July 31, 2001
The Honorable Paul Sarbanes
Committee on Banking, Housing and Urban Affairs
United States Senate
Washington, D.C. 20510
Dear Chairman Sarbanes:
On behalf of the Real Estate Services Providers Council, Inc. (RESPRO®), I would like
to commend you and members of the Committee for your efforts to curb predatory practices in
the mortgage lending industry by bringing public attention to these practices in your July 26,
2001 and July 27, 2001 hearings.
RESPRO also would like to submit written testimony for the hearing record on two
specific issues addressed in the hearings and in pending legislative proposals: (1) the definition
of “points and fees” under the 1994 Home Owners Equity Act (HOEPA); and (2) a proposal
presented in other witnesses‟ testimony to reform the Real Estate Settlement Procedures Act
(RESPA) and the Truth in Lending Act (TILA).
Background of RESPRO®
RESPRO® is a national non-profit trade association of business alliance partners from all
segments of the home buying and financing industry. Our membership includes mortgage
lenders, mortgage brokers, real estate companies, home builders, title underwriters and agents,
vendor management companies, and technology companies (see attached membership list). The
majority of our members (1) offer mortgage loans either directly, through wholly-owned
subsidiaries, or through joint ventures; and/or (2) offer closing services to accompany the
The common bond of RESPRO® members is that they all offer multiple services (“one-
stop shopping”) to consumers through affiliations and strategic alliances with other settlement
service providers. As an association of providers across industry lines, RESPRO‟s goal is to
promote competition and consumer choice a regulatory environment that enables all providers to
compete in a level playing field, regardless of their industry or affiliation.
1. HOEPA’s “Points and Fees” Definition
Currently, a mortgage loan is considered to be “high cost” under HOEPA – and therefore
subject to its restrictions -- if the points and fees paid by the consumer exceed the greater of 8
percent of the loan amount or $400, whichever is greater.
The Act defines “points and fees” to include all charges listed under 12 C.F.R. §
226.4(c)(7) (including title, appraisal, credit report, and other closing costs) “unless the charge is
reasonable, the lender receives no direct or indirect compensation with the charge, and the
charge is not paid to an affiliate of the lender (emphasis added)”.
Consequently, HOEPA currently excludes reasonable closing costs that are paid to
unaffiliated third parties, but includes reasonable closing costs that are paid to affiliated parties in
determining which loans are subject to its restrictions.
RESPRO® believes that the current definition of “points and fees” inadvertently
discriminates against mortgage originators and closing service providers who are part of
affiliated business arrangements, without fulfilling HOEPA‟s purpose. This is because HOEPA
includes points and fees based on the mortgage originator‟s business structure, as opposed to the
reasonableness of the closing costs.
For example, a $1,000 charge for title insurance and $300 charge for an appraisal in a
particular loan transaction by an unaffiliated settlement service provider would not be counted as
“points and fees”, while similar or even lower charges by an affiliated settlement service
provider (e.g., $750 for title insurance and $250 for an appraisal) would count as “points and
a. Consumer Benefits of Affiliated Businesses
The only conceivable basis for treating the charges of affiliated businesses differently
than unaffiliated businesses would be an unfounded concern that affiliated businesses charge
higher fees for settlement services. But in fact, affiliated businesses in the mortgage marketplace
over the last 20 years have consistently been proven to potentially increase competition and
lower costs for home buyers and owners.
The Department of Housing and Urban Development (HUD), which regulates affiliated
businesses under the Real Estate Settlement Procedures Act (RESPA), has repeatedly recognized
the potential consumer benefits of affiliated businesses. In a 1994 proposed RESPA rule, HUD
said, “controlled business arrangements [today called affiliated business arrangements] and so-
called „one-stop shopping‟ may offer consumers significant benefits, including reducing time,
complexity, and costs associated with settlements.”2 In a Regulatory Analysis accompanying a
1996 final RESPA regulation, HUD stated, “[T]here is some reason to expect that referrals
among affiliated firms may reduce costs to businesses and consumers. Business may benefit
from lower marketing costs and the ability to share information on the home purchase or
refinancing among settlement service providers. In the long run, any cost savings should be
