Mr. Chairman and Members of the Committee, I am Ron McCord, CMB, President of American Mortgage and Investment Company, headquartered in Oklahoma City, Oklahoma. I am currently also serving as President of the Mortgage Bankers Association of America (MBA). With me, today, are Mike Ferrell, Senior Staff Vice President and Legislative Counsel, Karen Kapen, Associate Director and Counsel, and Paul Mondor, Director, Regulatory Compliance.
MBA appreciates the opportunity to appear before this Subcommittee today and comment on the Real Estate Settlement Procedures Act (RESPA) and the Truth in Lending Act (TILA). We commend you, Mr. Chairman, for holding these hearings and for your continued leadership in this area. We are committed to continuing to work with you and the Committee to seek ways to keep the costs of homeownership at reasonable and affordable levels for the country's homebuyers, and to keep the homebuying process as simple and as understandable as possible.
Mr. Chairman, we come before you today to declare the seemingly obvious: the business of buying, selling, and financing a home is in the midst of a dramatic transition. With change has come the realization that the current legal and regulatory structure governing home purchases, as well as the financing of the homebuying transaction, is in great need of modernization in order to keep pace with the marketplace and reduce confusion. MBA has not come to this decision lightly or without concern or consideration for the members of our industry or the consumers they serve. But it is a simple fact that the current regulatory system is broken.
For much too long, individuals and groups have come to Congress in search of limited or short-term relief from the burdens of the statutes. In addition, some have petitioned Congress to modify RESPA and TILA in ways that would sanction otherwise prohibited business practices. These initiatives, while well intentioned, have created a patchwork of rules and regulations designed to inform and protect consumers, prohibit certain practices, or provide guidelines for the industry to follow. In reality, what has resulted is an avalanche of forms and disclosures that have numbed rather than enlightened consumers; burdened lenders and settlement service providers; and finally, added costs to an already costly process. We must find a better way.
In finding a better way, our paramount concern must remain focused on the consumer. Unless realtors, lenders, and settlement service providers can assure homebuyers that any changes will not disadvantage them, the process of reform is doomed to failure. Consumers must have the confidence and security of knowing that the proposed reform of current laws will not diminish the safeguards they have come to count on.
In our view, reform of RESPA and TILA should be a two-step process involving short- and long-range objectives. The short-term goals are intended to address two specific legal and regulatory matters that may impede and potentially preclude agreement on any comprehensive, long-term reform of RESPA/TILA that will ultimately benefit consumers and the marketplace.
In short, MBA urges Congress as the first step to:
MBA believes Congressional intervention is necessary and, indeed, urgent at this time. The old RESPA rules no longer apply to the changing marketplace, and new rules cannot be enacted fast enough to make a difference. Several class-action lawsuits involving yield spread premiums have motions for class certification pending. Regulations affecting industry-wide compensation plans are set to take effect the first of next month. Thus, passage of this three-part package would effectively declare a temporary time-out while all interested parties concentrate on the second step: meaningful long-term comprehensive reform of the mortgage components of RESPA and TILA to bring them up to date with the realities of the homebuying process.
Each initiative is discussed in greater detail below.
MBA believes that the current regulatory framework affecting the homebuying process is dysfunctional. Over the course of many years, one consumer protection statute after another has been layered upon the home purchase transaction. Although many of the statutes have admirable purposes and, taken alone, have good consequences, the effect of this layering has been confusion, not clarity. Every day, participants in the homebuying process face a confusing and complex set of rules. Likewise, lenders face similar problems that make compliance unnecessarily costly and burdensome. Consumers ultimately bear the brunt of these increased costs.
Recently, MBA commissioned an independent, consumer study to determine how borrowers regard the overall settlement process and the lending information they receive during settlement: In other words, whether they understand the information they are provided by law or regulation; whether they find it useful; and, if they find it to be timely. Yankelovich Partners, in telephone interviews, conducted the study with 500 consumers who had either financed or refinanced a home during the previous year. The study revealed that, while most homebuyers report receiving many types of information relative to the home lending process that are helpful, more than four out of ten borrowers indicated they get too much information to comprehend.
Simplicity is the key. MBA estimates that some three million households a year would benefit from clearer, more concise information on the home lending process. The survey shows that consumers want straight-forward, comprehensible information. In addition, they want less paperwork, documents that are written in plain English, and a thorough explanation of all fees. Consumers would find it helpful to receive all mandatory documents related to the loan process as early in the application process as possible. For example, nearly all borrowers in the study reacted positively when asked whether they were interested in receiving a firm cost commitment prior to the start of the application process. Ninety-eight percent reacted very positively when asked if they would like to receive a detailed statement of all mortgage costs prior to applying for a loan. In addition, most expressed a preference for receiving all information documents associated with their loan before the loan process actually begins. I should note, we are not sure this is fully feasible, but the survey results clearly document the direction we should take.
