Our customers have told us that the old ways of financing a home are no longer acceptable. Customers have come to expect speed, efficiency, accuracy and convenience. So we have revamped our loan origination process in order to make it faster and more convenient for the customer.

The new program, called MortgagePower, features faster loan approvals, limited documentation requirements, reduced origination costs and superior levels of service for borrowers who come to us through Mortgage Power members.

Much of the consumer satisfaction and service benefits are achieved through the realtor's role in the mortgage process. Over the past 9 years, Citicorp has made over $50 billion of mortgage loans to more than 450,000 consumers under the Mortgage Power program.

Our customers annually reward us with some of the highest satisfaction scores in the business. Importantly, there have been virtually no consumer complaints about the program. In addition, no one has ever brought to our attention single consumer complaint filed against our program with HUD. The complaints we have heard are from our competitors.

The controversy comes from those competitors who would prefer to have these consumer benefits legislated out of existence rather than have to compete in the free market. It is the realtor's role in this process that has stirred our competition. They would like to have the benefits of realtor involvement in the mortgage process and the use of new computer technology at point of sale legislated out of existence rather than have to compete in the free market. Their logic is that if realtor can be precluded from charging a fee to the consumer for these services, they won't offer the mortgage service. To create this controversy, they have suggested that Citicorp's success results from paying referral fees to realtors for loan business.

Nothing could be further from the truth. Citicorp does not pay referral fees. We are adamantly opposed to such a practice. In fact, we have urged HUD to strictly enforce the anti-kickback provisions currently contained in RESPA which preclude the payments of such fees.

The real issue in this debate are whether realtors should be permitted to assume the larger role that consumers have cast for them; whether consumers should have the right to pay for enhanced services at the point of sale from realtors; and whether consumers have adequate protection as we move into an era of computer-based one-stop shopping for mortgages.

Let me deal with each of these issues.

Real estate agents and other intermediaries are playing a larger role in the financing transaction not because lenders have decided that they should, but because they are in the best position to provide the kind of convenience, counseling and service the consumer has demanded. Because realtors are providing more services in response to consumer demand, a growing number of them are also beginning to charge a fee to their clients for these services.

Programs like MortgagePower have come about in response to the consumer's demand for professional counseling, fast, hassle-free

processing and the convenience of computer-based mortgage services at the point of sale.

The role of the realtor is still evolving, of course, thanks to technology. A growing number of realtors are already using computerized loan origination systems which allow them faster access to loan information, do comparison shopping and give them the capability to take the customer's application and electronically transmit it to the lender of the consumer's choice.

Citicorp's MortgagePower Plus system even goes a step further. We have automated the underwriting process and can give borrowers a binding loan commitment, complete with a Truth in Lending Disclosure and Good Faith Estimate, while they are still in the realtor's office.

MortgagePower Plus runs on the same computer that the realtor can use to access loan information on as many as 50 or more other lenders. We believe that this type of new technology will revolutionize the mortgage process and will prove to be the most efficient, cost-effective and convenient way to obtain a loan.

Realtors who have MortgagePower Plus can provide consumers with a comparative analysis of Citicorp products and pricing and match them up against the hundreds of products of other lenders by dialing into another computer loan origination system. They can match a consumer's needs with the best products and sources, assist the borrower in completing a loan submission to the lender of the consumer's choice, and work the loan through the closing process.

Realtors providing this service typically do so at a cost to the consumer which is a quarter to half of that charged by independent mortgage brokers providing the same service. This is because realtors can spread their overhead over both the realty and mortgage transaction. A mortgage broker must cover all of their costs from the mortgage transaction.

The issues raised by those who would preclude the realtor from providing this service are:

1. Conflict of interest. We believe that there is no conflict of interest in providing separate services related to the same property. In fact, the buyer and the seller have a community of interest regarding financing the home purchase, the critical element in facilitating their mutual desires. The realtor is the natural source for counseling on this important decision.

