\u IMPACT OF REGULATIONS UNDER THE REAL
ESTATE SETTLEMENT PROCEDURES ACT ON
SMALL BUSINESSES
Y 4. SM 1 : 103-32
Inpact of Regulations Under the Rea.
HEARING
BEFORE THE
COMMITTEE ON SMALL BUSINESS
HOUSE OF REPRESENTATIVES
ONE HUNDRED THIRD CONGRESS
FIRST SESSION
WASHINGTON, DC, JULY 1, 1993
Printed for the use of the Committee on Small Business
Serial No. 103-32
m..
70s . '
U.S. GOVERNMENT PRINTING OFFICE
WASHINGTON : 1994
For sale by the U.S. Government Printing Office
Superintendent of Documents, Congressional Sales Office, Washington. DC 20402
ISBN 0-16-044170-6
Y IMPACT OF REGULATIONS UNDER THE REAL
ESTATE SETTLEMENT PROCEDURES ACT ON
SMALL BUSINESSES
Y 4. SM 1 : 103-32 =^=— ==— "
Inpact of Regulations Under the Rea. . .
HEARING
BEFORE THE
COMMITTEE ON SMALL BUSINESS
HOUSE OF REPRESENTATIVES
ONE HUNDRED THIRD CONGRESS
FIRST SESSION
WASHINGTON, DC, JULY 1, 1993
Printed for the use of the Committee on Small Business
Serial No. 103-32
U.S. GOVERNMENT PRINTING OFFICE
WASHINGTON : 1994
For sale by the U.S. Government Printing Office
Superintendent of Documents, Congressional Sales Office. Washington, DC 20402
ISBN 0-16-044170-6
COMMITTEE ON SMALL BUSINESS
JOHN J. LaFALCE, New York, Chairman
NEAL SMITH, Iowa
IKE SKELTON, Missouri
ROMANO L. MAZZOLI, Kentucky
RON WYDEN, Oregon
NORMAN SISISKY, Virginia
JOHN CONYERS, Jr., Michigan
JAMES H. BILBRAY, Nevada
KWEISI MFUME, Maryland
FLOYD H. FLAKE, New York
BILL SARPALIUS, Texas
GLENN POSHARD, Illinois
EVA M. CLAYTON, North Carolina
MARTIN T. MEEHAN, Massachusetts
PAT DANNER, Missouri
TED STRICKLAND, Ohio
NYDIA M. VELAZQUEZ, New York
CLEO FIELDS, Louisiana
MARJORIE MARGOLIES-MEZVINSKY,
Pennsylvania
WALTER R. TUCKER III, California
RON KLINK, Pennsylvania
LUCILLE ROYBAL-ALLARD, California
EARL F. HILLIARD, Alabama
H. MARTIN LANCASTER, North Carolina
THOMAS H. ANDREWS, Maine
MAXINE WATERS, California
BENNIE G. THOMPSON, Mississippi
Jeanne M. Roslanowick, Staff Director
Stephen P. Lynch, Minority Staff Director
JAN MEYERS, Kansas
LARRY COMBEST, Texas
RICHARD H. BAKER, Louisiana
JOEL HEFLEY, Colorado
RONALD K. MACHTLEY, Rhode Island
JIM RAMSTAD, Minnesota
SAM JOHNSON, Texas
WILLIAM H. ZELIFF, Jr., New Hampshire
MICHAEL A. "MAC" COLLINS, Georgia
SCOTT McINNIS, Colorado
MICHAEL HUFFINGTON, California
JAMES M. TALENT, Missouri
JOE KNOLLENBERG, Michigan
JAY DICKEY, Arkansas
JAY KIM, California
DONALD A. MANZULLO, Illinois
PETER G. TORKILDSEN, Massachusetts
ROB PORTMAN, Ohio
(II)
CONTENTS
Page
Hearing held on July 1, 1993 1
WITNESSES
Thursday, July 1, 1993
Bell, Roger N., president, The Security Abstract & Title Co. Inc., Wichita,
Kansas •■•••■•• ^
Birmiel, Howard A., attorney, chairman, Crisis, Burke, VA; accompanied by
Joel Holstad 5
Rowland, Terry, vice president and general manager, Prosperity Mortgage
Corp., a subsidiary of Long & Foster, Fairfax, VA •• 10
Sims, Ray, senior vice president, GE Capital Mortgage Services Corp., Resi-
dential Express Division, Cherry Hill, NJ 21
Spera, Pall, realtor, Pall Spera Corp., Stowe, VT 15
Tasker, Herbert B., CMB, chairman, and CEO, All Pacific Mortgage Co.,
Concord, CA 19
APPENDIX
Opening statements:
LaFalce, Hon. John J 44
Poshard, Hon. Glenn 48
Prepared statements:
Bell, Roger N 136
Birmiel, Howard A 49
Executive Summary H-
Rowland, Terry 120
Sims, Ray 232
Spera, Pall 146
Tasker, Herbert 217
(in)
IMPACT OF REGULATIONS UNDER THE REAL
ESTATE SETTLEMENT PROCEDURES ACT ON
SMALL BUSINESSES
THURSDAY, JULY 1, 1993
House of Representatives,
Committee on Small Business,
Washington, DC.
The committee met, pursuant to notice, at 9:30 a.m., in room
2359- A, Rayburn House Office Building, Hon. John J. LaFalce
(chairman of the committee) presiding.
Chairman LaFalce. The Small Business Committee will come to
order.
This morning's hearing concerns regulations issued by the De-
partment of Housing and Urban Development just prior to the No-
vember 1992 election affecting various aspects of the real estate in-
dustry under RESPA, the Real Estate Settlement Procedures Act.
The regulations permitted certain activities including the pooling
of computerized information about mortgage availability and, in
some circumstances, remuneration for referrals to providers of set-
tlement services.
RESPA was first enacted by Congress in 1974 to protect consum-
ers from unnecessarily high real estate settlement charges due to
abusive practices. Among other things, RESPA prohibited kick-
backs or other fees relating simply to the referral of business to
providers of settlement services. Congress addressed RESPA again
in 1973, adopting certain amendments seeking to clarify the statute
and how it should be interpreted.
Over the years, HUD has issued various informal opinions on as-
pects of RESPA. In addition, HUD published proposed regulations
in May 1988. By December of that year, HUD had developed pro-
posals for a final rule on referral fees under RESPA. But the final
rule was not promulgated. Then, last November, days before the
election, HUD published regulations concerning controlled business
arrangements and computerized loan origination systems to
become effective in 30 days.
Proponents of the new regulations believe they promote efficien-
cy and enable consumers to gain access to better, faster service.
They say the regulations merely reflect the changing nature of the
real estate marketplace. Opponents, on the other hand, say the reg-
ulations unfairly discriminate against small businesses which are
independent providers of settlement services. They maintain that
competition will be weakened and consumers will suffer if the reg-
ulations are permitted to remain in effect.
(l)
There is some interesting news regarding this issue which I
would like to report at this time. Late yesterday, we were advised
by HUD that very shortly they will be publishing a notice for a
public hearing to address a number of issues concerning the regula-
tions that were issued in November. This notice is on file at the
Federal Register and should be published by the end of this week
or early next.
The issues to be addressed at HUD's hearing include the exemp-
tion for employer employee referral fees, the appropriateness of
buyers making referral payments under computerized loan origina-
tion systems, the provisions relating to preemption of State laws in
this area, and the question of whether the provisions calling for
disclosure of controlled business arrangements adequately protect
consumers.
While HUD's decision to hold a hearing on these issues is one
that was arrived at independently from this hearing, I am pleased
that HUD appears to agree that the circumstances in which the
regulations were promulgated last year raise legitimate questions
about whether another look is appropriate. I hope today's hearing
can help focus the issues to be addressed during HUD's review of
these matters.
Our committee will hear from a panel representing a variety of
groups on both sides of this issue, and I look forward to hearing
their diverse views. Before introducing our witnesses, though, I
would like to ask any members of the panel if they have any open-
ing statements.
I first call upon our distinguished Ranking Minority Member,
Ms. Jan Meyers of Kansas.
[Chairman LaFalce's statement may be found in the appendix.]
Mrs. Meyers. Thank you, Mr. Chairman. Thank you for calling
this hearing to examine the impact of the regulations implemented
pursuant to the Real Estate Settlement Procedures Act or RESPA
on small businesses.
The regulations' prior interest to those represented today were
10 years in the making and just made final by HUD on December
2, 1992. Since then, when the rules were first published in the Fed-
eral Register, considerable disagreement, some might say an all-out
war, has developed in the real estate industry among businesses
who disagree over the regulations' interpretation of controlled busi-
ness arrangements and computerized loan origination systems.
I am somewhat familiar with this fight, Mr. Chairman, as my
home State of Kansas addressed the issue of controlled business ar-
rangements in 1989. The State legislature passed a law which was
litigated to the Kansas Supreme Court and upheld that limits to 20
percent the amount of business any title company could receive
from referrals pursuant to CBA's.
I am very pleased we have a witness from the great State of
Kansas with us today, Mr. Roger Bell from Wichita, to discuss the
Kansas statute and how the Federal regulations are causing confu-
sion for States that already had taken some kind of action.
Mr. Chairman, we have a very knowledgeable panel assembled to
speak from both perspectives on the RESPA regulations this morn-
ing. I commend you for bringing the committee's attention to the
issue and look forward to the testimony of all the witnesses.
Thank you very much.
Chairman LaFalce. Do any other Members have any opening
statements they wish to make?
Mr. Bilbray.
Mr. Bilbray. Mr. Chairman, I just wanted to compliment you on
this hearing. I am very, concerned on this matter, after having
read all the preliminary testimony and facts given to me. I know in
many areas we have tried to prevent referrals within companies
for fees, figuring the abuses are going to be very, serious, especially
like physicians to their own laboratories. Yet we seem in this par-
ticular area to have gone 180 degrees and encouraged internal re-
ferrals but not external referrals.
So I am very concerned about this and anxious to hear the testi-
mony of all the witnesses. Thank you.
Chairman LaFalce. Mr. Ramstad.