59 Fed. Reg. 37360, 37361-61 (July 21, 1994).
passed on to consumers in most cases. Consumers may benefit additionally from reduced
shopping time and related hassles.”3
In its last statement on the consumer benefits of affiliated business arrangements, the
Department of Justice expressed a similar opinion: "...[A]rrangements among providers of
different goods or services who do not compete with one another -- including diversification by a
single firm into the provision additional complementary services -- may benefit consumers in a
variety of ways. Regulatory efforts to interfere with such arrangements should not be undertaken
in the absence of a strong showing that they are economically harmful to consumers." 4
The only empirical studies on the impact of affiliated businesses in the home financing
marketplace have reinforced the opinions of HUD and the Department of Justice. In 1992,
Anton Financial Economics, Inc. compared the prices for a basket of title/closing services
offered by affiliated and unaffiliated providers in the Minneapolis-St. Paul marketplace by
sampling 16 firms that operated in 77 offices in the Twin Cities area (70% of the offices in the
marketplace). It concluded that unaffiliated title companies in the Minneapolis-St. Paul
marketplace charge approximately $13 more for a basket of title/closing services than affiliated
title companies, and that the growth of affiliated businesses in the Minneapolis-St. Paul area has
increased competition in the marketplace over an 11-year period.
In 1994, RESPRO® commissioned a study by Lexecon, Inc., a national economic
consulting firm specializing in the application of economic data to legal and regulatory debates,
which analyzed the title and closing costs of over 1000 home purchase transactions -- affiliated
and unaffiliated -- during a one-week period in September 1994. The study concluded that title
services for transactions involving affiliated title/closing businesses not only are competitive
with those provided by unaffiliated title/closing companies, but actually result in a two percent
In its 1996 Economic Analysis 5, HUD recognized the Lexecon, Inc. study and concluded
that the results may underestimate the costs benefits of affiliated companies:
“HUD is aware of only one study that compares prices of settlement services provided by
affiliated and non-affiliated firms. RESPRO®, an association of controlled businesses,
commissioned a study by an independent contractor, Lexecon, Inc...[T]he study may be]
biased in favor of the unaffiliated firms. Therefore, the [study] results might suggest that
affiliated firms on average have lower prices than their competitors (emphasis added).”
3 1996 Department of Housing and Urban Development Regulatory Analysis, accompanying June 7, 1999
Real Estate Settlement Procedures Act (RESPA) final regulation at 61 Fed Reg 29237 (June 7, 1996).
Letter from Robert A. McConnell, Assistant Attorney General, Department of Justice, to Chairman Henry
B. Gonzalez, Chairman, Subcommittee on Housing and Urban Development, Committee on Banking,
Finance and Urban Affairs, U.S. House of Representatives, April 26, 1983 (opposing legislation to restrict
affiliated businesses, which was subsequently rejected by a House of Representatives Subcommittee by
Id at 3.
b. The Issue Should Be Reasonableness of Charge, Not Who Provided The Service
Even if Congress was concerned that affiliated businesses may charge higher fees than
unaffiliated mortgage originators when it enacted HOEPA, HOEPA‟s definition of "points and
fees" already mandates that the charges of ancillary service providers are to be counted if they
are not reasonable. Therefore, there is no need to retain a superfluous and discriminatory
requirement that they be paid to a provider that is not an affiliate of the mortgage lender. In fact,
as our initial example illustrates, HOEPA counts the ancillary fees of an affiliated service
provider toward the “points and fees” threshold even if they were lower than the fees charged by
an unaffiliated provider. This serves no purpose.
Some legislative proposals, such as S. 2415, which you introduced in 2000, would
attempt to create more uniformity in the definition of “points and fees” by including all closing
costs – whether paid to affiliated parties or unaffiliated third parties -- in the “points and fees”
While this amendment would eliminate the unjustified discriminatory treatment of
affiliated businesses under HOEPA, we recommend that it be accompanied by an increase in the
minimum dollar amount for coverage to reflect the reasonable value of the closing services to be
included in the “points and fees” definition. Otherwise, it has the effect of further reducing the
“points and fees” trigger beyond what is intended by the HOEPA amendment.
