Thank you Mr. Chairmen and members of the Committee for the opportunity to discuss with you the Real Estate Settlement Procedures Act (RESPA) and the prospects for fundamental statutory reform. I commend you for convening these timely hearings.
For the last year, the Department of Housing and Urban Development (HUD) has been encouraging a reexamination of the statutory framework for regulation of the home mortgage finance process. But let me be clear. In doing so, we reaffirm our commitment to the consumer protection goals of RESPA and the Truth in Lending Act (TILA) -- meaningful disclosure and protection against unnecessarily high costs.
Purchasing a home remains the single largest and most complex financial transaction most consumers make in their lifetime. Moreover, as we work to achieve the President's goal of expanding access to homeownership to record levels, we must reach traditionally underserved homebuyers for whom the process is especially daunting. New homebuyers may be, for example, the first in their family to own their own home. We must take every reasonable measure to make the homebuying and homeownership experience for these families -- and every family -- a rewarding and successful one.
Similarly, as the market explodes with innovative products that let homeowners take advantage of equity in their homes, elderly and unsophisticated homeowners become more vulnerable to predators who wish to put the homeowner's equity to work for their own, not the homeowner's, benefit. In one such recent case, the Senate acted quickly to help HUD deal with so-called financial planning firms exploiting elderly homeowners in obtaining HUD's HECM reverse mortgage. We cannot allow such abuses to happen.
The RESPA statute, although not perfect, has been effective in controlling certain abusive and unreasonable practices that existed when the act was first passed. The primary goal of any legislative reform, therefore, must be providing more effective tools for consumer protection. I believe, however, that enhancing consumer protection is not necessarily inconsistent with other objectives that have been advanced. There are many aspects of the current system that could be improved to the benefit of consumers and industry alike. I will detail below some areas where improvement should be sought.
But first, I would like to share one observation that I suspect you know better than I do. Reform will not be possible without consensus on reform's major elements. The 23-year history of Congressional and administration efforts to tackle RESPA problems teach us that battles -- whether between consumers and industry or within industry itself -- lead inevitably to stalemate.
For this reason, I have been pleased to see the early cooperation between industry and consumer advocates in approaching reform. I see signs that all parties are truly listening to one another's concerns and learning from one another -- prerequisites if consensus is to be reached. HUD will continue to encourage And foster this communication and make sure that consumer advocates always have a seat at the table.
No one solution, of course, will fully satisfy all affected parties. Compromise is the art of the possible. If each interest abandons the negotiating table to lobby the Administration or Congress for their ideal solution, we will see no progress and the recriminations of the last 23 years will continue.
For this reason, we have put all interested parties on notice that, when any proposal is put before us, we will respond: "What do the others think?" and "How can your proposal help to meet the concerns of others?" I urge you to do the same.
of course, like the Congress itself, HUD cannot relinquish its duty to exercise independent judgement about the public interest. So, consensus or not, we will provide you with our recommendations at the end of the joint HUD-Federal Reserve process described in Governor Meyer's testimony.
Governor Meyer's written testimony also details the efforts of HUD and the Fed to fulfil Congress, directive to streamline RESPA and TILA disclosures and the reasons why the agencies concluded that further streamlining of disclosures required legislative change. I concur. There is no need to repeat those conclusions here.
I would like to add, however, our appreciation for the productive working relationship between the Board and the Department. As Governor Meyer details, HUD and the Fed staffs have worked together for years to coordinate Regulations X and Z. I am particularly grateful for the cooperation and mutually beneficial support we have shared in this most recent effort and look forward to its continuation as we work toward legislative recommendations for your consideration next year.
Secretary Cuomo has established guiding principles for the Department's regulatory efforts under RESPA. These principles are equally applicable to any discussion of fundamental statutory reform. They will serve as a litmus test against which we will measure any proposal.
As I mentioned, the goal of legislative reform must be to provide more effective tools for consumer protection in today's marketplace -- a marketplace radically different than the one that existed when RESPA and TILA were first written. As we develop reform recommendations over the next six months, we will focus on areas for improvement in today's regulatory structure. Reviewing the testimony from last week, I see many of these items mentioned by the affected parties.
