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Tuesday, February 25, 2003
U.S. House of Representatives,
Subcommittee on Housing and
Community Opportunity,
Committee on Financial Services,
Washington, D.C.

    The subcommittee met, pursuant to call, at 2:07 p.m., in Room 2128, Rayburn House Office Building, Hon. Bob Ney [chairman of the subcommittee] presiding.

    Present: Representatives Ney, Green, Bereuter, Baker, Shays, Hart, Tiberi, Harris, Waters, Lee, Watt, Miller of North Carolina, and Davis. Also present was Mr. Manzullo.

    Chairman NEY. [Presiding.] Good afternoon. The subcommittee on Housing Community Opportunity will come to order. And without objection, all members opening statements will be made part of the record. Hearing no objection they are part of the record. I would remind subcommittee chairs and ranking minority members are recognized for five minutes each. All other members are recognized for three minutes each. And we will alternate, of course, between the majority and minority. I would also want to note due to the length of the time we are going to have to spend and the amount of witnesses, we will try to keep fairly strict on the opening statements to the time so that we can have the opportunity to hear from the witnesses.
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    This is the first housing subcommittee hearing since I was selected as Chairman. It is my hope that the hearings we conduct in the 108th Congress will be informative and of an invaluable assistance to the members as we contemplate legislation that provides housing opportunities for all Americans. I intend for all the hearings to be fair and balanced, and I pledge to work with Ms. Waters, the ranking member, and all the members to see that this is a very productive subcommittee. And I would note, Ms. Waters and I had a conversation just this past week on communicating with each other throughout this process.
    Today's hearing is about the Department of Housing Urban Development's July 28, 2002 proposed rule that attempts to reform the Real Estate Settlement Procedures Act, as we all know as RESPA, which will be the first major reform attempt since 1974. On October 5, 2002, the Financial Services Committee heard testimony from Secretary Martinez. Chairman Oxley and the members have expressed a desire to hear other perspectives on this proposal before it became final. This hearing is a continuation of that process in reviewing the proposed rule by hearing from the many different groups that will be affected by this proposed regulation.
     The Committee has invited a broad cross-section of the real estate and mortgage finance industry as well as consumer advocates in an attempt to fully understand this impact of RESPA reform. I think that everyone here shares the intent of HUD in crafting this regulation which is making real estate settlements easier and more transparent for consumers.
    Buying a home has become simply too complex and needs to be simplified so there is more transparency in the pricing of settlement services. While we all may agree on that goal, of course, there are a lot of differences on how we are going to achieve that goal. Our witnesses today are here to offer their views on whether or not the proposed rule will achieve that transparency and simplify the home buying process, and if not, what can be done to improve the proposal.
    I do look forward to hearing from our witnesses. And I want to take a moment to recognize that because of the size and complexity of the real estate settlement industry, we are unable to accommodate, of course, every group that wanted to come to testify today. We also have some material for the record that we will submit. I know that such groups as the Independent Community Bankers of America and the Appraisal Institute have statements that reflect important segments of the real estate settlement process, and with objection, their statements, as well as those of the Consumers Bankers Association, American Bankers Association, and the National Association of Realtors, will be entered in the record. Hearing no objection, they are entered into the record. Also, without objection, the members will be allowed to submit again their written statements for the record.
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    At this time I would yield to Mr. Watt.
    Mr. WATT. Thank you, Mr. Chairman. I will be very brief. If our ranking member was here and—or if we had other members who had not been here previously to discuss this issue, I probably would just pass, but—actually I will defer to my ranking member since she just walked in. And then I can pass.
    You want me to continue or you——
    I think I agree with the Chairman that we all think that some procedures that make the buyers more aware of what is happening, and speed up the process, and less complex are desirable, but that the devil is always in the details. And how you get there from here is a very complex issue that, I guess I have probably been dealing with longer than most people on this committee because I practiced law for 22 years doing real estate work before I came to Congress. So that is 22 years plus the 10 years that we have been talking about this on the committee. Thirty-two years I have been working on this issue, and some things that appear to be logical are not necessarily the most logical way to proceed. And some ways that appear to be illogical may be the only way that you can achieve the necessary objectives.
    So I will be anxious to listen to all of the people who have input to make on this issue. I think our objectives are all the same, to simplify and make the process more transparent and more visible. How we get there from here can be a very difficult issue, and I will be looking forward to your suggestions about how you do that.
    I did submit a letter to HUD on this issue on the proposed regs and they did not much care for what I had to say, but maybe you all can have some influence, and maybe we can have some influence in this process. So I look forward to it and I will yield back the balance of my time.
    Chairman NEY. I thank the gentleman for his statement. And the chair will yield to the ranking member.
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    Ms. Waters?
    Ms. WATERS. Thank you very much, Mr. Chairman. I would first like to thank you for making this such a top priority for the work of the subcommittee. We could not have a more timely or important attempt at reforming and simplifying the home buying process.
    I would like to commend HUD for the work that they have done. I know the length of time that HUD has been involved in trying to deal with this reform, and it is not easy. We had a lot of vested interest here from the mortgage brokers to the lenders themselves, and everybody who does loan origination, the real estate interest, insurance interest. And I have noted in the information that I have been given that everybody has got something to say about what is good and what is bad about the proposed reform. And so we are all going to have to work together to see if we can do the best possible job for the citizens of this country.
    I need not say to anyone in this room that home ownership is perhaps one of the most important efforts that any citizen can be involved with. This business of home ownership has been referred to as like motherhood and apple pie. We are all told that we should aspire to own a home and we all do want to own a home and should be able to own a home.
    And so most people do not pay cash for their home, they have to get involved in a very complicated and sometimes scary system and procedures in order to do that. And we have got to help our citizens be able to have access not only to mortgages, but to be able to feel comfortable that they can sit down with loan originators and others and not be frightened or have the procedure so complicated that they do not understand what is going on.
    In all that we do, I think someone mentioned it in their proposed statement here, we must not do anything that will exacerbate the problems that we are trying to straighten out in this committee. Whether it is on the Republican side of the aisle or the Democratic side of the aisle, we are all focused on doing something about predatory lending. And we do not intend to allow anything to happen in this reform process that will make that job more difficult or more complicated.
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    So I am delighted that you are all here today. I look forward to hearing your testimony. And I am hopeful that we can have a bipartisan effort that will move forth from this committee at the appropriate time, based on all of the information that we have gathered and all that we have come to understand about the process so that in the final analysis, we will be able to serve our constituents and protect our consumers.
    So I would like for everybody to make some money, but not at the expense, necessarily, of our consumers.
    So, with that, Mr. Chairman, I will turn this hearing back over to you.
    Chairman NEY. I thank the ranking member for her statement.
    And the gentleman from Wisconsin, Mr. Green?
    Mr. GREEN. I thank you, Mr. Chairman, I have no opening statement. I look forward to the testimony.
    Chairman NEY. The gentleman from Alabama, Mr. Davis?
    Mr. DAVIS. Thank you, Mr. Chairman.
    The up side, I guess, of these kinds of hearings is that junior members, like myself, get to question relatively near the beginning. The down side is having to follow Mel Watt and Maxine Waters. So I hope you will take that into account.
    I want to welcome all of you today. I have the advantage, I suppose, of being a new member of this committee. I do not have a lot of preconceptions about what took place before I got here.
    What I can tell you is as I look at RESPA, first of all, I share Ms. Waters' comment that this is a serious problem and I think that HUD ought to be complimented for trying to get its hands around it.
    I would also echo Mr. Watt's comments and the Chairman's comment that all of us, I think, want to see consumers have as much information as possible—no less than that. What none of us want to see is a system that at the end of the day purports to offer a certain level of predictability, but then to see that predictability undone by various definitional ambiguities.
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    At the same time, none of us want to see a world where the burden is put on consumers—on people that were trying to buy a home for the first time to unravel the process that is already frighteningly complex.
    I have a third concern, that I suspect Mr. Watt may have, too—a lot of solo practitioners—a lot of small practice lawyers in this country of ours depend on real estate closings and they depend on the real estate closing business to earn a livelihood. I have a natural predisposition against a system that does not give people a chance to select their own lawyer—that may be the old criminal defense lawyer in me talking, to some extent. But what troubles me about these reforms—and my questions may well be along these lines—deal with the lack of flexibility with individual borrowers—potential homeowners would have in a system which does not necessarily allow them to select their own counsel.
    I would agree, as a general proposition, that the interests of people trying to buy a home and people trying to sell it is often an antagonistic one. Certainly a lot of the people who are engaged in the process believe it is an antagonistic one. So I favor a regime, if we can find a way to serve our predictability interests—I favor a regime that would give people more flexibility in selecting counsel of their choice.
    But I am eager to learn from you. I am eager to listen to you. And I suspect since not that many of us are here, it will not take that long to do either one of those.
    I yield back the balance of my time, Mr. Chairman.
    Chairman NEY. I want to thank the gentleman.
    Next is the gentleman from Nebraska—Mr. Bereuter?
    Mr. BEREUTER. Thank you, Mr. Chairman—no opening statement.
    Chairman NEY. Thank you.
    The gentleman from North Carolina, Mr. Miller?
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    Mr. BRAD MILLER. No opening statement—I am struck by how diverse the perspectives are with the witnesses and I look forward to hearing the testimony.
    Chairman NEY. The gentlelady from Florida?
    Ms. HARRIS. No opening statement, Mr. Chairman. Thank you.
    Chairman NEY. What an easy committee.
    The gentleman from Connecticut?
    Mr. SHAYS. Mr. Chairman, just to thank you for holding these hearings and thank our witnesses—no statement.
    Chairman NEY. And the gentleman from Pennsylvania?
    Oh, the gentleman from Illinois, Mr. Manzullo?
    Mr. MANZULLO. Thank you, Mr. Chairman, for the opportunity to provide a statement at today's hearing. I am a member of the Financial Services Committee, but not of this subcommittee.
    Without a doubt, the residential real estate market is a bright spot in our otherwise uneven economy. HUD's proposal to revise the regulations governing the residential real estate settlement process is ambitious, it is complex and it is rushed.
    While I support simplifying the process so that more first-time home buyers could enter the market, I believe that HUD's rush to finalize its proposal jeopardizes our real estate market in the short term. In addition, if adopted, it will make fundamental and perhaps irreversible changes to the process that may undermine the long-term goals of providing affordable housing and consumer benefits within a residential real estate market.
    I believe that HUD has not—N-O-T—HUD has not fully analyzed and carefully deliberated all the critical issues from this proposal. Specifically, HUD has not thoroughly considered the economic effects of the proposal on small businesses, a very important segment of our community—of our economy.
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    Pursuant to the Regulatory Flexibility Act and Executive Order 12866, HUD attempted to undertake an economic analysis of the proposal and its effect on small businesses. While the 98-page document summarizes and highlights many elements of the proposal, HUD has failed to adequately determine the economic effect on segments of the small business community. HUD readily admits the small business community may lose anywhere from $3.5 billion to $6.3 billion annually. However, HUD does not break down the costs to each segment of the industry. HUD does not even include all the industries impacted.
    There is no detailed economic analysis for the community banks, small real estate agents, small title agencies—just to name a few, along with the other small businesses.
    As chairman of the Small Business Committee, I am going to be holding a hearing on HUD's regulatory flexibility analysis to determine why this organization cannot simply follow the law.
    Ms. Velazquez, who is my ranking member on the Small Business Committee, is opposed to this proposal. The Small Business Administration, through Tom Sullivan, chief counsel for advocacy, is opposed to this proposal because HUD has not, Mr. Chairman, followed the law.
    In fact, if you take a look at their proposal, they attempt to do in 88 pages a $6 billion economic analysis. And HUD should hang its head in shame over having all the resources and not being able to simply determine the groups that are involved.
    As a practitioner of law for 22 years—the same as Mr. Watt—and someone who has been through over a thousand real estate transactions, this is not a new area to me. But I can assure you of this—if this goes through, Mr. Chairman, you could find this entire industry will be tied up by five or six major lenders across the country, creating one of the largest monopolies and smoking all the small businesses in the country.
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    I would call your attention to page 63 of the report that says, ''Summary of Small Businesses Impacted and Alternatives Considered''—all they had to say is that because you have third party providers out there they could participate and be a part of these large conglomerates. I mean, it is such a naivete that they will get smoked simply because they are not big.
    Chairman NEY. I want to thank the gentleman. The time of the gentleman has expired.
    An opening statement, if Mr. Baker wishes, from Louisiana?
    Mr. BAKER. Thank you, Mr. Chairman. I have no statement at this time.
    Chairman NEY. I want to thank the gentleman.
    We will move on to introduction, quickly, of the witnesses and then we will move on to the panel.
    I want to thank all of the witnesses for being here today.
    First is John Courson. Mr. Courson currently serves as Chairman of the Mortgage Bankers Association of America. The Mortgage Bankers have a membership of approximately 2,600 companies, including all elements of real estate finance, mortgage companies, mortgage brokers, commercial banks, thrifts, life insurance companies, as well as others in the mortgage lending field.
    Mr. Courson also serves as the CEO of Central Pacific Mortgage Company, which is headquartered in Folsom, California.
    Margot Saunders—Ms. Saunders serves as the managing attorney of the National Consumer Law Center, NCLC; provides support training and technical assistance for legal professionals in the areas of consumer fraud, debt collection, finance law and home ownership programs. Ms. Saunders duties include representing low-income clients on financial credit issues and analysis of water and energy issues as they affect low-income people.
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    She has recently completed terms on the Federal Reserve Board's Consumer Advisory Council and the American Waterworks Association Public Advisory Forum.
    Stanley Friedlander—Mr. Friedlander is the President of the American Land Title Association and the past President of the Ohio Land Title Association. He is the Co-founder and President of the Continental Title Agency Corporation, headquartered in Cleveland, Ohio.
    It is a little warmer in D.C.—not much—than Cleveland this morning.
    Anne Canfield—Anne Canfield is Executive Director of the Consumer Mortgage Coalition, known as CMC, a trade association representing national mortgage lenders, servers—servicers and service providers. Ms. Canfield is also President of Canfield and Associates, Incorporated.
    Neill Fendly—Mr. Fendly currently works with Camelot Mortgage, Incorporated, an Arizona-based mortgage company, and has been involved with the National Association of Mortgage Brokers as a member of the board of directors before serving as Vice President elect and President of NAMB.
    He is currently the Government Affairs Chair for NAMB and was a member of the federally mandated mortgage reform working group.
    D. Russell Taylor—Mr. Taylor is the first Vice Chairman of America's Community Bankers. He has been a member of ACB's board of directors since 1998. Members of ACB originate more than 25 percent of all mortgages in the United States and significantly more than half of all mortgages originated by depository institutions.
    Mr. Taylor also serves as a member of the New Jersey League Community and Savings Bankers and is a member of the Government Affairs Counsel on Legislative and Regulatory Committee. He is currently the President and CEO of Rahway Savings Institution in Rahway, New Jersey.
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    And F. Gary Garczynski—Mr. Garczynski is the immediate past President of the National Association of Home Builders. He is testifying today for C. Kent Conine, NAHB's current president, whose flight to Washington from Dallas was canceled.
    Mr. Garczynski is President of the National Capital Land and Development Company in Woodbridge, Virginia. In the past 30 years, he has built over 4,000 homes in the greater Washington metropolitan area. He has served on the executive committee of NAHB since 1993 and on the Virginia Housing Study Commission since 1995. He was also an appointee to Virginia's Commission on Population and Growth.
    I want to thank all of the witnesses for your important testimony today.
    And without objection your written statements will be made part of the record. You will each be recognized for a five-minute summary of your testimony.
    And we will begin with Mr. Courson.


