Testimony of

Peter F. Hunt
Hunt Real Estate Corporation

On Behalf of The

Real Estate Services Providers Council, Inc.
(RESPRO®)

Before The

U.S. House of Representatives
Subcommittees on
Housing and Community Opportunity
And
Financial Institutions

On

Mortgage Lending Disclosure Reform

September 16, 1998

 

Good morning, Chairman Lazio, Chairwoman Roukema, and Members of the Subcommittees. I am Peter Hunt, President & CEO of Hunt Real Estate Corporation based in Buffalo, New York. Today I am representing the Real Estate Services Providers Council, Inc., also known as RESPRO®. I appreciate the opportunity to testify here today.

Background of RESPRO

RESPRO® is a national non-profit trade association of providers from a cross-section of the home buying and financing industry, including real estate brokerage companies, mortgage bankers, mortgage brokers, title companies, insurance companies, and financial institutions (see RESPRO Membership in Attachment 1). The common bond of RESPRO® members is that we are all "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" provisions of the Real Estate Settlement Procedures Act (RESPA), which were enacted by Congress in 1983 to exempt from RESPA’s referral fee prohibition (Section 8) "a return on ownership interest or franchise relationship" in more than one settlement service provider under three conditions: (1) that a person making a referral to an affiliated company disclose in writing to the consumer the financial nature of the relationship; (2) that a person making the referral to an affiliated company not require the use of the affiliated service; and (3) that no fees for referrals flow between affiliated companies that are not otherwise allowed under RESPA for unaffiliated companies.

Since 1983, the number of affiliated businesses have significantly increased in the marketplace, as real estate brokers, mortgage lenders, mortgage brokers, title companies, and other settlement service providers have decided to offer their customers reduced time, complexity, and costs associated with the purchase or refinancing of a home through the purchase of multiple settlement services at one time and place. Empirical studies that we have summarized in Attachment 2 have shown the consumers are, in fact, reaping the benefits of the presence of affiliated businesses in the home buying and financing marketplace.

RESPRO®’s Interest In Mortgage Disclosure Reform

Since the Subcommittees asked HUD and the Federal Reserve Board to address their concern over the complexity and overlap in mortgage lending disclosure requirements under RESPA and the Truth in Lending Act (TILA), RESPRO® has actively participated on behalf of affiliated settlement service businesses in the Mortgage Reform Working Group, an ad hoc industry-consumer group that has met regularly since July 1997 in a continuing attempt to reach a consensus on mortgage disclosure reform.

We’ve also engaged our own diverse membership in the same dialogue, and I’m glad to report that RESPRO®’s members from across industry lines have reached an internal consensus on some of the fundamental issues associated with RESPA/Truth in Lending reform that we would like to share with you today, particularly in the areas of "packaged" services, affiliated business disclosures, mortgage broker compensation, settlement disclosures, and RESPA remedies. RESPRO®’s position is a consensus in the true meaning of the word, in that individual affiliated mortgage, real estate, and title industry providers were able to jointly agree to an approach to RESPA/TILA reform in some areas that would not be their particular industry’s first choice, but that is preferable to the group as a whole over alternative reform proposals.

Dual Disclosure Scheme: "Packaged" Services vs. Binding Good Faith Estimate

The Department of Housing and Urban Development (HUD) and the Federal Reserve System recommended in their July 17, 1998 joint report to Congress that RESPA and TILA be amended to provide a "dual disclosure" system for mortgage loans under which mortgage originators could either:

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 "packaged" services at 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 for providers to guarantee a comprehensive loan "package" be based on three premises:

1. Packaged" Services Should Be Optional, Not Mandatory.

If the federal government mandates one delivery system -- packaged services -- for home buying and financing services, the home buying and financing marketplace would be significantly disrupted since many providers who are not now offering a full menu of loan services to home buyers and owners would be forced to either offer a comprehensive loan package, market their services to a far more limited universe of providers (those that offer a comprehensive loan package), or go out of business. This could significantly diminish competition and consumer choice in the marketplace.

