Senate Banking, Housing and Urban Affairs Committee

Subcommittee on Financial Institutions and Regulatory Relief

Subcommittee on Housing Opportunity and Community Development

Hearing on the Real Estate Settlement Procedures Act (RESPA),
the Truth in Lending Act (TILA) and problems surrounding the
mortgage origination process.

10:00 a.m., Wednesday, July 9, 1997

Consumers Union appreciates the opportunity to testify today about many of the traps consumers face when they make what is usually the biggest transaction of their lives -- buying a home. We are particularly pleased that this hearing is addressing ways to make the regulatory system work better for consumers so that consumer protection laws can achieve their intended purposes. We are hopeful that this kind of constructive approach can give homebuyers and the relevant private sector parties involved in the homebuying process relief from the complexities and inefficiencies of the status quo.

CONSUMERS FACE NUMEROUS FINANCIAL TRAPS DURING THE HOMEBUYING AND FINANCING PROCESS

Unfortunately, loopholes in the Truth in Lending Act (TILA) and the Real Estate Settlement Procedures Act (RESPA) make it very difficult for homebuyers to protect their pocketbook when they shop for a home and all the related services necessary to finance and settle the deal. We detail some of these loopholes in the attached document, which is a copy of the comment letter we submitted to the Department of Housing and Urban Development ("HUD") and the Federal Reserve Board (the "Fed") earlier this year. Briefly, these loopholes include, but are not limited to, the following:

• Consumers Get Critical Information Too Late in the Homebuying Process: The critical TILA and RESPA disclosures are typically made after the prospective homeowner submits the mortgage loan application and what often involves hundreds of dollars in application fees. Both laws allow these disclosures, which include the annual percentage rate and the settlement service cost estimates, to be made within three days after the consumer submits the loan application.

  This timing flaw makes the disclosed information useless for shopping purposes and forces consumers to pay hundreds of dollars with the application without any firm assurances about the terms of the deal.
  
  

• Once Disclosed, the Lender Can Change the Critical Terms at Closing: Even the terms disclosed within three days after the consumer submits a mortgage application are not firm. The lender, for example, can change the disclosed annual percentage rate so long as the actual rate is accurately disclosed at the closing.

  The uncertainty the consumer faces up until the closing is one of the major reasons the so-called "right of rescission" or "cooling off period" provided by TILA is so critical. Given the size and complexity of the transaction, and the uncertainty the consumer faces until closing, the consumer needs at least a three day period after closing to review the terms and mull over the transaction.

  Unless homeowners are able to get firm commitments on loan terms before paying hundreds of dollars in application fees, we believe the three-day cooling off period, which is currently only available for certain junior mortgages and refinancings, should be extended to cover all mortgage loans used to purchase a home (i.e., all "purchase money" mortgages).
  
  

• Consumers Are Forced to Rely on Others to Protect Their Interests. These serious information gaps often force homebuyers to rely on a real estate agent or other party in choosing their real estate settlement providers. This makes it extremely imperative that these referring parties make referrals that are truly in the consumers' interest and not tainted by their own monetary self-interest.

NUMEROUS REFORMS ARE NEEDED TO MAKE THE PROCESS MORE CONSUMER FRIENDLY

Our attached comment letter sets forth the major TILA and RESPA disclosure reforms that we believe are critical to making TILA work effectively for homebuyers. They track the TILA and RESPA loopholes we enumerate above. They would improve the current disclosure rules by:

• Making the disclosure come at a useful time for shopping purposes
• Making the content of the disclosures more relevant and understandable
• Making the disclosed information "stick" through the closing.

Additionally, we believe there are numerous other proposals that could make the marketplace and the regulatory system work better for all involved. For example, some have proposed an idea that could minimize the referral fee kickback problem and simplify what is now an inherently complex process for the consumer. Under this proposal, the mortgage lender or other party would purchase all settlement services and offer a firm lump sum price to the homebuyer. We believe this idea offers great promise and should be explored further.

BROKER FEES AND EMPLOYEE COMPENSATION

The anti-kickback rules of RESPA are critically important to ensure that homebuyers are not steered to a bad deal simply because a party on which they rely has a financial interest in making the referral. Because consumers enter the real estate market infrequently and find it extremely complex, they have traditionally relied heavily on real estate agents and other professionals for settlement service referrals. In turn, settlement service providers market themselves and their services to these pivotal parties, in hopes of receiving their referral business.

