Segment 2 Of 2 Previous Hearing Segment(1)
SPEAKERS CONTENTS INSERTS
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REFORM OF THE REAL ESTATE SETTLEMENT
PROCEDURES ACT (RESPA), AND THE
TRUTH IN LENDING ACT (TILA)
WEDNESDAY, SEPTEMBER 16, 1998
U.S. House of Representatives,
Subcommittee on Financial Institutions
and Consumer Credit and
Subcommittee on Housing and
Community Opportunity,
Committee on Banking and Financial Services,
Washington, DC.
The subcommittees met, pursuant to notice, at 10:10 a.m., in room 2128, Rayburn House Office Building, Hon. Rick Lazio, [chairman of the Subcommittee on Housing and Community Opportunity], presiding.
Present: Chairman Lazio; Representatives Roukema, Bereuter, Ehrlich, Kelly, Paul, Kennedy, Vento, Roybal-Allard, Barrett, Watt, Bentsen, J. Maloney of Connecticut, and Sherman.
Chairman LAZIO. This joint hearing will come to order. I want to welcome everybody to this joint subcommittee hearing between the Subcommittee on Financial Institutions and Consumer Credit and the Subcommittee on Housing and Community Opportunity. This joint hearing is on RESPA and TILA disclosure reform, and we're very pleased to have an outstanding panel before us today.
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I'm going to give Members an opportunity to make an opening statement, and I hope we can keep this relatively brief, because we are expected to be out of here by 12:30, and the room has to be swept, so we're going to move things along a little bit more quickly than I would otherwise like to do. In that sense, we are going to try to keep—I'm told 12:15 actually, so I'm going to ask that all the testimony will be submitted for the record, without objection. So, I ask for a summary of each of the Members and I want to keep it to about three minutes.
Today marks the second in our two-part series of joint hearings with the subcommittees to shed light on the need to reform mortgage lending disclosure requirements.
As many of you know, our first hearing was on July 22nd when the two subcommittees met to hear testimony from representatives of the Fed and HUD. I stated at that hearing the obvious: we have had, for at least 25 years, two laws that protect consumers in the mortgage lending process. However, ''The Real Estate Settlement Procedures Act,'' (RESPA), and ''The Truth in Lending Act, (TILA), are outdated. While the Fed and HUD commented on their July 16th Joint Report to the subcommittees, I stated then and repeat now that the congressional mandate of the agencies was to simplify, streamline, reduce paperwork, and make specific recommendations to Congress.
Instead, the Joint Report, while thought-provoking, fails, in my estimation, to meet the congressional mandates outlined in Section 2101 of the Economic Growth and Regulatory Paperwork Reduction Act of 1996 or the joint letter sent by Chairwoman Roukema and myself last year.
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The Joint Report's Executive Summary states that the Report and the recommendations are a starting point for congressional considerations. These recommendations ''do not change any existing regulatory requirements.'' Moreover, the Summary specifically states that the Report, ''Does not explore all the details that must be addressed in making changes to TILA and RESPA.''
Having noted the agency's own admission that the Report may circumvent part of the congressional intent, let me outline some of my concerns.
First, what troubles me most is that the Joint Report supports a dual disclosure system that allows RESPA Section 8 exemptions for providers that bundle settlement services. The alternative disclosure system allows a more strict adherence to the good faith estimate for those settlement agents that don't bundle. Without taking sides on bundling versus individual settlement services, I can't help but wonder if there was a simpler way to address disclosure among all the lenders and service providers rather than what appears to be a negotiated treaty among warring parties in the mortgage finance system. There has to be a simpler way to address RESPA and TILA.
Second, and related to my first concern, I am struck that the Joint Report did not address, head-on, the relevance of RESPA's Section 8. Section 8, when enacted in 1974, was intended to prohibit abuse by realtors who referred potential borrowers or home purchasers to certain lenders and settlement services. After 24 years, it is safe to assume that the whole financial system has changed and differs in pattern and practice as originally intended when RESPA and TILA were enacted. I believe there are other ways to protect consumers from kickbacks that are ultimately harmful, while at the same time modifying Section 8 to meet the realities of a modern mortgage finance system.
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Third, I am disappointed that the Joint Report did not address paperwork reduction. While the agencies testified that a majority of paperwork may be the product of State and local laws and regulations, I was not clear whether the agencies reviewed all the Federal disclosure requirements, including those outside the purview of RESPA and TILA and whether they explored cooperation with State and local regulatory agencies.
I want to underscore the need for overall RESPA and TILA reform. I recently received a letter from Adam Semcken who lives in West Islip, New York, that is part of my congressional district. Mr. Semcken closed on a loan that was later sold to Mellon Mortgage Company in Denver. It appears that no one wants to take responsibility for paying the escrow taxes to Suffolk County, and Mr. Semcken can't come up with the $2,700 to pay out of pocket. While this scenario is slightly different than the disclosure issue at settlement, Mr. Semcken's scenario highlights the public's overall confusion regarding RESPA.
In April of last year, I brought together the industry and consumer groups involved in home buying and financial services and asked that they develop a consensus on a new statutory framework that could replace RESPA and TILA. That group later became known as the Mortgage Review Working Group.
Today, I look forward to hearing testimony from representatives of this working group. I understand that the two panels are a representative cross-section of all the groups working together to craft a replacement of RESPA and TILA.
Before I recognize Chairwoman Roukema and my Ranking Member, Mr. Kennedy, I want to note that I intend to adjourn the hearing by 12:15 so that this room may be prepared for the Full Committee hearing with Secretary Rubin and Chairman Greenspan. Because of these time limitations, I ask the witnesses to limit your testimony as I had mentioned earlier. Your written comments will be entered into the hearing record, and the Members of these two subcommittees will have five minutes each to ask you questions.
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I want to now recognize Chairwoman Roukema for her opening statement.
[The prepared statement of Hon. Rick Lazio can be found on page 262 in the appendix.]
Mrs. ROUKEMA. Thank you, Mr. Chairman, and certainly I want to welcome everyone here today, all the panelists and those that are in the audience. It's the second of two joint hearings as has been outlined by the Chairman. At the July hearing, we heard the findings of the Federal Reserve and HUD regarding their Joint Report to the Congress, and certainly we must hear today with great anticipation representatives, consumer groups, and the industry, the whole industry.
The reform effort is about improving the Federal statutes that have proven to be wholly inadequate. We need meaningful information here today on how to provide protection for the home buying public as well as clear instruction from the industry. The information provided under present laws is clearly confusing to all groups.
Presently, consumers don't receive information regarding the true cost of their mortgage until after they start the application process—that's very clear to all of us. This lack of early information hampers the consumers' ability to shop for the best deal, but to make matters worse, consumers frequently don't understand the meaning of information disclosed to them once they receive it. In fact, the 1997 study conducted by the University of Michigan, more than half the consumers polled thought the APR, or the annual percentage rate, under TILA was the interest rate on the loan, not realizing the distinction between the two terms——
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Excuse me, Mr. Chairman, I'm afraid there's some inattention here.
Mr. KENNEDY. We're paying attention. Do you want me to repeat your last sentence?
Mrs. ROUKEMA. I'm sorry, I'm sorry. This is far too serious an issue for that kind of humor.
The question of what finance charges are included in the APR calculations confuses banks. Data indicate that for examinations of State member banks conducted between 1991 and 1995, the finance charge for disclosure for closed-end credit was the most common violation of Regulation Z. Data from other regulatory agencies indicate substantial evidence of the same.
Finally, the failure of the existing regulatory framework to keep up with a changing marketplace has also resulted in legal actions, significant, extensive legal actions regarding mortgage broker fees and the use of the right of recision.
The home buying process used to be much simpler. It's now gotten so confusing that even educated borrowers don't understand the process.
I think there's a good case in point that was recently published, I guess September 13th, in an issue of Newsday about a couple in Delray Beach, Florida, Kathy and David Binniger. The evidence is clear now. It detailed the Binniger's settlement costs doubled between the time they received the good faith estimate and attended the closing. David Binniger, a professor of genetics—a rather well-informed person—considered rejecting the loan on the spot, but because he mistakenly thought many of the fees were non-refundable, he went through with the closing. It's a very interesting documentation in Newsday of the problems that we're having.
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As I stated in July at the first hearing, if we can't go back to those simpler times, maybe we can go back to the future, and it is my sincere hope that we can move forward with a clearer, simpler process back to the future and create new legislation in the next Congress, and this will be the basis of it.
I'd like to take a moment to note that we have among our distinguished panelists today a number who are from New Jersey, and I'm proud to reference them.
Mr. Robert Jordan, Mr. Robert Levy, and Mr. Louis Meyer, each of whom brings a different perspective to the table. Mr. Jordan is the co-founder and president of an 18-year-old mortgage banking company that specializes in mortgages to inner-city and minority borrowers. Mr. Levy, a long-time associate and friend, is the Executive Director and Counsel to the Mortgage Bankers Association of New Jersey, a nationally recognized authority on the Real Estate Settlement Procedures Act. Mr. Meyer is president of NIA/Lawyers Title Agency in Paramus, directly in my district, and has been employed in the title industry since 1970. He brings considerable practical experience to this subject. I'm especially pleased that the three of you are participating today, and we greatly respect your testimony.
The subcommittee has been deluged with requests—and here we get to a subject that we've had considerable discussion on—and that is who would be testifying today, and a particular concern of mine was my concern for having the umbrella group representing the views of mortgage originators included among our panelists, and I thought it would be most ill-advised to try to undertake a full review of the issues being addressed without hearing from this group. So, with my co-Chair's indulgence, as you know, as we all know, I invited John Courson, President and Chief Executive Officer of Central Pacific Mortgage Company, but he will be speaking here today as a panelist on behalf of the Mortgage Bankers Association. I am convinced that there is no other group on this witness list that brings us a broader focus on the important issues. The mortgage bankers represent more than 50 percent of the home mortgages in this country. I would hope that they could be on the first panel, if there's a way of discussing the order of things, I would be happy to, and it is my understanding, Mr. Chairman—if I can ask my question directly, because you and I only had a two second conversation as you came in today—it is my understanding that you've requested that they be included on the second panel. That would receive my agreement, and I believe the agreement of the Mortgage Bankers providing we understand that with our time limitation there will not be a way of precluding that testimony. So, if we could guarantee that under any circumstances the full panel will be heard fully and completely before the 12:15 cutoff, I would be in agreement.
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Chairman LAZIO. If the gentlelady would yield.
Mrs. ROUKEMA. I'd be happy to yield.
Chairman LAZIO. As long as Members move through their questioning quickly and we can stay on time, there should be no reason why we don't complete both panels.
Mrs. ROUKEMA. Again, I don't agree. I want to make it clear I don't understand why we have to be discussing whether it's the first panel or the second panel since this is a joint hearing, but if that's the Chairman's explicit wish, as long as he wields the gavel and we're all behaving ourselves and complying with the rules, I'd be happy to agree.
Chairman LAZIO. I thought that this was agreed with your staff beforehand.
Mrs. ROUKEMA. No, I'm sorry, it wasn't until after I arrived here that I had even a hint of this recommendation.
Chairman LAZIO. Mr. Kennedy.
Mr. KENNEDY. Thank you very much, Mr. Chairman, and I'm glad we're getting rules and regulations straight around here about TILA and RESPA. There's some things I'm going to really miss about the House of Representatives and——
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Chairman LAZIO. Which are?
[Laughter.]
Mr. KENNEDY. Not this. I want to commend my friend Rick Lazio and Mrs. Roukema for calling this hearing on this issue that directly affects tens of millions of Americans, the disclosure of mortgage rates, terms and settlement costs. However, given the importance of the issue, it's inexcusable that the Majority party has chosen once again to skew this hearing through a blatantly biased selection process of witnesses. The Majority's decision to reject the requests made by Representative Vento and myself to have credible representation by consumer groups is regrettable. It's bizarre to begin a process of rewriting RESPA and TILA by excluding Consumers Union, a preeminent advocate of consumer rights. It's equally inexcusable to study the issue of protections from high-cost mortgage scam artists without hearing from the AARP, which represents the primary targets of such scams, our senior citizens.
As we review and potentially rewrite mortgage disclosure laws, I believe that there are three major priorities that we should look at. First, we need to revise the disclosure laws to achieve real and fundamental competition in the mortgage market. This does not mean enacting the industry wish list, which amounts to little more than disclosure simplification and relief from liability from misleading and anti-competitive practices. And it does not mean a perpetuation of the current process which implies a consumer right to shop amongst different lenders, but, in fact, severely limits that right.
