On behalf of the NATIONAL ASSOCIATION OF REALTORS (NAR) I am pleased to submit comments regarding the Real Estate Settlement Procedures Act (RESPA) and the Truth in Lending Act (TILA) as well as our views on reforming the mortgage origination process. I am Russell K. Booth, president of NAR. I am a REALTOR from Salt Lake City, Utah.
Our Association is composed of nearly 720,000 real estate professionals involved in all aspects of the industry. Almost seven of ten real estate firms derive at least 50 percent of their income from residential brokerage. Successful real estate sales and marketing are inextricably linked to an informed real estate purchaser and seller. REALTORS provide valuable consumer service in working with sellers and purchasers to understand and negotiate the real estate transfer process, including the disclosures and paperwork associated with Truth in Lending and RESPA compliance. REALTORS depend on satisfied customers to build a reputation in the community and gain repeat business. We welcome the effort by the Senate Committee on Banking, Housing, and Urban Affairs and the Subcommittee on Financial Institutions and Consumer Credit interest in RESPA because of the impact that the law has on how REALTORS do business.
Over the years NAR has worked with the U. S. Department of Housing and Urban Development (HUD) principally to address our industry s concerns regarding RESPA disclosures and other regulations closely associated with mortgage settlement process. NAR, has worked with HUD on issues raised by rules promulgated in 1992 and, more recently in 1996. Essentially REALTORS focused on the regulation of certain business and corporate activities that are likely to be the subject of future legislative proposals.
THE NATIONAL ASSOCIATION OF REALTORS recently employed the consumer polling firm of Hart-Riehle-Hartwig Research, which interviewed a representative cross section of 808 home buyers nationwide who purchased their homes within the past two years. Survey respondents were asked about their experiences in the purchase of their home. Specifically, home buyers were asked about the difficulty of the home-buying process, their satisfaction with current settlement services and the closing process, the appeal of one-stop-shopping of settlement services, their understanding and satisfaction with disclosures in the real estate transaction, and their opinions on the practice of one-stop shopping. Key findings from this research include:
Bundling of goods and services is evident as a trend throughout the U.S. economy. Examples include supermarkets providing items once exclusively provided by specialized grocers, bakers, butchers, and fish mongers; department stores stocking goods previously only provided by dry goods and specialty clothing stores; and food courts replacing restaurants in malls and office complexes. Much of this trend is driven by technological change, and has resulted in significant cost savings to industries that have adapted to bundled products and services. Under competition, a significant portion of these savings ultimately are passed on to the consumer in the form of reduced cost or enhanced quality of service.
Similar cost advantages can be anticipated for real estate firms that can effectively bundle settlement services. These firms cost savings would include reduced marketing costs, reduced application costs (e.g., shared forms, electronic records), reduced personnel cost, and reduced office costs as duplicative procedures are eliminated. In the presence of competition, the reduction in the cost of providing these services will be passed on to the consumer. Equally important, the trend toward bundling of settlement services will provide ancillary benefits for the consumer. Consumers are being served with not only lower explicit costs, but also increased convenience.
The REALTORS and other settlement service providers do not want to be frozen out of this business trend by short sighted regulations based on either flawed interpretation of the respa statute or an outdated statute which many in the industry believe needs to be replaced with one that works and can adapt in today business environment.
A primary impediment to bundling of settlement services for residential real estate transactions is the Real Estate Settlement Procedures Act (RESPA) and its attendant regulatory provisions as mandated by the Department of Housing and Urban Development (HUD). RESPA severely restricts the interaction among the various types of providers of services ancillary to housing purchases. Starting from a mission of preventing kickbacks" the regulation has posed barriers to a variety of arrangements for business integration.
Bundling of services is a trend in a variety of U.S. industries. This bundling provides added convenience and value to consumers, through reduction of costs of search and related "transactions" costs. In industries in which bundling is available, bundled and unbundled providers typically compete by serving different niches of the market. In such industries, each segment takes advantage of its comparative advantage. Bundled providers emphasize convenience and standardization. Unbundled providers emphasize specialized services and options. In such markets there is no necessary relationship between the size of the provider and whether the service is bundled or unbundled; in particular, small firms frequently provide bundled services by purchasing components from other providers or by developing alliances with independent providers. Bundling also benefits the consumer by increasing the value of brand name and reputation, thereby easing consumer concen about the quality of services provided.