Mr. Ramstad. Very briefly, Mr. Chairman, I would like to wel-
come the witnesses here today. In Minnesota this is a very conten-
tious issue, a very important one. I commend you, Mr. Chairman,
for your leadership in calling this hearing. I look forward to hear-
ing from this distinguished panel.
Thank you, Mr. Chairman.
Chairman LaFalce. Mr. Flake.
Mr. Flake. Thank you for holding this hearing Mr. Chairman.
Today we convene to explore the ramifications of the RESPA Act
of 1974, which seeks to eliminate kickbacks and referrals that un-
necessarily increase the cost of real estate settlement services. In
communities like the one I represent, this is an extremely critical
and important issue. Therefore, I look forward to hearing from the
witnesses.
In November of last year, the Department of Housing and Urban
Development promulgated rules to execute RESPA in order to pre-
vent kickbacks to real estate brokers for loan referrals. However,
there has been much controversy over the provision within the
rules that stipulates controlled businesses can pay its employees
for referrals to affiliated real estate providers.
This rule has induced controversy because many contend that it
is in direct violation of RESPA which seeks to prohibit such direct
kickbacks. It is my hope this hearing will uncover the possible det-
riment that could result from this ruling and how this issue affects
small businesses, which are the predominant businesses of the
Sixth Congressional District of New York and many other districts
of Members of Congress.
Mr. Chairman, Having heard from this marvelous body of wit-
nesses gathered here, I look forward to the testimony and hope we
can come to some concrete conclusions with regard to the Real
Estate Settlement Procedures Act [RESPA]
Thank you.
Chairman LaFalce. Mr. Poshard?
Mr. Poshard. I ask unanimous consent that an opening state-
ment be inserted into the record.
Chairman LaFalce. No objection, so ordered.
[Mr. Poshard's statement may be found in the appendix.]
Chairman LaFalce. If no other members of the panel have any
questions, I think we will get to our witnesses.
Let me ask that all of our panelists this morning to limit their
verbal presentations to absolutely no more than 10 minutes, prefer-
ably fewer. We will, however, include the entirety of your prepared
statement in the record. In the interest of time we would appreci-
ate you limiting your verbal statements.
We go into session today at 10 a.m. The first bill on the calendar
is the Commerce, State, Justice appropriations bill. One of the first
amendments up will be a Mr. Penny amendment trying to delete
all the money from the SBA save for disaster loans. I would appre-
ciate the assistance of the members in both sides in defeating that
amendment or amendments that may be offered.
As a matter of fact, if we get to that point in time where the
amendment is offered, I may well have to recess the deliberations
of this committee so we can go to the floor to defend that.
Let me read you a bit about all the witnesses. Mr. Howard Bir-
miel will be a first witness. He is an attorney in Northern Virginia.
He is an independent provider of settlement services. He serves as
the chairman of CRISIS, which stands for the Coalition to Retain
Independent Services and Settlements. He is very much opposed to
the HUD rule.
Mn Terry Rowland will then follow, vice president and general
manager of Prosperity Mortgage Corporation, a subsidiary of Long
& Foster. Like our previous witness, Mr. Rowland is based in
Northern Virginia. He is here as a representative of the Real
Estate Services Providers Council and is very supportive of the
rule.
Mr. Roger Bell, president, Security Abstract & Title Co., from
Wichita, Kansas. That is not by coincidence that a Representative
from Kansas is here today. Both Ms. Danner and Mrs. Meyers were
very, very interested in that Mr. Bell appears in his capacity as a
representative of the American Land Title Association of which he
was President in 1978 and 1979. Mr. Bell is very opposed to the
rule.
We will then have Mr. Pall Spera, a realtor from Stowe, Ver-
mont. Mr. Spera owns his own firm and comes to us today as a rep-
resentative, though, of the National Association of Realtors. He
will be speaking in favor of the rule.
Then we will hear from Herbert Tasker, representing the Mort-
gage Bankers Association of America. Mr. Tasker is chairman and
CEO of All Pacific Mortgage Co., of Concord, California. He will be
speak against the rule promulgated by HUD.
Last we will hear from Mr. Ray Sims, senior vice president of GE
Capital Mortgage Services. Mr. Sims works out of Cherry Hill, New
Jersey. He will describe for us GE's new national program intended
to extend mortgage availability into underserved communities
throughout the country. He will be speaking in favor.
So we have a distinguished and a very balanced panel. We will
first hear from Mr. Birmiel.
TESTIMONY OF HOWARD A. BIRMIEL, ATTORNEY, CHAIRMAN,
CRISIS, BURKE, VA; ACCOMPANIED BY JOEL HOLSTAD
Mr. Birmiel. Good morning, Mr. Chairman and members of the
committee. My name is Howard Birmiel. I am a real estate attor-
ney and title company owner in Northern Virginia and a principal
of CRISIS, the Coalition to Retain Independent Services in Settle-
ments. We are a group of settlement and title agents, attorneys
and independent escrow companies whose businesses stand to be
greatly harmed to the point of extinction following the promulga-
tion of HUD's new rules of the RESPA.
I also have behind me Joel Holstad from the State of Minnesota
who has lived with, and is intimately familiar with, the controlled
business issues on which I speak. He has submitted a written state-
ment which I will ask the committee to consider.
Chairman LaFalce. Without objection.
Mr. Birmiel. We appreciate you holding this hearing to hear the
issues. Our coalition has aligned with it, in our positions against
controlled business in the real estate settlement services industry,
the Mortgage Bankers Association, National Association of Mort-
gage Brokers, Consumer Federation of America, Independent In-
surance Agents of America, Savings and Community Bankers Asso-
ciation, Ahmanson Mortgage, American Land Title Association,
California Escrow Institute, Florida Association of Independent
Title Agents, Independent Land Title Association of Minnesota,
and other groups.
The latter three State groups have been living with and some-
what dying from the controlled business scenarios which HUD now
promotes with a fervor, about which Mr. Holstad can speak from
experience.
First, some background to explain. Let me start with the certain-
ty that small, independent competition in the unique settlement
and title insurance markets keeps prices down and consumer inter-
ests at hand.
What are the steps in real estate settlements? First, the realtor
writes the contract for the house purchase. The purchaser applies
for a loan. He may go to a mortgage lender or broker. The apprais-
er gets involved. Then the process moves on to the settlement or
escrow agent. The title search is performed, title examination is
performed. The conveyance documents are prepared and processed.
The contract terms are carried out. There is a surveyor involved.
The termite inspection. The home insurance is selected. All of
these are settlement providers involved in the process.
How does the purchaser get referrals for each of these functions
in buying a home? The realtor refers the purchaser to the mort-
gage lender and to the settlement agent. The realtor is, by far, the
most important entity in the referral of settlement business. The
consumer relies upon, generally, and trusts his realtor in most
cases, not every case but in some cases.
Despite all of the disclosures that the entity is an affiliate of the
real estate company, the consumer is going to take that realtor's
suggestion out of the trust of the personal relationship and not as a
matter of convenience. He relies on his realtor to tell him how the
process is done.
A lender referral also can be made to the settlement agent.
These services are performed by small businesses. They work well
because they are independent; they keep the consumers' interests
in mind. Referrals from realtors and lenders, for the most part,
have been made based on price and quality of service provided by
small businesses, including mortgage lending, and settlement
agents.
RESPA was enacted in 1974 in response to evidence of kickbacks
in the mortgage and settlement referral process. Realtors or lend-
ers would be paid kickbacks for referral of settlement service busi-
ness, which business was referred for the self-enrichment of the re-
altors. There were newspaper articles by Ron Kessler in The Wash-
ington Post. Certain Members of Congress were made aware that
they, too, were paying more due to kickbacks being passed on to
the consumer in the mortgage lending and settlement process.
RESPA prohibits the payment of kickbacks, referral fees, and
things of value in connection with referral of settlement services. It
worked well to clean up the industry and keep the various services
independent for the consumer. The home purchase for the con-
sumer, generally, is the largest transaction the consumer makes in
their life.
I pulled out of a drawer the special information booklet I got
from HUD in 1975 when I started my practice in real estate. I
started reading: "For many people, buying a home is the most sig-
nificant financial step of a lifetime. The RESPA act helps to pro-
tect you. While real estate brokers help to provide advice and may,
in some areas, supervise the settlement, in most instances, they
serve the seller and not the buyer."
Over most of the 1970's and 1980's, realtor ethics prohibited
steering of settlement business; the realtors in my area were cau-
tioned to make certain that they gave three names of settlement
service providers.
What happened in 1983? The realtors obviously wanted to own
mortgage and title operations and be protected from antikickback
provisions. They wanted new profit centers. The 1983 Controlled
Business Amendment, Section 8(c)(4), provided that referrals to an
affiliate in which the referring company had at least 1 percent
ownership interest were OK, as long as the only thing received in
return was a return on investment from the referring entity. The
use of the affiliate was not a required use, and the disclosure of the
referred company's affiliation was made to the buyer.
Congress could not have imagined the potential proliferation of
schemes to steer business, some then legal, some perhaps not,
which it was now creating at the urging of large real estate enti-
ties.
Thus began the advent of self-referrals in the real estate indus-
try. Some States recognized these controlled business permissives
were devastating to small businesses and consumers, and were able
to enact restrictions on controlled business and referrals, limiting
the amount of controlled business that could be done by affiliates,
requiring them to compete in the marketplace as well. These affili-
ates cannot compete with independents in the absence of captured
referrals. HUD and the real estate industry now attack these State
laws, calling them anticonsumer.
The growth of controlled business was most rapid in Southern
California, Florida, and Minnesota. It is a consumer detriment. The
referral of mortgage and settlement business has, in large part,
become based in a new profit center to be derived for the real
estate entity doing the referring, instead of price and quality of
service provided, which has been the basis for referral in the ab-
sence of these new businesses by the realtors. Without HUD's regu-
lations, the smaller real estate businesses in the country had not
yet figured this out.
What incentive is given to the agent to make the referrals to the
company's affiliate, legal or illegal, and to play the company line in
keeping referrals with in-house affiliates? For the last number of
months I have been finding out.