Despite the rhetoric of the mortgage lenders and brokers, the mortgage lending market is simply not as competitive as most other products such as cars, TV sets, or home computers. The reason is simple: at a critical time when the consumer selects a lender or a broker, the consumer is not given the binding price and a fee quote. Thus, consumers who go through the trouble of contacting a number of different lenders and brokers are not comparing rates and terms, but mere estimates of rates and terms. Generally, consumers get a binding quote only after paying a significant credit report, application fee, and appraisal costs, a point where it is often too late or too financially infeasible to search for another lender. Therefore, it is time that this subcommittee act boldly to overcome this lack of competition.
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I believe we ought to seriously consider HUD's proposal identified in the Joint HUD/Fed Report to provide consumers with a guaranteed rate and point information subject only to market changes and the verification of information such as creditworthiness or the value of collateral. Without such an approach, the simple truth is that consumers will continue to lack the ability to comparison shop in a way that we understand and accept. HUD and the Fed do outline a number of other joint recommendations relating to timing and disclosure, APR and finance charges, and other issues. But those are merely changes around the edges, since they don't fundamentally empower the consumer to do true comparison shopping. Combined with industry pressures for relief from liability, the effect of such cosmetic changes could easily be to sanction a system with limited competition. So, I urge the subcommittee to act boldly to promote meaningful competition.
The second issue we should deal with here is the critical need to strengthen the provisions of the Home Ownership Equity Protection Act which protects against abusive high-cost home equity loans. Despite passage of this bill several years ago, there is still evidence that elderly and unsophisticated home owners are being taken advantage of by unscrupulous lenders. These lenders, combining usurious rates with balloon payments, suck out equity and push homeowners into foreclosure. I note that both the HUD and Fed recommend that substantive protections be adopted that will target abusive lending practices without unduly interfering with the flow of credit, creating unnecessary creditor burden, or narrowing consumers' options in legitimate transactions. We should adopt HUD's and the Fed's recommendations to add protections against balloon payments, to prohibit up-front collection of lump sum credit insurance premiums for high-cost equity loans, and require minimum standards for notice that creditors must provide in home foreclosures. We should also adopt HUD's making recommendations which require creditors to take into account a consumer's capacity to repay, expand the restrictions on repayment penalties, and adopt new foreclosure prevention strategies, including expanded delinquency counseling, establishing rights to cure delinquent loans and establishing a Federal Unfair and Deceptive Practices Act standards to provide private remedies for unfair and unconscionable transactions.
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The third issue we need to address is the problem of mortgage brokers who directly or indirectly misrepresent their fiduciary duty and charge borrowers hidden lender-paid fees and actually steer their clients away from the best available loan. I commend everyone on the subcommittee to read the recent article by Ken Harney entitled, ''Suit Challenges Lender Payments to Brokers.'' This article outlines lawsuits being brought against mortgage brokers who double-dip by collecting hidden fees from lenders in exchange for steering their clients toward a loan with a higher interest rate. This practice is unconscionable and in violation of Section 8 of RESPA. Incredibly, there is a strong movement in this subcommittee to provide legal relief for such unscrupulous operators through a moratorium against class-action suits. I strongly advise this subcommittee not to adopt such a moratorium which would simply sanction bad faith actions.
There is no question that we need to resolve these issues and resolve them in favor of disclosure and fairness. Brokers should be required to more clearly disclose their fiduciary duty, ending the practice of implying that they represent the borrower, seeking the best loans when they, in fact, represent one or a number of lenders. And we need to resolve the yield spread premium issue. Yield spread premiums are not by themselves the problem. But they should not be allowed when they are used surreptitiously, when they are used to encourage brokers to get a bad deal for the borrower.
In closing, I'm very concerned that we do not allow the industry groups to hijack the process of revising our RESPA and TILA laws. I look forward to working with you, Mr. Chairman, and other Members of the subcommittee to resolve these issues.
Thank you very much.
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Chairman LAZIO. I thank the gentleman.
The Ranking Member of Financial Institutions, Mr. Vento.
Mr. VENTO. Well, thanks, Madam Chairwoman and Chairman Lazio for convening the second hearing on this topic. I regret and state my disappointment that the request I made with Joe Kennedy was disregarded or at least not accommodated. We sit today in a compressed hearing that will hear eight or nine witnesses, all distinguished, all important, all valued, but only one consumer group witness. The deficiency of such agenda creates the impression of imbalance and the gagging of a major consumer voice.
Mr. Chairman and Madam Chairwoman, I am disappointed that we would begin to approach this complex matter of reforming the home buying process in hearings in which we explore the harmonization on such a sour note. Apparently, the necessary flexibility here from other key constituencies has been somewhat accommodated, but not our request for a single, additional consumer witness.
In addition to being limited to witnesses, the hearing is compressed or to be done by 12:15 to accommodate an important meeting of the Full Committee. I understand your dilemma, but the outcome is simply not satisfactory. We do a disservice to an important topic when we shoehorn it in a timeframe and then short-change and limit the witnesses that are here today that we have come to hear. I don't intend to continue on this note, but in the end we know that the topic at this point may be contentious, but the procedure here shouldn't be the debate that we're talking about today.
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So, let me turn just to the topic, briefly, the progress made by HUD and by the Federal Reserve Board on this topic is key to achieve the objectives of streamlining this disclosure and essential safeguards of TILA and RESPA. Their Report is a significant undertaking that hopefully will provide a framework for discussion and a point of beginning summed up in the four basic questions that the agencies have identified.
I recognize that some significant energy has gone on the in the private sector on the TILA, RESPA reform, both in the Mortgage Reform Working Group and outside of the group. I am glad that we will hear from a few who were involved in that process and other consensus building processes this morning. I only wish there was as much consensus building and effort in terms of structuring this hearing as there's been the good faith effort on the part of the groups on the outside. You deserve better, frankly.
We will need many a good mind and positive spirit to forge a consensus if we are to successfully approve these statutes for all involved. We'll need a process that will allow the big and small players to continue to serve their niches in the marketplace. We'll need a system that provides the essential information to consumers and has and will convey sound information that they can readily use for comparison purposes, even geneticists may need that, especially geneticists, because they're thinking about human genomes. We need relief for the paperwork and incursion of duplicate disclosures and costs. Such redundancy adds to the red tape and paperwork and creates confusion—not understanding. We need to shut down the indefensible scams and overpriced home equity or refinance loans designed to shortchange and to essentially steal from vulnerable house-rich, yet cash-poor citizens.
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So, I look forward to this, but, obviously, there's little time to begin, but we'll all try and study this very carefully as we go forward, Mr. Chairman, and hopefully can resolve some of our own differences.
Chairman LAZIO. I thank the gentleman. Just make the point that this is, of course, the second hearing that we've had on this topic. The Minority gave us three witnesses to consider, one of which was accepted for this hearing. Another one, we're informed, did not wish to testify, but rather wanted to submit their testimony which is in the record, and so we have been accommodating to the Minority. Thank you.
Mr. VENTO. That's your view. I appreciate your view of accommodation.
[The prepared statement of Hon. Bruce F. Vento can be found on page 268 in the appendix.]
Chairman LAZIO. Thank you.
Mr. Paul.
Mr. PAUL. Thank you, Mr. Chairman. I want to compliment the Chairman for calling these hearings on this very important issue. It gives me an opportunity to offer a free market solution to the many problems brought about by RESPA and TILA.
As we debate the possibility of reforming of these regulations, RESPA and TILA and reforms to mortgage lending disclosure requirements, we should consider outright repeal. Given the current reality of taxpayer-backed deposit insurance, some ''safety and soundness'' regulations may make sense in that environment. However, any and all regulations not required for safety and soundness actually detract from the safety and soundness of individual financial institutions and ultimately the financial system. If we are indeed concerned about safety and soundness and taxpayers' liability, we should repeal these regulations.
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Regulations have costs. Financial institutions pay the cost of compliance. Consumers pay the cost of higher fees and more limited service as a result of the regulations. Taxpayers pay the higher cost of a larger, more intrusive Government. Consumers are denied the benefits of private market alternatives that are unable to compete with the Government intervention.
To the extent that these regulations amount to a Government credit allocation scheme, they contribute to the artificial booms and busts in the economy due to the misallocation of resources resulting from the misallocation of credit according to the Austrian business cycle theory. Unfortunately, each Government intervention distorts the market which causes a problem which is then used to justify the next round of Government intervention.
Martin Meyer, guest scholar at the Brookings Institution and author of The Bankers: The Next Generation, writes in a recent Barron's column, ''Who Should Regulate the Banks?'', August 31, 1998, ''Seen through a wide-angle lens, the storms that have buffeted banking reveal our ongoing passage from a climate where banks dominate markets to a climate where markets dominate banks.'' Further quoting: ''Ultimately, the right answer to the question of which Government body should regulate the financial services sector is 'none of the above'.'' He is right, and we should heed his advice.
Compliance costs of these regulations fall disproportionately on smaller institutions which create a marginal incentive to consolidate the industry into fewer, but larger, market participants. Larger institutions can better absorb the costs of these burdens, and the increased regulatory costs create a barrier to entry into the market. Consumers are not necessarily better served by an even greater consolidation of the industry.
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Smaller institutions face the highest compliance costs in relation to total assets, equity capital, and net income before taxes reveals Regulatory Burden, The Cost to Community Banks, a study prepared for the Independent Bankers Association of America by Grant Thornton in January of 1993.
For each $1 million in assets, banks under $30 million in assets incur almost three times the compliance of banks between $30 million and $65 million in assets. The regulation almost quadruples costs on smaller institutions to almost four times when compared to banks over $65 million in assets. These findings are consistent with both equity capital and net income measurements according to this Report.
The estimated aggregate cost of bank regulations—non-interest expenses—on commercial banks was $125.9 billion in 1991, according to The Cost of Bank Regulations: A Review of the Evidence, Board of Governors of the Federal Reserve System Staff Study 171 by Gregory Elliehausen, April 1998. It reports that studies estimate that this figure amounts to 12 to 13 percent of non-interest expenses. These estimates only include a fraction of the ''most burdensome'' regulations that govern the industry. It adds—this is from the Federal Reserve—''The total cost of all regulations can only be larger. The basic inclusion is similar for all the studies of economies of scale. Average compliance costs for regulations are substantially greater for banks at low levels of output than for banks at moderate or high levels of output.''
RESPA has inspired frivolous lawsuits, and TILA does a disservice to the consumer with misleading information. These governmental regulations are not only unwarranted to maintain the safety and soundness of the banking system, but their compliance costs actually undermine bank profitability and increase the likelihood of future taxpayer-funded bailouts. If we are not to pass an immediate, outright repeal of these regulations, we should at least consider sunsetting them and returning them to the proper, constitutional jurisdiction at the State level or, even better, rely on the private market regulation.
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Chairman LAZIO. I thank the gentleman.
Mr. Watt.
Mr. WATT. Thank you, Mr. Chairman. I'll be very brief.
Having practiced law for 22 years before I came to this body in a practice where a significant portion of my practice was real estate, I know that it is a very, very difficult issue to determine what kind of paperwork and regulations are necessary, both for the protection of consumers who are probably at one of their most vulnerable times to people who are inclined to abuse them, but certainly not overreacting in that direction, because I, having dealt with lenders and realtors, know that the great, great, great bulk of the people involved in this industry probably could get away with what my colleague just said and have no regulations and still be fair. Where you get to in that spectrum is a very, very difficult and delicate issue, and I think it's important for us to have further discussions and hearings about it, and I'm looking forward to hearing the witnesses' perspectives on it, and I don't have an answer even after being involved in it for a long, long time. So, I'm looking forward to this hearing, and I hope we can proceed with it forthwith, and I'll yield back to make that possible. Thank you.
Chairman LAZIO. I thank the gentleman. Any other Members who wish to make a statement? If not, we're going to proceed to Ms. Kelly. I just want to once again announce this for the Members that have just walked in: we need to vacate this room by 12:15, so we're going to try and move ahead as quickly as possible. The gentlelady's recognized.
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Mrs. KELLY. Thank you, Mr. Chairman. I simply want to—for the sake of expediency here—I want to know if I can have the unanimous consent to insert my statement in the record?
Chairman LAZIO. Bless you. With objection—without objection, rather.
[Laughter.]
Mrs. KELLY. Thank you.
[The prepared statement of Hon. Sue W. Kelly can be found on page 264 in the appendix.]
