thank you for your presence this morning and in effect let you go about your very busy business. Thank you, very much. Chairman GONZALEZ. Our next panel consists of Mr. Ronnie Wynn, president of the Mortgage Bankers Association of America; Mr. Donald Henig, president of the National Association of Mortgage Brokers from Phoenix, AZ; Mr. Robert Levy, executive director and counsel of the Mortgage Bankers Association of New Jersey, from Union, New Jersey; and Mr. Angelo Mozilo, president of the Countrywide Funding from Pasadena, CA. Gentleman, as also in the case of the last group, let me thank you profoundly. Most of you have traveled from distant points as did most of the previous panel. I cannot tell you in words how much I personally appreciate your help and your ready response on rather quick notice. If there is no objection, we will start with Mr. Wynn and thank you again. Mr. Wynn you have appeared before us maybe three times. STATEMENT OF RONNIE J. WYNN, PRESIDENT, MORTGAGE BANKERS ASSOCIATION OF AMERICA Mr. WYNN. Yes. Thank you, Mr. Chairman. I am Ronnie Wynn, president of the Mortgage Bankers of America. Since 1986, HUD has approved two types of referral fee programs. We believe these approvals, at a minimum, violate the spirit of RESPA and incorrectly interpret the intent of Congress when it enacted the law. It will probably not come as a surprise to this subcommittee that these approvals were issued by political appointee policy makers serving with former HUD Secretary Pierce. In the Borrower Pay opinions, HUD has approved plans whereby real estate agents can collect fees from borrowers for referrals to lenders with which the agent has a pre-arranged relationship. No work need be performed. In the Lender Pay opinions, HUD has approved plans whereby lenders to pay real estate agents' fees for referring borrowers, under the theory that work is performed. On May 16, 1988, HUD published for comment proposed revised RESPA regulations. HUD received over 2,000 responses to the proposed regulations. A draft final rule, dated December 7, 1988, reversed the position that HUD had taken in private opinion letters and prohibited the payment of referral fees. I would like to read from the preamble of the proposed regulation: "... It was concluded, however, that the (previously approved fee) arrangement materially altered this straightforward borrower pay mortgage broker concept. The person receiving the fee was often a real estate broker who was also receiving a sales commission from the seller. As a consequence, the realtor was placed in a conflict of interest situation in which he was able to shape the terms of the sales contract, particularly the financing terms, to assure the expeditious closing of a real estate sale, in order to earn a sales commission, and to exert influence to direct the use of one lender over another, as well as potentially generating a referral fee paid by the borrower.. This draft was written by the non-political appointees the professional career employees who understood the abuses and who saw that their responsibility was to the homebuyer not the realtor or the lending industry. However Secretary Pierce stopped the final rule from being published. In the last 18 months Secretary Kemp has moved decisively to reform HUD, to purge the Department of past abuses and questionable practices. We congratulate him on this move. However, we believe he should act just as decisively to correct the growing referral fee problem. Why should referral fees be prohibited? MBA believes that both lender pay and borrower pay referral fees should be prohibited for the following reasons: Referral fees raise the cost of housing. Referral fees add unnecessary costs. Lenders must duplicate work done by real estate agents to comply with insurer and secondary market requirements. The additional fee for duplicated work represents a true additional cost, which, in all probability, will be passed on in some form to the homebuyer. To complete the record for Citicorp and Citicorp Mortgage I would like to read to you a solicitation to the real estate community which I think points out the essence of the referral fee issue. "For the first time Citicorp Mortgage is offering real estate professionals like you the ability to save your clients time and the opportunity for you"-talking to the real estate agent-"to make money. Furthermore, it offers you the ability to turn time into money." The attachment would suggest that real estate agents working approximately 3 weeks a year can make $120,000 on referral fees paid under MortgagePower programs. If the real estate agent has the opportunity of making an additional $120,000 a year versus a lender who pays nothing, as to who they would take that loan to, I would ask, Mr. Chairman, if we could have, to complete the record, a copy of this letter entered as part of the record. Chairman GONZALEZ. Certainly. [The information referred to can be found in the