Academic research conducted on behalf of the NATIONAL ASSOCIATION OF REALTORS made certain conclusions from examining the experiences of bundling of services in other industries. This research found that bundling of services does not disproportionately favor large firms. As long as inter firm payments are permitted for the provision of ancillary services, the real estate service industry could mimic the experiences of other industries by having small firms also act as providers of bundled services. Computerized lending origination systems are an example of a service that enables small firms to compete with large firms in bundled services. The research conducted by Peter Colwell and Charles Kahn of the Department of Finance, University of Illinois is submitted for the record.
Regulatory restrictions however have impeded the introduction of inter-firm arrangements. The current rules clearly favor large firms over small firms, by permitting incentive payments within a firm in the context of an employer/employee relationships but creating confusion for small firms attempting to create bundled service arrangements. This is evident in recent HUD policy statements on "Sham Controlled Business Arrangements" and on office space rental have had the effect of reinforcing the regulatory bias in favor of large firms. Nonetheless, the correct solution is to relax restrictions on small firms, not to impose additional restrictions on large firms. There are two reasons for this: 1) Discouraging bundling by small firms has particularly damaging effects on smaller communities; and 2) Because of economies of scale to lobbying and legal innovation, large firms more quickly adjust to avoid the effects of regulatory changes, so that tightened restrictions are de facto more binding on small firms than on large.
The fundamental difficulty with RESPA is the attempt to distinguish between referral fees and other payments. This is the basis for regulatory frustration at HUD. The attempt to ban referral fees leads to a regulatory morass as more and more categories of activities become subject to scrutiny as disguised referral fees. An example of this is HUD s recent entry and exit in their attempts to regulate Computerized Loan Origination services, HUD issuance of a 1992 regulation permitting employee payments for marketing affiliated company services and now HUD s attempt to severely regulate such payments.
As long as the incentives of real estate firms are kept in line with those of customers, the use of referral fees and one-stop-shopping will increase quality of service, as the more knowledgeable provider of the bundled arrangement searches with less cost and greater accuracy from the best affiliates. The factors which serve to protect consumers in markets in which information is important are the value firms and professional associations place on their reputations, and the legal obligations of agency and fiduciary relationships. Bundling increases the value of a firm's brand name, thereby increasing the protection it provides consumers for quality services.
Even if the sections of RESPA prohibiting referral fees were eliminated, the legislation's disclosure provisions would still be of use to consumers in the market. The legislation can also play a useful role in standardizing procedures across firms and markets. Nonetheless, the soon- to-be-implemented restrictions on payments to employees for referrals will not prove beneficial to consumers. In order to allow consumers to take advantage of one-stop-shopping, RESPA's restrictions should be loosened, not tightened.
Business structures have changed and technology has become the driving force in how real estate settlement services are delivered. As our research shows, consumers want greater convenience savings which come with a more efficient mortgage delivery system. The technological changes and modern business structures taking place today are out-stripping current statutes and regulators attempts to create workable regulations. Attempts to harmonize and create regulations that can adapt over time have failed because statutory authority is unclear or nonexistent. It is time for the Congress to re-examine the original purpose of consumer statutes passed years before the computer age and business operations taking place on the World Wide Web and other business arrangements. These issues must be addressed soon to give diversified real estate firms, lenders and others in the settlement process certainty of the laws under which they must operate. Real estate settlement providers face an inordinately confusing, inconsistent, and complex set of rules that make compliance unnecessarily costly and burdensome. These increased costs for business operations, delays for consumers and legal fees are paid by the consumer and many times these increased costs prohibit citizens from becoming homeowners. This is opposite of the purposes of these consumer protection statutes.
NAR along with 20 other industry and consumer groups are part of the Mortgage Reform Working Group initiated by Representative Lazio (R-NY), Chairman of the House Subcommittee on Housing and Community Opportunity. The group was created to determine the problems surrounding the residential real estate transaction and attempt some solutions. We have made great progress at the two meetings held to date and have another scheduled later this month. We urge this subcommittee to call upon hud to delay implementation of their employer payments to employees regulations until these groups have been given enough time to find as much consensus as possible and turn their findings or proposed legislative replacements for respa and tila over to congress in order to enact major reforms in this area.
Of the 19 sections comprising the real estate settlement procedures act (RESPA), the core hindrance of one-stop-shopping is section 8 of respa. This section was originally designed to prohibit kickbacks between settlement service providers and a real estate agent and mortgage, title or other settlement providers. The consumer harm congress was attempting to address were undisclosed payments to real estate agents from mortgage, title recommending a particular provider. The congress was worried such fees would increase the closing costs on homes and wanted to prohibit or limit them.