    Mr. COURSON. Good afternoon. Thank you for inviting the Mortgage Bankers Association to participate in these hearings.
    Mr. Chairman, I would like to just state up front that the Mortgage Bankers Association does stand behind Secretary Martinez' bold and far-reaching proposal to reform the mortgage disclosure system.
    I have been in this business—many would say too long, but over 40 years. And throughout those 40 years, the one consistent thing that I have seen is the growing amount of paperwork, numbers, calculations and confusion that has built up and seems to build every year as we move through the genesis and development of the mortgage lending process, a process that, through those numbers and that myriad of paperwork has tended only to fool and mislead borrowers and certainly add confusion to an already confusing transaction.
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    So we, at the Mortgage Bankers Association, commend and applaud Secretary Martinez for really stepping up to the plate and putting forth a proposal—a far-reaching proposal that would, in fact, address the complexity and confusion in the mortgage lending process.
    Through the introduction and the concept of a guaranteed fee package, the proposal has put forth a rule that would, in fact, simplify—would, in fact, take some of the mystery, some of the detail and some of the confusion out of this existing disclosure system.
    As you know, the Guaranteed Package, obviously, is a package that contains two components—a lump sum of the cost to close the loan and an interest rate. We, at MBA, are very confident that HUD's package has three very important objectives to it. The first, it simplifies the process of mortgage—of the mortgage disclosure systems. Secondly, it certainly provides consumer certainty. And it will foster and does foster competition.
    And, Mr. Chairman, just let me say, again, simplification, certainty and competition—let me just talk for a minute, if I may, about simplification. I have talked about the complexity of the process not only from the consumer standpoint, but those of us who are practitioners who originate loans. Through the guarantee fee package arrangement, we are able to give the consumer a single price and an interest rate that is more clear and clearly more simple than trying to pour through a list of charges that are very confusing and, frankly, the purposes of which are unknown to many consumers.
    Secondly, the certainty—the consumer now will have, with certainty, a price that he or she can shop effectively to determine that they are getting the best deal for them.
    And, of course, lastly, fostering competition because with this process, we will be able—and they will be able to negotiate and go to lenders—go to originators and shop for the best transaction and create competition in a marketplace that, today, really is forestalled by virtue of the fact of the complexity.
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    Obviously, we have submitted our comments to the department for some areas where we think there can be improvement and modifications. But let me say that we do believe that the Secretary—and I applaud the Secretary for being on the right track.
    Before I close, Mr. Chairman, though, I would like to say one other thing. There has been a lot of conversation in past weeks and months about the negative impact of this rule on small businesses and the fact that small lenders will, in fact, be disadvantaged and large lenders will replace them as effectively being able to compete.
    MBA dissents from that view and we can speak, frankly, with some certainty in that more than 50 percent of our members are small, midsize lenders. We compete today. There are large lenders out there that are better capitalized, have lower cost of funds, have affiliated a business arrangement and have the wherewithal, clearly, that many of us who are small and midsize lenders do not have, but yet I will tell you that we compete effectively in this marketplace.
    Actually I look at it and say that this proposal gives us a better opportunity to compete. We now can enter into co-ops, affiliations, alliances that allow us to become part of groups that we assemble services to provide to the consumer to more effectively compete in the marketplace. So I would tell you—I would say to you that our members are competing today against the same lenders that will be there after this rule is passed. And we think, in fact, we can effectively compete.
    So I thank you and I appreciate the opportunity to testify before this committee.

    [The prepared statement of John A. Courson can be found on page 158 in the appendix.]

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    Chairman NEY. Well, I thank the gentleman for his testimony.
    Ms. Saunders?


    Ms. SAUNDERS. Thank you, Mr. Chairman. I appreciate the opportunity to be here today. I testify on behalf of the low-income clients of the National Consumer Law Center, as well as the Consumer Federation of America, Consumers Union and U.S. PIRG.
    We wish, also, to commend Secretary Martinez for the dramatic approach to RESPA reform advocated in these proposed rules. The stated goals of the rules and the orientation are wonderful to protect consumers. We credit the hard work and the creativity of the HUD staff in the conception of the rule and we think that many of the ideas in the rules are constructive.
    There are several overarching concerns and a myriad of important details that we believe must be worked through to ensure that the rules do, in fact, protect consumers. And we have provided 47 pages of comprehensive comments to HUD to facilitate that.
    However, we want to make absolutely clear that our most important concern is that this rule not be allowed to facilitate predatory lending. And we have that concern because the Guaranteed Mortgage Package, which is the subject of so much of the debate, will have the effect of hiding the Truth in Lending Disclosures that are required in most mortgages today. The impact of that cannot be understated for agency and consumer enforcement of the single most effective and important consumer protection law that we have on the books affecting consumer mortgages.
    As a result we—and, now, this is a broad coalition of consumer and legal services programs across the country—have strongly advocated to the Secretary that if he moves forward with the Guaranteed Mortgage Package that he exclude from it all subprime loans. They have proposed excluding all HOEPA loans. That is not a broad enough category because the impact of the Guaranteed Mortgage Package would be to allow many loans which would otherwise be counted as HOEPA loans to be included in the guarantee and we would have no way of determining if, in fact, it was a HOEPA loan. By HOEPA, I mean the Homeownership Equity Protection Act, which is the federal law designed to protect against predatory lending.
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    There are three main aspects to the rule. One is the Guaranteed Mortgage Package. The second is the change in the disclosures of the yield-spread premiums charged by brokers. And the third is the rule's proposal on how to deal with Good Faith Estimate disclosures.
    The Guaranteed Mortgage Package, we think, has a lot of good ideas and we support it, so long as it, in fact, is a guarantee of both closing costs and points and interest rate. That is crucial. If you allow someone to buy a package of services without also buying the interest rate, it is like buying the wheels on a car without buying the car. And those wheels are only going to go on certain cars. In fact, you are tied into certain loans without knowing what the price for the rest of the loan package will be.
    The yield spread premium proposal that HUD has made is very good. Essentially for the first time, HUD is actually requiring that consumers be given the benefit of the fee that the lender is paying to the broker. And since the fee the lender is paying to the broker is reflected in the interest rate that the consumer pays, the consumer should have control over how that fee is applied.
    In the amount of time I have now, I cannot go into the complexities here, but while we do support the proposal, we must point out that to make this proposal effective, it must be included in those parts of the regulations that deal with yield spreads, which are enforceable. It cannot just be included in those parts of the regulation which deal with disclosures, which are not privately enforceable.
    Thirdly, HUD has proposed that the information that consumers received on the Good Faith Estimate when they first apply for a loan actually be true information and that there be small tolerances between the amount of money that the lender says is going to be charged and the amount of money that is actually charged for closing costs when the consumer gets to closing. We support these proposals and think they are very, very good.
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    And, in sum, I am happy to answer any questions. We have worked extensively with HUD in the hopes that they will continue with some parts of this rule and guard against facilitating predatory lending in other parts.
    Thank you.

    [The prepared statement of Margot Saunders can be found on page 400 in the appendix.]

    Chairman NEY. Thank you for your testimony.
    Mr. Friedlander?


    Mr. FRIEDLANDER. My name is Stanley Friedlander. I am the President of Continental Title Agency located in Cleveland, Ohio. I am appearing today as President of the American Land Title Association, which represents both title insurance companies and over 1,750 title insurance agents, most of which are small businesses like mine.
    ALTA, and I, personally, would like to thank you for holding these hearings. We understand the concerns—that many have prompted the HUD proposed regulations and believe that the Secretary and the Department deserve credit for the boldness of their initiative.
    However, the HUD proposed rules could have a very negative impact on our residential real estate market. We believe the rules proposed by HUD do not serve the interests of the consumers of our products and services; would adversely affect competition in our business; and will particularly hurt the small businesses that are the cornerstone of our industry.
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    HUD is proposing to replace the current regime with two alternatives. The first is a revision of the current Good Faith Estimate regime. The second regime HUD proposes would encourage mortgage lenders to offer what HUD refers to as a Guaranteed Mortgage Package, which would contain essentially all of the loan and other real estate-related settlement charges at a single guaranteed price, together with a loan at a guaranteed interest rate.
    We have serious concerns about these proposals and I will highlight an alternative we have recommended to HUD that would achieve many of the agency's objectives, while minimizing consumer and industry problems. We urge the committee to ask HUD to seriously consider this alternative.
    The HUD-proposed regimes would pose particular problems for consumers in purchase sale transactions, as opposed to refinance transactions. In those transactions, the buyer and the seller have separate interests from the lender in the nature and the quality of the title services required. Under the HUD blind package proposal, the consumer will not know the services that they are obtaining or the individual costs. And, therefore, will not be able to compare packages.
    In addition, in a home purchase, the buyer and the seller may already have agreed on the selection of the provider of the title or closing services before the buyer has even begun to shop for a mortgage.
    As the price of the Guaranteed Mortgage Package might also include these services, the borrower could end up paying twice for the same service. Further, in most areas of the country, as in Ohio, the seller generally pays half the costs of closing or a significant portion of the title insurance charges and government transfer and deed recordation charges. The HUD proposals tilt heavily in favor of the packaging alternative, because packagers are provided an exemption from the Section 8 of RESPA.
    As a mortgage loan at a guaranteed interest rate must be a part of the Guaranteed Mortgage Package, therefore only lenders will effectively be able to offer packages. This will have a particularly adverse consequence for our small businesses.
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    HUD has structured its GMP proposal in a way that mortgage lenders are in a position to realize greater profits on the Guaranteed Mortgage Package prices by negotiating lower prices from the providers of the service packages and will, themselves, pick up a packaging fee. Smaller abstractors and title agencies will not have the resources to be able to offer the kinds of prices that the larger company can provide and still be able to provide the quality of services required. Accordingly, these smaller businesses will have a difficulty competing for the consumers' business and surviving.
    We believe the two-package approach will allow lenders and others to package on a local level. It will take into account local costs, local needs and allocations that allow customization. We suggest that the HUD proposal be modified to adopt a Guaranteed Mortgage Package which would consist of a loan at a guaranteed interest rate and then all lender-related services as one charge and, in addition, a guaranteed settlement package. That could be offered by any party—by title insurers, agents, real estate brokers, lenders, escrow companies or attorneys. That would guarantee a single price for the settlement charges and they would include title and related charges, government recording and transfer charges and charges required for closing purposes.
    We believe this two-package approach would better achieve HUD's goals of ensuring price certainty in the settlement process for the customers and injecting significant shopability—price competition in both the lending and the settlement industries.
    Please also note that irrespective of whether one believes that HUD's proposals are good or bad, or workable or unworkable, this Committee and the Congress should be concerned about HUD's implementing such a change without clear legal authority.
    I thank the committee for the opportunity to participate in this process. And we encourage HUD to move slowly and carefully on this proposal.

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    [The prepared statement of Stanley B. Friedlander can be found on page 239 in the appendix.]

    Chairman NEY. I thank the gentleman for his testimony.
    Ms. Canfield?


    Ms. CANFIELD. Thank you, Mr. Chairman for the opportunity to testify. The Consumer Mortgage Coalition is pleased to be here today.
    We would like to submit a copy of our full statement and comment letter that we submitted to HUD for the committee record if that is possible.
    Chairman NEY. Yes, without objection.
    Ms. CANFIELD. Thank you.
    The CMC believes HUD's proposal represents a major step toward improving the process by which consumers obtain mortgage loans in this country. Significantly, it gives loan originators and other settlement service providers the option of guaranteeing closing costs to consumers. And if such a guarantee is provided, it allows packagers to use their purchasing leverage to lower these costs—something which RESPA, to date, has prohibited.
    With this guarantee, consumers will have a better understanding of closing costs and be better able to shop for the best loan that suits their needs. We also believe that this guarantee, which the proposal calls a ''Guaranteed Mortgage Package'' or a ''GMP,'' if structured properly, will help reduce predatory practices.
    The CMC has developed a comprehensive set of proposals to address predatory lending, which are in Tab 1 of our comment letter to HUD. The GMP is an important element of those proposals for two reasons. First, the proposal will ensure that consumers receive relevant information about a loan's costs early in the process, which promotes comparison-shopping. Second, by simplifying the comparisons, it will increase consumer understanding and make more difficult the deception that characterizes abusive loans.
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    I would like to focus today on five key aspects of HUD's proposal that we believe are crucial to this rule becoming a reality—not just the reality of becoming a final rule, but the reality of millions of borrowers obtaining lower cost loans as a result of receiving offers of guaranteed mortgage packages.
    First, the structure of the Guaranteed Mortgage Package—HUD has included in the GMP the guaranteed settlement costs and an interest rate component. Although the proposal calls this an ''interest rate guarantee,'' the interest rate is not, and cannot be, a guaranteed rate, unless the borrower locks in the rate and qualifies for the loan. The costs to the consumer and the industry of actually offering every applicant a guaranteed rate would be staggering. HUD understands this.
    Because they are not guaranteed, we have urged that the interest rate and any discount points which together constitute the interest price of the loan be separated from the guaranteed closing costs package. Consumers need to receive, and shop with, offers of guaranteed settlement costs. These costs, far more than the interest rate, are misunderstood and are not subject to comparison-shopping and come as unwelcome surprises to borrowers at the closing table.
    Also, if the interest price were removed from the package, non-loan originators will be more readily able to assemble and offer a guaranteed package because they would not have to offer the actual loan, an act that requires special licensing authority.
    If HUD determines to include an interest rate component in the GMP, it must be a conditional rate, subject to underwriting. HUD also wants borrowers who have either not yet accepted a GMP offer, or have accepted but not locked in the rate, to be able to track the rate using some verifiable index. This is a problem, however, because there is no universal index that can be used to track lenders' rates.
    Because loan pricing is highly company-specific and is driven by numerous internal and external factors, the only way for this to work is to require that loan originators make their rates available to these applicants on a daily basis, by phone, on a Web site or via some other medium. This will assure that similarly situated borrowers will be treated alike.
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    A few trade associations, as my colleague just mentioned, have urged HUD to adopt a two-package approach to the rule. One package would be the loan package, including the interest rate and any separate settlement charges imposed by the lender, such as loan origination or loan processing or underwriting fees. The second package would be a settlement package, which presumably would include the remaining settlement costs, such as title insurance, closing attorney, survey, et cetera. It is not clear where the costs for the appraisal or credit report would go. In some proposals, there would be a Section 8 exemption for the services within each package, but not across the packages.
    After looking closely at this approach, we cannot support it because it significantly complicates the origination process and raises more questions than it answers. Consumers want simplified shopping. They understand and shop for the interest rate, and they understand that they can raise or lower the rate with discount points. They now need a simple way to compare and shop for closing costs. Having certain closing costs in one package and other closing costs in another package makes it harder, not easier, to shop for these costs.
    The structure we see working best is one in which lenders and other settlement service providers may assemble and offer packages of guaranteed settlement costs.
    Second, the treatment of HOEPA loans—this proposal excludes from the exemption for packaging loans subject to the federal HOEPA, which applies to loans whose rate and points exceed specific thresholds. We strongly disagree with this exclusion. We think it is wrong to withhold from subprime borrowers the clear shopping and cost-saving advantages of obtaining GMP offers. It has been argued that many HOEPA borrowers today do not shop effectively for loans. That is all the more reason to include them under this rule. We need to give them every tool and motivation to shop. In fact, HOEPA borrowers are likely those most in need of GMP offers. Armed with guaranteed settlement cost offers, HOEPA borrowers can focus on obtaining the best loan price for the loan available to them in the market—price being the interest rate and the points.
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    Third, federal preemption—many state laws conflict with or frustrate the purpose of the HUD proposal. There are state laws that require the disclosure and itemization of all closing charges. There are other state laws, like Section 8, that—like Section 8 prohibit referral fees, or that require a direct pass-through of all third party closing charges to providers—of settlement—third party charges to consumers. An exemption from Section 8's federal prohibitions and the express federal authority to bundle and guarantee settlement costs, will have——
    Chairman NEY. I am sorry to interrupt—I would have to note that the time has expired if you want to——
    Ms. CANFIELD. Okay.
    Well, I was going to say that preemption is important—HUD has the authority to issue the rule with preemption. We would encourage them to do so, so that the Guaranteed Mortgage Package can actually work.
    And finally, as noted by some—by my colleagues here to my right, there are significant changes in the Good Faith Estimate. We have encouraged HUD to delay those changes in our proposed comment letter for two reasons. One is that if it became a requirement, all of our lenders would have to focus on implementing those mandatory changes, which would take up to 18 months, and delay doing the Guaranteed Mortgage Package.
    The second is that HUD's legal authority in this area is a little bit questionable. And it would delay—it might—pending lawsuits might delay the whole rule for years.

