Chairman Manzullo, Ranking Member Velazquez, Distinguished Members of the Committee:

Thank you for the opportunity to testify this morning before the Committee on Small Business of the United States House of Representatives regarding the procedures that were used by the Department of Housing and Urban Development to develop the Real Estate Settlement Procedures Act reform rule.

I want to start by stating that we at HUD have been working to comply with all applicable law, and with the widest public involvement, to carry out our responsibility to lower settlement costs to consumers under RESPA in this rulemaking.

As a key part of this process, we have worked diligently to satisfy all applicable legal requirements and procedures, including those that require analysis of the regulatory burden these changes may bring to small businesses. Acting Secretary Jackson and the Department are committed to full compliance in agency rulemaking. That commitment applies to our rulemaking in general and to our RESPA rulemaking, in particular.

As former Secretary Martinez testified last March, HUD regards RESPA reform and the involvement of small businesses as necessarily complementary; for RESPA reform to work, small businesses must continue to serve their key role in an efficient and effective settlement process. Small businesses perform important functions in real estate settlement transactions because these transactions are by their nature local. Real property is, of course, local, and a local realtor, appraiser, settlement agent and mortgage broker or mortgage banker is ordinarily required to complete the transaction. Because of the importance of small businesses in making mortgage credit available to increase homeownership, HUD as much as anyone is sensitive to the need to assure that small entities are able to continue to play their key role in the settlement process. At the same time, we also need to make sure that we are carrying out the statute's purpose as we comply with all other legal requirements.

HOMEOWNERSHIP OBJECTIVE

The President has set a national goal of increasing homeownership and creating 5.5 million new minority homeowners by the end of this decade. Because RESPA reform holds the promise of lower costs, this effort has become a key part of the Administration's homeownership effort. The mortgage finance process and the costs of a down payment including closing costs are major impediments to homeownership. Every day, Americans choose not to purchase homes because the process of buying and financing a home is unnecessarily daunting and complicated. Others stay away because they don't have the cash for a down payment -a large part of which are settlement costs. For those that do embark on the mortgage process, too many families find the process far too confusing and too costly. We regard this rulemaking as a major Administration initiative to better protect consumers and increase homeownership by making the process of obtaining a home mortgage simpler and clearer for American families.

RESPA

RESPA is a consumer protection statute that was enacted in 1974 to lower real estate settlement costs by assuring appropriate disclosures of these costs to consumers including at the time of mortgage application and at the time of settlement, and by prohibiting kickbacks, referral fees, splits of fees, and unearned fees in mortgage transactions. The law explicitly permits HUD to exempt particular classes of transactions from these prohibitions to benefit consumers.

Since 1974, the industry has changed dramatically and technology has brought new efficiencies to lower costs, but the RESPA statute and rules have remained essentially static. In 1998, as a result of direction from Congress, HUD and the Federal Reserve offered a variety of proposals to simplify and improve disclosures under RESPA. Shortly after the Bush Administration took office in 2001, a major RESPA issue confronted policy makers: the legality of yield spread premiums, payments to mortgage brokers from lenders based on the interest rates of individual loans. This issue came to a head following an Eleventh Circuit U.S. Court of Appeals decision 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 to consumers, HUD issued a clarification to an earlier policy statement on this issue. RESPA Policy Statement 2001-1 reiterated HUD's 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.

In the process of issuing the policy statement, it once again became evident to the Department that there were serious problems in the real estate settlement process. Therefore, in the policy statement, the Department committed itself to simplifying and improving settlement cost disclosures and the settlement process for all involved.

PROPOSED RULE

In July 2002, almost eighteen months ago, HUD published its proposed RESPA reform rule to simplify and improve disclosures provided at the time of mortgage application, in order to facilitate shopping by borrowers and to increase competition to lower settlement costs. HUD's proposal was in important respects informed by the joint HUD - Federal Reserve 1998 report as well earlier HUD rulemakings on mortgage broker fees. Most importantly, the proposed rule was the culmination of years of review of these issues as well as consultation with a wide variety of industry, consumer and government representatives.

