operating in a simplified and less restrictive regulatory framework, or to continue to operate in the current environment with clearer and more enforceable rules; include new protections against predatory and abusive lending practices that have threatened the homes and the financial stability of many vulnerable home owners nationwide.

    As you stated in your opening remarks, all of us recognize that buying and financing a home is a consumer's largest and most complex financial transaction. For most new home owners, the process is especially difficult and frustrating. Some new home buyers may be the first in their families to own their own homes. Some new home buyers have come from countries where owning their own home was beyond their expectations or experience. However, most new home buyers come away from the experience wondering whether they did the best they could or whether the fees they paid were excessive.

    New products have proliferated in the mortgage finance market to put home ownership within the reach of more Americans than ever before, allowing current home owners to take advantage of the equity in their homes for home improvements and cash for cars, college, a needed medical service, or even to provide a stream of income for the retirement years. But with these opportunities have come some opportunists, predators who seek out unsophisticated or vulnerable home owners to prey on for their own advantage, and not to help.
 Page 24       PREV PAGE       TOP OF DOC    Segment 1 Of 2  

    Older home owners, and home owners who live in areas that are not well served by lenders, may be particularly confused and vulnerable to abusive practices. We at HUD and my colleagues at the Federal Reserve Board believe that under RESPA and TILA we must make the experience of buying and financing a home both simpler, and consistent with the purposes of these Acts, more efficient.

    Therefore, when Congress asked that the Board and HUD improve and simplify disclosures, we took our work seriously. In dealing with RESPA and TILA reform, we must address the needs of all types of consumers, those who are credit-savvy and those who are not; those who have strong credit records and those who do not. We must recognize the desirability of the free flow of credit, but we cannot be blind to the reality that the unwary consumer may be greatly harmed.

    RESPA has dealt with some of the abuses that existed when the Act was first passed, but it has not prevented other abuses from appearing. Legislative reform must deal not only with simplification for the benefit of lenders, but protection for the benefit of consumers.

    In this Report, we at HUD have attempted to balance these competing interests, the needs of borrowers for a simpler and more efficient system and the creditors' needs to assure security for the credit they extend.

    It has become clear to us that reform will not be possible without consensus on reform's major elements. Those who loan the money, those who provide the settlement services, those who service the loans and those who insure the transaction if a loan somehow fails, all are parties affected by whatever rules the agencies make or the Congress enacts, and their interests have all been well represented.
 Page 25       PREV PAGE       TOP OF DOC    Segment 1 Of 2  

    The interests of the consumer will be affected most of all. HUD and the Board have taken steps to ensure that their interests have also been represented in our Report. We have seen evidence that the concerned parties are listening and learning from one another. Nonetheless, consensus has not yet been reached. But it is the hope of HUD that this Report will inspire consensus and will provide the necessary momentum for Congress, in cooperation with all the interested parties, to finish the job of mortgage reform.

    At HUD, Secretary Cuomo established principles for the Department's regulatory efforts under RESPA. These principles include: assuring meaningful and timely disclosures to consumers; protecting against illegal fees; recognizing that the settlement industry is changing; encouraging innovative products; removing impediments to lending to underserved areas and borrowers; involving consumer and mortgage industry groups; and providing clear rules for affected industries and consumers.

    HUD shaped its proposals in accordance with these principles.

    Governor Gramlich deferred to me in two areas that I would now like to cover. First, the desirability of achieving reliable closing cost information in order to promote shopping and competition, and second, recommendations regarding predatory lending practices.

    Under current RESPA requirements, when a consumer shops for a mortgage loan, he or she frequently contacts one or more lenders or mortgage brokers. While many consumers will shop for more favorable loan terms, most do not comparison shop for many settlement services. When the consumer visits a lender and sits down to discuss loan options, under current law, that lender is not required to provide the consumer an estimate of settlement costs until after the consumer applies for the loan.
 Page 26       PREV PAGE       TOP OF DOC    Segment 1 Of 2  

    Under RESPA, the consumer need not receive an estimate of settlement costs, which is the good faith estimate or GFE, until the time of or within a three-day period after the loan application. The lender is not required to provide it by mail until three business days after application. This means that the borrower may not receive a GFE until a week after application.

    And under RESPA, the estimate of settlement costs or GFE is just that, an estimate. If consumers discover that the cost estimates they receive differ significantly from the final figures, they have no Federal remedies to address inaccuracies. Consumers also must frequently pay a fee before receiving the GFE, and they may receive it too late to find it helpful in comparison shopping.

    While Section 8 of RESPA restricts kickbacks and unearned fees to protect consumers and to reduce settlement costs, mortgage lenders and others say that it has an adverse consequence to consumers. They say that the Section 8 prohibitions make lenders and others unwilling to engage in activities to negotiate a package of settlement services and that this ultimately deprives the consumer of lower settlement costs.

    Consumers and industry groups say packaging could lead to more consumer shopping and price competition. Limited relief from RESPA's Section 8 prohibitions is therefore necessary to foster these arrangements.

    Section 8 also has been used in litigation to protect consumers. Therefore, any changes to Section 8 to facilitate better disclosure necessitate substitute consumer protections. Also, in enacting HOEPA, the Congress was concerned that home equity-rich but cash-poor consumers were particularly vulnerable to being convinced to enter into mortgage loans that are not in the consumer's interest, but would enrich the vendor, and at worse, could lead to the loss of the consumer's home. These abuses, unfortunately, still persist.
 Page 27       PREV PAGE       TOP OF DOC    Segment 1 Of 2  

    The detailed disclosures under RESPA, while welcomed by some borrowers, are daunting to others. Under TILA, consumers also frequently receive disclosures of the annual percentage rate, or APR, and finance charges too late to allow them to shop for loans. The APR itself, because it is not widely understood and does not include all the costs of obtaining a loan, is not an effective tool for most consumers.

    In order to solve these problems, HUD and the Board have recommended in this Report that creditors and others be required to give firmer disclosure of settlement costs to consumers to promote shopping, competition, and to lower settlement costs. Both agencies recommend that creditors and others be offered a choice between guaranteeing settlement costs so that the costs stay the same from the time they are disclosed through the time of settlement, or providing a firmer estimate to consumers within a tolerance. Creditors and others would be liable for noncompliance.

    To encourage cost guarantees, HUD recommends, and the Board supports, establishment of an exemption from Section 8 of RESPA to be offered to creditors and other entities offering a package of settlement services.

    HUD specifically recommends an exemption that meets appropriate conditions, including offering consumers a comprehensive package of settlement services needed to close a loan; providing consumers with a simple prescribed disclosure that gives a guaranteed maximum price for the package of services through settlement; and discloses the rate and points for the loan and guarantees that the rates and points will not increase, subject to prescribed conditions.
 Page 28       PREV PAGE       TOP OF DOC    Segment 1 Of 2  

    HUD believes that consumers need complete information on rates and points and other closing costs as soon as possible. The Board recommends that initial disclosures be coordinated and provided within three days of application. This is the current RESPA rule, but not the TILA rule.

    HUD recommends earlier initial disclosures and believes that technology is making this possible. But if there is a tradeoff between complete disclosures and early disclosures in the case of lenders without automated systems or where credit information is incomplete, HUD recommends that the time limits be sufficiently flexible to ensure that the consumer receives complete cost information, including settlement costs and rates and points.

    HUD also recommends that consumers receive initial disclosures before they pay a creditor a significant fee that might deter shopping.

    As part of any reform legislation, HUD and the Board recommend that additional substantial protections be adopted. These protections should target abusive lending practices without unduly interfering with the flow of credit and without narrowing consumer options in legitimate transactions.

