Hon. Henry B. Gonzalez kers on the rates and terms of mortgage loans that are available to consumers. The title insurance industry has been in the forefront of developing and applying computer and other innovative technologies to enhance the speed, efficiency, and safety of transfers of interests in real estate. Innovations that will enhance competition such as the use of computers to facilitate the availability of information on mortgage lenders should be welcomed. On the other hand, to the extent such innovations are accompanied by arrangements or practices that provide financial inducements for real estate brokers to refer loan business to particular lenders, the potential anticompetitive effects of such arrangements cannot be ignored. The purpose of the August 8 hearing is to determine the extent to which section 8 of the Real Estate Settlement Procedures Act applies to or should apply to- certain computerized loan origination service programs. In considering these issues, ALTA believes your Subcommittee and HUD should be guided by the broad policy objectives that section 8 was intended to promote. A basic objective of section 8 was to ensure that all providers of services rendered in connection with residential real estate transactions have fair and equal access to the market on the basis of the competitive merits of their products, services, and charges. The legislative history of section 8 demonstrates Congress' recognition that consumers frequently select a provider of settlement services on the basis of the recommendation or referral of other real estate professionals with whom they deal — primarily their real estate broker or mortgage lender. Section 8 was intended to ensure that this recommendation or referral would not be based on financial benefits received by the real estate professional making the referral, but would be based on considerations that served the consumer's best interests — i.e., considerations of price, service, etc. The payment of kickbacks or referral fees as a means of securing referrals of business was prohibited by section 8 not only because such payments are inevitably recouped and passed on to the consumer in the form of higher charges, but also because, in the long run, such payments fundamentally undermine healthy, consumer-oriented competition and channel competition for business in directions that do not serve the consumer's interest. If competition is allowed on the basis of who can offer the greatest financial inducement to those real estate professionals who are in a position to influence the consumer's decision, the vigor of competition based on price, service, and quality will inevitably diminish. Whether any particular computerized loan origination program is a violation of the present language of section 8 is, in our view, a secondary issue. The primary issue that we believe your Subcommittee, Congress, and HUD should address is 33-291 090 - 17 Hon. Henry B. Gonzalez whether these programs are consistent with or in conflict with the objective of promoting the types of "on-the-merits" competition that Congress sought to achieve in enacting section 8. If they are in conflict with that objective, appropriate regulatory or legislative action should be taken. There are two particular thoughts that ALTA would like to share with the Subcommittee on the issues that are the subject of the August 8 hearing. First, we agree with the long-standing position of HUD that the making of a real estate loan constitutes the provision of a "settlement service" within the definition of that term in section 3 of RESPA. The points and origination fees charged by lenders frequently represent the largest items of settlement costs paid by consumers. It would be highly anomalous, to say the least, for RESPA to prohibit the payment of kickbacks or referral fees by providers of pest and fungus inspections or credit reports, but not to prohibit the payment of kickbacks or referral fees by mortgage lenders. In any event, to the extent there is a question on this issue, Congress should clarify the definition of "settlement services" to remove such ambiguity. Second, the payment of a thing of value by a lender to a real estate broker for the referral of mortgage loan business would appear to conflict with the policy objectives and existing language of section 8. It is less clear, however, whether existing section 8 prohibits the payment of a fee by the consumer to the broker for assistance rendered in connection with the consumer's obtaining a mortgage loan, or the circumstances in which section 8 might prohibit such fees. ALTA's position on this issue was reflected in the comments ALTA filed with HUD in July of 1988 in connection with HUD's proposed rulemaking on RESPA and remains our position today. Basically, such payments should be permitted only if the person receiving such a payment (or associates of that person) has not otherwise been compensated for providing settlement services in the transaction in which the mortgage broker fee is paid. If it is concluded that reasonable mortgage brokerage fees should be permitted to be paid by consumers to persons who have otherwise provided settlement services in the transaction, the person acting as mortgage broker should be required to provide information on the loans available from any lender that requests access to the computerized system. This latter requirement would ensure that mortgage lenders in a market cannot be frozen out of the opportunity to have their services brought to the attention of consumers who utilize real estate brokerage companies that otherwise might have an exclusive referral arrangement with a lender. Finally, on a related issue, ALTA would like to use this opportunity to urge your Subcommittee to improve the remedial provisions of section 8 by substituting Hon. Henry B. Gonzalez for or adding to the criminal sanctions of that section a competitor's right of action to obtain injunctive relief and, if successful in such action, attorney's fees and costs. In many, if not most, situations in this area, criminal penalties are inappropriate . More significantly, criminal penalties have proven to be an ineffective deterrent to section 8 violations. Competitors are frequently in the best position to know of section 8 violations of other companies in the industry and the ability of a competitor to obtain a court injunction against arrangements or practices that violate section 8 (plus the recovery of attorney's fees and costs) is likely to be a far more effective remedy and deterrent than criminal penalties. In conclusion, I would reiterate that, in ALTA's view, ensuring the ability of all providers of real estate settlement services to have effective access to the marketplace on the basis of the competitive merits of their products and services should be the overriding consideration applied by the Congress and HUD in determining the appropriate course of action to take on computerized loan origination service programs. CC: Members of the Subcommittee on Housing and Sincerely, James R. Maher Executive Vice President American