appendix.] Chairman GONZALEZ. Also your prepared text will be entered in the record as you have given it to us. Mr. WYNN. Thank you, Mr. Chairman. Allowing real estate agents, closing agents, title companies or anyone who receives a fee for services other than to become overly involved in the mortgage origination process seriously compromises the lending decision because their commission is contingent on the loan closing. Referral fees are not payments for work performed or services rendered. Services rendered by real estate agents as part of the referral are duplicative and must be verified by the lender, who is required to indemnify the ultimate investor when there is any defect in the processing or underwriting of that loan. No one should be entitled to fees without associated risk, and the real estate agents take none. Receiving a referral fee is a conflict of interest. The real estate broker/agent's primary contractual responsibility is to the seller, not the buyer. If a buyer/borrower pays a referral fee to a real estate broker/agent an obvious conflict of interest is created be cause the buyer and seller have different or opposing interests in the transaction. Referral fees are unnecessary for technological innovation or rapid loan processing. Sophisticated computer technology is an integral part of all modern mortgage lenders' businesses. As you will hear later today from Angelo Mozilo, these services can be, and are being provided, by many reputable firms without the added cost of a referral fee. Disclosure alone cannot solve the problem. Disclosure alone will not prevent possible abuses. Because of the emotions generally surrounding the sale or purchase of a home, unsophisticated buyers and sellers could easily agree to sign documents they really did not fully understand in order to complete the transaction. States are enacting legislation in lieu of Federal action on RESPA. A crazy quilt of confusing State legislation is developing as States react to referral fee programs. This important consumer issue should be addressed on a standardized, nationwide basis. Failure to do so will ultimately result in harm to American homebuy ers. Mr. Chairman, you and each of your committee Members have been provided with this book "Facts about Referral Fees." Within that book is support for why we should not have referral fees. I would ask that this book entitled, "Facts about Referral Fees" be added as part of the record. Chairman GONZALEZ. Without objection, it is so ordered. I want to thank you for the copy I received in my office the day before yesterday. [The information referred to can be found in the appendix.] Mr. WYNN. Thank you, Mr. Chairman. What can Congress and HUD do. HUD has the authority and should use it to end inappropriate referral fee practices. If HUD does not deal adequately with referral fees, Congress should. If HUD fails to act, MBA recommends the enactment of legislation that would prohibit the payment of a referral fee to anyone who is receiving a commission premised upon the sale of a property and would overturn the Graham ruling, to clarify that RESPA covers the making of a mortgage. MBA believes strongly referral feeds do not add value. Nor do such fees assure home purchasers the best services at the lowest possible cost. It is obvious that referral fees create an environment which undermines the integrity of the origination process, without adding any value to the mortgage transaction. We urge this subcommittee to insist that HUD issue, in final form, the regulations dealing with mortgage referral fees as they were drafted in December 1988. If HUD is not responsive, we urge congressional action. MBA appreciates the opportunity to testify before this subcommittee and will provide answers to questions or request for additional information, as requested, for inclusion in the hearing record. Thank you. Chairman GONZALEZ. Thank you again, Mr. Wynn. You have been most helpful. [The prepared statement of Ronnie J. Wynn can be found in the appendix.] Chairman GONZALEZ. Mr. Henig. STATEMENT OF DONALD HENIG, PRESIDENT, NATIONAL Mr. HENIG. Thank you, Mr. Chairman. The National Association of Mortgage Brokers is a not-for-profit professional society incorporated in 1973. NAMB represents the relatively new and beneficial industry of professional mortgage brokering-an industry comprised mainly of small, privately owned businesses providing a positive economic service for the consumer, the community, the lender, and the real estate broker. Our purpose in addressing this subcommittee today is to insure that each of the committee Members and staff understand the function, benefit, and special regulatory requirements of mortgage brokers. Also, to understand the inherent conflict of interest when a real estate broker accepts a fee from the seller, and then from the buyer. NAMB provides educational, certification, networking, and legislative services to residential and commercial