    These protections should be included as part of any legislation to ensure that all home owners benefit from reform. Specifically, HUD and the Board recommend protections for borrowers in loans now subject to HOEPA, including further restrictions on balloon payments; prohibitions against lump sum credit life insurance; Federal rights to notice in foreclosure advising consumers of their legal rights, the process to be followed if they do not exercise those rights, and informing them about the availability of third-party counseling.
 Page 29       PREV PAGE       TOP OF DOC    Segment 1 Of 2  

    HUD also recommends other key protections including counseling, reporting requirements, additional HOEPA amendments, new foreclosure prevention strategies, and a new Federal Unfair and Deceptive Acts and Practices Standard for transactions that are unfair or unconscionable.

    HUD also recommends additional information be provided to consumers under RESPA. Initial disclosures should inform consumers of the function of mortgage originators, including mortgage brokers; and should notify consumers of escrow accounts and cancellation of private mortgage insurance requirements.

    Moreover, in the event that Congress does not enact major reform, HUD recommends that an essential reform package be enacted. This opportunity for reform should not be missed. The package would include requirements for dissemination of educational materials earlier in the home buying or mortgage shopping process, combining or simplifying RESPA and various other things.

    I realize you have a vote, Madam Chairwoman, and I will end my remarks at this point.

    [The prepared statement of Gail W. Laster can be found on page 108 in the appendix.]

    Chairwoman ROUKEMA. All right. The vote was sooner, rather than later, as I kind of interpreted for you.
 Page 30       PREV PAGE       TOP OF DOC    Segment 1 Of 2  

    Mr. Lazio, would you like to take the first five minutes before we have to go for a vote and ask the first questions?

    I defer to my colleague, Chairman of the Housing Subcommittee, Mr. Lazio.

    Chairman LAZIO. I thank the Chairwoman. Let me ask both Mr. Gramlich and Ms. Laster. First of all, thank you for your testimony and your work on the issue and all the staff work that comes with it. I know there are a bunch of folks that work behind the scenes who are responsible for preparing the testimony and preparing the witness.

    But one of the things that I am a little concerned about is the direction that was given and the product that we have here. You noted that one of your goals in reviewing TILA and RESPA was to provide consumers with standardized cost information for their mortgage loans and that the goal of the Report was, among other things, to simplify and to streamline.

    And the Act also called upon both the Fed and HUD to simplify and include mortgage disclosure, including timing disclosures, and to provide a simple format for such disclosures. But in reading through the Report, I am a little troubled by the fact that it appears that at least in terms of simplification and streamlining, that we are moving in the opposite direction, that there is a dual system set up, that there is a difference of opinion as to timing, whether it is immediately at the time of application or whether it is three days afterwards.

    And I am concerned that this dual disclosure system would actually frustrate standardization and would set two playing fields, as opposed to a level playing field, one where services are bundled and where costs are guaranteed, which I take it would probably provide a competitive advantage to larger lenders. I'd like to hear your testimony on that.
 Page 31       PREV PAGE       TOP OF DOC    Segment 1 Of 2  

    And a second system that would provide for firmer good faith estimates with some type of ''fudge factor'' built in, which I don't see anywhere in the Report exactly what that is. I am wondering if you could speak to that issue of whether you feel like you are complying with the directive of Congress and whether and how this dual system complies with streamlining and simplification.

    Mr. GRAMLICH. Let me try. I think there are essentially two arguments for a dual system. Let me say at the outset that I think the Board and HUD in many ways would both prefer the guarantee system, the straight up guarantee.

    But there are at least two things you have to worry about. One is that it might not be possible for all lenders to do that now, so you don't want to pursue the goal of streamlining and set the bar so high for lenders that they can't participate in the market. So the dual system, we were thinking, was a little bit more flexible there.

    But as you point out, we haven't really thought through the so-called ''fudge factor,'' that is, the tolerance band. This, I think, does require some greater study. But the main problem there was the view that in moving just in one fell swoop from what we have now to the guarantee system, that it would just make it very difficult for some creditors, and we didn't want to constrict the supply of credit.

    Chairman LAZIO. Excuse me, we have such a limited time right now. If I can just jump in here, I am going to try to make a couple of comments, because I know we have a series of votes. I just want to emphasize the fact that I think the Fed and HUD need to redouble their efforts in terms of streamlining. That is a directive that was made here. I don't understand exactly how this system—I understand, Doctor, what you are saying in terms of the difficulty of the transition, but that doesn't get us to a system. You're not saying in this Report that transition—that we are ultimately going to be somewhere, and I think that is something we need to speak to.
 Page 32       PREV PAGE       TOP OF DOC    Segment 1 Of 2  

    I am wondering, as I look through this, and as I hear the testimony, what the current estimate of paperwork is, and how much paperwork do we actually eliminate through this Report? I don't see it. I see a number of consumer protections, some of which—probably most of which—I agree with strongly. I think they are very good; the concepts are good.

    But in terms of complying with unification of documents in disclosure and simplification, the mandate of Congress here, I am a little confused as to how you are complying with it. And finally, I have this press release from Friday and as I mentioned earlier, you mentioned seven or eight or nine times about how there is HUD legislation, proposed legislation. I am not aware of any legislation that exists. If there is—no, there is not any legislation.

    Ms. LASTER. No, you are correct, Congressman.

    Chairman LAZIO. I know sometimes we have an overzealous press operation and I will mark it up to that, but it does create some degree of confusion when that occurs.

    And finally, let me simply note that in the context of this press release also, it speaks to the fact that several hundred million dollars a year is going to be saved by consumers and if that is overstatement as well, I will mark that up to an overzealous press operation. If it is not and can be documented, it would be useful to have that, because I think that would be constructive in terms of us being able to come to some conclusion.

    Chairwoman ROUKEMA. With your understanding, Mr. Chairman, I think we will recess for the vote.
 Page 33       PREV PAGE       TOP OF DOC    Segment 1 Of 2  

    Ms. Laster, you will have an opportunity to respond, if you choose, when we return. But we are going to go for a quorum vote. However, Members are advised to return here ASAP. It would give us about 20 or 25 minutes before the next vote.

    Thank you. We will be back shortly.


    Chairwoman ROUKEMA. The hearing will come to order, please. We are pressed for time and I don't know whether Mr. Lazio is en route. I imagine he is. I thought we made it clear to other members of the panel here that we would be continuing immediately.

    In the interest of time, and because we are going to be interrupted with two more votes shortly, I believe that Mr. Vento now has the opportunity to ask questions and utilize this time in a productive way. I will say, however, Ms. Laster and Mr. Gramlich, that when Mr. Lazio does return, whether before this next vote or following our next series of votes, we will defer back to him for completion of his line of questioning. But in the meantime, we can be useful with Mr. Vento's questions, please.

    Mr. VENTO. Thank you, Madam Chairwoman.

    Just on that, following up on Mr. Lazio's questions, he obviously had some concerns about the fact that there were going to be some options available, but isn't this, in a sense, sort of a response to what the marketplace—I mean, one of the mandates here is not to try to preempt innovative products in terms of the marketplace.
 Page 34       PREV PAGE       TOP OF DOC    Segment 1 Of 2  

    For instance, I iterated in my statement that some individuals may be seeking to be preapproved for credit. Clearly, in that particular instance, when you don't have a down payment and you don't have a set price for the house or even a house or mortgage selected, you have to, if you want to serve that consumer and permit them to do the precertification or prequalification for a mortgage, you need to have a different type of option. How could you have anything but a good faith estimate? How could you have anything but an estimate type of process, because you don't know the date in terms of the timeframe. I mean, you could do it for a while.

    I am a little surprised, because I always thought my colleague from New York was against this sort of one-size-fits-all type of proposition.

    Chairwoman ROUKEMA. Do you mean me or——

    Mr. VENTO. No, no, my colleague from New York, our Chairman. And that he was in favor of a marketplace type—I mean, our task is to try to not necessarily have a one-size-fits-all type of solution here, but one in which there is some standards and some clarity with regard to eliminating streamlining where we could, not with regard to precluding the marketplace type of innovations or the types of services.

