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Statement by Secretary Mel Martinez
before the Committee on Financial Services
U.S. House of Representatives
October 3, 2002
Chairman Oxley, Ranking Member LaFalce, Distinguished Members
of the Committee:
Thank you for the opportunity to join you this morning to discuss
a major initiative of the Bush Administration: our unprecedented
effort to increase homeownership by making the home financing process
more transparent, simpler, and less costly.
We are committed to eliminating the homeownership gap that exists
today between the minority population and the rest of the country.
The President has set a national goal of creating 5.5 million new
minority homeowners by the end of this decade. Our comprehensive
plan for achieving this combines new initiatives and expanded programs
with public/private partnerships focused on making affordable homeownership
an option for more families.
The mortgage finance process and the costs of closing are major
impediments to homeownership. Every day, Americans enter into mortgage
loans - the largest financial obligation most families will undertake
- without the clear and useful information they receive with most
any other major purchase.
After agreeing to the price of a house, too many families sit down
at the settlement table and discover unexpected fees that can add
hundreds, if not thousands, of dollars to the cost of their loan.
And at that point, they have no viable options. On the spot, the
borrower is forced to make an impossible choice: either hand over
the extra cash and sign, or lose the house.
Americans spend approximately $50 billion each year on settlement
costs. I would guess that most of them do not know precisely how
much their mortgage loan will cost them until the eleventh hour,
and have little or no opportunity to shop for settlement services.
As a result, many homebuyers find the settlement process to be filled
with mystery and frustration.
It is time to take the uncertainty out of mortgage financing. This
Administration is committed to streamlining the process, so consumers
can shop for mortgages and better understand what will happen at
the closing table. It is for these reasons that HUD has proposed
a major overhaul of the regulations governing the Real Estate Settlement
Procedures Act (RESPA).
RESPA REFORM
RESPA has been a priority of mine since I came to HUD. Shortly
after taking office, I was faced with a major RESPA issue: the legality
of yield spread premiums, the rate-based lender payments to mortgage
brokers. This issue came to a head following an Eleventh Circuit
U.S. Court of Appeals decision in Culpepper v. Irwin Mortgage that
called into question the legality of these payments under RESPA.
Because the decision potentially jeopardized the legitimate use
of these payments to lower upfront settlement costs, HUD issued
a further clarification. What became RESPA Policy Statement 2001-1
reiterated our view that as long as the broker's compensation is
for goods, facilities, or services, and the total compensation is
reasonable, yield spread premiums to the mortgage broker are legal
under RESPA.
At the same time, the Department recognized that there were serious
disclosure problems involving yield spread premiums. We noted that
less-scrupulous brokers often used yield spread premiums to generate
additional profits, placing unsuspecting borrowers in higher-rate
loans without their knowledge.
In the process of issuing the policy statement, I committed HUD
to establishing clearer disclosure rules for mortgage broker fees,
and to simplifying and improving the mortgage origination process
for everyone involved.
BASIS OF THE REFORM EFFORT
While RESPA, as adopted in 1974, was appropriate for the time,
it has not sufficiently evolved and accounted for the many dramatic
changes in the lending and housing industries in the past 28 years.
The disclosure requirements under RESPA have not been substantially
revised in a decade.
And RESPA's promise of reduced settlement costs has yet to be fulfilled.
Reforming RESPA now is the right thing to do. Too many Americans
seeking to buy or refinance a home are not as well informed as they
need to be. The mortgage origination process is too complicated,
too costly, and too much of a mystery for many borrowers. The experts
told me that fixing this would be too difficult and too controversial,
and our efforts would probably not succeed. But this problem is
too important to ignore.
In June, the Administration unveiled a set of principles called
the Homebuyer Bill of Rights that will from now on guide the home
settlement process. These principles are consumer driven and rooted
in the homebuyer's right to know. They stand as the centerpiece
of our efforts to empower would-be homeowners - and existing homeowners
looking to refinance - through access to mortgage finance information.
The Homebuyer Bill of Rights specifies that:
- Homebuyers have the right to receive settlement cost information
early in the process, allowing them to shop for the mortgage product
and settlement services that best meet their needs;
- Homebuyers have the right to have the disclosed costs be as
firm as possible, to avoid surprises at settlement;
- Homebuyers have the right to benefit from new products, competition,
and technological innovations that could lower settlement costs;
- Homebuyers have the right to simplified disclosure and access
to better borrower education;
- Homebuyers have the right to know they are protected through
vigorous RESPA enforcement and a level playing field for all industry
providers.
