Finally, this real estate broker discloses that he/she is employed by the seller and that he/she has a duty to provide, not the best mortgage for the buyer, but the best mortgage for the seller.

Now that there has been full disclosure. What would the buyer say next? Where do I sign? I know you will tell me the best way to go; you are my friend. Full disclosure is impossible.

In reality, and opposed to the statements I have heard previously, it actually costs more for a consumer to get a loan through a real estate broker. Our studies show an additional half percent on the rate and 34 to 22 points extra.

In a recent case before the Department of State in New York addressed these issues. In Department of State, Division of Licensing Services vs. Home Market Realty Corporation, it was found on February 28, 1990, of this year that the real estate broker "had the duty to the seller to obtain a purchaser for the house and to take those actions which were required to further the sale, while he had a duty to the buyers to assist them in obtaining a mortgage on the best terms possible. Therefore, he was in the position of having the obligation to search for the best mortgage terms available, which could delay the sale, and of assisting the buyers to make application for mortgages even in situations where it was possible that because of the favorable terms applied for, the application might be rejected, resulting in the possible cancellation by the buyers of the contract to purchase the house."

In essence, it was found that the real estate broker had operated improperly.

Payment of any funds to the real estate broker would be for a service in which the real estate broker cannot in good conscience say they will always make the decision which best serves the interests of the seller, their client.

Also, there exists a tremendous motivation for some real estate brokers to make poor quality loans and this could destroy the entire industry.

I ask this committee to understand that real estate brokers have the ability to steer a client to a specific lender. No one will argue that point. We are simply trying to eliminate fees paid to real estate brokers to dictate what lender receives the mortgage application.

Two, mortgage broker exemption. Professional mortgage brokers should be able to be paid a fee for their services based upon the size of the loan, as is done uniformly in the mortgage lending industry throughout the Nation.

Professional mortgage brokers cannot be involved in steering a consumer because we do not have that ability. We do not have any control over the consumer's emotions, because we normally make initial contact with a consumer over the phone while they are shopping for a mortgage. There is no need to legislate our fees due to the fact that if they are not competitive, then the consumer will go to the next competitive lender/broker on their list.

In December 1987, in HUDs leaked draft of RESPA changes, they proposed a mortgage broker exemption and we would like to help structure this exemption.

Please understand that we are not requesting any exemption from the current disclosures required by RESPA or any Federal or

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State laws. We simply want to continue earning fees based upon competitive forces. Over 27 States have found that mortgage brokerage is a very different industry than real estate brokerage and regulate and license us separately.

I must address the comment made previously today by Mr. Flynn that real estate brokers provide the same service as professional mortgage brokers. It is simply not true.

Professional mortgage brokers do not have any ability to steer a consumer for reasons previously stated. We do not have a larger real estate commission hinging on the mortgage.

We do fully process mortgage loans and truly represent many lenders. My office represents over 100 lenders but the real number is that we send loans to approximately 30 lenders per month.

Most CLOs, even with 50 lenders, send more than 50 percent and up to 80 percent of their loans to one lender on the system.

In addition, the cost to the consumer is greater by applying through a real estate broker than by through a professional mortgage broker, as I have previously stated.

I would like to mention Mr. Flynn stated that he is not aware of professional mortgage brokers charging no points. Please be advised that professional mortgage brokers often, maybe even 50 percent of the time, charge no points or origination fees.

I strongly suggest that this subcommittee visit areas where these abuses of conflict of interest are costing the consumer large cost.

In summation, we believe that RESPA is clear in its intent of not allowing referral fees, and that the current schemes developed to enable lenders to pay directly or indirectly to real estate brokers for these referrals are simply ways to circumvent RESPA, while blatantly abusing the law of agency.

In reference to the mortgage broker exemption, we have not heard a single argument against this issue. It was not addressed in RESPA because at that time the industry was in its infancy at best. Today, we are a major player in the mortgage financing arena, and we must be considered for the good of the industry and the good of the consumer.

