So a realtor saying they are charging less will actually be charging more.

Mr. Mozilo. We ran a survey because if, in fact, Citicorp could deliver a better product and a less expensive product to the consumer, it certainly would validate the work, the worthiness of their program.

Our survey indicated that they were consistently between a half a percent and a percent higher than we were in their rate consistently, and yet they dominated the marketplace in the New YorkNew Jersey area, which indicated to us the kind of power that the real estate community had and that they were able to direct loans to them even though country-wide, our company was substantially lower in price.

The MBA also ran an independent study relative to these referral programs and found that there was about a half a percent, a little over half a percent higher cost to the consumer when they engage in those programs.

So the answer to your question is that there is certainly no indication that these convoluted technologically-driven programs are cheaper. They are not. There is every indication to believe they are much more expensive.

Mr. LEVY. In fact, in addition to those programs that are more expensive, Citicorp being one, the actual experience of one of the major CLO systems in the country, the experience there shows that there is no reduction in cost whatever to the consumer. In that particular case, at the time there was no increase in cost but there was no reduction in cost or benefit for the consumer.

You have two situations, one where there is a mortgage broker involved between the lender and the borrower and then you have situations where you have no mortgage broker but a mortgage banker or other lender dealing directly with the consumer.

In a lot of these cases where the mortgage banker, for example, would be on a CLO system, the mortgage banker has a cost, about a half a point, that is paid to their loan solicitors.

The argument is made that if you get onto the system you now save the half a point cost, so therefore the cost is reduced. It doesn't work, because the financial services representative who sits at the other end of the system and interprets the data coming through and the company he works for gets at least a half a point, so that there is exactly the same cost in the transaction from that standpoint.

The financial services rep is paid 2 or 3 bases points out of those 50 bases points, which is a half a point. So there is no saving and the largest lender, in fact, testified to that effect under oath, that the cost to the consumer is absolutely the same.

When you realize that the lenders on the system still have to maintain contact with these FSRs, ultimately, I believe, costs will go up because not only do they have to achieve the same half a point which has to be paid to the FSR and which is collected from the borrowers, and the lenders are told to stay at the same quotes as if they were dealing direct so they are absorbing the half a point cost

If they are charging three points on a loan off the system, they are told to stay at three points on the system. If they are on the

system, since the borrow pays the FSR it is FSR. It is coming out of the lender's pocket. Just to show you this is a complex subject and right now at the very least there is no saving to the consumer, but I believe that in the future as the mortgage banker finds that his costs are really greater, not even equal to the direct systems that they use, he is going to have to increase the charges to the consumer, so the consumer ultimately will pay more with the CLO, in my judgment, than they do directly today.

Chairman GONZALEZ. Mr. Mozilo, at the conclusion of your statement a moment ago you mentioned that you had made a study or your organization had made a study to evaluate the difference in cost between the nonuser and the user and that your findings indicated an increase or an enhanced cost. We have been trying to get some data base.

Mr. Mozilo. We can provide that data.

[The information referred to can be found in the appendix.] Chairman GONZALEZ. We would be grateful to you.

Mr. Henig, you also touched on something here which I think you referred to more substantially on page 9 of your testimony where you state that Citibank through their MortgagePower program controls over 20 percent of the mortgage market in the Queens area of New York City, and that their rates are unquestionably the highest.

You also say that Queens has a high percentage of minority borrowers. Is the implication of that statement that the MortgagePower program puts minority borrowers at a disadvantage in the mortgage marketplace?

Mr. HENIG. It is a shame, but it is true. The Queens, New York, market is where MortgagePower started and what I believe I offered in the statement is to go into Queens with any Member or Members of the committee that you wish and when we walk into a real estate broker-mortgage broker who are sending their loans directly to Citibank as well as a few other lenders, what you will find when we ask them the question what do I have to do to get your loans-if I come in with a better rate or can approve your loans in a better time frame, can I get your loans?