The realtor has no incentive or motivation to service either the seller or the buyer to the other's disadvantage. In fact, the realtor's principal obligation is to find a ready, willing and able buyer. In today's market, able means a buyer capable of financing the purchase.

The realtor is performing two separate and distinct functions which involve no conflicts of interest. As realtor, he acts as representative and advocate for the seller with respect to the buyer; when that engagement is substantially completed by the execution of a sales contract, he may then perform advisory services for the buyer with respect to the possible lender.

2. Adverse steering. The consumer's interests are adequately protected as long as there is full written disclosure of any fees paid by the consumer to the realtor for enhanced services. When the con

sumer contracts with the realtor, he/she will become legally obligated to provide the best possible loan alternatives.

Importantly, the realtor receives the same mortgage brokerage fee from the consumer no matter where a loan is obtained. There is no incentive to do anything other than recommend the best source. This is the case with MortgagePower, as well as any other borrower-paid fee program. Most realtors work with 3 or 4 lenders because of service, reliability and competitive rates. Our typical MortgagePower members refer less than 20 percent of their customers to us.

Computer loan origination systems have increased the consumer's choice. The same computer equipment can be used to dial into multiple systems to shop among as many as 50 lenders with hundreds of loan products. Our system is resident in many realtor offices alongside Rennie Mae and other computer loan origination systems with multiple lenders.

It may be of interest to this subcommittee that our customers typically shop two to four lenders and receive an average of 2.2 loan commitments before they decide which lender to go with. Clearly, consumers are looking out for their own interests and are not being steered in any single direction.

3. Double commission. The realtor does not charge a double commission. He/she receives a fee for the realty transaction. Any fee for mortgage services is for incremental service rendered for which the realtor has an incremental cost.

A realtor can charge substantially less for this service because there is an efficiency in providing both the realty and mortgage service at the point of sale and spreading his/her overhead against both the realty and the mortgage transactions.

In 1986, we asked HUD for an opinion on borrower-paid fees before we rolled out MortgagePower nationally. HUDs general counsel sent us a letter confirming that such fees could be paid, as long as they were fully disclosed up-front, in writing, and agreed to by the consumer. The intent of RESPA has always been to keep consumers informed and protected, not to restrict anyone's ability to charge a legitimate fee for services rendered.

The key words here are disclosure and choice.

With Mortgage Power, we believe that the up-front written disclosure we require is the first step. Consumers need to know what fees are going to be charged and what services will be performed.

The second protection comes from the fact that it is the consumer who pays the fee directly to the realtor. The act of writing a check to the realtor for these services is, in and of itself, the ultimate consumer protection.

As long as all fees are fully disclosed and understood, and the consumer is in control of any fees paid, realtors should have the option to charge the customers for services rendered in the finding of a mortgage. Consumers should be able to contract for these services if they wish.

All of our competitors' arguments are predicated on the belief that the consumer needs to be protected from himself. We disagree. Our experience is that consumers are capable of watching out for their own interests, as long as there are sufficient disclosures and adequate information available to them.

We have reached the point where homebuyers can find the home they desire, electronically enter a loan applications on the spot and know whether they have a commitment for a loan before they leave the house. That is innovation. That is progress.

The mortgage industry needs to embrace innovation and use it to simplify and expedite the loan process. Instead of limiting or restricting competition, we need to focus our efforts on finding innovative ways to make housing more affordable for Americans.

We need to work together to find new and better ways to make our processes more efficient and our programs more flexible so that consumers will be able to afford their dreams.

I believe we can achieve that, but only if we put aside the kinds of industry squabbles focused on restraining competition that get in the way of real progress that will benefit consumers.

That is what this issue is all about, the restraint of competition. Thank you, Mr. Chairman.

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

Chairman GONZALEZ. Thank you very much.