Chairman LAZIO. Now, if there are no other Members that wish to make opening statements, we will go to the first panel. I want to begin by thanking the panel for making travel plans to come in and for preparing a testimony. All the written testimony will be included in the record.
I'm going to introduce if I can, in order, the panelists on panel one. The first testimony that we'll hear will be from Douglas C. Webb who has been the Vice President and General Counsel of Citibank of New York State since 1984. Mr. Webb joined Citibank after serving as Chief Compliance Officer at Monroe Savings Bank in Rochester. Mr. Webb has been involved in regulatory and compliance issues in the mortgage and consumer industry throughout his professional career. He also served as Chairman of the Consumer Mortgage Coalition, a mortgage reform task force, in Washington DC.
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The second testimony we'll hear will be from Mr. Neill Fendly who is Vice President of the National Association of Mortgage Brokers, NAMB. Mr. Fendly has 15 years of experience in the mortgage broker industry. He is currently President and CEO of Pathfinder Mortgage Company and has been an active member of both the Arizona Association of Mortgage Brokers as well as the National Association of Mortgage Brokers for the past ten years. He was nominated in 1997 and named broker of the year and was a recipient of the 1997–1998 NAMB president's distinguished service award. Congratulations for those awards.
The third speaker will be John J. Hayt who is the Past President of the National Home Equity Mortgage Association and the former Chairman of EquiCredit Corporation. Mr. Hayt has been an industry leader in home equity lending with 32 years of experience in originating, selling, and servicing home equity loans. Since retiring as Chairman of EquiCredit in 1997, Mr. Hayt continues as a board member, and he also one of ten founding members of the National Home Equity Mortgage Association and has remained an active member since its inception. He served as president for three terms and served on the executive committee for an additional 21 years. Welcome.
Daniel W. Morton is President and Senior Counsel with the Huntington National Bank in Columbus, Ohio. Mr. Morton testifies on behalf of the American Bankers Association, the Consumer Bankers Association and the Independent Bankers Association of America; that's a trifecta I think.
[Laughter.]
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Mr. Morton has provided legal advice with respect to consumer retail and other regulatory matters at the Huntington Bank. He is also a member of several banking industry committees and currently serves as a member of the Federal Reserve Board's Consumer Advisory Counsel. We welcome you here.
Bob Levy is the Executive Director and Legal Counsel of the Mortgage Bankers Association of New Jersey and the League of Mortgage Lenders. Mr. Levy is also the legislative regulatory counsel to the Mortgage Counsel of New Jersey and the Mortgage Bankers Association of Pennsylvania. He's helped draft and pass mortgage bankers and mortgage license laws in both New Jersey and Pennsylvania. He's the Chairman of the advisory counsel to the American Association of Mortgage Regulators which represents mortgage banking and brokerage regulators from around the U.S. He's worked closely with RESPA and chaired a RESPA subcommittee for the Mortgage Bankers Association of America. I welcome you for coming in.
Robert Jordan, Jr. is the Co-Founder and President of County Mortgage Company in West Caldwell, New Jersey. The County Mortgage Company specializes in lending Government insured mortgages to inner city and minority borrowers. Mr. Jordan has been a practicing mortgage banker for the past 18 years and has been an active member of the Mortgage Bankers Association of New Jersey and the Mortgage Bankers Association of America. He's also the current Chairman of the New Jersey Partners for Home Ownership, a volunteer group dedicated to providing home ownership opportunities to all New Jersey residents. I want to particularly and personally thank you, Mr. Jordan, for the outstanding work that you have provided in working with our subcommittee in giving us some valuable information from a practitioner standpoint. You are a wonderful advocate for your industry, so I'm very happy to have you here.
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We now turn and recognize Douglas Webb, again, with the thanks of the subcommittee for your work already and for the request that you try to keep your summary remarks to approximately three minutes and then all of the testimony will be inserted in the record, and Members will have a full five minutes to question.
Mr. Webb.
STATEMENT OF DOUGLAS C. WEBB, VICE PRESIDENT AND GENERAL COUNSEL, CITIBANK (NEW YORK STATE), AND CHAIRMAN, CONSUMER MORTGAGE COALITION MORTGAGE REFORM TASK FORCE
Mr. WEBB. Thank you. Good morning. My name is Doug Webb, and I am Vice President and General Counsel of Citibank, New York State, and Chairman of the Consumer Mortgage Coalition of the Mortgage Reform Task Force. The Consumer Mortgage Coalition is an organization whose members are national mortgage lenders and servicers.
From an economic perspective, our mortgage finance system's ability to make low cost loans to consumers is the envy of the world. Many foreign nations are trying to replicate our formula for success in connecting global capital markets to individual homeowners. From a legal perspective, however, mortgage originations are governed by a patchwork of State and Federal laws that are out of date.
Recognizing this fact, Congress requested that the Fed and HUD simplify, improve, and conform the disclosures under TILA and RESPA. Congress' goal was to modernize the laws so that clearer and more certain information would be provided to consumers while simultaneously reducing liability and compliance burdens for the industry.
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For the record, we have submitted our detailed outline of the mortgage reform package that has been developed by the major lending trade associations.
First, we propose to simplify and unify the current TILA and RESPA disclosures by replacing them with a single disclosure. This new disclosure, given within three days of application, provides a guarantee of the fixed dollar charge required by the lender to make the loan and provides a good faith estimate of the rates, points, and monthly payment. By guaranteeing closing costs at application, consumers will no longer be surprised by unexpected closing costs at the closing table. This disclosure will, for the first time, inject competition into pricing for closing cost services, thereby driving them down. In order to achieve these efficiencies, however, mortgage lenders must be given the clear Federal authority to purchase the services they need to manufacture the loan. A loan commitment, after the lender has underwritten a loan, the approved rate will be disclosed and all required costs to make the loan guaranteed. A final disclosure in the same form will also be provided at closing.
Second, we propose new substantive protections to prevent abusive lending practices including limiting the financing of points to curb loan flipping; eliminating prepayment penalties on higher cost loans; providing forced placed insurance disclosures; creating new foreclosure protections, and enhancing consumer education programs.
Third, the remedies for violations will be refined. Liability for violations will vary based upon the harm caused by the violation and whether the lender responds and cures the violation upon notice of the error. Consumers will have greater ability to recover for disclosure errors without having to bring suit. Stiffer penalties will apply for intentional violations.
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If enacted, we believe that the mortgage lending industry package will create a win-win situation where both consumers and industry will gain greater certainty and lower costs. Our package achieves Congress' goals in a simple, practical way while reducing costs to consumers. The package also allows industry to continue to evolve to meet future needs. We would like to stress, however, that this is a compromise package in which the industry is accepting certain obligations in return for a reduced compliance burden and lower liability.
Before closing, I would like to comment on the Report issued by HUD and the Fed. We regret that their Report does not meet Congress' goals. Rather than eliminating disclosures known to be ineffective, it simply adds more disclosures that are of uncertain value. Rather than outlining a simpler, more streamlined process, it creates a dual disclosure scheme that increases compliance costs and eliminates many of the consumer benefits achieved by reform. Finally, rather than reducing industry's liability, it offers no liability relief or reductions in compliance burden. In fact, the Report offers a more complex and litigious variation of the current system.
The proposal being advanced by the mortgage lending industry provides a compromise that modernizes our Nation's mortgage lending laws. We thank you for the opportunity to testify today and look forward to working with your subcommittees as you develop your legislative proposals.
[The prepared statement of Douglas C. Webb can be found on page 271 in the appendix.]
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Chairman LAZIO. I thank you, Mr. Webb.
Mr. Fendly, you're recognized. Welcome.
STATEMENT OF NEILL E. FENDLY, VICE PRESIDENT, NATIONAL ASSOCIATION OF MORTGAGE BROKERS
Mr. FENDLY. Thank you. Madam Chairwoman, Mr. Chairman, Members of the subcommittees and distinguished panelists, I am pleased to testify today about the pressing need for mortgage reform. On behalf of the 9,000 members of the National Association of Mortgage Brokers, I want to sincerely thank both Chairman Lazio and Chairwoman Roukema for their continued leadership in housing affairs and for their interest in achieving fundamental reform.
There are an estimated 27,000 mortgage brokers in operation today, accounting for half of all residential mortgage originations in America. Mortgage brokers have sought regulatory relief, and absent such relief, a reignited class action litigation crisis threatens the viability of mortgage brokering and wholesale lending. In this context, mortgage brokers have, perhaps, the most vital interest in seeking comprehensive legislative reform.
In wholesale lending, mortgage brokers perform many of the origination services that otherwise would be performed by retail lenders. A mortgage broker provides wholesale lenders with retail branch offices. In the wholesale retail lending model, wholesale lenders offer brokers wholesale loan rates which are not directly available to the consumer. I cannot overemphasize the importance of what I have just said. In exchange for performing origination services that lenders would otherwise have to, the lenders offer brokers loan pricing that is not otherwise available to borrowers.
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Having established the very important distinction between wholesale and retail loan pricing, I would now like to discuss lender-paid mortgage broker fees, or yield spread premiums as they are known in the trade. First off, I wanted to state very carefully that the lawful fees mortgage brokers receive from borrowers and lenders are permissible, because they are earned. Mortgage brokers provide valuable good service and facilities to both borrowers and lenders and in return are entitled under RESPA to compensation that is reasonably related to the market value of these services.
Yield spread premiums are a legitimate way for borrowers to finance the cost of obtaining a loan instead of paying these costs out of pocket. In the case of ''no-cost'' and ''low cost'' loans, some or all of our compensation comes from the yield spread. Approximately 150 class action lawsuit allege that the mere payment of a yield spread premium to a mortgage broker constitutes a violation of RESPA; 90 of these suits have been filed this year alone. We now find ourselves in a renewed state of crisis as two class certifications have been recently granted by Federal district courts. These unfavorable rulings stress the need for an immediate legislative solution to the yield spread premium issue and fuels the fire for comprehensive reform.
NAMB has been a firm believer in mortgage reform and continues to participate in and support the efforts of the Mortgage Reform Working Group. NAMB is particularly pleased with the progress made by the informal subgroup known as the Originators Caucus. This ad hoc group comprised of NAMB, MBA, NHEMA, CMC, and HELLO. We have met extensively for almost a year and have reached consensus on a broad range of reform issues. This caucus, just this week, presented joint recommendations to the full MRWG.
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From NAMB perspective, the following are some of the key areas of the reform proposal: certainty for industry in how to comply and certainty for borrowers in how to buy; a level playing field for all market participants; a finely tuned disclosure blueprint which carefully balances certainty, timing, accuracy, and provides uniform disclosures to facilitate shopping; elimination of the APR; a schedule of remedies proportionate to the violations, combined with the ability to cure unintended violations; elimination of Section 8 referral-fee restrictions on the services required by originators to make a loan; and an anti-loan flipping provision limiting loan closing costs that can be refinanced.
Let me make it clear that the mortgage brokers' industry is willing to take on increased compliance burdens and legal liability in exchange for the many benefits for industry and consumers that could result from a reform effort brought to successful conclusion. Yes, we've asked for a level playing field on which we can compete openly and fairly. We do not, however, expect anything of other market participants that we don't expect of ourselves.
While substantial progress has been made within the MRWG subgroups, we have found the larger MRWG process unwieldy. We do not hold out high hopes for reaching a broad-based consensus under MRWG's mandate and composition. We believe that MRWG's mission needs to become more narrowly focused on mortgage finance issues.
We are well aware that the comprehensive reform of RESPA and TILA is a difficult and controversial task for Congress, and we are grateful to you, Mr. Chairman and Madam Chairwoman and to the other Members and staff of these subcommittees, for the interest you've shown in tackling this enormous challenge.
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[The prepared statement of Neill E. Fendly can be found on page 295 in the appendix.]
Chairman LAZIO. I thank the gentleman.
Mr. Hayt, welcome, and you're recognized.
STATEMENT OF JOHN J. HAYT, PAST PRESIDENT, NATIONAL HOME EQUITY MORTGAGE ASSOCIATION AND FORMER CHAIRMAN, EQUICREDIT CORPORATION
Mr. HAYT. Madam Chairwoman, Mr. Chairman, and Members of the subcommittee, the National Home Equity Mortgage Association, referred to as NHEMA, appreciates the opportunity to participate at this hearing on mortgage lending disclosure reform. Founded in 1974, NHEMA serves as the principal trade association for non-conforming home equity lenders. In 1997, the home equity lending industry originated approximately 4.1 million loans, totaling $268 billion. Most of these consumer mortgage loans were made by members of our association.
