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Thursday, October 3, 2002
U.S. House of Representatives,
Committee on Financial Services,
Washington, D.C.

    The committee met, pursuant to call, at 10:34 a.m., in Room 2128, Rayburn House Office Building, Hon. Michael Oxley [chairman of the committee] presiding.

    Present: Representatives Oxley, Royce, Lucas of Oklahoma, Ney, Kelly, Gillmor, Manzullo, Jones, Biggert, Green, Miller, Cantor, Grucci, Hart, Capito, Rogers, Tiberi, LaFalce, Waters, Maloney of New York, Velazquez, Watt, Bentsen, Maloney, Inslee, Scakowsky, Jones of Ohio, Hinojosa, Lucas of Kentucky and Clay.

    The CHAIRMAN. [Presiding.] This hearing of the Committee on Financial Services will come to order. Today's hearing is entitled Reforming the Real Estate Settlement Procedure, Review of HUD's Proposed RESPA Rule. Our only witness today will be the Honorable Mel Martinez, Secretary of Housing and Urban Development.
    Pursuant to the chair's announcement and rule 3(f)(2) of the rules of the Committee on Financial Services for the 107th Congress, the chair announces he will limit recognition for opening statements to the designees of the chair and ranking minority member of the full committee, and the chair and ranking minority member of the Subcommittee on Housing and Community Opportunity, to a period not to exceed 16 minutes, evenly divided between the majority and minority. Prepared statements of all members will be included in the record, and it is so ordered. The chair now recognizes himself for five minutes for an opening statement.
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    Today, the Financial Services Committee holds its first hearing on the administration's proposal to reform the mortgage disclosure and settlement process. For the average American, that process is called a real estate closing or settlement. For policy wonks and mortgage finance technicians, that process is called the Real Estate Settlement Procedures Act of 1974 or RESPA. In 1998, the former Banking and Financial Services Committee held two hearings on this very issue. In those hearings, the committee looked at recommendations from HUD and the Federal Reserve. The issues four years ago included whether the recommendations made more mortgage disclosures easier for consumers to understand and less onerous for the industry to implement, improve the timing of the disclosures such that they can serve as an effective shopping tool, provided consumers with more certainty about the money that will be needed at the closing table, and provided for a competitive marketplace without sacrificing the quality of services provided or creating conflicts of interest.
    Not much has changed in four years, and those issues resonate today as the committee looks at another proposal to simplify the closing process. The Secretary of Housing and Urban Development, the Honorable Mel Martinez, has provided the leadership necessary to move the debate forward on how best to meet the twin objectives of providing a meaningful disclosure process for the potential homebuyer, keeping closing costs down, and prohibiting unfair fees, and at the same time meeting the market and technology needs of the mortgage finance system, which are far different than envisioned in RESPA's creation back in 1974.
    In 1974, the mortgage lending and home buying experience was simpler. The homebuyer approached the local lending institution for a mortgage and that entity managed the process from application to 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 much different. Different parties may originate, hold and service the funded mortgage, and intermediaries have come about to join the parties together.
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    On July 29, 2002, HUD published a proposed rule that would significantly alter through regulation the mortgage financing process. This proposal, if finalized, will result in significant changes in how Americans purchase homes. My understanding is that the intent of the rule is to change the way lender payments to brokers are recorded and reported to consumers, improve HUD's good faith estimate settlement cost disclosure, and remove regulatory barriers to allow market forces and increase competition to promote greater choice for consumers by allowing guaranteed packages or bundling of settlement services and mortgage loans.
    The Secretary and the Administration are to be commended for taking this first step. We welcome the Secretary here today to allow him the opportunity to explain the rule, explain its rationale, and to answer our questions and respond to our concerns. Let's be clear. This is a very complex rule with significant impact on the American home buying experience. We have an extraordinary opportunity to remedy what many common Americans believe is a broken, convoluted and wasteful experience. Even the secretary himself when announcing reform talked about his home buying experience here in the metropolitan Washington area. He was the confirmed HUD Secretary and an attorney, yet he still did not understand all of the settlement documents and charges before him. Just like other Americans, he signed the papers and moved in. Mr. Secretary, I have had that experience at practicing law for almost 10 years in Ohio and it is indeed a frustrating experience for all of us.
    For most American families, buying a home is the single biggest investment they will ever make. It is unacceptable for the home buying process itself to be one of the most confusing ordeals that our citizens ever have to go through. As a public policy for the good of communities and families across the country, we want to encourage home ownership. We want to increase our home ownership rate beyond today's record 69 percent, to reach the lower income, inner city, minority and single family households who traditionally lag behind the national average.
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    Moreover, we want transparency in a process that all the participants can agree is fair and cost-efficient. This proposal I believe is the first step in the right direction in making that goal a reality.
    Mr. Secretary, welcome back to the Financial Services Committee. We look forward to your testimony. We also thank you and your staff, notably General Counsel Dick Hauser and Federal Housing Commissioner John Weicher for starting this process. I look forward to working with you to understand the complexities of this proposed rule and making adjustments where necessary so that we have a fair and workable product.
    I am now pleased to yield to the ranking member, the gentleman from New York, Mr. LaFalce.
    [The prepared statement of Hon. Michael G. Oxley can be found on page 30 in the appendix.]
    Mr. LAFALCE. Thank you very much, Mr. Chairman, Secretary Martinez, and Commissioner Weicher.
    I want to start my testimony by congratulating HUD Secretary Martinez for taking the initiative to propose a very comprehensive reform of the mortgage loan process. Buyer complaints about confusing disclosures and last-minute cost and rate increases have led many, including myself, to call for reform of RESPA. I commend you for moving forward with proposals to rein in yield-spread premium abuses, impose good faith estimate tolerance limitations, and create an incentive for loan originators to offer up-front guaranteed loan rates and total closing costs.
    Now, most of my constituents come up to me and say, I agree with 95 percent of your votes, but let's talk about the 5 percent. So I agree with most of what you are proposing, let's talk about some of the other areas.
    The specifics of any final rule that HUD ends up promulgating are critical to ensure that reform works. As you review public comments, as you move toward a final rule, I exhort you to resist calls to delete or weaken some of your key pro-consumer provisions, and instead actually make changes to strengthen the provisions to enhance their implementation and enforcement.
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    So to that end, I am giving you a comment letter today regarding your proposal. It is to lay out what I consider to be important markers for your final rule. I think there are four critical benchmarks, and let me just mention them and then go into each of them briefly. First, predatory lending protections must not be diminished. Secondly, a guarantee must be a real guarantee. Third, yield-spread premium abuses must end. And fourth, the enforcement of violations must be effective.
    Let me go into them. With respect to predatory lending protections, I do not mean this as a criticism, but I will point out that your rule does not include critically needed measures to rein in the growing problem. With the exception of the YSP reforms, the rule would not address the most common predatory and abusive mortgage loan practices. That includes exorbitant fees and rates, high pre-payment penalties, the requirement of up-front credit insurance, and pushing loans on borrowers with inadequate repayment means, and some others.
    Of equal concern, at least, is the bundling of loan fees under the guaranteed loan package agreement raises the possibility that important truth-in-lending consumer protections which are used to provide redress in case of violations which involve predatory loans could be diminished. Specifically, truth-in-lending act rights of rescission relating to violations such as whether fees are bona fide and reasonable, and whether exclusions are properly accounted for could be undermined.
    So HUD should not adopt a final rule incorporating packaging unless it also includes provisions which fully preserve existing predatory lending protections, and arguably the best way to meet this concern would be for Congress to enact comprehensive predatory lending legislation, on which this Congress regrettably has taken no action. In the last Congress and in this Congress, I introduced a bill that Senator Sarbanes introduced in the Senate. It is complex, I know, and it may not be the best product that the mind of man can come up with—I am very, very open on it—but I do think that we need some enhanced legislation in this area.