But RESPRO® believes that the preferable solution is to exclude fees paid to both
affiliated and unaffiliated closing service providers from the points and fees definition, and to
instead focus on whether the charge is “reasonable”.
Under such an approach, HOEPA would be amended as follows:
(g) Points and fees mean . . .
(2) all charges listed under Section 226.4(c)(7) of Title 12 of the Code of
Federal Regulations . . . unless the charge is reasonable and the lender
receives no direct or indirect compensation in connection with the charge.
For purposes of this section the fact that the lender may be affiliated with
the provider of any of the services listed under Section 226.4(c)(7) shall
not in and of itself constitute direct or indirect compensation to the lender.
The underscored language represents new language. The last underscored sentence that
we propose is simply intended to ensure that the “direct or indirect compensation” standard will
not be misread so as to maintain the status quo and to clarify that the charges of affiliated
businesses will be treated the same as unaffiliated businesses.
2. Real Estate Settlement Procedures Act (RESPA) Reform
Several witnesses representing the mortgage industry have suggested that predatory
lending can be addressed by “comprehensive mortgage reform”, which would involve legislative
or regulatory changes to the Real Estate Settlement Procedures Act (RESPA) and the Truth in
Lending Act (TILA).
Specifically, these witnesses propose that mortgage originators disclose to consumers the
firm, not estimated, costs of the settlement services needed to make the loan for which the
consumer has applied. In return for offering this guaranteed settlement service “package”,
mortgage originators would be exempted from Section 8 of RESPA (which prohibits referral fees
and fee-splitting) for arrangements they negotiate with the providers of the settlement services
that are included in the firm disclosure.
RESPRO® has actively participated on behalf of affiliated settlement service businesses
in the Mortgage Reform Working Group, the industry-consumer group that attempted to reach a
consensus on “comprehensive mortgage reform” in 1997 and 1998. As you know, the group
was unable to reach a consensus, although the Department of Housing and Urban Development
(HUD) and the Federal Reserve Board (Fed) used some of its findings in its 1998 Joint Report to
Congress on RESPA/Truth in Lending Act Reform.
RESPRO‟s cross-industry membership engaged in the same dialogue over that time
period, however, and reached an internal consensus on some of the fundamental issues
associated with RESPA/Truth in Lending reform that we would like to share with the
This cross-industry consensus was based on a fundamental premise: that any new
RESPA legislative or regulatory framework should be carefully structured to ensure competition
and consumer choice in the marketplace by allowing all providers, regardless of industry or
affiliation, to participate under the same regulatory standards.
In order for this to occur, we believe that any RESPA statutory amendment or regulation
that provides incentives for providers to guarantee a comprehensive loan “package” should
contain three elements:
a. Packaged Services Should Be Optional, Not Mandatory.
First, “packaged” services should be optional, not mandatory. The federal government
should not mandate any one delivery system for home buying and financing services, but instead
should continue to allow providers to offer consumers the choice of either a guaranteed loan
“package”, affiliated loan services under current “affiliated business” rules, or unaffiliated loan
b. Any Provider Should Be Able to Offer a Guaranteed Settlement Service “Package” Directly
To The Consumer.
Second, any provider should be able to offer a guaranteed “package” directly to the
consumer. Today, both lenders and non-lenders offer a variety of one-stop shopping alternatives
through affiliated businesses or contractual relationships, depending on the needs of their
customers. A real estate broker-owner or home builder, for example, may choose to offer its
customers a complete menu of mortgages and closing services, while others may decide to offer
just a package of closing services that would accompany a loan provided by an unaffiliated
lender, subject to that lender‟s approval. We believe that consumers should continue to have this
c. Services Included In the Package Should Be Disclosed To the Consumer.
Finally, individual closing services that accompany the loan should be disclosed whether
or not the provider offers a loan “package”. Consumers who want to compare any two
“packages”, or packaged loan services with non-packaged loan services, would not have the
information they need to do so if they do not know what services are in each “package” offered
We appreciate the opportunity to testify on these two issues. If you have any questions,
or would like to obtain background information referenced in our testimony, please feel free to
call me at 202-408-7038 or to e-mail me at email@example.com.
Susan E. Johnson, Esq.