    And there is, as is noted throughout this Report, an evolution in terms of the types of services at closing and purchase of a home. I mean, I can think of a range of about seven or eight different professionals that are involved, from the realtor to the mortgage banker to the closer to the financial institution to the title insurance. You can just go right down the line and you've got about a half-dozen to twelve different entities, depending on how you pursue this, that are actually involved in terms of serving that particular consumer, and trying to harmonize two different laws.
 Page 35       PREV PAGE       TOP OF DOC    Segment 1 Of 2  

    Now, my questions are, where we can harmonize it, are we doing it? For instance, Mr. Gramlich, Ms. Laster, is it the goal here to have one form, for instance, at closing? One form of estimate that would satisfy Truth in Lending and would satisfy RESPA?

    Ms. LASTER. Yes, it is. We have made those proposals. In answering both your question, Congressman Vento, as well as Chairman Lazio's question, I was going to point out that indeed we have proposed consolidation of the current forms, the model forms, and they are attached in Appendix A to the Report. We have model forms for both types of systems we propose.

    And with regard to the model forms, right now HUD has a good faith estimate form. The model form would take that form and put in it TILA disclosures. It would also put in it the initial transfer of servicing disclosures. So indeed, we have taken three of the forms and collapsed them into one in terms of the information that is provided.

    We have also tried to harmonize our coverage. RESPA and TILA cover different transactions and cover different parties, and we have made suggestions for how to harmonize that coverage.

    Also, something was made about the perhaps differences on timing. Frankly, that is not a real difference between HUD and the Board. Both HUD and the Board believe that the initial disclosure should be made as early as possible. The Board certainly agrees with that.

    With regard to the latter disclosure, the settlement disclosures, right now they are required to be given one day before settlement if asked for, or at settlement. We agree with the Board that they should be given three days before settlement, at a calmer time to give consumers more time to reflect.
 Page 36       PREV PAGE       TOP OF DOC    Segment 1 Of 2  

    One of the few points that we arguably differ on is that if there is a tension between providing earlier disclosures and providing firmer estimates under the good faith estimate system, or the guaranteed rates and points and closing costs under the guaranteed cost system.

    If there is a tension between providing those firm estimates or guaranteed costs and earlier disclosures, HUD simply says we would like that the creditor have the flexibility to make that firm or guaranteed disclosure complete. We realize that not all creditors will have the ability to have automated underwriting systems and will have the ability to provide them as early as we would like. But we have suggested ways to simplify the process.

    Mr. VENTO. Well, Mr. Gramlich, I see the red light on, but——

    Mr. GRAMLICH. Yes, let me comment on the first part of your question or comment, which is your economic analysis and say that it was very good. You put your finger right on what we are trying to do here, which is that in some ways Section 8 is getting in the way of true efficiencies for consumers and so our idea was to at least have an optional way that you could waive it, provided that you guaranteed the settlement costs, and that we would then let the market work, just as you said.

    So I would like to reaffirm what you said and say that that is exactly what we had in mind. The dual system may sound complicated, but what it really is, is letting the credit market work.
 Page 37       PREV PAGE       TOP OF DOC    Segment 1 Of 2  

    Mr. VENTO. Well, just to reiterate for the benefit of my colleague from New York who is here, I was suggesting that having some flexibility and having a duality in terms of this recognizes that there is a proliferation of different mortgage instruments and behavior on the part of consumers and on the part of a multitude of individuals and professionals involved in the sale and purchase process of a home. And I was just suggesting that, knowing your aversion to a one-size-fits-all, that I am certain that you would be supportive.

    Mr. Lazio—he isn't listening.

    Chairman LAZIO. I was listening.


    Mr. VENTO. That knowing your aversion to a one-size-fits-all type of solution, that we probably would want a system of disclosure that would be more responsive to what the marketplace is doing in terms of offering efficiencies and so forth.

    So I was suggesting that having simply one type of program here would be inappropriate. While the standards ought to provide for the flexibility that is envisioned, at least at this particular point, either at closing or at settlement or at the inception, it is not inappropriate considering the fact that there is a proliferation of different instruments and different circumstances that prevail with regard to high-cost mortgages, with regard to reverse mortgages, with regard to precertification and the other conventional type of mortgage situation.
 Page 38       PREV PAGE       TOP OF DOC    Segment 1 Of 2  

    Chairman LAZIO. Would the gentleman yield?

    Mr. VENTO. Yes, I would be happy to yield.

    Chairman LAZIO. The idea, I believe, was to achieve a level of standardization that actually would provide for more clarity on the part of consumers, but also relieve certain burdens from the lenders so that those costs can be passed on to consumers.

    And I think that is what is troubling. We have given a mandate toward a streamlined, simpler system that continues to prize disclosure, but also prizes clarity. While I am a fan of, in general, flexibility and moving away from this sort of one-size-fits-all, I mean, in every case you need to make some assessments, and in this case, I am a little concerned about the fact that the only thing—I am not hearing very much in terms of the original mandate from Congress. Although there are a number of initiatives that are being discussed that I agree with, I think that we need to go back and redouble our efforts to see that the mandate is complied with.

    Mr. VENTO. Well, I understand your point. My time has long expired. I know that the Chairwoman wanted to yield to you again on that very topic, so I am not going to continue with other questions. But there is some streamlining in terms of having one set of forms for TILA and RESPA. So there is every hope here, I think, of doing that without necessarily—we have to recognize that the programs and initiatives are dynamic in terms of mortgage and lending, so we certainly don't want to preclude it from continuing to move forward.

    Let me just yield back my time.
 Page 39       PREV PAGE       TOP OF DOC    Segment 1 Of 2  

    Ms. LASTER. Congresswoman, is it possible for me——

    Chairwon ROUKEMA. I am going to yield now to Mr. Lazio so that he can complete his prior questioning, and Ms. Laster had not had an opportunity to respond and perhaps Mr. Gramlich. If you have a follow-up question for Mr. Gramlich, I don't know.

    Mr. Lazio.

    Chairman LAZIO. I thank the Chairlady. Let me begin by allowing Ms. Laster to respond. I know she wanted to respond, and if Dr. Gramlich wanted to as well, that's fine.

    Ms. LASTER. As I said earlier before you came in, Congressman, that we have combined some of the forms that are required, as you well know. There is a good faith estimate form. In certain instances, there might be a RESPA requirement of an initial transfer of servicing notice, and the TILA disclosures. Those three disclosures have been combined. Again, it's attached as A–4 in the Report.

    We have combined those three disclosures into the model disclosure for both the guaranteed cost system and for the good faith estimate system. And yes, Congressman and Chairman, we understood your mandate to simplify and clarify, not just for consumers, but for creditors alike; and we believe that our Report and our recommendations do that as well, specifically, with regard to RESPA and TILA's different coverage.

 Page 40       PREV PAGE       TOP OF DOC    Segment 1 Of 2  
    As you know, RESPA covers creditors; TILA covers lenders. In terms of the type of transactions that they cover, the Acts differ. We have specific recommendations in terms of combining the coverage for RESPA and TILA so that they cover the same type of parties and they cover the same type of transactions. That will certainly help creditors.

    We also have clarification of TILA terms. A big part of what the Governor will talk about, I am sure, eventually, is what goes into the finance charge. Currently there is a ''some-in'' and a ''some-out'' approach. The fact that the Board and HUD are recommending exactly what goes into that finance charge will certainly add some clarity and simplification for lenders and creditors.

    We also provide simplification and clarification on the issue you touched on in your opening remarks. Hopefully and I know you might disagree with this—HUD clarifies Section 8, in terms of providing the Section 8 exemption in the guaranteed cost system. If indeed you have this exemption and you provide those services, there is clarity that the fees you are receiving as a mortgage broker for example, are legal.