They ask you how much do I get paid. I get paid X amount from this or that lender. Their loans are up for bid. When you ask them how can you do that, consumers are smart, they can look in the paper and see 20 lenders and brokers advertising different rates, don't they look? Their answer to you, and it has been said to me literally 30 to 50 times, that is the best thing about being in Queens, they don't know. Half of them barely speak English and we can do this without a problem.

They wonder how you can do it on Long Island, but there Citibank controls almost 10 percent of the market. It is realtors that have the ability to steer a client sending them directly to the lender.

In 1981, I bought my first house. I went to a real estate broker who showed me the house. After I signed the binder, he took down my income and my wife's income and hour combined income was, I believe, $19,000.

The house that we bought was $35,000. Knowing what I know now, I easily could be approved for that loan without any question.

He advised me that my income was not sufficient, that if I went out and tried to get a loan on my own he would have to instruct the seller that this could be a problem, but that he could help me get a loan.

I ended up paying 41⁄2 points, 151⁄2 percent. I can't say if it was competitive, but my total faith and trust was in that real estate broker.

That is what happens in many cases. Not all real estate brokers will steer their clients, by all means.

If we go to markets where real estate brokers are not mortgage brokers, they will say, "We cannot enter into situations where there is a conflict of interest. It is against our code of ethics from NAR."

Many of the real estate brokers don't want to get involved in mortgage brokering.

Chairman GONZALEZ. Well, I think that backs up you, Mr. Mozilo, even though you are based in California you did have operations in New York, and I believe in your statement you said that because of Citicorp you had closed your New York operations.

Mr. Mozilo. Yes. We closed all but one branch. We are hanging on by a thread, but we are hanging on because we will not pay referral fees. We think it is wrong.

And we don't believe that the disclosure is the answer to it because it is a very complex process buying a home. Most people buying a home, it is a first time experience. They don't know what is right or wrong. They don't have anything to judge it against, therefore, anything put before them is all right with them and the control the person has making the transaction is enormous. Therefore, you have unholy relationships that are very difficult to deal with.

If you chose not to play the game, we have to suffer the consequences as long as real estate people are permitted to accept fees of one kind or another.

I have been a victim and have witnessed what was explained by Mr. Henig.

Mr. HENIG. One of the interesting features of the Citicorp program and the way you hear the terminology "referral fee" and the way this really works in the States where the fees are being paid is that the Citicorp program says to the mortgage broker, the real estate broker who is acting as the mortgage broker, because you are a MortgagePower broker, we are going to reduce our fees by, say, half a point; you can charge what you want to the borrower, but we are reducing the fees by half a point.

The impression left is this is a wonderful thing because the borrower gets a reduction of half a point. What is really happening is that the realtor, since Citicorp if it were to lend directly, would be at 3 points and now through the mortgage broker he can have the loan at 22, Citicorp is allowing the real estate broker to take the half a point from the borrower and if they are reducing their points from 3 to 22, the borrower gets no benefit, because the real estate broker gets half a point.

It is an indirect referral fee. That is why the real estate community is so interested in using the Citicorp program. They are able to pick up that differential as a fee themselves.

If you can locate a copy of the NAR task force report to the Board of Governors, I think it is in 1989, you will find a statement in that report that says that under the Citicorp program, even they are against the realtors accepting a fee, because they say that under that program the realtors are not even doing work for the fee.

Mr. WYNN. If I might, I would like to be sure that the subcommittee fully understands MBA's position as it relates to referral fees.

Certainly Citicorp, because of their successful program, has been the object of most of the examples today, but we could just as easily be talking about title companies, closing agents or any other party that could be a transaction to that real estate process who have that center of influence over the buyer, who have the opportunity to charge additional fees just because of that center of influ

ence.

So I would hope the subcommittee would understand that this is from MBA's point of view, not just an exercise to criticize Citicorp's program but to put it into perspective that referral fees are wrong.