With
these principles to guide us, we undertook a major reform of the
regulatory requirements under RESPA.
After
months of consultations with industry groups, consumer advocates,
and federal agencies, including an initial review by the Office
of Management and Budget (OMB), HUD published its reform proposal
for public comment on July 29. The comment period is open until
October 28, 2002.
We
believe that this proposal can reduce closing costs by an average
of $700 per closing. That kind of savings will allow many more Americans
currently priced out of the homebuying market to buy a home. The
aggregate could result in a savings to consumers of as much as $8
billion. We also expect our proposal to promote innovation in the
marketplace and inspire greater public confidence in the mortgage
lending industry.
ELEMENTS
OF THE PROPOSED RULE
The
Proposed Rule addresses the inadequacies of the existing regulatory
scheme by:
- Fundamentally changing the way in which compensation to mortgage
brokers is disclosed to borrowers;
- Significantly improving HUD's Good Faith Estimate (GFE) settlement
cost disclosure; and
- Removing regulatory barriers to allow the industry the option
of offering guaranteed packages of settlement services and mortgage
loans to borrowers.
Broker Fees
Specifically, the Proposed Rule significantly improves the disclosure
of payments to mortgage brokers, commonly known as yield spread
premiums.
Under current rules, such a payment is frequently reported on the
GFE - and later at closing on the HUD-1 - with abbreviations that
most consumers are not well informed enough to understand. In addition,
the payment is not included in the calculation of broker compensation,
nor is it listed as an expense to the borrower. As a result, many
borrowers have no idea that they are paying for the yield spread
premium in the form of a higher interest rate.
The Proposed Rule would require that all such payments be reported
on both the GFE and the HUD-1 as a credit to the borrower toward
his or her closing costs.
This means that, when a broker intends to receive any compensation
from a lender payment based on the borrower's interest rate, the
broker must report it as part of the total origination charge. This
preserves the use of rate-based lender payments as a means of paying
closing costs while lessening the chance that brokers will use these
payments to increase their income without the borrower's knowledge.
The Good Faith Estimate
The Proposed Rule would further revise the GFE to better achieve
the law's basic purposes. Current GFE requirements arguably lessen
consumer understanding and increase costs by requiring that every
charge, however creative, be itemized on the form.
The new GFE would require that the charges of settlement service
providers - the lender, broker, title agent/insurer, and other third
parties - be combined and disclosed as a single dollar figure for
each major category. The Rule would also establish limits or tolerances
to provide clearer standards for good faith estimates of most of
these charges. Specifically, the Rule establishes a zero tolerance
for the loan origination fee and other services provided or selected
by the loan originator, and a 10 percent tolerance for most services
provided by third parties. Some costs are not subject to a tolerance
- such costs as per diem interest, hazard insurance, and buyer's
title insurance, which are outside the control of the loan originator.
These changes to the GFE and the regulatory scheme hold great
promise for eliminating duplicative or unnecessary charges, or "junk
fees," and will lead to lower settlement costs. We also believe
that the new GFE requirements will empower consumers to shop for
the best loan to meet their needs; consumers will get the GFE before
they have to make a commitment to the lender, giving them time to
shop, and the GFE will emphasize the total cost of the loan - the
bottom line for the consumer.
Packaging
The Rule permits loan providers to offer guaranteed mortgage packages.
This might provide an even better means of encouraging shopping
and lowering costs.
Under our packaging proposal, the settlement costs cannot vary
from the time the offer is made, and the rate - unless locked by
the borrower - can only vary in accordance with an observable index
or yardstick. Packages must remain open for 30 days. The fact that
these packages will consist of one or two numbers at most will permit
true price comparison.
Any entity offering such a package may qualify for a safe harbor
from RESPA Section 8 scrutiny if it offers the following - at no
charge - to a borrower who submits an application:
- A guaranteed package price for all lender-required settlement
services;
- A mortgage loan with an interest rate guarantee; and
- A contract for the transaction in the form of a Guaranteed
Mortgage Package Agreement.
The key point with our packaging proposal is that the Rule in
no way mandates packaging; it simply makes it available as an option.
It is not our intention to pick winners or losers in the industry
but rather to unleash the creativity of the marketplace.