Disclosure is intended to help consumers understand the services being offered so-that they will be effective shoppers. With well-informed consumers, competition will work to reward the lowest-priced and highest-quality service. But the complexity of disclosure may prevent it from working to foster competition. Instead, some potential homebuyers may be deterred by the complexity and others may rely too heavily on professionals to lead them through the maze, presenting opportunities for abuse.
I agree with Governor Meyer's assessment that most of the paperwork in a typical closing does not flow from RESPA or TILA. We can only tackle what we control, but there is room for improvement.
The TILA disclosures, Good Faith estimate, and HUD-1 Settlement Statement are the most important tools available to help a consumer comparison shop. Yet, as you heard last week, consumers may not fully understand the APR and Finance Charge information provided. To protect consumers, the RESPA disclosures detail all the ancillary fees and services purchased separately. But, as a result, the consumer has difficulty identifying and comparing the three things most important to them: (1) the cash they will need to close; (2) their expected monthly payment; and (3) the cost of their credit (by interest rate or other measure).
While many consumers do effectively shop for the best rate and points on their mortgage, rarely
do they shop effectively for .other services required to complete the transaction, relying instead on the
recommendations of other real estate or mortgage professionals. Too few of these costs and services are
subject to effective competitive forces. And the costs add up.
RESPA and TILA disclosures are mailed three business days after loan application, by which time the consumer has selected a product and often paid a non-refundable application fee. Earlier information is needed to foster effective shopping. While there is a tradeoff between the timing and accuracy of information, the barriers to early delivery of disclosures have largely been erased by technology.
At closing, consumers can be faced with actual costs varying significantly from those initially
disclosed. As information is verified about the consumer's credit capacity and collateral, there may be
bona fide reasons why costs may change. Similarly, when borrowers are prequalified, the transaction
may vary from what was assumed for qualification. On the other hand, all too often, junk fees first
appear at closing when the consumer has little opportunity to object. Ideally, there should be less room
to change estimates without good reason. In any event, some mechanism is needed to ensure that when
expected costs change, consumers understand those changes and have meaningful choices.
RESPA's applicability to some business practices can be unclear. For example, the 1983 amendments authorizing controlled business arrangements left in place language prohibiting referral fees. As a result, HUD was left with competing statutory goals when some argued the referral fee prohibition prevented the effective use of controlled business arrangements that Congress had expressly authorized. Similarly, the Section 8(c)(2) test for permissible compensation can be problematic. On the one hand the statute expressly permits payment reasonably related to the value of "goods or facilities actually furnished or services actually performed." On the other hand, the legislative history says HUD should not set prices for goods or facilities or services, making it difficult to identify their value for purposes of applying this test to a potential referral fee.
For any statute, there are times where its applicability to a given circumstance is clear on its face and other times when regulation or interpretation by a regulator is required. With well crafted statutes, the former is more often the case than the latter; but, with RESPA, we find ourselves asked to provide guidance on its application to virtually every new business plan in the industry.
For consumers and industry alike, the lack of clarity presents problems. Enforcement is difficult
when it is unclear if the practice is prohibited. Meanwhile, industry participants seeking to comply
cannot figure out whether their practices will survive scrutiny. And in a competitive marketplace, those
who err on the side of caution must compete with those who take a more aggressive view of the statute's
meaning. The uneven playing field that results prevents competition from working to lower price and
improve service for consumers. Meaningful reform would provide a clear line between permitted and
Most participants in the settlement process try to be honest, serve their customers' interests, and
comply with the law. But there will always be those who do not. The agencies and advocates for
consumers need to have effective tools to stop abusive practices. At last week's hearing, a consumer
advocate acknowledged that they use TILA's right of recision and RESPA's Section 8 to target abusive
practices, even where the protection was not designed to address the abuse they find. Reform proposals
must identify and define what constitutes abuse and then design tailored enforcement tools to address
those bad acts.
Careful prescriptions against abuse will serve market participants well too, not only to define
carefully what is and is not prohibited, but also to improve public perceptions about the industry.
When RESPA was first enacted, the settlement service industry was different than it is today. We
are seeing both consolidation (e.g., single firms owning affiliates providing different services) and
specialization (e.g., wholesale lenders relying on retail mortgage brokers to deliver product).
Innovations we cannot anticipate today will be upon us before the ink is dry on new legislation. A new
regulatory structure must be flexible enough to deal with constant market change without rewriting
regulations or statutes.