    And finally, we think that indeed when you said ''simplify'', you also said ''summarize''; and clearly, we are summarizing terms. Our Report suggested these documents be the place consumers can go for information about total costs and information about monthly costs. And we also believe creditors and other settlement service providers will work in a less restrictive regulatory environment. So we think we have heard your mandate to simplify and clarify. We could certainly look further, as we have said. This is a starting point. But we heard that and we attempted to do that for both consumers and creditors.

 Page 41       PREV PAGE       TOP OF DOC    Segment 1 Of 2  
    Chairman LAZIO. I appreciate that. I am wondering if you can quantify the amount of paperwork that you think has been reduced through this recommendation?

    Ms. LASTER. That is based on an estimate. I think you are referring to the statement in the—I don't want to say ''infamous'', but the press release. And what we said there was——

    Chairman LAZIO. Actually, let me take you off the hook there, so I don't have you trying to justify the numbers in the press release unless you choose to. What I really was talking about was in terms of the paperwork burden, not quantified in terms of dollars, but if you can just tell me sort of in terms of volume. Has there been an assessment of the current burden in terms of paperwork? And if your suggestions were implemented, could you quantify what the reduction might be?

    Ms. LASTER. Well, I understand your concerns, having bought two homes myself. There are tons of documents presented with a settlement. But, not to pass the buck, only perhaps five or six of them are Federal law-related. A lot of them are related to State law requirements and what is required by the lenders.

    So we have outlined what those documents are that are RESPA-related, that are TILA-related, and attempted focusing on those documents, not the State-related documents, because I don't believe that was part of our mandate. But in terms of Federal requirements, we have addressed taking those six documents related to RESPA and combining them.

    Chairman LAZIO. Can you quantify? I am trying to get to the point of, if all we are doing is taking the volume of six documents and compressing it into one and not really eliminating duplicative burdens and questions and disclosures, then we are not really getting to the mandate. I believe that you agree with that mandate, and maybe you could speak to that and help me out.
 Page 42       PREV PAGE       TOP OF DOC    Segment 1 Of 2  

    Mr. GRAMLICH. Well, I think there is a lot of simplification in this process in terms of actual paperwork reduction, which is what you are asking about. Our quick estimate here would be something like five to ten pages.

    Chairman LAZIO. Out of how many?

    Mr. GRAMLICH. Well, I think it is forty or so, isn't it, in a typical settlement document?

    Ms. LASTER. Forty or fifty.

    Mr. GRAMLICH. Forty or fifty, of which a great amount is due to State law. We could get you more precise estimates of this, if you want. But let me mention a few other ways. I would recommend to you looking at this settlement statement in Appendix A–5. It really does seem to be very, very simple and clear. And after all, this is a pretty complicated transaction. I mean, you are not going to put all this on the back of a postcard.

    Another way in which there is great simplification is in terms of the timing, and that is instead of the consumer getting documents at all different times, basically things happen at two different dates in this new process.

    So I think there is a lot of simplification. There is some paperwork reduction. There is a great improvement in clarity. But for the paperwork reduction, a lot of the difficulty there involves State law, and I am not sure what the Congress or anybody else can do about that.
 Page 43       PREV PAGE       TOP OF DOC    Segment 1 Of 2  

    Mr. VENTO. If the gentleman would yield.

    Chairman LAZIO. I would yield.

    Mr. VENTO. I think that it says how many papers at closing are directly a result of Federal law, as compared to all the papers that are presented to consumers. I think that he has offered to get us the specific information on that and I think we ought to say, ''Yes, we would like that.''

    [The information referred to can be found on page 105 in the appendix.]

    Chairman LAZIO. That would be helpful. With the additional caveat that it seems to me it is entirely possible that we can take some of the data required by the State and not duplicate the effort of asking additional questions which again confuses consumers and burdens lenders.

    I think we want to do neither of those things. So, again, I would just ask that we redouble our efforts. I would ask that we get specific legislative language. That would be incredibly helpful to this subcommittee. I think that is what we need; we need your expertise toward simplification, toward this unification which I hear that you have signed off on.

    And I think we need to resolve this yield spread premium issue in terms of bundling. I think I am hearing from both of the witnesses that the bundling of services could very well benefit consumers. I believe that. I think we are of an age and era where there can be efficiencies achieved through bundling of services as long as there are appropriate levels of disclosure and that there are enough conflict-sensitive protections to consumers to ensure that there is no double-dealing.
 Page 44       PREV PAGE       TOP OF DOC    Segment 1 Of 2  

    So let me leave it with that, saying that I appreciate the work product. I think there is a lot more that needs to be done. I'd like to have some of this stuff quantified. I am interested to see what the State obligation is over here, or State responsibility is. But to move from fifty pages to five pages is not wholly satisfactory to me. I'd like to see a better effort and I am willing to work with you to make sure that happens. I yield back to the gentlelady.

    Chairwon ROUKEMA. Well, I thought I was beginning to understand things with a little more clarity, but I am not sure now. Mr. Lazio ended up on the subject—he threw in the subject of bundling. I am going to ask the question in my own form, but I must also say that I have a bit of confusion or skepticism—non-clarity, about why this all seems to take so long in this day of computers and instant analysis and instant retrieval of all kinds of information.

    I just don't understand why the time spans on all of these things have to be so long. Maybe you can help me with that. That is an overall question. But specifically, on the bundled services versus a firmer cost estimate, it seems to me that under the bundled services approach, the best interests of the consumer may not come first. For example, we don't really know what the range of services are, really, or whether or not there would be an incentive for creditors to offer lower quality services to enhance the profit margins.

    The other aspect of it is whether or not the interest of the consumers are there, and whether or not under bundled services there is any real way to understand whether or not there are conflicts of interest here.
 Page 45       PREV PAGE       TOP OF DOC    Segment 1 Of 2  

    Could you each address that particular basket of concerns?

    Ms. LASTER. Certainly. I believe it was a three-part question. Your first question was whether or not there would be real savings. We believe that under the bundling approach—well, let me just take the packaging approach.

    Chairwoman ROUKEMA. No, under bundling of services, it doesn't seem there would be any incentive for lower costs or maintaining quality of services.

    Ms. LASTER. I think so, Madame Chairwoman. First of all, it would free the service settlement providers to enter into volume-based discounts, to provide services at a lower cost so that their package is lower priced than the next package being offered.

    And indeed, we have evidence and we have heard from creditors that this is what they would like to do, but they have concerns about Section 8 and being able to enter into such volume-based discount arrangements.

    I believe the first part of your question was——

    Chairwoman ROUKEMA. That was the first part of my question. The second part was how do we avoid problems with conflicts of interests and whether or not the standards are being met.

 Page 46       PREV PAGE       TOP OF DOC    Segment 1 Of 2  
    Ms. LASTER. Again, we acknowledge that there are, as you say, conflicts of interest, and we have set out the parameters. We acknowledge that in particular cases there may be the need for additional disclosures. This is true in the mortgage broker case, where indeed, the broker may be receiving both direct fee from the borrower, as well as an indirect fee from the lender. We will look at the issue of affiliates who are part of a bundling package, and whether there is a need for further disclosure there. We would address that.

    But we do believe that overall there will be a cost savings to the consumer, and if there is a need for further disclosures, we will do that. And I think the other thing you—I'm sorry.

    Chairwoman ROUKEMA. Yes, I think now we will have to go on to Mr. Gramlich, please, on these issues.

    Mr. GRAMLICH. Just one thing to point out. There are tradeoffs in this. The more disclosures you have, that disclosure is on paper, so your question is sort of offsetting Mr. Lazio's previous point.