It just happens to be that Citicorp is one of the institutions that was able to get this in progress and we think the issue can be dealt with by the simple issuing of a regulation and the final draft prepared by HUD back in December 1988.

Chairman GONZALEZ. The fact remains that that is also one of our primary tasks, to see-I don't believe in legislating just for legislating sake. In other words, if the core of this problem can be reached through administrative rule-making power, I, for one, would prefer that it be done that way.

Mr. WYNN. We agree with you, Mr. Chairman.

Chairman GONZALEZ. What we seek is to find what, if any, is our legislative responsibility through these hearings. This is why they are so immeasureably helpful. Of course, we realize that like in other marketplace cases, we have got competitive situations and those of us sitting up here legislating are not in the business and I think the biggest fear I have ever had is that making decisions that would wittingly or unwittingly adversely impact any American area of activity. That is unintended.

So this is a sensitive and complicated issue, as you know, and I, for one, would much prefer to leave an agency like HUD, that supposedly have the expertise on the day by day basis to oversee these things and judge where it, through administrative and regulatory processes, the general Congressional intent of the legislation can be served without additional legislative problems.

So this is the reason that for us imposes some difficulty.

You do state, Mr. Wynn, that these referral fees do increase the closing costs, and what portion of that enhanced costs would you, if you have some opinion or judgment, what effect do the CLOS have on the computation in the lending marketplace and the allocation of credit and thereby resulting in enhanced costs?

I realize that in almost every field of endeavor where you have technological breakthroughs that-for instance medicine-it is great to benefit from modern science, but some of the medical technology that has been developed is so costly that it may result in

particular medical services being available to a relatively few and affluent citizens.

As I see it, perhaps there is a danger that even in this lesser sophisticated area that could be the case. I am not saying it is, but in your opinion what would you say is the contribution to an enhanced cost by the use of the CLO and the referral process?

Mr. WYNN. I think, Mr. Chairman, let me first say that with respect to the CLO concept technology, as Mr. Mozilo pointed out, he is a perfect example of a very reputable banking company that operates nationwide who has spent $30 million developing a CLO-type technology in which he charges nothing for that. So when he finds himself where he has to go out of business because a competitor who may have that technology is demanding a fee for it, I think that is the perfect example of how the CLO system can add fees. Therefore, if Mr. Mozilo or others like him have to withdraw from an area of the country, what you wind up with is, sure, is technology, but a very limited selection of lenders to chose from. Once that happens is when there could be some real potential for increased cost to the consumer, because the competition has been eliminated.

Mr. Mozilo. If I can comment, the-we find that the cost of the technology is far outweighed by the savings that we benefit from by the speed and efficiency that technology brings. I don't think it is analogous to the life-death situation that you have in the medical field. So we

There is no basis for countrywide charges for this investment technology, because we have benefited and passed that benefit on to the consumer. The problem is that technology is being used as a guise for charging the consumer extra fees when there is no basis for it.

If the real estate community feels they are experiencing additional costs because of the complications of the process today, then they should increase their real estate commissions and that resolves the issue.

The second comment, I think in your investigatory process in dealing with HUD, ask them why when they gave Citicorp the letter in 1986 permitting them to enter into the MortgagePower program, why did they omit FHA loans in that process, saying you cannot permit referral fees to be paid under this concept for FHA loans. Why do they have now two classes of borrowers? Do they feel a FHA borrower is less sophisticated than a borrower of millions, and a borrower of $126,000 doesn't have to be protected? Why did they bifurcate that?

In our discussions with HUD, we have not gotten an answer except on the face of it HUD is concerned about this whole process. Mr. Mozilo. We are not comfortable with putting their program under the Mortgage Power Program.

Mr. LEVY. I think there are a couple of factors we have to consider here. One of the warnings I would throw out to the subcommittee that I think we have to be extremely cautious about is that these CLO programs are, number one, relatively new, they are popping up everyday. So you have new programs everyday with different costs associated with them. You cannot categorize them completely in one category. The Prudential system in its own letter to