    [The prepared statement of Anne C. Canfield can be found on page 69 in the appendix.]

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    Chairman NEY. Thank you for your testimony.
    Ms. CANFIELD. Thank you.
    Chairman NEY. Mr. Fendly?


    Mr. FENDLY. Chairman Ney, Ranking Member Waters, members of this subcommittee, I am pleased to be here and appreciate the opportunity to discuss HUD's proposal to reform RESPA.
    Today, mortgage brokers originate more than 60 percent of all residential mortgages and are the key to bridging the gap in minority home ownership, based on a recent study. A mortgage broker does not simply press keys and provide the customer with a loan, but instead, serves the role of adviser, credit counselor, underwriter and personal contact to the consumer. Brokers also provide lenders a nationwide distribution channel that is less expensive than traditional lender branch operations.
    We support the administration's goal to increase home ownership and HUD's stated goals of simplifying the mortgage process, but this rule achieves just the opposite. The proposed rule is unworkable in the real world for both industry and consumers, will harm small businesses and the mortgage broker industry, in particular.
    In our comment letter, NAMB provided HUD with a sample Good Faith Estimate form. Our proposal will strengthen, simplify and clarify the disclosure of costs provided to consumers in advance of settlement and give consumers a true comparison of the costs of a mortgage loan.
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    NAMB has many concerns with HUD's proposed rule, but the single most important issue is HUD's re-characterization of yield spread premiums. The characterization of a yield spread premium is a lender payment to the borrower for a higher interest rate trades and ambiguity in the marketplace that will not only confuse borrowers, it negates HUD's own 1999 and 2001 statements of policy, which define a yield spread premium as a payment for goods, facilities or services actually furnished or services actually performed for the lender, as well as the borrower.
    Mortgage lenders save millions of dollars in facilities and employee costs by originating loans through mortgage brokers. Yield spread premiums help pay the day-to-day broker operations. HUD's re-characterization of a yield spread premium ignores lender payments to the mortgage brokers for the facility that the broker provides to the lender.
    In addition, this re-characterization will lead to a new round of class action litigation, as borrowers will be confused as to the function of a yield spread premium and will ask at closing, ''Where is my check?'' The class action plaintiffs bar will seek these consumers out, causing another wave of class action lawsuits for the industry, which will only increase the costs to the consumer.
    The proposed rule also creates an artificial and competitive disadvantage for the mortgage broker industry. By regulating that the broker include the yield spread premium in the calculation of net loan origination charge, but not including the same for all originators, HUD is complicating the real estate settlement prices—process. The consumer is unable to do a true apple-to-apple comparison of the cost of the mortgage.
    This proposed rule will also prohibit a mortgage brokers' ability to advertise a no-point loan, even though our competitors will be allowed to do so. A broker and a lender might charge a consumer the same rate and cost for a mortgage loan, but if both receive indirect compensation, only the broker must show this as direct compensation. Thus, for the very same loan to the consumer, a broker cannot advertise this loan as a no-point loan and will appear less competitive.
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    Under the proposed rule, many mortgage brokers will no longer be able to originate FHA and VA insured mortgage loans. Direct compensation is limited, by regulation, to 1 percent on these types of loans.
    In the proposed rule, indirect compensation is artificially transformed into direct compensation and subject to the cap. If brokers cannot charge enough to cover their costs for these types of loans, brokers will be forced out of the VA and FHA lending industry. This is significant as approximately 31 percent of all FHA insured mortgage loans are originated by mortgage brokers.
    This proposed rule was not built on a solid foundation of market realities, but, instead a fundamental misunderstanding of such realities due to its flawed economic analysis. Constructing the rule based on inaccurate analysis will lead to a flawed rule that will cause great harm to consumers and could have devastating repercussions in a $2 trillion housing market.
    The SBA has requested that HUD issue a revised analysis that takes into consideration the comments of affected small entities and develops regulatory alternatives to achieve HUD's objectives while minimizing the impact on small business. Even the FPC said the disclosure of both compensation contained in the proposal could confuse consumers and lead them to misinterpret the overall costs of a transaction and that it might inadvertently burden consumers and competition.
    NAMB believes HUD has significantly underestimated the regulatory burden of its proposed rule. HUD admits the proposed rule would increase the regulatory burden by 2.5 million burden hours, which is the equivalent of 289 years. Such a huge burden will increase the cost of credit to consumers.
    NAMB sincerely appreciates the opportunity to share our concerns with you on HUD's proposed rule to reform RESPA. We respectfully request that the subcommittee and the Financial Services Committee work with HUD to ensure that any finalized rule actually achieves HUD's stated goals of providing clarity and simplification to the consumer, while not providing further confusion or complexity to the marketplace.
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    In achieving this goal, HUD must ensure that credit remains available for consumers and is not compromised.
    Thank you.

    [The prepared statement of Neill Fendly can be found on page 168 in the appendix.]

    Chairman NEY. Thank you.
    Mr. Taylor?


    Mr. TAYLOR. Thank you.
    Chairman Ney, Ranking Member Waters, Members of the Subcommittee, thank you for this opportunity to be here today and testify on this important issue.
    My name is Russ Taylor. I am the President and the CEO of The Rahway Savings Institution, which is located in Rahway, New Jersey. We are a New Jersey state chartered mutual savings bank, founded in 1851. We have $430 million in assets. And our primary business is one to four family residential mortgage lending.
    Today I have the honor and the privilege of testifying as Chairman of America's Community Bankers. ACB member banks originate more 25 percent of all mortgages originated in the United States and significantly more than half of all mortgages originated by depository institutions. In our members operate a large number of mortgage banking affiliates that originate a substantial part of the business from the segment of the industry.
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    Thank you for this opportunity to testify today on RESPA reform.
    Mortgage process mandates are extremely burdensome, costly and confusing for consumers and lenders. Reform is long overdue. ACB is pleased that Secretary Martinez has taken an important step forward in this issue. But changes must be implemented with careful deliberation and with a sufficient transition period consistent with the cost of compliance.
    ACB generally supports the concept of the Guaranteed Mortgage Package and the proposal to require mortgage broker disclosures. However, we strongly urge HUD to reconsider making changes to the Good Faith Estimate contemporaneously with introduction of the Guaranteed Mortgage Package. We believe that making all of these changes at the same time would unnecessarily disrupt the mortgage market.
    ACB strongly supports HUD's efforts to require disclosure of mortgage broker fees and believes this requirement should be implemented immediately. Mortgage broker disclosure is essential to preventing possible abuse of yield spread premium payments. We do not believe that potential delays in other elements of HUD's proposal should delay this new requirement.
    ACB supports the option of Guaranteed Mortgage Package, but we strongly believe that the current Good Faith Estimate must remain a viable alternative for those lenders who do not wish to package or who are unable to do so. It is simply too dangerous to dramatically change Good Faith Estimate procedures while simultaneously launching the potentially revolutionary Guaranteed Mortgage Package.
    ACB believes that small to medium-sized lenders are an integral part of the mortgage process and it is imperative that they be able to use the packaging option to the extent that they wish. We believe that many community banks will be able to work with local service providers to offer an attractive package. It may be that the optimal way for smaller institutions to participate in the packaging option may be to use larger third parties to coordinate or provide the Guaranteed Mortgage Package. In this case, we support restrictions in the ability of GSEs to offer packages and regulation to prevent loan steering by third party packagers. Without such regulations, the full competitive benefits of RESPA reform are unlikely to be realized.
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    The proposed Guaranteed Mortgage Package, arguably, would provide customers an easy method of comparison-shopping. However, we are concerned that providing a so-called interest rate guarantee that is held open for a minimum of 30 days as part of the package would just not work. Problems arise because it is not a true interest rate guarantee. And the length of commitment is beyond industry norms. We suggest that HUD work with lenders to develop a methodology for establishing and adjusting rates.
    Another concern is conflict with state law. There are approximately 40 states in which the Guaranteed Mortgage Package may not be able to be implemented for a variety of reasons. ACB suggests that HUD look at the differences in how closings are conducted from state to state and at what different state laws may require.
    In conclusion, ACB believes that—one, mortgage broker fee disclosures are an integral part of making mortgage fees comprehensible to consumers and should be implemented immediately. The Guaranteed Mortgage Package, with revisions, should take priority and be tested in the market as soon as practicable. And finally, revisions to the Good Faith Estimate should be postponed, re-examined and adjusted as the Guaranteed Mortgage Package is being tested.
    ACB members stand ready to work with the members of the committee and HUD to complete the RESPA reform process in an effective manner.
    We thank you for the opportunity to testify on this issue today.
    Thank you, Mr. Chairman.

    [The prepared statement of D. Russell Taylor can be found on page 418 in the appendix.]

    Chairman NEY. Thank you.
    Mr. Garczynski?
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    Mr. GARCZYNSKI. Chairman Ney, Vice Chairman Green and Members of the Committee, on behalf of the 212,000 member firms of NAHB, I am pleased to have this opportunity to testify in support of HUD's proposal to reform RESPA.
    NAHB's comments today will focus on two major components of HUD's proposal. First are the changes in the disclosure requirements of the cost of mortgage transactions to the consumer—the Good Faith Estimate. Second, I want to comment on the addition of an option for lenders to offer a package of settlement services at a guaranteed cost—the Guaranteed Mortgage Package.
    NAHB applauds HUD's efforts to increase the transparency and simplify mortgage transactions and loan closings by improving the disclosure of mortgage fees and expenses to consumers. The proposed changes should also eventually lower mortgage transaction costs and help minimize unexpected charges at the time of loan settlement.
    My oral statement will be confined to those aspects of the proposed rule which deal with the circumstances involved in processing mortgages for newly built homes. Transactions for newly built homes are different in that they typically involve a fairly lengthy loan origination process that matches a sometimes lengthy building process.
    On the Good Faith Estimate, under the requirements for the estimate, the proposed rule does not specify when changes in the transactions warrant a new disclosure. Re-disclosure could be burdensome to lenders in a new construction environment where the loan origination period spans from housing start to home completion and may last anywhere from four months to nine months or more. Many changes can, and normally do, take place during the construction process. For example, the purchase price may fluctuate, depending on the buyer's optional preferences. Also, the attractiveness of different mortgage products may change, as could the buyer's financial situation.
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    Changes in the home purchase price directly impact the cost of document stamps, transfer tax fees. And similarly, changes in the loan amount affect the fee charge for the lender's title insurance. On the Guaranteed Mortgage Package—the concept of the Guaranteed Mortgage Package is appealing and could reduce consumer costs primarily through originator's negotiations with settlement services that are provided.
    However, a guaranteed package that is determined at loan commitment and lasts until settlement on a new home transaction puts the packager in a position of excessive risk. This may lead the original packager to offer less competitive terms than packagers who have an opportunity to offer a mortgage package closer to the date of the projected loan closing. Wider tolerances in guarantees would be needed for a new home transaction where the price and loan amount often change dramatically during the construction period.
    So NAHB recommends for financing quotes on newly constructed homes that both the Good Faith Estimate and the Guaranteed Mortgage Package have an alternative that is based upon a days-until-closing threshold for providing final quotes and guarantees. For example, a lender would provide preliminary estimates at the initial application and then issue final guaranteed estimates 30 or 60 days out from the proposed closing. This procedure would be comparable to the timing of guarantees that would be made in financing an existing home purchase.
    The solution would allow the customer sufficient time to shop again if the final package was deemed to be less than competitive, while providing the lender an opportunity to adjust those components of the package that actually changed.
    In closing, NAHB recognizes the effort HUD has put into correcting some salient shortcomings in an otherwise effective housing financing system. However, loans for new homes, which represent more than a quarter of the annual purchase mortgage originations, have unique characteristics and, thus, they must be specifically addressed in any RESPA reform package. We are confident that HUD will address the concerns that have been expressed regarding this proposal and can do so without sacrifice to mortgage services.
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    Thank you.

    [The prepared statement of F. Gary Garczynski can be found on page 325 in the appendix.]

