ALTA® continues to educate members of Congress about the implications to the title industry of possible changes to the Real Estate Settlement Procedures Act and the Truth in Lending Act (RESPA/TILA). Representing ALTA® members, spokesman Louis C. Meyer, Jr., President of NIA/Lawyers Title, testified on September 16 at joint hearings of the Housing Subcommittee and Financial Institutions Subcommittee of the House Banking Committee. Mr. Meyer asked Congress to defer any consideration of mandatory packaging of real estate closing services and costs until a full study can be made of the possible impact on consumers. He suggested that Congress should act only after developing full information on:
1) whether or not a freezing of the present settlement system would result, which would limit on-going technological advances in the delivery of closing services;
2) whether specific reform proposals could limit consumer choices and comparison shopping;
3) whether "packaging" could result in lower quality closing services from fewer providers;.
4) whether reform proposals could result in kickbacks and referral fees with no consumer benefits.
Committee Chairs Marge Roukema (R-N.J.) and Rick Lazio (R-N.Y.) both expressed concern about approaches analyzed in the Federal Reserve and HUD report (FED/HUD Report.) Rep. Roukema expressed concern that the proposal creates not only potential conflicts of interest between the packager and service provider, but also raises questions about the quality of services provided. Chairman Lazio wondered if "there was a simpler way to address disclosure among all the lenders and service providers rather than what, [in the FED/HUD Report] appeared to be a negotiated treaty among warring parties in the mortgage finance system." He also noted that the Report did not directly address the relevance of Section 8, the anti-kickback provision of RESPA.
The Subcommittee heard from a variety of stakeholders in the issue with widely different views on the scope and substance of reform. Many witnesses testified on a variety of aspects of reform as well as the FED/HUD Report itself. This discussion will focus on only those aspects of the testimony likely to be of most interest to the title industry, primarily the reactions to the Section 8 proposal included in the FED\HUD Report.
Doug Webb, Vice President and General Counsel of Citibank, testified on behalf of the Consumer Mortgage Coalition in favor of broad-based reform, including changes to the origination process for disclosure, remedies for disclosure violations, and Section 8 issues. In addition, he promoted consumer protection policies, including foreclosure reform, limitations on specific loan terms and products, and prohibitions on certain practices. Of key concern to the title industry are proposals to pre-empt state laws which, if left untouched, would "preclude the uniform and consistent nationwide operation of new Federal provisions," according to Mr. Webb. Such state laws restrict business affiliations and require originators to allow borrowers a choice among available service providers.
The National Association of Mortgage Brokers (NAMB) witness, Mr. Neil Fendly, focused on the yield spread premium issue, noting that one of NAMB’s key reform proposals focused on elimination of Section 8 referral fee restrictions on services required by the originator to make the loan. Home equity lenders reported that the dual disclosure allowing lenders to guarantee loan closing costs or provide a modified good faith estimate would not simplify the loan process for the consumer. The combined testimony of several lender groups, including the Consumer Bankers Association, American Bankers Association, and the Independent Bankers Association, argued that Section 8 relief is necessary for lenders to guarantee closing costs and supported the concept of coupling guaranteed closing costs with Section 8 relief. However, these groups also noted that their members were "not of one mind" as to the merits of mandating guaranteed closing costs as opposed to permitting institutions to offer a guarantee as an option to the current good faith estimate.
Real estate industry representatives, including Rick Synder, Chair of the National Association of Realtors (NAR) Presidential Advisory Group on RESPA\TILA Reform, testified that in order to qualify for a Section 8 exemption, the FED/HUD Report requires a disclosure to the consumer that includes the rate, points, and package price, an approach that could prevent a Realtor (or any other potential packager who lacks a lending source) from marketing their services directly to the consumer. NAR also testified that it would support the ability of a packager to supplement a basic package with additional services such as a home inspection or warranty while retaining the section 8 exemption for the entire package. NAR also noted that failure to disclose the services within the settlement package was a real weakness with the FED/HUD report. Peter Hunt of HUNT Real Estate, testifying on behalf of RESPRO, agreed with NAR that packaged services should be optional not mandatory, that any provider should be able to package, and that services included in the package should be disclosed.
Consumer groups, represented by Margot Saunders of the National Consumer Law Center, noted that the large mortgage lenders have been pushing hard for a change in the law which would mandate a guaranteed closing cost package without a guarantee for rates and points. Ms. Saunders compared this to marketing tires to car buyers before they purchase the car -- a borrower would apply for the loan based on the guaranteed closing cost package, without receiving any guarantee of the interest rate or points.
In analyzing the potential effects of some of the RESPA reform proposals, Mr. Meyer noted that the industry has evolved beyond an exclusively title focus. Mr. Meyer noted that ALTA®’s 2,400 members and their 100,000 employees are extensively involved in numerous aspects of residential real estate transactions. For example, many members now provide appraisals, credit reports, escrow services, flood certifications, relocation services, and closings. Through partnerships and affiliations, the title industry is effectively providing the one-stop shopping that has become a theme of the real estate industry. In recent years, the title industry has also invested heavily in technology, as automation can dramatically increase the efficiency of service delivery. An internet-based system for nationwide communication of title information is also part of his own company’s operation.
Mr. Meyer also noted that ALTA® had significant concerns with one aspect of the Report and with proposals aired in the Mortgage Reform Working Group? the concept that lenders package settlement services and guarantee the costs of the package. First, the Report is based on a presumption that the lender is the consumer of settlement services. Rather, the buyer and seller, who often negotiate among themselves, are actually the true consumers of settlement services. For example, in two-thirds of the country, the seller pays for title insurance. The guaranteed loan closing cost proposal would shift that cost to the borrower. Also, consumers do shop for settlement services. Pointing out that a recent Gallup survey showed that 48% of consumers actually shop for title insurance services, Mr. Meyer noted that this trend might grow as consumers use the Internet and other technology resources to shop for real estate services.
ALTA® hopes that Congress will carefully examine the basic premise behind packaging. Even the Federal Reserve Board has noted that having the lender as an intermediary in the purchase may be less efficient than having the consumer transact directly with the provider of the title service. In his testimony, Lou Meyer concluded that the precepts of the packaging proposal outlined in the report contradict a basic principle of mortgage reform: The proposed exemption from section 8, the anti-kickback provision of RESPA, described in the Federal Reserve Board and HUD Report, would not require lenders or others who might package closing services to disclose the services or costs of products actually provided in the package. It would allow lenders to charge hidden fees, which would not be linked to services. ALTA® urged the Subcommittees to fully evaluate these proposals before introducing legislation that effectively mandates lender packaging.