    But I think the important thing here, and I think the point for the Congress to keep its eye on, is that what we are trying to do is to unleash competitive forces. Right now, it is difficult for the creditors to bundle services because of Section 8. It was a well-meaning provision, but it actually probably gets in the way of having a competitive market work.

    If it were possible, which it should soon be, for borrowers to call around and find well, ''What is your list of packaged services and how much does it cost?'', and then call various competing providers, then you would see competition regulating all this. This would be the ultimate regulation, as indeed it is for other things in a market economy.
 Page 47       PREV PAGE       TOP OF DOC    Segment 1 Of 2  

    So what we are trying to do here is to establish the preconditions for true competition working. And that is the main thing that is going to bring the benefits to the consumer.

    Chairwoman ROUKEMA. I am not quite sure how those bundled services offer full disclosure, but if you can come up with a specified way of doing that, I will take your word for it. We will talk about that further, but can you address the conflicts of interest question?

    Mr. GRAMLICH. Let me defer to Ms. Laster on that one.

    Chairwoman ROUKEMA. All right.

    Ms. LASTER. I believe that additional disclosures may be necessary, and we recognize it. Your first question, though, was does HUD recommend what's in the package? We certainly do. What should be in the guaranteed cost package are all the costs needed to close the loan. However, we don't specify what those costs will be, because different packages may include different items.

    If, in fact, there is a question about a conflict of interest for somebody in a package who has fiduciary obligations both to the lender and to the borrower, then we think that can be dealt with through disclosure. But to foreclose the opportunity of bundling or of packaging of services when we have every indication that both the market and creditors—small creditors as well as large businesses—are interested in packaging their services to be able to offer a better product, a simplified product, and a product at a cheaper price, we feel that should be one of our starting points.
 Page 48       PREV PAGE       TOP OF DOC    Segment 1 Of 2  

    Chairwoman ROUKEMA. All right, thank you. If you'll wait just one moment while I confer with my colleague here, please.

    All right. If you will be generous with your time, we do have at least two Members who want to continue with the questioning after this series of votes. Dr. Gramlich, Ms. Laster?

    Ms. LASTER. Certainly.

    Chairwoman ROUKEMA. All right. We will be back as soon as possible after this series of votes. Thank you.


    Chairwoman ROUKEMA. We will call this hearing back into session and we appreciate our panel here. With that, we will refer to Mr. Ehrlich, please.

    Mr. EHRLICH. Thank you, Madam Chairwoman, for everything and for your indulgence.

    I don't quite know who to address this question to, so if it's all right with everybody, whoever wants to take a shot. As you all know hopefully, I have a bill in concerning the yield spread premium lawsuits and the moratorium that I am trying to put into law with many Members of this House on both sides of the aisle, fortunately, with respect to these lawsuits.
 Page 49       PREV PAGE       TOP OF DOC    Segment 1 Of 2  

    I've been reading the relevant portions of the Report and of course I am very familiar with the proposed reg you all put out a few months ago. My question, at the very bottom line, is particularly in view of your statement with respect to HUD's proposed regulation applicable to mortgage brokers, and I quote, ''Even if all requirements are met, the presumption may be rebutted if the total compensation received by the broker exceeds a test to be established by HUD during the rulemaking. Where the broker does not enter into a contract, the fees may be presumed to be illegal.''

    Now, I understand you all put out the proposed regulation with the idea of creating some safe harbors for these folks, and I know you share our bottom line goal, which is to hopefully remedy what, in the view of many folks in this House, are frivolous lawsuits or lawsuits filed simply to gain leverage with respect to settlement.

    So my question at a bottom line is where are we with the rulemaking process? I understand that there have been a lot of concerns about the safe harbors, and the bottom line with safe harbors being that they are really no safe harbors. But what can I tell these folks who come to me, these entrepreneurs who are out there providing a service, trying to follow the law, who do not want to be sued; yet as a result of the failure to really create, in a regulatory environment, true safe harbors, continue to have these lawsuits filed against them.

    Long-winded question. I apologize.

    Ms. LASTER. That's OK. I'll try to take it step by step.

 Page 50       PREV PAGE       TOP OF DOC    Segment 1 Of 2  
    In terms of where we are on HUD's proposed mortgage broker rule, as you indicated, that rule was proposed in October 1997. You probably know, Congressman Ehrlich, that it was after we had many attempts at getting a proposed rule. We had negotiated rulemaking in 1996. We also had a first crack at a proposed rule before that. And 1992 was when we basically started down this road where HUD finalized the requirement that mortgage brokers must disclose their total compensation, both indirect fees from lenders as well as direct fees from borrowers.

    At some point, I believe, in this process in January—and again, you might have been a signatory on the letter, Congressman—there was a request to Secretary Cuomo from Members of Congress, both houses, to delay work on the proposed mortgage broker rule.

    I believe the Secretary's response was that he understood the concerns of Congress but would continue to work on it, and we were also working on this Report. We had 9,000 or more comments on the proposed rule, so there was a lot of work to do.

    Mr. EHRLICH. I understand this is not the only issue you are working on.

    Ms. LASTER. So we are still working on that and now that the Report is out, we hope to be addressing it soon. Specifically again, in terms of the test, we have to: number one, decide whether or not we will go forward with another proposed rule that would indicate what that amount is in terms of whether or not you are in the qualified safe harbor, or go ahead with the final rule which would indicate what that amount is and the like.

    So we are now addressing those concerns, and unfortunately, I cannot give you a specific date. I am aware of the uncertainty. There was a case, the Culpepper case in the 11th Circuit, where again, the indirect fees, and to be clear what we are talking about, the additional fees that the consumer might not know about, that court found that indeed, in that particular fact pattern, such fees were illegal, because they were unearned. The court found it was in fact a referral fee.
 Page 51       PREV PAGE       TOP OF DOC    Segment 1 Of 2  

    So we are aware of the tension. We are trying to address it. We believe we have addressed it in our proposed rule. If I might add to that, would your question be how does it fit into what we would be recommending today in the Report?

    Mr. EHRLICH. Right.

    Ms. LASTER. We addressed that, and I would call your attention to, I believe it's Appendix F in our Report.

    Mr. EHRLICH. In fact, I read directly from it, I think so. I don't mean to interrupt, but——

    Ms. LASTER. No, I understand.

    Mr. EHRLICH. The problem here is with the split in the courts and the rather subjective tests that the courts have created, when you add that to the—and I understand what you tried to do and I applaud you for the attempt—but still, the rather subjective nature of the safe harbors, particularly with respect to the last paragraph. And I read directly from that last paragraph, ''Even if all the requirements are met, the presumption may be rebutted where total compensation received exceeds . . .'' and so forth.

    We are trying to come to some sort of objective standard so that consumers, mortgage brokers, lawyers, understand precisely what we are talking about. That's not it; that doesn't make it. And that, of course, leads to more litigation. And even where mortgage brokers are winning litigation, as you all know, there is an opportunity cost associated with litigation. And that is not a great win. Once you get sued and pay the legal fees and finally win, I don't count that as a win.
 Page 52       PREV PAGE       TOP OF DOC    Segment 1 Of 2  

    So I realize we have the same bottom line, but there is an increasing frustration out there. I realize I may not be talking to precisely the right person with respect to what you do every day, but if you can carry that message back, we are really desperate for a remedy.

    In addition, I would ask your support for our bill. It is a bipartisan bill. It basically says, ''Look, time out. Since you all are trying to get your rulemaking together and get all the comments from all the various interested parties out there, the fair thing is to at least put a moratorium out there so that we do not have innocent people involved in the web of very expensive lawsuits.''

    Can I get your comment on the moratorium bill, the Department's view?

    Ms. LASTER. Certainly. I believe the Administration hasn't taken a formal position on the bill, but indeed, I understand both the pros and cons, the concerns, the uncertainty, the fact that the circuits are split, and we will take it under advisement.