    Chairman NEY. I want to thank the panel for their testimony.
    One question I have for anyone on the panel that would like to answer it—under the proposal, loan originators offering loans whose rate or points trigger the HOEPA protections may not benefit from the Section 8 exemption. Should the packaging proposal be extended to HOEPA? And if not, what is the lender's incentive to offer a guaranteed package?
    Would anybody like to comment on that?
    Ms. CANFIELD. We believe, and stated in our testimony, that the Guaranteed Mortgage Package proposal should be extended to HOEPA loans and they should be included. Without it, there is—HOEPA borrowers are not going to be able to get the benefit of the Guaranteed Mortgage Package offer.
    Chairman NEY. I assumed you would want to respond, Ms. Saunders.
    Ms. SAUNDERS. That is right, Mr. Chairman. I appreciate the opportunity.
    Because the effect of the package will be to hide Truth in Lending Disclosures and it will be impossible to determine whether a lender has complied with Truth in Lending when a package is offered, we think that it is very important to preserve Truth in Lending Compliance for all loans which are not of the most competitive nature. And there can be no debate, I think, that some subprime loans are predatory. To avoid spreading the problem of predatory loans, we need to at least maintain the current transparency, not add to the murkiness of the situation.
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    So we think that, at least at the beginning part of the process, the Guaranteed Packages should not be allowed not only to HOEPA loans, but to all subprime loans.
    Mr. COURSON. Mr. Chairman?
    Chairman NEY. Thank you.
    Mr. Courson?
    Mr. COURSON. I am sorry—if I may——
    Chairman NEY. Yes.
    Mr. COURSON. In due respect, the system under the proposed rule of the guaranteed fee package—Guaranteed Mortgage Package does not obviate the need to still provide a Truth in Lending Disclosure at the time of the closing of the loan. So, in effect, the borrower will still receive a Truth in Lending Disclosure disclosing those charges that are in the finance charges and the amount financed and an APR, in addition to the Guaranteed Mortgage Package disclosures.
    There will be two disclosures. And the TILA, if you will—the Truth in Lending—will still be provided as it is today.
    Chairman NEY. Thank you.
    One other question I would have, I think, for Ms. Canfield—there is currently at least four national lenders offering one-fee loan products—an example would be ABN AMRO. Since lenders are doing this without a Section 8 exemption, why is there a need for a regulatory change because they are doing it without Section 8 exemption?
    Ms. CANFIELD. First, I would make the observation that there are tens of thousands of loan originators out there and only four that are offering any kind of product similar to what we are talking about. But the difference here is a timing difference. Under the HUD proposal, HUD is saying that you will get the Section 8 exemption if you guarantee closing costs at application and send out the guarantee in writing to consumers within three days. For the products that I have seen out there in the marketplace today, their guarantee does not come until much later in the loan—in the loan process—really almost near loan commitment, after the loan has been underwritten and the property has been appraised. So the HUD proposal would provide more certainty much sooner in the process than what is allowed today under current law because RESPA prevents it from happening.
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    Chairman NEY. One final question I have and, Mr. Fendly, I do not know if you want to comment on this, but the ''Wall Street Journal'' ran an article yesterday that stated that all mortgage brokers are making millions off of the refinance boom. And I just wondered if you wanted to give us your——
    Mr. FENDLY. I did, Mr. Chairman. I would like to make a couple comments about it.
    First of all, the writer picks the top producer at one of the top brokerage firms in the highest cost metropolitan areas in the country to stereotype our industry. And I think it is somewhat absurd to criticize an industry and characterize them in this manner, based on one individual.
    But it also states that 5 percent of the brokers make over $1 million, but the average broker made $120,000. Statistically, if you run the numbers, this means the other 95 percent make an average of less than $74,000, working 10 to 12 hours a day, seven days a week—meeting with loan applicants virtually any time day or night.
    And I think they have glossed over the good things about mortgage brokers. A wide yield spread premium was used to pay closing costs and consequently, the borrower got a great rate and paid no closing costs. The actual payment for the loan was slightly more than 1 percent—$2,800 on $240,000. And I think this underlines our assertions that yield spread premiums are used to help the borrower. And furthermore, 1 percent on a loan is a far cry from 6 percent realtors make on the purchase of a home.
    Now, it is true, some loans are less labor intensive than others, but just like the realtors, some homes sell faster than others, but they still get their 6 percent and that is pretty much non-negotiable.
    And last——
    Chairman NEY. My time has run out.
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    Mr. FENDLY. All right.
    Chairman NEY. Luckily, I think somebody else might want to respond to that, I would assume.
    Thank you.
    Ranking Member—Ms. Waters?
    Ms. WATERS. Well, let me apologize for having to go out for a few minutes. Let me pick upon some of the discussion that I heard coming back in. For many years, there have been a lot of questions about fees and charges for mortgage brokers. As was indicated in testimony by our consumer advocate here, the concern about mock displaying all of the charges is a concern that did not just start today, but it has been there for a long time. And I do not have the empirical data, but the reputation of brokers for charging exorbitant fees is a reputation that you have gained, whether or not you are deserving.
    If, in fact, there is a belief by consumers, and particularly by consumer advocates, that the charges have been exorbitant, what can you do to convince us who are concerned about that, that we do not need to continue to display every fee that is charged in a transaction?
    Let me ask that question of Mr. Courson.
    Mr. COURSON. Let me respond from the Mortgage Bankers Association standpoint. Obviously, I think that what you are getting, Congresswoman, is, in fact, the certainty of a one—of a guarantee. The issue today is one, frankly, of an opportunity of bait and switch—of showing a consumer at the time of application a list of charges on a Good Faith Estimate that has no important law to enforce that if by the time that consumer goes to the closing or the funding those numbers change through the addition of fees or other hidden charges and now the consumer is so far down the path they are at the closing table—and under current law, there is no penalty for that.
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    And so this system is one that says, ''Tell the consumer up front, give them a guarantee—a one number guarantee and when they get to closing, that number does not change.''
    Ms. WATERS. How can I be assured, as a consumer that that one number is not exorbitant? How do I know that you have not doubled what I would have had to pay had I known what the fees for each of the items should have been—could have been?
    Mr. COURSON. That is a very good question. If, today, you took a Good Faith Estimate, which you are given, which is a laundry list, if you will, of charges and tried to shop it, I would submit to you that even some of us in the business would have difficulty shopping that to try to match up different fees, different language, different terminology, different charges. And, in fact, very honestly, we talk about predatory lending, if—anything that has that much confusion in it is, in fact, an opportunity to fool the consumer.
    So now, what you do is with one number—that is a shopable number. They now have one figure that they can shop with other originators. You know, when a customer comes in to one of our branch offices—consumer—they really, in all due respect, want to know two things—maybe three. One, how much cash do I have to bring to closing? What is it going to cost me? How much cash do I have to have? And what are my payments and my interest rate?
    And I will tell you that my experience in 40 years in the business—of people looking at Good Faith Estimates and trying to, if you will, see if the pest inspection or the flood certification or the whatever else we have certifications are marketable—in our market, it just does not happen.
    So let us simplify it—give them one price and now they can call any company and say, ''I have been told my closing costs for this transaction are not going to exceed X, what are yours?''
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    Ms. WATERS. But does this make it very difficult for small businesses to be competitive where the big boys just wipe you out by undercutting all those prices that you are getting?
    Mr. COURSON. Well, in all due respect, if I thought that, I would not be here testifying as part of this. I do not—I do not envision being wiped out.
    Actually, I think it proposes some opportunities. We do compete against the big people now. The lenders are out there—they are certainly much better capitalized—lower cost of funds. They have affiliated business arrangements and they compete on closing costs, too. I mean, we are out there trying to originate loans and close loans and competing with rates and fees and closing costs.
    Frankly, I think this gives the small business person such as myself an opportunity to come in and form co-ops, affiliations—you read about groups that are forming—which allow us, frankly, to go with others and, perhaps, negotiate better transactions to compete more effectively than we do, really, head-to-head today.
    Ms. WATERS. Thank you very much.
    Chairman NEY. Thank you.
    Mr. Green?
    Mr. GREEN. Thank you, Mr. Chairman.
    I have a few questions for Mr. Friedlander, if I could.
    Mr. Friedlander, the assumption that HUD is apparently making with its proposal is that title companies and other service providers have a fee that is large enough that it needs to be, essentially, attacked or squeezed in the packaging. And then they assume that that savings will be passed on to consumers. What is your reaction to that assumption?
    Mr. FRIEDLANDER. This has been one of our major concerns about the packaging proposal. The squeezing of the title service fee is going to hurt the small business. First of all, we have to give quality service and we have to give a quality product. We are highly regulated by the state's departments of insurance. And being able to reduce the price of a insurance policy is absolutely wrong and illegal in Ohio. So we would have to have some preemption, to start with, in order to change the title insurance premium.
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    To reduce the cost to the point where we will no longer be able to give the quality of service I think would be a detriment to the consumer.
    The packaging fee will be a fee and the packager will not disclose what is actually in the package. So we may be reducing our costs, but the package price may just result in additional profit to the packager or to the lender if he is the packager.
    Mr. GREEN. Well, I guess the question is if the proposal is—if, in fact, it is going to lower costs to consumers, why should we care if the packaging proposal favors big lenders or big title companies over smaller ones? I mean, why should any of us up here care about that?
    Mr. FRIEDLANDER. If it was a matter of reducing costs because of efficiencies, that would be one thing. But it is reducing costs by squeezing the title company. And by squeezing the small agent, it would virtually put them out of business so only the large title companies would be able to compete and the playing field would not be level.
    Mr. GREEN. You said something a little earlier that caught my attention. You said that in Ohio—did I understand you to say that there are—that you are state regulated to the point where you do not have flexibility—is it in the rates that you provide or the fees that you charge?
    Mr. FRIEDLANDER. There are—there are different ways of charging fees in different states. Some states have what is called a single price that would include the title search, the premium and the closing costs. In Ohio, the premium is the only regulated part of the fee so that the title search and the closing costs are work charges—the title insurance premium is regulated by the state.
    Mr. GREEN. And then something else that you said in your statement that I found interesting—you pointed out that in Ohio—I think you said the custom is that title insurance is split half-and-half between the buyer and the seller.
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    Mr. FRIEDLANDER. Yes, that is correct—in Ohio and in many other states, that the seller and the buyer split the costs of the title—in some places the seller pays all of it. For example, in Cleveland, the conveyance fee tax is generally paid by the seller. In other parts, it is split half-and-half.
    Mr. GREEN. So in other words, this proposal is going to have a very different—a varied effect, I should say, state-by-state because of the way that the transaction is treated now under current law.
    Mr. FRIEDLANDER. In every state the regulations are a little bit different. Some states are highly regulated. But in all states, the state department of insurance controls the fees of the premium. And I would say that there would be a—really an unfair situation where we would be charging a lower premium to a purchaser who is buying a property being financed by a large lender and charging a different premium by a purchaser who is coming from a smaller lender. I think that would be illegal. In fact, the NAIC—the National Association of Insurance Commissioners—have written a letter that—I will provide a copy of that to the committee.
    Mr. GREEN. Thank you.
    And just with the brief time I have left, Ms. Saunders, have you had a chance to see the two package proposal that the title companies have talked about? And do you have any reaction to it?
    Ms. SAUNDERS. Yes, I have seen it. And I do have a reaction to it. I think that, unfortunately, it would not work. Let me make it clear that we have no problem with anybody offering a package. Our problem is the Section 8 exemption being provided in response to a package. Our concern is that a consumer not be tied into a portion of the closing costs of the loan without knowing what the loan interest rate is, itself.
    Mr. GREEN. My time is up.
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    Chairman NEY. I would note that the time has expired.
    Mr. Watt?
    Mr. WATT. Thank you, Mr. Chairman.
    If I have listened carefully to all of the people on this panel who have testified, I have concluded that the only person who has wholeheartedly endorsed this proposal is Mr. Courson, although the gentleman on the end, whose name I cannot pronounce——
    Mr. GARCZYNSKI. Garczynski.
    Mr. WATT. ——Garczynski—said that he was endorsing it, then he proceeded to say that he wanted several different changes made to it for home builders.
    So I take it the only person on this panel who actually endorses this proposal as it is written is Mr. Courson. Am I correct in that?
    Mr. COURSON. Congressman, I—let me characterize—I did say in my testimony we have submitted a 60-page comment letter that we did offer some suggested modifications. We certainly support——
    Mr. WATT. So you do not endorse it either, then?
    Mr. COURSON. I did not say that.
    Mr. WATT. All right. Well, let me—let me get—I was going to focus more on you because you were the—you were the person who seemed to be endorsing it most. And you seemed to suggest that this will increase competition. And it may well increase competition between lenders. I think some of us are concerned at—about the impact on competition below the level of the lender.
    And let me just play this out for you because as I understand this proposal, the Guaranteed Mortgage Package is a one number figure. And if I get a one number figure from you, as a lender, I do not know what is in that one number figure for attorney's fees, for title insurance, for deed preparation, for recording fees. I have got one number. And so I do not find out, as I understand it, until I get to the closing to a settlement sheet what the specific number is for attorney's fees and the various other components of that one number.
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    How do I, under those circumstances, have the ability to go out and shop, as you said, for a lower attorney's fee, a lower mortgage—title insurance premium? You know, I do not know how—and I think what you said is it might increase competition between lenders, but what you are—what you have done is set up a system where you control the whole system, as the lender, for title insurance, for attorney's fees, for the whole range of other things that are variable. Now, recording fees are controlled. Title insurance premiums may be controlled. But there is a whole range of services that I could go and shop if I had the numbers and if I were inclined to shop.
    Now, that is one concern I have about it. And maybe you have an answer to that.
    My second concern is that with this Section 8 exemption, which is, in effect, I understand, a safe harbor, if I get down to the closing, I get my fees disclosed—if something is dramatically out of line—suppose you have squeezed everybody—you have squeezed the title insurance company—you have squeezed the title lawyer and, in the process, what you have done is you have increased the amount of fees that are paid to the lender. And now you are telling me I cannot even—I do not even have any recourse against you for doing that because you have got a Section 8 exemption there.
    Now, those are the concerns I have about what you are saying. And perhaps there are responses. I hope you will use the balance of the time, maybe, to respond to it.
    Mr. COURSON. I would be happy to, Congressman.
    When a consumer comes to one of our offices, they want a loan. They want a mortgage loan.
    Mr. WATT. No, I want the best loan I can get. I mean, I—and I want the best legal fees I can get. I want the—you know, I want to have the option to choose to use a lawyer friend of mine, even if—even if he charges me more. If you are not telling me how much he is charging for that, I do not—you know, you are assuming the only thing I am looking for is a loan. And that is just not the case in my experience.
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    Mr. COURSON. May I finish? I will finish the rest of my answer now.
    And when that person comes, they obviously are concerned about the amount of cash that it is going to take to close that loan and the rates and the payment that they will have. And I will submit to you today, Congressman, that people that come—the customers that come to one of our retail branch offices—coming for a loan do receive a piece of paper that has itemized costs on it. And——
    Mr. WATT. But does—is that required under this?
    Mr. COURSON. It—well, no, it——
    Mr. WATT. I am saying required under this—under these regulations.
    Mr. COURSON. That is correct.
    Chairman NEY. I am sorry, the time has expired.
    Mr. Shays?
    Mr. SHAYS. Mr. Chairman, thank you.
    I enter into these questions with some reluctance because I, frankly, think that this is some of the most confusing stuff. I have had about seven closings in three years. I have signed more things. I do not pay any attention, frankly, to what I sign. I hire the best lawyer I can hire to trust him. And I hire a broker—a real—a broker who I can trust and then I just have them give me the one page that summarizes. And then I go back and I figure out when I refinanced if I am paying less each month than I was the last time. And then kind of feel pretty good about it.
    But I am saying to you that most of what I fill out I think it is junk—I think it is stupid. And I know that somehow we are responsible for it right here—all of you and all of us.
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    And so, I am just curious as to have someone here, as clearly as possible, without using words like ''it will be a disaster,'' tell me why this is not good to have it be easier and less expensive.
    Chairman NEY. Anybody want to offer?
    Going once——
    Mr. FRIEDLANDER. The issue that we are dealing with is a change in a current regulation. We have all agreed——
    Mr. SHAYS. Well, my philosophy is that anything that is going to change what currently happens is 50 percent likely to be an improvement.
    Mr. FRIEDLANDER. The RESPA rules have needed modification and changes. It is very difficult to make these changes. And in order to make the changes, we have a lot of people sitting at the table with a lot of different interests.
    Mr. SHAYS. A lot of vested interest—correct.
    Mr. FRIEDLANDER. The consumer should be number one in this process, but the disclosures that the consumer needs—and I will speak from the title point of view—that in a refinance situation, the consumers needs are not the same as in a purchase sale transaction. Certainly there is need to know ''What am I getting?'' And this is part of the problem that we see in this proposal—it is blind. The consumer does not know what is in the package—he does not know if he is getting an appraisal. He does not know if he is getting an owners policy.
    And this is why we are——
    Mr. SHAYS. But, you know, the sad thing is even when you sign the documents, you do not know.
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    Mr. FRIEDLANDER. I am sorry?
    Mr. SHAYS. Even when you sign all of those documents, you do not know what you are getting.
    Mr. FRIEDLANDER. In this proposal——
    Mr. SHAYS. No, under present circumstances.
    Mr. FRIEDLANDER. You are probably right.
    Mr. SHAYS. You are under this assumption that all of these papers tell me something. There is so much and it is—you know, there is only about two pages in the entire document—the summary—that I find valuable. Everything else, I do not find valuable.
    Ms. CANFIELD. Perhaps if I could say something, Congressman, I think that is why the lender trade associations do support the rule with some modifications to make it simpler, because the services that are going to be included in the Guaranteed Mortgage Package are not for the benefit of the borrower, really—for the—for the benefit of the lender so that the lender can make the loan. And if the consumer is—if we get Section 8 relief, you will see downward pressure in pricing on all sorts of services that go in that package because packagers, not just lenders, will be able to average cost price.
    In addition, from a simplification perspective, the consumer will get that one number at application. Now, what we have also suggested is that the changes in the GSE be postponed so that if the consumer wants to, as under existing law, go choose the title—go choose the closing attorney or a separate title policy or whatever, they can—they can operate under existing law and continue to do that.
    But what we are talking about here is allowing for the option for all the settlement services to be guaranteed at application to the consumer.
    Mr. SHAYS. The one tragedy in this business, as I see it, is I have a lot of constituents who basically may have missed a month—have kept current, but they are always one month or two months behind. They have not been able to refinance in the last four or five years. The irony is they need these—refinancing more than anyone else, and they are the ones that have the least likelihood of being able to do it. And yet they have been constant in their payment, they just were behind years ago. And I would love to find a way that this committee can solve this problem. And I will tell you, that is one reason why I chose to be on this committee.
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    Chairman NEY. I thank the gentleman.
    Ms. CANFIELD. I will talk to you.
    Chairman NEY. A response to that?
    Mr. TAYLOR. Very quickly.
    Chairman NEY. You were still yellow.
    Mr. TAYLOR. I can tell you, as a lender and a local lender and that is our main business, that why this guaranteed package becomes an interesting alternative is nobody looks at those numbers which are itemized. Nobody understands them as a consumer. It is not that they are good or bad or that the good intentions did not bring them to the table. The fact is that nobody knows what they are about, so nobody does look at them.