In paraphrasing the statute, this section prohibits any person from giving, and any person accepting, any fee, kickback, or thing of value for referring any settlement service to any person. In effect, what the statute is doing is stifling the ability of the real estate industry to provide services that consumers want, while giving the consumer a stack of confusing and overwhelming papers.
NAR believes a good idea for consumer protection has actually become a hindrance for innovative and time savings services to be offered to the consumer -- this is the opposite of the original intent. These provisions place hud in the position of determining the proper amount of wages and prices a settlement service provider can charge or pay to employees or outside contractors. This places a chilling affect on innovative practices and investments. Many of our members have expressed their reluctance to make the investments needed to offer consumers new products and services for fear what was legal under the 1992 final resparule will be illegal if and hud when releases a new final rule. This has resulted from hud s statements, since early 1993, to industry that businesses should not rely on the 1992 final regulation.
We believe one source of reluctance many real estate firms are very careful not to go too far afield with new industry innovations for fear of hud criminal sanctions which, even if alleged and disproved, can tarnish the company s reputation in the community in which they operate. A risk few of our members will gamble their firms future on. RESPA should be decriminalized.
In 1992, after almost 10 years of thought and study, hud issued a final respa regulation dealing with section 8 that many in the industry could operate within because it relied on disclosures to consumers rather than government micro management to protect the consumer. The NATIONAL ASSOCIATION OF REALTORS applaud the 1992 regulation and have appealed to hud to keep the 1992 regulation in place until major respa and tila reform can take place. A reform which would not place hud in the position of regulating the wages and prices of real estate services but assisting consumers with disclosures at appropriate points during the home buying and lending process.
The realtors disagreement with HUD's current regulatory attempts are narrowly focused on hud s decision to regulate diversified real estate firms. These are real estate firms which are participating in more than one settlement service. For example, a real estate firm that owns all or part of a mortgage company. This type of ownership was specifically approved by the congress in 1983 when it created a safe harbor in which these firms could operate and develop free of government intervention provided certain guidelines were followed. This safe harbor has enabled some real estate firms to contemplate offering consumers one-stop-shopping.
HUD's 1996 final regulation on employer payments to employees affected large and small real estate firms very negatively and created such a regulatory maze that even the best washington attorneys were confused as to its application 95% of the time.
As an example, here is a quote from hud's may 9, 1997, regulation of employer payments to employees.
A more appropriate guideline is that a manager not routinely performing settlement services may still receive compensation under the exemption if either: (1) the total value of the services provided by the manager does not exceed 5 percent of the annual income to the office or unit for which the manager is responsible attributable to RESPA-covered transactions, or (2) the manager performs settlement services in no more than three RESPA-covered transactions.
This regulatory clarification as described by HUD created confusion among the real estate industry. This is an example of how regulatory interpretation can hinder the creation of one-stop shopping environments. The typical real estate firm would shun affiliated business arrangements rather than deal with the uncertainties of HUD s micro-management of the real estate office.
The part of hud's 1996 and 1997 employer compensation regulation the REALTORS are concerned with is narrowly directed at bonus or marketing payments from a real estate firm to their own bona fide employees. A business practice virtually every company in america uses to motivate their employees!!
Please note for the record that these are employees of the real estate firm, not the real estate agents who are independent contractors. Nar agrees the real estate agent cannot be compensated in any fashion for referring consumers to the services of the real estate broker -- they are independent contractors. This is an important distinction.
HUD does not have regulatory writers or staff to carry out and interpret their regulation for each and every variation of bonus payments a real estate firm devises for their managers and employees. This is an unacceptable intrusion into the compensation arrangements of real estate firms.
Keeping hud out of regulating the real estate office is not anti-consumer. The relationships between the real estate firm and the affiliated companies they own are disclosed to consumers and they are given clear notice that they are not required to use the services offered by the real estate firm and are free to shop elsewhere.
The NATIONAL ASSOCIATION OF REALTORS believes hud is outside the scope of their authority granted in the statute to regulate employee payments. Two memorandums concerning, among other items, employer payments to employees support this view. One from the united states justice department and one from the office of management and budget are submitted for the record. Nar believes these two documents point-out the faulty statutory basis for hud s attempt to regulate employer payments to employees in its june 7, 1996 and may 9, 1997 employer payments to employees regulations.