We've submitted our full statement for the hearing record, but wish to highlight the following key points: NHEMA believes and agrees that current TILA and RESPA provisions and interpretations that apply to mortgage lending are seriously flawed and do not work well for consumers or for the mortgage industry. Comprehensive statutory reforms are needed to simplify and clarify disclosure requirements, reduce compliance burdens and costs, and enable consumers to engage in effective, informed comparison shopping when seeking home mortgage financing.
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When drafting such reforms it's very important for Congress to understand the home equity lending industry. Our industry provides needed, fairly priced credit to millions of middle-class Americans who rely on their greatest asset, their home equity, for funds to pay off other consumer debts, especially higher cost credit card debt, finance home improvements, pay for their children's education, for medical expenses, to start their own small businesses, and to fulfill numerous other personal financial needs. Further, we provide purchase money financing for this credit-impaired borrower.
We have indeed immensely enhanced the lifestyles of millions of Americans. Regrettably, some have been harmed. We provide mortgage credit to your typical, middle-American home owner. Our industry's primary distinguishing factor is that our customers tend to be those who may have had some type of impairment on their credit record, so that they cannot qualify for the very best rates that are available to people without such credit blemishes, for example from banks, conventional lenders, or Government-insured loans. Our borrowers, generally, do present somewhat higher credit risks and require more costly hands-on servicing, but they are still good customers who pay their debts. There are millions of creditworthy Americans who fall into our market segment, and we're proud to serve them just as you are to represent them in Congress.
The home equity lending industry, clearly, generally, is not charging consumers exorbitant rates nor is it targeting senior citizens and vulnerable, low-income consumers with predatory lending practices, stripping away consumers home equity and throwing them out of their homes in foreclosure proceedings as some groups seem to be alleging. Home equity borrowers, generally, are from 35 to 50 years of age; they have annual incomes between $40,000 and $50,000; they have what we categorize as ''A-minus'' or ''B'' credit, representing about 85 percent of our outstandings; they're good customers, but they fall below the A-grade credit that I mentioned a moment ago. They pay on time, about 94 percent of all of our borrowers are current with their monthly payments; about 2 percent of them default. They're not low-income consumers or senior citizens; there's only approximately 10 percent of them that exceed the age of 65 years, and only about 10 percent of them make less than $30,000 a year, and many of them are obtaining a first mortgage.
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Home equity lenders, generally, charge reasonable, fair rates based on their costs and consumer credit risks. Rates usually range, depending on credit risks, 2 to 6 percent above those available to A-grade borrowers. 1997 rates averaged around 11 percent, well below credit card and personal loan rates, and today's rates are even lower. We lose money on foreclosures about 93 percent of the time, and such losses average about 50 percent of our original investment.
Abusive practices are the exception not the rule in the industry. However, NHEMA has recognized that are a few unscrupulous mortgage brokers and lenders who are engaging in improper practices. NHEMA is firmly committed to forcing this rogue minority of bad apples to stop such improper practices. NHEMA has developed a comprehensive RESPA-TILA reform proposal, a copy of which is appended to my full statement. We are continuing to work to refine our initial proposal. We also are now working with other groups to develop as much a consensus as possible and to come up with joint proposals for reform. In particular, I'd like to emphasize NHEMA's strong support for targeted reforms, such as the concept of limiting of fees or the financing of fees when loans are refinanced within a 12-month period. That will prevent specific abuses such as loan flipping.
NHEMA also wants to call to your attention to the so-called Homeowners Equity Recovery Act—HERA—approach, that we have proposed to help prevent foreclosure abuses. Under our HERA proposal, many homeowners facing foreclosure proceedings would be able to forestall transfer of title to their property for several months during which they could seek to sell their house and recover any remaining equity after paying off outstanding mortgage debt obligations.
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While we are committed to fighting hard for targeted protections and simplifications that will better serve both consumer and industry interests, NHEMA strongly opposes certain unfocused proposals being advocated by HUD and some other groups. For example, we oppose HUD's recommendation for a new UDAP statute to allow anyone to sue whenever they think that a mortgage loan is somewhat, somehow unfair or unsuitable. We believe that such unfocused, litigation-generating proposals would be counterproductive. A Federal UDAP would foster extensive, costly litigation and force lenders to raise credit rates and limit credit availability to needy consumers. Ultimately, it is only the consumer that will pay the cost of that litigation.
NHEMA instead prefers targeted remedies such as the fee limitations we are proposing to stop loan flipping that will address specific problems.
Chairman LAZIO. I would ask you to please summarize the comments.
Mr. HAYT. In summary, we believe that RESPA and TILA reforms are needed. We believe that mortgage disclosures can be provided that are clearer, simpler, more understandable, and more useful for consumers to shop for the most suitable mortgage products and services and thus lessen compliance costs and burdens and litigation risks for lenders and mortgagers.
[The prepared statement of John J. Hayt can be found on page 310 in the appendix.]
Chairman LAZIO. I want to thank you and again apologize to the witnesses for the brevity of these remarks. We do, however, have a few Members that want to ask questions, which is a sign of Member interest.
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Mr. Morton, you're recognized. Welcome.
STATEMENT OF DANIEL W. MORTON, VICE PRESIDENT AND SENIOR COUNSEL, HUNTINGTON NATIONAL BANK, ON BEHALF OF ABA, CBA, AND IBAA
Mr. MORTON. Thank you. Mr. Chairman, Madam Chairwoman, Members of the subcommittees, my name is Dan Morton. I'm an attorney with Huntington Bank in Columbus, Ohio which is a major provider of mortgages and other loans in Ohio and surrounding States. As a member of the Federal Reserve's Advisory Council, I'm quite familiar with these issues. In fact, my first exposure to Truth in Lending was in 1982 when this body undertook simplification, and it's time, I think, to be back at it again.
This statement is provided on behalf of Consumer Bankers Association, the American Bankers Association, and the Independent Bankers Association of America, each of which has been an active participant in the discussions about loan disclosure reform. These organizations represent thousands of financial institutions of all sizes across the country. We're grateful for this opportunity to share our views on this process.
Both the Federal Reserve and HUD are to be commended for achieving the difficult task of summarizing the reform debate in the Report submitted to Congress. On the whole, however, we are disappointed that the Report presents significant regulatory burden and expense, while offering only moderate simplification of disclosure reforms. While there are several things that could be fixed, we believe that reforms should accomplish at least two major goals: first, the APR should be replaced with a simple interest disclosure; and the concept of finance charge should be eliminated. While the Report recommends the addition of the simple interest disclosure, it still retains the APR and finance charge. The APR is one of those good ideas that don't work in practice. Consumers don't use it to shop, and it confuses them. The finance charge is one of those good ideas that get abused in practice. It puts the focus not on what costs are charged or disclosed, but rather on what they're called. The Report's all-in finance charge simply perpetuates these problems and does not offer a real solution.
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Second, the reform should provide meaningful relief from Section 8 of RESPA. As the Report recognizes, the proposal to permit guaranteed packages of cost needs Section 8 relief. We believe HUD's proposal to make this relief also contingent on guaranteeing the rate and points is not feasible. Other Section 8 relief is also needed.
We believe Congress should not be distracted from achieving these goals by additional proposals intended to deal with a few unscrupulous and marginal lenders. Though well-intended, these proposals create significant regulatory burden for all lenders with little likelihood of success, and will ultimately be harmful to consumers by reducing available products and increasing costs. To the extent Federal law is used at all here, it could encourage States to adopt licensing and examination requirements that would make it less likely for these bad actors to stay in business. Education and counseling opportunities could also reduce instances of abuse.
Disclosure reform is an important goal, but, unfortunately, many of the costs in the Report's recommendations outweigh the benefits. We remain hopeful, however, that meaningful and cost-effective disclosure reform can still be achieved. Thank you for this opportunity.
[The prepared statement of Daniel W. Morton can be found on page 375 in the appendix.]
Chairman LAZIO. Thank you very much for your brevity. It's wonderful to see you again. It's been——
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Mr. LEVY. Yes, short time.
Chairman LAZIO. Yes, it's been at least three days.
[Laughter.]
Mr. LEVY. Good morning.
Chairman LAZIO. Again, I want to compliment you for your great advocacy for the lending industry, both in Pennsylvania and in New Jersey, and of course here in Washington.
Mr. LEVY. Thank you, Mr. Chairman.
Chairman LAZIO. I recognize you.
STATEMENT OF E. ROBERT LEVY, EXECUTIVE DIRECTOR AND LEGAL COUNSEL, MORTGAGE BANKERS ASSOCIATION OF NEW JERSEY
Mr. LEVY. I'm very honored and pleased to be here. I have the greatest respect for you, Mr. Chairman and Mrs. Roukema as Chairwoman of the other subcommittee and the Members here who took their time to listen to us. I'm sure it's an exciting subject to all. I was somewhat disillusioned. I really expected the cameras to be on me today, and then I learned that Chairman Greenspan has taken all the play away, so my three minutes of fame have kind of slowly disappeared.
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Chairman LAZIO. The good news is he's talking about RESPA and TILA.
Mr. LEVY. Right.
[Laughter.]
You have my written statement, and I'm not going to read it. I represent The Mortgage Bankers Association of New Jersey, The League of Mortgage Lenders and the Mortgage Bankers Association of Pennsylvania here today. They represent a total of approximately 675 corporate members that provide a full range of services in terms of mortgage products. To put my remarks in context, Congress should recognize that mortgage lenders and mortgage brokers are doing an outstanding job for the consumer with historically low rates and points, so with all the evils and all the ills that we're trying to correct, we ought to recognize that the marketplace is, notwithstanding, working extremely well.
We have not yet seen the negotiated documents that will emanate eventually from MRWG or subgroups of MRWG, and, therefore, we can't comment on them. We look forward to seeing them and certainly will review them with enthusiasm and interest and will then see whether they temper our views at all.
I do want to say that we are facing 150 class actions that have been filed on yield spread premiums. We should be doing something about that. While many on the surface look at the most recent decisions as very detrimental cases, there are some benefits since the courts did recognize that the fact that a yield spread premium is paid does not mean that a fact-finder could not find that the premium was paid in exchange for services rendered which would make it a legal payment under RESPA. So, there is some positive in some of these cases, but, again, we have to stop the class actions.
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Some feel that RESPA is entirely broken. I know that there is good reason to feel that way, but I do want the subcommittee to recognize that, in fact, RESPA, when it was created in 1974, Congress had real vision by providing a document not unlike our Constitution which can be expanded and modified. It's malleable; the process for that is provided for in Section 19 which enables HUD to create exemptions for RESPA which become, in effect, part of the law itself. HUD also is given broad authority to interpret RESPA. Frankly, I think the problems that we have faced are caused more by the fact that HUD is probably understaffed and not able to provide the bright line guidance that they can provide to the industry, and I think we ought to take a look at that. We ought to focus a little bit upon whether we can help HUD do that.
In terms of packaged services, we have some real questions about it. We're not going to pass judgment on the proposal at this time except to say beware that this could lead to a situation where only the larger companies can make deals with the various vendors of services, cut their costs, and, therefore, create a real monopolistic, anti-competitive marketplace which ultimately can result in higher costs to the consumer when the small companies are ultimately forced out of the business.
Another point that I want to bring to your attention is the possibility of the preemption of State laws. State regulators, for whom I have a great respect, are doing a pretty good job from the standpoint of the consumer end of the consumer interest. They know the consumer markets; they're closer to the consumers than we'll ever get on a Federal level, and we have to be very careful if we're going to start preempting State laws and changing State-regulated fee structures and the like. Each State has its own policies in this regard, and they are legitimate and deserve protection when looking at them in the context of the local and State interests.
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One thing I have to mention in my brief presentation and something I'm very concerned about is ''lender lockout.'' That occurs when some affiliated companies, those that own realty offices as well as mortgage lenders, have their affiliated mortgage lender sitting in the real estate office. They guide the borrower directly to that mortgage lender; urge the borrower to fill out a loan application promptly; get the deal done quickly, and they do not allow other lenders to come into the offices as historically was the case for many, many years. It seems to me rather peculiar that we're all here urging greater disclosure so consumers can shop better, while at the same time allowing lender lockout that undermines the very ability to use these disclosures in a meaningful way. We ought to look at this practice. We did present the issue to HUD. HUD said it had no jurisdiction under RESPA. That ought to be changed. The retaliation against realtors who do not bring consumers to the affiliated lender has to be stopped. HUD has mentioned that in the Joint Report. These are difficult issues, I know; difficult political issues, But we must face them if we truly want to create an atmosphere where meaningful shopping can take place.