    What the Guaranteed Mortgage Package allows to happen is one number be given to that consumer when they walk in the door because there is two questions that they ask me: What is my rate? And what is it going to cost to close? And that is all they need to know, from their perspective. I am not suggesting that is all they need to know—that is what they think they need to know. And there is nothing else that you are going to tell them other than ''Here is my rate, and here is the closing costs in this loan.''
    When you give them that itemized list, the fact of the matter is, nobody looks at it. They say, ''Where do I sign? You tell me.'' So they are relying on community institutions already to guide them through the process and to tell them what is right and what is wrong and where they should sign.
    Chairman NEY. Thank the witness.
    Mr. Davis?
    Mr. DAVIS. Thank you, Mr. Chairman.
    Let us assume for a minute all of the virtues of the Guaranteed Mortgage Agreement in terms of consistency and predictability. As I look at the regulations, one of the things that really strikes me is kind of a catch-all exception that says that the price can be modified, subject to—the language, I believe, is ''acceptable final underwriting and property appraisal.'' Now, we struggle with reasonable doubt in this society. We struggle with preponderance of evidence in the civil cases. That strikes me as being one of the more untrammeled standards I have ever seen, frankly.
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    Can any of you explain to me why that exception and the reference to ''acceptable, final underwriting and property appraisal'' does frankly not constitute such a big potential exception that it rips a hole through the whole—virtues of the mortgage agreement?
    Yes, ma'am?
    Ms. SAUNDERS. I would agree with part of what you said and try to distinguish another part. We have expressed very deep concerns about the meaning of ''subject to final underwriting.'' The idea behind the Guaranteed Mortgage Package, and we support this idea—that the consumer gets to call up four or five different creditors and say, ''Here is my Social Security number, here is my income, here is what I think the house is worth. Will you do an initial credit analysis and tell me what I qualify for, assuming that the information that I gave you about the house value and the income and any other questions that I am answering for you are true?''
    The black box that we all do not understand of credit worthiness, then, is resolved before the consumer pays anything. And that allows the consumer to shop between lenders about all those issues which most consumers do not understand, which is what loans they actually qualify for.
    The issue of how much the house is worth is going to stay the same. It will be resolved by an independent appraiser, regardless of what lender that the consumer eventually chooses.
    So the idea is that the consumer will get a commitment on points, and on costs to close and interest rates, subject only to verification of the information that the consumer has the ability to determine himself—him or herself, up front. But HUD has not been clear in the proposed regulations what ''final underwriting'' means. If it only means determining verification of those things, that is fine. If it means something more, we have concern—great concern.
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    Mr. DAVIS. Let me follow before anyone else answers—that there is another item in the regulations that do not make a whole lot of sense to me. Given the fact that this particular provision does not require a disclosure of the itemized costs, how would a litigant or how would a potential buyer have a clue what in the world would potentially constitute ''underwriting and property appraisal'' if all you get is a final number and you have no capacity to actually pull out the itemized costs?
    That strikes me as a major tension in the regulations.
    Mr. COURSON. Congressman, there is, as part of the proposed disclosure in the HUD rule a disclosure where the lender does disclose certain services whether they—yes or no answer they will or will not obtain, appraisal being one, for example. So they will tell the consumer—there is an addendum says I will or will not get an appraisal. And certainly in most states there are laws on the books that the consumer is entitled to a copy of that appraisal or their credit, if in fact it is—there is one that exists.
    Mr. DAVIS. Ms. Saunders?
    Ms. SAUNDERS. That is another problem with the rule, frankly. If you get—if the lender gets an exemption from Section 8 for providing the package, then at closing it turns out that the lender has not complied with the promise, all the consumer has is the ability to bring a Section 8 case. But the consumer does not have any of the information, as you have just identified, to enable him to bring the Section 8 case. So losing the exemption means you now have a right, which you have no ability to enforce.
    So what we have proposed is that if HUD moves forward with this, they have to say that if you do not keep your promise, you have got—you have created a presumption that Section 8 has been violated, otherwise, taking away and then giving back the Section 8 exemption is meaningless because the consumer would not have the information.
    Mr. DAVIS. One final question before my time runs out—given the fact that these cases would be litigated in the state court, I think almost all of you would agree that certain states might have widely varying definitions of what fits this criteria. So, were any of you proposing to possibly federalize this cause of action? And if you are not proposing that, how do you deal with the inherent inconsistency that would result?
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    My time has expired, but, Mr. Chairman, if you would indulge someone answering that?
    Mr. COURSON. Under the two package agreement, our closing package—we do not require a Section 8 exemption.
    Ms. SAUNDERS. It is already a federal claim.
    Mr. DAVIS. Okay.
    Ms. SAUNDERS. So it would be a federal claim.
    Mr. DAVIS. Thank you, Mr. Chairman.
    Chairman NEY. Thank you, Mr. Davis.
    The gentlelady from Florida?
    Ms. HARRIS. Thank you, Mr. Chairman.
    I came to this meeting today wondering what was good about this package. And I did not like the idea that larger lenders might have the—that we might have been creating an unfair competitive advantage for large lenders over small and other small businesses.
    But I cannot help but make the assumption that Secretary Martinez would only be doing this for good reasons. And by listening to you, it sounds as though we are—he is trying to, of course, lower costs and simplify the process.
    I think it still comes down—that is really what I want to know—is that going to happen? Are consumers really going to experience lower costs? Or are lenders just going to experience larger profits? Are we really going to create the kind of competition that, in essence, less—it would simplify in that the consumers would bear a smaller share of the cost?
    And then on a smaller—on the micro—the second part of the question is—two more questions—why cannot we list out—even though I know that it is complicated and they do not go to look at each of the different—pricing of each service and they each come in for different things, why not be more transparent? Why not list them all out?
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    And then the second part of that is why cannot the borrower choose if they have an attorney that they feel close to—if they have a relative in the real estate business? Why cannot they opt to choose those individuals or those businesses should those individuals be able to comply with the lenders' specific price points?
    Mr. FENDLY. Mr. Chairman, can I answer the last two first? And then——
    Ms. HARRIS. Yes.
    Mr. FENDLY. I think the issue of listing them out, if you would—remember, this is a guarantee now, that is given at the time of—within three days of application. Today the system—we list them out on a Good Faith Estimate. But, remember, there is no enforcement provision if you are right or wrong or have listed some or not listed some or omitted some or put the wrong price. Now we are putting a guarantee out, so in some respects, frankly, as an originator or lender, we are taking some risk in that we have missed a cost or we have mis-estimated or mis-priced a cost, but yet we are guaranteeing that. So there is a difference between listing them as an estimate that has no enforceability or giving a guarantee as to what those costs will be.
    Ms. HARRIS. If you were working with specific vendors, if you will or specific service providers and they had committed to that cost, then at least you would have that backup provision. But if others would also be willing to work for that amount, then it would seem that the transparency aspect would be important, just to be able to show.
    Mr. FENDLY. Some may or may not. You know, we focus very different—well, we focus on the package concept here. The basic tenet of the proposed rule is that the customer has a guaranteed settlement fee disclosed to them. The idea of putting together packages, if you will, is sort of an off-shoot of the basic tenet of the rule, which is tell the customer up front and give them a guarantee of what their settlement service costs are going to be.
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    And so, in many packages that will go forward, there may or may not be discounting or packages, if you will. It may be that the originator knows for that type of loan in their marketplace that the closing costs will be this and they are willing to guarantee that and have to compete because they are going to have to be competitive as that—as that package does get shopped elsewhere.
    And if the consumer asks—if any came in and asked for an itemization, there is nothing that precludes an originator or lender from giving him the list of the charges.
    Mr. COURSON. If I may, this is exactly what we are talking about in our two package proposal. What the lender needs in order to make the loan is the lender's concern. And that is—they know what they have to do. But the second part of the package, the settlement part, we feel strongly that the consumer has the option to choose what he wants in that package and whether he wants an owner's policy—whether he wants a survey.
    These are items that he may choose to get for himself where you have a buyer and a seller. So our proposal simplifies, itemizes and allows choice. Every area is a little bit different—different needs in different places. And I think that the two package proposal certainly would answer that issue.
    Ms. CANFIELD. I guess, Congresswoman, I have a slightly different view. RESPA was created over 30 years ago and it was based on the premise that consumers would shop for all these settlement services. Thirty-plus years later, they do not shop for those services.
    With regard to itemization, the fact is that in a Guaranteed Mortgage Package there will be some loans where, you know, the lender—or the packager and the lender will not feel it necessary to make a full-blown appraisal. They might be able to do an automated evaluate—automated appraisal. They might decide that a more simplified title insurance arrangement is appropriate for that loan. So borrowers of the services on those loans are going to vary. In addition, the pricing on them will vary.
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    And as these packages are going to be put together, packagers will go out and negotiate volume discounts and they will say, ''Okay, for the first $100,000—100,000 loans, we will give you a price we will set at, say, $100 a loan. If you bring us 500,000 loans, those appraisal prices are going to go down to $50 a loan.'' So you do not know, for the consumer, which loan is actually getting which price appraisal or which price service.
    The idea here is that competition in guaranteeing the consumer a package price—one price up front at application that competition will simply the process for the consumer, drive competition in the cost of those services and ensure that the consumer understands the transaction better than they do today.
    Chairman NEY. Time is expired.
    Thank you.
    The gentlelady from California, Ms. Lee?
    Ms. LEE. Thank you, Mr. Chairman.
    Let me first say the more I listen, the more questions I have. But I know I only have a few minutes. So let me see if I can move it pretty quickly.
    First of all, it seems to me that somehow—and I cannot get my hand on it yet, but it seems like under this Guaranteed Mortgage Package the consumer, the smaller institutions, the smaller law firms—they are going to get the short end of the stick. And I cannot really figure out how they are going to get the short end of the stick, it just sounds like it.
    Let me ask you one question with regard to—and I am trying to unravel this—in the bundled package, for example, you lock in an interest rate. Does the consumer know that you pay a point or whatever it is now to lock in this interest rate? Is that disclosed? I believe now under Good Faith Estimate you are required to—if you lock in an interest rate—to say, ''Well, you are going to pay a premium for this.''
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    Mr. COURSON. The interest rate component that they receive when they receive a good faith—or a Guaranteed Mortgage Package contains the cost and it contains an interest rate that is based upon or tied to an observable or verifiable index. In other words, some borrowers come in and do not want to lock their loan right away. They want to float with the market. Some of them think they are maybe smarter than we are, so they do not lock their loan right away.
    And what this says is if they do not lock, from the time they get the Guaranteed Mortgage Package until the time they lock, their loan—their interest rate they are quoted will not move by more than the market index on which their loan has been based. So they have—in effect, they have avoided the bait-and-switch where you tell them one thing and then the market moves a half-a-point, but you ratchet up the rate a full point. So they have that.
    Now, any time they come—and for that—and for the issuance of that Guaranteed Mortgage Package, there are no fees permissible under the proposed rule.
    If in—if sometime they come back and they want to lock their loan later, or so—and then, as in today, that is an agreement and whatever, you know, they agree to and the lender charges, it would be an agreement to collect a lock-in fee, but only when they lock in the loan and assure that that is going to be the absolute rate.
    Ms. LEE. And the average consumer is supposed to understand this and know this and be able to shop around and call three lenders within three days—and five lenders within three days and make some kind of rational informed decision on which option they would want?
    Mr. COURSON. I would suggest that, as opposed to Congressman Shays' stacks of paper and what they go through today, this is a far superior opportunity for the consumer to make sure that they are getting the best deal.
    Ms. LEE. Let me ask you, with regard to the subprime lenders—that maybe I can get a clear answer on that—why are—and I—it is my understanding subprime lenders are exempt from the RESPA regulations. Are they—are they required to comply also?
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    They are? Okay. What about home equity loans? What about reverse mortgages? Are all mortgages—does RESPA cover all mortgages?
    Ms. SAUNDERS. Yes.
    Ms. LEE. All types of mortgages—subprime?
    Ms. SAUNDERS. No. Currently RESPA covers all subprime mortgages, however it does not cover open-end lines of credit.
    Ms. LEE. Does not? Okay.
    Ms. SAUNDERS. No. The disclosures are not required for open-end lines of credit. So those are—home equity lines, if you—if you mean by that you get a $25,000 line of credit——
    Ms. LEE. Yes.
    Ms. SAUNDERS. ——and you would be able to draw down $1,000 and pay it back and draw down another $1,000, RESPA does not—is not——
    Ms. LEE. It does not cover that.
    Ms. SAUNDERS. ——at this point. It could be——
    Ms. LEE. Yes.
    Ms. SAUNDERS. ——that is a matter of regulation. HUD could decide to cover it and we have, in fact, recommended that HUD do cover home equity loans.
    Ms. LEE. Okay. Good because I know senior citizens, oftentimes, take home equity loans and they need, I think, to be covered under this. And—you all have sent in a recommendation on that?
    Ms. SAUNDERS. Yes, ma'am.
    Ms. LEE. Okay. On the unforeseeable circumstances, can anyone define what ''unforeseeable circumstances'' means? I mean, what is that? Does anybody have an understanding or can define what that means? I think it is—HUD provide for that, as it relates to a brokers obligation to live up to the terms that any—I think the language in it is ''any emergency making it impossible or impractical to perform.''
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    Ms. CANFIELD. Are you referring to the changes on the Good Faith Estimate, Congresswoman?
    Ms. LEE. Yes, as it—yes, in terms of how you get out of the loan—that is a clause that—it is sort of an out clause, as I understand it.
    Ms. SAUNDERS. Another—may I address that?
    Ms. LEE. Yes.
    Ms. SAUNDERS. As I said in my testimony, there are three different proposals which HUD is making and they are each substantively different. The third one, which we have spent very little time here discussing, would require that there be very little change that lenders make on the third party charges from what is disclosed on the Good Faith Estimate, which you get three days after application, to what you actually have to pay. We are not talking any longer about the package.
    Ms. LEE. Yes.
    Ms. SAUNDERS. This is, essentially, the current method ramped up. Right now, if you apply for a mortgage, you will get a good faith estimate a few days later which will say, ''Your title insurance will be this much. Your appraisal will be this much. Your—'' and so on, but when you—when you go to closing, there is nothing in the current law that requires that mortgage originator to have kept those promises. The disclosures that are made in the Good Faith Estimate are not privately enforceable.
    So if, as happens all the time, you—the consumer goes to closing and the charges are considerably higher than promised in the GFE, there is nothing the consumer can do, except to walk away from the loan, which is generally not an option.
    Chairman NEY. Time.
    Ms. SAUNDERS. So what HUD has proposed is that there be a very small tolerance between what is proposed—what is disclosed up front and what is actually charged at the end. And then HUD said you can get out of that—the originator can change that for unforeseeable circumstances, such as the house is not a house, it is a farm and the appraisal is far more complicated to do than just reviewing a one-story house.
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    Chairman NEY. The time has expired. Thank you.
    The gentleman from Ohio, Tiberi?
    Mr. TIBERI. Thank you, Mr. Chairman.
    I was a licensed realtor in Ohio and you all have succeeded to confuse me today in your testimony.
    Mr. Courson, if you could explain something to me—a comment you made—and let me frame the issue. Mr. Fendly, I believe, said that the proposed rule—the 1 percent cap on FHAs would essentially put brokers out of the FHA business.
    Is that correct, Mr. Fendly?
    Mr. FENDLY. Correct.
    Mr. TIBERI. And you also said that 31 percent of the market right now in FHAs is provided by mortgage brokers?
    Mr. FENDLY. Also correct.
    Mr. TIBERI. And, Mr. Courson, you said that the proposed rule would increase competition in the lending area. How does 31 percent of the lending going away increase competition?
    Mr. COURSON. Our comments also included the fact that there is an inconsistency and have asked—have asked the department to revise the 1 percent cap. There is an inconsistency there. It has been there for a number of years. That regulation has been there for a long time and is inconsistent with the current proposal. And so we have—now, with the guarantee, we have also made the same comment as the National Association of Mortgage Brokers.
    Mr. TIBERI. Do you believe that HUD has the ability, Mr. Courson, to raise the cap?
    Mr. COURSON. I do not want to speak for what HUD can or cannot do, but it is—and it is—and I am not an attorney, but it is my understanding it is a regulation, so it could be changed by a regulatory proposed rule or regulatory rule.
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    Mr. TIBERI. Mr. Fendly, do you believe that they have the ability to raise the cap?
    Mr. FENDLY. They do—whether they will do it or not remains to be seen.
    Mr. TIBERI. Mr. Taylor, do you have the—do you believe they have the ability to raise the cap?
    Mr. TAYLOR. We believe—excuse me—yes, we do and we do believe that his regulation could be, in part, brought to fruition through HUD—that there needs to be no further regulatory or legislative action taken.
    Mr. TIBERI. Mr. Fendly, why do you believe that the cap causes your members to—how do I want to put this—not be able to make the loan?
    Mr. FENDLY. You are referring again to the FHA loan?
    Mr. TIBERI. Yes.
    Mr. FENDLY. Historically, a broker will receive compensation—two forms on an FHA loan. The direct compensation would be the one point cap on front. The indirect compensation is the yield spread premium, which they will charge, generally speaking, an average of another point, in order to cover their costs.
    By recasting that yield spread premium from indirect compensation to direct compensation, that violates the cap that is in current existence right now because that would be two points. It limits us to one point and there is absolutely no way we can cover our costs with one point.
    FHA loans, by their very nature, are more difficult and time consuming to consummate than a conforming loan.
    Mr. TIBERI. And Mr. Taylor, you would agree with that?
    Mr. TAYLOR. Yes, I would—yes, I would.
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    Mr. TIBERI. And Mr. Courson, you would agree with that, as well?
    Mr. COURSON. Yes. The 1 percent cap, Congressman, is years old and it was always assumed that a FHA loan is a 1 percent origination fee—there is an interest rate and there is a discount. And as, obviously, you well know, that marketplace changes and now we are into providing closing costs through grades of trade-off, if you will, of the teeter-totter. And all of that new innovation and new financing tools that are available have really rendered that regulation antiquated and outdated.
    Mr. TIBERI. Back to you, Mr. Fendly, you mentioned in your testimony about no-point loans and advertising. Explain to—explain to us a little bit more why you believe that is a disadvantage to brokers, as opposed to others in the lending field.
    Mr. FENDLY. There is re-characterized in the yield spread premium, once again, from a direct compensation to direct compensation. As such, a retail mortgage lender and a mortgage broker offer the same loan at the same terms and they are receiving the same amount of indirect compensation. However, in order to advertise that, by this proposed rule, we would have to show that as a one point direct compensation fee—in it—in any——
    Mr. TIBERI. A one-point direct compensation fee to—
    Mr. FENDLY. To the broker—the retail mortgage lender would show zero points. By definition, we would have to show one point for the exact same loan with the exact same costs and the exact same terms. I think it is reasonable to assume that the average consumer looking at such an advertisement would think that a mortgage broker was more expensive.
    Mr. TIBERI. Why are not they, then, in your—in your mind?
    Mr. FENDLY. I am sorry?
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    Mr. TIBERI. Why are not they more expensive, then, in your mind, under that scenario?
    Mr. FENDLY. Well, the biggest reason is because we are in the communities themselves—we are actually in with the local people. We work in their communities. we are strengthening home ownership in their communities. we are going out to their homes. We make those house calls. We deal with these borrowers frequently, for years and years and years and subsequently their children. We provide better prices, better service and better product.
    Mr. TIBERI. Under the FHA, you said that you—your industry provides 31 percent of the loans. Do you know the breakdown for the rest of the 69 percent?
    Mr. FENDLY. I do not.
    Mr. TIBERI. All right. Do you provide the largest bulk, do you know?
    Mr. FENDLY. I do not know the answer to that question, Congressman.
    Mr. TIBERI. Mr. Taylor, do you know?
    Mr. TAYLOR. No, I do not have any specific numbers, Congressman.
    Mr. TIBERI. Okay.
    Mr. Chairman, I know my time has expired. I would just like to submit for the record the Uniform Mortgage Cost Disclosure that was part of the comment period that was provided by the mortgage brokers. it is a disclosure form. I would like to provide it into the record.