The Economic Growth and Regulatory Paperwork Reduction Act of 1996, directed the Federal Reserve Board and HUD to simplify and improve the home mortgage disclosures under TILA and RESPA and if necessary recommend changes to the statutes in order to carry out such harmonization. The NATIONAL ASSOCIATION OF REALTORS recently submitted comments to HUD and the Federal Reserve Board for simplification and harmonizing of the two statutes.
The mortgage lending process engenders considerable confusion for any number of potential home buyers. Lenders, real estate agents, closing agents, and attorneys can all relate experiences that underscore the need for simpler, more effective consumer disclosures. In numerous instances, however, the real estate agent is the individual that the borrowers uses for interpretation, explanation, and reassurance throughout the lending process. This includes all the forms, the timing, and the need for particular disclosures, associated information (formal and otherwise) that is intended to assure informed shopping for mortgage credit. While the extent that home buyers may rely on a real estate agent in this particular role may vary widely among locales and markets, this aspect a real estate agent's customer service makes REALTORS particularly interested in simplification and improvement in TILA and RESPA disclosures.
REALTORS support the intention of the Federal Reserve and HUD to eradicate the overlap between the RESPA and TILA disclosures, remove the conflicts of some provisions of these two laws and to devise, as much as possible, a single, simplified the disclosure format that meets the requirements of the law. Although a growing number of REALTORS may be mortgage brokers or even mortgage bankers, 69% of our members are residential real estate sales agents and brokers. Our concerns, then, are necessarily focused on the TILA and RESPA disclosures associated with purchase money mortgage transactions.
Under the Truth in Lending Act REALTORS run the risk of becoming subject to disclosure requirements when any discussion of annual percentage rate (APR) arises in a conversation with a potential home buyer. Pre-loan qualification discussions immediately come to mind in this situation, and in a more subtle situation the opportunities offered by electronic commerce may also require attention to TILA disclosures.
The familiar refrain that there is the stack of paper that home buyers must face is real. We believe that there are issues that influence this general concern. Principally, we believe that the role of state and local laws are contributing to the paper and must be addressed, or at least distinguished from the documentation and disclosures required by federal law. Our informal survey suggests that significant portion of this paper mound is generated by state and local disclosure requirements and loan closing practices. This situation does not negate the need for careful consideration of whether TILA and RESPA disclosures can be simplified and harmonized. Indeed, we would not want to see simplification and harmonization efforts result in more confusion based on a lack of information.
The NATIONAL ASSOCIATION OF REALTORS supports improving TILA disclosures. Our long standing policy on Truth In Lending disclosure stems from the advent of adjustable rate mortgages (ARMs) and the concentrated effort to develop fair, consistent and reliable disclosure regarding these instruments. Then, as now, our concern focused on providing information that permitted potential home buyers to effectively shop for the best mortgage lending option available, whether the financing vehicle was an ARM or a fixed-rate mortgage. It is our opinion that the home mortgage consuming public deserves the most timely, accurate, and fullest information to make well-informed mortgage credit choices.
Annual Percentage Rate, Other Fees Disclosure
Perhaps the most critical consumer information that can be disclosed under TILA is the cost of mortgage financing and the costs associated with actual real property transfer. These are material disclosures. A lender s failure to provide them places the lender in jeopardy for statutory damages. Yet based on actual experience many REALTORS question whether the appropriate disclosures are indeed being made. That is, does the information disclosed according to the statute actually assist the home buyer in making a mortgage choice?
The annual percentage rate (APR) is useful for advertisement comparison and shorthand quotes, but it does not represent the real cost of financing. It is a confusing computation that needs more clarity.
APR can be calculated in any number of differing methods, that require even more explanation upon close examination by a borrower. There should be clarity, however, that APR does not effect a borrower s monthly payment, because the monthly payment is a function of the interest rate and the length of the loan.
Anecdotal information from practicing real estate agents indicates that consumers do not find this number to be relevant since it is so different from the contract rate, which is what the consumer uses to price mortgage credit. The consumer becomes confused when the APR changes, or when the mortgage type (ARM versus fixed-rate mortgage) and rate and points of the different mortgage options vary, but there is no change in down payment or amount of credit requested. More to the point, however, the APR is an effective yield to the lender, including the effect of points or prepaid interest and any balances on there return due in the future. The APR is a subclass of effective yields, and is calculated without any prepayment assumptions. Home owners, however, do not as a group hold their mortgages to term.
