Copyright 2002 eMediaMillWorks, Inc.
(f/k/a Federal
Document Clearing House, Inc.)
Federal Document Clearing House
Congressional Testimony
October 3, 2002 Thursday
SECTION: CAPITOL HILL HEARING TESTIMONY
LENGTH: 2750 words
COMMITTEE:
HOUSE FINANCIAL SERVICES
HEADLINE:
REAL ESTATE SETTLEMENT PROCEDURES OVERSIGHT
TESTIMONY-BY: MEL MARTINEZ, SECRETARY
AFFILIATION: U.S. DEPARTMENT OF HOUSING AND URBAN
DEVELOPMENT
BODY: STATEMENT OF MEL MARTINEZ
SECRETARY , U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
COMMITTEE
ON HOUSE FINANCIAL SERVICES
OCTOBER 3, 2002
Chairman Oxley,
Ranking Member LaFalce, Distinguished Members of the Committee:
Thank
you for the opportunity to join you this morning to discuss a major initiative
of the Bush Administration: our unprecedented effort to increase homeownership
by making the home financing process more transparent, simpler, and less costly.
We are committed to eliminating the homeownership gap that exists today
between the minority population and the rest of the country. The President has
set a national goal of creating 5.5 million new minority homeowners by the end
of this decade. Our comprehensive plan for achieving this combines new
initiatives and expanded programs with public/private partnerships focused on
making affordable homeownership an option for more families.
The
mortgage finance process and the costs of closing are major impediments to
homeownership. Every day, Americans enter into mortgage loans - the largest
financial obligation most families will undertake - without the clear and useful
information they receive with most any other major purchase. After agreeing to
the price of a house, too many families sit down at the settlement table and
discover unexpected fees that can add hundreds, if not thousands, of dollars to
the cost of their loan. And at that point, they have no viable options. On the
spot, the borrower is forced to make an impossible choice: either hand over the
extra cash and sign, or lose the house.
Americans spend approximately
$
50 billion each year on settlement costs. I would guess that
most of them do not know precisely how much their mortgage loan will cost them
until the eleventh hour, and have little or no opportunity to shop for
settlement services. As a result, many homebuyers find the settlement process to
be filled with mystery and frustration.
It is time to take the
uncertainty out of mortgage financing. This Administration is committed to
streamlining the process, so consumers can shop for mortgages and better
understand what will happen at the closing table. It is for these reasons that
HUD has proposed a major overhaul of the regulations governing the Real Estate
Settlement Procedures Act (RESPA).
RESPA REFORM
RESPA has been a
priority of mine since I came to HUD. Shortly after taking office, I was faced
with a major RESPA issue: the legality of yield spread premiums, the rate-based
lender payments to mortgage brokers. This issue came to a head following an
Eleventh Circuit U.S. Court of Appeals decision in Culpepper v. Irwin Mortgage
that called into question the legality of these payments under RESPA.
Because the decision potentially jeopardized the legitimate use of these
payments to lower upfront settlement costs, HUD issued a further clarification.
What became RESPA Policy Statement 2001-1 reiterated our view that as long as
the broker's compensation is for goods, facilities, or services, and the total
compensation is reasonable, yield spread premiums to the mortgage broker are
legal under RESPA.
At the same time, the Department recognized that
there were serious disclosure problems involving yield spread premiums. We noted
that less-scrupulous brokers often used yield spread premiums to generate
additional profits, placing unsuspecting borrowers in higher-rate loans without
their knowledge.
In the process of issuing the policy statement, I
committed HUD to establishing clearer disclosure rules for mortgage broker fees,
and to simplifying and improving the mortgage origination process for everyone
involved.
BASIS OF THE REFORM EFFORT
While RESPA, as adopted in
1974, was appropriate for the time, it has not sufficiently evolved and
accounted for the many dramatic changes in the lending and housing industries in
the past 28 years. The disclosure requirements under RESPA have not been
substantially revised in a decade.
And RESPA's promise of reduced
settlement costs has yet to be fulfilled. Reforming RESPA now is the right thing
to do. Too many Americans seeking to buy or refinance a home are not as well
informed as they need to be. The mortgage origination process is too
complicated, too costly, and too much of a mystery for many borrowers. The
experts told me that fixing this would be too difficult and too controversial,
and our efforts would probably not succeed. But this problem is too important to
ignore.
In June, the Administration unveiled a set of principles called
the Homebuyer Bill of Rights that will from now on guide the home settlement
process. These principles are consumer driven and rooted in the homebuyer's
right to know. They stand as the centerpiece of our efforts to empower would-be
homeowners - and existing homeowners looking to refinance - through access to
mortgage finance information.