Instead, we recommend that Congress continue to allow providers to offer consumers the choice of either a guaranteed loan "package" under the new law, affiliated loan services under RESPA’s "affiliated business" provisions, or unaffiliated loan services. If the availability of guaranteed comprehensive loan packages provides consumers with lower costs and more certainty, then the marketplace will inevitably lead to their growth and acceptance.

We support the HUD/Fed "dual disclosure" approach to packaged services, which gives providers an option of "packaging" or not "packaging". However, we strongly recommend that Congress assure that the "binding GFE option" to packaged services is a true option by (1) providing for a reasonable tolerance to accommodate the non-packager’s potential competitive disadvantage in negotiating discounts with ancillary providers; (2) providing for penalties that are proportionate to the violation (which would include allowing providers to "cure" any difference between the actual closing costs and estimated closing costs plus tolerance at closing); and (3) assuring that the "Packaged Service" disclosure, the binding GFE, and the HUD-1 Settlement Statement provided at closing be as similar as possible to allow the consumer to effectively compare the cost of loan services offered by "packagers" and "non-packagers".

2. Any Provider Should Be Able to Offer "Packaged" Services Directly to the Consumer.

Today, both lenders and non-lenders offer a variety of one-stop shopping alternatives through affiliated businesses or contractual relationships, depending on their needs of their customers. A real estate broker-owner or home builder, for example, may choose to offer its customers a complete menu of mortgages and closing services, while others may decide to offer just a package of closing services that would accompany a loan provided by an unaffiliated lender, subject to that lender’s approval.

We support the HUD/Fed proposal that any mortgage originator -- including an affiliate of a non-lender such as a real estate broker-owner or homebuilder -- should be able to offer and guarantee a comprehensive loan package under the new statutory framework.

However, we are concerned about the HUD/Fed proposal that a provider must offer a "comprehensive loan package" -- which it defines as the rate, points, and lump-sum closing costs -- in order to obtain statutory relief under RESPA. If non-lenders are not offered the same statutory incentives to offer and guarantee a total closing cost package directly to their customers, they are not likely to be able to effectively compete with lenders in the marketplace for these closing services. We urge Congress to allow non-lenders to provide and guarantee a total closing package -- separate from the rate and points -- directly to their customers under the same statutory framework, subject to pre-approval of the closing package by the lender.

3. Services Included in the Package Should Be Disclosed to the Consumer.

Consumers who want to compare any two "packages", or packaged loan services with non-packaged 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. We support the HUD-Fed recommendation that the "package" should provide a separate listing of the services included so that the consumer can more effectively comparison shop, and we urge Congress to adopt this recommendation.

Other RESPA/TILA Reform Issues

1. Affiliated Business Disclosure

Under RESPA’s affiliated business provisions, any person who refers business to an affiliated company must disclose in writing to the consumer the nature of the financial relationship with the affiliate and an estimated range of charges for the referred service. HUD regulations have added additional requirements to the affiliated business disclosure that are not specifically required by RESPA.

While HUD and the Fed recommend that loan "packagers" be exempt from the affiliated business disclosure requirement in return for providing the package at an up-front guaranteed cost, "non-packagers" who refer business to an affiliated provider would still be required to provide an affiliated business disclosure.

RESPRO® ’s members believe that a consumer has the right to know if a person who refers settlement services has a financial relationship with a provider to which the consumer is referred. However, we also believe that the current affiliated business disclosure now required under RESPA and HUD regulations is a complex, wordy document that (1) detracts from its primary purpose; (2) adds paperwork to the home buying and financing transaction; and (3) significantly increases an affiliated business’ compliance burden for minor errors in disclosures that are meaningless to the consumer.

RESPRO® recommends that Congress specifically address the unnecessary complexity of the RESPA-required affiliated business disclosure in its efforts to streamline and unify mortgage loan disclosures. Our specific recommendations are provided in Attachment 3.

3. Mortgage Broker Compensation

HUD and the Fed propose to provide a Section 8 exemption for fees paid by lenders to mortgage brokers (e.g., yield spread premiums) — which have been the subject of class action lawsuits in the mortgage industry -- if the mortgage lender or broker guarantees a comprehensive loan package to the consumer under the new regulatory framework. Non-packagers, however, would continue to be subject to the current RESPA regulatory environment for lender-paid mortgage broker fees. HUD published for comment a proposed rule governing mortgage broker compensation in October 1997, but has not yet provided final regulatory guidance to the industry on the legality of such fees.