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    But in the absence of that, HUD can ensure that loans of a predatory nature are not protected from legal redress because of their packaging status. I have got a number of recommendations in my letter to address this issue, most especially I do not think you should allow the use of a guaranteed mortgage package agreement if it includes a prepayment penalty. Prepayment penalties are an important element of predatory loans and they are commonly used to effectively lock borrowers into high interest rate loans.
    Let me go into the second marker, that a guarantee must be a guarantee. Any rule that takes away consumer protections by granting a section 8 RESPA exemption should condition such exemption on both an up-front guarantee of total closing costs and an interest rate guarantee. So I commend you because your mortgage package agreement does include both. But my question is in the nature of the guarantee. It is not a criticism, it is more a question. The guarantee could be meaningless or misleading if you cannot take it to the bank, so to speak. A meaningless guarantee would erode both the policy and the statutory basis for the exemption. The proposed rule states that under the GMPA, an interest rate guarantee would be subject to acceptable final underwriting and property appraisal.
    Well, it is a question of what that means and how it is interpreted. It is critical that the rule be strengthened to ensure that the subject to acceptable and final underwriting clause not be permitted to be used to increase rates at the whims of the loan originator without justification. I have given you some suggestions as to how to ensure that. So I just want your rule beefed up in that respect.
    Third, with respect to yield-spread premiums, again I applaud your treatment of yield-spread premiums. But I think we need to enhance the enforcement of broker compensation provisions by making it a presumptive violation of section 8 for a broker to fail to fully credit yield-spread premiums to the borrower, and explicitly make such violations subject to class action status. I think that would be extremely important as a deterrent enforcement mechanism. I think it is also important to retain the proposed rule's requirement that brokers and all loan originators disclose their role in a loan transaction.
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    My last point, the enforcement of the violations must be effective. With respect to the good faith estimate, zero and 10 percent tolerance requirements. It is not clear how consumers could seek effective redress or how HUD could enforce violations of the newly imposed GFE tolerances. As HUD pointed out in its 1998 HUD-Fed RESPA Report, GFE violations are essentially unenforceable under current statute. Now, the simple solution would be to enact statutory enforcement provisions such as are included in my mortgage reform bill, H.R. 4818. But in the absence of such legislation, HUD should at least state that noncompliance with the GFE tolerance provisions would constitute an unfair and deceptive practice.
    Also, with regard to enforcement of violations of the GMPA, the rule states that packagers would lose their section 8 exemption. However, it is unclear how consumers could pursue redress under section 8 in a bundled closing cost package where individual charges are not itemized. Section 8 enforcement of packaging violations should be more explicitly addressed in the final rule.
    And lastly, I would like to note that even if HUD moves forward to implement a final rule along the lines of your proposed rule, a number of legislative provisions from my mortgage loan consumer protection act, 4818, would nicely complement and enhance your rule. Specifically, I would ask for your support and Congress' consideration of provisions from my bill to statutorily prohibit markups and undisclosed lender fees, to require prompt return of escrow balances on loan payoffs, to improve the accuracy of the APR calculation on mortgage loans, and to establish enforcement provisions for disclosure violations.
    I thank you for your consideration. I thank the chair for its indulgence. I know I have gone a bit over my five minutes. I thank the chair.
    The CHAIRMAN. The gentleman's time has expired.
    The gentlelady from New York, Ms. Kelly.
    Mrs. KELLY. Thank you, Mr. Chairman.
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    The current laws surrounding real estate closings are far too complicated, and they have long deserved reform. For years, different groups have worked to build consensus on reforming the laws to no avail. So I think HUD should be commended for their effort to simplify the process and lower the closing cost because when you get involved in a real estate closing, if you do not know what you are doing, if you are a first-time homebuyer, it is very intricate and the costs of the closings have become a barrier, and the complication of the closings have become a barrier for many American families that look for the security of home ownership. So of course, it is important for us to do policy changes. With any policy change, Congress is probably going to have some questions, but I think we are all grateful that Secretary Martinez has taken the time to come to discuss the issues with us. Secretary Martinez, I thank you for being here. I think your presence today is a clear indication of the importance of this issue for all of America's consumers and first-time homebuyers. So thank you so much for being with us.
    I yield back.
    The CHAIRMAN. The gentlelady yields back.
    The gentlelady from New York, Ms. Maloney.
    Mrs. MALONEY OF NEW YORK. Thank you, Mr. Chairman, and thank you, Mr. Martinez, for testifying today.
    As observers of RESPA reform are well aware, this is a complicated subject with competing interests from all over the financial services industry. While reform efforts have stalled repeatedly over the last decade, technology and mortgage products themselves continue to move forward, making the need for simplification of the home buying process even more important.
    The CHAIRMAN. The committee will reconvene. You were saying, Ms. Maloney?
    Mrs. MALONEY OF NEW YORK. Yes, thank you very much, Mr. Chairman. In the interests of time, I would just like to put my comments in the record. But I would like to note that while the process is far too complicated, we do need to acknowledge that the American mortgage market is a model for the rest of the world. Any effort to reform the home buying process must not damage this success, a large part of which I attribute with the emphasis that we have in the process on consumer protection.
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    I want to note a survey that I found tremendously important and interesting that Fannie Mae recently conducted on national housing. It showed that minority home ownership significantly trails the rest of the country. So it is an area where we do need an emphasis. While we know that the down payment mortgages are widely available, the survey found that 30 percent of Americans believe that you need to pay 20 percent of the cost of the home up front, including 39 percent of both African Americans and Hispanics. I brought out several other important points from this survey, but I just want to close and put my comments in the record in order to move forward quickly. I look forward very much to working with you, Mr. Chairman, as we move forward with this process.
    Thank you.
    [The prepared statement of Hon. Carolyn B. Maloney can be found on page 38 in the appendix.]
    The CHAIRMAN. I thank the gentlelady.
    I now have the honor of introducing the first Hispanic immigrant and first Cuban American ever appointed to serve in the President's Cabinet. The Secretary of the U.S. Department of Housing and Urban Development Mel Martinez is a strong leader. He is working hard to address the housing needs of families across America.
    The gentleman from North Carolina?
    Mr. WATT. Did you make a decision that nobody else was going to do opening statements?
    The CHAIRMAN. Yes.
    Mr. WATT. Okay. I am sorry. Thank you.
    The CHAIRMAN. You will have plenty of time for questions.
    Mr. WATT. I must not have been here when you made that announcement. I apologize.
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    The CHAIRMAN. No problem.
    As a teenager, the secretary fled from Cuba to America as part of a Catholic humanitarian effort that eventually brought 14,000 children to this country. He had to leave his family behind, spoke no English. But through the generosity of strangers and his own conviction that he could succeed in this land of possibility, he did. Secretary Martinez graduated from Florida State University College of Law, practiced law in Orlando for 25 years. During that time, he actively involved himself in giving back to the community.
    Now, as a member of the Administration, Secretary Martinez is working with many of us in Congress to help a record number of Americans find safe and affordable housing. He is pursuing a number of bold initiatives to increase home ownership among minorities, including the reform of the home buying process that we are going to be discussing today. He is also working to provide down payment assistance to families, boost the supply of affordable homes, and increase education to empower home buyers to make informed decisions.
    Secretary Martinez, welcome back to the Financial Services Committee. You are always welcome here.


    Secretary MARTINEZ. Thank you, Mr. Chairman. Thank you very much, and Ranking Member LaFalce and members of the committee. It is great to be back with you.
    I appreciate the opportunity to discuss with you this morning a major initiative of the Bush administration which is to try to increase the number of minorities particularly, but the number of home owners throughout America.
    Mr. Chairman, in order to reserve some of my time, I will submit all of my comments for the record, but would like to just summarize them for you at this time.
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    The CHAIRMAN. Without objection.
    Secretary MARTINEZ. The Bush Administration is committed to eliminating the homeownership gap that exists today between minority populations and the rest of the country. In challenging the real estate and mortgage finance industries to work with us to boost homeownership among minorities, the president has set a goal to increase minority homeownership by 5.5 million new minority homeowners by the end of the decade. The mortgage finance process and the cost of closing are major impediments to homeownership. Every day, Americans enter into a mortgage loan, the largest financial obligation most families will ever undertake, without the clear and useful information they receive with most any other major purchase.