    Mr. EHRLICH. Can I ask you to get a specific answer back from the Administration?

    Ms. LASTER. Yes, sir.

    Mr. EHRLICH. Thank you very much.
 Page 53       PREV PAGE       TOP OF DOC    Segment 1 Of 2  

    Chairwoman ROUKEMA. Ms. Velázquez, I believe you are next.

    Ms. VELÁZQUEZ. Thank you very much, Madam Chairwoman.

    Ms. Laster, I want to echo the same concerns expressed by the gentleman, Ehrlich, regarding the yield spread premium. I have been approached by many of my constituents who run very small mortgage brokerages. They are concerned about the issue of yield spread premiums. Could you answer one simple question for me? Are yield spread premiums legal or illegal?

    Ms. LASTER. It depends on whether or not the fee is reasonably related to the goods or services provided. That is not a legalism, but I think in terms of understanding the RESPA statute, it is not a rate-making statute. We cannot promulgate a rate that says this is legal. By statute, Congress has prescribed that we examine on a case-by-case basis whether or not a fee is reasonably related to the services provided.

    Ms. VELÁZQUEZ. However, you told the industry how and where to disclose these payments. Tell me, why have you told consumers when to expect this disclosure?

    Ms. LASTER. Well, as I indicated to Congressman Ehrlich, it has been a long process, and one of the processes that was involved, I indicated, was negotiated rulemaking. And that meant having folks from the industry, consumers and the like. What we learned was, in fact, there is an issue about confusion about what a mortgage broker does in terms of these fees.
 Page 54       PREV PAGE       TOP OF DOC    Segment 1 Of 2  

    Specifically, when you are talking about the yield spread premium fee, that is a fee that the mortgage broker gets from the lender, and in many instances, the borrower doesn't know about that fee. So in terms of requiring it to be disclosed, that was part of our consumer protection objective, to make clear that this is the wave of the future, that these transactions do happen; because we really did find today, in today's atmosphere, that people don't understand the functions of the mortgage broker and that he can be compensated by both the borrower and the lender.

    Ms. VELÁZQUEZ. So I understand you are dealing with this issue and you understand that this is a very confusing issue.

    Ms. LASTER. It is, yes.

    Ms. VELÁZQUEZ. So I hope that HUD doesn't take too long to issue a simple policy statement.

    Ms. LASTER. Yes, well, we tried to address it in our proposed rule. So, given Congressman Ehrlich's comments, Congressman Lazio's comments, many other comments, now is the time to address it, so we understand your concerns.

    Ms. VELÁZQUEZ. Ms. Laster, in February, at a Small Business Committee hearing on SBRFA, I asked HUD about a Section 610 review of the mortgage broker rule. That rule was finalized in 1992 under the Real Estate Settlement Procedures Act, RESPA, and affects disclosure of mortgage broker fees.
 Page 55       PREV PAGE       TOP OF DOC    Segment 1 Of 2  

    The rule requires only one segment of the mortgage industry to disclose indirect payments from secondary market investors, the small mortgage businesses. Forcing the small businesses to disclose these fees works to their detriment. In fact, in 1988, the FTC released a report warning HUD against this rule because it would have an adverse impact on small mortgage brokers. Has HUD undertaken a Section 610 review of the mortgage broker rule?

    Ms. LASTER. Not that I am aware of.

    Ms. VELÁZQUEZ. Why not?

    Ms. LASTER. I wasn't aware of the request, but we will certainly undertake that now and get back to you.

    Ms. VELÁZQUEZ. Well, I brought it to the attention of HUD when we conducted this hearing of the Small Business Committee. What more does it take for HUD to review this?

    Ms. LASTER. Nothing more. I will certainly make sure that it is done.

    Ms. VELÁZQUEZ. Given the controversy on the possible SBRFA violation, is HUD considering withdrawing this rule?

    Ms. LASTER. The rule—no. I really can't speak to that issue, I'm sorry.
 Page 56       PREV PAGE       TOP OF DOC    Segment 1 Of 2  

    Ms. VELÁZQUEZ. I guess you will get back to me.

    Ms. LASTER. Yes.

    Ms. VELÁZQUEZ. Thank you.

    Thank you, Mrs. Chairwoman.

    Chairwoman ROUKEMA. Thank you.

    Mr. Sessions, Congressman Sessions from Texas.

    Mr. SESSIONS. Thank you, Madam Chairwoman. I have stepped in a little bit late and have not had the opportunity to hear all of your testimony. But I had an opportunity to hear Mr. Ehrlich and then the dialogue that has just gone on, and I'm not sure what you said when you said you will get that done or agreed to it.

    Are you saying that you are going to ensure that a decision is made on this relationship of the broker fees?

    Ms. LASTER. I believe what the Congresswoman—and I don't mean to speak for her—but she indicated that she had made a request to HUD to look at this.

    Mr. SESSIONS. There have been a lot of requests to HUD, including a bill. And you are now going to, as a result of what she said, you are going to ''look at it''; or you ''have been trying to look at'' and you are ''going to render''—I am not trying to be tough with you, but I don't understand why someone did not come prepared today to say ''we are aware there have been over 9,000 public comments on this issue and we recognize it is an issue that has gone on too long.'' I am stunned to hear that HUD supposedly thought that they had issued some ruling on this to address it.
 Page 57       PREV PAGE       TOP OF DOC    Segment 1 Of 2  

    Ms. LASTER. Well, I am somewhat confused. One issue is the yield spread premium, the proposed mortgage broker rule. That is what had the 9,000 comments. I thought Congresswoman Velázquez was talking about a different issue.

    Mr. SESSIONS. OK. Help me out, and I am sorry.

    Ms. LASTER. And I am sorry, Congressman.

    Mr. SESSIONS. Please tell me what you did agree to then, because I am confused.

    Ms. LASTER. Congresswoman Velázquez was talking about the small business concerns—again, I don't want to speak for you, Congresswoman—610, I believe you said, regarding RESPA. What Congressman Ehrlich is talking about and what is involved in this Report is broker fees in terms of Section 8 of RESPA.

    Mr. SESSIONS. Broker fees. So in other words, what you agreed to do is to look at the 610 issue?

    Ms. LASTER. Yes. The Congresswoman indicated she had spoken to someone at HUD about this. I intend to speak to that person and see if I can get back to her. I can definitely get back to her on where we are on our review and if we are going to consider withdrawing the rule.

 Page 58       PREV PAGE       TOP OF DOC    Segment 1 Of 2  
    Mr. SESSIONS. Beautiful. I did admit I was confused on the issue and asking for a clarification. My questions then would relate to the mortgage broker fee issue.

    Ms. LASTER. Which I am prepared to discuss.

    Mr. SESSIONS. Beautiful. You had indicated at some point that you felt like it was clarified or answered or responded to a few minutes ago.

    Ms. LASTER. No, sir, I didn't. I said that I would hope that our proposed regulation would lend some clarity, and I believe we have also lent some clarity about how those fees would be treated in terms of our Report, whether it be through a guaranteed cost system or a good faith estimate system.

    Mr. SESSIONS. And when would you anticipate that we would see these clarifications?

    Ms. LASTER. Well, when I said earlier, again I apologize if you didn't hear me——

    Mr. SESSIONS. That's my fault. I am the one that came in late.

    Ms. LASTER. I apologize if you've heard this before, but we had been requested by Members of Congress—and maybe yourself included, sir, to withhold working on the mortgage broker rule until we proceeded on this RESPA/TILA reform Report. So now we know that we have done the Report and we will turn our attentions to the mortgage broker rule in its final form. Or it might come out in another proposed form, as well.
 Page 59       PREV PAGE       TOP OF DOC    Segment 1 Of 2  

    Mr. SESSIONS. And you anticipate that would be when?

    Ms. LASTER. Some time within the next months, in the fall.

