Good morning Mr. Chairman and members of the Committee. My name is Regina

Lowrie, and I am President and CEO of Gateway Funding Diversified Mortgage

Services, in Fort Washington, Pennsylvania. Today, I appear before you as Vicechairwoman

of approximately 2,700 companies, and includes all elements of real estate finance:

mortgage companies, mortgage brokers, commercial banks, thrifts, life insurance

companies and others in the mortgage lending field.

I commend the Chairman’s leadership in calling for hearings on the very crucial matter

of the pending HUD regulations aimed at simplifying Regulation X, the rules which

implement the Real Estate Settlement Procedures Act (RESPA). I also commend the

Chairman for focusing on the concerns of small business entities. MBA shares those

concerns. A major portion of our membership is composed of small business entities—

both brokers and lenders—and we care deeply about the effects of this rulemaking on

their operations and activities, as well as on consumers.

I’ll start by summarizing MBA’s views on this subject. MBA supports reforming the laws

that govern mortgage lending in order to give consumers and our members a simpler

and more straight-forward process. We urge, however, that reforms be done correctly,

through improvements that are both workable and efficient in their application. In the

undertaking to simplify the law, it is critical that we not lose sight of the consumer and

that we ensure that any new regulatory system retain strong protections for mortgage

shoppers and stimulate consumer choice and market competition. We can achieve all

these objectives simultaneously, but only through a very careful balancing of interests.

come up with the solutions necessary to address the panoply of implications that

emerged from the far-reaching proposed rules.

For this reason, MBA reiterates its request to HUD to re-propose this rule. MBA

believes that re-proposing the rule is the only step that will allow policy-makers carefully

to balance all interests and enhance the quality of the final regulations. Further

consideration of the rule’s contents will also allow us to ensure that these amendments

are not needlessly challenged by endless litigation.

Mr. Chairman, I’ll begin by reminding the Committee that the United States has the

world’s most efficient and inexpensive system for delivering mortgage capital to

consumers. MBA has always believed, however, that we can improve on this system,

and that we can create a disclosure process with better and more reliable consumer

information that enables borrowers to truly shop for the best mortgage. For several

years, our Association has been the most ardent and consistent proponent of reforming

the mortgage process and simplifying consumer disclosures. Our efforts extend all the

way back to 1997, when we led the industry in assembling groups of experts from all

segments of the industry through the "Mortgage Reform Working Group," and engaged

in crafting simplification plans acceptable to all interested parties. Even when the

Mortgage Reform Working Group failed to reach consensus on certain difficult points,

MBA persisted in its efforts to construct an improved disclosure system, and continued

to advocate for realistic legislative reforms through meetings and negotiations with

federal government representatives and consumer groups interested in mortgage

simplification.

Our tireless efforts in this arena demonstrate our sincere commitment to the goal of

"simplification." Our current appeal to HUD to re-propose rule is based on this

commitment and on our deep understanding of the complexities and pitfalls of this

endeavor. MBA’s unwavering dedication to achieving meaningful mortgage reform has

strengthened our resolve to ensure that the final outcome is a clear step forward in a

process that affects the opportunity for all Americans to become homeowners.

Consistent with our track record as advocates for reform, MBA voiced support for HUD

Secretary Martinez’s initiative to reform RESPA in July 2002. MBA welcomed the

proposal as the initiation of a process that would re-engage all interested industry and

consumer groups to discuss, in earnest, the modernization of the outdated RESPA

rules. In preparing for those comments, MBA took unprecedented steps in getting the

message of the proposed rule out to its members, and expended countless hours in

collecting member views and researching, analyzing and developing the critiques and

recommendations contained in the comments.

In the end, MBA submitted 60 pages of recommendations and edits on HUD’s proposal.

It is important to realize that mortgage lenders are the entities that are most directly

affected by the disclosure requirements and penalty provisions of the RESPA statute,

and, therefore, bear the most direct impact in this rulemaking. The comments submitted

by MBA are based entirely on the operational experiences of mortgage lenders and they

convey very fundamental market realities that are based on everyday business

operations.

We believe that there is a special urgency to ensuring that the MBA comments are

lending process. If they say something won’t work, then it won’t work. Making the

changes and rectifications recommended by MBA will ensure the very viability of the

new regulatory system. Some of the more important concerns relating to the proposed

rule, and expressed in MBA’s October 2002 comments, are as follows—

shop for credit by pressing mortgage creditors to offer firm interest rate disclosures

when consumers apply for a "packaged" loan. In our comments, we warn HUD that it is

tremendously risky to offer consumers solid interest rate guarantees only three days

after they apply for a loan, or to offer solid commitments on interest rate "indices" based

on the unclear provisions set forth in the proposed rule. The unpredictable nature of

interest rate fluctuations will impose significant market risks on lenders. This increased

market risk will, in turn, increase costs in any guarantee offered by lenders—costs that

will be passed on to consumers through considerable premiums on the interest quote

offered. Alternatively, lenders may decide to quote consumers a higher interest rate to

ensure that they can "cover" any unexpected market shifts. Under either scenario, the

result is increased costs for consumers. This is utterly contrary to the very purpose of

the provision.

industry that public policy would dictate against engaging in such activities. Simply

stated, without more clarity and specification, it is entirely unrealistic to expect lenders to

good faith estimate (GFE) system will bring about significant operational risks and will

greatly increase legal uncertainties for lenders. Specifically, the proposed imposition of

strict "tolerance levels" on lenders for settlement fees is risky and fundamentally unfair,

as lenders neither set nor control the fees charged by third-party settlement servicers.