    After agreeing to the price of a house, too many families sit down at the settlement table and discover unexpected fees that can add hundreds, if not thousands of dollars to the cost of their loan. As a result, many home buyers find the settlement process to be filled with mystery and frustration. This administration is committed to streamlining the mortgage finance process so consumers can shop for mortgages and better understand what will happen at the closing table.
    For these reasons, HUD has proposed major overhaul of the regulations governing the Real Estate Settlements and Procedures Act. RESPA has been a priority of mine since I came to HUD. Shortly after taking office, I was faced with a major RESPA issue, the legality of yield-spread premiums. In order to preserve yield-spread premiums as a tool to defer part of the settlement cost, we clarified our policy statement, repeating our view that as long as a broker's compensation is for goods, facilities or services, and the total compensation was reasonable, yields for premiums to the mortgage broker are legal under RESPA.
    At the same time, we recognized that there were serious disclosure problems involving yield-spread premiums. We noted that a small, but seemingly significant number of brokers, often use yield-spread premiums to generate additional profits, placing unsuspected barriers and higher rate loans without a corresponding benefit to the buyer. And so in the process of issuing the policy statement, I committed HUD to establishing clear disclosure rules for mortgage broker fees and to simplifying and improving the mortgage origination process for everyone involved.
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    This was long overdue, and while some may disagree on some specifics—according to the ranking member, 95 percent to 5 percent, that is good—all agree that it was time for a thorough review of RESPA. Beginning last year, we undertook a major reform of RESPA's regulatory requirements. After months of meetings with industry groups, consumer advocates and other interested parties, HUD published its reform proposal for public comment on July 29, 2002. The comment period is open until October 28.
    In addition to adding transparency and certainty to the settlement process, we believe that our proposal can reduce closing costs by an average of $700 per closing. That kind of savings will allow many Americans currently priced out of the home buying market to buy a home. Overall, the annual savings to consumers could be as much as $8 billion. We also expect our proposal to promote innovation in the marketplace, create more competition as consumers can make better-informed decisions, and inspire greater public confidence in the mortgage lending industry.
    The proposed rule addresses the inadequacies of the existing RESPA regulations in three ways. The rule fundamentally changes the way in which compensation to mortgage brokers is disclosed to borrowers, while preserving the use of yield-spread premiums to help pay closing costs. The rule lessens the chance that brokers would use these payments to increase their income without the borrower's knowledge. The rule significantly improves HUD's good faith estimate settlement cost disclosure. This holds great promise for eliminating duplicative or unnecessary charges which will lead to lower settlements costs. Consumers will get the GFE before they have to make commitment to the lender, giving them time to shop for the best loan to meet their needs.
    Finally, the rule permits loan providers to offer guaranteed packages of settlement services and mortgage loans to borrowers. While packaging of services may be desirable and drive down costs, we simply believe that there is no reason to preclude it from happening through regulation. Because they ensure greater transparency, we believe that our proposed reforms will make it more difficult for unscrupulous lenders to abuse borrowers.
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    I want to be very clear that we do not consider RESPA reform to be a cure-all for many problems associated with predatory lending. More must be done to address predatory lending, while preserving a source of credit in the sub-prime market for those with less than perfect credit histories. We have issued the proposed rule and the comment period is open until October 28, 2002. We have asked all segments of the industry, as well as consumer groups, to comment on the possible impact of our proposal. We look forward to improving the proposed rule through these comments. We are encouraged by the broad support the rule has received. HUD is committed to creating a home buying and mortgage finance process grounded in transparency and simplicity. By reforming the rules governing the purchase and financing of a home, we will create new opportunities for first-time home buyers, keep the American dream of homeownership alive for more families, and inspire greater public confidence in the mortgage lending industry.
    I would again like to thank the committee for the opportunity to meet with you today. We look forward to your comments. We look forward to the other comments that we are receiving, and we look forward to improving this rule for the benefit of all American families.

    [The prepared statement of Mel Martinez can be found on page 39 in the appendix.]
    Thank you, sir.
    The CHAIRMAN. Thank you, Mr. Secretary. You will indeed get some comments today, I can assure you, and some questions, as would be expected.
    You mentioned that you thought that the average closing could save $700. How did HUD arrive at that number?
    Secretary MARTINEZ. Well, it is an imprecise number, to be sure, but we believe that by creating greater competition, allowing consumers to shop for services, that it will drive down costs; that it will encourage all of the participants in the closing process to create efficiencies and in creating those efficiencies, we believe we will see a reduction in the closing costs and all of the numerous fees that are apparent. We believe that there are a number of fees that often get tacked on in the closing process that frankly are not grounded in anything significant of benefit to the consumer. So we believe that through all of that and the efficiencies generated by it, that it will drive down costs.
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    The CHAIRMAN. You mentioned, of course, that the comment period ends on October 28, this month. What time line do you envision for review of comments, revision of the proposed rule, and approval of the final rule?
    Secretary MARTINEZ. We do not have a precise time line. We are receiving a lot of comment, but we know that a lot of significant comments will be coming after this hearing. We will digest all of those comments, and then continue the consultation process with the members of this committee, and then arrive at a final rule.
    In terms of a time line, I am not wedded to a specific time line. Whatever time it takes to digest and sufficiently absorb all of the comments that will be received, we will take. I am not interested in a rule that is out quickly. I am interested in a rule that comes as close to getting it right as we possibly can.
    The CHAIRMAN. Does that also include, then, the deadline for comments?
    Secretary MARTINEZ. Well, the deadline for comments I think needs to be fixed, because frankly I think one of the enemies of reform would be to drag out this process ad infinitum. In fact, I think it already by some observations would have been dragged out for many years. So I would like to stick to that time of comment. If, as we got to that date, it was apparent that for fairness and in order to be inclusive in comments we needed to extend it, it would seem to me that that would be the right thing to do. But it would also be my hope that those who are going to comment will have ample opportunity in what is now another month to comment on the rule.
    The CHAIRMAN. We want to work with you towards that goal. We have obviously some issues in terms of when the Congress adjourns for the year. I understand there is an election coming up, and so as a result we want to work with you, but also make certain that that deadline is not necessarily an artificial one that would preclude all of the members, as well as the public to provide information.
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    Secretary MARTINEZ. Mr. Chairman, we will work with you on that, and be sure that—we need to take the comments. We have asked, in fact, for over 30 questions of specific issues where we want the industry, the consumers to comment on. There are many issues about this proposed rule that still need to be shaped by the comments that we will get.
    The CHAIRMAN. Thank you.
    The housing industry more than any other industry has supported and propped up our economy, as you have indicated in the past. Mortgage rates are an all-time low. The homeownership rate is on the rise. Other countries look at our system as a model to be emulated. How will the new RESPA proposal affect our housing and mortgage markets? How can we be assured it will not hinder the ready access to mortgage credit that our system now provides?
    Secretary MARTINEZ. Mr. Chairman, I am convinced that it is going to enhance our housing market. I think it will open the doors to home buyers that currently are priced out of the marketplace. While $700 does not seem like a large sum of money, when you can reduce that from the number of dollars that we are going to be impacting of the dollars needed at closing, I think that could be very dramatic indeed. So as we increase the numbers of the pool of potential home buyers, I think that will be good for the housing market. In addition to that, from the early comments that I have heard from the mortgage banking industry and the very supportive comments, I believe that it will not have any detrimental effect on the availability of mortgage money.
    The CHAIRMAN. My time has almost expired. I just want to ask you one other issue. It seems to me that the number of closings that I have participated in private practice, one of the most intimidating things for anybody buying particularly their first home is to be confronted with these reams of forms and warnings and all of the paperwork that just seems to never end, and the role of the closing attorney to explain all of these to these people, their heads swimming around, they are making the biggest purchase of their life. They see their life passing before them. One of the factors that always frustrated me was that at the end of the day, I did not feel my client really understood a whole lot anyway. All they knew was that they were buying a house, that they had to sign a bunch of papers, and that just by the sheer volume of those papers drove up the cost of the closing process.