mortgage brokers across the Nation. We constantly strive to improve the quality and professionalism of mortgage broker services available to the public. Through its national professional members and affiliated State organizations, NAMB now represents over 3,700 small business members across the nation who are part of an industry estimated to originate between 55 and 65 percent of all residential mortgage lending in the Nation. A mortgage broker is a trained real estate financing professional, who, as their major business and for a fee, puts together a lender and a borrower after having thoroughly reviewed the needs and capabilities of that borrower, the characteristics of the borrower's property, and the various lending programs available from a wide range of lenders. We do this in compliance with and under the restrictions of all State and Federal laws relating to mortgage brokers. The mortgage broker completes the origination function in the life cycle of a mortgage. After having been trained, licensed, established a business, approved by lenders, advertising, attracting customers and competing an application, the mortgage broker accomplishes what is really the most crucial phase in their part of the origination function, the processing phase. During processing the mortgage request, the professional mortgage broker completes all the verifications of employment, deposits, mortgages and other debt; order the appraisal, credit reports, and title; prepares the initial Reg-Z and Good Faith Estimate disclosures; completes submission sheets, borrower assertions, and final FNMA Form 1003s, as well as the FNMA Transmittal Summary. The final package is then submitted to the specific lender which has been selected by the mortgage broker as having the best combination of rates, points, terms, and record of closing. Since a professional mortgage broker is familiar with the qualifying requirements for multiple lenders, the same mortgage broker has more than a 90 percent closing rate the first time a package is submitted to a lender. A single lender CLO does not have that same success rate because all of their packages are submitted to the same lender regardless of the specific needs of that consumer's mortgage application. Lenders are moving targets in that the programs offered by them and the rates inherent in each program change quite frequently, often more than once a day. A mortgage broker offers the opportunity to change to a different lender at the last second if the institutional programs have changed, or if the circumstances of the borrower or the property warrant changing. Single lender CLOS do not offer that flexibility. A mortgage banker is distinguished from a mortgage broker in that, under State law definitions as to the functions performed, the mortgage bankers frequently use their own funds to close, and may service the loans after closing. A mortgage broker in most cases cannot. A real estate broker receiving a fee for taking an application and referring it to a lender would fit neither of the above definitions. They provide none of the benefits of either a mortgage broker or a mortgage banker. If a CLO "captures" the processing of a mortgage application from a real estate broker, and it is really during the processing phase that a mortgage broker makes the final and most informed decision as to which lender a package will be sent, then the borrower has lost the capability to choose between lenders. The market changes every day and single lender CLOS are very rarely the best situation for the borrower. Now, let me touch on two concerns that are of major importance to the mortgage brokerage industry: One, conflict of interest. I have heard an argument from real estate brokers that this inherent conflict, which is not disputed, say that it would be impossible to adequately disclose to a buyer that the real estate broker is legally handcuffed to the seller and, therefore, must disclose everything to the seller, including information that could jeopardize the buyer's mortgage. Then, in the end, the buyer must pay for this disservice. Imagine a young couple looking for a home to purchase. They visit a real estate broker, and for the next 3 to 6 months, they drive around in each other's cars looking for homes. They have and use each other's home telephone numbers. The real estate broker gives candy to their children, and may even baby-sit while the young couple goes back a second or third time with their parents. Now, this couple decides to purchase the house of their dreams and they go back to their friend, the real estate broker's office to sign the papers. Now, the real estate broker provides the buyers with a form disclosing that he/she must report any negative facts about the buyer's mortgage to the seller and that this could end the deal. Also, if anything negative arises during the processing of your application, then the real estate broker will have to immediately inform the seller. |