Dear Sir or Madam:

RE: Docket No. FR-4727-P-01 Real Estate Settlement Procedures Act (RESPA); Simplifying and Improving the Process of Obtaining Mortgages to Reduce Settlement Costs to Consumers Proposed Rule, 67 Federal Register 49134-49174 (July 29, 2002)

The National Association of REALTORS (NAR) appreciates the opportunity to submit these comments in response to the above-proposed rule. The NAR is America's largest trade association, representing more than 800,000 members involved in all aspects of the residential and commercial real estate industries. When it comes to the home purchase transaction, REALTORS hold the position closest to the consumer. From the very early stages of the home search to closing day, the REALTOR is involved and acts as an advisor in the process. It is because of this very important role that we feel we can offer valuable insight into how these proposed changes may impact the consumer as well as the industry.

NAR applauds the efforts of Secretary Martinez to improve the home mortgage transaction for consumers. We admire his dedication and we appreciate and agree with the stated goals of reform as set forth by the Department: 1) to simplify and improve the process of obtaining home mortgages, and 2) to reduce settlement costs for consumers. As we review this very detailed proposal, we offer comments we believe are consistent with not only the goals for reform but true to RESPA's original purpose when Congress enacted it in 1974. That purpose is to effect certain changes in the settlement process for residential real estate that will result in -

(1) more effective advance disclosure to homebuyers and sellers of settlement costs; and (2) the elimination of kickbacks or referral fees that tend to increase unnecessarily the costs of certain settlement services. Therefore, we attempt to balance the need for reform with the continued need for consumer protection.

With that in mind, we find some provisions of this proposal may achieve this balance while others fall short. I will summarize our overall reaction to this proposal and then go into more detail.

The goals of reform can be achieved by improving the current Good Faith Estimate (GFE) regime. While we think the proposal before us must be more carefully constructed, we support further analysis and development of this concept.

here is not enough evidence of consumer and industry benefit to move forward with the Guaranteed Mortgage Package (GMP) at this time. Additional data collection, research and analysis need to be conducted to provide evidence of significant benefits. There are risks inherent in this proposal and until more is known about the likely impacts, HUD should postpone advancing this kind of significant regulatory change.

Congress should address many of the changes to RESPA in this proposal. To propose a repeal of Section 8 or to require providers to fix their fees requires oversight by the body that created RESPA.


I. The Enhanced Good Faith Estimate (GFE)
The Enhanced Good Faith Estimate (GFE) represents a much-improved disclosure process and provides the consumer with additional information about the loan than the borrower receives today. The goals of reform, certainty and simplicity, can be achieved without sacrificing the important consumer protections of Section 8. The Enhanced GFE consolidates costs into categories and imposes pricing discipline on lenders thus providing borrowers more certainty early in the process enabling them to shop and compare loans. It also clarifies that volume discounts are permissible, thereby encouraging lenders to seek discounts that can be passed on to consumers.

This incremental approach will reduce the potential for any market disruption and will pave the way for future changes as appropriate. Specifics of this approach should be carefully studied to minimize burdens on the industry, such as the tolerances for those services not within the control of the lender. Additional thought on the mortgage broker compensation disclosure should also be more fully analyzed so as not to place the broker at a competitive disadvantage to a retail lender. There could also be small business implications that require additional scrutiny. In addition, the GFE form should be further reviewed and amended so borrowers can more easily reconcile it with the HUD-1 at closing. The improvements to the GFE will go a long way toward achieving the stated goals of the Department and are consistent with the original purpose of RESPA.

II. The Guaranteed Mortgage Package (GMP)
The GMP approach represents a far more radical approach to reform. It will provide lenders an exemption from the Section 8 anti-kickback provisions of RESPA for offering to borrowers a guaranteed package of settlement services along with the loan. This approach is untested and may lead to market disruptions. There are too many uncertainties about this proposal that need to be further analyzed.

At first glance, the prospect of creating a simplified disclosure that includes an interest rate and total closing costs at no cost to the consumer is appealing. However, we are concerned that the GMP proposal has real potential to result in negative consequences for the consumer, the lending and settlement service industries, and the overall economy. We come to this conclusion after carefully weighing the benefits of the available reform options against the potential for negative market consequences due to the loss of RESPA's Section 8 consumer protections. What amounts to broad relief for one segment of the industry without evidence of consumer benefit or continued consumer protections represents a flawed approach to reform and should be revisited.