Affiliated businesses offer the promise of greater efficiency and convenience for the consumer, as well as marketing advantage to the provider. In a truly competitive market, affiliated businesses would survive only if this promise holds true. However, the current law gives advantage to affiliated businesses, allowing them to benefit from referrals of business - a practice prohibited for unaffiliated firms. We cannot know whether the extraordinary growth of affiliated business arrangements in recent years is driven by efficiency of organization (which lowers consumer costs) or the benefits of paying referral fees (which could inflate consumer costs). Any future regulatory scheme should create a level playing field on which market forces -- not regulatory preferences -- determines the most efficient form of organization.
The controversy concerning lender-paid mortgage broker fees illustrates a number of areas that could be improved in the current regulatory system. Consumers do not understand their relationship with the mortgage broker, leaving them vulnerable to adverse steering. Information disclosed about lender-paid mortgage broker fees under HM regulations is difficult to understand and comes too late in the process to help consumers make an informed choice. Lenders struggle with uncertainty about permitted and prohibited behavior.
Although last year's negotiated rulemaking was not ultimately successful at crafting a consensus on this difficult issue, it was helpful in illuminating the problems and forging some common ground. HUD will soon send to the Congress for 15 day review a proposed rule that builds on the work of the negotiated rulemaking committee and satisfies the principles that Secretary Cuomo has established.
The proposed rule would give consumers who want to use a mortgage broker meaningful disclosure. The disclosure would provide consumers with the necessary tools to understand the relationship between the mortgage broker and the consumer and the mortgage broker's compensation.
The proposed rule will be delivered soon. The Secretary has asked us to review the proposed rule one more time to ensure it is fully consistent with the principles he set forth. In addition, we are consulting to ensure that we understand the legitimate objectives of all parties so that the rule can address them, to the extent feasible.
We hope that the industry and consumer groups will come together to support the proposed rule when announced. We view it as a great opportunity for industry and consumer advocates to come together to clarify the services offered by a newly emerging business and strengthen the reputation of an industry that can benefit consumers. However, it will be only a proposed rule. We expect that it will be much improved before final implementation based on comments received from all parties -- comments we expressly solicit with a series of questions in the preamble.
Finally, you have asked me to comment on the status of the Department's regulations concerning employee compensation. As you know, last June, HUD published a final rule concerning referral payments for employees in affiliated businesses. That rule would have eliminated a broad exemption, in place since 1992, that allows businesses to pay their employees for referring consumers to affiliated settlement service providers. In its place, HUD proposed to put two more narrow exemptions for employee referral payments to managers and to those not providing settlement services -- circumstances where we believed the harm from adverse steering of consumers was less great.
In the Economic Growth and Paperwork Reduction Act of 1996, Congress directed HUD to delay the effective date of that rule until at least July 31, 1997 and to provide 90 days notice before such rule were to go into effect. On June 9th, HUD published a proposed rule suggesting a third exemption that, if we decide after July 31st to publish the 1996 final rule, would go into effect along with the other two exemptions. This third exemption would be for payments to employees for referrals to affiliates who provide the same type of service (e.g., from lender to lender), another case where the harm of adverse steering is small. This exemption would address concerns of large financial institutions that, for reasons having to do with corporate and bank regulatory concerns, offer different products from different subsidiaries. The comment period on this third proposed exemption just ended last week and HUD is reviewing the comments received.
After the July 31st date passes, HUD has reviewed the comments on the proposed like-provider exemption, and we know more about the prospects for fundamental statutory reform from the July 30th HUD-Federal Reserve forum, HUD will decide whether to delay further implementation of the employee referral compensation regulations or to publish a notice of when they will become effective, no less than 90 days thereafter.
Mr. Chairmen, on behalf of Secretary Cuomo, I want to thank you for the opportunity to appear here today to offer HUD's perspective on the prospect of fundamental reform of RESPA. We remain cautiously optimistic that a reform proposal can be designed that will enhance consumer protection, while simultaneously providing greater industry certainty and addressing other weaknesses in today's regime. But the industry should make no mistake. The Secretary will stand firmly against any proposal that seeks to roll back consumer protections without replacing them with more effective tools to end abusive practices. I know that you share these goals and we look forward to working with you toward them.