Statement of John Courson President & CEO Central Pacific Mortgage Company on behalf of Mortgage Bankers Association of America before the Committee on Financial Services Subcommittee on Housing and Community Opportunity Hearing on HUD's RESPA Reform Proposal February 25, 2003 Good morning Mr. Chairman and members of the Committee. My name is John Courson, and I am President and CEO of Central Pacific Mortgage Company, headquartered in Folsom, CA. I am also Chairman of the Mortgage Bankers Association of America (MBA),1 and it is in that capacity that I appear before you today. I thank you for inviting MBA to form part of the important discussions regarding regulatory reform of the Real Estate Settlement Procedures Act ("RESPA"). This regulatory reform initiative, as set forth in HUD's recently issued proposed rule entitled "Simplifying and Improving the Process of Obtaining Mortgages To Reduce Settlement Costs to Consumers,"2 will have far-reaching import for our industry and on the American consumer. I want to begin my presentation by stating that we strongly support Secretary Martinez in his initiatives to simplify and improve the mortgage process, and we believe that the Proposed Rule is a major step forward for both consumers and the industry. MBA commends the Secretary on issuing this sweeping proposal. The issues and controversies implicated by RESPA, a broad-reaching, 29-year MBA is the premier trade association representing the real estate finance industry. Headquartered in Washington, D.C., the association works to ensure the continued strength of the nation's residential and commercial real estate markets, to expand homeownership prospects through increased affordability, and to extend access to affordable housing to all Americans. MBA promotes fair and ethical lending practices and fosters excellence and technical knowhow among real estate professionals through a wide range of educational programs and technical publications. Its membership of approximately 2,600 companies includes all elements of real estate finance: mortgage companies, mortgage brokers, commercial banks, thrifts, life insurance companies and others in the mortgage lending field. old statute, are complex and politically thorny. Undaunted, Secretary Martinez has recognized that the mortgage process has become much too complex and that there currently exists an urgent need to thoroughly reform the process in order to ensure the objectives of clear disclosures and consumer protection in the mortgage shopping process. The sheer scope of HUD's proposal demonstrates a great deal of leadership and courage by the Secretary. This reform initiative also demonstrates foresight on the part of HUD, as it brings real solutions to the table, and challenges us all to come together and reach agreement on fixing a mortgage disclosure system that has become increasingly complex and burdensome for all the parties involved. MBA Position MBA has consistently called out for the need to enact fundamental reforms to the bewildering and confusing mortgage shopping process. MBA has been a constant partner in discussions with government and consumer groups to craft workable methods to simplify and improve the mortgage process. MBA sees HUD's Proposed Rule as a unique opportunity to effectuate large portions of long-discussed improvements to the mortgage process. As can be expected with any far-reaching project to improve and innovate existing systems, we believe that there are a number of technical issues that still require attention and resolution by HUD. Notwithstanding these details, we want to make clear to the Committee that MBA fully embraces the more important concepts of reform advanced by HUD's proposed rule. MBA believes that, if properly structured, HUD's "Guaranteed Mortgage Package" system will improve and simplify disclosures, foster market competition, and strongly enhance protections for all consumers. The Current System To properly appreciate the benefits of the reform proposals now advanced by Secretary Martinez, it is fundamental to understand how the current home mortgage disclosure system operates and why it has been criticized as flawed and ineffective in adequately protecting mortgage shoppers. Disclosures The Congressional intent in enacting RESPA was to protect consumers from unnecessarily high settlement costs by affording them with greater and more timely information regarding the nature and costs of the settlement process, and by prohibiting certain business practices. The statute sets out to achieve these goals through two principal disclosures-the good faith estimate of settlement costs (GFE) and the settlement statement (HUD-1). The GFE provides consumers with an itemized estimate of the costs the consumer will be required to pay at closing. This disclosure, containing such items as fees for origination, surveys, appraisal, credit report, etc., must be given to consumers within three days of application for a mortgage loan. The second key disclosure, the HUD-1, is provided to the consumer at closing, and lists all actual costs paid at, or in connection with, the settlement. From a consumer's perspective, these forms may be effective in alerting them as to the generally anticipated costs they will have to incur at settlement, but the disclosures fall short of providing them with reliable figures that they need to effectively shop the market. As its name implies, the "good faith estimate" requires that cost disclosures to consumers be made in good faith, and that they bear a "reasonable relationship" to actual charges. RESPA does not impose any liability on the creditor for an inaccurate or incomplete estimate, nor for failing to provide one at all. It is important to understand the reality of the current law-the figures disclosed on the GFE, the key disclosure that consumers use to shop for settlement services, are neither firm nor guaranteed. If a consumer discovers that that the cost estimates they received at application differ significantly from the final HUD-1 figures, they have no redress or federal remedy to address the inaccuracies. MBA believes that this legal structure is entirely inappropriate for both consumers and industry. Consumers that shop the market for the best prices available can never be assured of the actual costs at settlement. This system also provides little incentive for creditors and others to increase accuracy or incur risks in order to ensure such accuracy. In fact, it is the unscrupulous actors that benefit, as bait-and-switch tactics cannot be detected, and the intentional underestimating of costs and fees actually bears rewards in the competitive market place. A further criticism of current disclosures centers on their complexity. Under existing regulations, the GFE and HUD-1 forms must separately itemize every single charge associated