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    I know we share that same frustration and we have discussed it before. And part of it, frankly, is legislated. That is, some of the basic RESPA changes that were made in the original RESPA Act of 1974, but it just seems to have grown exponentially. Obviously, I think anything that we can do to simplify that process to make it more functional, to make it more understandable, not to intimidate these folks, would be a great service to the country. We salute you for your willingness to roll up your sleeves and deal with this very difficult issue.
    The gentleman from Texas, Mr. Bentsen.
    Mr. BENTSEN. Thank you, Mr. Chairman and Mr. Secretary.
    I have a couple of questions for you. The proposed rule seems to be, as it relates to broker compensation, seems to be a pretty dramatic change from HUD's position over the last several years with respect to yield-spread premiums. I and other members of this panel were engaged with HUD over the last several years as they were trying to propose disclosure language of yield-spread premiums and how best to inform the borrower whether or not there was compensation between the wholesale lender and the retail lender. And in fact, there had been some court cases, as you are well aware, affecting this. But it seems to me in your rule, HUD now has really come about-face and taken the position that as it relates to retail lenders or brokers, there can be no yield-spread premium. That is not the case for the wholesale market, but is that correct?
    Secretary MARTINEZ. That is not correct, sir. I think we preserve yield-spread premium. It is just in the way it is disclosed. We believe that the broker compensation as such is part of the origination fees that are charged by the lender and the broker and whoever all participates in that process. The yields premium per se is provided as a vehicle for the borrower to obtain up front dollars in exchange for a larger or higher interest rate so that he or she can offset the cost of settlement. That now is disclosed clearly as a credit to the borrower, allowing the borrower to understand the nature of that—
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    Mr. BENTSEN. If I might, Mr. Secretary, but am I correct in understanding it may only be used as a credit to the borrower, not for any fees related to the broker?
    Secretary MARTINEZ. That is correct, but that is not inconsistent with HUD's past rules.
    Mr. BENTSEN. I am not sure that it is not. I think in the past that HUD had taken the position that they did not oppose yield-spread premiums inasmuch as they were properly disclosed and the borrower understood that in fact the retail lender might be receiving compensation through the loan rate from the wholesale lender.
    Secretary MARTINEZ. That is correct. The point of distinction between the HUD rule and the litigation that was taking place was in the treatment of the individual borrower as a single case-by-case transaction, or whether we could make assumptions and lump all of the transactions together and deal with yield-spread premium in that fashion. We have said all along, and in fact the issuance of our rule clarification was in response to the litigation so that we could preserve yield-spread premium as a vehicle for borrowers who had to have a yield-spread premium in order to make those closing costs fit their needs.
    Mr. BENTSEN. But—and I need to move on because my time is short—I do think it changes to some extent. Let me ask this, and I assume that the opinion of the department is that the need for this also is insufficient transparency in the retail mortgage market?
    Secretary MARTINEZ. Correct. In other words—I am sorry, I do not want to take your time. That is correct.
    Mr. BENTSEN. I appreciate that. I do not mean to cut you off.
    Secretary MARTINEZ. I am sorry.
    Mr. BENTSEN. And the other part of the rule, you have the GMP, guaranteed mortgage package, or whatever—I have to get all my acronyms straight—but, and then the new good faith estimate. Is it correct that, are wholesale lenders able to provide the GMP product or not?
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    Secretary MARTINEZ. Yes, they can.
    Mr. BENTSEN. So a lender can, as part of their overall loan package, a wholesale lender, provide this package.
    Secretary MARTINEZ. Yes.
    Mr. BENTSEN. Is there any concern with respect to HUD that a wholesale lender, which is not subject to the same yield-spread premiums, would have the ability in basically buying the business as opposed to the current structure? By that, the wholesale lender not only because of size and capital and equity, as compared to the market players now—the title insurance companies, mortgage brokers and all the rest—but also because of access to the capital markets for purposes of pricing loans, that basically they would be subsidizing to buy the business. It is something we have seen in other factors of the capital markets recently that raised some concerns of this committee and the Congress. But is this something that the department considers?
    Secretary MARTINEZ. I do not think that would be the case. I mean, I think we have not seen that as a problem.
    I want to go back to that yield-spread premium issue. I think the way to clarify your view of it and what I have been trying to say is that while the department viewed yield-spread premium as a problem, we in keeping consistent with our rule, did not feel like the litigation avenue was the most viable way to regulate RESPA, and that this rule change will now do what could not be done under the existing rules. And so in other words, we are going to now allow for a clear disclosure of YSP in a way that makes it very difficult for its misuse by those in the marketplace who would abuse the borrower.
    Mr. BENTSEN. Thank you.
    Mrs. KELLY. [Presiding.] Thank you very much.
    We go to Mr. Royce.
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    Mr. ROYCE. Yes, before we vote, let me just ask you, today it is estimated that over 50 percent of mortgages are originated through mortgage brokers, and traditionally these mortgage brokers are small business owners, often having less than five employees on their staff. Many of these small business mortgage brokers are concerned that they will not be able to offer a guaranteed mortgage package and will be forced to continue to offer good faith estimates, which will put them, in their view, at a competitive disadvantage. I would like to ask if either of you could comment on that concern.
    Secretary MARTINEZ. I understand the concern. I do believe that a small participant in the marketplace can only, without packaging, through the GFE, continue to be a viable player in the process. I think a small businessman and a small broker will have the benefit of being the closest to the consumer. That is not going to change. They will have the benefit of a network of people who give leads into businesses, whether it be a realtor or whoever it may be. So I view their function as vital and important, and I think it can continue whether or not they have become a part of the packaging scheme or not. In other words, what we are proposing allows the possibility of packaging. It does not mandate it and does not dictate that that would be the only way to do business.
    Now, if a broker is efficient and if a broker can in participation or partnership with other providers to the closing process take advantage of the new scheme of doing business, I think they could be very successful. So I do not think there is anything here that predetermines winners and losers in the marketplace. It does open the marketplace to greater competition, to greater transparency and greater clarity, which will allow the consumer to make better choices.
    Mr. ROYCE. Let me ask your colleague there to comment as well. John, do you have anything to add to that?
    Mr. WEICHER. No, I think that is absolutely right. The brokerage industry was a very small industry 10 or 12 years ago. Brokers have found ways to provide mortgages, to originate mortgages that other participants had not found. We do not think that anything in the rule is going to make it harder for brokers to do the job that they have been successfully doing for the last dozen years.
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    Mr. ROYCE. Yes, they are a rather amazingly large share of the market. They are half of the market, I believe.
    Secretary MARTINEZ. And they are because even financial institutions find it useful to use the broker network in order to create efficiencies in the way they generate loans. So I think all of those marketplace efficiencies will continue. I think it will create some changes in the way their fees are disclosed, and I think frankly more clarity will only enhance the good honest broker out there trying to do a good job for their customer.
    Mr. ROYCE. Well, Chairwoman?
    Mrs. KELLY. Thank you very much.
    Ms. Tubbs Jones?
    Mrs. JONES OF OHIO. Thank you, Madam Chairwoman.
    Good morning, Mr. Secretary, how are you?
    Secretary MARTINEZ. Good.
    Mrs. JONES OF OHIO. A couple of questions, short questions. Overall, I think this is a great idea. There are just some questions I have with regard to the packaging. On the application itself, it says interest rate guarantee on the guarantee mortgage package agreement—even though this is guaranteed, a lot of consumers do not realize that, and you have it in small writing that this agreement is subject to verification of your credit rating. They do not realize that their credit rating has a flux. Maybe if this is going to be the end form, that you could make it large that credit rating affects the rate that you are going to get, so that they understand, well, you gave me 7 percent, and my credit, I am a C credit person, that it is going to fluctuate, because ''guarantee'' kind of misrepresents that your credit has to be at a certain level.