Mortgage brokers, the subject of the latest RESPA controversy related to the law's anti-kickback rules, are certainly in a pivotal position to make settlement service referrals. Their business is to refer borrowers to a mortgage lender.

If a broker receives a fee from the lender for referring a mortgage borrower to the lender, then the broker could be steering the borrower to a bad deal solely for the fee. This is just the type of situation that the anti-kickback rules of RESPA was designed to deter.

Aside from the question of whether a particular mortgage broker practice violates RESPA's anti-kickback rules, we believe that the practices of the mortgage brokerage industry warrant close scrutiny by this subcommittee. We have long heard complaints about high, unexpected fees and other problems from consumers who deal with mortgage brokers. At the very least, many consumers appear to be reasonably confused about whether the broker is working in the consumer's interest or simply its own self-interest.

The "controlled" or "affiliated" business arrangement is another area of current RESPA controversy. HUD's efforts to provide some certainty about RESPA's applicability to these arrangements still leaves some unsatisfied.

We believe that affiliate relationships between those selling settlement services can pose serious conflicts of interest that harm homebuyers in the market for these services. Here, too, the question is whether homebuyers are being steered to a bad deal when a business is allowed to compensate its employees for referring customers to an affiliate for settlement services. We believe that this type of compensation scheme is fraught with conflicts of interests by which consumers can be steered to bad deals.

WHERE TO GO FROM HERE

Consumer organizations and those private sector parties involved in the homebuying and financing business are currently engaged in what appears to be a constructive dialogue about reforming the current regulatory system to make it work better. We believe it is best to let that process proceed for the next few months to see if a consensus reform package can be developed. We look forward to participating in this process and working with this subcommittee as it proceeds.

January 31, 1997
Rules Docket Clerk
Office of General Counsel
Room 10276
HUD
Washington, DC 20410-0500

Re: Docket No. FR 4184-P-01 -- Simplifying, Improving and Coordinating the Real Estate Settlement Procedures Act and the Truth in Lending Act

Dear Docket Clerk:

Consumers Union appreciates the opportunity to respond to the joint notice from the Federal Reserve System and the Department of Housing and Urban Development (HUD) soliciting suggestions about how to simplify, improve and coordinate the Real Estate Settlement Procedures Act (RESPA) and the Truth in Lending Act (TILA), as directed by section 2101 of last year's omnibus spending bill.

Consumers Union believes that the goals set forth in section 2101 are laudable. We also believe they might be attainable if federal policymakers make it clear to all who participate in this exercise that the goal is true reform of the mortgage lending process rather than retreat from the goals of consumer protection.

Following a brief introduction, our comments address two general issues, as requested in the advance notice of proposed rulemaking: First, what reforms may be appropriate to achieve the three listed goals and, second, to what extent do these reforms require statutory amendment. >Introduction: The Paperwork Burden Associated with Getting a Mortgage Falls on the Consumer Far More Than the Lending Industry

During the last few years, some have tried to suggest that TILA and RESPA account for the mountain of confusing paperwork that consumers face in the course of financing their home. Nothing could be further from the truth.

Consumers do face a mountain of paperwork during the mortgage closing process, a mind-boggling reality that makes the process confusing, unfair and risky for the individual borrower. But the disclosures required by TILA and RESPA represent only a tiny "pebble" within the mountain of paperwork presented at closing. Indeed, during a typical closing on a home purchase loan, these laws generate only two of the pieces of paper in the paper mountain that typically stacks up to more than a hundred pieces of paper altogether.

Graph 1 dramatically demonstrates this fact. It shows the number of pieces of paper that confronted a typical consumer when she closed on a mortgage to finance a home in Montgomery County, Maryland, only a few years ago. It also shows that only one piece (of the 118 pieces) was a disclosure required under TILA. That piece of paper, which is your basic TILA disclosure, contained crucial information about the interest cost of the loan, the amount financed and a handful of other key features.

Aside from the mountain of paperwork, consumers also face other serious difficulties during the mortgage lending process. For example, as Consumers Union documented in a study we conducted last year, consumers are often forced to put up hundreds of dollars to apply for a mortgage loan without knowing the key terms of the loan for which they are applying.