Lower desk fees. E&O insurance is paid by the broker. You get
higher commission splits if they go with the company referral.
Withholding the buyer referrals from real estate agents not going
with the company program. Setting of office quotas for numbers of
mortgages and closings referred to affiliates. Payment of agent's
final commission early at their settlement if they refer the buyer
to their affiliate's closing service.
We provided documentary evidence that all of these have devel-
oped since the 1983 amendments. In the large realty company sce-
narios these business steering practices are happening rapidly.
They particularly proliferate in the larger real estate companies in
the States I have mentioned to keep the business in-house.
When the real estate agent makes a referral to its companies'
title or mortgage affiliate now based on self-gain of the realty com-
pany rather than the price and quality of the service, as would be
the norm in an environment free of kickbacks, the consumers' in-
terests are left to the wind. The independent providers of loan and
title insurance are driven out of the marketplace. They cannot
Chairman LaFalce. Mr. Birmiel, it has been suggested to me
that perhaps if you could bring the microphone a bit closer, we
could hear you a bit better.
Mrs. Meyers. I see some people in the back of the room who may
be having some trouble hearing you.
Mr. Birmiel. The independents could, however, under the
present regulations, sell out a part of their business to the realty
company so the real estate entity could receive its return on invest-
ment permitted by the statute.
The system of checks and balances created by the 1974 act,
which kept the elements of the settlement services businesses dis-
tinct and independent, where they could look out for the interests
of the consumers without undue pressure to make a loan or close
the transaction, began to wear away; this happened in the interests
of new real estate and lender in-house profit centers, which these
lending and title closing affiliates would provide.
The RESPA enforcement unit was created, I believe, in 1991, to
take complaints from consumers regarding RESPA violations in-
cluding those involving kickbacks and incentives to agents for re-
ferral of business. The expectation was that a volume of a few hun-
dred complaints per year would be received from consumers. The
complaints filed ran quickly into multiple thousands as myself and
other competitors of the abusers vented their years of frustration.
The unit was quickly inundated, evidencing that substantial
kickback problems and both legal and illegal attempts to control
business referrals abound.
This is documented in anecdotal evidence from competitors of
the offending businesses, and in newspapers articles involving ille-
gal incentives, again in the California and Minnesota areas. They
strangely resemble the 1974 kickback practices.
What happened on November 2, 1992, the day before the elec-
tion? In 1988, HUD had issued draft regulations for implementing
the controlled business amendments. Hearings were held in 1990.
Substantial controversies existed. They were rewritten. Additional
drafts began to surface, even as late as 1991. On November 2, HUD
published final regulations, effective in 30 days, containing a recipe
to the real estate and lending industries on how to create your af-
filiate and refer business to it.
Documented evidence shows a political decision made at HUD to
encourage the growth of affiliates. The regulations provide referral
fees can be paid to employees of real estate companies and lenders
for the referral of mortgage and settlement service business to af-
filiates. We call them kickbacks.
I understand that, at early hearings, the real estate industry rep-
resented they needed referral fees in order to get their employees
to refer the business to their affiliate.
Realtors who typically represent the seller could now act as loan
originators, take loan applications, charge consumers fees, and act
to obtain loans to the buyer in the alleged interest of greater choice
for the consumers. The realtors as loan originators could then be
paid fees by the lenders, a portion of the money earned by the
lender.
I will defer to the representatives of the mortgage bankers who
will explain in more detail about this controlled business conflict.
How are these justified by the proponents of one-stop shopping?
They promote consumer convenience. The consumer can go in the
front door of the real estate office; he never comes out, under the
scenario. The largest transaction of his life is made in a conflict-
laden system in which the realtor's commission, the affiliated lend-
er's profits, and the title company's fees all depend upon giving the
loan and closing the deal. Who is looking out for the consumer's
interest?
Lower fees from integration of all the processes of the package of
services. Allegedly, the consumer will be charged less from the less-
ening of administrative costs. Will a discount of $200 on a package
of services offset the fact that the nonaffiliated lender down the
street may be charging half a percent less, amounting maybe to
$1,000 less, for obtaining the loan? The consumer does not get to
them because they don't have an opportunity to shop.
The consumer is going to be discouraged from shopping by the
realtor whose corporate entity is asking the realtor to keep the
business in-house, and this does go on.
This concentration of business with realtor affiliates will destroy
independent providers who do not otherwise have to answer to a
parent realtor and lender for providing these services. When the
controlled business scenarios become control of business as they
have in California, Minnesota, Florida, and areas of Pennsylvania,
the independents either become part of a real estate office or they
are driven out of business. The independent competition suddenly
does not exist anymore, and the affiliates are free to charge what
they wish.
A few weeks ago, HUD entered into a $700,000 settlement with
Coldwell Banker alleging illegal practices in steering purchasers to
its affiliated lenders and title affiliates in Minnesota and New
Jersey. Although Coldwell admitted to no wrongdoing, we in the
business and the real world have observed that in Coldwell offices
their business was steered to their own affiliates in large numbers.
It is a simple matter. It is a simple matter of money. The real-
tors would like to use their profit centers, and they certainly are
going to steer their agents in that direction, whether or not their
agents can get direct compensation, obviously not, under the regu-
lations.
However, it does fall through; the pressure comes through; the
incentives are there as is played out in the States that have ad-
vanced prior to the regulations.
Chairman LaFalce. Mr. Birmiel, I am going to have to ask you
to conclude your remarks shortly bece ase you have exceeded the 10
minutes.
Mr. Birmiel. I would like to conclude by just going through three
scenarios that I have observed.
The larger real estate company has its wholly owned affiliates
and advertises one-stop shopping. The consumer walks in the front
door, doesn't come out. The independent provider is not allowed to
walk past the front desk, not allowed to sell his services to the
agents.
The smaller company, Century 21 franchise, cannot advertise a
fully-owned affiliate, a fully-owned title affiliate, for example. A
title company forms a new title agency, partially owned by the
Century 21 broker as an affiliate. The real estate broker has no li-
ability or responsibility for the title operation. For all the business
they can refer from their agent, they receive their return on in-
vestment. They have none of the liabilities, none of the responsibil-
ities of owning a title company.
Three Century 21 offices in the Northern Virginia area have
done this, at least that many since the regulations were enacted;
Century 21-Teachers, Century 21-Marie West, and Century 21-
Great American.
An attorney set up a broker's title company in which he sold in-
dividual shares to real estate agents, and they would own 65 per-
cent of the title agency. He would own 35 percent. His firm would
do the settlements. Where does the consumer fit into all this?
As many referrals as these realtors can make, they run their
return on investment and profit. This is all illegal according to the
1983 amendments, as I see it. All the consumer has got is a disclo-
sure of the relationship. He is going to get referred to this entity.
There is no room for discounting or one-stop shopping. The title
company is making less; the realtor is getting a return on the in-
vestment.
Look at these entire scenarios, and I believe we have a consumer
problem to be addressed. I believe we have a small business prob-
lem to be addressed as a result.
Chairman LaFalce. Thank you very much, Mr. Birmiel.
[Mr. Birmiel's statement may be found in the appendix.]
Chairman LaFalce. Our next witness, Mr. Terry Rowland, repre-
sents the Real Estate Services Providers Council.
10
TESTIMONY OF TERRY ROWLAND, VICE PRESIDENT AND GENER-
AL MANAGER, PROSPERITY MORTGAGE CORP., A SUBSIDIARY
OF LONG & FOSTER, FAIRFAX, VA
Mr. Rowland. Good morning, Mr. Chairman and members of the
committee.
My name is Terry Rowland, and I am vice president and general
manager of Prosperity Mortgage Corp., a subsidiary of Long &
Foster Companies, Inc. Our sister company, Long & Foster Real
Estate, Inc. provides real estate brokerage services throughout 13
offices and 6,300 agents in the States of Virginia, Maryland, Penn-
sylvania, West Virginia, Delaware, as well as in Washington, DC.
Today I represent the Real Estate Services Providers Council,
called RESPRO, of which Long & Foster companies, Inc. is a
member.
Mr. Chairman and members of the committee, RESPRO wel-
comes the opportunity to testify on the Department of Housing and
Urban Development's final Real Estate Settlement Procedures Act
regulation.
RESPA was formed in 1992 by diversified real estate services
providers throughout the country, known as controlled businesses
arrangements under RESPA, who decided to unite to support a
Federal and State regulatory environment that allows businesses
to offer one-stop shopping to homebuyers.
Our membership is open to companies of all sizes offering a wide
variety of settlement services for homebuyers.
Attachment one to my testimony provides a list of RESPRO's
current members, which totals 22; and are still growing. As you
can see, our membership is open to real estate brokerage compa-
nies, mortgage companies, title companies, and any other service
providers of settlement services as defined by HUD under RESPA.
We are all united by one common bond: We want to offer one-
stop shopping for homebuyers in a cost-efficient manner through
affiliations, joint ventures, and partnerships with companies offer-
ing related services.
RESPRO believes that the current RESPA law and HUD's 1992
final RESPA regulation benefit the consumer by allowing our com-
panies the ability to offer these products and services that our cus-
tomers really need.
After RESPA was enacted in 1974, three fundamental changes in
the real estate services marketplace have made it not only desira-
ble but inevitable that real estate settlement services providers es-
tablish financial relationships. These are controlled business ar-
rangements, with other service providers in order to offer multiple
products and services for homebuyers.
First, homebuyers' demands have significantly changed since
RESPA was enacted. As you can see from attachment three, two-
income households made up 38 percent of the population in 1974.
By 1990 it was 47 percent. The numbers expected to make up 52
percent of total households by 1995. More two-income households
mean less time available to spend on the complex home purchase
transaction. It means homebuyers want more convenience. They no
longer have time nor the desire to go to a real estate broker for
brokerage services, a mortgage broker or lender for a mortgage
11
loan, a title company for title insurance, and so on and so on down
the line.
Second, a major change in the marketplace has been the increas-
ingly widespread use of advanced technology in home and in busi-
ness. The availability of computers, hot lines, fax machines, and
other technological advancements enable all settlement service pro-
viders to expand their geographic markets, lower their costs
through increased efficiencies, tap into capital markets and in-
crease the amount of information and product choice that are
available to homebuyers.