    Secretary MARTINEZ. We have been hearing that comment, and I think it is well taken. I think what we have here, by the way congresswoman, is not what we hope will be the final form.
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    Mrs. JONES OF OHIO. Okay.
    Secretary MARTINEZ. This is still too much lawyer-speak for me. I want to make it more consumer friendly.
    Mrs. JONES OF OHIO. Wait a minute.
    Secretary MARTINEZ. I understand. You are one.
    Mrs. JONES OF OHIO. Okay.
    Secretary MARTINEZ. But you know, so I agree with what you are saying, and we are taking that into account as we go forward, and ''guarantee'' may not be the right terminology.
    Mrs. JONES OF OHIO. Okay. Let's go to federal preemption. It appears that the packaging concept may be at odds with some of our State laws. For example, the package provides applicants with aggregate cost amounts rather than detailed itemization, and many States require itemization. The package allows freedom to negotiate volume discounts, to use average cost pricing over multiple transactions, and several other things. I am just wondering, how are we going to—to realize the benefits of the package, are you willing to adopt a strong position on federal preemption? Or where are you on that, when you have a disagreement between the State and the federal law in some of these things?
    Secretary MARTINEZ. We are still working through that, and I do not have a final answer for you on that today.
    Mrs. JONES OF OHIO. Okay.
    Secretary MARTINEZ. But the fact is, I think for this to work, it has to be available throughout the country. We want to not just limit it where it is applicable. So the best answer I can give you is that we are still working through that.
    Mrs. JONES OF OHIO. Okay.
    And then the other thing is, have you thought through how you would implement this? Are you thinking that maybe you would do either guaranteed mortgage package at one time, and then do the other, or vice versa? One of the things when I was an administrator, I used to always think, oh, this is a great idea and I am going to implement it, but when it got down to the low level folks who had to implement it, it became a struggle. Are you thinking you are just going to go, this will be done at one time, or you will implement in stages, or where are you on that?
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    Secretary MARTINEZ. I have a great fear, that the greatest enemy to this process is delay and those kinds of issues, so I am focused on getting it done. But I think good reason should prevail. If we can implement it in a way that will allow people to go forward and apply it, we will. I think, frankly, my sense is to apply it all at once and then allow for a period of shaking out in the marketplace where enforcement will work with people as they try to implement it. But I would be disinclined to have incremental application of it.
    Mrs. JONES OF OHIO. Lastly, part of this guaranteed mortgage package and the other implementation is focused on mortgage brokers who—I have attempted to implement some legislation that would have required them to have a certification or training in the processing of applications because there is no regulation on them. I am not saying all mortgage brokers are not great people, but I am just saying that some of the dilemmas that people purchasing housing have had has been with the mortgage broker. I note that in your proposal, the fees would come directly from the borrower, rather than from the lender. What can we do to help borrowers in this process, even though they are paying the fee, have a better understanding of the process? I do not have necessarily any ideas other than education and the like, but I think that once we give that back to them, it is their responsibility, where some people when you see a check, they are going to take whatever is on the other side of the table.
    Secretary MARTINEZ. Right.
    Mrs. JONES OF OHIO. That is my last question.
    Secretary MARTINEZ. You are precisely right about the problems. What we have attempted to do to the rule is to clearly disclose it and let the borrower know this is something that you are paying for. You are getting a higher interest rate so that this amount of money here which is coming to you now is going back as a closing cost. So we believe disclosure and education are a big part of it. We are also more than doubling our enforcement staff for RESPA enforcement. So all of these things I think working together will help.
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    But again, we are open to suggestions. We are working closely with the consumer groups. We find a lot of support among them, some with some reluctance, and we look forward to hearing their concerns so that they can enthusiastically embrace it. So we will work with them and continue to hear their concerns.
    Mrs. JONES OF OHIO. Thank you, Mr. Secretary. I am sending you a letter about a project in my district. I hope to hear back from you. Thank you.
    Secretary MARTINEZ. Thank you. Okay.
    Mrs. KELLY. Thank you, Ms. Tubbs Jones.
    We have been called for a vote on the floor. There may be a second vote following this one, so the committee will recess for the floor vote and reconvene in approximately 15 minutes. It depends on whether we have that second vote. So thank you. The committee is in recess.
    Mrs. KELLY. If everyone will be seated please, we will re-start the hearing, and we go to Mr. Ney.
    Mr. NEY. Thank you, Madam Chairwoman.
    Mr. Secretary, you have made clear that one of your main goals in promulgating the rule is to empower consumers and have transparency. I think that is tremendous and I want to give you a lot of credit for that.
    Also, I think in your testimony, you believe this rule would help reduce instances of predatory lending because of how it empowers the consumers and increases disclosure. I think that is also a good direction to go.
    I had one concern I wanted to ask about, and that is the proposed rule will not apply to HOEPA loans. I just was curious why the rule does not extend the benefits of increased disclosure and loan simplification to the segment of the market that I think really needs it most, which are the high-cost loans, namely those covered by HOEPA. So I was just curious about that, what I think is maybe a missing component in that rule. Madam Chairwoman, may I just, if you would indulge me for a second, ask one more for the record. I may not be able to be here, but I would just like to get the second question out, if I may.
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    Mrs. KELLY. By all means.
    Mr. NEY. Thank you. I appreciate your indulgence on that. In 2001, Mr. Secretary, HUD reiterated that broker fees could be legal under RESPA, as long as they were payments for goods, facilities and services and the amounts of payments were reasonably related to what was provided.
    I agree with that interpretation, and I think probably many members of this committee also would appreciate your efforts to provide certainty in the 2001 policy statement.
    The problem, however, is that I am not sure the proposed rule truly matches completely as it should the statement of policy. The rule characterizes the yield-spread premium as a lender payment to the borrower. I think something might have gotten lost in the translation in the sense that payments for goods, facilities and services is not the same as the lender payment to the borrower. So I just wondered if there is further clarification needed on this point, and that is my question for the record.
    Mrs. KELLY. Thank you, Mr. Ney.
    What I will do is hold the record open for 30 days anyway, so that people can submit written questions. But in addition to that, if you are amenable to it, we will just go then to the next person on the list and we will let people ask questions until we can get the sound system fixed, and then we can go on with it that way. If you do not mind, you can answer these questions in writing, if that would be preferable for everybody.
    Mr. WATT. Madam Chair, could they just come up to the one of the mikes that is working?
    Mrs. KELLY. That is possible, but I think maybe we have a few people crawling under the table right now to fix this, and hopefully we will get it done. So if we can just—Mr. Lucas, you are next, and if you would like to just pose your questions and we will go on from there, because the Secretary is under a time constraint. He needs to leave here and I want to try to get everyone in as quickly as possible.
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    Mr. LUCAS OF KENTUCKY. Okay, Madam Chairman.
    Mr. Secretary, I commend you for your leadership on this issue. This proposed rule would allow lenders and non-lenders such as real estate brokers and home builders and title companies to participate in the packaging. The rule would also require that the packagers guarantee the interest rate, as well as the closing costs for a loan. Non-lenders, however, who are a major source of funds in the real estate finance market, are not in a position to guarantee the interest rate. This seems like it is going to create an unlevel playing field here, and I have heard you say that everyone can participate, but how does a non-lender guarantee an interest rate? That would be my question for the record.
    Mrs. KELLY. Have you any further questions, Mr. Lucas?
    Mr. LUCAS OF KENTUCKY. No, ma'am.
    Mrs. KELLY. Thank you.
    Secretary Martinez, I am next on the list, and I just would like to know how this rule will impact small businesses. By that, I am concerned about the large lenders dominating the market by packaging services, and that could hurt small businesses. For instance, is it not possible that small title companies could be run out of the market from this? My interest is in trying to protect our small businesses. At some point, I would hope that we can get an answer for that question.
    My next question is that under HUD's proposed rule, a yield-spread premium is characterized as a credit from the lender to the borrower. Is it not really a payment from the lender to the broker for the goods and the facilities or the services? If that is not so, then I believe that this needs further clarification. I would hope that HUD would address—
    Do you want to come up? We could be very unconventional here, and the two of you could come up and sit here and have one of these microphones. I think these microphones work. Yes, these do, so why don't you just come on up here and we can do it that way.