    Mr. SESSIONS. Some time in the next month?

    Ms. LASTER. Months. In the fall.

    Mr. SESSIONS. Months?

    Ms. LASTER. Months. Within the fall.

    Mr. SESSIONS. By a date, September 1? Is that the fall?

    Ms. LASTER. I was pressed about this in other hearings I have had.

    Mr. SESSIONS. Good, at least we're consistent.

    Ms. LASTER. Right. And as you may not know, HUD needs to go through clearance through various agencies that have jurisdiction over these matters, so I really cannot promise a date that I would have to come back here and be held to. But I do think we can move on this by the fall.

 Page 60       PREV PAGE       TOP OF DOC    Segment 1 Of 2  
    Mr. SESSIONS. Thank you so very much. I am interested in us resolving the matter properly. And just to put a conclusion to it, I believe that the service that these people offer is value added to the process, an important part of the process, and I believe there should be a way for them to be compensated properly that would be a line item as it is today so that we know what it is and we don't hide the cost and we say exactly what it is. I appreciate your time with me. Thank you.

    Ms. LASTER. Thank you.

    Chairwoman ROUKEMA. Mr. Bentsen, do you have questions?

    Mr. BENTSEN. Thank you, Madam Chairwoman, and I apologize for not being here for everyone's testimony. I was caught up in the thrilling testimony that Chairman Greenspan gave this morning and I was still recovering from it this afternoon.


    I did have a couple of questions. I don't want to pile on with respect to the mortgage broker issue, but it is something that has caught a lot of people's attention. I would just make a couple of comments.

    You pointed out, and the Secretary has pointed out in a letter to me that I think you received more comments on your proposed rule at least in recent history, if not in HUD's entire history.

 Page 61       PREV PAGE       TOP OF DOC    Segment 1 Of 2  
    Ms. LASTER. Yes, that's right.

    Mr. BENTSEN. Just a couple of things. With respect to Mr. Ehrlich's legislation, I have reluctantly cosponsored that because I question the idea of setting these types of moratoriums, but I do think that this is sort of a quirk in the law as a result of HUD's inability to come to a conclusion on the rule.

    I would ask you all to go back and look at this with respect to Mr. Ehrlich's question, because it may well not be inconsistent with the Administration position, given that the President last week in his statement with respect to the Year 2000 problem said that we very well might want to impose some type of liability moratorium as it relates to that issue.

    I don't know that you can compare mortgage broker issues to Y2K, but again, they are along the same lines, and I would encourage you to do that.

    Additionally, I would encourage you, as you work on the final rule, and hopefully get to a conclusion soon, because I think that is almost more important than what the final rule is. I think it's certainty in what the position of HUD is, the regulator is, and then the market can deal with it accordingly.

    But that the proposed rule seemed to treat the yield spread premium in a punitive way to where the broker had to make a disclosure—and I am all in favor of disclosure—but in almost admitting guilt. And I think that is problematic.

 Page 62       PREV PAGE       TOP OF DOC    Segment 1 Of 2  
    I think it is good that there is disclosure. I also think there is sufficient price transparency in the mortgage market today, as compared to ten or twenty years ago, that I would think that most consumers are capable of seeing whether or not they are getting the best deal.

    That may not be true, and you all may have data that indicates otherwise. But I know you can open the Houston Chronicle on Saturday and Sunday, and I know you can open The Washington Post on Saturday and Sunday, and there are numerous listings for mortgage rates available. Now those don't always tell the whole story, and they may have some points listed, discount and origination points, they may not. But it does, within a band, give you an idea of where the marketplace is and the consumer is able to ask their broker, or whichever broker, ''How come Acme Mortgage is doing it at 7 and you are saying 7.25 plus a point origination and a half-point discount?'' So I would just ask you to take that into consideration when you are doing that.

    The other question I would ask the entire panel is with respect to the APR. The testimony I scanned, the Fed testimony, and I would assume the HUD testimony, both indicate that we should retain the APR, and I think that is correct. I think adding the additional cost to it probably makes sense to get to a closer real rate or cost of credit, although I am curious as to if you found what the differential is. Is it several basis points, a couple of basis points?

    Mr. GRAMLICH. We worked out a case in Appendix A–4 of the Report, and it's 23 basis points.

 Page 63       PREV PAGE       TOP OF DOC    Segment 1 Of 2  
    Mr. BENTSEN. So it is a significant difference?

    Mr. GRAMLICH. Yes, significant, sure.

    Mr. BENTSEN. Thank you.

    Mr. GRAMLICH. But one thing, and I think you know this. One advantage of this whole system is that you will see both the interest rate and the APR, so you get both the level of the APR and the spread between these.

    Mr. BENTSEN. But if I might, Madam Chairwoman, you are saying in the costs that are not currently included under TILA, that they would have almost a quarter-point increase on the overall rate over a 30-year.

    Mr. GRAMLICH. I am talking about in the new system where we include all costs that are required to get credit. That is our new definition of what goes into the cost items, both finance charge and the APR. It is different from the present definition, which has a few exceptions.

    So in the new definition, in this one example we worked out in the Appendix, it is 23 basis points. It probably is less than that now, because there are some exceptions, but I don't know that for a fact.

    Mr. BENTSEN. And this is based upon an average loan size?

 Page 64       PREV PAGE       TOP OF DOC    Segment 1 Of 2  
    Mr. GRAMLICH. Yes. There is also an example on page 14 that has slightly different numbers, but also this one has 32 basis points on page 14 of the Report. So we give a few examples, but it is usually of that order.

    Mr. BENTSEN. Thank you.

    Thank you, Madam Chairwoman.

    Chairwoman ROUKEMA. All right, thank you. I might note for our panelists before I turn over for final questions from Mr. Vento, I might note that our plan is to have a second hearing with the consumer and industry groups as early in September as possible. It hasn't been precisely scheduled as yet, but any further material you have on this mortgage broker rule, or other issues that you are still working to clarify, if you could present that information in written form and submit it to our subcommittee prior to that hearing, it would be very helpful.

    And particularly this mortgage broker rule, because I am sure that will come up with some specificity and interest in September, and I would appreciate that.

    Mr. Vento.

    Mr. VENTO. Madam Chairwoman, I appreciate the opportunity to raise a few questions. I would ask unanimous consent that Mr. Kennedy's opening statement be put in the record and that we have the opportunity to submit
questions in writing.

 Page 65       PREV PAGE       TOP OF DOC    Segment 1 Of 2  
    [The prepared statement of Hon. Joseph P. Kennedy II can be found on page 82 in the appendix.]

    Chairwoman ROUKEMA. Yes, you read my mind. I was about to conclude with that. We always hold the record open for questions answered in writing to be submitted for the record. Thank you.

    Mr. VENTO. Thank you, Madam Chairwoman.

    There is some concern about consolidating, or putting more closing costs into an annual percentage rate-type of prescription, because it may actually begin to lose some of the meaning. Clearly, the Chairwoman, Madam Chairwoman Roukema, asked if there would be an itemization and I heard you say, yes, there would be an itemization of what is placed into that.

    Is there any reason that yield spread premiums can't be put into that type of an equation, into that type of bundle for that package? That would be one of my questions, anyway, concerning it. If we are going to have a bundle and that is part of what's being offered, or one is being suggested, I think there are probably some problems with it, but I will let you suggest what that means.

    Mr. GRAMLICH. Could I just——

    Mr. VENTO. Yes.

    Mr. GRAMLICH. What we are going after is that there is a list of the services covered in the finance charges and the APR, but there is no itemization of how much money is for each one. That's the present rule.
 Page 66       PREV PAGE       TOP OF DOC    Segment 1 Of 2  

    Mr. VENTO. Right. No, I understand that, but the thing is if you are going to have such a list, is it going to be a standardized list of services, or is it going to be a moving target? That's the question I have. I would rather see this be a standardized list of services.