Moreover, many fees are subject to variances based on consumer needs and

preferences; such needs and preferences are not known or understood three days after

application.

We note that by amending the upfront GFE disclosures, HUD is imposing

changes to every other major disclosure required by RESPA. The regulations mandate

that the GFE form list items in a way that corresponds to the listings of the HUD-1

Settlement Statement. Since the proposed rule completely reconfigures the GFE form,

this means that the HUD-1 form may require alterations and edits. And, since HUD is

proposing to alter the order and the rules that attach to the GFE disclosures, then HUD

will also have to re-write RESPA’s "Special Information Booklet" to ensure that

consumers remain well informed of the new rules and disclosures that apply to

mortgage transactions.

There is no doubt that the proposed RESPA reform regulations will force every

single lender and broker in America, in one single swoop, to completely revamp their

entire upfront disclosure systems—lock, stock, and barrel.

the term "Application" under existing regulations with an ambiguous new standard. This

definitional change is extremely significant because the full panoply of statutory

requirements imposed under RESPA’s strictures (and indeed the requirements of other

statutes, such as the Truth in Lending Act and Home Mortgage Disclosure Act) are

triggered by the technical details of whether a consumer’s inquiry rises to the level of an

"application," as defined by the RESPA regulations. Replacing the time-tested definition

of "application" with an unclear standard will considerably disrupt mortgage lending

operations nationwide.

Guaranteed Mortgage Package (GMP), as proposed, will result in violations of—or at

there could be multiple conflicts within one single state. Without some relief from state

restrictions, it will be impossible to achieve a uniform implementation of the GMP

provisions of the proposed rule. We note that the patchwork of state provisions works

against the general thrust of capital market efficiency, which results in lower costs in the

mortgage market.

that intersect with elements covered by other federal laws, particularly the Truth in

Lending Act (TILA). In some instances, HUD explicitly imports provisions of TILA into

the new requirements advanced by the proposed rule. This overlapping of

requirements is extremely confusing, and sometimes poses irreconcilable differences

with HUD’s proposed regulations. The confusion created by the overlay of the new

rules on the veritable maze of existing rules and requirements that apply to mortgage

lending operations will prevent scores of lenders from fully engaging in "packaging"

activities. Moreover, the repercussions that flow from running afoul of any of these

regulations, and indeed, the risks to reputation that loom in instances of even minor

violations, will act to severely restrict the number of entities willing to participate in

"packaging," and will therefore diminish the vigorous competitive effects of this

regulatory experiment.

MBA members have even more profound concerns with a crucial issue that arises

outside of the proposed rule’s written provisions. In the Economic Analysis to the

proposed rule, HUD states that "lenders, real estate brokers, appraisers, settlement

agents, or literally anyone else may form the package and may be eligible for the safe

harbor for which it qualifies." The Economic Analysis goes on to state that "[o]riginators

could develop their own packages or specialized firms could develop packages or

components of packages, which they would then sell to the originator." Then, in a

statement that has no explicit support from the language of the proposed rule itself, the

Economic Analysis further explains that "sub-packages may be formed and sold to fullfledged

packagers" and that "[t]his is permissible since the sub-packager is within the

package."

The broad language of the Economic Analysis creates alarming "loop-holes" that allow

unscrupulous players to use the protections of the GMP to collect improper "kick-backs"

and referral fees. There are three possibilities for abuse. First, if entities are allowed to

"sub-package," consumers could be "pre-sold" on a package that contains either inferior

services or above-market profit margins. In this scenario, the lender receiving the

referral would be obligated to accept the services of the "sub-package" and refrain from

making any competitive counter-offers for fear of losing future business referrals.

Second, the "sub-packager," having already captured a customer, could improperly

steer that customer to the lender that promises to pay the highest referral fee. If the

lender uses the services, the "steering" sub-packager would fall within the exemption of

the full "package," and the otherwise illegal referral fee would be legal. Third, a

dishonest party that refers business to a lender or other service provider could blatantly

demand referral payments from the lender and then "cleanse" that payment by

performing sham services (or no services at all), allegedly within the rubric of the

"package." Under this scenario, the referral payment would be legalized, as fees paid

within the package are exempt, and the dishonest player could penetrate the "package"

without culpability because there is no requirement regarding minimal levels of services

that must be performed to be part of that "package."

