Statement of General Counsel Gail Laster before the
July 17, 1998
Senate Committee on Banking, Housing, and Urban Affairs
Subcommittee on Housing Opportunity and Community Development
you, Mr. Chairman, and members of the Committee, for the opportunity
to testify before you today with Governor Gramlich of the Board
of Governors of the Federal Reserve System, regarding the efforts
of HUD and the Board to recommend reform of the Real Estate Settlement
Procedures Act (RESPA) and the Truth in Lending Act (TILA).
joint report on RESPA/TILA reform that Governor Gramlich discussed
represents an unprecedented cooperative effort between HUD and the
Board. We at HUD believe it carefully identifies problems under
the current RESPA and TILA statutes, explores alternative solutions,
and then offers substantial recommendations for legislative change.
We are particularly grateful for the Board'-s dedication to the
development of the report and the fine cooperation between our respective
staffs in that effort. The interplay between these two staffs and
the advice from outside interested parties, such as the Mortgage
Reform Working Group, have given this report a vitality which it
would not otherwise have achieved. I also want to personally commend
the staff of your committee who have been most attentive and helpful
in their dealings with both agencies.
I. Improvements in the Current System
Governor Gramlich indicated, the proposals in our joint Report would
solve several problems under RESPA and TILA, to protect consumers
and to provide clearer, less burdensome rules for industry. If enacted
into law, these proposals would:
consumers to be better able to shop for home mortgages, increasing
competition among settlement service providers to lower settlement
lenders and other settlement service providers the choice of operating
in a simplified and less restrictive regulatory framework, or
to continue to operate in the current environment with clearer
and more enforceable rules;
new protections against predatory and abusive lending practices
that have threatened the homes and the financial stability of
many vulnerable homeowners nation-wide.
of us recognize that buying and financing a home is a consumer's
largest and most complex financial transaction. For most new homeowners,
the process is especially difficult and frustrating- Some new homebuyers
may be the first in their families to own their own homes. Some
new homebuyers have come from countries where owning their own home
was beyond their expectations or experience. Most new homebuyers
come away from the experience wondering whether they did the best
they could, or whether the fees they paid were
the homebuying process does not necessarily end the homebuyer's
involvement with the home finance system. With the increase in real
estate values and the down trend in interest rates, homeowners often
refinance or take on additional secured debt. Even if they don't,
they hear and see enticements to do so in the media every day.
products have proliferated in the mortgage finance market to put
homeownership within the reach of more Americans than ever before,
allowing current homeowners to take advantage of the equity
in their homes for home improvements and cash for cars or college,
a needed medical service, or even to provide a stream of income
for the retirement years. But with these opportunities have come
some opportunists--predators who seek out unsophisticated or vulnerable
homeowners to prey on for their own advantage, not to help
older homeowners and homeowners who live in areas that are not well
served by lenders may be particularly confused and vulnerable to
at HUD and my colleagues at the Federal Reserve Board believe that
under RESPA and TILA, we must make the experience of buying and
financing a home both simpler and, consistent with the purposes
of these Acts, more efficient. Therefore, when Congress
that the Board and HUD improve and simplify disclosures, we took
our work seriously. In dealing with RESPA and TILA reform, we must
address the needs of all types of consumers, those who are credit-savvy
and those who are not; those who have strong credit records and
those who do not. we must recognize the desirability of the free
flow of credit, but we cannot be blind to the reality that the unwary
consumer can be greatly harmed.
has dealt with some of the abuses that existed when the act was
first passed, but it has not prevented other abuses from appearing.
Legislative reform must deal not only with simplification for the
benefit of lenders, but protection for the benefit of consumers.
In this report, we at HUD have attempted to balance these competing
interests, the needs of borrowers for a simpler and more efficient
system and the creditors' need to assure security for the credit
they extend. In most cases, the Board of Governors and HUD were
able to make joint recommendations. In some circumstances, we deferred
to the Board in respect for their expertise; similarly, in other
areas, they deferred to us. On occasion, one or the other of us
are submitting our separate recommendations. But I want to assure
the Congress that the process_,, which you mandated, involved an
extensive consideration of all of the public and private views that
both HUD and the Board could obtain, and an intense and interactive
exchange of views between the Board and HUD on all of these critical
all of these interactions it becomes clear to us that reform will
not be possible without consensus on reform's major elements. Those
who loan the money, those who provide the settlement services, those
who service the loans, and those who insure the transaction if the
loan. somehow fails, all are parties affected by whatever rules
the agencies make or the Congress enacts, and their interests have
been well represented. The interests of consumers will be affected
most of all; HUD and the Board took steps to ensure that their interests
also have been well represented. We have seen evidence that the
concerned parties are listening and learning from one another. Nonetheless,
consensus has not, yet been reached. It is the hope of HUD that
this report will inspire consensus and will provide the necessary
momentum for Congress, in cooperation with all the interested parties,
to finish the job of mortgage reform.