Finally, the competitive dynamics of the real estate marketplace
have dramatically changed since 1974. The maturation of the baby
boom generation has increased supply and decreased demand for
residential homes so that more providers of settlement services are
competing for fewer customers. As a result, settlement service pro-
viders have one or two choices if they want to survive. They can
either expand into ancillary services and tap into new markets or
they can artificially retain high profit margins by restricting entry
into the segmented marketplace by new members.
We believe that the diverse figures or one-stop shopping provides
significant consumer benefits such as greater consumer choice,
better service, greater competition, and most importantly, lower
costs. Studies have shown that when settlement service companies
are able to diversify into other services, it results in real cost sav-
ings for the consumer.
For example, a 1992 survey of title service costs in the Minneapo-
lis-St. Paul marketplace found that diversified providers charged
approximately $13 less per closing for a market basket of title serv-
ices — including buyers closing, plat drawings, assessment search,
name search, and record satisfaction — than the independent pro-
viders.
My written testimony contains other examples of actual and po-
tential cost savings from diversification.
Unfortunately, companies have never been able to fully provide
the consumer benefits associated with diversification and one-stop
shopping because of the confusing Federal regulatory environment
over the last decade.
RESPRO supports the statutory framework Congress established
in 1983 which established a safe harbor under RESPA for con-
trolled business arrangements as long as: The consumer is provided
with meaningful disclosure of any financial relationship between
two companies and the normal range of fees charged for the service
provided; the consumer is not required to purchase more than one
settlement service from one company; and, the only fees paid be-
tween providers within the same controlled business arrangement
for referrals of business be a return on ownership interest or a
return on the franchise relationship.
But for almost a decade, HUD stifled the ability of diversified
companies to develop innovative products and services for home-
buyers by refusing to issue regulations to implement the 1983 con-
trolled business arrangement amendments to RESPA.
Until the December 2, 1992, final RESPA rule was issued, diver-
sified companies were forced to rely on a series of HUD opinion let-
ters that often reached inconsistent and vague conclusions about
12
what diversified companies can and cannot offer their customers.
Because reputable companies do not want to inadvertently subject
themselves to RESPA's criminal and civil sanctions, they were re-
luctant to offer these products and services that best met the needs
of their customers in a changing marketplace. Smaller companies
that could not afford expensive legal opinions to provide them com-
fort in offering new products and programs were at a particular
disadvantage in this unfair and uncertain regulatory environment.
Finally, in 1992 HUD issued a final RESPA rule that ended the
decade of unclear and inconsistent regulatory guidance for diversi-
fied companies as to what is and what is not allowed under
RESPA.
RESPRO believes this final RESPA rule recognizes 1983 congres-
sional intent to allow companies to provide consumer benefits asso-
ciated with diversification.
Significantly, the rule provides that a diversified company may
offer its customers multiple products and services at the point of
sale; a diversified company may offer consumers discounts or re-
bates if a customer chooses to purchase more than one product or
service from a company; and a diversified company may offer con-
sumer discounts or rebates if the customer chooses to purchase
more than product or service from the company; and a diversified
company may compensate its management and nonreal estate
agent employees for developing and implementing programs involv-
ing the cross-marketing of multiple products and services.
HUD's final RESPA rule also follows Congress' intent to provide
adequate consumer safeguards against potential abuses when deal-
ing with diversified companies. For example, diversified companies
must disclose in writing the nature of any business relationship be-
tween any two providers, the estimated charge of the settlement
service being provided, the fact that the customer is not required to
purchase one product or service to get another, and the fact that
the customer may be able to help to get the service at a lower rate
by shopping with another company.
A standard disclosure form shown in one of my attachments is
provided with my testimony.
A diversified company may not require that customers purchase
one of its products or services in order to purchase another product
or service.
No affiliate in a diversified company may directly or indirectly
pay another affiliate for the mere referral of business.
Providers of multiple settlement services must perform distinct
services in return for each payment they receive.
HUD's Regulatory Impact Analysis of the final RESPA rule esti-
mated that the consumer savings from allowing diversified compa-
nies to cost-efficiently offer and market multiple products and serv-
ices for homebuyers at the same time and/or place are estimated
at up to $150 per transaction and up to $148.5 million for all home-
buyers.
Attachment five to this testimony includes articles that summa-
rize many other significant consumer benefits that flow from
HUD's new RESPA rule.
One provision under the controlled business arrangement provi-
sions of HUD's final RESPA rule deserve further discussion be-
13
cause it has been so misinterpreted by independent providers of
services that fear competition from diversified companies.
The new rule provides that RESPA does not prohibit an employ-
er's payment to its own employees for any referral activities. Con-
trary to much of the publicity surrounding this rule, this provision
does not apply to real estate agents which are considered independ-
ent contractors and not employees.
We do believe, however, that the ability to compensate managers
of diversified companies, which is permitted by the rule, is crucial
to the continued existence of diversified companies in the real
estate marketplace.
A diversified company that wants to offer one-stop shopping to
homebuyers will naturally assign this responsibility to its manage-
ment. Without the ability to compensate management in accord-
ance with their job requirements, diversified companies would not
be able to efficiently offer one-stop shopping for homebuyers.
Chairman LaFalce. Mr. Rowland, I have to ask you to try to
conclude your remarks.
Mr. Rowland. I will summarize my comments.
In summary, REPRO strongly believes today's homebuyers and
real estate marketplace require a regulatory environment that
allows companies to offer multiple products and services for home-
buyers at one time and at one place by establishing affiliations,
joint ventures, and partnerships with other companies.
By providing settlement service providers with clear and consist-
ent regulatory environment that allows companies to diversify in
the most cost-efficient manner possible, HUD's final RESPA rule
will increase consumer choice, enhance consumer service, increase
competition among providers of services for homebuyers, and lower
the costs associated with buying a home.
Thank you for this opportunity to testify. I will be glad to answer
any questions.
Chairman LaFalce. Thank you very much.
[Mr. Rowland's statement may be found in the appendix.]
Chairman LaFalce. I have allowed both of the first two wit-
nesses to go not only a bit but way beyond the 10 minutes. But
since one was opposed and one was for, it sort of balances out.
For the rest of the panelists I am going to have to be very rigid
for the 10-minute rule. With 10 minutes before, we are going to go
to the next witness. If you could finish before then, that would be
OK, too.
Mr. Bell.
TESTIMONY OF ROGER N. BELL, PRESIDENT, THE SECURITY
ABSTRACT & TITLE COMPANY, INC., WICHITA, KANSAS
Mr. Bell. Mr. Chairman, members of the committee, my name is
Roger Bell. I am president of Security Abstracts and Title of Wich-
ita, Kansas. I am here today representing the American Land Title
Association.
ALTA has 2,000 members, including title insurance companies,
independent title agents, abstracters, and attorneys. ALTA mem-
bers search, examine, and insure land titles to protect owners and
14
mortgage lenders in real estate against losses from land title prob-
lems.
The typical ALTA member such as myself is a small business op-
erator. ALTA member firms employ nearly 100,000 people over the
country and operate in nearly every county of the 50 States.
ALTA believes that there are three principal problems with the
RESPA regulations.
First, it is already difficult to compete with the controlled busi-
ness company. Now, the regulations could be the last nail in the
coffin for many independent small businesses such as mine. The
root of this problem is the permission granted in the regulations
for an employer to pay a bonus fee to an employee for the referral
of the consumer's business.
Frankly, we recognize there is a difference with real estate
agents as independent contractors. But, ladies and gentlemen, can I
tell you, they will be sure that agent is properly compensated.
For example, a real estate brokerage company can pay an office
manager or a mortgage lender can pay its own loan originator an
incentive bonus or fee to encourage that person to steer business to
the controlled title agency.
This aspect of the regulation conflicts with the congressional de-
termination that beyond the payment of bona fide dividends, no
other thing of value should be paid or received in controlled busi-
ness arrangements.
If an independent title agency such as mine made a similar pay-
ment to the office manager or the loan originator, it would be sub-
ject to criminal and civil sanctions for violating Section 8 of
RESPA. Consequently, independent agents find that they are
unable to compete.
We agree with the Consumer Federation of America that allow-
ing such payments will determine the direction of referrals. They
recognize that there is a great danger that few, if any, consumers
will be able to escape the one way highway of financially induced
referrals to captive affiliates. I believe that highway is one that
leads toward increased prices. Carried to the ultimate conclusion, it
will also lead to fewer providers of settlement services.
Our second major concern is the attempt in the regulations to
preempt State-controlled business provisions that go beyond the
disclosure approach Congress adopted. The controlled business ex-
emption to RESPA was enacted in 1983. At that time, Congress
knew that the National Association of Insurance Commissioners
was considering requirements that controlled title agencies obtain
a significant portion of their business from sources other than re-
ferrals from their own controllers.
Consequently, Section 8(d)(6) of RESPA was specifically included
to avoid Federal preemption of stricter State-controlled business
laws. Congress made this clear in the language of the statute. The
committee report also made it clear that RESPA should in no way
inhibit the States from adopting such provisions.
Indeed, my own State of Kansas as Representative Meyers men-
tioned, adopted such controlled business provisions. Yet the RESPA
regulations suggest that this law has been preempted.
Going back to Kansas for a moment, in 1986, as a result of con-
sumer complaints, my State insurance commissioner became con-
15
cerned about controlled businesses in the title insurance industry.
He appointed a study group composed of representatives of all seg-
ments of the real estate industry. The commissioner then proposed
the legislation that this committee recommended. This legislation
passed the Kansas legislature unanimously in the State Senate,
and with only two dissenting votes in the House, and was enacted.
As enacted, it limits the amount of controlled business, in which a
title company could engage, to 20 percent of its gross operating rev-
enues. In other words, it forces it to go on the marketplace and
compete for its business.
This controlled business legislation has played an important role
if preserving competition in our State. Unfortunately, the RESPA
regulations raise concerns about Federal preemption. I have heard
the same concern has been expressed in other States that are con-
sidering such legislation.