And, finally, I want to mention predatory lending. The subprime market is healthy. We have to be extremely careful that we do not overreact to a few cases, isolated cases, of predatory lending and be overbroad in our attempt to legislate against those practices, thereby harming the many good lenders in the market. Thank you.
Chairman LAZIO. Thank you very much.
Last, but certainly not least, one of the practitioners who has been enormously helpful to the subcommittee, Robert Jordan.
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STATEMENT OF ROBERT JORDAN, JR., PRESIDENT, COUNTY MORTGAGE COMPANY
Mr. JORDAN. Mr. Chairman, Mr. Levy and I traveled down here together. We prepared a joint written statement in order to help accommodate the time. Rather than make a statement, I just want to say what I bring to this subcommittee is expertise of running a mortgage company on a day-to-day basis. I'm active and involved in our State trade association and other members, but hopefully in the question and answer period, I can answer questions that the subcommittee might have as to the practical implications of what the changes in law might do. So, rather than say anything further to you from the written statement from Mr. Levy and I, and I'd rather just take questions if you have any.
[The prepared joint statement of E. Robert Levy and Robert Jordan can be found on page 387 in the appendix.]
Chairman LAZIO. I thank you. Let me begin by thanking the entire panel for excellent testimony and for the preparation of the written testimony, and I will try and be relatively brief with my questions. I want to begin with you, Mr. Jordan, if I can, because we must be aware of the impact this might have on the practices in credit and lending for folks like you and the people that you supervise. So, can you give us a sense of what type of impact the HUD/Fed concept paper, I'd say for lack of a better word, might have on you and on people in similar positions?
Mr. JORDAN. I don't think that this fixes it in the sense that it needs to. The most common problem we have on a daily basis at my company is borrowers calling up totally confused by the annual percentage rate, by the good faith estimate, by the truth in lending. Everything that goes out to the borrowers, they're confused by, and even our attempts to explain still just add to the borrowers' confusion. There was a hope on my part that the Joint Report would really simplify what's going on, but it just seems to add a different level of bureaucracy. In getting into some of the very nitty gritty details of this, to me, it seems like I might have to put a regulatory person on staff to handle the old and then the new layer of regulations that are coming on, but also a concern of mine is that there seems to be a set of two different classes of lenders: those that will have an exemption from Section 8 through the bundling of services with the guarantee of fees and then those that won't. Why, logic says to me, would you have two different classes of lenders? If there's a problem, just correct the problem for all as opposed to now further splitting the industry and coming up with two different classes of disclosure.
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Chairman LAZIO. Well, let me ask Mr. Levy this question as a matter of fact. How much of the problems that we've experienced with RESPA are the result of understaffing or capacity, and by that I mean having enough qualified people to do proper enforcement? Apparently this is being addressed by HUD, in the draft ''concept paper'' by using additional regulation?
Mr. LEVY. Yes, well, there are two levels I think we have to address; one is HUD enforcement. HUD enforcement is definitely hampered by a lack of staff. That's very clear, and, in fact, we, through the AAMR group, the American Association of Mortgage Regulators, met with HUD and have tried to utilize State enforcement to enhance and supplement what HUD is doing. The problem with that is that you now have a whole level of individuals that have to learn what RESPA means; how it works; what it's interpretations are. That has not been very effective. I think in that regard, to enforce properly, we need greater staff, without question, at the Federal level.
By the same token, I think with regard to the guidance and interpretive efforts of HUD exemption from Section 8 that we need, I think that, frankly, over the years, I can't say anything but that HUD has failed us. HUD has failed the industry in that they have not provided the kind of bright line, clear guidance that I believe they could have provided, and that has taken place for a variety of reasons. We all recognize, I think HUD has said so very clearly, it is a political entity. It is a political arm of the Federal Government, and, as a result, it, unfortunately, gets involved to too large an extent in politically negotiated issues and controversies. As a result, it has found it very difficult to come out with clear guidance. We've had any number of times where we have had what have become known as ''leaked drafts'' of proposed regulations, and we've looked at them; some we've applauded; some we've had problems with, but very few of them ever came to light.
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So, I think that we really need to deal with that and recognize that we have the enforcement authority; we have the ability to interpret; we have the ability to exempt. We can keep RESPA completely up-to-date and in-line and in-tune with what the industry needs are as far as I can see if we had those kinds of bright line interpretations.
Chairman LAZIO. Thank you. I'm going to ask this last question of Mr. Webb.
Outline for me what you think the strengths and weaknesses of the Joint Report are. How much of it do you think is really providing guidance to Congress? Do you think it's consistent with the mandate to streamline and simplify, particularly for folks served by services such as Bob Jordan's who are often sub-prime, low-income folks?
******
Mr. WEBB. Well, I think if we look at the HUD/Fed Report——
Chairman LAZIO. Pull the microphone over, please.
Mr. WEBB. When we look at the strengths and weaknesses of the HUD/Fed Report, we were pleased to see that the Report did consider the idea of the guaranteed closing costs that we think will really help to inject competition into the closing cost industry and lower costs for consumers. But it should be recognized that it really is a burden for the industry, and we had hoped that there would be some real reduction in compliance burden. We had wanted to see a real analysis of the types of disclosures that are made now to be able to get rid of the disclosures that aren't particularly helpful to consumers. As was mentioned, we really don't think that the APR has been a helpful shopping tool, nor has the finance charge been a helpful shopping tool, and we wanted to slim down the entire package of disclosures that are being provided to consumers. I think that we really need to look at how we can harmonize that and reduce the amount of disclosures.
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The other thing is that the dual disclosure approach I think is going to cause a lot of difficulties for lenders who try to use the second approach, to continue to provide estimated closing costs to consumers. The difficulty there is that they will be, in effect, taking on many of the obligations of the lenders who choose to guarantee the costs, because they would be subject to making up the difference in the instances where the actual cost charge to the consumer would be more, yet they wouldn't be able to control who that provider was or negotiate the prices directly.
Another thing that we were concerned about is really looking at how we can continue to make loans at a low cost to all consumers. As I noted in my testimony, I think that right now within the United States, the rates that consumers get are very low compared to many areas in the world. We're able to really flow through the benefits of the secondary market, and we have to be careful as we look at how we want to revise the rules that we retain that benefit.
One of the proposals that was mentioned in the Report was to try to have lenders provide a guarantee of not only closing costs up front, but also rates as well. While that may sound initially attractive, I think that it does raise some real fair lending concerns, as well as concerns about how we're going to be able to provide as many homes to as many people as possible. We need to be able, as lenders, when we are taking an application and making a loan, to be able to fully underwrite that loan so that we know the risk that is represented by that consumer and can provide that consumer with the best rate possible for their particular situation and the level of risk that they represent.
In trying to revise the disclosure rule, I think anything that is going to undercut the ability of lenders to fully underwrite that loan, is going to ultimately result in consumers, especially consumers who have marginal credit where it's a difficult underwriting decision, to wind up getting higher rates than they do now, and we think that that's one aspect that we have to be very careful of.
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Chairman LAZIO. Thank you very much.
Mr. Vento.
Mr. VENTO. Thanks, Mr. Chairman. A couple of questions here.
Mr. Morton, you advocate not using APR mortgages and, in fact, just using simple interest rates. On what do you base the assumption that consumers don't use APR for loan shopping?
Mr. MORTON. Well, I think it's in the Report itself. Some of the studies the Fed did, including focus groups, indicated a substantial majority of consumers, while they are not necessarily uncomfortable with the fact that the APR is there, they don't really use it to shop. What they use is the interest rates and the costs, and the interest rate is this rate that really does attach to their loan. The APR is some Federal number that the consumers aren't quite sure what it is. In fact, as indicated, I think earlier, many of them think it's the same as the interest rate. It might be a good idea, but it doesn't seem to work.
Mr. VENTO. Mr. Fendly, in your testimony, obviously, you talk about mortgage brokers and wholesale loans and yield spread premiums. One of the contentions, of course, is that the yield spread premium ought to be disclosed at the loan consummation. That, obviously, is what the court case is about. In fact, if there are, of course, reduced interest rates that comes through the wholesale basis, then why shouldn't there be greater disclosure, at least demonstratable service in terms of class B or C mortgages in that particular instance?
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Mr. FENDLY. Well, I think it is disclosable in the interest rate itself; that is part of the process. It's as simple as that. You have to remember——
Mr. VENTO. But in terms of the payment to the mortgage broker, it may not be disclosed as payment to the mortgage broker; that's what the issue is. It's disclosed as interest rate, but not necessarily as payment to the mortgage broker.
Mr. FENDLY. It is on its good faith estimate and the HUD–1.
Mr. LEVY. It is disclosed.
Mr. VENTO. My understanding is that it is in dollars, but it isn't disclosed at final closure. In terms of what the cost and the actual dollar amounts are, all of those are disclosed at that time?
Mr. LEVY. Yes, that's correct.
Mr. VENTO. Is there some—the issue here revolves around the court case in terms of—the latest court case you pointed out in Minnesota—Mr. Levy did—in which there was a representation that some yield spread premiums can be, in fact, justified. Is that correct, Mr. Levy?
Mr. LEVY. Yes, that's correct. The court recognized in a case where there were services rendered shown to the court in fact, and the fact that the parties thought they were paying for those services, the court indicated that depending upon the facts of the case, the mere fact that it is a yield spread premium does not preclude a factual finding that indeed it is in payment for services rendered, and if that were the case, it would be a legal payment, a lawful payment under Section 8 of RESPA.
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Mr. VENTO. One of the things, Mr. Levy, I noted in your comments was that if RESPA had simply done more, faithfully implemented in terms of rules and regulations over a period of the last 24 years, I guess, that we wouldn't be at this position. But isn't one of the problems here that the various innovations in terms of housing finance have actually been surging ahead, really, or could be viewed as limited by various regulations that might have been put in place for RESPA?
Mr. LEVY. Well, the answer is yes and no. In other words, the innovations have certainly created part of the problem, but HUD could have kept up with those in my judgment through their ability to exempt certain classes of transactions under RESPA—that's an express provision in RESPA, Section 19 of RESPA, I believe—and their ability to interpret through policy statements and regulations and interpretive statements that are published in the Federal Register. So, they have this very broad authority. In fact, we submitted a petition to HUD twice to exempt yield spread premiums, having been exasperated by the court's only decisions up until that point, not because it wasn't valid from a substantive standpoint, but rather on the basis that they intended to come out with a rule and that that rule was going to deal with the subject matter. However, a rule dealing with the issue never was finalized.
Mr. VENTO. Yes, I agree that they're valid, but I think the thing is that the solution here, of course, is to completely exclude them from any type of challenge and remedy in terms of the remedy, and there has to be a remedy where there is a problem.
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Mr. Webb, you suggested consumers don't need to know—or want to know—the services their guaranteed packages would cover. How could you compare packages to see if they were giving the same package of services for different prices? Wouldn't they want to know if, for instance, they're getting a termite inspection where the cost of the appraisal in other packages were included in that package?
Mr. WEBB. Well, I think one thing——
Mr. VENTO. Use the microphone, please, Mr. Webb.
Mr. WEBB. I think one thing that we have to recognize is that the services that a lender needs to close a loan will change from time to time. In some cases, a lender may need to have a particular inspection; in other times they don't. Oftentimes they don't know that until they're further down in the transaction where they have, perhaps an appraisal which then shows to them that they need to take another step and get an inspection.
If we were to have to itemize up front and disclose all of the potential services that might be required, many of the services that would be listed there would be services that ultimately the consumer wouldn't get, and that would be misleading. The other thing is that those services, as I said, are really done for the benefit of the lender. The lender is entitled to rely on them, but it's questionable whether the consumer can rely upon on them. If the consumer was concerned about a termite inspection, certainly, they can go out on their own and purchase that type of service, but it would be very difficult, I think, to get the types of economies that you're going to get from the packaging of services. If you require lenders to itemize, it is a substantial compliance cost, and I think, as I said before, it's going to be misleading to consumers to just have a whole laundry list of potential services that might take place on their loan but, in fact, may never actually occur.
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Chairman LAZIO. I thank the gentleman; his time has expired.
Chairwoman Roukema.