Interest Rate Guarantee
A GMP and interest rate guarantee, subject to change resulting only from a change in an observable and verifiable index, must remain open to the potential borrower for thirty days. The reason for linking the two is to prevent a lender from increasing the interest rate to make up for any losses on the guaranteed package. The lending community argues that this requirement is unworkable. They don't believe such an index exists and to offer a guarantee when there is no certainty the borrower will ever return to accept, presents risk to the lender. There is a cost to a guarantee and this cost could be significant and will ultimately be passed on to the consumer in the form of a higher interest rate or package costs.

While lenders may find the 30-day interest rate guarantee unworkable, any deviation from this requirement undermines the rationale for the GMP in the first place. To guarantee one piece of the offer and not the other can lead to bait and switch tactics and other abusive practices. Since the proposal does not attempt to define this index, it can be assumed HUD has already given up on this part of the issue. Therefore, additional analysis is required to assess the impact of guaranteeing one part of the loan and not the other.

Who Can Package?
The proposal states that "anyone can package." It is misleading for HUD to suggest this while also requiring that the packages be advertised with a guaranteed interest rate The only players in the marketplace that can offer a guaranteed interest rate are the lenders. This is confirmed in another provision that requires the GMP to be signed off by a lender. Therefore, real estate brokers will only be able to offer packages if they form a relationship with a lender. Even then, the terms of the relationship and the package arrangements will be subject to the specific lender requirements. They will not be able to market their services directly to consumers. Packagers will always be under the control of the lender.

If this proposal is intended to promote competition among non-lender packagers, a mechanism must be designed that will truly allow anyone to package independent of the loan. If designed correctly, it may offer opportunities for non-lender packagers, such as real estate brokers, and provide alternative choices for the consumer, which do not exist under this proposal. In addition, it is imperative that the services within the package be itemized so the borrower can make true cost and service comparisons.

A proposal put forward by the American Land Title Association (ALTA) recommends HUD entertain a "two package approach", a lender package and a settlement package. This is a variation of the GMP that attempts to create additional opportunities for non-lenders to participate. While we have not thought through this idea, this indicates there might be alternative reforms that have not yet been considered.

Again, these above issues argue the need for additional study on this proposal, the need for alternative approaches to the GMP, and its impact on the consumer as well as the industry.

Economic Impact of GMP
HUD's Economic Impact Analysis estimates significant cost savings to the borrower. We believe this report to be arbitrary and void of in-depth analysis. While HUD projects cost savings of $10.3 billion under their GMP proposal, they either dismiss or ignore some of downside risks that are inherent in the GMP proposal. In an economic analysis written by Ann Schnare, PhD., The Downside Risks of HUD's Guaranteed Mortgage Package, (copy attached and submitted for the record) some of the potential negative outcomes of granting a Section 8 exemption are identified. The paper challenges HUD's assumptions about the market reaction to the GMP and identifies the key uncertainties associated with it.

There is the likelihood that HUD's packaging proposal can lead to increased concentration within the industry and reduce competition. Lenders will be provided a financial incentive (section 8 exemption) to package with no obligation to pass along discounts to borrowers and as a result will control the entire mortgage transaction. This will most likely lead to increased market share of the large lenders who already control the lion's share of the mortgage origination and servicing market. Small service providers including real estate brokerages with ancillary services will be at risk. Today the real estate transaction is still very much locally based. Small and mid-size service providers offer competitive choices to borrowers.

Any regulation that moves an industry toward a more concentrated market structure should be viewed with considerable caution. An increased concentration of powers into the hands of a smaller number of large lenders and service providers could lead to higher closing costs—the exact opposite of HUD's stated goals for reform.

Again, not enough is known about the likely impact of the GMP to support advancing this concept at this time. An incremental approach, such as the improved GFE is a more attractive option for satisfying HUD's stated goals for reform. By simplifying the GFE and clarifying that volume discounts are not violations of RESPA, HUD has created the necessary environment for packaging to occur.