I ask this subcommittee to act on these RESPA issues quickly. I would like to thank the subcommittee for allowing me the opportunity to express the viewpoints of the National Association of Mortgage Brokers.

[The prepared statement of Mr. Henig can be found in the appendix.]

Chairman GONZALEZ. Thank you very much, Mr. Henig, and for your prepared text.

Mr. Levy.

STATEMENT OF E. ROBERT LEVY, EXECUTIVE DIRECTOR AND LEGAL COUNSEL, MORTGAGE BANKERS ASSOCIATION OF NEW JERSEY, UNION, NJ

Mr. LEVY. Thank you very much.

It is a great honor for me to appear before you, a man that I have such high regard for and a subcommittee for which I have a high regard.

I want to-you have my written statement, so I am not going to read it word for word. I will summarize.

I want to say, first, this is a complex subject as is evidenced by the various statements that we have heard here today. However, I think we can simplify a lot of it if we focus on the issues that are of greatest concern to us.

I might say that as executive director and counsel for the Mortgage Bankers Association of New Jersey and consultant for Pennsylvania Mortgage Bankers, and someone who has been involved in hearings on this issue for months, I am rather familiar with all of the arguments and all of the positions of the various parties as well as administration's of the various parties as to how the various programs work.

We have two issues when you deal with a realtor. You have the conflict of interest issue and the referral fee issue, distinct issues, although interrelated.

RESPA focuses primarily on the referral fee aspect. However, I believe it covers the realtor, not only because that person is explicitly referred to under the settlement service definition, but also because, Mr. Chairman, a realtor is always receiving a referral fee when he gets a fee in connection with a mortgage loan.

I believe the realtor is already paid for the services that he renders in connection with a mortgage loan through his sales commission, and therefore, since he is already paid for that service, he should not be paid again by the borrower or any other source.

I say this because we all recognize, and I think the testimony here shows today, that the realtor has always had a role in relation to the mortgage financing; and why? Because he has to find a buyer ready, willing and able-and that word was emphasized a number of times by my opponents-able.

What does "able" mean?

Someone financially capable of closing the sale. Why is the realtor concerned with that ability? Because his duty is to the seller, to see that that sales contract closes. For that he is paid very well as a percentage of the sales price, his commission, and that commission covers all of the things he has to do in order to get the sale to close, produce the buyer who is able. If that is the case, the matter is simple, that anything the realtor chooses to do to assist in financing his duties should be paid for by the seller, not the buyer. The conflict problem is so severe that you can't avoid it by disclosure and you enhance it by payment of a fee. When a fee is paid there is a real agency relationship created between the buyer and the realtor. Does this make sense? When you look at the conflict involved, a realtor who has a duty to a seller has a duty to see that the sale closed, and one of the parties earlier said that the seller desires to see the mortgage contingency in the sales agreement covered as soon as possible. That means that the seller's interest in seeing to it that the mortgage contingency is met, that is that a mortgage commitment is achieved because then the sales contract is enforced, then the sales contract has to be closed. Until that time, the buyer can walk away.

So the seller is interested in speed to lock the buyer in.

The programs you are hearing about, the speed aspect favors the seller, not the buyer. The buyer has a period of time within which to get a mortgage. He doesn't need speed.

I was very interested in your comments, Mr. Chairman. You said when I went out and got a mortgage, I was interested in one thing, could I afford the monthly payments.

Not only is that true in your case, but that is true in most cases, and that is why you haven't had a huge human cry from the general public, because the general public also looks at mortgages the same way and they need guidance. When they don't have guidance, they say I can afford that loan, it is $100 a month or $500 a month, and, therefore, I am going to take this loan, I can afford to make the payments.