ECONOMIC AND SMALL BUSINESS ANALYSES

At the time the proposed rule was issued, the Department issued an economic analysis and an initial regulatory flexibility analysis, in accordance with the Regulatory Flexibility Act as amended by the Small Business Regulatory Enforcement Fairness Act of 1996 (SBREFA). These analyses addressed the market impacts of RESPA reform, and the compliance and regulatory consequences of the proposed rule, including the consequences as they related to small business.

HUD recognized the significance of its proposed rule and the desirability of full public discussion. Therefore, in order to maximize public comment on its proposal, HUD extended the public comment period for the rule, the economic analysis and the initial regulatory flexibility analysis from the usual 60 days to 90 days. HUD also asked for comment on 30 specific questions, to ensure that all major issues were fully considered.

By the end of the comment period, on October 29, 2002, HUD had received a record number of comments, nearly 43,000. Of these, about 400 were substantive responses, detailed letters from a broad range of industry, consumer and government representatives. These 400 responses covered all aspects of the rule and addressed all of the 30 questions raised by HUD in the proposed rule. The remainder were short letters, in many cases form letters, expressing opposition to the rule but not offering alternatives or suggestions for improvement.

During the period of almost 18 months since the rule was proposed and almost 15 months since the comment period ended, the Department has met with interested groups. We have held more than 60 such meetings with interested groups and parties as well as maintaining continued contact with interested government agencies, and we believe that we have met with every group that has expressed a desire to meet with us. These meetings have certainly included representatives of affected small businesses. We have heard the views of these groups concerning the proposal's impact on them, and their suggestions for revisions. During this time, we also testified before and benefited from the views of Congress including this Committee as well as the House Committee on Financial Services and the Senate Banking, Housing and Urban Affairs Committee.

REVISIONS TO THE IRFA

The comments that we have received and the meetings that we have held have included discussions of the Initial Regulatory Flexibility Analysis (IRFA). In developing the final regulatory flexibility analysis we considered these views and gave careful attention to the guidance of the Office of Advocacy of the U.S. Small Business Administration. This guidance helped us consider how best to minimize burdens, while keeping in mind the objectives of our reform effort.

FINAL RULE UNDER REVIEW

On December 16, 2003, HUD submitted a final rule, economic analysis and final regulatory flexibility analysis to the Office of Management and Budget (OMB) for Administration review. Because the rule has been formally submitted to OMB and is still under review there, I cannot comment on the specifics of any part of the rule or the accompanying analyses. Discussing the rule or these analyses while the rule is under OMB review would undermine the deliberative process and interfere with the ability of the Executive Branch to make decisions. Nonetheless, I can say that in my experience at HUD over four administrations, there are nearly always changes between a proposed rule and a final rule, based on the comments received. Indeed, making changes effectuates the purpose of public comment.

I can testify that we have worked diligently to follow applicable procedural requirements to assure that the final rule satisfies RESPA's intent, and that the process itself has satisfied applicable small business related requirements as well as the other procedural requirements of the Administrative Procedures Act. I can also assure you that there has not been a rush to promulgate this regulation, but rather a deliberate and careful effort to ensure that the letter and spirit of RESPA, the Administrative Procedures Act and the Regulatory Flexibility Act of 1996, as amended by the Small Business Regulatory Enforcement Fairness Act of 1996, are fully satisfied.

CONCLUSION

We believe that the Department has developed a comprehensive, balanced rule. In developing it we carefully considered all comments offered by the public, including the comments offered by settlement service providers such as title agents, brokers, appraisers, credit bureaus, consumers, and others that provide the basis for changes in the final rule.

I thank the Committee for the opportunity to meet with you today. Your continued interest in the Department's efforts to reform RESPA is evidence of the importance of the issues we are addressing, and I can assure you that we recognize their importance.