Testimony of the 108th Congress
HOUSE FINANCIAL SERVICES HOUSING SUBCOMMITTEE U.S. HOUSE OF REPRESENTATIVES
FEBRUARY 25, 2003
The Independent Community Bankers of America (ICBA)1 is pleased to submit written testimony today on behalf of our nearly 5,000 community bank members, and to share with you their views on the Department of Housing and Urban Development's (HUD) proposed Real Estate Settlement Procedures Act (RESPA) rule. On October 28, 2002, ICBA responded to the invitation to comment on the proposed rule, and submitted an extensive letter to HUD, a copy of which is attached for your reference.
ICBA and its members place a high value on the importance of homeownership. Our current mortgage finance system has enabled a record number of Americans to realize that dream, and we fully support the administration's goal to further increase minority homeownership by 5.5 million families. It is a simple fact that the lower the costs of obtaining a mortgage, the more affordable homeownership becomes.
HUD's proposed rule has been presented as an attempt to simplify and improve the process of shopping for mortgage loans with the three main objectives being to: (1) fundamentally change the way in which mortgage broker compensation is reported; (2) improve the existing RESPA disclosure scheme; and (3) remove regulatory barriers to enable the offering of packages of settlement services to borrowers.
While the ICBA is a proponent of simplifying the mortgage loan process, and giving borrowers more choices, we have serious concerns with the proposed rule, because it will seriously undermine the mortgage finance process, and reverse the trend of overall homeownership growth. We firmly believe that should this rule be adopted as it stands, it will, at a minimum, result in borrower confusion, hidden fees, increased settlement costs, and fewer credit and settlement service options as small lenders and brokers are driven from the market because they simply will not be able to negotiate the necessary discounts from settlement service providers to compete with larger institutions -- in short, a serious disruption of the mortgage finance system.
Our testimony addresses the following areas covered by the proposed rule: Mortgage Broker Compensation; HUD's Good Faith Estimate (GFE) settlement cost disclosure; and Guaranteed Mortgage Packages.
Mortgage Broker Compensation
The proposed rule calls for a change in the manner in which lender payments to brokers are recorded and reported to consumers. Specifically, the rule would require that for loans originated by mortgage brokers, any payments from a lender based on a borrower's transaction, would be reported on the Good Faith Estimate (GFE), and the HUD-1/1A Settlement Statement as a lender payment to the borrower, including payments based on an above par interest rate on the loan (including yield spread premiums). Similarly, any borrower payments to reduce the interest rate (discount points) in brokered loans must equal the discount points paid to the lender, and be reported as a borrower payment to the lender. HUD believes that this change will resolve disputes regarding broker compensation, and improve the process of obtaining a home mortgage.
ICBA fully supports disclosure of broker compensation in mortgage loan transactions. However, it is our view that this proposed change would neither resolve the current broker compensation issues, nor accomplish the goal of improving the process. Reporting broker compensation as proposed will not result in a simpler more transparent process, but will instead result in more confusion for the borrower. We believe that retention of the existing disclosure requirements would prove far less confusing.
HUD's Good Faith Estimate Settlement Cost Disclosure
The proposed rule also calls for a change in the existing RESPA disclosure scheme through a new format for the Good Faith Estimate (GFE). The goal is to create a consumer friendly form providing borrowers with more useful and accurate information to assist them in the mortgage finance process. The rule proposes more precise cost estimates than what is currently required. These estimates would be grouped by category with a zero tolerance level for some items, except in the event of unforeseeable and extraordinary circumstances, and a ten percent tolerance level for others. While HUD considers this an enhancement to aid the borrower, we believe it will affect both borrower and lender by ultimately resulting in an increase to the cost of loan packages, and will negatively impact the ability of community banks to compete in this arena.