We note here that MBA does not disagree with the "safe harbor" approach taken by

HUD in its proposal. We are concerned, however, that HUD must delineate that "safe

harbor" more carefully, or risk a return to pre-1974 conditions where rampant "kickbacks"

and referral fees served unnaturally, and needlessly, to inflate settlement costs.

Unless carefully crafted, the "sub packaging" provisions described by HUD could lead to

the disguising of referral fee payments, "sham" arrangements, and a host of other

market distortions. To this end, HUD must address the "sub-packaging" descriptions

and other ambiguous language contained in the Economic Analysis, as this language

raises the specter of legalizing naked referral fee payments without any countervailing

benefits for consumers.

This rulemaking has a number of statutory problems that are not easily resolved, as

they stem from fundamental questions about HUD’s basic authority to administer the

RESPA statute.

First, there is substantial agreement within the legal community that HUD lacks the

requisite authority to enact a system of tolerances under RESPA’s GFE provisions.

Legislative history clarifies that the GFE disclosure is meant to provide consumers with

an early set of cost disclosures that the consumer can use as a general guide to engage

in further shopping and comparisons of individual settlement service providers.

Congress never intended that the GFE form be regarded as a solid pledge or assurance

from the lender to the consumer regarding third party settlement fees. Nor did

mortgage transaction in instances where the estimated fees turn out to be inaccurate.

To the contrary, by explicit Congressional design, nothing in RESPA’s GFE provisions

mandates precise accuracy in the initial three-day disclosures, particularly for those fees

under the control of third parties. We believe, therefore, that by proposing strict cost

tolerances and by proposing rescission-type remedies for consumers when such

tolerances are unmet, HUD is inventing and implanting consumer protection provisions

that Congress specifically intended to exclude. In short, HUD is clearly overstepping its

regulatory authority.

HUD further overextends its authority by proposing to prohibit lenders from

compensating mortgage brokers for services that they legitimately perform in the

transaction. In the proposed rule, HUD proposes the elimination of so-called "yield

spread premium" payments, replacing it with a requirement that any payment due from

lenders to mortgage brokers (for services performed in the transaction) must be

characterized as fees credited from the lender to the consumer and tendered to the

broker. This proposed amendment is not only incredibly troublesome for purposes of

brokered transactions, but it is also directly contrary to the plain statutory language

contained in Section 8(c) of RESPA that specifically allows for the payment of services

actually performed and goods or facilities actually rendered.

Finally, MBA believes that serious statutory questions would surface should HUD

decide to finalize a rule containing "dual packaging" options. The statutory doubts arise

under two independent bases. First, as compared with the "single package" system

proposed by HUD, the "dual packaging" system gives rise to unique competitive

dynamics and completely different economic burdens on affected members. In addition,

"dual packaging" is a system that would require a distinct set of regulatory requirements

as it imposes new disclosure duties on entities that have no burdens under the existing

regulatory regime. The novelty of this proposal, and the fact that HUD’s thinking has

evolved beyond the original proposed rule, mandates that HUD re-issue another

proposed rule, and that it prepare another economic analysis, that fully explain how it

seeks to structure this new option. Second, and perhaps more fundamentally, since the

RESPA statute assigns the pertinent disclosure responsibilities to "lenders," it is

uncertain that HUD even possesses the necessary authority to shift and re-define the

statute’s disclosure rules on entities other than lenders.

This brief and summarized explication should suffice to give the Department additional

grounds for pause. There are serious legal problems and foundational doubts inherent

in the reform proposals as proposed. We fear that, without deeper analysis and wider

consultation regarding the new provisions, HUD’s reform rules will be encumbered by

multiple legal proceedings.

Mortgage reform promises to bring significant benefits to consumers and the real estate

finance industry alike. However, if not done correctly, it should not be done at all, as it

will "deform" rather than "reform" the mortgage process. The nature and extent of the

changes proposed by HUD require that all segments of the industry and consumers be

granted a full opportunity to review HUD’s latest reform plans through the issuance of

another proposed rule.

No one will benefit by having a final rule that is unworkable and counter to efficient

lending operations. No one benefits by the enactment of a law that hampers robust

competition in the marketplace. No one will win by finalizing a rule containing overly

broad exemptions that inadvertently strip consumer protections and allow for the

masking of blatant referral fee payments. No one will gain from the enactment of legally

ambiguous provisions that can be easily challenged and litigated into uncertain

interpretive results. In the end, we will all lose by prematurely finalizing a rule that will

alter, in entirely uncertain ways, the operations of an industry that has been, and

continues to be, the strongest pillar sustaining our nation’s economic health.

Mr. Chairman, the stakes are simply too high. We urge that this Committee join our call

to convince HUD to re-propose the RESPA reform rules so that we can ensure a robust

discussion and meaningful dialogue that allow for the maximum input from consumers

and industry. We ask that you help us in convincing HUD that this rulemaking must be

done right if it is to be done at all.

1 MBA is the premier trade association representing the real estate finance industry. Headquartered in Washington, D.C., the