Land Title Association CITICORP MORTGAGE, INC. SUPPLEMENTAL COMMENTS TO TESTIMONY GIVEN BEFORE THE HOUSE BANKING COMMITTEE'S SUBCOMMITTEE ON HOUSING AND COMMUNITY DEVELOPMENT ON AUGUST 8, 1990 During the August 8 hearing on the Real Estate Settlement Procedures Act (RESPA), there were several statements made by witnesses of the second panel that were either untrue or misleading. Since Citicorp was represented on the first panel and as such not provided an opportunity during the hearing to respond to these statements, we would like to do so at this point in the hearing record. Several untrue or misleading statements came from Mr. Ronnie Wynn, President of the Mortgage Bankers Association. For example, Mr. Wynn said (on page 65 of the unedited version of hearing transcript) that fees accepted by real estate agents for mortgage origination services provided to consumers should be prohibited because they raise the cost of housing. If this were a reasonable conclusion, then it is also reasonable to conclude that mortgage brokers should not be able to accept a fee for mortgage origination services they provide because it too raises the cost of housing. The fact is that mortgage brokers and real estate agents are willing and able to provide unique financial services to homebuyers that choose to use their services. Philisophically speaking, both the Realtor and the mortgage broker should be able to get paid for those services. Practically speaking, however, Realtors are often able to charge less for their services. Whereas mortgage brokers typically charge two percent of the loan amount for their services, Realtors are willing to offer essentially the same service for a fee that averages somewhere between $250 and half a point. This makes economic sense since the mortgage broker's sole compensation is derived from fees charged for providing mortgage origination services whereas Realtors are able to spread the cost of providing such services over their already-existing real estate brokerage operations. Mr. Wynn also stated that fees charged by Realtors for providing mortgage origination services are unnecessary because the work they perform must be duplicated by lenders. Again, to the extent that this statement is true--which it is not-it must also apply to services provided by mortgage brokers. It is useful to point out that the services provided by mortgage brokers and Realtors under the Citicorp program are not duplicated by Citicorp. In fact, for those mortgages where a real estate or mortgage broker is involved, Citicorp reduces the origination fee to the borrower because brokers--be they real estate or mortgage brokers--are performing a service in developing a loan application package. Mr. Wynn suggested that Realtors would present homebuyers only those loan products on which they can earn fees related to mortgage origination services. In an attempt to underscore this point, Mr. Wynn submitted for the record a Citicorp Mortgage solicitation piece which was informally prepared by an energized account executive who was attempting to motivate real estate firms to consider an active role in the mortgage process. This "solicitation" piece was certainly not authorized by management, and to the best of our knowledge was not used in any market other than Nashville, TN. When management learned of the piece, it was immediately discontinued. In fact, Realtors could not realistically expect to perform such mortgage services in the short time suggested nor generate the level of income implied by the piece. An even more fundamental point can be made, however; given how vitally important word of mouth is to sustaining a realty business (most business comes from the combination of repeat business and recommendations from former customers to their friends and associates), it is hardly realistic to suggest that Realtors would steer homebuyers into what is known to be a "raw deal" on a mortgage loan in order to receive a minimal fee on mortgage origination services provided. Mr. Donald Henig, President of the National Association of Mortgage Brokers, cited (page 77) a study conducted by his trade association which suggested that consumers paid more for a loan obtained through a real estate broker by as much as one-half percent on the note and an additional three-quarters to two and one-half points in origination fees. We would certainly be interested in learning the methodology used and seeing the data which supports that statement on a nationwide basis. It is our experience that real estate firms on average charge $250 to one-half point for assisting borrowers in obtaining loans on property in which the broker is involved. Further, Mr. Henig suggested (page 109) that Citicorp improperly conducts its mortgage lending business in Queens. In fact, during a field hearing held late last year in Queens by the House Banking Committee's Oversight and Investigations Subcommittee to assess the lending patterns and practices of mortgage lenders in Queens, Citicorp was commended by a local chamber of commerce as well as Representative Floyd Flake (the area's Representative) for its lending activities in Queens. In the course of answering questions, another witness on the second panel, Mr. Angelo Mizilo, President of Countrywide Funding, alleged (pages 98 and 111) that Citicorp/Citibank was partially responsible for putting him out of business by paying Realtors mortgage referral fees. Firstly, this statement is absolutely untrue since Citicorp/Citibank does not pay referral fees for any mortgage loans. Despite the rather free use of the term "referral fee" throughout the testimony of the second panel witnesses, Citicorp has not and does not pay a fee for the referral of a mortgage application. To the contrary, under our program any fee paid to the Realtor for helping obtain mortgage financing is paid directly and voluntarily to the Realtor by the homebuyer. Secondly, most of Citibank's mortgage business in New York City is sourced through mortgage brokers--very little comes through Realtors contrary to Mr. Mozilo's claim. Even so, Citibank has only a 12% market share in the 10-county New York City area, a highly fragmented market with numerous competitors, and could hardly have caused Countrywide to close three of its four offices. We believe this statement by Mr. Mozilo is outrageous and totally misleading. Mr. Mozilo also questioned (page 117) why FHA was not available through the Citicorp MortgagePower Program. The reason why FHA and VA loans are not available through this program is because of the regulatory requirements imposed to verify employment, credit standing, and downpayment information. This, along with other regulatory requirements, cause significant time delays in order to reach a credit decision. Conversely, Citicorp's Mortgage Power Program was conceived of with the idea of streamlining the mortgage origination process by using other methods to verify information. In the early 1980's, Citibank revolutionized the lending process by reducing the time from application to loan commitment from 60 days to 15 days. Even |