Certain costs are much easier for loan originators to estimate than others, and certain costs set by third parties are difficult for a lender to guarantee. For example, loan originators generally know, with certainty, the cost of a credit report. However, situations often arise for consumers with unusual credit histories when additional information must be verified causing the costs to unexpectedly increase. This may especially be the case with recent immigrants or minorities who do not have traditional credit histories, the very individuals the Bush administration is trying to reach, and the very individuals who reside in the communities served by our member banks. Similarly, a loan originator may order a property survey or appraisal expecting that, based on experience, it will cost a certain amount that can be guaranteed, but find that once work has begun, the property requires additional surveys or appraisals at an additional cost. Both of these are examples of costs that under the proposed rule would fall in the zero tolerance rate category, and would, therefore, have to be guaranteed by the loan originator who would also be required to absorb any and all unexpected or additional costs. Aside from the two previous examples, there are several other zero or ten percent tolerance rate items that may vary depending on the final loan amount and closing date, both of which can change at the request of the borrower, yet any resulting increase in costs will again be absorbed by the lender. This will naturally result in loan originators increasing the costs of packages to all borrowers to guard against such contingencies.
Moreover, all service providers do not charge the same amount for their services. Our community banks generally use the lowest cost provider. However, for reasons beyond the bank's control, that may not always be possible. There will be times when the preferred provider is unavailable or too busy to ensure that the requested work is completed according to the borrower's schedule. The precise cost estimates and guarantees required under the proposed rule will place banks between the proverbial rock and a hard place. They will either have to quote the highest rates and price themselves out of the competitive mortgage finance market or attempt to remain competitive while running the real risk of having to absorb those unexpected and additional costs. We believe that the firmness of the cost estimates proposed by HUD does not adequately reflect the variances that legitimately occur in the industry. Loan originators should be required to document changes to justify increases in the cost of items at settlement, but locking them into fees at the application phase can only result in increased costs.
Finally, the instructions to "Attachment A-1" of the revised forms requires loan originators to itemize services that the borrower can shop for, and estimate the cost of these services ". . .based on local market averages for the areas where the property is located." It is our view that the requirement to collect and maintain data to determine market averages is an unreasonable and burdensome expectation, particularly for small originators located in large metropolitan areas. We believe a better approach would be to require that the originator insert the estimated cost of the service as if they were providing it.
As you can see, the proposed enhancement to the GFE will impact both borrowers and originators in a manner that will be contrary to the rule's objectives.
Guaranteed Mortgage Packages
Finally, the proposed rule seeks to facilitate mortgage shopping and promote competition by removing the regulatory barriers to allow a safe harbor under RESPA for Guaranteed Mortgage Package transactions. A Guaranteed Mortgage Package (GMP) consists of a mortgage loan with a guaranteed interest rate and a package of settlement services required by the lender to close the mortgage. The settlement services would include, but are not limited to, all application, origination and underwriting services, the appraisal, pest inspection, flood review, title services, title insurance and any other lender required services except hazard insurance, per diem interest and escrow deposits.
Unlike the GFE, a GMP would not itemize the specific services to be provided. HUD believes that the GMP will make it easier for borrowers to shop for mortgages through simpler more transparent transactions, and will further reduce settlement costs as a result of market forces, borrower shopping and competition. It is our position that the GMP will take away the borrower's opportunity to shop for those items included in the package. Further, because all services are packaged, there would be no assurance to the borrower as to what will and will not be provided. This will, in effect, eliminate comparison shopping, one of the essential elements of the process that this rule seeks to promote.
In addition to the package of settlement services, a GMP must include a guaranteed interest rate that is tied to an observable index or other appropriate means that would assure borrowers that if the lender increased the rate, it was not driven by the lender's desire to increase its origination profits. This proposed change is simply unreasonable in that it does not reflect the realities of the mortgage industry, and how interest rates are set and how quickly they can change in the course of a day. The rule also assumes that lenders and brokers control the interest rates they offer which, in most situations, is simply not the case. Interest rates offered by community banks are often set by the secondary market organizations or lenders that purchase the loans. HUD's proposal that brokers or lenders guarantee rates without any type of financial commitment from the consumer while the consumer is free to shop for the best package, unreasonably exposes the brokers and lenders to interest rate risk. The cost of this risk will either be borne by the banks or the borrowers. To protect itself against interest rate risk the institution will incur additional expenses that can be recouped only if the consumer returns for the loan, or consumers may bear the cost of higher rates imposed by the institution.