The Most Common Complaints about RESPA Cannot be Fixed with the GMP
Over the years, we analyzed some of the most commonly cited problems for which RESPA reform was the solution. We discovered that in many instances the problems either could not necessarily be solved by reforming RESPA or the solution could be found without sacrificing the consumer protections of Section 8.

Too much paper.
One of the most often-quoted consumer complaints about the mortgage transaction is the amount of paper involved. As you know, any changes to RESPA, or any other federal regulation will not significantly reduce the amount of paper involved in the transaction. In fact, some pieces of this proposal such as the enhanced GFE actually add more disclosures. This is not necessarily bad but the perception that RESPA reform, specifically this proposal will eliminate the volume of paper in the mortgage transaction is simply not true.

Junk Fees
HUD includes in its supplementary information the problem of surprise "junk fees" imposed at settlement. While this in fact may be a widespread problem, we only know this to be the case anecdotally. To our knowledge there is little or no data to confirm that large variances exist between the GFE and HUD-1 settlement statement, their size and the kinds of fees that represent the surprises. Until this data is collected and analyzed, it would be pre-mature to totally dispense with a system that has been working so well for the large majority of consumers today. Improvements to the GFE such as imposing pricing restrictions on lender fees, could adequately address this issue.

Prohibited volume discounts
Many claim that HUD's rules that require originators to pass through third party costs without "markups" directly to the borrower, impede the packaging of settlement costs. We disagree with this assessment. The current rules prohibit an originator from making a profit from the negotiated discount, it does not preclude anyone from taking advantage of this as a marketing tool. If a volume discount is negotiated for appraisals at $250 instead of the usual $300, the lender can compete on this lower settlement cost. It is unclear whether the real issue is the uncertainty over Section 8 and volume discounts or the ability to make a profit on these services. An analysis of legal challenges in this area would be instructive. Until there is evidence that volume discounts have been challenged as RESPA violations and therefore a real threat to innovation, the clarification HUD provides in this proposal should provide the added security they require.

The consumer cannot comparison shop among lenders
Since the current rules do not require firm cost quotes and therefore permit lenders to increase their costs at closing, some believe consumers generally do not shop for loans. However, many lenders today choose to compete on quoted costs and guaranteed packages are occurring in today's marketplace. For example ABN-AMRO, offers a One-Fee closing cost package to their borrowers. (See Ann Schnare paper). If lenders increase their fees at closing, it is a business decision. HUD should not have to reward lenders with Section 8 relief simply because they stand by their costs.

It is important to note that consumers are much more sophisticated today largely due to an increased use of the Internet to research houses for sale, mortgage credit options, title and related services. NAR has conducted some research in this area and the results demonstrate a growing usage among homebuyers and sellers. Perhaps borrowers didn't shop in the past because tools like the Internet did not exist.

Additional thoughts about the GMP
The GMP will reduce transparency in the transaction. Borrowers will shop for a loan based on an interest rate and a "black box" of settlement costs. To move from a process today where borrowers are fully informed of the various services required to close the transaction to one in which the borrower is assumed to only be interested in the lump price of the package is taking a step backwards in the area of consumer education. Despite claims to the contrary, consumers want to know what they are getting for their money. If they don't know what services are in a lender package, how will they compare them to the services being provided by another lender? Even in the 1998 HUD/Fed Report, they recommended that "consumers want to know what services they are purchasing…", and so they suggested the services in the package be itemized.

The proposed rule contemplates that Section 8 would continue to prohibit any payments for the referral of business between the packager and any of the entities outside of the package. It includes a footnote to explain that, for example, a real estate agent, outside of the package, would continue to be subject to Section 8 for accepting a payment from a packager for referring a customer to a package. It is important to note the services of a real estate agent are not a required service of a lender. However, HUD is not clear that real estate agent services shall not be included in the GMP. This is further clouded by the lack of itemization of services in the package. If HUD should advance the GMP, it is imperative that they expressly exempt real estate brokerage services from the lender required services package.

The GMP proposal assumes volume discounts secured by the lender from third party settlement providers will result in lower costs to the consumer. Under the enhanced GFE, the lender is required to pass along those savings. Under the GMP, the lender is free to mark up the services and keep the entire markup as profit. Lower consumer costs are not guaranteed.