ALTA has brought this problem to the attention of the new ad-
ministration at HUD. We are hopeful they will clarify that State
laws in this area that are not preempted.
Finally, the title insurance industry has also raised a number of
questions regarding a new concept-core title agent services. This is
HUD's attempt to identify the basic services that a title insurance
agent must perform to avoid his compensation being viewed as a
RESPA Section 8 violation. In other words, he has to do all the
things necessary to provide the product if he is going to charge a
full rate for that product.
We have seen a number of shell companies in the Kansas part of
the enactment of our legislation that were really pass throughs;
they had no employees; they contracted with another title company
to produce the entire work product at a lesser rate than the going
rate. Of course the shell company collected the difference.
We commend HUD on addressing this issue. However, we hope
HUD is able to refine the provision to at least take into account
the many regional variations in the settlement industry. The busi-
ness isn't conducted the same over the entire country.
We deeply appreciate the committee's concern about this issue.
We hope that the members of the committee express misgivings
about the regulations to HUD.
Thank you very much, Mr. Chairman.
Chairman LaFalce. Thank you.
[Mr. Bell's statement may be found in the appendix.]
Chairman LaFalce. Our next witness will be Mr. Pall Spera.
TESTIMONY OF PALL SPERA, REALTOR, PALL SPERA CORP.,
STOWE, VT
Mr. Spera. Thank you, Mr. Chairman. I will adhere to your time
instructions. Mr. Chairman and members of the committee, my
name is Pall Spera. I am a realtor from Stowe, Vermont, and also
1993 Chairman of the Public Policy Coordinating Committee of the
National Association of Realtors. I am president of a real estate
brokerage firm with 20 realtor associates and two appraisers and
represent 750,000 members of the association.
I would like to thank you and the members of the committee for
the opportunity to present the views of our members on the De-
16
partment of Housing and Urban Affairs' final ruling on imple-
menting the 1983 amendments to the Real Estate Settlement Pro-
cedures Act. Of particular concern are realtor involvement in the
mortgage process through computerized loan origination and the
continued ability of our members to participate in diversified finan-
cial services, companies known as controlled business arrange-
ments, or CBA's, as Mrs. Meyers as indicated.
My written statement will provide a general statement of sup-
port on behalf of the National Association of Realtors for the De-
partment of Housing and Urban Affairs's final rule, effective De-
cember 2, 1992, and overview of recent trends in the real estate
brokerage industry and implications of those changes for the con-
tinued profitable of our industry, a discussion of computerized loan
origination and realtor involvement, consumer benefits derived
from the point of sale delivery of mortgage-related services, the leg-
islative history of the intent of Congress, and a statement of NAR's
policy with respect to RESPA.
Because the focus of this committee is small business, I will at-
tempt to frame the issues in terms of the benefit that HUD's final
rule, if left unchanged, will bring to the thousands of small busi-
nessmen and women who represent the majority of NAR's mem-
bership.
The 1990 median income for brokers was $31,400, while the
median income of sales persons is $22,500. Moreover, the definition
of a CBA asset by Congress in 1983 is having just over 1 percent
ownership interest in a related real estate company or an affili-
ation by virtue of an agreement to do business together as a
common — as is common in family businesses.
The National Association of Realtors commends HUD for issuing
a rule that is a victory for consumers while allowing industry
growth. It removes the artificial boundaries between different types
of real estate services associated with the sale and purchase of a
home and allows the real estate professionals to join forces to offer
multiple services for homebuyers and sellers at one time and in
one place.
We do not expect our members to abandon real estate brokerage
as their primary source of revenue. We believe in their right and
the right of all individuals to choose how they wish to grow with
the industry. Had the final regulations curtailed these rights, both
industry and consumers would have borne the cost.
Putting aside the industry turf battles of the past decade and
fears of potential abuses that some seem to think will be inevitably
associated with change, we believe the discussion should be about
the more meaningful issue of how the role of real estate profession-
als is changing, the forces driving the change, and the competitive
tools needed to survive in that transition.
The primary focus is technology and the real estate brokerage in-
dustry, but similar arguments could be presented for other settle-
ment service providers as well. The answer for them is the same as
it is for us, sir. We will have to change some of our old ways of
doing business to meet consumer demand for versatility and better
service. Real estate firms in particular will have to diversify their
clients and customers and become more conversant with the realm
of possibilities available through technology.
17
The world of the realtor is, indeed, changing. Technological inno-
vations are accelerating at a rapid pace with the advent of inte-
grated technologies, voice, data, video, traditional delivery of real
estate is being replaced by new services. In many cases these new
technological applications to real estate data offer an efficient, cost-
effective, and highly organized exchange of information. The con-
sumers are likewise becoming increasingly aware of the technologi-
cal opportunities that are available to them.
We are ready to respond to that challenge but cannot do so if
shackled by excessive regulatory intervention. Real estate broker-
age, especially residential brokerage, will continue to be the most
important revenue producer for real estate companies in the
future. That is not to say that broker owners will not offer other
real estate services like CLO, title, and escrow; but these additional
services are not expected to provide more revenue than brokerage
services enhanced by computer technology.
Nevertheless, it is critical that real estate firms be allowed to
provide a full range of real estate related services. The average
profitability of a residential brokerage companies has fallen signifi-
cantly in recent income, expense, and profits studies conducted by
the association. As business costs continue to escalate, real estate
firms will be required to achieve profitability through cost contain-
ment and diverse figures.
As we have seen computerized multiple listing services take over,
the new approaches to real estate information are quickly trans-
forming, our consumers will receive information, including charac-
teristics of home and supporting real estate transaction informa-
tion and the like. The competitive business climate of the 1990's
and the more rapid integration of technology in every day activi-
ties may well catapult these systems into full industry penetration
by the end of the decade.
The systems included in my written statement offer a new ap-
proach to real estate information access and dissemination, pivotal
elements in the selling and buying of real estate, the computerized
loan origination system has been discussed as CLO involves the
placement of a computer or terminal in a broker's office. It pro-
vides information about the loan products offered by one or more
lenders. It can be used to prequalify borrowers and transmit mort-
gage applications. Buyers are assisted in the application process by
the system operator.
Today there are fewer nationals systems. But as technology be-
comes less costly, regional and local systems will emerge tailored to
the specific needs of individual real estate markets. The CLO
system of the future will be open to as many lenders as the system
can accommodate, which, essentially, is unlimited.
The only reason for excluding lenders will remain negative expe-
riences with the lender's performance during the funding process
of the servicing and mortgaging of the loans.
The computerized loan origination systems extends the services
to the realm of mortgage finance. They enable real estate brokers
and their agents to keep up with the literally hundreds of basic
combinations of loans available to fulfill the needs of their compli-
ance and customers.
18
In my particular area, the CLO system would provide those rural
areas served by one, possibly two financial institutions, with the
mortgage products of national lenders bringing much need competi-
tion to these markets and increased choices for our consumers.
They are also useful during periods of high interest rates when
lenders are less willing to negotiate interest rates. Computerization
enables lenders to turn around loan application in as little as a few
days when the average time a home buyer waits for a decision on a
loan processed manually is more than 30 days. The introduction of
streamlined processing has forced all lenders to improve their turn-
around time.
For consumers for whom a simple, fast process is of tantamount
importance, the coming of age of the mortgage delivery system has
been long overdue. The streamlined process lowers transactional
cost of obtaining a mortgage through reduced points, fees, interest
rates, and/or some of the combinations.
A reduction of a quarter of a point in these transaction points,
which is a reasonable estimate of consumer savings, translates into
approximately $6,000 over the life of the loan. Additional consumer
benefits are included in my written statement.
The National Association of Realtors adopted, through its board
of directors, in 1989 that, where a real estate broker or agent pro-
vides services in addition to or different from those that he or she
is obligated to provide by his or her agency agreement, that broker
is entitled to remuneration for those services, provided that full
and written disclosure is made and accepted by all clients and cus-
tomers to the transaction in advance of undertaking to perform
such services.
The National Association of Realtors is opposed to the accept-
ance of fees by real estate brokers or agents for the simple referral
of customers or clients to mortgage lenders and providers of other
settlement related services.
As we have said, the emphasis is added on that that is commonly
referred to as naked or blind referral fees.
The National Association of Realtors does not support further
legislative changes to RESPA but would recommend some clarifica-
tion at the regulatory level. Specifically, it would be helpful to add
definitions of computerized loan origination and bona fide employ-
ee. We believe this would end some of the controversy surrounding
referral fees to independent contractors and additional fees to com-
puter information services that are typically provided free of
charge by broker agents representing sellers.
Chairman LaFalce. I am going to have to ask you to sum up
now, Mr. Spera.
Mr. Spera. The real estate industry is growing and requires a
revolution of mortgage lending to handle that growth. By the year
2000, there will be a demand for $1.4 trillion in mortgage money, 7
to 10 million more people may be buying homes.
The preference for these homebuyers will be to increase the need
for alternative mortgages and real estate brokers and agents who
can take the buyer quickly and knowledgeably through every step
of the transaction.
19
In our view, we no longer can put a stranglehold on the mort-
gage delivery system because of an alleged turf war between com-
peting interests.
Denial of the inevitable can be deadly. We have spent too much
time fighting each other. We should be joining forces to bring the
real estate industry into the 21st century.
Thank you, Mr. Chairman.
Chairman LaFalce. Thank you very much.
[Mr. Spera's statement may be found in the appendix.]
Chairman LaFalce. Our next witness will be Herbert Tasker,
chairman of the board of All Pacific Mortgage Co., speaking on
behalf of the Mortgage Bankers Association of America.
TESTIMONY OF HERBERT B. TASKER, CMB, CHAIRMAN, AND CEO,
ALL PACIFIC MORTGAGE CO., CONCORD, CA
Mr. Tasker. Mr. Chairman and members of the committee, I am
Herb Tasker, chairman of the board, CEO of All Pacific Mortgage
Co., I am also serving as president of the Mortgage Bankers Asso-
ciation.