Further, the requirement that loan originators must post and constantly update mortgage rates on their website would be very costly and highly burdensome for community banks. First, not all community banks have websites, and secondly of those that do, few offer the ability to apply for mortgage loans. ICBA recently completed its 2002 Annual Community Bank Technology Survey.2 Seventy three percent of community banks responding maintain an internet site, and of that group, seventy four percent offer some banking services through the site. However, most services offered by community banks through internet websites relate to account information with only about thirty percent of respondents indicating that they offer their customers the ability to apply for loans through their website. Therefore, it appears that the larger lenders are in a better position than many community banks to comply with the proposed interest rate posting requirement.
Loan originators should not be forced to make unnecessary and expensive expenditures for technology. Requiring lenders to post an interest rate index is impractical, and may not serve as a reliable tool for consumers. Some loan originators offer only a handful of loan products, while others may have dozens of products and rates. Moreover, interest rates can change within a day during volatile periods. The effect of compliance on smaller financial institutions would be enormous, and would force many to exit the market altogether. The significant resources that would be needed to maintain current data, could be better allocated to originating and processing mortgage loans and marketing to those minority families the Bush administration has targeted for homeownership.
Finally, to allow packagers to offer the GMP, the rule provides a safe harbor from RESPA Section 8. Therefore, the very provisions that were developed to protect consumers from special fee arrangements between settlement service providers and loan originators do not apply. Proponents of this safe harbor provision believe that it is necessary in order to offer the GMP and lower mortgage costs. However, nothing in the proposed rule indicates that the cost savings would be passed along to the borrower. ICBA views this as a complete reversal, and an exposure to the risk that we will return to the environment of abusive practices that RESPA Section 8 was originally designed to prohibit.
ICBA has repeatedly raised concerns about the effect the HUD proposal will have on the ability of smaller banks and service providers to compete against the larger market participants. We agree with HUD's premise that consumers benefit when they have choices. However, it is clear that the proposed rule will eliminate consumer choice in that the smaller, and lower volume generating lenders, brokers and settlement service providers will be driven from the market because they simply will not be able to negotiate the necessary discounts from settlement service providers to compete with the larger institutions in offering GMPs. We strongly believe that is it wrong for a government agency to regulate institutions out of an industry simply because of their size. This is clearly a rule that favors the largest institutions in the mortgage industry.
Community banks are also concerned that the GFE and GMP requirements will limit their ability to provide early credit counseling, and to offer alternative products that may better suit the borrower's needs. Should HUD feel compelled to move forward with the GMP, it should only do so as a test while making no changes to the current GFE. Currently, several institutions are marketing versions of a guaranteed package. We see this as the best way to proceed - allow the market to continue its evolution without regulatory mandates to packages.
In conclusion, the ICBA has grave concerns that HUD's proposed changes to RESPA will seriously undermine the mortgage finance process, and reverse the trend of overall homeownership growth. While HUD believes this rule will simplify and improve the process of shopping for mortgage loans, ICBA feels strongly that this will not be the case. This proposal will dramatically alter the manner in which mortgages are offered, making the process more confusing, impacting consumer choice in the selection of individual settlement services, and decreasing consumer options for mortgage products. It will also inevitably create an environment where the largest originators and settlement service providers will drive out the smallest.
If this rule is adopted, it will result in a serious disruption of the mortgage finance process, and increase, not decrease as HUD predicts, the cost of homeownership. ICBA opposes the proposed rule because of the damage it will do to consumers, the mortgage finance system, and the small loan originators and settlement service providers that participate in it. Accordingly, we strongly urge the Committee to encourage HUD to reconsider the proposed rule, and to proceed cautiously and slowly to avoid a disruption of the mortgage finance process, and a negative impact on consumer choice and homeownership growth overall.
Thank you for the opportunity to submit testimony today. ICBA stands ready to work with the Committee on this important issue.
1 ICBA is the primary voice for the nation's community banks, representing nearly 5,000 institutions with 17,000 locations nationwide. Community banks are independently owned and operated and are characterized by attention to customer service, lower fees and small business, agricultural and consumer lending. ICBA's members hold more than $526 billion in insured deposits, $643 billion in assets and more than $402 billion in loans for consumers, small businesses and farms. For more information visit www.icba.org.
2 The survey was sent to over 9,000 community banks with over a ten percent response rate. Those banks responding had an average asset size of $160 million.