Mrs. ROUKEMA. Yes, I'll try to be brief. I want to acknowledge that I've heard particularly what Mr. Levy has said related to a question I had intended to ask, but with respect to your comments regarding the bundled packages, RESPA Section 8, and the anti-competitive nature of that; I heard that. But I want to approach it, perhaps, with Mr. Levy first and if we have time, for others to comment, on another perspective, and some of you have already referenced it, but I've heard no one talk about the penalties. So, let me ask the question, take the liberty in answering the question, OK? Because these are complex issues.
You've mentioned the relief from Section 8 of RESPA and—I don't know, I think you've said that across the board relief is not appropriate in some cases; in other cases, it is, OK? But whether it's appropriate or not, address that. However, should that relief include yield spread premiums—and that relates to Mr. Vento's question, I think—wait a minute, let me ask the question.
Mr. VENTO. I would just point out that it is not in the good faith estimate. I just got through it with staff here, and it's not in the good faith estimate.
Mrs. ROUKEMA. Oh, I see. All right. Well, I want to get beyond that. I want to get beyond it, and relate to two portions of it.
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One, nobody's mentioned penalties and one of the things that was clearly pointed out in a number of areas, but particularly in the recent Newsday article regarding the Binnigers in Florida, that one of the things they learned is that there are no penalties for these violations. Now, I'd like to hear you address that portion of it in connection with the fact that I genuinely am with you in trying to stem the tide of lawsuits. But as we stem the tide of lawsuits, would it also expose consumers to conflicts of interest on the part of the creditors, and that, again, goes back to the penalty aspect of this it would seem to me? So, Mr. Levy, and then I see Mr. Webb wants to respond. Hopefully, we'll have time for at least both of you.
Mr. LEVY. Yes, Mrs. Roukema, I think, without question—when I say RESPA's not broken, it's not entirely broken. There are some adjustments that could be made, obviously, and one of them could be in the area of penalties, because, that's correct, there are no penalties for failing to provide an accurate GFE or a GFE that's way out of whack or failing to provide HUD–1 and so on, and, yes, that would be certainly I don't think the industry would object to appropriate penalties for those failures. I don't——
Mrs. ROUKEMA. I'd love to hear your recommendations for what they should be, but go on, maybe that's too much for today. Go on.
Mr. LEVY. And as far as the yield spread premium issue is concerned, I think that all we're talking about really is that the yield spread premium is a manner of calculating a fee to a mortgage broker. The mortgage broker's providing services to the lender as well as to the borrower. The fact that the borrower may pay a fee to the mortgage broker doesn't necessarily preclude a fee being paid by a mortgage lender, because services are being provided both to a borrower as well as to a lender. There are many services that brokers provide in terms of processing loans; in terms of obtaining verifications and various other activities, and I think that as long as those are correctly identified and there's a reasonable payment to the broker for the value of those services which is inherent in what RESPA now requires, there is no danger in the payment of yield spread premiums, and, in fact, they can be very beneficial as in the case of no-cost loans.
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Mrs. ROUKEMA. Thank you. But how do we deal with this apparent conflict, in trying to stem the tide of lawsuits? Wouldn't that be contradictory to what we've just said?
Yes, Mr. Webb.
Mr. WEBB. One thing I wanted to address is the situation you noted, where the individuals at closing found out that they were paying thousands of dollars more than they expected to pay. It's true that under current law, the good faith estimate is just an estimate. It can change, and if you're charged more at closing, you really don't have recourse. Right now that is not always the lender's fault, because the lender can't choose those providers; can't contract for those services; can't really nail down the cost. That's what our proposal is addressing. It would be an up-front guarantee of the cost. At closing, you wouldn't be charged any more than you were guaranteed. If the lender did charge more, the consumer would have recourse. They could simply notify the lender that they were charged more than they should have been charged, and the lender would make up the difference. If the lender failed to do that, the consumer would still have the ability to bring suit, and in addition to getting a refund of the overcharge would have additional damages and attorneys' fees. So, we think that that provides a much better recourse for the consumer than exists now, and it gives them the ability to get refunds without having to go through the cost of bringing suit.
Mrs. ROUKEMA. But it sounds as though, in and of itself, that would be an incentive for more lawsuits. No? Am I wrong?
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Mr. WEBB. What we're looking for is proportional remedies. The industry is not looking for consumers to be without recourse. What we want is that the remedies are targeted to the problems. Right now, the disclosure rules are so complex and convoluted that a good lawyer can pick out disclosure errors in many, many cases.
Mrs. ROUKEMA. All right. I get your point. Thank you; well taken. Thank you very much.
Chairman LAZIO. The gentleman from Texas, Mr. Bentsen, is recognized.
Mr. BENTSEN. Thank you, Mr. Chairman.
Disclosure is very complicated. It should be simple, but then you're always trying to figure out what you might exclude, and it ends up making it very complicated, at least in my experience. There are a couple of things in reading the statements—I have to say, I just was stunned—I was reading one of the statements, and there's a sentence that says, ''Simply stated, price competition undermines the marketplace.'' When I went to graduate school, it was kind of the other way around.
[Laughter.]
But I understand what you're saying, I mean, from my own business background that price competition can undermine the marketplace with respect to service, but the market tends to rebound in many cases.
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I have a couple of questions: one is one had advocated the elimination of ''flipping'' through a prohibition on fees to brokers during a 12-month period after origination. Is it possible that might cause more problems? In the last 15 days, the long bond has come down 50 basis points, and I think mortgage rates have come down 25 basis points. Now, might that preclude someone full access to the market where there were brokers or lenders who might be offering a produce with a fee attached that they otherwise couldn't use? I know that was in one of the statements that was made.
The other I would ask, and I'd like your comments on, again, going back to the APR, I understand in the Fed Report, I think they told us that the inclusion of fees had about a 25 basis point effect—or could have about a 25 basis point effect on the APR. Is the problem that you in the marketplace see that somebody walks in; they said, ''I thought I had a 7 percent, 30-year, fixed-rate loan, but now I look at my APR, and, in fact, it's 7.22, 8.71, whatever. That's not what I bargained for.'' Is there no way we can describe that in plain English that what that really is that it's the discounted amount based upon the fees?
And with respect to the Section 8 and the yield spread premium, my concern over that in the past has been—and I think this is what Mr. Levy is saying—is HUD just needs to come up with an answer, right or wrong, they just need to come up with an answer and deal with this issue and eliminate the regulatory loophole that has allowed for the class action suits, and I fully agree with that. Their initial response I think was overbearing in trying to come up with disclosure. I think yield spread premium can be beneficial. I also think, as the gentleman from Minnesota says, it can be problematic. But is there a way to properly disclose it? I mean, how would you all propose disclosing that, both as brokers and lenders to the borrower, because I think ultimately we're going to have to determine that in some form of legislation?
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And, finally, I'd like a little more detailed comments on why we can't come up with some form of a good faith estimate after a certain period of time of the cost associated with the mortgages. Personally, I'm a little shocked when I read stories about people who show up and find out they have all these fees. I've been through a number of closings myself, and I'm usually hammering on the lender to tell me how much each fee is going to be, because I know it's going to be a struggle when you get to the closing table to make sure you've got the cash to do it. But this is a real problem, and isn't there a way that we can put something like this together that's a good faith estimate?
Mr. JORDAN. I'd like to try and answer some of the questions as a lender.
First, in reference to the good faith estimate, it's true, at some point, I, as a lender, know what all the expenses are going to be, but that's the problem, at some point. Many of the estimates that we give are not charged by us. For example, in New Jersey, lawyers close the majority of the loans in the northern half of our State. I don't know what the borrowers' attorney is going to charge them as a fee to represent them, nor do I know exactly what the survey cost is going to be, because we don't provide the service. They generally get the title insurance and the survey on the loan through the closing attorney, but at some point in the loan, I discover that information and should be, and currently am, required to disclose that to the borrower. I believe you can give an accurate, good faith estimate early enough in the process to help borrowers, and it wouldn't be an unfair burden on the industry to do that just still understanding that it's an estimate, and there should probably be a tolerance to what that estimate can be, but it can be done.
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In reference to the APR question—because I get that on a daily basis—it's exactly what you said. The borrowers say, ''You quoted me a certain interest rate, and now I get this form in the mail from you, and it has a higher rate than you quoted. What are you doing, why?'' And it just immediately begins an adversarial relationship where the borrower believes you've lied to them; it's that simple. ''You quoted me one rate, and now I'm getting something else, why?'' And that's a problem.
Mr. BENTSEN. And you're not able to explain to them why the rate's different?
Mr. JORDAN. Yes, then we do, but sometimes people understand and sometimes they don't. It just all of sudden has changed the relationship. The very happy moment where they've found the house; they've applied for a mortgage, and they're on their way and this first form coming out to them, suddenly changing the relationship somewhat in many instances.
Mr. BENTSEN. Thank you, Mr. Chairman.
Chairman LAZIO. I thank the gentleman.
Mr. VENTO. Mr. Chairman, I ask unanimous consent to put in the record this article of September 5 concerning suit challenges and lenders payments to brokers, and I'll point out that it is not in the good faith estimate with regard to the yield spread premium. It only shows up as a payment in the final transaction as a cost to the lender, and, of course, that's the issue. The issue here, whether you recognize it or not, is whether or not there's a benefit that comes through, and I think it isn't in the good faith estimate. It is not there, and it was stated that it was, so there's a misunderstanding——
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Chairman LAZIO. Without objection.
[The information referred to can be found on page 269 in the appendix.]
Mr. VENTO. And I would point out further that the——
Chairman LAZIO. If the gentleman would just suspend——
Mr. VENTO.——the APR, there's nothing in the Report.
Chairman LAZIO. If the gentleman would just suspend for one second, so that I'll recognize you for 30 seconds to complete your point.
Mr. VENTO. There's nothing in the Report that suggests, as Mr. Webb has said, that the consumer groups this Report is against do not come out against APR. They do not come out. So, it is not in the Report that you suggest, and you'll have to point that out specifically to me and to the subcommittee—in this Report right here. The Report concerning—the Joint Report, there's nothing in this that disregards the APR.
Chairman LAZIO. Let me try and get back to regular order, if I can, on this, and Mr. Webb looks like he's ready to levitate off the chair, so——
[Laughter.]
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——you may want to answer that if you can when it's appropriate. Are there any other Members who wish to ask any questions of this fine panel? If not, if there are any other responses or any other points that you would like to make, please make them in writing.
Mr. BENTSEN. Mr. Chairman, Mr. Sherman has questions.
Chairman LAZIO. OK, yes, I'm sorry. Let me just say that we have a bit of a time problem, in fact, more than a bit. We were supposed to be out of here by 12:15, and we have a second panel, so we've been trying to keep points as brief as possible, but I would recognize, of course, the gentleman—I appreciate him being here—Mr. Sherman.
Mr. SHERMAN. The HUD/Fed proposal calls for a dual disclosure under which the lender can either offer a total guaranteed loan package containing a mortgage and all other services to close the loan or a binding good faith estimate of closing costs with individual settlement services selected as per the current practice. The Report makes it clear that HUD/Fed did not intend to make packaging of these services mandatory, however, what is not clear is whether a lender must offer the consumer both options, both the traditional system as well as the guaranteed package. For example, assume a major lender in a community decided to offer loans only as part of a guaranteed package. Under this situation, would a consumer be forced to accept the lender's services as a condition of getting the loan? Does this create an anti-competitive situation by denying consumers any choice in settlement service providers? And should we require lenders to offer both the traditional option as well as the package option? I address that to whichever members of the panel would like to answer.
Mr. WEBB. If I could answer that question. First of all, the Fed/HUD Report was not anticipating that a lender would have to offer both options. I think it would be very difficult to get the benefits of the guaranteed closing cost approach if a lender had to offer both of the options, because one of the benefits of the guaranteed closing cost approach is that a lender can go out and negotiate with the settlement service providers and arrange for discounts in the cost of those services, and those efficiencies would then be passed on to the consumer. If you had to offer both systems, that would be, first of all, an enormous compliance cost, because you would have to completely change the process of how you originate loans to accommodate both systems. You've got two different——
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Mr. SHERMAN. Well, in keeping the traditional system, all the forms are written. They just have to keep doing what they're doing now.
Mr. WEBB. Well, we can keep that entire large stack that we have now plus the ones that we have for the new disclosure scheme and do that simultaneously. There's obviously a cost in that. Another benefit of lenders being able to arrange for these closing cost services is that as we package and manufacture that loan, we need these services provided to us on a timely basis in order to make that loan efficiently. That benefit is really destroyed if you have to offer both systems.