The Homebuyer Bill of Rights specifies
that:
Homebuyers have the right to receive settlement cost information
early in the process, allowing them to shop for the mortgage product and
settlement services that best meet their needs;
Homebuyers have the
right to have the disclosed costs be as firm as possible, to avoid surprises at
settlement;
Homebuyers have the right to benefit from new products,
competition, and technological innovations that could lower settlement costs;
Homebuyers have the right to simplified disclosure and access to better
borrower education;
Homebuyers have the right to know they are protected
through vigorous RESPA enforcement and a level playing field for all industry
providers.
With these principles to guide us, we undertook a major
reform of the regulatory requirements under RESPA.
After months of
consultations with industry groups, consumer advocates, and federal agencies,
including an initial review by the Office of Management and Budget (OMB), HUD
published its reform proposal for public comment on July 29. The comment period
is open until October 28, 2002.
We believe that this proposal can reduce
closing costs by an average of $
700 per closing. That kind of
savings will allow many more Americans currently priced out of the homebuying
market to buy a home. The aggregate could result in a savings to consumers of as
much as $
8 billion. We also expect our proposal to promote
innovation in the marketplace and inspire greater public confidence in the
mortgage lending industry.
ELEMENTS OF THE PROPOSED RULE
The
Proposed Rule addresses the inadequacies of the existing regulatory scheme by:
- Fundamentally changing the way in which compensation to mortgage
brokers is disclosed to borrowers;
- Significantly improving HUD's Good
Faith Estimate (GFE) settlement cost disclosure; and
- Removing
regulatory barriers to allow the industry the option of offering guaranteed
packages of settlement services and mortgage loans to borrowers.
Broker
Fees
Specifically, the Proposed Rule significantly improves the
disclosure of payments to mortgage brokers, commonly known as yield spread
premiums.
Under current rules, such a payment is frequently reported on
the GFE - and later at closing on the HUD-1 - with abbreviations that most
consumers are not well informed enough to understand. In addition, the payment
is not included in the calculation of broker compensation, nor is it listed as
an expense to the borrower. As a result, many borrowers have no idea that they
are paying for the yield spread premium in the form of a higher interest rate.
The Proposed Rule would require that all such payments be reported on
both the GFE and the HUD-1 as a credit to the borrower toward his or her closing
costs.
This means that, when a broker intends to receive any
compensation from a lender payment based on the borrower's interest rate, the
broker must report it as part of the total origination charge. This preserves
the use of rate-based lender payments as a means of paying closing costs while
lessening the chance that brokers will use these payments to increase their
income without the borrower's knowledge. The Good Faith Estimate
The
Proposed Rule would further revise the GFE to better achieve the law's basic
purposes. Current GFE requirements arguably lessen consumer understanding and
increase costs by requiring that every charge, however creative, be itemized on
the form.
The new GFE would require that the charges of settlement
service providers - the lender, broker, title agent/insurer, and other third
parties - be combined and disclosed as a single dollar figure for each major
category. The Rule would also establish limits or tolerances to provide clearer
standards for good faith estimates of most of these charges. Specifically, the
Rule establishes a zero tolerance for the loan origination fee and other
services provided or selected by the loan originator, and a 10 percent tolerance
for most services provided by third parties. Some costs are not subject to a
tolerance - such costs as per diem interest, hazard insurance, and buyer's title
insurance, which are outside the control of the loan originator.
These
changes to the GFE and the regulatory scheme hold great promise for eliminating
duplicative or unnecessary charges, or "junk fees," and will lead to lower
settlement costs. We also believe that the new GFE requirements will empower
consumers to shop for the best loan to meet their needs; consumers will get the
GFE before they have to make a commitment to the lender, giving them time to
shop, and the GFE will emphasize the total cost of the loan - the bottom line
for the consumer.
Packaging
The Rule permits loan providers to
offer guaranteed mortgage packages. This might provide an even better means of
encouraging shopping and lowering costs.
Under our packaging proposal,
the settlement costs cannot vary from the time the offer is made, and the rate -
unless locked by the borrower - can only vary in accordance with an observable
index or yardstick. Packages must remain open for 30 days. The fact that these
packages will consist of one or two numbers at most will permit true price
comparison.
Any entity offering such a package may qualify for a safe
harbor from RESPA Section 8 scrutiny if it offers the following - at no charge -
to a borrower who submits an application:
- A guaranteed package price
for all lender-required settlement services;
- A mortgage loan with an
interest rate guarantee; and
- A contract for the transaction in the
form of a Guaranteed Mortgage Package Agreement.