Many of RESPRO®’s members engage in mortgage lending or brokerage activities either directly or through affiliations. We strongly believe that it is essential for both packagers and non-packagers to have clear-cut and equal regulatory standards governing mortgage broker compensation, and we therefore support a statutory clarification that mortgage broker fees are not illegal under RESPA regardless of whether a "package" is offered. In the meantime, we support a moratorium on class action certifications for RESPA lawsuits in this area until such time as Congress and/or HUD are able to provide clear regulatory guidance.

4. Settlement Disclosures

HUD and the Fed recommend that all providers, whether they package or not, redisclose significant changes in the Annual Percentage Rate (APR) and other material disclosures and provide a final copy of the HUD-1 Settlement Statement three (3) days prior to closing. The HUD-1 Settlement Statement is now required to be provided at closing, and, if requested by the consumer, one (1) day prior to closing.

Our members across industry lines were unified in their belief that the HUD/Fed proposal would have the effect of delaying closings for consumers for at least three days on a universal basis, with no corresponding benefit.

Consumers who are buying a home, refinancing their mortgage, or financing a subordinate lien on their home significantly value the ability to close the loan as quickly as possible. To add a "3-day waiting period" for review of the HUD-1 Settlement Statement would automatically add three days on to the time between approval of the loan and closing.

Neither would the consumer benefit from the additional 3-day waiting period. If, under the HUD/Fed recommendations, the provider either guarantees the cost of a loan "package" or is subject to penalties if its actual closing costs exceed the estimated costs on the "binding GFE" with a tolerance, the consumer would already be protected against substantial unexpected costs at closing.

Congress should seriously consider whether the benefits of providing the consumer the actual costs of closing the loan three days before closing versus a narrow range outweigh the benefits of providing consumers an expedited closing. As an alternative, RESPRO® recommends that the HUD-1 Settlement Statement be structured in a manner to enable the consumer to effectively compare at closing the actual closing costs with those on the "Packaged Services" or "binding GFE" disclosure, with a right to cure the difference at closing.

5. RESPA Penalties and Remedies

HUD recommends in the HUD/Fed Report a variety of changes to RESPA remedies to increase HUD’s enforcement authority under RESPA, such as increased injunctive authority, additional civil money penalties to cover costs for RESPA enforcement (in addition to current civil money penalties that would be paid directly to the consumer), strengthened criminal sanctions for Section 8 violations, providing a competitor the right to sue its competitors under RESPA, and increasing the statute of limitations for both consumers and the government.

With the exception of increased injunctive authority, RESPRO® questions imposing increased penalties for RESPA violations in the absence of a more clear-cut regulatory environment for all settlement service providers. HUD’s regulatory guidance to the industry since RESPA was enacted in 1974 has been sporadic, confusing and inconsistent. While HUD and the Fed have attempted to provide more regulatory certainty under RESPA and TILA for providers who guarantee an entire loan "package", their proposal does nothing to minimize the compliance burden of those who do not "package", and, in fact, adds to it by imposing penalties for exceeding disclosed estimates on the Good Faith Estimate (GFE) for the first time.

We particularly oppose HUD’s proposal to give providers the right to sue their competitors under RESPA. RESPA regulates what is a natural practice of providers in other industries — to pay for access to the point of sale to the consumer. As a result, the law inevitably creates "turf battles" among settlement service providers for a regulatory environment that allows their particular type of business access to the consumer. To allow competitors specific authority to sue each other would dramatically increase the amount of unnecessary RESPA litigation, increase providers’ compliance burden, and stifle technology and other innovations that could be beneficial to home buyers and owners.

RESPRO® also recommends that Congress add a "knowing and willful" requirement to the imposition of criminal penalties under Section 8 of RESPA, similar to that required under TILA. Currently, Section 8 of RESPA imposes criminal penalties of $10,000 or one year imprisonment, or both, even if the violation is not knowing or wilful. These criminal penalties are in addition to (1) civil penalties of 3 times the amount of any charge paid for the settlement service involved in the transaction; and (2) substantial cash settlements and consumer refunds HUD has obtained in RESPA enforcement proceedings.