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    Secretary MARTINEZ. I did not realize today's testimony would also involve a promotion.
    But I am happy to be up here.
    Let's see, where were we?
    Mrs. KELLY. I had a question. I am going to go back and let Mr. Lucas have a shot. Mr. Lucas, do you want to re-pose that question?
    Mr. LUCAS OF KENTUCKY. You probably heard the question, but I think just to repeat the important part is, how can a non-lender guarantee an interest rate? It seems like to me that puts him at a big disadvantage.
    Secretary MARTINEZ. I think what will have to happen is that this is going to be a changed marketplace. I do not think a non-lender can guarantee a package. But what I have been hearing is that there are arrangements already being created in a sense to react to the rule. So in some ways it will be a somewhat changed business environment, but I do not believe it will dictate necessarily that someone who is a broker cannot participate in the system as is currently proposed. There still is room for non-packaged deals to go forward. They will have to be well designed. The cost will have to be reasonable because the consumer will have a chance to compare costs.
    And let me just point something out which I think in part, Madam Chairwoman, goes to answer your question, which is, I am looking now at the language of the act in section two of RESPA. It says that the purpose of this act is to ensure that consumers throughout the nation are provided with greater and more timely information on the nature and cost of the settlement process, and are protected from unnecessarily high settlement charges. So while at the same time I am sympathetic to a small business person, I do not think we are designing a system that does not allow them to succeed. I also do not believe the purposes of the RESPA act are focused on the small businessman. They are focused on the consumer.
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    Mr. LUCAS OF KENTUCKY. But a non-lender in fact cannot participate in the packaged area competitively.
    Secretary MARTINEZ. They can participate if they create an arrangement with a lender. In other words, they will now have to work in—they do now work in partnership with a lender. A broker has to go somewhere for the loan, so they can put a package together with the people that they are now in business with.
    Now, one other question that was raised is the nature of broker fees. I believe that broker fees are derived from the origination fee that is still going to be paid by the borrower. The YSP is something that the borrower needs to understand is something that he is getting at the time of closing, at the time of settlement, in exchange for a higher interest rate. And that fee properly is to offset the closing costs, the origination fee is part of that closing cost. So the broker fee as part of the origination cost will still be paid by the YSP. It is just that the borrower understands that is something that came to him or her, so that now the borrower can go back and pay the person or the lender for the origination fee, which includes the broker fee. It is a little convoluted, but I think you follow me.
    Mrs. KELLY. Thank you.
    Reclaiming my time, I feel that this is a fairly complicated issue, and I think that perhaps we may need some clarification so that the borrower understands what is going on here in very simple terms. As you stated earlier, you want it in less legalese. I think it is very important that the YSP be explained to the borrower in such a way that they understand and this gets clarified in a better way.
    Some people have said that this method of having the YSP credited to the borrower toward the broker's fees and the total loan origination cost is just likely to be very, very confusing to the consumer, more confusing than the current disclosure requirements. I would like you to explain why you think the change is necessary and what the benefit is to the consumer.
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    Secretary MARTINEZ. I have heard that in the last couple of days and I find it just shocking that anyone would suggest that. I think even though the proposed GFE that we now have is not final, if you were to put it side by side with the current, it goes from about 62 potential items to one or two or three. So I think it will be much clearer. Currently, YSP is put on there as YSP dot and a number, or a figure. It does not come back to a ledger to be deducted or added, and someone would have to presume to know what YSP is. In the form we are proposing, it will say payment to broker in exchange for higher interest rate. That is what it is. And so in other words, I think we have covered that, and I would continue to invite those who find it too confusing in the way we are proposing it to work with us to make it simpler. We are asking for comments. We have even gone to length of hiring a consultant to work with us on language that would be less legal and more consumer friendly, and we look forward to input that would clarify it even more.
    Mrs. KELLY. We have some question here, Mr. Secretary, as to whether that is stated in the way that you just described, or whether it is stated as simply credit to borrower. If that is the case, then the borrower does not get a clear picture. So I think it is incumbent upon us to look for clarification so it is quite clear on the face of it, and I think that that may be worth having a look.
    Secretary MARTINEZ. Absolutely. We welcome the comments and input on that, absolutely.
    Mrs. KELLY. Thank you.
    We go now to Mr. Watt.
    Mr. WATT. Thank you, Madam Chair.
    First of all, Mr. Secretary, I thank you very much for being here and for the effort that you have made to try to improve the system. I think it is an important effort and it can be a controversial effort, and just getting in the middle of it and trying to do something in and of itself has to be commended.
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    I want to make a couple of comments that may be a little counter-intuitive and express some concerns. This is based on the fact that I was out there doing this stuff for 22 years. Sometimes we can sit here and do something either, and it has a completely different impact in the real world. Quite often, I have been kind of out of step on some of these issues because even if it has the intended impact in the real world, sometimes my experience in the real world is a little bit different than other people's experiences in the real world. I think that is what we come here to try to bring to the process and understanding of what impact this is going to have in the real world.
    Let me just make a couple of comments about several things that I think may have unintended consequences. Number one, and this is not one of those, I just want to call it to your attention, one of the comments I have gotten is that you are not accepting either online or fax comments, and that plus the fact that you have this deadline that is looming on people may impel you to go back and look at the deadline, not for the purpose of delay, but to make sure that everybody gets their day. I do not know whether that is the case or not, and I am not even asking the question at this point, but if that is the case, I hope you will look at the possibility of maybe extending the comment deadline.
    Second, my real concern is that this puts lenders in much, much greater control of the entire process, and maybe that is necessary to get costs down in this area, but I think it is going to have some real world consequences that I am not sure how to address, but at least ought to be on the table. If you all can find a way to address them, I hope you will consider that. This is my experience, even under the existing RESPA process, lenders basically dictate to borrowers who their lawyers will be and who their title insurance companies will be. So I am concerned that this category of lender-required services and shoppable lender required third-party services gets some more scrutiny, because in the real world basically lenders will have their own buddies, the good old boy system I used to call it, who will close all of the loans and small minority attorneys simply will not be able to get into the process.
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    I saw it happen time after time after time. The only time I ever closed a loan was when the borrower demanded that I be used; never did the lender say, we want to use this person because they had their own infrastructure. This guaranteed mortgage package system is going to make that even more heavy-handed and more closed and more controlled, similar to the point that Chairperson Kelly was raising. The smaller people in this process are going to get frozen out. The people who are not in the good old boy system are going to get frozen out. Maybe it will drive down costs some, but I think we have the responsibility to look at a broader impact if we are going to be doing this.
    Mrs. KELLY. Mr. Watt, you need another 30 seconds.
    Mr. WATT. If you would, thank you.
    The other thing that I think this has the capacity of doing is, and there is legislation, I acknowledge, on the books that prohibits lenders from doing titling, but now that we have allowed lenders to branch out into other things, including title insurance, I think the possibility of heavy-handedness there, not with some illegal transaction, but just with a wink and a nod exist, and you need to be aware of that.
    If there is any way to address those concerns and still do what—I mean, I understand what you are trying to do. This is not a criticism of what you are trying to do. But it is important that we do not freeze out people who should be participating in this process in the lender assistance process and in the servicing process, and I hope you will take those comments into account.
    Thank you.
    Secretary MARTINEZ. Thank you very much, sir.
    Mrs. KELLY. Ms. Biggert?
    Mrs. BIGGERT. Thank you, Madam Chair. If you sit here long enough waiting for your turn, usually all the questions have been answered and the concerns. I would say that was true, but I do want to comment on the packaging. I, too, in one former life was a lawyer for real estate transactions, as well as some other things, but the thing that I heard was how complicated the rest of the package is, or the forms. And I would have to say that I think for consumers that have had trouble with that as not having a good lawyer who is really able to explain what is on there and go through the mortgage package. I think that is very important that people have that now. That probably raises the cost, and to spend a little more time, although I would not say that for most lawyers that real estate closings are a money-making deal, or that you are going to make a living just off of that.