The key point with our
packaging proposal is that the Rule in no way mandates packaging; it simply
makes it available as an option. It is not our intention to pick winners or
losers in the industry but rather to unleash the creativity of the marketplace.
Injecting greater competition into the mortgage lending process and
among settlement services is an important reason for reforming RESPA. When
consumers are empowered to shop for the best loan to meet their needs, the
market will respond to the competition by lowering closing costs. When closing
costs are reduced, home loans will become less expensive and more families will
become homeowners.
RESPONSE TO THE RULE
Since publication of the
Proposed Rule, we have been heartened by the strong support it has received from
numerous industry and consumer groups, and governmental agencies. But, some
criticisms about the Rule and its possible impacts have been brought to our
attention. Some of these criticisms are based on misconceptions that we are
attempting to correct. Others are differences that I think can be bridged. In
some cases, we may simply have to agree to disagree.
RESPA ENFORCEMENT
Another feature of the Department's reform effort is stepped-up
enforcement.
I have committed new resources toward enforcing RESPA - to
address current violations and to make certain that the benefits of the proposed
reforms are achieved. In conjunction with significantly increasing the level of
staff devoted to RESPA enforcement, I have established a new office, along with
a new Deputy Assistant Secretary, to bring greater attention and departmental
resources to RESPA enforcement.
This summer, the Department announced
five major settlement agreements with mortgage lenders and service providers,
with payments of nearly $
2.3 million. HUD has budgeted
$
1.5 million that is available to investigate RESPA violations.
And we are beefing up our investigative staff to further strengthen our RESPA
enforcement efforts.
HUD continues to work with other federal and state
regulatory agencies, as we did recently with the Federal Trade Commission in the
Mercantile Mortgage case, to complement and leverage our enforcement efforts.
You should also know that the Department will continue to defend its
position that one settlement service provider's markup of another provider's fee
is a RESPA violation. The Department of Justice has recently filed amicus briefs
in three federal circuit courts of appeal taking this position. Markups add to
settlement costs and are inconsistent with our goal of assuring transparency in
disclosures to consumers.
PREDATORY LENDING
Finally, I would like to say a few words about
predatory
lending, an issue this Administration - and the Committee Members as
well - are deeply concerned about.
Elderly and minority homeowners are
particularly vulnerable to
predatory lending practices. These
practices include loan "flipping," home improvement scams, unaffordable mortgage
loans, repeated refinancings with no borrower benefit, and "packing" life
insurance and other products into the loan amount.
We believe that our
proposed reforms, and the greater transparency they ensure, will make it more
difficult for unscrupulous lenders to abuse borrowers. But I want to be very
clear that we do not consider RESPA reform to be a "silver bullet" solution to
predatory lending. More must be done to address
predatory lending while preserving a source of credit for those
with less-than-perfect credit histories.
Consumer education and enhanced
financial literacy are potent weapons in combating
predatory
lending. For this reason, the Department is currently providing
$
20 million for consumer education and housing counseling, and
has requested an additional $
15 million for this fiscal year,
which we hope you will include in our appropriation this fall.
In
addition, HUD has undertaken a number of other initiatives to fight
predatory lending in FHA programs. These include:
-
Strengthening oversight of FHA-approved mortgage lenders through the "Credit
Watch" program, with the goal of identifying problem loans and lenders earlier
on;
- Expanding protection of homeowners by proposing performance
standards for appraisers of FHA single-family homes under the Department's
"Appraiser Watch Initiative"; and
- Developing a rule to stop "flipping"
of FHA-insured properties.
HUD has played a key role in the Baltimore
predatory lending task force. The combined efforts of federal,
state, and local authorities, as well as profit and nonprofit organizations, has
led to increased consumer education, restructured loans, and a large number of
indictments. We believe that this approach can and will serve as a model for
other areas targeted by predatory lenders.
CONCLUSION
We believe
that the Department has developed a well-crafted proposal. We look forward to
reviewing the comments offered by the mortgage lending industry, consumers,
government agencies at all levels, and others that will provide the basis for a
final Rule. To be truly effective, the final Rule will require the full
participation of each of these interests; therefore, we need to know whether the
approaches we have proposed are the right ones - and if not, what alternatives
may work better.
I am committed to creating a homebuying and mortgage
finance process grounded in transparency and simplicity. By reforming the rules
governing the purchase and financing of a home, we will create new opportunities
for first-time homebuyers, keep the American dream of homeownership alive for
more families, and inspire greater public confidence in the mortgage lending
industry.
I would again like to thank the Committee for the opportunity
to meet with you today. I appreciate your continued support of the Department's
efforts, and I welcome your continued counsel as we work together on behalf of
the American people.
LOAD-DATE: October 4, 2002