Last December, HUD regulations took effect, which made two
significant changes to RESPA. First, those regulations allowed bor-
rowers to pay real estate agents who provided computerized loan
origination systems, or CLO's.
Second, those regulations allowed employers to pay employees
for referrals where there is an affiliation between different settle-
ment service providers. This is known as the controlled business ar-
rangements.
MBA is deeply concerned over the proliferation of mortgage re-
ferral fee programs. People are paying too much for their homes
when unnecessary fees are buried within the closing costs. Referral
feels inject financial inducements into what should be an open,
competitive process.
In 1974, RESPA was enacted to inform buyers about settlement
costs and to protect consumers by prohibiting abusive practices,
such as kickbacks and referral fees. This prohibition also ensured
that the settlement service providers would compete fairly and
openly. The principles of RESPA are as important today as they
were in 1974.
Our concern is that HUD regulations allow programs that vio-
late these basic consumer protection principles. The spirit of
RESPA has been blatantly violated. If steps are not taken to soon
revitalize the law, consumers' cost also increase while healthy com-
petition will decline.
By allowing real estate agents to be paid for work performed, a
new fee is being added to the transaction. Generally, even where a
real estate agent performs work, such as taking an application, the
lender must check the information as a quality control or, in most
cases, retake the entire application.
Paying for this service only adds more cost. We believe it is a
thinly veiled excuse for paying a referral fee.
The real estate agent does not underwrite the loan, have the fi-
nancial capacity to indemnify a lender for losses due to fraud or
20
error, or assume the risk if interest rates shift during the loan ap-
plication process.
Also, by allowing real estate agents to charge a fee for the CLO
service, additional costs are added. Realtors have traditionally
helped buyers to obtain financing as one of the services provided to
the seller. Homebuyers should not have to pay additional fees to a
real estate agent for helping find a loan.
The new HUD regulations will encourage adverse steering and
will reduce competition. The regulations allow the borrower to pay
a fee to the real estate agent for loan information listed on the
CLO system. Moreover, the regulation does not define a CLO
system at all. It gives no guidance on how many lenders or loan
programs must be listed. There is no incentive to design the CLO
system to carry loans with the best rates or terms. There is no re-
quirement that the rate information from lenders who are not par-
ticipating on the CLO be given to the borrowers. Indeed, a lend
who wants to have loan information listed on a CLO cannot
demand open access to that system.
We are concerned that exclusive CLO arrangements will be es-
tablished and will restrict consumers' choices. The consumer will
be paying for a limited service, and the lenders not on the system
will get less business. Limiting competition is not beneficial to the
consumers or lenders.
Allowing the payment of a fee to a real estate agent affects the
quality control because it jeopardizes the integrity of the credit
process. A real estate agent's primary compensation is the sales
commission. Allowing individuals with a strong vested interest in
seeing a loan closed to become actively engaged in taking loan ap-
plications has the potential to seriously compromise the lending de-
cision.
Allowing a real estate agent to collect a sales commission from
the seller and a fee from the buyer for the CLO service has tremen-
dous potential for creating conflicts of interest. Many consumers,
particularly first-time buyers, are unsophisticated about the steps
involved in the purchase of a home. Thus, they look to the real
estate agent to guide them through the process. However, the real
estate agent has a contractual relationship with the seller — it is
to sell the home at the highest possible price within an acceptable
time frame.
The buyer and the seller have different and sometimes opposing
interests. Liberal underwriting and speedy processing are impor-
tant to the seller and the real estate agent. But the borrower is
more interested in interest rate and points, the monthly payments,
and the size of the down payment.
MBA believes that the computerized loan origination systems
can be useful to the consumers and to the lending industry. Howev-
er, we need to protect the consumer and to ensure a competitive
marketplace. Therefore, MBA believes that certain controls need to
be in place.
Specifically, we believe that multiple lenders must be allowed to
list their products on the CLO. The borrower must have adequate
disclosure about the service provided and the fees required before
committing to pay for the service. The fee must be reasonably re-
lated to the value and the cost of the service provided. The borrow-
21
er must pay the fee at the time that the service is provided, not at
the closing of the loan.
In summary, MBA strongly believes that referral fees do not add
value. I am concerned that today we are witnessing a return to the
pre-RESPA period when consumers were paying unnecessary or
hidden fees that increased the cost of home ownership.
Computerized loan origination systems can be beneficial to the
home buyer and to the lending industry, but controls must be in
place. We should not allow CLO systems to choke off access of lend-
ers to the consumer. We should not allow CLO systems to discour-
age borrowers from shopping around for the best price because the
price of convenience may not be just the fee paid but the higher
cost mortgage.
We should not allow lenders who do not participate in the CLO
system to be excluded from getting referrals. Without referrals.
Those businesses will close and will no longer be a competitive
force to keep mortgage rates and real estate settlement costs com-
petitive.
We should not allow HUD to sanction a system that reintroduces
the unnecessary fees that were purged by Congress from this Na-
tion's real estate market after 1974. We believe the new adminis-
tration should carefully review the regulations implemented last
December to assess the impact on consumers as well as the impact
on the competitiveness of the mortgage lending and settlement
services industries. If HUD is not responsive, we urge congressional
action.
Thank you, Mr. Chairman, for this opportunity to share my
views on this important issue with you and the rest of the commit-
tee. We would be happy to furnish any additional information.
Chairman LaFalce. Thank you very much, Mr. Tasker.
[Mr. Tasker's statement may be found in the appendix.]
Chairman LaFalce. Our final witness will be Mr. Ray Sims,
senior vice president of GE Capital Mortgage Services, Residential
Express Division.
Mr. Sims.
TESTIMONY OF RAY SIMS, SENIOR VICE PRESIDENT, GE CAPITAL
MORTGAGE SERVICES CORP., RESIDENTIAL EXPRESS DIVI-
SION, CHERRY HILL, NJ
Mr. Sims. Mr. Chairman, members of the committee, I am Ray
Sims, senior vice president of GE Capital Mortgage Services, Resi-
dential Express Division of Cherry Hill, New Jersey. My company
is a subsidiary of GE Capital Mortgage Corp., which is involved in
many aspects of the mortgage business.
My career has been as a mortgage banker. GE capital mortgage
has been an active member of the Mortgage Bankers Association of
America. I am pleased to be here to testify on the implications of
technology and the Real Estate Settlement and Procedures Act
rule.
As you know, the isolation of neighborhoods and the segregation
of people from the mainstream of communities is an important
aspect of our problem of distressed neighborhoods. Many families
in urban and rural areas do not have access to the kinds of services
22
— including financial services — that the rest of us take for grant-
ed.
Often we have found that underserved neighborhoods are not
connected to the mainstream mortgage community. At the same
time, there are resources in underserved neighborhoods, such as
community groups, nonprofits, churches, real estate agents, finan-
cial institutions, that can act as ready and willing partners for
mainstream participants.
What has GE capital done as a corporation? GE Capital Mort-
gage is acting as a principal link between the neighborhood and
the mainstream mortgage system. We are bringing substantial pri-
vate sector capital to residents of underserved neighborhoods and
communities. In doing so, we have sought to utilize the latest com-
puterized loan origination technology. Indeed, CLO capability is an
essential link in our outreach program. A principal reason why I
am here today is to illustrate for you how CLO's can be used to
bring mortgage services to urban and rural communities which are
currently underserved.
We are in the business of helping people buy homes, particularly
those who cannot afford a large down payment. The heart of GE
capital is one of our country's largest mortgage insurance compa-
nies. In that business, we insure lenders in the event that borrow-
ers who buy homes with a low down payment do not repay their
mortgage. Without us, many of these families could not qualify for
a mortgage.
As my colleagues at GE have worked in urban and rural neigh-
borhoods, they have identified other resources that we can bring to
expand the availability of capital.
Mr. Chairman, we have 17 members of the Residential Express
Network, 14 of which are minority- or women-owned, including Af-
rican-American, Hispanic, Native American, Asian, and East
Indian institutions. Most of these are smaller banks that were not
making residential mortgages only 1 year ago. If they were making
loans, they had a very limited product offering that required at
least 20 percent down payments. Most of these institutions were
not connected to the mainstream mortgage system or the second-
ary market because they lacked the resources and/or the expertise.
Since writing this testimony, I can add, over the weekend Unity
Bank in Texas has joined our network. Yesterday, through over-
night mail, Gateway Bank in Missouri, the only minority bank in
that State, is now part of the GE network. Of these banks, 12 of the
17 have already originated loans.
The banks that have joined the network move quickly to serve
the unmet needs in their communities. The remaining institutions,
quite frankly, are just waiting on our training program. Residential
Express provides a source of fee to the lenders while helping retain
their customers and potentially expanding their customer base.
These are very important economic considerations for community
and minority lenders.
Briefly, here is how Residential Express works at GE. When a fi-
nancial institution joins, we will train the lender's staff at their
site. The computer program performs almost every function you
can imagine. It electronically provides loan prequalification, appli-
cation analysis, immediate feedback on underwriting decisions, and
23
daily mortgage rate information. It provides a tremendous variety
of mortgage information to homebuyers on interest rates, points,
down payments, and repayment schedules, importantly, it even
allows a lender to pull a credit report right off the screen for the
borrower to review instantaneously. It allows a lender to discuss
with the borrower what he or she needs to do in order to qualify
for a mortgage.
Now, while the processing and underwriting may be performed
by GE, the loan is closed in the name of the institution and owned
by that institution. Loans may be held in their portfolio, or they
can sell them to GE or secondary market sale or other institutions.
Equally as important, homebuyers are provided access to all of
our conventional mortgage products, including the Community
Homebuyers Program and other low down payment programs. It is
critical that underserved neighborhoods have access to all types of
mortgage products, both conventional and Government insured.
For example, City National Bank, a small minority-owned bank
in Newark, New Jersey, made only three mortgages in all of 1992. I
am pleased to report that since entering the Residential Express
Program on March 1, they have registered 25 loans, 8 in the first 3
weeks of June.