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    But I do have concern with the packaging and particularly with the title insurance, because I think it is so important that there be a title insurance company that is independent of a lender because of the possibility of just assigning to a particular company all the time, and they might get a little remiss in the duties and just take it for granted and not really do the title search and looking at all of the different things that appear on that title policy and are taken care of. So I think that is something to be concerned about that we have some independence. I think as Mr. Watt said about the lawyers, even that it is just everybody working together, and you get—you are not competing, and I think that to choose is very, very important, and to have the independence of all of those groups. To me, that is the most important.
    The other thing is that since you are making all of these changes, do you have the legal ability to do that, or does there have to be legislation to provide that safe harbor for the packaging?
    Secretary MARTINEZ. On the issue of the legal ability, it is clear that the Secretary is designated or delegated by the Congress the ability to exempt for a good purpose anyone from the application of certain parts of the RESPA act. So we clearly do have it. I would say on the whole issue of packaging, and it really goes to the last question as well, we are not mandating it. We currently have the situation whereby government regulation, the packaging of certain services is simply prohibited. All we are doing here is allowing the marketplace to determine and to work in the field, and if packaging evolves so be it.
    We are not mandating it. We are not preferring it. We are not advancing it. We are simply removing the regulatory barriers that have kept it from occurring. It is going to be a changed marketplace which will require different practices and different arrangements than what has been done in the past, but that is always the way of the marketplace. Frankly, more competition and lower cost to consumers in buying a home I think is well worth the disruption that it might bring to long-established business practices. So it is a weighing of benefits and challenges.
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    Mrs. BIGGERT. Well certainly, you know, more people can buy more of a first home, but we have seen the largest boom in real estate right now. We certainly do not want to do anything that will harm that and drive the ability for people to purchase homes down.
    With that in mind, I had one other question, which now I have lost, so I will yield back my time.
    Thank you.
    Mrs. KELLY. Thank you.
    Mr. Clay?
    Mr. CLAY. Thank you, Madam Chair. Mr. Secretary, Good morning, how are you?
    Tell me, do you think—does HUD believe this rule is a solution to the problem of predatory lending?
    Secretary MARTINEZ. Absolutely not.
    Mr. CLAY. You do not.
    Secretary MARTINEZ. No, sir. I think the problem of predatory lending, the problems of TILA, which are not governed by HUD, aside from this rule, we think that greater disclosure will help the consumer be a smarter, more informed, better armed consumer and in that way I think it can help someone not fall prey to predatory lending. But predatory lending is a problem which the changes in this rule are not going to cure.
    Mr. CLAY. Have you proposed any legislation to impact predatory lending or to rid us of predatory lenders?
    Secretary MARTINEZ. We are going to be proposing certain things in further reform of RESPA that need to be legislative changes. Predatory lending is only regulated by HUD as it relates to FHA lending, which is about 7 percent of all mortgage lending. So we have a very small role in that. We do work very closely in the area of predatory lending with the Federal Trade Commission. We recently finished a case with them where we did a joint prosecution with great results. We have worked very closely with the predatory lending task force in Baltimore. We are now taking it to a couple of other communities where we are using that same task force approach. So we are doing a number of things in predatory lending, but you also have to understand that the Truth in Lending Act and other areas of regulating the banking industry is really where there is greater enforcement of lending laws.
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    Mr. CLAY. Another question—do you have any concerns that these new rules could adversely affect mortgage brokers and thus reduce the availability of mortgage credit in some areas?
    Secretary MARTINEZ. We do not believe that it will affect the availability of credit. Quite the contrary, the mortgage banking industry is very supportive of these changes. I do understand that there is great concern from some brokers. I just do not believe that the fears are warranted, for the good, ethical, efficient broker who is doing a good job for his consumer. All we are doing is requiring clear disclosure of their compensation, and in doing so we are just putting it out there for the marketplace for the consumer to have a greater opportunity to make a choice in his purchasing of a mortgage loan.
    Mr. CLAY. Thank you, Mr. Secretary.
    Madam Chair, may I yield the balance of my time to Mr. Watt?
    Mrs. KELLY. Certainly.
    Mr. CLAY. Thank you.
    Mr. WATT. I will not use the balance of the time. I just wanted to take issue with the Secretary's presumption that this process is going to somehow increase competition. The concern I have is that in the real world, it is going to decrease competition for the kind of closing services that you think, you keep saying it is going to increase competition for because basically what the lenders are going to do is close the ranks of who closes loans. That cuts down on the amount of competition, not increases the amount of competition.
    So I hear what you are saying in a theoretical sense this might have the impact, but in the real world that is not going to happen. I hope you will not continue with that mindset, because if you continue with that mindset, you will not do anything to try to address the issue. So I want to break you out of the mindset that this is somehow going to increase competition. It is not. Lenders will have their own package teams and they will funnel all of their business to that package team, and everybody else in the marketplace will be left out. That will not increase competition, believe me.
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    Secretary MARTINEZ. I hear you, sir. I think I am speaking of competition in the sense of consumers will be better informed, will be informed earlier in the process, will have a chance to shop for services—so competition in that sense. I hear your concern, though, and we will take that into account. And if there is any way that we can improve the rule to create more competition to ensure that this is not just all of a sudden now done by five people in America, I will do what we can to tweak it in that direction. Any input that your office of those of your constituents that are concerned want to provide, we will be listening to them. And by the way, I should tell you I have already heard very clearly and directly online comments about the rule in my e-mail, so we will be available to hear about it.
    Mr. WATT. Are those becoming part of the official record, though?
    Mrs. KELLY. Mr. Watt, I am sorry, your time is up.
    Just as an observation, since we are talking about information for the borrowers, and information for these first-time home buyers, I would like you, Mr. Secretary, to review and consider an appropriate letter-size font. I am concerned that these documents are written in such tiny type they discourage people from reading them. So I think it is very incumbent upon all of us to make these documents easily readable. They are difficult enough to read, but the font size is so small they are quite hard to read.
    We go now to Mr. Tiberi.
    Secretary MARTINEZ. You are absolutely right.
    Mr. TIBERI. Speaking of small print—first off, I want to thank you, Mr. Secretary, for your work on this. You and I have talked about this in the past. I want to talk a little bit about the level playing field that you and I have agreed on, and also thank Ken and Theresa for their work. And yesterday, Ken gave me this document, and it is in pretty small print. But on the document, the issue that has been talked about today, and I know enough to make me dangerous because of my former life as a realtor, the point that we have all been talking about is this lender payment to borrower for higher interest rate. And right below that, there is a box that you have been talking about—the disclosure part, which is a net loan origination charge from the borrower.
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    Let me tell you why I do not think it is a level playing field. I hope we have enough time to circle back to talk about Congressman Watt's concern. But let me get a little chart that I did. This chart shows under your proposed rule what I believe can happen. And that is because of the yield-spread premium, a broker is going to have to, with respect to advertising to a consumer on a 7 percent interest rate mortgage, they are going to have to advertise a two point origination fee. At the same time, because of the way the lender is paid on the back end of a deal, the lender can advertise at zero points. Now, the bottom line is under your disclosure form, and I agree with this, under the net origination, it is going to end up the same in terms of the cost to the borrower. I think your staff would agree.
    However, the broker is going to be disadvantaged because as we all know through advertising today and as a realtor, consumers are very, unless it is a lawyer who does real estate work, are very much influenced by zero points. I can tell you that as a realtor. And so the broker is going to be disadvantaged even though their client in the end will pay the same.