    Mr. GRAMLICH. It is standardized in the sense it is all costs that the lender would require to get credit. So it is standardized in that sense.

    Mr. VENTO. In other words, if the service is necessary, it would be represented there, so that consumers could go from lender to lender to get a reading as to what the cost would be.

    Mr. GRAMLICH. That's right.

    Mr. VENTO. Of course, one of the issues here is to try to hold down the cost, so that in terms of receiving that estimate, or doing that application, that there wouldn't be a prohibitive cost involved. That is another issue that is ongoing here which hasn't been raised, because we can all go through all kinds of machinations, but if it is going to cost $100 every time you make out an application, that is another problem.

    Mr. GRAMLICH. Right.

    Mr. VENTO. And HUD suggests that the Home Ownership Equity Protection Act ceiling be adjusted to further limit abusive loan practices while the Federal Reserve Board suggests that with more closing costs in the APR, we should instead evaluate how it is working with the proposed changes, because the APR will be going up on all loans, therefore effectively lowering the ceiling.
 Page 67       PREV PAGE       TOP OF DOC    Segment 1 Of 2  

    How many basis points of change do you expect in the APR if your proposal were implemented? I think you answered that question at 23 basis points. Is that the answer that you made?

    Mr. GRAMLICH. Or so. I mean, it would depend on the——

    Mr. VENTO. Well, a range of 20 to 30 basis points.

    Mr. GRAMLICH. Yes.

    Mr. VENTO. So it is not how significant is it——

    Mr. GRAMLICH. In general, the way this works, is the difference would be greater on short term loans, shorter term mortgages, because the settlement services would be one-time costs, and what the APR does is to spread that over the life of the mortgage. So if there are more years in the mortgage, it spreads out to a lower amount.

    Mr. VENTO. One of the questions that has come up—and I don't really have a lot of time; I'm trying to move a little bit here in deference to my Chairperson—but, do you think there should be a fee allowed for bundling itself, or would there be a fee allowed for bundling itself?

    Mr. GRAMLICH. The idea here is that with the bundling what the consumer would care about is the net price to the consumer. So whatever happens before then, that just happens. The goal here is to get the best deal for the consumer.
 Page 68       PREV PAGE       TOP OF DOC    Segment 1 Of 2  

    Ms. LASTER. And HUD takes a somewhat different view. One of the goals of packaging is to shop, and by shopping again, I mean comparing different bundles, different packages and comparing the prices you may get from the package versus the prices you will get from your good faith estimate, with the tolerances.

    And if, in fact, there is a high fee in order to get that information, that will limit consumers' ability to comparison shop among packages, or comparison shop among different settlement providers in the present scheme that we have now.

    So while we realize there might be a nominal fee for a credit report so that the lender or the packager can do the basic analysis in order to give you the guaranteed price in that scheme or give you a good faith estimate in that scheme, we would recommend that the fee not be high.

    Mr. VENTO. I think where we're really doing is you're crossing a lot of different groups here that have before had their own due diligence. And you know, one of the problems is this consolidation type of activity where the realtor starts and they can actually provide that service, it has led to a lot of problems.

    And it hasn't just been this Department of Housing and Urban Development. We have been for the last ten or fifteen years waiting for rules to come out on RESPA. And of course, part of the thing you are getting caught up in here just in the disclosure is this crosscurrent, not just of a disclosure issue, but in terms of who can offer what services.

 Page 69       PREV PAGE       TOP OF DOC    Segment 1 Of 2  
    And of course, when we start talking about yield spread premiums or some of the other services here, I agree. Because once the consumer comes in and diligence has been done on that consumer and the realtor, or whoever the bundler is at that particular point, the bank can assure that they have got all of that done and you are self-certified and that, then other institutions should be able to accept that and you shouldn't have to go through the credit check. So that would be ideal.

    So we are looking at this for the consumer in terms of updating it. There are a lot of folks out there however, that have been actors and participants in this process that are going to be bucking this. Not because of disclosure. That is simplifying disclosure, even if we provide for it to be fairly dynamic and responsive to the marketplace; and it is going to run into some problems, not just on yield spread premiums, but on other matters as well.

    So that is one of the problems in terms of trying to come up with a consolidated statement of TILA and RESPA, is that you immediately get into these other types of charges and services, specialized services that historically have been offered and they are now being eclipsed by this bundling type of process.

    But as long as there is the option for consumers to choose one or the other, and there are the proper safeguards. I mean, I don't know that there are inherently any conflicts of interests, as the Chairwoman pointed out, within that package of services. I think that if you could identify an inherent conflict of interest. Various States have other requirements. That's why I think Mr. Lazio's question with regard to how much of that paperwork is related to what a State might require and are we going to have to work with that. Obviously, what most of the Congress likes to do, and others that are dealing here nationally like to do, is preempt some of the consumer State issue. So that is another issue that we have to be mindful of.
 Page 70       PREV PAGE       TOP OF DOC    Segment 1 Of 2  

    So I will quit at this particular point, because my questions are in a sense somewhat rhetorical. I do appreciate the work and the continuing effort that you are making to bring this together. I think it will be very helpful to those of us in Congress who are working on the matter.

    Thank you, Madam Chairwoman.

    Chairwoman ROUKEMA. Thank you.

    Mr. Watt of North Carolina, do you have a question?

    Mr. WATT. Thank you, Madam Chairwoman. I don't have a question. I just wanted to apologize to the witnesses for not being here. I was in a markup in another subcommittee and I couldn't get out, but I wanted to assure them that it was not for lack of interest.

    Most people find this very uninteresting, I am sure, but when you have practiced law doing this kind of work for about fifteen to twenty years, sometimes you bring a slightly different perspective to it.

    I want to assure you that I will review your recommendations and if I have some feedback, I will certainly give it to you in writing, or perhaps at some point I could get a meeting with some of your representatives.

 Page 71       PREV PAGE       TOP OF DOC    Segment 1 Of 2  
    Ms. LASTER. Certainly.

    Chairwoman ROUKEMA. Mr. Watt, I think prior to your arrival I did state that we will be having a second hearing in September for the consumer groups and the industry groups. But we will keep the record open and HUD and the Fed have agreed to respond in writing to any questions submitted by Members, so that will be open for you.

    Mr. WATT. Well, I thank the Chairlady and I think it's a great idea to have a follow-up hearing, and I will try to use the time between now and the follow-up hearing to review.

    Chairwoman ROUKEMA. Yes, it will be hopefully in early September. We don't yet have a date scheduled.

    Also, I would like unanimous consent that Mr. Kennedy's statement will be included for the record and statements of any other Members, as well as questions for the record and for our panelists.

    Ms. LASTER. Madam Chairwoman.

    Chairwoman ROUKEMA. Yes, Ms. Laster.

    Ms. LASTER. Yes, might I just request, because I assume you are about to adjourn.

 Page 72       PREV PAGE       TOP OF DOC    Segment 1 Of 2  
    Chairwoman ROUKEMA. Yes.

    Ms. LASTER. In terms of your procedures—and please excuse me if this is not a proper procedure—but normally we will get the testimony to review, and in light of the various adjournments for the votes, would it be possible in reviewing our testimony, if it were not clear, to supplement it with any written statements?

    Chairwoman ROUKEMA. Yes, absolutely. That certainly should be understood by both you and your assistants here, and the record will be open for that.

    Ms. LASTER. Thank you.

    Chairwoman ROUKEMA. And any additional information you feel is important to supplement the statements that have already been made.

    Ms. LASTER. Thank you.

    Chairwoman ROUKEMA. Thank you.

    And with that, we adjourn for the afternoon.

    [Whereupon, at 4:57 p.m., the hearing adjourned, subject to the call of the Chairs.]

Next Hearing Segment(2)