I am excited about Residential Express, although the program
only began in February, it is growing at a geometric rate. It has
averaged a growth rate of 112 percent a month in mortgage activi-
ty. Mortgage loans from $15,000 to $20,000 have been made as well
as larger mortgages that have been accommodated through the
system. Residential Express meets the full spectrum of the commu-
nity's needs.
We have also entered the rule markets as well. In Glasgow, Mon-
tana, and Hulbert, Oklahoma, we are the first to bring national
mortgage markets to these rural homebuyers and the Native
Americans. At Valley Bank in Glasgow, a town of 4,500 residents
and over 3 hours from the nearest metropolitan area, seven loans
were registered in the past month totaling over a half million dol-
lars. Without the latest technology, these markets could never be
effectively served by the variety of desirable mortgage products
and services.
I believe that programs like Residential Express and the commu-
nity homebuyers that rely on new technology and build on institu-
tions already serving their community are the kinds of partner-
ships which should be encouraged by Congress and the administra-
tion.
We at GE are aware that controversy has developed concerning
the rules for operating computerized loan origination systems. I am
not a lawyer or a RESPA expert but rather a businessman and
mortgage banker. We have not been involved in the forefront of
the regulatory debate regarding RESPA and CLO's. This is not to
say we are not interested in how these issues are involved. But
until now our focus has been on the development and application
of new technology.
From our experience, I can tell you that this technology has the
potential to bring immense benefits to many homebuyers in all
areas across the Nation. This is especially true in underserved
urban and rural areas. CLO's can provide homeowners the means
24
to access national mortgage credit capital markets in ways which
are as sophisticated as any available to homebuyers in upper-
income neighborhoods.
This is important that this technology not be prematurely cir-
cumscribed by any rules which may be designed to protect against
abuses more imagined than real. We think that HUD was correct
when it stated in the preamble to its RESPA regulations that there
are, and I quote, "potentially substantial consumer benefits in the
utilization of new technology. Further, the technology was in flux
and represented, at most, no more than 1 to 2 percent of mortgage
originations annually. Considering all of these factors, HUD con-
cluded it would issue a CLO exemption which would have the effect
of eliminating possible regulatory inhibitions on the development
of this technology."
In closing, we are now reaching out to underserved markets
through Residential Express services available at minority- and
community-owned banking financial institution. But in the future
we may utilize this technology with nonprofit groups, majority- or
minority-owned real estate companies.
Please don't close off these avenues to bring mortgage services to
inner city and rural families and, indeed, to all homebuyers.
We believe that the speed, convenience, and cost savings associat-
ed with computerized loan origination are too important to be lost
in any intramural turf battle among settlement service providers.
Mr. Chairman, our experience has taught us three important les-
sons.
First, no single entity can provide the entire solution to the prob-
lems of these underserved communities. It takes the collective
strength of all of us in Government at all levels, nonprofits, com-
munity groups and the private sector — working in partnership.
Second, it is essential to link underserved neighborhoods to the
mainstream community. We at GE have been the link, providing
knowledge, the latest technology, and access to capital.
Finally, in order to be successful, these programs must be good
and profitable business. Only commercially viable efforts will sus-
tain the large infusion of private sector dollars, the big dollars,
needed over the long term.
If we apply these lessons to residents and businesses in economi-
cally underserved communities, I am very confident that we will
make good progress in bringing these neighborhoods into the eco-
nomic mainstream of society.
Mr. Chairman and members of this committee, I really do appre-
ciate the opportunity to testify on these important programs and
would be more than pleased to answer any questions.
[Mr. Sims' statement may be found in the appendix.]
Chairman LaFalce. Thank you very, very much.
We have had a very distinguished panel of expert witnesses. One
of the difficulties is, you are all too good, because I tended to agree
with each of you after I listened to you. The problem was you dis-
agreed with each other.
So I am going to ask you to do me a little bit of a favor and that
is to walk me through it, OK?
I am going to ask, in particular Mr. Rowland, Mr. Spera, and Mr.
Sims, to walk me through their shop. Then afterwards — and I am
25
going to try to find out how will you be benefited, how will you be
hurt.
Afterwards, I am going to ask Mr. Birmiel, Mr. Bell, and Mr.
Tasker to tell me how I could have been disadvantaged and I was
unaware of it.
Mr. Rowland, Mr. Spera, and Mr. Sims, I am looking for a house.
Let's say I want to spend $200,000 for a house, and I come into
your realty company and I say, would you represent me and find
me a house; I want three bedrooms, a bathroom on the first floor,
et cetera, et cetera, et cetera; and I don't have too much for a down
payment; so I want a pretty good sized mortgage, too.
Do we enter into a contract? Do I sign a contract with you, or
not? No contract, right?
Mr. Rowland. Would you like to have the process described as it
might happen in a Long & Foster office, for instance?
Chairman LaFalce. Sure.
Mr. Rowland. Because Long & Foster is a sister company to the
mortgage company. As you enter the Long & Foster office, as you
meet an agent, that agent would have given you a disclosure on the
relationship between Long & Foster and the name of the mortgage
company.
Chairman LaFalce. How big is this statement?
Mr. Rowland. Full-sized legal sheet. It is not buried in the small
print.
Chairman LaFalce. How many sheets of paper are you going to
be giving me?
Mr. Rowland. That will be the initial sheet you get from the
Long & Foster agent.
Chairman LaFalce. Are there any other sheets you will be
given?
Mr. Rowland. It depends on what kind of real estate services
you would like with that agent. You can sign up a buyer
broker
Chairman LaFalce. You mean when I tell you I want you to
help me find a house, the first thing you are going to do is tell me
you are not just a real estate agent, but your company is affiliated
with somebody else?
Mr. Rowland. Absolutely.
Chairman LaFalce. We are not going to find a house for 3
months, probably, right?
Mr. Rowland. That is not necessarily — it would depend on you.
Chairman LaFalce. With me it is probably going to be 6 months.
I am a pretty fussy guy. I don't know that I will read that paper. If
I read it, I may well have forgotten about it, because it is 3 months
since you gave it to me.
Mr. Rowland. Real estate is a complicated business. It is because
of laws
Chairman LaFalce. All right.
Mr. Rowland. It is because of the laws that these disclosures are
required.
Chairman LaFalce. Now it is 5 months later and you have been
taking me around. As far as I am concerned, you are my guy. I am
your guy. You and I have got a real good relationship. I trust you,
26
OK? I found this house, I look at it, let's buy it. What do we do
next?
Mr. Rowland. Typically a real estate agent at that point would
again, hopefully a real estate agent would have helped you prepare
for the mortgage process not at the last minute, but as you begin to
look, he or she would have asked you questions about what kind of
a mortgage you are looking for.
Chairman LaFalce. The company you are associated with also
offers mortgages, right?
Mr. Rowland. Absolutely. I would like to give you that informa-
tion as well as that same disclosure that agent will also give you
three additional companies that you might
Chairman LaFalce. Why three?
Mr. Rowland. That is just a standard practice.
Chairman LaFalce. It doesn't have to be three?
Mr. Rowland. That is something I guess I would defer to the
NAR on.
Chairman LaFalce. Does it have to be three? Does it have to be
five? Does it have to be one other? Could it be no other?
Mr. Tasker. I don't think there has to be anything.
Chairman LaFalce. There is no requirement. You could just say,
your own company, right? You wouldn't have to tell me that at
that time, would you?
Mr. Rowland. Yes, you would be — if I were your real estate
agent, I would be required, if we had an affiliated mortgage compa-
ny, to tell you at the first contact that we had those other relation-
ships.
Chairman LaFalce. You told me that 5 months ago, and now
you are telling me that if I want a mortgage fast, I could
Mr. Rowland. We would have started 5 months ago. I would
have encouraged you as your agent to seek financial assistance
early.
Chairman LaFalce. Five months ago would you have started me
on at least three or maybe just with yours?
Mr. Rowland. Or the company would have started you with at
least three, and letting the consumer make the choice.
Chairman LaFalce. But there is no requirement for that at all?
Mr. Bilbray. Mr. Chairman, when I bought my home here they
prequalified me early to find out how much I could qualify for. Is
that typical of what you do too?
Mr. Rowland. Very typical.
Mr. Bilbray. But you do that through your own mortgage com-
pany or any company that I said at the time?
Mr. Rowland. We disclose the relationship to the consumer at
the first contact, and make a referral of at least three mortgage
lenders, in addition to our own, at the first contact.
Chairman LaFalce. Let's assume you are a good guy and you are
doing the three. There is at least a hundred out there, right?
Mr. Rowland. At least 100.
Chairman LaFalce. And I would imagine on this totem pole of a
hundred there have got to be some that are really, really good, and
some that are really, really bad.
Mr. Rowland. I assume that, too.
27
Chairman LaFalce. How do I know you are not giving me three
that are really, really bad?
Mr. Rowland. Chairman LaFalce, I would have to assume that
this is not the same consumer we had in 1975. There is tremendous
information available in the marketplace.
Chairman LaFalce. That is right, because there is so much infor-
mation the consumer is 10 times more confused than he was
before. Ten times more confused. Therefore he needs to have trust
in you more than he ever had before.
Mr. Rowland. Absolutely.
Chairman LaFalce. The problem is, I can't go into your mind
and I know you are a good-looking guy, a presentable guy.
Mr. Rowland. Thank you.
Chairman LaFalce. But I don't know if you are a real good guy.
You sound good, you look good, but are you good?
Mr. Rowland. I might make the point
Chairman LaFalce. Maybe you are too good for me?
Mr. Rowland. That is one of the strongest arguments in favor of
controlled businesses, because if I were not a good guy, my being
associated with the real estate activity could be damaging to many,
many other people in their livelihood. As an independent mortgage
person who you come
Chairman LaFalce. You could be a bad guy to me which could
be good to all your associates. I am concerned about whether you
are going to be a good guy to me. I want the best deal I can get.
Mr. Rowland. Your real estate agent is not compensated from
the mortgage company, and would hope to make much more out of
her relationship or his relationship with you
Chairman LaFalce. There is no financial relationship between
you and this mortgage company affiliate of the real estate broker-
age of which you are an agent?
Mr. Rowland. As an independent agent that is expressly prohib-
ited.