To date there have been few criminal penalties imposed in the history of either RESPA or TILA enforcement. However, the mere possibility of criminal penalties for RESPA violations that are unintentional — coupled with the uncertain and inconsistent regulatory environment at HUD — has significantly stifled the development of technology and other innovative services that could benefit the home buyer and home owner.

We therefore urge Congress to make RESPA criminal penalties consistent with those under TILA and the vast majority of criminal statutes by requiring that a violation be "knowing and wilful" before criminal penalties can be imposed.

We appreciate the opportunity to testify 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.

Attachment 2

Empirical Evidence of Consumer Benefits From Affiliated Businesses

Empirical studies have shown that affiliated settlement service providers have the capability of offering consumers reduced time, complexity, and costs associated with the purchase or refinancing of a home through the purchase of multiple settlement services at one time and place.

1. 1992 Anton Financial Economics, Inc. Study of Minneapolis-St. Paul Marketplace: In 1992, Anton Financial Economics, Inc. compared the prices for a "basket" of title services offered by affiliated and unaffiliated providers in the Minneapolis-St. Paul marketplace by sampling 16 firms that operated in 77 offices in the Twin Cities area (70% of the offices in the marketplace). It concluded that:

2. 1994 Lexecon, Inc. Study: In 1994, RESPRO® commissioned a study by Lexecon, Inc., a national economic consulting firm specializing in the application of economic data to legal and regulatory debates, which analyzed the title and closing costs of over 1000 home sales transactions — affiliated and unaffiliated — during a one-week period in September 1994. The transactions occurred in seven states — Florida, Minnesota, Tennessee, Wisconsin, Mississippi, Pennsylvania and California. The study concluded that title/closing services for transactions involving affiliated companies not only are competitive with those provided by unaffiliated title companies, but actually result in a 2% savings for consumers.

3. 1996 HUD Economic Analysis: In a 1996 Economic Analysis accompanying a June 7, 1996 final RESPA regulation governing affiliated businesses, HUD recognized the Lexecon, Inc. study and concluded that the results may underestimate the cost benefits of affiliated companies:

"HUD is aware of only one study that compares prices of settlement services provided by affiliated and non-affiliated firms. RESPRO®, an association of controlled businesses, commissioned a study by an independent contractor, Lexecon, Inc...[T]he study may be] biased in favor of the unaffiliated firms. Therefore, the [study] results might suggest that affiliated firms on average have lower prices than their competitors (emphasis added)."

HUD concluded in its 1996 Economic Analysis that:

"[T]here is some reason to expect that referrals among affiliated firms may reduce costs to businesses and consumers. Business may benefit from lower marketing costs and the ability to share information on the home purchase or refinancing among settlement service providers. In the long run, any cost savings should be passed on to consumers in most cases. Consumers may benefit additionally from reduced shopping time and related hassles."

ATTACHMENT 3

RESPRO® RECOMMENDATIONS
FOR RESPA’S AFFILIATED BUSINESS DISCLOSURE

Congress amended RESPA in 1983 to require that affiliated settlement service providers disclose to consumers who are referred to an affiliate the nature of the financial relationship with the affiliate to which the consumer is being referred and a range of charges for the referred service.

RESPRO® believes that a consumer has the right to know if a person who refers settlement services has a financial relationship with a provider to which the consumer is referred. However, we also believe that this "affiliated business arrangement" disclosure can more effectively achieve its fundamental objective if the following changes are made:

I. Regulatory Changes

4. Eliminate the disclosure of specific percentages of affiliates. In 1996, HUD revised RESPA regulations to require for the first time that providers disclose the specific percentage of ownership in any affiliated provider to which the consumer is being transferred.

We believe that this additional requirement is irrelevant to the consumer and detracts from the disclosure’s fundamental purpose. It makes no difference no consumers whether they are being referred to a wholly-owned subsidiary, a third tier subsidiary, a joint venture partnership or an unity in which the referring party or Vice President has an § 1/2% ownership interest. What matters to the consumer is that there is some type of affiliate relationship and that the referring party might benefit from the referral. Additional information distracts the consumer’s focus from this more essential disclosure.