with closing. Though the intent is noble, this requirement creates a massively complex form that hurls disparate and obscure figures at consumers in a way that they cannot comprehend or effectively use to shop.3 From the industry's perspective, these disclosures are burdensome and expensive to administer. Not only are the forms costly to produce, but more importantly, they are subject to varying interpretations by different jurisdictions and regulatory entities. Creditors are always uncertain as to what degree of itemization is required, how certain costs are to be disclosed in instances where the services are out-sourced, and what line items to use in instances of nontraditional transactions that require special services. This is exacerbated by the fact that closing requirements vary across state lines, thereby causing disclosure requirements to vary in order to accommodate for such differences. Often, local For example, some of the fees required to be listed on the GFE may constitute costs that are already included and built into the loan's interest rate. Others may be fees that are dependent on the loan amount or price of the property. jurisdictions create disclosure requirements that are in direct contradiction to express federal guidelines. Section 8 Further difficulties arise in connection with the restrictions found under Section 8 of RESPA. This portion of the statute prohibits kickbacks, fee-splitting, fees for referrals of "settlement service business," and unearned fees, and imposes very heavy monetary and criminal penalties. MBA believes that the anti-steering provisions of Section 8 of RESPA serve very legitimate consumer protection purposes, as they shield home shoppers from improper influences that hamper shopping and competition. However, RESPA's Section 8 provisions are vague and subject to varying interpretations that impose barriers to cost-saving arrangements. For example, any attempt by lenders to negotiate for better prices with third-party settlement service providers, or efforts to regularize costs through average-cost pricing, could be deemed to constitute violations of Section 8. I must note that all of the disclosure and legal complexities I describe here frequently lead to expensive and baseless class action litigation. Conflicting advisory opinions emanating from regulators can create classes of plaintiffs based on one or another of the varying interpretations. Special mortgage products that lower costs and benefit consumers create uncertainties under the ambiguous application of the RESPA statute. The Internet is now growing as the dominant medium for commerce, and yet the anti-kickback provisions of RESPA have not yet been clarified vis-à-vis online transactions. All these legal risks are menacing to industry, and generate massive legal and regulatory costs that can only be passed on to consumers through higher prices. Need For Change Although we can all agree that the American home finance system is recognized as the best and most efficient in the world, we cannot ignore the fact that consumer confusion persists and that the mortgage settlement process is bewildering to most home shoppers. The problems outlined above are real and have the effect of raising costs and trumping true competition in the market place. Worse still, in many instances, the confusion created by the current labyrinth of forms and disclosures allows unscrupulous actors to dupe and defraud even the most careful consumer. We believe, and repeat here today, that the scourge of "predatory lending" is in large part caused by the complex disclosure laws that allow dishonest players to perpetrate deception on unwary consumers. Mr. Chairman, we can do better, and through this proposed rule, HUD has provided us with the blueprint from which to start our reform efforts. HUD's Proposal The Department's Proposed Rule, issued on July 19, 2002, contains far-reaching proposals that could fix virtually all the market and consumer problems I have identified above. The central element of HUD's proposal focuses on the creation of a carefully defined safe harbor that produces greater clarity and increased reliability for the shopping consumer. Under HUD's Proposed Rule, lenders and other settlement service providers would be allowed the option of offering applicants a "guaranteed" fee package in lieu of a GFE. This guarantee, dubbed the "Guaranteed Mortgage Package” (“GMP") under the proposal, would require a single lump-sum amount that represents the total of those costs expected to be incurred in connection with the originating, processing, underwriting and funding of that loan. As an important element of the GMP system, HUD is requiring that entities engaging in packaging offer to consumers, within 3 days of a loan application, an "interest rate guarantee," subject to change resulting only from a change in an "observable and verifiable index" or based on other appropriate data or means to ensure the guarantee. To encourage shopping, the proposal would not allow lenders to collect any application fees (prior to consumer acceptance of the GMP offer). Under the proposal, any person who assembles and offers such a package or whose services are included in such a package would be exempt from the restrictions and prohibitions of Section 8 of RESPA relating to referral fees, mark-ups, volume discounts, and fee splitting. The Concept of "Packaging" MBA believes, and has long advocated, that the "guaranteed fee package system" of the type set forth by HUD is the most effective way to achieve accurate disclosures for consumers. The effectiveness of this system is premised on the reality that consumers do not generally shop for individual settlement services, such as appraisal and credit reporting services. Rather, consumers shop for the mortgage loan, which is the central element that in turn requires the purchase of the other ancillary services. Since each lender has different loan products, and since each lender has different investors that impose different requirements pertaining to such services, these ancillary services can rarely be purchased independently from the mortgage loan. As they advance through the mortgage shopping process, consumers tend to focus only on the mortgage loan, and are therefore interested in the overall "price" of the loan itself rather than the individual price for those ancillary services performed for the benefit of the creditor or the ultimate investor. The "packaging" system recognizes this reality, and constructs a system whereby the consumer is presented with a single price that includes all items required to close the loan. The “packaging" system streamlines cost disclosures to consumers by assembling practically all required closing costs under one single figure, thereby allowing consumers to better understand the overall cost of the |