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    [The following information can be found on page 450 in the appendix.]

    Chairman NEY. Without objection, provide it for the record.
    Thank the gentleman.
    The gentlelady from Pennsylvania?
    Ms. HART. Well, since Mr. Tiberi was a licensed real estate broker, I was a licensed title agent and an attorney who handled quite a bit of mortgage closings and used to—I will not admit it, but giggle at some of the forms that I had to have people sign.
    So when I heard that this was being reviewed—what was required—I was pretty happy about it. But, unfortunately, I have not been completely happy with the result. But listening to all of you today, I guess I am in good company.
    My question, actually, has to do—back—and I hate to keep asking questions to create sort of a fuss between the brokers and the—and the mortgage bankers, but I am going to do that.
    The RESPA—actual preamble to the change in the—in the reg stated that mortgage brokers originate more than 60 percent of the residential mortgages. And I know it was also cited in some testimony today. That would lead me to believe, since the market usually works—it always works if we let it—but—because it usually works, but if we interfere with it a lot—that would lead me to believe that mortgage brokers provide a product that the public wants.
    That having been said, I would like anybody who represents the actual mortgage bankers themselves to tell me, in light of the fact that we have heard that a number of mortgage brokers will be put out of business by this, what are you going to do that is different than what you do now to fill in the blank? What would you have to do differently than you do now to fill in the blank if all of these mortgage brokers are put out of business?
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    Ms. CANFIELD. I—John, do you want me to take this? Okay.
    First, the brokers are a very valuable distribution system for the lenders' loans. And we think that they will—and want them to continue to remain a very valuable distribution system for our product.
    With the changes that all of the lender organizations have recommended to HUD, we think that will be a reality.
    The other thing is that with regard to the Guaranteed Mortgage Package——
    Ms. HART. Before you go on, you are suggesting then that they will not go out of business as a result of this?
    Ms. CANFIELD. We certainly hope not.
    Ms. HART. Okay. Go on.
    Ms. CANFIELD. Secondly, with regard to the Guaranteed Mortgage Package itself, what we see happening is that there will be the manufacturers of the packagers—of the package and then the distributors for the package. So the distributors will be not only lenders and bank branches, et cetera, or mortgage bankers, community—thrift, savings and loans, et cetera, also be mortgage brokers, potentially real estate agents, potentially anybody that wants to get out there and distribute packages to consumers, including title insurance companies. We also think that they will have an opportunity to package—put together the packages.
    So I think John mentioned earlier that he thought——
    Ms. HART. You think that they will also be, as a result of the package distribution——
    Ms. CANFIELD. They will be manufacturing——
    Ms. HART. ——originating loans—the mortgage—well, I mean, the only people who can in that category would be the mortgage brokers.
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    Ms. CANFIELD. Brokers and lenders—you have to be licensed in order to——
    Ms. HART. Right.
    Ms. CANFIELD. ——originate a loan. So——
    Ms. HART. But——
    Ms. CANFIELD. ——they will continue to do that. Maybe I am misunderstanding what——
    Ms. HART. You are convinced that they will be.
    Okay. Let us go back to the mortgage brokers, then. In light of that statement, can you tell me, aside from the issue—or is the main issue the low value—the low amount mortgages and the ones that are government insured that you are not going to make any money on so you are not going to bother with them anymore—is that the issue? Or is there another issue that we are missing that Ms. Canfield has missed?
    Mr. FENDLY. I believe there are multiple issues. And certainly the FHA-VA loan program is part of that issue. But to get back to small business again, I think it is very, very important to understand, as the statement you made, my company has five employees. I have been in the business industry for 20 years. You are never going to convince me that I can compete in a packaging scenario with a mega-lender. And quite frankly, our industry is composed mostly of small brokers.
    Contrary to what I have heard at this hearing, I believe the only opportunity it provides for small mortgage brokers is to seek a new career.
    Mr. COURSON. Can I respond, Congresswoman? I am sorry.
    Ms. HART. Well, sure.
    Mr. COURSON. Well, you know, one of the—and that is one of the reasons that in our comment letter to the department, we, frankly, have encouraged them—there are two different proposals, if you would, one talking about the Guaranteed Mortgage Package, the other about the Good Faith with the tolerances.
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    We are saying to the department, ''Let us take the package—let us put it into play—let us see if the consumer, the originators, the lenders will accept it.'' Is the guarantee something that is acceptable in the marketplace? Is it good for the consumer? Is it good for the industry? Does the packaging benefits benefit closure? Because if they do, in a free marketplace it will get acceptance, it will get traction and it will move forward. But do not change both at the same time. Leave the current Good Faith, allow the marketplace to work the way it is working today because if the package, in fact, is viable, then in the—in the marketplace, it will gather that acceptance. And do not change both at the same time.
    Chairman NEY. Thank you.
    Time has expired.
    Ms. HART. Thank you, Mr. Chairman.
    Chairman NEY. I want to thank the panel for their testimony—a very interesting testimony on an important subject today. I want to thank you.
    Also note—the chair would note that some members may have additional questions for this panel which they may wish to submit in writing to the panel. Without objection, the hearing record will remain open for 30 days for members to submit written questions to these witnesses and to place their responses in the record.
    I want to thank you.
    We can move on to the second panel, please.
    I want to thank the second panel for being here.
    The first witness is Peter Birnbaum. Mr. Birnbaum is the President and Chief Executive Officer of Attorneys' Title Guaranty Fund, Incorporated, which is headquartered in Champaign and downtown Chicago, Illinois. Attorneys' Title Guarantee Fund provides title insurance to home buyers and lenders through its network of 3,500 member lawyers.
    Dr. Charles J. Mendoza—Dr. Mendoza is a member of the board of the American Association of Retired Persons—AARP. As a former criminal defense attorney, Dr. Mendoza is active in AARP's telemarketing fraud campaign. He has written numerous articles on consumer fraud which have been published in national magazines. He also plays a key role in working with AARP's Hispanic membership. AARP is a non-profit, of course, non-partisan membership organization for people aged 50 and over.
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    I will see you in a year.
    AARP provides information and resources, advocates on legislative, consumer and legal issues, assists members to serve their communities and offers a wide range of unique benefits, special products and services for its members.
    Arne M. Rovick—Arne M. Rovick is Vice Chairman General Counsel for Edina Realty Home Services, a large regional broker operating in Minnesota and Western Wisconsin. Edina Realty has had an affiliated mortgage company and an affiliated title insurance and closing services company and an insurance agency that was added.
    Arne has been a Director of the Real Estate Services Provider Counsel, Incorporated—RESPRO—and is a past chairman.
    Ira Rheingold—Mr. Rheingold is the Executive Director and General Counsel of the National Association of Consumer Advocates—NACA. And NACA is a nationwide association of more than 800 attorneys and consumer advocates who have a wide range of experience curbing abuse of the predatory business practices and promoting justice for consumers.
    I want to welcome everyone here today on the panel. Thank you for attending.
    And we will start with Mr. Birnbaum.


    Mr. BIRNBAUM. Mr. Chairman, thank you.
    Members of the committee, I represent a constituency of about 20,000 law firms nationwide that represent the typical mom and pop in their home closing. So I could certainly relate to many of the comments by Congressman Manzullo, Congresswoman Hart, Congressman Watt, Congressman Davis in terms of what it is like to practice law in this area.
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    We are opposed to the packaging aspects of the proposed rule. And I thought in articulating that we would look back and then look to where we are today before making comments.
    When Congress enacted this legislation in 1974, it is clear that it wanted to accomplish four things—one is to give consumers better protection for the largest financial transaction of their lives; two, to prohibit kickbacks because Congress found that the cost of the kickbacks passed on to the consumer; three, to disclose the cost of home sales and home purchasers to the seller and buyer; and finally, to give consumers the right to shop.
    RESPA is not perfect, and we heard a lot of comments related to that today. It needs a lot of work—lots of dumb stuff—these closings with hundreds of documents. I agree it is totally confusing. But the concept works. And certainly the proposal does not address some of those comments that were addressed today.
    I think it is important to step back for a second and do look at the fact that the closing business and the title business is a highly competitive business. There are lots of competitors, lots of price competition, lots of service competition.
    The proposed rule, in my opinion, is going to overturn an important cornerstone in terms of consumer protection in the housing industry. We have got four serious problems with the proposed rule.
    First, and foremost, we believe that the proposed rule has the effect, and I think it has been noted by members of the committee today, of eliminating competition and, in effect, giving a monopoly to big banks and mortgage banks. Effectively, small law firms, small title agents are going to be out of business if this becomes a reality.
    Second, and startling to me—and I am surprised there has not been more comment on this—is that it gives banks, and no one else, pretty much safe harbor immunity from criminal and civil prosecution for taking kickbacks. One, I question the statutory authority for that and two, when Congress found the need to make this prohibition was specifically to protect the consumer.
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    Three, it allows lenders to sell these closing services as part of a package with no disclosure to the consumer of what they are buying, from whom or what price.
    And then finally, and it was addressed by one of the committee members earlier, it seeks to set a national framework for real estate transactions. And as a result—and I think Congressman Green raised this—it is going to have the practical effect of preempting state law. Before we do that—before we go down that path, we have got to remember that closings are very parochial in nature—who does closings—who pays for these closings—how the services are allocated between the parties in terms of costs—very parochial—a patchwork quilt, if you will. it has always been regulated at the state level and it is impractical, improper and probably exceeds HUD's authority to suggest otherwise.
    My opinion if this rule passes—I think that four things are going to happen. One, prices are going to rise. Kickbacks—there is no question in my mind—are going to be passed on to the consumer in the form of higher prices. Also, in terms of cost allocation in seller-pay states, those costs are going to be shifted to the buyer and it is going to make prices rise.
    Two, consumers, if they are bewildered today, they are going to be even more bewildered by this process that hides virtually all the costs.
    Three, competition is going to be eliminated.
    And then, four, all lawyers and all the other small folks that are in there providing this kind of competition are going to be gone from this business.
    What do we think you should do? A couple of suggestions—one, there is a lot of talent in this room today, alone. And there is a lot of talent in this industry. And to my knowledge, HUD has not worked with an advisory council on trying—there is a lot of disagreement about how to implement these rules. And I would love to see HUD bring us in to try to work through some of the issues.
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    Two, I think you should study the costs. The Secretary says that this is going to lower consumer prices. I do not see that. I do not see that at all and I think we owe it to the consumers to study that issue.
    Three, I think that absolutely this should be done by legislative process and not by rule. I do not believe that HUD has the authority to promulgate this regulation.
    We ask that you not implement the rule as drafted. We think that costs are going to skyrocket. We think that housing is going to become less affordable. There is going to be no less paperwork involved. And a complex process is going to become even more mystifying to the consumer.
    Thank you.

    [The prepared statement of Peter J. Birnbaum can be found on page 63 in the appendix.]

    Chairman NEY. The time has expired. Thank you.
    I also would note, without objection, your written statements for the entire panel will be made a part of the record. You will be each, of course, recognized for your five minutes, but it can be made part of the record without objection.
    Dr. Mendoza?


    Mr. MENDOZA. Good afternoon, Chairman Ney and Ranking Members Waters and Members of the Subcommittee on Housing and Community Opportunity.
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    I am Charlie Mendoza and I am a member of AARP's board of directors. And I really appreciate this opportunity to offer AARP's assessment of the U.S. Department of Housing and Urban Development's proposal to reform the Real Estate Settlement Procedures Act.
    We believe, at AARP, that there is a clear need to simplify and improve the process of shopping for and obtaining home mortgages. And AARP strongly supports the thrust of HUD's approach for reforming today's confusing settlement process.
    For nearly a decade, AARP has been actively advocating for the reform of RESPA, with these same objectives in mind. Many homebuyers are mid-life Americans buying a long awaited first home, or those who are trading up, or older
    Americans who are restructuring their households as they approach their retirement years. Unfortunately, the existing
    RESPA disclosure requirements have turned a virtue into a vice by inhibiting, rather than facilitating, competition for loan products and comparative shopping by homebuyers.
    Chairman Ney, because of the importance and complexity of the issues being raised, I have attached to my statement a copy of AARP's detailed agency comments regarding the proposed RESPA reform rule. If space permits, I would like to request that our comment letter be made a part of today's hearing record.