The survey demonstrates just some of the issues that must be addressed to respond to consumers' desires. Accordingly, Congress and the industry need time to address the myriad of problems that currently exist. Further, the current confusion experienced by borrowers, coupled with the regulatory and legal challenges facing the industry, demonstrate the clear need for all parties to resist the natural tendency or practice of piecemeal legislative and regulatory solutions. That approach will only add to the confusion. Rather, we must be committed to a process that will produce broad-based comprehensive reform of the legislation governing the mortgage transaction.
The means by which we achieve actual reform or reach consensus is equally important. That is why MBA has suggested that Congress direct the Federal Reserve Board (Board) and HUD to act as conveners of a forum through which all interested parties may engage in a rational, honest discourse and tasked with the responsibility of recommending a comprehensive re-write of RESPA and TILA as they apply to the home purchase and finance transaction. We believe that these Federal agencies are uniquely situated and qualified to undertake this process.
As you may know, as many as ten to twenty different interest groups and trade associations now have task forces at work developing recommendations and policy positions on comprehensive RESPA/TILA reform. The advantage of the Board and HUD sponsoring the dialogue among these groups would be two-fold: First, and foremost, the convener(s) must be impartial, knowledgeable, competent, and credible on Capitol Hill. We believe these qualities describe the agencies and virtually no other interested party. Second, the convening of a forum by the agencies would establish it as the definitive reform initiative and impose a certain discipline on the process, whereby all participants would be more likely to work together.
If there is to be an agency-sponsored forum, we believe it is best that it be mandated by Congress. It would add to thecredibility of the process that it take place at the direction of Congress, given that its recommendations will have to be enacted by Congress. Further, we anticipate that the agencies would prefer an express mandate from Congress. The existing mandate for review and recommendation mandated by Congress last year is too narrow. It technically calls for review of RESPA/TILA disclosures only, and recommendations on simplifying and streamlining them. The need is far broader, and Congress should thus explicitly recognize that expansion.
MBA is ready to work with you, Mr. Chairman, and others in the Congress, and throughout the housing sector, to overhaul and modernize the Federal laws that govern the purchase, sale, and financing of a home. There is no doubt that consumers should be able to understand the information that is being disclosed, and the industry should be able to comply easily with the requirements imposed by those statutes, at reasonable cost and without the constant threat of litigation. Thus, reform should result not only in the availability of adequate and reliable information that will allow consumers to make informed decisions today and tomorrow, but should also provide clear and concise rules for compliance by lenders.
Reform also should encourage broad-based competition. New regulations should be simple and effective, but be flexible enough to allow the tailoring of market-based innovation to meet consumers' specific needs. Congress needs to wipe the slate clean and begin again to construct a legal and regulatory environment that will protect the homebuying public as well as facilitate competition in the mortgage marketplace.
As crucial as overall reform is, there exist two immediate problems that are symptomatic of the current legal and regulatory environment and which need to be addressed in order for many industry participants to concentrate on, and be committed to, the process of comprehensive reform. These issues involve lender-paid broker compensation, or yield-spread premiums, and employer-employee compensation programs.
MBA believes a moratorium on class-action lawsuits involving yield spread premiums is appropriate and necessary. Since early this year, the mortgage banking industry has been subjected to an unprecedented number of class action lawsuits initiated by a small number of avaricious plaintiffs' lawyers. The cases rest on the theory that compensation paid by wholesale lenders to mortgage brokers--a business practice that has been commonplace for years--violates Section 8 of RESPA. Despite this flimsy legal theory, those cases, of which there are now at least 50, have wreaked havoc with the industry. And despite the industry's best efforts to comply with the letter and spirit of RESPA, we now find ourselves in this precarious legal situation because our principal regulator, HUD, has turned aside our vigorous pleas to provide clear and decisive guidance in this matter.
Notwithstanding its current silence, HUD repeatedly has given tacit approval to so-called servicing released and yield spread premiums and has, through various opinion letters, testimony, consumer brochures, and the like, allowed the widespread impression to continue unabated that the practice, if not per se lawful, certainly is not per se unlawful. Here are a few examples:
"Similarly, other compensation paid by the lender to the mortgage broker, such as
servicing release premiums or yield spread premiums, or any other type of payment
or premium tied to the origination of the loan should also be disclosed."
"12.Facts. A is a mortgage broker who provides origination services to submit a loan to a Lender for approval. The mortgage broker charged the borrower a uniform fee for the total origination services, as well as a direct up-front charge for reimbursement of credit reporting, appraisal services or similar charges.