Throughout the life of that loan as long as they can afford to make the payments, they will never know that, in fact, had they had the proper guidance at the time they made the loan they may have saved enough to buy another product to enhance their lifestyles with. They haven't and don't have it and will never know unless someone pulls them aside and says, let's look at the period of time that you got your mortgage loan, see where you got your mortgage and see whether at that time-Citicorp acknowledges that they are in the upper quartile on rates when they make loans-if you had not been in that program and saved half a point over a 15 year period, how much would you save?

When you ask the buyer if he had known about the other choices available, I bet then you will hear the complaint, because then you will have an informed buyer. Now, we don't.

The complexity of the mortgage market today makes it even less likely that you are going to have an informed buyer. When the realtor suggests that the realtor ought to be more involved in the mortgage transaction, I have to chuckle because I recall hearing the same individuals indicate that on these sophisticated CLO programs, they do not believe the realtor should be the one to advise the buyer because he is not sophisticated enough in the mortgage aspects to be able to properly advise the borrower. That is true.

What has happened with the CLO is that you now have a new acronym, the FSR, a financial services representative. That individual is a paid employee of the brokerage operation that operates the CLO and that meets with the buyer who is brought by the realtor to that individual.

That FSR has to look at these 50 or 60 programs if you are lucky enough to have one of those-some have only one lender on a system-and that has to interpret the data for the buyer.

The CLO is anything but objective, but the FSR looks at the screen, calls the lender and says, are these current rates. He finds out what else is involved with the various programs. He is visited by solicitors from the companies because they come to him to give him input and we find that a large bulk of loans, even though they are on a multi-lender system wind up going to one company.

The CLO has no great objectivity to it. In fact, it can be more insidious a problem than any others we face, because it appears objective.

So, this screen is not wonderful. It is a guise, a tool in the road to making a mortgage loan than can be used properly, be helpful or be extremely detrimental.

The real fine system in Ohio was one proposal where the realtors association attempted to get together a joint venture, a program whereby you would have a CLO system put in the realtors' offices.

The CLO system operated with one lender on the system so that the individuals that were placed on that system and there was some insensitivity to do that, both for fees and because the realtors association was involved were not getting the benefit of a full range of mortgage product at all. They would have been much better served by loan solicitors coming in from the various lenders showing their various products and being able to complete effectively so that competitive forces will work in the interest of the borrower, as it does now.

I think it is important to focus on the CLO. We know there is no saving to the consumer. We know it has a capacity to be abused, that it isn't objective, and quite frankly, it is being used as a boot strap, being presented as a reason to pay fees. It is being said that we can't use the CLO and give the consumer all these benefits unless you allow us to take fees.

That is not true and I say, number one, the CLO doesn't give you those benefits. It can be very abusive and, two, the fees are already being paid through the sales commission, and there is nothing wrong with the realtor increasing that sales commission if that is what is necessary in order to pay the cost of serving the seller.

Who should be in a better position to pay the realtor's cost than the party who is making money on the equity in a home? Shouldn't the money come from that source rather than a borrower who is already paying out a lot of money in order to try to achieve his goal of homeownership? I think the proper place for that additional cost is the seller.

Here you have a buyer. When the broker comes to that buyer and starts working on a mortgage, recognizing his obligations to the seller, which is speed, can he advise properly, say, Mr. Buyer, I just realized you are going to be moving in the next 3 or 4 years, your corporation is probably going to move you, I think maybe you should have an ARM or there is a new product at X-Y-Z mortgage company, let's look at that.

Is he going to do that when there is a fixed rate mortgage available today that the buyer shouldn't have, but it is easy to obtain, maybe a no downpayment deal. The realtor has to chose the quick route because that is what the seller wants. If he doesn't, he abuses his obligation to the seller. If he starts working with the buyer to assist him in the mortgage lending process, it may take a couple of more weeks to find the right deal and the seller will say are you representing my interest.

Even the National Association of Realtors in its task force report concluded that there is this conflict and what they said was let's go out and require that you enter into a written agreement with the buyer at the time you begin to look for a mortgage, because you have to have a written agency agreement to protect yourself. Otherwise, there are too many problems with the transaction.