    [The following information can be found on page 336 in the appendix.]

    Chairman NEY. Without objection.
    Mr. MENDOZA. Thank you.
    HUD's proposal contains three major provisions—enhanced disclosures of mortgage broker or loan originator compensation; revisions to the Good Faith Estimate system, often referred to as GFE Disclosure; and the availability of guaranteed mortgage packages that include guaranteed settlement costs and interest rates. This loan package is often referred to as the GMP option.
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    In the limited time that I have to address the subcommittee, I would like to suggest or highlight several key features of AARP's comment letter as they refer to these provisions.
    First, AARP supports HUD's proposal to streamline and improve the Good Faith Estimate and to create a new disclosure form to permit the offering of a Guaranteed Mortgage Package. The GMP package carries with it guaranteed loan terms and settlement costs.
    Second, we support HUD's proposal to streamline and improve the accuracy of the GFE option. The proposed changes will offer significant advantages to borrowers over the current system by creating greater certainty. The revised GFE will be especially beneficial for subprime borrowers who will receive firmer cost information without the risk of losing important consumer protection rights.
    Third, we favor the GMP as a novel concept to promote true comparison shopping by providing certainty for consumers at an early shopping stage.
    Fourth, we strongly recommend, however, limiting the GMP package to the competitive prime market until knowledge regarding subprime market behavior becomes more standardized and reliable. Our concern is that the subprime market has not yet developed the required market information that is necessary for creating competitive pricing standards.
    Fifth, in our comments to the department, we detail the need for greater enforcement mechanisms for the GFE and the GMP.
    And lastly, we suggest revising the proposed GFE and GMP disclosure forms to improve their clarity and comprehensibility.
    Arcane as the language of RESPA may be, the substance of RESPA is tied directly to a central component of the American dream, the expectation that most of us, as Americans, will be able to afford to own our home.
    We really appreciate the purpose served by this hearing in focusing public attention on an important rule-making proposal and process. And let me close by saying that while a number of important and useful modifications can and should be made to the proposed RESPA rule before final promulgation by HUD, we strongly support the department's efforts to move this rule forward. And we, at AARP, would be happy to answer any questions that you have regarding our proposal.
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    Thank you.

    [The prepared statement of Charles J. Mendoza can be found on page 329 in the appendix.]

    Chairman NEY. I would thank the witness for his testimony.
    Mr. Rovick?


    Mr. ROVICK. Mr. Chairman, good afternoon.
    My name is Arne Rovick and I am Vice Chairman and General Counsel of Edina Realty Home Services, a full service real estate brokerage company headquartered in Edina, Minnesota. Edina Realty Home Services is the parent company of Edina Realty, which participated in over 33,000 residential real estate transactions in the year 2002 in Minnesota and Western Wisconsin. Edina is also the joint venture partner in Edina Realty Mortgage, which originated over 6,300 residential mortgages; and the parent Edina Realty Title, which issued over 16,000 title policies and performed 20,000 closings during the same period.
    Today, I represent the Real Estate Services Providers Council, known by the acronym RESPRO, of which I have served as past chairman and currently serve as a member of the board of directors. RESPRO is a national non-profit trade association of approximately 220 companies from a cross-section of the home buying and financing industry, including real estate brokerage companies, mortgage companies, title and other settlement service providers.
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    Mr. Chairman, RESPRO supports the goals of providing consumers early, simple and firm information about their mortgage costs. However, RESPRO believes that HUD's proposed single-package approach to RESPA reform would not accomplish these goals.
    First, HUD's single-package approach contains a 30-day interest rate guarantee requirement that will prevent virtually all mortgage lenders from guaranteeing a loan package. This is explained further in my written testimony.
    Second, even if it was possible for mortgage lenders to guarantee the interest rate, HUD's single-package approach, as a practical matter, would bar non-lenders such as title underwriters and agents, vender management companies and other settlement service providers from competing with lenders in the packaging marketplace because they do not offer, and therefore could not guarantee, the interest rate or the loan origination services that HUD requires to be included in the package. Instead, they would be forced to partner rather than compete with a mortgage lender if they want to offer a guaranteed settlement service package.
    And as a result, we believe the competition that is supposed to pass on cost savings to consumers will be diminished and not promoted.
    Let me give you an example from the perspective of Edina Realty Home Services. Our title company currently issues title policies and performs closings on behalf of our mortgage company and over 100 other mortgage originators operating in our marketplace. Edina Realty Title would like to offer guaranteed settlement service packages directly to our real estate customers that could be used not only for mortgages provided by our company, but by any of the more than 100 mortgage originators in our marketplace.
    Not only would this allow us to offer more of our real estate customers the potential benefits of packaging, but it would also provide small local mortgage originators in our marketplace a means to compete against the large national lenders.
    HUD's proposal, however, would prevent us from offering these packages for these local mortgage originators because we would not guarantee the interest rate and points, even though we could and would offer superior service and pricing with respect to all of the services needed to close a transaction.
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    Edina is not alone in their willingness to compete and do packaging in the marketplace. A significant number of the nation's residential real estate brokerage companies and home builders offer title services to their customers through wholly owned subsidiaries with joint ventures.
    In addition, many title and vendor management companies would like to be able to offer settlement service packages directly to customers that could be used with the loan they eventually select. By excluding such a substantial base of potential competitors from the packaging marketplace, HUD's single-package proposal would effectively put control over the distribution and marketing of settlement service packages in the hands of mortgage lenders. We believe this would diminish competition and will increase prices of loan packages over what they would be in a more competitive environment.
    To correct these deficiencies, RESPRO has proposed to HUD a two package concept. Under our proposal, a consumer would shop among mortgage lenders for a loan with a guaranteed price for lender services and among both lenders and non-lenders for a guaranteed price for the closing services needed to close the loan.
    Finally, RESPRO believes that the proposed binding Good Faith Estimate—the alternative to packaging—would significantly disrupt the marketplace by increasing liability risks for lenders, creating consumer confusion and increasing administrative burdens for providers in all industries.
    In the opening statement of its proposed RESPA rule, HUD stated, ''The American mortgage finance system is justifiably the envy of the world. It has offered unparalleled financing opportunities under virtually all economic conditions to a very wide range of borrowers that, in no small part, have led to the highest home ownership rate in the nation's history. Clearly, our residential mortgage industry is not broken. It has functioned well. The residential real estate industry has been one of the strongest sectors of our nation's economy for the past three years. This is not to say it cannot be improved.''
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    We welcome the opportunity to——
    Chairman NEY. Mr. Rovick, if you could summarize your testimony.
    Mr. ROVICK. Yes. We welcome the opportunity to test the theories of the packaging system and believe that the GFE system should stay in place until the theories of that packaging system are tested in the marketplace.
    Thank you.

    [The prepared statement of Arne Rovick can be found on page 381 in the appendix.]

    Chairman NEY. Thank you, Mr. Rovick.
    Mr. Rheingold?


    Mr. RHEINGOLD. Thank you, Mr. Chairman, and members of the committee for inviting us to testify today.
    As I hear people comment about being involved in the real estate process and being involved in the closing process, I also am an attorney who has been involved in the real estate process, although my background is a little different. I spent the last six years, prior to coming to Washington, working in Chicago running a foreclosure prevention project, representing seniors and low-income people in the poorest communities of Chicago who were victimized by bad loans and were facing foreclosures.
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    So the perspective that I bring and the membership that I—that—of National Association of Consumer Advocates are from people who are representing folks who have been damaged by the mortgage lending process. And the eye we bring toward HUD reforms is that eye. And we look toward it to see whether it is going to help those consumers, as well as other consumers who are confused by the real estate mortgage process.
    When we look at the HUD proposal, we have three positive comments. We think that its intention is extremely good. We particularly like the part of the Guaranteed Mortgage Package, which provides an interest rate and closing cost guarantee when a Guaranteed Mortgage Package agreement is offered. The mortgage—the interest rate and closing cost guarantee is essential to help in the shopping process. A package that does not include both closing costs and interest rates would be meaningless because a closing—interest rates can be changed to maximize the benefit for people—to maximize lending industry—I am sorry, let me start again.
    If the closing costs are brought down to get somebody to buy that loan, that cost will be made up in the interest rates. We think that unless the package includes both the closing cost guarantee and an interest rate guarantee, the—it simply cannot work.
    A second point of the proposal, which is very important and very good is HUD's attempt to re-characterize yield spread premiums as a payment from the lender to the borrower. During the last several years, no issue has been more contentious than the use of the yield spread premiums in the home mortgage lending process. Time and again, consumers have unknowingly received a mortgage with a higher interest rate than they had otherwise qualified for because of inappropriate and illegal kickbacks paid by lenders to brokers in the form of yield spread premiums.
    HUD's proposal to change the way yield spread premiums are disclosed is an important first step in allowing consumers to have greater control in choosing the type and structure of their loans and the methods—and in the methods they choose to compensate their mortgage broker.
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    Finally, in terms of the proposal, we like HUD's bright line rule that attempts to make the Good Faith Estimate a meaningful binding document that provides real information to consumers. it is a game right now and I—as some of the great works of fiction, as clients walked into my office with the original Good Faith Estimate, as I compared that to their closing document. There was no correlation—there was no reality in what we looked at from the beginning of the process to the end of the process.
    Making that binding becomes very important for a consumer so that at the end game, when they are trying to close, they are not surprised by costs that have just changed enormously. I think that is an extremely important proposal and a very good thing that HUD has done.
    With that as background, we do have some problems with it—with the HUD's proposed rules.
    The major problem—maybe not a problem, but a major concern is we think that their proposal does nothing about predatory lending. And if it is not looked at carefully, can, in fact, enable predatory lending.
    One of the assumptions that the proposal creates is that people shop for loans. And I think in the prime marketplace, you and I—members of this committee—people here—we may shop. In the subprime marketplace, people are not shopping.
    Creating a Guaranteed Mortgage Package with the assumption that people are going to just take that information in poor communities and unsophisticated communities are going to take that information and shop is simply false. And it does not help them. And, in fact, it will hurt them because it eliminates the single biggest tool people will have to defend themselves in foreclosure, which is Truth in Lending defenses. They will be unable—people will be unable to determine whether or not the loan they have violates Truth in Lending with the Guaranteed Mortgage Package as it is currently structured.
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    And it is crucial that HUD, if they go forward on this, talk with the Federal Reserve—coordinate with the Federal Reserve to determine how those costs function along with Truth in Lending.
    I am about out of time, so I am going to stop here. I have additional remarks in my written commentary.
    I think overall, the direction that HUD is taking in this proposal is a good one. I think there are specific concerns that we have that they need to amend the proposal so that it really does help people and it does not do anything to extend the predatory lending problem that we see in the country today.

    [The prepared statement of Ira Rheingold can be found on page 375 in the appendix.]