Refinancing and the frictional measure of home owners changing residents significantly influence the duration of mortgage loans, as does the adverse effects of default and foreclosure. The average weighted life, a common duration measure of a pool of mortgages, of conforming conventional mortgages generally range from 9 to 11 years. Government-insured or government-guaranteed mortgages (FHA, FMHA, VA) duration generally ranges from 10 to 14 years, depending on the year of origination. Clearly, an effective yield measure, which incorporates the actual mortgage duration, is a truer cost measure than the APR. One commonly cited measure is the effective rate on conforming conventional mortgages published monthly by the Federal Housing Finance Board (FHFB), which uses 10 years as the prepayment assumption.
It is important to note that some prepayment assumption would be superior to no assumption if the goal is to provide the consumer with the true cost of mortgage financing. Coupled with the consumers poor understanding of what APR means implies that this disclosure requirement does not accomplish the purpose that was intended.
Timing of Disclosures
Clearly an issue in this regard is the matter of relevancy. Disclosures made early, but without any reliability, are, at the least, misleading. Yet there are items that can be disclosed earlier. The TILA disclosures at pre-application regarding home equity credit and ARMs could be combined with the RESPA Good Faith Estimate.
It seems likely also that legislation might be required to incentivize lender willingness to make it clear to borrowers whether the terms associated with a loan will hold through closing. The legislation could permit lenders to defer this guarantee, but there should be provision to advise borrowers on just how firmly this quotation of terms relied upon. In California, for example, there is the required declaration that quoted terms and costs will not exceed a specified amount or allowable tolerance. With that done, borrowers are better armed to perform the comparisons necessary to find the lending that best suits their needs. This concern takes on more seriousness when considering electronic loan applications and subsequent lock-ins.
The mortgage lending process has evolved to the point that it seems reasonable to consider reorganizing the disclosure booklets, and combining the special information booklet, the home-equity line of credit booklet, and adjustable rate mortgage booklet into one. This revision would reflect the range of mortgage products available as well as their comparative benefits and shortcomings in various economic and interest rate scenarios, while reinforcing the need for informed mortgage finance comparison. A combined booklet should provide information that can give the borrower a better sense of just what mortgage lending is all about, and should accomplish that objective with clear, layman s language.
Currently the adjustable rate booklet and disclosures are confusing. REALTORS report that this confusion is with regard to ARMs mortgage interest rates. Although some lending critics suggest that maintaining a historical profile of variable rate mortgage products should be discontinued, the likely result of such would be even more confusion. In fact, ARMs should be looked at from a historical perspective and should be compared to fixed-rate mortgage products.
Despite the various efforts at simplification and disclosure, the focus is on the paperwork, to date, not the evolving roles of the various industry participants. Moreover, mortgage financing is not nearly as segmented as it was a mere five years ago. That fact should be made and, where distinctions are less clear, this situation should be explained to mortgage credit consumers.
The adoption of common definitions under RESPA and TILA is a recent change in this direction. The next step could well be explaining the actual mortgage finance process as a continuum, with clear identification of the various roles that each component of the home mortgage finance industry plays. An important revision in this respect would be identifying the role of the mortgage broker in this process. There should be a glossary of terms used in mortgage lending and underwriting that incorporates such innovations as automated underwriting, credit scoring and mortgage scoring. Finally, the role of mortgage insurance should be better explained, and home buyers should be alerted to the prospect that under certain conditions mortgage insurance may be canceled once it is no longer needed.
The Board indicated that it would consider recommending to Congress whether the distinctions between purchase money mortgage and mortgage refinance transactions should continue. REALTORS would support removing the distinctions. Although home buyers are more sophisticated and knowledgeable about their mortgage finance options, they are still vulnerable to ill-advised mortgage finance options because information about mortgage products and options is so segmented. Aggressive mortgage lending can only confuse the situation more, where competition for loans in a particular interest rate environment or market segment becomes intense.
With all the foregoing stated, the NATIONAL ASSOCIATION OF REALTORS have
made the following recommendations to HUD.
HUD has publicly acknowledged that RESPA is in need of reform it is pointless to implement piecemeal changes to RESPA now, which would require the entire industry to modify their compensation structures and practices only to change them again in the next few years. The goal of home ownership is near and dear to every American, help us achieve the goal of providing services to allow them to obtain a home.
We believe that the congress, consumers, and real estate industry as well as a new respa statute would best be served if this body delays the employee compensation rule, halts the class action lawsuits and focuses its efforts on reforming the statutes surrounding the home mortgage process so that ultimately we can serve more homeowners.
Thank you for the opportunity to express our views.