Mr. SHERMAN. So, we'd be in a situation where—you know, we live by the Golden Rule: He who has the gold makes the rule. And we could have a situation where a lender who's a dominant lender in a small community could, in effect, put the title companies, the escrow companies in that community out of business, and, as I remember—I didn't go to the same graduate school as Mr. Bentsen—but as I remember a discussion of anti-trust law and the objectives, if anything, Microsoft is being nailed for packaging, and as you understand by putting forward this proposal, that we are opening the door not only to packaging, but to packaging as the sole mode of doing business. This is as if we got a proposal that said Microsoft wants to make sure that you can't get Windows without getting their net navigator. Isn't the whole idea of anti-trust law to allow competition where you can buy one service or one good from a party and then go to competitors for the other related services?
Mr. LEVY. By the way, that's one of the concerns we expressed in our statement, and I also want to point out another quirk here, and that is, it seems to me that if the whole focus here is on enabling consumers to shop in a more knowledgeable, meaningful way, then to have two systems in place, a GFE and a package services system or process, would mean that the consumers, again, are comparing apples and oranges. You're really not accomplishing the goal sought when you have more than one specific manner of giving information to the consumer that is standardized. However, once you standardize, then you get involved with the evils that you were just suggesting.
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Mr. WEBB. But one point I would like to make is that you're presupposing a situation where a lender in a particular area is dominant, and I think that, really, if you look at how the mortgage industry works today, there's thousands and thousands of mortgage brokers throughout the country. There's a large number of lenders who lend throughout the entire country. There's virtually no area in the country where there isn't real competition for mortgages right now, and the consumer would have a choice to access the mortgage market through a number of different ways.
Mr. SHERMAN. I think my time has expired.
Chairman LAZIO. Yes, I'm going to have to cut into this; I apologize again. I want to thank this panel for their outstanding testimony. Thank you for all the work that you have done and wish you a safe and healthy ride back home.
Mr. VENTO. Mr. Chairman, I just think this is unsatisfactory to have all these open questions. I think Members and most of the panel here are frustrated, and I'm frustrated. We just simply can't operate like this. I don't think this treats the witnesses or the Members fairly with regard to trying to rush through these particular comments.
Chairman LAZIO. If the gentleman would suspend for a minute. I don't want to get into a long dialogue with you, because we're going to eat up precious time. Of course, you know this is beyond our control. This was something that was imposed on us in terms of another hearing that was scheduled, and it certainly isn't the way I would prefer to conduct this hearing. Let's move to the second panel, so we can try to hear from all the witnesses. Thank you very much.
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Let me make some comments as the second panel comes forward. Let me thank the second panel for their testimony which will be included in the record, and I want to reemphasize for all those that will be testifying the importance of trying to keep their summaries to three minutes. If we run out of time, we would like to leave some time for questions, so I would ask that the witnesses please respect the time problem.
I am not going to do formal introductions, and I would ask people to please be quiet so that we can continue. Instead of doing a longer introduction—the first person who's going to be testifying is Rick Snyder who is the Chairman of the RESPA Task Force for the National Association of Realtors here in Washington, DC. We welcome you here today.
The second testimony we'll hear is from Peter Hunt who is the President of Hunt Real Estate in Williamsville, New York. He is testifying on behalf of the Real Estate Services Providers Council, Incorporated, which is otherwise known as RESPRO. Welcome.
The third testimony we will hear is from Louis C. Meyer, Jr. who is the President of the NIA/Lawyers Title Agency, Incorporated. He will be speaking on behalf of the American Land Title Association, and he's also from Paramus, New Jersey—where do all these New Jersey people come from? I don't know.
And Ms. Margot Saunders, the Managing Attorney, National Consumer Law Center in Washington, DC. I welcome you here today as well.
And, finally, John Courson, who is President and Chief Executive Officer of Central Pacific Mortgage Company and serves as president of the California Mortgage Bankers Association. I want to welcome you particularly for your long trip in. Thank you for attending this hearing.
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And we will go right to the testimony. Mr. Snyder, you're recognized.
STATEMENT OF RICK SNYDER, CHAIRMAN, RESPA TASK FORCE FOR THE NATIONAL ASSOCIATION OF REALTORS
Mr. SNYDER. Thank you very much.
On behalf of the 720,000 members of the National Association of Realtors, we appreciate the opportunity to express our views on the Report. NAR has reviewed the joint FED/HUD Report outlining the recommendations for RESPA and TILA reform. We've identified major areas of concern.
The key areas of concern include the proposed scheme for packaging settlement services; the dual disclosure methods; and the penalties for noncompliance. Let me begin by raising a few questions about the requirements established in the Report for packaging settlement services.
First, who can package? HUD and Fed recognized that if the packaging was limited to lenders, competition would be restricted, therefore, others would be permitted to participate. However, to qualify for an exemption, the Report requires a disclosure to the consumer that includes the rate points and package price. This approach could deny a realtor or other potential packagers who lack a lending source from marketing their services directly to the consumer.
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In terms of should the services in the packages be itemized, the Report recommends itemizing those services that are customarily required to close a loan. The Board and HUD, as well as some lenders, do not believe that itemizing individual costs or service providers is necessary. We feel that this is a real weakness in the Report. In order to make informed decisions, consumers need all the information available. A blind bundle of services, in our view, is just inadequate.
The provision of an early laundry list of customary services without any obligation to disclose services actually performed until the final closing statement, does nothing to assist the consumer in their evaluation of competing packages. NAR believes that the contents of the settlement package must be disclosed. The settlement services, the provider of those services, and the total price of the package, branding of packages, gives consumers additional assurance of quality.
In terms of dual disclosure, we are pleased that the Fed and HUD Report does not mandate the packaging of settlement services. The consumer should maintain the right to purchase services separately, and lenders should be prohibited from denying them this choice.
In terms of the penalties for non-compliance, as was raised in an earlier question, the Report recommends remedies to protect consumers against inaccurate disclosures and also proposes to strengthen RESPA's criminal sanctions. NAR opposes any attempts to increase criminal penalties, and, instead, we recommend that criminal penalties within RESPA should be limited to cases of wanton, willful, and egregious acts.
My comments so far have focused on the concerns that we have with this Report. I'd like to add a few comments on areas where we think we have some agreement.
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We feel any reform proposal should require early and, to the extent possible, simplified disclosures. Any effort to further educate the consumer on the home purchase transaction is also commendable and a position NAR has always advocated. Additionally, we feel it is extremely important to enact measures that address abusive lending practices. The entire industry suffers when such practices are allowed to continue, and, again, on behalf of the National Association of Realtors, we appreciate this opportunity.
[The prepared statement of Rick Snyder can be found on page 395 in the appendix.]
Chairman LAZIO. I want to thank you for your testimony and also for the great work the Realtors do in a number of different areas.
Peter Hunt, you're recognized. Welcome.
STATEMENT OF PETER F. HUNT, PRESIDENT, HUNT REAL ESTATE, ON BEHALF OF REAL ESTATE SERVICES PROVIDERS COUNCIL, INC.
Mr. HUNT. Good morning and thank you, Chairman Lazio and Chairwoman Roukema and Members of the subcommittees. I'm Peter Hunt, President and CEO of Hunt Real Estate Corporation, based in Buffalo, New York, and today I represent the Real Estate Services Providers Council, also known as RESPRO. I appreciate the opportunity to testify here today.
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RESPRO is a national, non-profit trade association of providers from a cross section of the home buying and financing industry. The common bond of RESPRO members is that we are ''affiliated businesses,'' which means we have chosen to offer one-stop shopping for home buyers and owners through affiliations, joint ventures, or other strategic relationships with other providers. RESPRO's members are regulated at the Federal level under the affiliated business arrangement provision of the Real Estate Settlement Procedures Act.
Since you asked HUD and the Fed to address your concern over the mortgage lending disclosure requirements under RESPA and RESPRO has engaged our own diverse membership in a dialogue, and I am glad to report that RESPRO's members from across industry lines have reached an internal consensus on some of the fundamental issues association with RESPA/TILA reform that we would like to share with you today, particularly in the area of ''packaged services.''
As affiliated businesses who currently offer multiple services for home buyers, RESPRO members recognize that consumers may benefit from the cost efficiencies, certainty, and convenience inherent in the offering of package services in an up-front guaranteed cost to the consumer. However, we also believe that any new statutory framework should be carefully structured to ensure that it preserves competition and consumer choice in the marketplace by allowing all providers, regardless of industry or affiliation, to participate under the same regulatory standards. Therefore, we recommend that any Federal legislative framework that provides incentives to providers to guarantee a comprehensive loan package be based on three principles: first, package services should be optional, not mandatory. The Federal Government should not mandate any one delivery system for home buying and financing services, but instead should continue to allow providers to offer consumers the choice of either a guaranteed loan package, affiliated loan services under current affiliated business rules, or unaffiliated loan services.
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Second, any provider should be able to offer packaged services directly to the consumer. Today, both lenders and non-lenders, such as real estate brokers, owners, title companies, and home builders, offer a variety of one-stop shopping alternatives through affiliated businesses or contractual relationships depending on the needs of their consumers.
We support the HUD/Fed proposal that any mortgage originator including an affiliate or non-lender such as a real estate broker, owner, or home builder, be able to offer a guaranteed loan package. However, we are concerned about the HUD/Fed proposal to only provide statutory incentives to providers who offer a comprehensive loan package. If non-lenders are not offered the same statutory incentives to offer and guarantee a total closing cost package directly to their customers, they're not likely to be able to effectively compete with lenders in the marketplace for those closing services.
Finally, individual closing services that accompany loans should be disclosed whether or not the provider offers a loan package. Consumers who want to compare any two packages or package loan services with non-package loan services would not have the information they need to do so if they do not know what services are in each package offered to them.
RESPRO members have also agreed on a consensus approach to a number of other issues presented in the HUD/Fed recommendations which I address in my written testimony that I request be included in the record.
Chairman LAZIO. Without objection.
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Mr. HUNT. We appreciate the opportunity to comment on mortgage disclosure reform, and we look forward to working with Congress to improve the home buying and financing process for both providers and consumers.
[The prepared statement of Peter F. Hunt can be found on page 402 in the appendix.]
Chairman LAZIO. Thank you very much. I also want to invite you to Buffalo night tonight over at the Hart Building.
Mr. HUNT. I wish I could be there.
Chairman LAZIO. Mr. Meyer, you're recognized. Welcome.
STATEMENT OF LOUIS C. MEYER, JR., PRESIDENT, NIA/LAWYERS TITLE AGENCY, INC. LLC ON BEHALF OF THE AMERICAN LAND TITLE ASSOCIATION
Mr. MEYER. Madam Chairwoman, Mr. Chairman, Members, my name is Louis C. Meyer, Jr. and I am president of NIA/Lawyers Title Agency, LLC in Paramus, New Jersey. I appreciate the opportunity to appear before you today on behalf of the American Land Title Association.
ALTA's more than 2,400 members and their 100,000 employees are extensively involved in numerous aspects of residential real estate transactions. For example, many of our members now provide appraisal, credit report, escrow services, flood certifications, relocation services, and closings. Through partnerships and affiliations, companies in our industry are effectively providing the one-stop shopping that has become a theme within the real estate industry.
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As an industry, we have also in recent years invested heavily in technology, as automation can dramatically increase the efficiency of service delivery.
The issues of RESPA and TILA simplification and reform are of critical importance to our members. ALTA has been active as a participant in the deliberations of the Mortgage Reform Working Group, and we appreciate the efforts that the Federal Reserve System and the Department of Housing and Human Development have made in their Joint Report to grapple with the issues involved in simplifying the mortgage lending process. There is much in the Joint Report and the proposals aired in the Mortgage Reform Working Group that is commendable and we support providing earlier and better information to consumers; providing such information before consumers are required to pay significant application fees, and providing substantial protections to consumers against significant abuses. We look forward to continued dialogue on those issues.
We have significant concerns with one aspect of the Report and in proposals aired in the Mortgage Reform Working Group, namely to have lenders package settlement services and guarantee the cost of the package.
We believe that there is a presumption that the lender is the consumer of the settlement services. Rather, the buyer and seller, who often negotiate among themselves, are actually the true consumers of the settlement services. For example, in two-thirds of the country, the seller pays for title insurance. The guaranteed loan closing cost proposal would shift the cost to the borrower instead. Also, consumers do shop for settlement services. A recent Gallup survey showed that 48 percent of consumers actually shopped for title insurance services and we expect that this trend will grow as consumers use the internet and other technology resources to shop for real estate services.