Our 1996 study, entitled "The Refinancing Fray: A Survey of 90 Mortgage Loan Offices in Nine Major Metropolitan Areas," looked at industry practices in the mortgage refinancing market. We believe the unfair practices the survey revealed are also pervasive in the purchase money mortgage market. We found:

• No loan office offered a guarantee that the loan rate quoted up front would be available at closing.
• Virtually all loan offices imposed some type of fee at the time of application, and these fees were hefty, ranging from $175 to $1000.

We can think of few other areas in the commercial marketplace where consumers are expected to put up hundreds of dollars without firm assurances about what they were getting for their money. We consider this practice to be fundamentally unfair. Unless it is corrected in some way, the "fair disclosure" goals of TILA can never be fully achieved.

Our 1996 survey also revealed that loan offices often provide confusing and inaccurate information to prospective borrowers who call for information about the lenders' underwriting practices and loan terms:

• Some of the loan offices charged for a lock-in agreement but initially claimed it was free.
• In follow-up calls, 31 percent of the offices surveyed stated different information about loan to value requirements, fees or lock-in policies than they had stated during our initial inquiry.
• Fee practices varied widely, making cost comparisons extremely difficult.
• Similarly, interest rate terms varied, making rate comparisons difficult. Some offices were willing to quote a rate at 1 point or 0 points, and others offered no such rate.

We hope that TILA and RESPA can be amended to correct some of these serious problems so consumers have the tools they need to protect their pocketbook during one of the largest financial transactions of their lives.

At the same time, we recognize that there is room to combine and simplify portions of RESPA and TILA, particularly in connection with the disclosures required three days after application under both laws. There is also a need to reevaluate the content of the disclosures to determine whether some disclosures should be eliminated or supplemented. We do not have firm views on every detail of the "content" question. We hope we can have a good faith dialogue in this area with policymakers and interested members of the lending industry.

Reforms Needed

1) Timing: Except in the case of variable rate loans, neither TILA or RESPA require the lender to provide any information about the terms of the loan until after the consumer has submitted an application -- and paid hundreds of dollars in fees. It is critical that consumers get basic cost and related information before putting hundreds of dollars on the line. The basic information should be provided when the consumer inquires about a lender's loan program (and before the consumer pays any fee, refundable or nonrefundable). (This would probably require a statutory amendment.)

2) Content: As mentioned, we do not have firm views about all the details of an ideal TILA/RESPA disclosure. We do believe, however, that any disclosures required by regulation should reflect what we know about the way consumers shop for a mortgage. The disclosures can also serve an educational function by providing key information that consumers might currently ignore -- to their disadvantage -- in the hopes of alerting them to the information's importance. But, if a disclosure omits information that many consumers consider to be key, these consumers may not appreciate the disclosure's relevance.

We believe that the "note rate," and the points associated with it, probably fall into this category. Judging by our experience and the reported proliferation in newspapers around the country of "rate/point" tables showing the rate and point terms available in the local market, we assume that consumers rely heavily on these two interrelated terms when shopping for the best mortgage deal. Consequently, we encourage the Board and HUD to incorporate these discrete terms as separate disclosures in any basic TILA disclosure document.

3) Making the disclosures meaningful and helpful for shopping by making them "stick": As mentioned, most lenders today refuse to reveal the final terms they are willing to provide until after the consumer submits an application, and associated fees. Consequently, we strongly encourage an amendment to TILA that would correct this obvious market imperfection, and unfairness to the consumers.

Specifically, we believe that a lender's pre-application TILA disclosure should indicate whether the lender is willing to guarantee the disclosed terms through closing. Lenders unwilling to provide such a guarantee would be free to do so, but they would have to make this fact clear in the TILA disclosure provided when the consumer inquires about the lender's loan program.

This critical reform should be feasible since lenders are in the best position to know the volume of applications they are receiving and, therefore, the time by which the applicant's loan could get to closing -- key factors in a lender's decision about the "firmness" of a rate quote. Of course, the law should also allow the lender to condition any guarantee on the consumer's timely submission of required documentation. Failure by the consumer to respond on a timely basis to a reasonable request for information should remove the lender's obligation to provide the terms that the lender may have guaranteed.

4) Consolidation and simplification: It is eminently reasonable to combine the pre-application TILA disclosures and the "good faith" estimates required under RESPA. We encourage HUD and the Federal Reserve Board to work together to accomplish that result, which does not appear to require a statutory amendment.

We look forward to working with you in the coming months toward meaningful reform of TILA and RESPA.

Yours truly,
Michelle Meier
Counsel for Government Affairs

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