Packaging could limit the cost savings to consumers that could otherwise be realized through technological gains. For example, lenders use many appraisal techniques today. Depending on the transaction, the following options are available: a full appraisal, an Automated Valuation Model (AVM), a Competitive Market Analysis (CMA), and a Broker Price Opinion (BPO). If the lender elects to use an AVM or CMA in place of a full appraisal, the cost to the lender will be a fraction of a full appraisal. However, this cost savings will not have to be passed along to the consumer. Also, without itemization of services, a package that includes an AVM can be priced the same as a package with a full appraisal when theoretically, the AVM package should be priced lower.

Another example is in the case of credit reports. The cost of credit reports has decreased over the years. Due to technology advances, a credit report can be purchased for as little as $12.95. Packaging could hide these price differentials and could offer little incentive to lenders to keep the costs down. In fact, to the contrary, they will have a great incentive to increase the cost with a Section 8 exemption.

As pressure mounts on settlement providers such as appraisers, title companies, pest inspectors to drastically cut their prices to ensure inclusion in a lender package, quality of service could deteriorate. HUD is silent as to who guarantees the quality and satisfaction of the individual services within the package. It is therefore presumed that if something goes wrong due to the poor work of a provider in a package, the lender may be subject to litigation. Are lenders willing to take on that additional liability?

While lenders contend that these services are for their use, the borrower pays for them and is directly impacted by the quality of the service providers. For example, a lender may have a contract with a certain pest control company and includes this service in its package. The pest control company may not be very reputable yet meets the minimal needs of the lender. Substandard work could mean problems in the future that may result in thousands of dollars for the homeowner.


III. Any Major RESPA Changes Should be Made in Cooperation with Congress
Regardless of which approach to reform HUD endorses, Congress should be consulted before any final action is taken. While we support the concept of the Enhanced GFE, we question whether HUD has the authority to require lenders to guarantee their fees. Similarly, repealing Section 8, a core provision of RESPA, should receive considerable debate on Capitol Hill by the body that created it in the first place. What Congress deemed a prohibited practice, HUD recommends looking the other way as long as the prices are guaranteed. It was clear in the recent congressional hearing held by the U.S. House of Representatives' Financial Services Committee that there is much interest in this issue, specifically its impact on small business. There is too much at risk to move forward in a less than thoughtful and deliberative manner.

Other Regulatory Considerations
The Federal Reserve Board and the Treasury Department are currently undergoing a rulemaking process to determine whether or not Financial Holding Companies and financial subsidiaries of national banks should be permitted to engage in real estate brokerage and property management. Should such proposal be adopted, it would have significant consequences for the structure and competitiveness of the real estate marketplace directly impacting consumers and businesses alike. To propose changes at this time to RESPA would be premature. Until there is certainty about what the competitive landscape will look like in terms of banks and real estate, further regulatory relief measures should be put on hold.

Conclusion
The real issue in the RESPA debate is Section 8 and whether the problems identified in the mortgage process can be addressed without removing this very important consumer protection. By providing a Section 8 exemption to the GMP, HUD has created a powerful regulatory incentive that could move the industry to packaging with or without efficiency gains.

The changes proposed under the GMP approach will undoubtedly alter the lending and settlement services industries. In the process, HUD's regulation could increase concentration, reduce transparency, discourage innovation, reduce the quality of services provided, and ultimately lead to higher closing costs. Small and medium size settlement services providers as well as consumers, could be at risk. While HUD argues the impact on small business is not their concern, we maintain they are essential to the viability and the long-term health of the housing market.

As much as we would like to offer specific constructive recommendations on how the GMP should be defined to overcome our concerns, we are unable to do this because it would require analysis for which the basic underlying data does not exist. Until some quantitative research and analysis is conducted relative to the benefits and costs of removing this consumer protection, we cannot support this approach to reform. We are not convinced the benefits of perceived simplicity will outweigh the potential costs to the industry. We are living in a time when homeownership rates are near historic highs and mortgage interest rates are near historic lows. Housing is too important to the overall economy to make sweeping changes pre-maturely.

We encourage you to more fully develop the Enhanced GFE concept. After appropriate analysis and Congressional review, we believe this is the concept HUD should advance.

I thank you for the opportunity to express the views of the National Association of REALTORS and stand eager to work with HUD to further address these issues.

Sincerely,


Martin Edwards, Jr., CCIM
President