Secretary Cuomo's Principles Concerning RESPA Regulations and Reform
HUD, Secretary Cuomo established guiding principles for the Department's
regulatory efforts under RESPA. These principles include:
meaningful and timely disclosures to consumers;
against illegal fees;
that the settlement industry is changing;
impediments to lending to underserved areas and borrowers;
consumer and mortgage industry groups; and
clear rules for affected industries and consumers.
shaped its proposals in accordance with these principles.
TWO HUD CONCERNS
Gramlich deferred to me in two areas which I would like to cover
now: the desirability of achieving reliable closing cost information
in order to promote shopping and competition and the recommendations
regarding predatory lending practices, including revisions of the
Home Owner's Equity Protection Act (HOEPA).
Improved disclosure requirements and guaranteed costs.
current RESPA requirements, when a consumer shops for a mortgage
loan, he or she frequently contacts one or more lenders or mortgage
brokers. While many consumers will shop for more favorable loan
terms, most do not comparison shop for the many settlement services.
When the consumer visits a lender and sits dow-n to discuss loan
options, under current law the lender is not required to provide
the consumer an estimate of settlement costs until after the consumer
applies for the loan. Under RESPA, the consumer need not receive
an estimate of settlement costs (the Good Faith Estimate or GFE)
until the time of, or within a 3-day period after, loan application.
The lender is not required to provide it by mail until three business
days after application. This means that the borrower may not receive
the GFE until a week after application.
And under RESPA, the estimate of settlement costs Or GFE is just
that, an estimate. If consumers discover that the cost estimates
they receive differ significantly from the final figures, they have
no Federal remedies to address inaccuracies. Consumers also frequently
must pay a fee before receiving the GFE, and they may receive it
too late to find it helpful in comparison shopping.
Section 8 of RESPA restricts kickbacks and unearned fees to protect
consumers and reduce settlement costs, mortgage lenders and others
say that it has adverse consequences to consumers. They say that
Sect-ion 8's prohibitions make lenders and others unwilling to engage
in activities to negotiate a package of settlement services and
that this ultimately deprives the consumer of lower settlement costs.
Consumers and industry groups say packaging could lead to more consumer
shopping and price competition. Limited relief from RESPA's Section
8 prohibitions is therefore necessary to foster these arrangements.
8 also has been used in litigation to protect consumers. Therefore,
any changes to Section 8 to facilitate better disclosures necessitates
substitute consumer protections. Also, in enacting HOEPA, the Congress
was concerned that home equity-rich and cash-poor consumers were
particularly vulnerable to . being convinced to enter into mortgage
loans that are not in the consumer's interest but would enrich the
vendor, and worse, could lead to the lose of the consumer's home.
These abuses persist.
detailed disclosures under RESPA, while welcomed by some borrowers,
are daunting to others. Under TILA, consumers also frequently receive
disclosure of the Annual Percentage Rate or "APR" and finance charges
too late to allow consumers to shop for loans. The APR itself, because
it is not widely understood and does not include all costs of obtaining
a loan, is not an effective shopping tool for most consumers.
order to solve these problems, HUD and the Board have recommended
in the report that:
Targeting abusive lending practices.
Creditors and others be required to give firmer disclosures of
settlement costs to consumers to promote shopping, competition
and lowered settlement costs. Both agencies recommend that creditors
and others be offered a choice between guaranteeing settlement
costs (so that the costs stay the same from the time they are
disclosed through the time of settlement) or providing a firmer
estimate to consumers (within a tolerance) Creditors and others
would be liable for noncompliance.
encourage cost guarantees, HUD recommends, and the Board supports,
establishment of an exemption from Section 8 of RESPA be offered
to creditors and other entities offering a package of settlement
services. HUD specifically recommends an exemption that meets
appropriate conditions, including: (1) offering consumers a comprehensive
package of settlement services needed to close a loan; (2) providing
consumers with a simple prescribed disclosure that gives a guaranteed
maximum price for the package of services through settlement;
and (3) discloses the rate and points for the
loan and guarantees that the rate and points will not increase,
subject to prescribed conditions.