5. Eliminate the listing of the property. HUD’s currently required "affiliated business arrangement" disclosure also requires specific information regarding the property that is the subject of the transaction.

This information is unrelated to the purpose of the "affiliated business arrangement" disclosure, and can therefore detract from its message. In addition, many referrals are made before the consumer has even decided what house or property they are purchasing.

6. Modify the capitalized required use language. Currently, the "affiliated business arrangement" disclosure form provides that an affiliated provider states, "YOU ARE FREE TO SHOP AROUND TO DETERMINE THAT YOU ARE RECEIVING THE BEST SERVICES AND THE BEST RATE FOR THESE SERVICES." This creates an impression that the provider is warranting to the consumer that he/she will in fact receive "the best rate" and "the best services", when this may not in fact be the provider’s representation. Perhaps this provider is instead informing the consumer that he/she are receiving rates and/or service that meet a particular need. RESPRO® believes that this language should be modified to read, "YOU ARE FREE TO SHOP AROUND TO DETERMINE WHETHER YOU ARE RECEIVING THE LEVEL OF SERVICE AND RATES THAT YOU DESIRE FOR THESE SERVICES."

4. Eliminate the written acknowledgment requirement. HUD recently revised the "affiliated business arrangement" disclosure form to require a written acknowledgment of receipt. This acknowledgment is not statutorily required. In fact, when Congress recently modified RESPA to allow affiliated providers to obtain the written acknowledgment when offering services by telephone, mail, and electronic means, it used the terminology "any required written receipt of such disclosure", thereby implying that it is up to HUD to require the written acknowledgment.

While many affiliated providers have chosen to request a written acknowledgment on the "affiliated business arrangement" disclosures form, it is required for any other federally-required home loan disclosure form. In general, TILA disclosures for not have to be acknowledged in writing. This receipt of GFE does not have to be acknowledged in writing. And until recently, affiliated business disclosure forms did not have to be acknowledged in writing, RESPA is not aware of any documented problems associated with the "affiliated business arrangement" disclosure form that justifies this additional requirement.

7. Clarify that the format and language in HUD’s "Affiliated Business Arrangement Statement" can vary as long as the essential disclosures are made. Many providers desire to place additional language in their "affiliated business arrangement" disclosure, such as a description of the services they are referring or a disclosure of employee compensation or conflicts. RESPA recommends that HUD clarify that its :affiliated Business Arrangement Statement" is a model and not a script that must be precisely followed, as long as the disclosure’s essential message is prominent. If there is certain language their needs to be capitalized or which must be recited, then HUD should clearly indicate this.

8. Eliminate the requirement that the disclosure be provided as a separate sheet of paper. Some providers would like to consolidate the "affiliated business arrangement" disclosure in a booklet or pamphlet with other related disclosures. So long as the affiliated business disclosure remains clear and conspicuous, the consumer may benefit from receiving in conjunction with other information that is provided at the same time.

II. Statutory Changes

1. Eliminate the need to estimate a range of charges for the service being referred. While no doubt well motivated, this requirement has two fundamental flaws.

First, it is of little practical help to the consumer. If the referred services is a mortgage, the most important piece of information - the interest rate of the loan ---is not even required to be disclosed. The origination and discount points that are required to be disclosed generally vary inversely with the mortgage’s interest rate. Thus, if a consumer is paying low origination and discount points, it is probably because the interest rate on the loan is higher than market. For other referred settlement services, it is extremely difficult to provide an effective or meaningful range of charges. For example, homeowners insurance depends upon a myriad of factors (location, material or house [brick or frame], type of insurance desired [replacement cost or not], level of deductible, etc.) that for other purposes require a rate manual. Disclosure of the range of charges on an affiliated business disclosure form is confusing and, once again, detracts from the disclosure’s essential information

Second, this information is largely redundant with the GFE that the consumer obtains as soon as a loan application is made. Because the same, if not better, information is provided as part of the GFE, this requirement should be eliminated from the "affiliated business arrangement" disclosure form.