Comment. The mortgage broker's fee must be itemized in the Good Faith Estimate
and on the HUD-1 Settlement Statement. Other charges which are paid for by the
borrower and paid in advance are listed as P.O.C. on the HUD-1 Settlement
Statement, and reflect the actual provider charge for such services. Also, any other
fee or payment received by the mortgage broker from either the lender or borrower
arising from the initial funding transaction, including a servicing release premium
or yield spread premium, is to be noted on the Good Faith Estimate and listed in
the 800 series of the HUD-1 Settlement Statement."
"Mortgage Brokers. Some companies, known as "mortgage brokers" offer to find you a mortgage lender willing to make you a loan. A mortgage broker may operate as an independent business and may not be operating as your "agent" or representative. Your mortgage broker may be paid by the lender, you as the borrower, or both. You may wish to ask about the fees that the mortgage broker will receive for its services."
The only logical inference for the industry to draw from the limited advice HUD has given is that it interprets RESPA as allowing lender-paid broker compensation. It is now regrettable that HUD has failed to take responsibility to declare in unequivocal terms the intent of its policy. Thus, while HUD fiddles, the industry is being scorched by the high costs of defending against these lawsuits, not a single one of which has resulted in a final resolution adverse to the mortgage lending industry. Had HUD been willing to state its interpretation of the law clearly and in a timely fashion for the sake of all concerned--consumers, industry, and federal courts being presented with tortured interpretations of Section 8--we would not be here today asking Congress for help.
Mr. Chairman, appended to my statement is a summary or status report on the lawsuits filed to date that are nearing class certification. One of those cases, Mentecki v. Saxon Mortgage Inc., et al (Myers v. Crestar Mortgage Corp.), has a class certification hearing scheduled for late this week, on July 11. The time is ripe for action, and although the moratorium is an unusual approach, such action does have precedent. In 1995, Congress enacted legislation that imposed a moratorium on the certification of class-actions lawsuits involving the TILA. The suits were based upon an ambiguity in the definition and disclosure of finance charges. The Act was then followed by legislation that permanently resolved the dispute and provided relief for mortgage lenders from potentially devastating costs of their defenses. Although the facts of the cases in 1995 differ from the facts of the pending cases, enactment of a moratorium has been used in exceptional circumstances. The recent spate of lawsuits involving the yield-spread premium issue and the potential for extraordinary, yet unnecessary, costs creates just such an exceptional circumstance. Relief is absolutely necessary to enable Congress and the regulators to examine this issue thoroughly and to enact a comprehensive and permanent solution that addresses this and a host of other RESPA/TILA issues. All parties must be free from externally imposed pressures while undertaking the reform initiative. There needs to be a "time-out" to permit calm, dispassionate, uncoerced discussion of the issues on all sides. A moratorium is needed to accomplish this objective.
The second issue involves employer-employee compensation. The current moratorium on HUD's employer-employee compensation rules is due to expire on July 31, 1997. MBA believes that an extension of this moratorium also is in order.
On June 7, 1996, HUD published a rule in the Federal Register that amended Regulation X under RESPA to provide an additional exemption for payments by employers to their own employees for referral activities. Among other things, the rule allows employers to pay fees to certain employees of their own or affiliated organizations for the referral of settlement services. The employees must be ones who do not provide settlement services in any transaction, and the fees may be paid to a "managerial employee" who "does not routinely deal directly with consumers " This amendment, however, never took effect because Congress enacted a moratorium prohibiting HUD from effectuating these changes. That moratorium expires on July 31, 1997.
The rule, should it take effect, will have a number of deleterious effects. First, the ambiguity of the rule is likely to cause confusion for companies with affiliate relationships who are trying to offer compensation plans that comply with these new requirements. Such confusion has in the past invited litigation and provided little, if any, identifiable benefit to consumers. Second, the rule would prohibit a wide variety of bona fide marketing practices that involve modest compensation for referrals within families of firms that provide real estate settlement services. In most instances, these arrangements are highly efficient and reduce the overall costs of buying a home. Third, if the rule is implemented and later changed in the course of comprehensive reforms, the marketplace would be unduly disrupted. The imposition of a rule that may shortly be replaced is but another example of the need to wait for overall reform rather than making small, incremental changes. With the expiration date of the moratorium looming ahead, Congress needs to take action now to extend the moratorium and avoid the disruption and confusion that an interim change would create.
Mr. Chairman, on behalf of the MBA, I want to thank you for the opportunity to appear here today and to offer our perspective on this issue. MBA supports a comprehensive approach to RESPA and TILA reform, while simultaneously providing for a moratorium on class-action lawsuits involving lender-paid broker fees and extending the current moratorium on the employer-employee regulation. We are committed to working with you and the Members of the Committee to resolve the issue in a reasonable and atisfactory manner. We would be pleased to answer any questions you may have or to provide further information, as necessary, for the record.
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