Injecting greater competition into the mortgage lending process
and among settlement services is an important reason for reforming
RESPA. When consumers are empowered to shop for the best loan to
meet their needs, the market will respond to the competition by
lowering closing costs. When closing costs are reduced, home loans
will become less expensive and more families will become homeowners.
RESPONSE TO THE RULE
Since publication of the Proposed Rule, we have been heartened
by the strong support it has received from numerous industry and
consumer groups, and governmental agencies. But, some criticisms
about the Rule and its possible impacts have been brought to our
attention. Some of these criticisms are based on misconceptions
that we are attempting to correct. Others are differences that I
think can be bridged. In some cases, we may simply have to agree
to disagree.
RESPA ENFORCEMENT
Another feature of the Department's reform effort is stepped-up
enforcement.
I have committed new resources toward enforcing RESPA - to address
current violations and to make certain that the benefits of the
proposed reforms are achieved. In conjunction with significantly
increasing the level of staff devoted to RESPA enforcement, I have
established a new office, along with a new Deputy Assistant Secretary,
to bring greater attention and departmental resources to RESPA enforcement.
This summer, the Department announced five major settlement agreements
with mortgage lenders and service providers, with payments of nearly
$2.3 million. HUD has budgeted $1.5 million that is available to
investigate RESPA violations. And we are beefing up our investigative
staff to further strengthen our RESPA enforcement efforts.
HUD continues to work with other federal and state regulatory agencies,
as we did recently with the Federal Trade Commission in the Mercantile
Mortgage case, to complement and leverage our enforcement efforts.
You should also know that the Department will continue to defend
its position that one settlement service provider's markup of another
provider's fee is a RESPA violation. The Department of Justice has
recently filed amicus briefs in three federal circuit courts of
appeal taking this position. Markups add to settlement costs and
are inconsistent with our goal of assuring transparency in disclosures
to consumers.
PREDATORY LENDING
Finally, I would like to say a few words about predatory lending,
an issue this Administration - and the Committee Members as well
- are deeply concerned about.
Elderly and minority homeowners are particularly vulnerable to
predatory lending practices. These practices include loan "flipping,"
home improvement scams, unaffordable mortgage loans, repeated refinancings
with no borrower benefit, and "packing" life insurance and other
products into the loan amount.
We believe that our proposed reforms, and the greater transparency
they ensure, will make it more difficult for unscrupulous lenders
to abuse borrowers. But I want to be very clear that we do not consider
RESPA reform to be a "silver bullet" solution to predatory lending.
More must be done to address predatory lending while preserving
a source of credit for those with less-than-perfect credit histories.
Consumer education and enhanced financial literacy are potent
weapons in combating predatory lending. For this reason, the Department
is currently providing $20 million for consumer education and housing
counseling, and has requested an additional $15 million for this
fiscal year, which we hope you will include in our appropriation
this fall.
In addition, HUD has undertaken a number of other initiatives
to fight predatory lending in FHA programs. These include:
- Strengthening oversight of FHA-approved mortgage lenders through
the "Credit Watch" program, with the goal of identifying problem
loans and lenders earlier on;
- Expanding protection of homeowners by proposing performance
standards for appraisers of FHA single-family homes under the
Department's "Appraiser Watch Initiative"; and
- Developing a rule to stop "flipping" of FHA-insured properties.
HUD has played a key role in the Baltimore predatory lending task
force. The combined efforts of federal, state, and local authorities,
as well as profit and nonprofit organizations, has led to increased
consumer education, restructured loans, and a large number of indictments.
We believe that this approach can and will serve as a model for
other areas targeted by predatory lenders.
CONCLUSION
We believe that the Department has developed a well-crafted proposal.
We look forward to reviewing the comments offered by the mortgage
lending industry, consumers, government agencies at all levels,
and others that will provide the basis for a final Rule. To be truly
effective, the final Rule will require the full participation of
each of these interests; therefore, we need to know whether the
approaches we have proposed are the right ones - and if not, what
alternatives may work better.
I am committed to creating a homebuying and mortgage finance process
grounded in transparency and simplicity. By reforming the rules
governing the purchase and financing of a home, we will create new
opportunities for first-time homebuyers, keep the American dream
of homeownership alive for more families, and inspire greater public
confidence in the mortgage lending industry.
I would again like to thank the Committee for the opportunity to
meet with you today. I appreciate your continued support of the
Department's efforts, and I welcome your continued counsel as we
work together on behalf of the American people.
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