Before we recognize Mr. Gordon, I wanted to ask the reporter to place this statement in the beginning of the opening remarks when I explained about Members present. I wanted to point out and the record should show that Mrs. Roukema, who is the ranking minority Member of this subcommittee would be here except for the fact that she has, and has had for some time, a very serious family medical situation, and, in fact, today that member of her family will be undergoing surgery, and the record should show that that is the only reason she is not here.

I might add that she wasn't present at the time we had debate on July 31 and August 1 on the housing authorization bill for that same reason, and the record should show that otherwise she would have been here and at the time we first conceived of these hearings, she was agreeable, as was Mr. Wylie, the ranking minority leader.

Mr. Gordon.

STATEMENT OF STANLEY M. GORDON, GORDON & DRYSDALE, ON BEHALF OF THE PRUDENTIAL REAL ESTATE AFFILIATES, INC., COSTA MESA, CA, ACCOMPANIED BY KARUN KHANNA, DIRECTOR, LENDER SERVICES, THE PRUDENTIAL REAL ESTATE AFFILIATES, INC., COSTA MESA, CA

Mr. GORDON. I am Stanley M. Gordon of Gordon and Drysdale appearing on behalf of the Prudential Real Estate Affiliates, Inc. With me is Karun Khanna, director of Lender Services for that company.

When the Prudential Real Estate Affiliates commenced as a real estate brokerage franchiser, it chose to bring the most advanced technology to the real estate broker's office. In the forefront of this was the development of a computerized loan origination system known as CLOS which would enable the real estate broker to provide added services to the consumer similar to those of a mortgage broker.

CLOS is designed to have approximately 6 national and 3 regional lenders on it, selected by Prudential in consultation with its franchisees. The lenders are selected on the basis of reputation for service and ability to provide a wide variety of loan products. Unique to the system is its ability to analyze and compare multiple lenders and products based on the preferences of the homebuyer. A short or long form application is generated on the system. Lenders pay Prudential $425 per application as the reasonable value of developing and operating the system network and Prudential pays the real estate broker franchisee $100 per application as partial reimbursement for the broker's costs and services. The homebuyer makes no payment to the real estate broker in obtaining a loan through CLOS.

Integral to the operation of this and other computerized loan origination systems is the economic necessity for the real estate brokers operating them to receive compensation for the reasonable value of their services rendered and facilities provided.

The real estate broker in our case is incurring added expenses, which includes employing a systems administrator, in providing services which are clearly additional to those traditionally provided by real estate brokers.

Notwithstanding HUDs approval under RESPA of Prudential's giving reasonable compensation to its franchisees for operating CLOS, we find ourselves in a political battle to remain in the marketplace. Simply stated, if real estate brokers cannot receive reasonable compensation for these added costs they will not provide the services.

The arguments of the mortgage banking and brokerage trade associations against such compensation are fallacious and self-serving. Furthermore, there are no actual consumer complaints. On the contrary, we are prepared to submit statements from satisfied consumers who have used our services.

Real estate brokers are no less entitled to receive compensation than mortgage brokers for essentially the same services. If computerized loan origination services are simply a referral arrangement then what are the mortgage brokers doing to justify even higher compensation.

The pricing of loans on CLOS is the same regardless of whether the loan is obtained through the system or outside of it. To lenders on CLOS, the system is an alternative to using mortgage brokers or in-house solicitors to obtain applications. Hence, the costs of CLOS to the lender is the same, if not less, than traditional methods to obtain applications. We also believe that most borrower pay systems result in no added cost to the consumer or the lenders because their pricing method is the same as used by traditional mortgage brokers.

The real estate broker operating a computerized loan origination system has no greater conflict of interest and probably less than that of mortgage bankers or brokers. The informed involvement of the consumer in loan selection and analysis is a vast improvement to being referred to a mortgage banker or broker whose sole compensation is based on the consumer obtaining a mortgage from them. Contrary to the assumption that real estate brokers in being