believes that consumers need complete information on rates
and points and other closing costs as soon as possible. The Board
recommends that initial disclosures be coordinated and provided
within 3 days of application. This is the current RESPA rule,
but not the TILA rule.
recommends earlier initial disclosures and believes technology
is making this possible. If there is a trade-off between complete
disclosures and early disclosures, in the case of lenders without
automated systems or where credit information is incomplete, HUD
recommends that the time limits be sufficiently flexible to ensure
that the consumer receives complete cost information, including
settlement costs and rates and points. HUD also recommends that
consumers receive initial disclosures before a significant fee
that might deter shopping is paid by them to the creditor.
part of any reform legislation, HUD and the Federal Reserve recommend
that additional substantive protections be adopted as part of the
reform package. These protections should target abusive lending
practices without unduly interfering with the flow of credit and
without narrowing consumer options in legitimate transactions. These
protections should be included as part of any legislation, to ensure
that all homeowners benefit from reform.
and the Board recommend:
for borrowers in loans now subject to the Homeowners' Equity Protection
Act (HOEPA) including-
restrictions on balloon payments, and
against lump sum credit life insurance,
rights to notice in foreclosures advising consumers
of their legal rights, the process to be followed if consumers
do not exercise those rights, and information about the availability
of third party counseling.
also recommends other key protections including:
- Requiring pre-transaction counseling where appropriate for vulnerable
borrowers before they enter into HOEPA loans;
requirements - Imposing reporting requirements for certain unregulated
lenders on HOEPA loans;
HOEPA Amendments - Expanding coverage and protections under HOEPA,
including such measures as regulating the financing of closing
costs, requiring lenders to take into account the borrower's capacity
to repay, expanding the current restrictions on prepayment penalties,
and providing new protections for home improvement borrowers claiming
contractor nonperformance or malfeasance;
foreclosure prevention strategies - Adopting new foreclosure prevention
strategies that, where appropriate, include pre-foreclosure counseling
and new Federal rights for borrowers to cure delinquent loans
and recover remaining equity through private sale prior to foreclosure;
UDAP Standard - Congress should consider establishing a new Federal
unfair and deceptive acts and practices standard for transactions
that are unfair or unconscionable.
also recommends that -
information be provided to consumers under RESPA - that initial
disclosures inform consumers of the functions of mortgage originators
(mortgage brokers), requirements for escrow accounts and private
mortgage insurance (PMI); and that
remedies be established for misdisclosure and non-disclosure,
private causes of action, expanded injunctive authorities, strengthened
criminal sanctions, and more uniform statutes of limitations.
in the event Congress does not enact major reform, MM recommends
that an essential reform package be enacted. This opportunity for
reform should not be missed. The package would include: requirements
for dissemination of educational materials earlier in the homebuying
or mortgage shopping process; combining and simplifying the RESPA
and TILA disclosures and coordinating their timing to the greatest
extent feasible; disclosing the additional consumer information
described above; requirements for more accurate estimates of settlement
costs; simplified and new remedies against inaccurate disclosures
and other consumer protections; and appropriate protections against
HUD and the Federal Reserve agree that, for the public to benefit
from the changes we propose, there must be a commitment to educating
consumers about the changes. Consumers must understand the two disclosure
approaches--guaranteed, and estimated settlement costs--and uses
of the APR for purposes of shopping and negotiating loan terms.
reform under RESPA must provide more effective tools for consumer
protection-in today's marketplace--a marketplace radically different
than the one that existed when RESPA and TILA were first written.
Chairman, on behalf of Secretary Cuomo, I want to thank you for
the opportunity to appear here today to offer HUD's perspective
on the joint report of the Board of Governors of the Federal Reserve
Board and = on RESPA/TILA reform. I am optimistic that our report
can lead to reform that will enhance consumer protection, while
simultaneously providing greater industry certainty and addressing
other weaknesses in the current State and Federal coverage of mortgage
loan transactions. To acquire a home, to enjoy a home, this is the
bedrock of our liberty and our freedom in America.
know that you share these principles. Governor Gramlich, his colleagues
at the Board of Governors and we at HUD are hopeful that these recommendations
will move the debate on reform proposals. We stand ready to do whatever
we can do to assist the Congress's efforts.
Content Archived: January 20, 2009