    Chairman NEY. Thank you for your testimony.
    Questions—Mr. Rovick, you talk about a two-package proposal—have you seen the two-package proposal being put forward by the title industry?
    Mr. ROVICK. Yes, I have—yes, I have.
    Chairman NEY. How does it compare?
    Mr. ROVICK. Our proposal differs on two points—one, our proposal does not call for the guaranteed interest rate in the lenders' package for the reasons that the lenders have said—that it is difficult to lock an interest rate for 30 days.
    And the second point escapes me at the moment. I am sorry.
    Chairman NEY. You can get back to me on it.
    Mr. ROVICK. Yes.
    Chairman NEY. Mr. Birnbaum, would the two-package proposal—first, have you seen the two-package proposal put forward by the title industry?
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    Mr. BIRNBAUM. I have.
    Chairman NEY. And does that address some of the concerns that you have raised?
    Mr. BIRNBAUM. Not completely, but we are talking with ALTA about that issue right now.
    Chairman NEY. So you at least see some selling points—some positive effects that you are looking at?
    Mr. BIRNBAUM. I do. I am still concerned about who is in control of the process in either package approach. It seems to me that when we look at the packages, a lot of independence is lost in terms of who is choosing and whether the consumer really has a say in that process.
    Having said that, though, I have been working with the ALTA folks and they—we are hoping to come up with a agreement.
    Chairman NEY. Mr. Mendoza or Mr. Rheingold, I do not know if you have opinions on the two-package proposal?
    Mr. RHEINGOLD. I received it this afternoon, so I—
    Chairman NEY. Fair enough. Obviously, you can supply comments at a later date.
    Mr. ROVICK. Congressman, Mr. Ney, the second point I wanted to make is that in our two-package proposal, RESPRO provides for a Section 8 exemption in the settlement services package, which the ALTA package did not. And we believe that is important so that the vendors participating in that package can freely negotiate the prices among themselves.
    Chairman NEY. Okay. Thank you, that is helpful.
    One question I had, I guess, for all of you, if you can comment on it. we have had different people, Mr. Birnbaum, for example, make reference to the inconsistencies in some ways of this proposal with some of the state laws. Do you have suggestions on how we might be able to have some sort of reconciliation of these state inconsistencies with the federal proposal?
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    Mr. Birnbaum, I will begin with you.
    Mr. BIRNBAUM. Well, you could start with the—one of the things, I guess, that troubles me the most is this whole Section 8 issue. You know, what we are talking about—it is unprecedented, really, in my experience to allow immunity from prosecution to a class of people while still leaving the rest of the industry exposed to prosecution. And I question whether HUD has the authority to do that independently of Congress. It certainly seems like that would be your province.
    If there is a feeling that you want to delegate that back, I suppose being admittedly somewhat myopic on it, if you were to give—leave that up to the states to make that decision—that is something, if I had to live with it, I probably could live with it.
    Chairman NEY. How about some of the other inconsistencies?
    Mr. BIRNBAUM. Well, again, you know, the packaging idea seems to gut all of the—I am from Chicago and—Illinois, it would seem to be inconsistent with our consumer fraud act. So, again, if you allow the states—and, again, you know, Carl Sandburg called my town the patchwork quilt of cultures. And that is—I think you heard that today in terms of this industry. If you—if you leave it up to the states to govern these kinds of issues—and if HUD wants to make broad policy statements about this, fine. But ultimately, in the trenches, doing—and 90 percent of what we do are mom and pop's bungalow on the north side of Chicago—let our marketplace decide and let our state decide. And that certainly seems consistent with the approach that Congress has taken on this issue.
    Chairman NEY. Well, if other members—Mr. Rheingold?
    Mr. RHEINGOLD. There is one other matter—one inconsistency and area that I have addressed in my written comments, but I think it is very important that HUD stay out of—in the Good Faith Estimate proposal, there is language in it that I think is extremely dangerous and really would offend state law. And the language gives mortgage brokers a tremendous benefit that we think is extremely dangerous. And I will read a little bit. ''We do not offer loans from all funding sources and we cannot guarantee the lowest price or the best terms available in the market.''
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    This is a written document—you have heard all this testimony about people who read that—who do not read any of the documents, yet one of the HUD forms that people are going to be handed is a document that basically says, ''I am your mortgage broker, but I am not going to get the best loan for you or I am not going to be obligated to get the best loan for you.''
    Well, that is fine, except for the fact that in a lot of mortgage transactions, particularly with mortgage brokers, they are telling people, orally, ''I am going to get you the best loan. I am going to get you the best deal.'' And I think it is really dangerous. And there are lots of state law out there that defines when a fiduciary exists and protects people when, in fact, they have been misled or have been told that there is a relationship there that somebody is—a relationship of trust. And I think that language in that federal statute is extremely dangerous. And we deserve some important state protections for the consumers.
    Chairman NEY. Thank you.
    Thanks to all of you.
    Ms. Waters—questions?
    Ms. WATERS. Well, I think a lot of my concerns have been addressed. But I guess I want to ask anyone who would like to respond on the panel whether or not you believe HUD has the authority to propose the reforms that are being proposed. I hear a lot about—several people saying they do—they do not.
    If you do not believe that they have the authority, tell me why.
    Mr. ROVICK. Congresswoman, we believe that there is very questionable authority on the ability to provide for the firm GFE. The legislative history of the statute shows that the prior provision that called for a firm GFE was repealed and in its place the Good Faith Estimate as we know it today was put in there. So we think that the GFE that they have proposed here would not be sustained by the courts. And that is why we have recommended that the GFE program stay in place while we test the packaging.
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    The packaging issue, I think, is a close call. There are arguments either way as to whether that is supported by the statute or not. And I am not sure which way a court would come out on that decision.
    Mr. BIRNBAUM. Congresswoman?
    Ms. WATERS. Yes?
    Mr. BIRNBAUM. When you enacted RESPA in 1974, I think the direction from Congress to HUD was to implement regulations that were supportive of the goals that were articulated by Congress. Now, by regulation—I mean, frankly, in my market, one of the most important provisions is this anti-kickback provision—Section 8 of RESPA. It keeps people aware—on their toes—keeps the marketplace in check and I think it keeps costs down.
    How a federal agency can now, by regulation, grant immunity to a certain class of parties from criminal prosecution is beyond me.
    The other issue is state preemption. I think that the policy statement was clear when the statute was enacted as that to the extent that the states offered greater consumer protection that the state statute would control. Here, the packaging proposal, at least my opinion and the way that I think our legislature would look at it, would say that this is taking away important consumer protection, particularly in this area of disclosure and who is paying what for—at what price and from whom.
    You know, rather than this being transparent, which is the goal, I would suggest that the closing services part—the pricing is totally invisible to the consumer. And I think that is up for the states to decide.
    Ms. WATERS. So you think that any local statues—state or city statues—that create disclosure in a particular way would be preempted—could be preempted if, in fact, we adopted the——
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    Mr. BIRNBAUM. That is absolutely the way I read this. And that terrifies me. I just do not think it is appropriate.
    Ms. WATERS. Any other opinions on authority or preemption?
    Mr. RHEINGOLD. I actually do not know the answer to that because, in fact, the way the courts—I did not think HUD had the authority to issue its 2001 letter, which damaged consumers incredibly when they redefined how yield spread premium should be utilized. Yet, courts had deferred to HUD in what they have done. So I am not sure I have an answer to that.
    I think that there are much bigger preemption issues that is face—that Congress is facing besides RESPA right now. I think you have a national—you have OCC doing preemption of state laws and city laws. you have got OTS doing preemption. I am not sure that that—this is as big a concern as what we have got elsewhere involving mortgage lending.
    Ms. WATERS. Yield back.
    Chairman NEY. I thank the ranking member.
    The question I wanted to ask you was asked of the last panel by the gentlelady from Florida, Katherine Harris, will this make things better for the consumer in the mortgage market?
    Mr. ROVICK. We support the premise underlying the concept of packaging. The one price, all-encompassing package may make it easier for the consumers to comparison shop. But what we disagree with is the single-package approach. But we think giving the consumer a single price for each of our proposed two packages and giving them the ability to compare that with other packages could, conceivably, result in competition.
    Chairman NEY. Okay. On that point, just to narrow it down a little bit, then, overall, when you weigh them, what you have said, is the answer no or is the answer yes?
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    Mr. ROVICK. Packaging has never been tested in the marketplace and, therefore, we would like to see it tested in the marketplace and prove itself out, leaving the current GFE in place as an alternative until the theories of packaging are proved out. But I think packaging may lead to easier comparison shopping.
    Mr. BIRNBAUM. Come on, you know, how can it be? I mean, if you have fewer competitors and you have got a scheme where the folks, which are mainly going to be large institutions can control the payments that are flowing to them, which are really, today, are a federal crime—it can be prosecuted for giving and receiving kickbacks.     If they are controlling that process and they are receiving that dough, that money is not going to, you know, be passed on to the consumer, it is going to come in the form of higher prices. So if you have fewer competitors and higher prices, how does the consumer win?
    Mr. RHEINGOLD. I guess I would disagree with my fellow Chicagoan a little bit here. I think there is a finite class of consumers who can be benefited by this proposal. I think the GMP works for sophisticated consumers who will understand how to shop around. I think it does absolutely nothing and may do damage to people in the subprime market who are sold to and who are not shopped to.
    I also think that there is something that seems to be missing here—is that there is nothing in this HUD package that—HUD proposal that requires lenders to use the GMP. it is simply an option if they are seeking Section 8 exemption.
    The GFE will still be alive and well and people can make loans under that—on that criteria, as well. So I think it simply opens another opportunity for lenders to offer a different lending package to people.
    So I think that, if done right, I think it will help consumers, even—particularly sophisticated consumers in the prime marketplace.
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    Chairman NEY. AARP have any pains, Doctor?
    Mr. MENDOZA. Well, I am an unlicensed consumer. We can talk about sophisticated consumers but, obviously, I am not one of them.
    I think what we need is for the language to be a lot simpler. I looked at one thing there and it said, ''Origination charges.'' And as I looked, I am thinking—''What are we talking about?'' We are talking about what we are going to be charged by the broker and by the lender. I think that—and we put it in our package, as I looked at it, some things that I think we really need to do to make it simpler for the consumer to understand what they are looking at so then they can go ahead and make comparisons. But until the consumer can look at the sheet and understand it, I think we are repeating history all over again. And I am not an expert in this area, obviously.
    Chairman NEY. I will yield to the gentlelady.
    Ms. WATERS. Let me be clear—as I remember your testimony, you supported this proposed reform for the GMP in offering one price, without having to delineate all of these charges. Is that correct?
    Mr. MENDOZA. Yes, because I think that in there is another option. What we are also saying is that you have got to make this cover sheet a lot simpler so the person can understand when they start doing their comparison shopping what it is we are comparing—what price is this versus what——
    Ms. WATERS. ——comparing two things now under this reform.
    Mr. MENDOZA. Right.
    Ms. WATERS. And that is the bottom line consolidated price of all those fees that you used to see that you will not see any more and the interest rate. Is that right?
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    Mr. MENDOZA. Yes.
    Ms. WATERS. So do you think that is simplifying it? Or do you think that is hiding or confusing?
    Mr. MENDOZA. Well, we think that this form here simplifies it much more than it is—I was just handed this form here. And we have made some suggestions to this form. We think the form is a good start and you can see in our package, once you get it, that we have added some suggestions, I think, that will make this form a little better for the consumer.
    Ms. WATERS. And let me be clear about what Mr. Rheingold is saying.
    Are you saying the same thing—that you think that this proposed——
    Mr. RHEINGOLD. I think it is a good idea. I think that the concept is a very good one. I think it simplifies the process. I think there are a lot of risks involved in it and I think it has to be done well. I think that when you do the GMP and you give Section 8 exemption that you need to be very—and that is basically an exemption from liability—you need to be very clear about what happens when that gets violated.
    I think it can benefit consumers. I think it would make shopping easier for consumers, yes, I do, but I think there are things in that proposal that need to be put in place so that when a lender does not follow the rules that lay—are laid out under the HUD proposal, there is enforcement mechanisms to make them comply. And that is something that is in my written proposal, but I think it is also—it is very important to make it work.
    Ms. WATERS. Okay. Just to make sure that I am understanding you correctly—you believe that there are things that can be done to make the proposal beneficial to the consumers without identifying all of the fees and charges?
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    Mr. RHEINGOLD. Absolutely. I mean, I have to tell you, I have gone over more closing documents with consumers who were faced with foreclosure who had no clue as to what all of those charges were. Simplifying the process, saying, ''Here is your closing costs, here is your interest rate,'' would eliminate a lot of confusion. I think that is a good idea in concept—yes, I do.
    Ms. WATERS. Thank you.
    Mr. ROVICK. Congressman, I would just like to amplify—the complaint in today's market is that there is 30 to 40 itemized items on a HUD one settlement sheet. So I think by having two packages with two prices simplifies all of those line items.
    We disagree with HUD—we do believe that the services which are provided within each of RESPRO's proposed two packages should be itemized so the consumer knows what services are being provided. But we think that there is some merit to the single price on each of the two packages in enabling the consumer to comparison shop with other providers.
    Ms. WATERS. So you think—what you are telling me is you think you should list out lawyer's fees, pest control fees, et cetera, without putting a price beside each of them and just say, ''These are the services we are getting you and this is the bottom line price?''
    Mr. ROVICK. Yes, Congresswoman.
    Mr. RHEINGOLD. If I can add one important point here about the GMP?
    Ms. WATERS. Yes.
    Mr. RHEINGOLD. it is fine to do—I mean, I think it is fine to do one cost. I think the problem runs into in the subprime market the fact that there is a real interplay between the RESPA and the breakdown of costs and determining whether a loan violates Truth in Lending or HOEPA.
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    And if you have that one cost without any breakdown, it becomes impossible for consumer advocates and consumers to determine whether Truth in Lending has been violated. And that is an oversight in this proposal.
    For instance, when someone came to my office and I was representing them—they were being faced with a foreclosure in Chicago. They would come to me and the first thing I would do is look at all of their loan documents. And I would say, ''Okay, this fee looks kind of funky.'' But under current law, particularly Truth in Lending, which—that breakdown of fees was extremely important for me to look at because if a fee was overblown—may not have been a RESPA violation, but, in fact, it may have led to a Truth in Lending violation.
    Ms. WATERS. Yes, but you are here—you are saying it is okay to eliminate that.
    Mr. RHEINGOLD. No, what I am saying it is okay in a finite market—in a subset of the marketplace. I think it is okay in the prime marketplace where you are not going to find Truth in Lending violations—where you are not going to find predatory loans. I think it is very important that the GMP proposal does not remotely sink—work its way into the subprime marketplace.
    Ms. WATERS. I agree. And as a matter of fact, if I am—if I have read this correctly, HUD may be suggesting that also—that it not be used in the subprime market.
    Mr. RHEINGOLD. They are—they—what they said was that it should not be used for loans that are HOEPA loans. We think that the subprime market and the predatory marketplace is far below where HOEPA is and we would suggest—I know AARP has suggested—my friends at NCLCS suggested different ways to measure what a subprime loan is because it—HUD goes there, but they do not go close to far enough in making that——
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    Ms. WATERS. Well, is this not a good compromise to others on the panel?
    Mr. BIRNBAUM. I think that if it is important to give consumers the opportunity to know what is going on that that opportunity should be available whether they are prime or subprime. And I think that the same theory applies. I mean, the typical consumer buying their house, whether they are rich or poor, is relatively a babe in the woods. And even the lawyers that are on this committee talk about how confusing these closing are.
    So, to me, if this is all done behind closed doors and the lender's picking the lawyer and the title company and all these other providers, what is the check and balance? You know, maybe Ira is right, maybe in a lot of cases they do not really pay attention, but is not it at least a governor on the process to say, ''well, at least you can hire your own lawyer. At least you can hire your own title company.'' And you do not have it done behind a curtain where the party that is picked is the one that is going to pay the most dough to get the business. It just does not make sense to me.
    Ms. WATERS. Well, I do not want to jump to any early conclusions about any of this. I think we have got a lot more to learn. But I have to tell you that as we fight through this and we attempt to get some reforms that may be beneficial to the people who need them the most, I would lean on the side of making sure we protect those in the subprime market, because these are the people, for whatever reasons, are least able to do the competitive shopping and to raise questions and to do a lot of other things.
    You are right, you know, the preference would be that everyone would have equal protection under the law, but if we have got to do somebody, we do the ones at the high end.
    Mr. BIRNBAUM. Yes, but Congresswoman, let me respectfully suggest that in close—and we do—my company does 40,00 to 50,000 closings a year, so we see a lot of stuff from A to Z—soup to nuts kind of stuff. And the typical mom and pop—middle class, you know, qualified buyer—lots and lots of abuses go on at that level, too. So this is the American dream. And lots of people are paying too much dough because of bad lending practices. And I think that this proposed rule only exacerbates that problem.
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    Ms. WATERS. You are absolutely right.
    And it can be, if I may, Mr. Chairman, it can be sometimes confusing. But what is interesting about a lot of the people that I try to protect is they are thrown into subprime no matter how much money they make, no matter how good they pay their bills. And so we would be able to help some people a little bit, in a different way, perhaps, get some disclosure. Because unfortunately, a whole set of people are placed into subprime lending that could be in prime lending.
    So those are the kinds of considerations we have to give to this.
    Mr. BIRNBAUM. And that is a good point and Ira sees it more than me, but absolutely.
    Ms. WATERS. Thank you.
    Chairman NEY. The point is they did not know they could have been in prime. And how do you get to that point?
    I think Mr. Rheingold mentioned about sophisticated and unsophisticated and somebody else mentioned about simplification. And you can simplify, but what do you do with the unsophisticated buyer, even if it is simplified if—who is the protector or the gatekeeper or the person that works with them. I think that is a—you know, I mean simplification is great and disclosure, of course, is important, but who also helps the unsophisticated buyer? Or is it buyer beware? I mean, you——
    Mr. RHEINGOLD. Well, I think part of it—part of the piece that has to sit in here is that there has got to be some teeth to the regulation, which I do not think exists in the current proposal. If, in fact, you are going to allow this guaranteed mortgage price—and I actually think that it may lower prices—if, in fact, a lender does not do—they do not comply with the Guaranteed Mortgage—they—in other words, they come up, they say, ''is is what your rate—interest rate is going to be. This is what your closing cost is going to be.'' And at closing it changes, then there has got to be some teeth there so that there is some real enforcement—so there is an incentive for lenders not to do that.
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    Chairman NEY. So what is the suggestion?
    Mr. RHEINGOLD. The suggestion is that if, in fact, they do not comply with the Guaranteed Mortgage Pack—if they do not comply with their promise—that initial promise, it becomes a presumption that they have violated Section 8 of RESPA. So you create a violation, because the consumer cannot prove it any other way.
    I think the GFE thing—the GFE proposal is a good one because it impacts the unsophisticated consumer. Like I said, the bait-and-switch is alive and well. That Good Faith Estimate bears almost no resemblance to what you see in the end product. Making that Good Faith Estimate binding becomes very important because people, up front, know what the cost they are getting, within some limited tolerances. I think that is a good suggestion.
    I think that HUD does not—but, unfortunately, as far as that proposal—this stuff gets just so complicated—the problem with that is there is no enforcement mechanism if, in fact, the end product does not match the Good Faith Estimate. It just says, ''Oh, we have to give you another Good Faith Estimate.'' Or you have to give them something that matches.
    One thing HUD can do, which is in our—in our suggestion, is simply say that if a lender gives you a final closing document that is not within the tolerances that the Good Faith Estimate is supposed to give you, then that would be considered an unfair and deceptive practice. And then you could be able to use state law to prove that they violated the law. That would be—that would be a suggestion to give it more teeth, as well.
    Chairman NEY. Mr. Birnbaum, did you a——
    Mr. BIRNBAUM. My experience—and, again, this is based on my own bias of where I am at and where I practice—but a good gatekeeper in our market is the lawyer that represents the client from contract to closing. I think that having an advocate for the largest financial transaction of your life is a great one. it is not true in all states, though.
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    And Congresswoman Waters talked about seniors—at least, you know, in California lawyers do not do closings, but at least with reverse mortgages you have to go through that counseling period. And perhaps setting a mechanism in place where, particularly in predatory lending, where people get advocacy and counseling before they get into these rip-off deals would ameliorate the problem.
    Chairman NEY. I want to thank the panel.
    And also the Chair notices some members may have additional questions for this panel. They may want to submit them in writing. Without objection, the hearing record will remain open for 30 days for members to submit written questions of the witnesses and place their responses in the record.
    I want to thank the panel.
    And I also want to thank the ranking member, the gentlelady from California, and the other members for their participation in today's hearing.
    [Whereupon, at 4:56 p.m., the subcommittee was adjourned.]