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We also hope that Congress examines the basic premise behind packaging. The Federal Reserve Board notes that having a lender as an intermediary in the purchase may be less efficient than having the consumer transact directly with the provider of title services.
The precepts of the packaging proposal outlined in the Report contradict a basic principle of mortgage reform. The proposed exemption from Section 8, the anti-kickback provision of RESPA, would not require lenders or others who might package closing services to disclose the services or cost of products actually provided in the package. It would allow lenders to charge hidden fees which would not be linked to services. We ask that your subcommittee carefully evaluate these proposals before introducing legislation to address mortgage reform. I will be happy to respond to any questions you may have.
[The prepared statement of Louis C. Meyer Jr. can be found on page 417 in the appendix.]
Chairman LAZIO. Thank you very much.
Ms. Saunders, welcome.
STATEMENT OF MARGOT SAUNDERS, MANAGING ATTORNEY, NATIONAL CONSUMER LAW CENTER
Ms. SAUNDERS. Thank you, Mr. Chairman and Madam Chairwoman. We very much appreciate the opportunity to be here today. We testify on behalf of our low income clients as well as the Consumer Federation of America, Consumers Union, the National Association of Consumer Advocates, and the United States Public Interest Research Group.
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All of these consumer groups have participated in the lengthy meetings of Mortgage Reform Working Group, and we have met and discussed these issues extensively with the Federal Reserve Board and with HUD. We have also spent countless hours thinking about this issue and talking about the issue with our colleagues, and our recommendations that are contained in my fairly lengthy written testimony have not come about lightly. They are the result of hundreds, if not thousands, of hours of attorneys spending time discussing the problems, considering the issues with other attorneys around the country who have devoted their lives to represent consumers.
I have three main points to try to make to you today in my few minutes.
One is that the HUD/Fed Joint Report was the product of an extensive amount of work of these two agencies. These agencies carefully considered all of the opinions that consumer groups as well as industry brought to them. You should not reject the recommendations made in that Report lightly and proceed to consider an industry bill in the next Congress. We are very, very, frankly, scared that we'll have to deal with one of the industry bills that we know industry is writing. The Mortgage Reform Group has really come to a standstill at this point. The industry has made its proposals; the consumers have made their proposals, and we don't seem to be able to move beyond that. But the HUD and Fed Joint Report does recognize most, if not all, of the consumer groups' concerns, and therefore, we really commend it highly to you.
Second of all, the disclosures required under the current law are not adequate, as you know. I cite in my comments the fact that foreclosures in this country have skyrocketed; they've gone up nearly 400 percent since 1980 when Congress deregulated interest rates. There are serious problems out there. Industry may tell you that they don't like to foreclose, nevertheless, we are seeing more and more foreclosures every day. Half-a-million households a year losing their homes to foreclosure is too many. One of the ways to address this problem, if we have deregulated environment, is to increase competition. We do not have effective competition in the market now, as has been noted by Mrs. Roukema and others. You cannot shop for a mortgage loan the same way that you can shop for a car or a loaf of bread.
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The consumer groups recommended, and the HUD recommendations concur with this, that you change the law to make sure that a consumer can obtain a credit report, provide it to a number of lenders, and get a guaranteed rate, points, and closing costs which is contingent upon verification of the information that the consumer provides about income and the value of the house. In this way, a consumer will truly be able to shop for a loan. In fact, some of the mortgage groups have agreed that this is a responsible and appropriate way to change the system.
Last, I must emphasize very quickly that abusive loan protections are very, very necessary, and it would be inappropriate to proceed with amending the only two Federal laws that essentially govern mortgages in this country without dealing with the abusive loans that we see every day in every State in the country. In my testimony, I've outlined a review of the types of abusive terms that we see, and we have outlined proposed recommendations to deal with that. I thank you for the time.
[The prepared statement of Margot Saunders can be found on page 427 in the appendix.]
Chairman LAZIO. I want to thank you for your extensive testimony. I also want to reemphasize that all of the testimony will be included in the record and will be read. If we have questions from Members based on that testimony, I would ask the witnesses answer to that.
The final testimony from John Courson is now appropriate. Mr. Courson, you are recognized.
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STATEMENT OF JOHN COURSON, PRESIDENT AND CEO, CENTRAL PACIFIC MORTGAGE COMPANY, ON BEHALF OF MORTGAGE BANKERS ASSOCIATION OF AMERICA
Mr. COURSON. Chairwoman Roukema, Chairman Lazio, and Members of this subcommittee, my name is John Courson, and I am President and Chief Executive Officer of Central Pacific Mortgage Company in Citrus Heights, California, and today I am here representing the Mortgage Bankers Association of America on whose executive committee I currently serve. I am also Chairman of the Mortgage Bankers Association RESPA/TILA Guidance Committee.
There is general agreement among all those who are affected by RESPA and TILA, from the originators of mortgage loans to the family who is trying to buy a home, that reform of these laws is necessary and will benefit all concerned. Individually, each statute presents serious and legitimate problems for the industry with regard to compliance and workability.
MBA believes that the current requirements in TILA and the rules about what is and is not counted in the finance charge and the annual percentage rate disclosures are far too complex for consumers to be useful. Further, MBA believes that the right of recision provision contained in TILA is unnecessarily onerous. Under this provision, if any of the material disclosures are inaccurate, the consumer may unwind the entire transaction including all interest paid for up to three years after the closing.
A significant problem with RESPA as its currently written is the disclosure requirement for the good faith estimate of settlement charges and the HUD–1 settlement statement. This requirement means that lender must anticipate even third party fees. RESPA also contains one of the most far-reaching regulatory provisions affecting the mortgage industry which you've discussed earlier, Section 8. Section 8 of the statute prohibits referral fees for referrals of settlement service business including mortgage lending. Since late 1996, a number of class action lawsuits have been filed alleging that yield spread premiums are illegal kickbacks and, as such, violate Section 8. These lawsuits have wreaked havoc on the industry. For this reason, MBA believes that reform is appropriate and necessary.
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Within the coalition of consumer groups and industry representatives, known as the Mortgage Reform Working Group, there is general agreement on the need to reform in six specific areas. These six areas are: disclosure; substantive protection against abuse; foreclosure relief or loss mitigation; referral fees; penalties and remedies; and State law preemption. MBA is committed to reaching a consensus on these areas of reform by working not only with MRWG, but other organizations who are part of MRWG who are committed as we are to mortgage reform. Those most affected by RESPA and TILA generally agree that changes in these areas would go a long way toward reform.
Our written statement which we submitted yesterday in accordance with our invitation to testify, contains more comprehensive explanations of MBA's views on each of these areas. I appreciate the opportunity to testify and will be glad to respond to questions. Thank you, Mr. Chairman.
[The prepared statement of John Courson can be found on page 462 in the appendix.]
Chairman LAZIO. I thank the gentleman. I am going to suspend my questions to give members, particularly the Minority, some time to ask questions. I would ask if it's possible to try and restrict questions to three minutes. We'll be able to all get through this, and if we have more time, we can go back to individual Members, but I'm going to turn, first, to Mrs. Roukema.
Mrs. ROUKEMA. Mr. Chairman, I'm sorry that with the limitation on time here, I don't believe that my questions can be answered in that time span, but I am going to submit to at least Mr. Meyer, Mr. Courson, and Ms. Saunders a question with respect to the litigation requirements. I think particularly from Mr. Meyer, from his group, I want to hear your response to how we deal with reforms and still face that question of undue litigation. At the same time, Mr. Courson, I think you heard some of the other comments, and I would want to submit those questions to you including what penalties ought to be invoked? And, Ms. Saunders, it would be especially important for us to hear from you, because you've had a lonely voice here, and a different perspective, but if we don't meld and we don't integrate these two perspectives, there will never be any reform here. So, I would also like, Ms. Saunders, for you to respond in writing, all three of you, to my expressed concerns regarding the problems of litigation, escalating litigation; the needs for penalties to be part of those reforms, and, of course, any other points, but I think you've made yourselves perfectly clear, in my estimation, as to what you find are the pluses and minuses of the HUD and Fed Report. So, I express my appreciation.
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Chairman LAZIO. I thank the gentlelady.
Mr. Watt.
Mr. WATT. Thank you, Mr. Chairman. I think I'll pass also. I know we're under time constraints. I would like, however, receive a copy of the response to Mrs. Roukema's question which I think is a very, very important one and the one that, if you're going to scale back disclosures and procedural requirements, how you counteract that by assuring folks who then abuse the process have liability for it; a very difficult issue. But I yield back.
Chairman LAZIO. I would make a unanimous consent request that all of the responses be included as additional comments, and the panel should feel comfortable responding in writing to any questions that come up, and we will include that in the record.
Mrs. ROUKEMA. Excuse me. Will the gentleman yield?
Mr. WATT. I'll be happy to yield.
Mrs. ROUKEMA. I thought those were the known rules of subcommittee hearings. In any event——
Mr. WATT. Well, we know how subcommittee testimony is, however.
Mrs. ROUKEMA. Excuse me.
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Mr. WATT. It goes in the record, and it gets buried there.
Mrs. ROUKEMA. I'm glad you asked the question, because it is the clear intention that their responses be part of the record, the formal record, and they will be shared with everyone on the subcommittee.
Chairman LAZIO. I'd also like to make a unanimous consent request. The following request is, without objection, adopted also. There was a request on the part of several Members who were not able to be here to submit their opening statement for the record, and my request is that Members be given three days in order to submit their opening statement, and, without objection, that's so ordered.
The gentleman yields back?
Mr. WATT. Yes.
Chairman LAZIO. Mr. Bentsen.
Mr. BENTSEN. Thank you, Mr. Chairman. I'll be brief. I just have a couple of questions.
First—and I may submit some for the record as well—Mr. Meyer, this loan packaging, two questions on that: one is, would you see this as a situation where you end up having capitated fees? Is the managed care approach to mortgage lending where you would see this having an effect on title agencies, title insurance companies' fees? And the second question is, is there a degree of independence between the title agency and title insurance that is provided that the lender needs to rely upon for creditworthy purposes? I mean, is there a fear that you could start to get into sloppy title work, and if you're just jamming out these loans and all of sudden you find out you didn't really have clear title and there's a risk to the lender?
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Mr. MEYER. In those States in which there is no rate regulation, and rates are regulated in many States, one of the fears of the industry is that there will be pressure on price and with pressure on price goes a decrease in the service provided, and you get sloppy title work because of that. We feel that we provide a valuable service to lenders, and we'd like to keep that out of the package, because if the lender controls the package, they're going to control the supplier.
Mr. BENTSEN. If I might, and Ms. Saunders, I think you hit a lot of interesting points in your testimony. I have some great concerns of some issues you raised with respect to the 125 percent LTV lending and some others, and I may submit some questions on that and the home improvement, which the Chairman and I have both been very involved at looking at some of the scams related to FHA.
Mr. Snyder, I received a letter from the realtors regarding the affinity exemption within the Senate relief bill and the objection of NAR to that. Quite frankly, I don't completely understand what that's all about. Could you give me a very quick explanation of your concern with affinity, and what does that mean?
Mr. SNYDER. Well, the concern from the realtor community continues to be that through consumer choice; through the ability for non-lender service providers to provide and participate in ancillary services and services that are tied to the transaction, that that net benefits the consumer; opens competition, and will have the net effect of driving down costs. And so, the issue from the realtor community is to broaden the playing field if you will, and remove it from the current situation where there is a prohibition through RESPA, as an example, for participation of the brokerage community within that arena.
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Mr. BENTSEN. Thank you. Thank you, Mr. Chairman.
Chairman LAZIO. Thank you, Mr. Bentsen. I have a few questions. It should take no longer than 20 minutes or so.
[Laughter.]
I'm going to submit them in writing and ask that you get back to me. Let me thank the panelists for some very fine testimony. Let me emphasize that we can integrate the information that we have discussed today and develop a good reform plan. It's very clear that this is going to be very important, both in terms of enforcement issues and class action suits that are out there to provide some direction and some certainty to the marketplace. We need to get to the point where we have clearer, more rational disclosure for both consumers and lenders.
Let me also announce that this room will be cleared, and so anybody who wants to attend the next hearing will have to step outside for a few moments while the room is properly secured, and then you will be allowed back in. With that being said, on behalf of Mrs. Roukema and myself and the rest of the subcommittee, let me thank everybody for attending. This hearing is now adjourned.
[Whereupon, at 12:17 p.m., the hearing adjourned, subject to the call of the Chair.]
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