    Now, to complicate that, I believe, on your form this lender payment to borrower at a closing, I could just imagine sitting at a closing table where the borrower is going to say, well, does not the lender owe me a check for $675. So I appreciate what you are doing. I agree 100 percent that RESPA needs to be reformed. I think we are going to disadvantage small brokers at the expense of lenders. I think that if you go further on and talk about what Congressman Watt talked about with respect to FHA and VA, many first-time home buyers, many brokers in my district are dealing with those first-time home buyers. You have a 1 percent cap on FHA and VA, and again brokers are going to be disadvantaged because they are going to have to disclose. The lender gets paid on the back end, and suddenly I think you are going to have less competition because the broker is just going to say, I cannot compete on this end. And so you have got 33 to 35 to 40 percent of the market being taken out because they are just simply not going to originate these loans.
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    So two questions there, one, comment on the FHA-VA; and two, comment on what I think you are trying to disclose, but through this type of disclosure on this type of form, you are actually disadvantaging the broker because of the way this is going to be advertised in the market.
    Secretary MARTINEZ. Well, we need to make sure that we do a form that is fair, honest, clear disclosure. What you have suggested there would not be an honest way to compare apples to apples. We are trying to come to a form that will allow a consumer to look at apples to apples comparisons and shop for services so they can get the best deal out there.
    Right now, they do not. Right now, they have no clue what they are paying. So we are moving forward in this process, but we are also looking forward to comments. Whatever proposals would improve this form that come to us, we will take into account, and if it improves it, we will do it. So we are looking forward for that input on those comments.
    Mr. TIBERI. I appreciate that, because I think right now—
    Secretary MARTINEZ. This is not a final form. This is not a final product.
    Mr. TIBERI. My concern is, and I think it was mentioned earlier by the Chair, that the closing period is at the end of this month. Congress is going to be gone. I think we all agree this is a confusing issue, and we are on the same page in terms of level playing field and disclosure. But clearly, I believe that what is proposed thus far will not only disadvantage small brokers in particular with respect to packaging, with respect to the way the advertising will end up occurring, even though in the end the net origination fee will be the same. I think the confusion with the lender payback credit causes really a broker to have to go and meet additional hurdles than a lender. I think ultimately that will constrict the market. You will have less competition and in the end, I think we all agree that we want more competition. We want more disclosure and a level playing field. I do not think this actually does that. I appreciate your comments in terms of getting us there.
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    Secretary MARTINEZ. Thank you.
    Mrs. KELLY. Thank you.
    Mr. Manzullo?
    Mr. MANZULLO. Thank you, Mr. Secretary.
    I do not know of one member of Congress here that is in favor of your proposed packaging. I associate myself with the remarks of Mr. Watt and Mrs. Biggert. I have closed over 1,000 real estate transactions as an attorney for 22 years. I did a lot of commercial litigation. As far as I am concerned, the more adverse parties you have at a closing, the more protected the consumer is, because everybody checks on what everybody else is doing.
    This is a very dangerous rule for several reasons. Number one, I think it is naive to say that it is going to help out the consumer. You admitted, and the statement is there, that somebody who wants to come up with a guaranteed package has to know what the interest rate is going to be fixed at. If it is not the lender, then it is somebody who has to have, quote, an arrangement, with the lender. But what is going to happen here is the lenders will smoke out everybody else. They will have their own party. They will not be able to get in—the appraisers, the title company, the surveyors, the escrow agent, whatever is necessary to close. This is a dangerous rule.
    We have a problem. I am the chairman of the Small Business Committee, and I want to tell you right now on the record, if this becomes law, I will be the first one to file a bill under the Congressional Review Act to repeal the regulation. It needs to be vetted and the problem here—we are having problems now with small banks that are being smoked by some real estate agents, that have their own cozy arrangements with another bank. We have some title companies that are being smoked. We have some real estate agents that would like to have more of the pie and they somehow cannot get their foot in the door. The problems exist now. What this does is this legitimizes monopolistic practices. It places power in the hands of the lender in this case because only the guy that knows the fixed interest rate, he will call the shots. He will pick his appraiser. He will pick everybody involved in that real estate transaction and the entire closing on it.
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    I think you have way exceeded—RESPA was set up for the purpose of disclosure. Somewhere down the line, somebody said, I do not think it is a good idea to have somebody in charge of the entire real estate closing. Now, you are changing your mind on it. Now, referral fees will be allowed from the person who devises this entire package on it. As I look at this thing, everybody is going to have a guaranteed mortgage package agreement. There will not be one real estate broker in the country that will not say this is a one-stop shop for you to come here and find out exactly what is going on.
    One of the purposes of the disclosure statement which is given weeks in advance is for the person buying the property to go out and shop. And it sure was my experience that I shopped. The fees are radically different, depending on where you go. But I am deeply disturbed about this because you will—you shall end up, you shall end up with entirely monopolizing of the practice of the sale of real estate in this country.
    Mr. Tiberi is right. Mrs. Biggert is right. We know. We have been there. I have been involved in extensive litigation and we have avoided a lot of litigation because we have had situations where you have had an appraisal at the real estate closing. I am sorry. We have had a survey, and there is a problem with the survey. Now, let me ask you a question. What happens when the lender, in this case the guaranteed mortgage package agreement, he is the one who has the survey done. And then he also has the title insurance lined up, and you have title insurance in this case that would guarantee the survey, with a special exception. Now you have got all these conflicts of interest. They are all down to one person, and that is the lender. Who is going to be the responsible party for this? The bank? The bank says, oh, no, we just loan money.
    Secretary MARTINEZ. Are you suggesting, sir, that today a consumer goes to a closing with a full understanding of all that he is being charged, having shopped for a surveyor, having shopped for a title company, had an opportunity to compare prices between more than one title company, perhaps had an opportunity to even been guaranteed a closing cost that is going to be the same from the day he was given that figure, to the day of closing?
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    Mr. MANZULLO. Yes, absolutely. If you have a broker who is on the ball—
    Mrs. KELLY. Sorry. Your time is up.
    Mr. MANZULLO. Could I have an additional one minute?
    Mrs. KELLY. Would you like 30 additional seconds?
    Mr. MANZULLO. Thank you very much.
    What I am suggesting to you is that this will not solve the problem. This will make it even worse because it will close the doors on shopping—all that somebody who has a guaranteed mortgage program has is then we do not have to do anything anymore because it has all been taken care of by one person.
    I would like to see you delay this so we can have hearings before the Small Business Committee. Your Regulatory Flexibility Act says that $3.5 billion of the fees of the $6.5 billion fees is generated by small businesses. The little guys are going to get smoked, and I think it would be in the best interest of them and the consumer to put off this until at least next year.
    Mrs. KELLY. Mr. Manzullo, can you please sum up?
    Mr. MANZULLO. Thank you.
    Mrs. KELLY. Thank you.
    Mr. Secretary, would you like to respond?
    Secretary MARTINEZ. Well, I know he likes what I am doing.
    Actually, I would, if I may. I think that there are three portions to what we are proposing. Only one of those three deals with packaging. The other two have to do with disclosure of broker compensation, so we are two-thirds in agreement, then. That is good.
    The issue of packaging, and I should say, I guess it is a philosophical thing as to whether government ought to impose on the marketplace that there should not be packaging. If what you are saying is true, I think the marketplace has a way of evolving to allow for things to not be as dire as I think you suggest. But I look forward to continuing dialogue with you about this and discussing it further, because obviously you have some strong felt views on it. They are not consistent with a lot of what I am hearing. There are an awful lot of people out there who think that we are doing a good thing, whether it be on the consumer side or whether it be on the industry side. So I understand your concern and I would look forward to just continuing our dialogue.
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    Mrs. KELLY. Mr. Secretary, we really appreciate HUD coming up here to explain and talk with us about this. We really thank you for your testimony today and we all look forward to working with you and your staff to try to improve the mortgage finance system in terms of making it fair and cost-effective in the settlement process. Also obviously there is some concern that we do not squeeze out our small businesses in that process.
    The chair notes that some members may have additional questions for this panel which they may wish to submit in writing. Without objection, the hearing record will remain open for 30 days for members to submit written questions to those witnesses, and to place their responses in the record.
    With that, we thank you very much for your time and appreciate it. This hearing is adjourned.
    [Whereupon, at 12:34 p.m., the subcommittee was adjourned.]