Chairman LaFalce. Is there any type of financial remuneration
that
Mr. Rowland. No, sir.
Chairman LaFalce. What about a promotion? Might you be pro-
moted? Might you get a bonus?
Mr. Rowland. As a real estate agent? I am an independent con-
tractor who affiliates with the real estate broker as an independent
contractor. So as an independent contractor, I see our relationship
as one where if I do a good job for you, you will make a recommen-
dation for your colleagues to buy houses through my company and
through me. So I have too much at risk to refer you to
Chairman LaFalce. To tell you the truth, I won't even know
whether you have been good or bad to me. As long as the deal
closes, I am going to walk away happy not knowing whether I did
or didn't get a good deal. Of course, there are so many things to
getting a good deal or a bad deal. These points are so confusing to
me.
The maturity of the loans are so confusing to me. The additional
fees that there may or may not be added on, you negotiating the
points, I get all confused about points.
28
Mr. Rowland. Truth in lending legislation requires that all of
that be disclosed.
Chairman LaFalce. But you can disclose as much as you want. I
don't understand it. I just really don't understand it.
Mr. Bilbray. I agree, Mr. Chairman. I am an attorney and I
couldn't understand mine when I closed it. I have to have some-
body really explain it.
Chairman LaFalce. But you know what is making it even more
complex for me, you have got computers today, and I can't use
computers, because when I went to school I couldn't learn how to
type much less learn on a computer. But how are you going to use
this computer for me? Have you got a computer in your shop? Is
this one of these new things, this computer loan origination?
Mr. Rowland. Are you asking me as a mortgage banker or as a
real estate agent?
Chairman LaFalce. You are my friend. You are the guy — I
come into the community and, I went to you. So you are everything
to me. I don't pigeonhole you. You are my future for the next 30 or
40 years.
Mr. Rowland. I am a real estate agent?
Mr. Bilbray. You are my agent.
Mr. Rowland. Through many of the multiple listing services in
this area, real estate agents have access to computerized programs
for prequalifying to show the benefits of renting or buying.
Chairman LaFalce. Are you going to use one of these for me?
Mr. Rowland. As a real estate agent I may do that, and that
won't be associated with any particular lender whatsoever. That is
simply a real estate agent knowing about mortgages giving you
counseling before you even get to the lender.
Chairman LaFalce. Who buys all this equipment? Your real
estate company does?
Mr. Rowland. The real estate company would have the multiple
listing service terminals in their offices.
Chairman LaFalce. This multiple listing, is this the same thing
as computer loan origination?
Mr. Rowland. Absolutely not.
Chairman LaFalce. Oh, it is not?
Mr. Rowland. Absolutely not.
Chairman LaFalce. What about this computer loan origination?
Mr. Rowland. There are computerized loan origination sys-
tems
Chairman LaFalce. Does your office use one of those?
Mr. Rowland. No, we do not.
Chairman LaFalce. Mr. Spera, do you have one of these comput-
er loan origination
Mr. Spera. At this particular time my office does not. We are
waiting for the technology to offer that to us. We certainly would
like to be a recipient of that opportunity and offer that service.
Chairman LaFalce. I want to find out about this — there is no
GE real estate mortgage division in my neighborhood, so I am not
going to walk into some store that says GE capital mortgage serv-
ices, right?
Mr. Sims. No, you are not, because we are
29
Chairman LaFalce. Who am I going to walk into that is going to
hook me into dealing with you, Mr. Sims?
Mr. Sims. A bank, thrift or credit union.
Chairman LaFalce. The reason I am going to this bank is be-
cause the branch manager goes to the same church I go to on
Sunday, all right?
Mr. Sims. That is a good start.
Chairman LaFalce. But that is all I know. I don't know whether
it is a good banker. I really don't know — all I know is, hey, he
goes to the same church I do, he sees me there, he is probably
going to be nice to me.
How do you come into this picture? You don't go to my church.
Mrs. Meyers. Mr. Chairman, all I know is, after this hearing
nobody is going to want to sell you a house.
Chairman LaFalce. I want you to know I am not as dumb as I
appear.
Mrs. Meyers. I will second that.
Mr. Sims. In our case under the residential express network, you
would be actually going into your local community bank, thrift or
credit union, and we will already have been there if they have our
network and have trained the personnel they have selected on-site
to actually take applications and understand programs or products.
Chairman LaFalce. But this is a bank, this is a thrift. They have
been in the business of taking applications for mortgages for a long
time. I mean, I can't think of — I can't think of any S&L, or any
savings bank, or any commercial bank where I live that hasn't
been giving residential mortgages for a long time. Who are you
training?
Mr. Sims. I would be inclined to agree on the S&L for the most
part, but certainly in credit unions and commercial banks, and our
experience has been the programs that they are offering are not
always the ones that consumers are looking for. In fact, since they
haven't been able to be connected into perhaps Fannie Mae, Fred-
die Mac or the secondary market, but they are offering the con-
sumer not what the consumer is looking for, so we are indeed
training them and helping them set up their mortgage depart-
ments.
Chairman LaFalce. So you're really dealing with very, very
small neighborhoods?
Mr. Sims. The bulk of the institutions are small, that is correct.
Chairman LaFalce. But these are small neighborhoods — excuse
me, small little institutions. Isn't the portfolio of most small insti-
tutions, save credit units, residential mortgages?
Mr. Sims. No. The problem is, and I can go through it very quick-
ly, we are in a 7 percent, roughly, fixed rate environment, and if
they were to put your loan on the books for 30 years at 7 percent,
and then if we get into an environment where they have to pay
you 11 or 12 percent, like your CD, they have a problem, and since
they are not connected to the secondary market, we have enabled
them to sell those loans through our network so they can do many,
many loans in the community.
Chairman LaFalce. The facilitators of secondary markets is
something I have a little knowledge of and understand. But what
has that got to do with loan origination?
70-043 0-94-2
30
Mr. Sims. Because they take your operation and work in tandem
with us to underwrite and process the loan, that is done electroni-
cally with a PC at the bank.
Chairman LaFalce. So you have gone into this bank that didn't
know how to make mortgages and you have trained this bank that •
should have known how to make mortgages how to make mort-
gages. But you didn't do this for nothing, did you?
Mr. Sims. No, we did not.
Chairman LaFalce. What type of fee did you get from the bank?
Mr. Sims. We charged the bank probably no more than $1,500 to
do the training and set them up.
Chairman LaFalce. By set them up, how do you set them up?
You provide your computers to them?
Mr. Sims. No, we do not.
Chairman LaFalce. They use their own computers?
Mr. Sims. Yes, we do. We do give them software for their comput-
er.
Chairman LaFalce. You give it or sell it to them?
Mr. Sims. Give it to them. We give it to them in the confines of
the $1,500. We are there for 3 days. I mean, when we went to Hul-
bert, Oklahoma, for example, it is a long ways. The $1,500 went to
help defray some of those costs to train some local bank personnel.
The other thing is it is not so much they didn't know how to do the
mortgages
Chairman LaFalce. Now they have access to this computer, how
is this going to help me? What is on the computer? What is the
information that is on there? Is it all about GE's
Mr. Sims. It is a full array of programs including bank portfolio
products and GE products if they chose to sell us a loan.
Chairman LaFalce. Well, now, what consumer products are out
there? We could pretty much guarantee the GE products will be on
there, correct?
Mr. Sims. If they are part of our network, yes, sure.
Chairman LaFalce. What other products of competitors of GE
would be on there?
Mr. Sims. That would be up to the bank, If they wanted to go
that route. I would say currently since we are just getting these
small community banks into business, it is their programs and
pricing and ours only.
Chairman LaFalce. So in other words, this computer loan origi-
nation could just have the bank that previously wasn't giving mort-
gages and your own product, there may be no other; correct?
Mr. Sims. Yes, but at the same time when they close the loan, it
is in their name and they own it. They are under no obligation to
sell GE that loan.
Chairman LaFalce. I understand that.
Mr. Sims. So they could sell it now on the secondary market be-
cause we have given them the tools to take applications in a way
that the market accepts it.
Chairman LaFalce. I understand. I understand. But where is the
benefit to me, though? That is a hookup with you, but that is not
giving me a choice. Wouldn't I be better off if somebody would give
me a wide array of choices?
31
Mr. Rowland. That in fact was one choice you didn't have living
in that small community before. I think that is an example of the
excellent use of technology, even though it brings one group of
products, those are additional products, additional choices for you
as a consumer.
Chairman LaFalce. I don't think there is any question that we
have to recognize that technology can give the consumers addition-
al advantages today. The question is, what type of qualifications
should we put on it.
We have a number of issues. One of them is computerized loan
origination, but one of them is controlled businesses, too. With re-
spect to the computer loan originations, there is a big difference be-
tween the regulations that were promulgated November 2, 1992,
and the regulations that were going to be promulgated 4 years ear-
lier by HUD, night and day difference. It is almost impossible to
defend the regulation promulgated in 1992 knowing what was
going to be promulgated 4 years earlier.
Would you agree with that, Mr. Rowland?
Mr. Rowland. I would not.
Chairman LaFalce. Mr. Tasker, would you agree with that?
Mr. Bilbray. Is there anybody who agrees with it?
Chairman LaFalce. Oh, yes. There are at least three and prob-
ably more, but not publicly.
Mr. Rowland. I think whenever you impose those restrictions,
you limit the use of the technology.
Chairman LaFalce. What were the restrictions in the rule we
thought was going to be promulgated 4 years ago?
Mr. Rowland. As I remember, there would be a restriction of the
amount that could be earned.
Mr. Tasker. It limited the fee which the real estate broker could
be paid for assisting in the credit process, and even that limit was
probably too high at the time.
Mr. Rowland. Is that really something that we need to legislate?
Would not the market take care of that?
Mr. Tasker. It hasn't in the past.
Chairman LaFalce. What about requiring that multiple products
be offered? I mean, multiple lenders. All the lenders who want to
take advantage of that be able to.
Mr. Tasker. That was a good process, because it exposed the con-
sumer to a more competitive array of products in order to obtain
their loan.
Chairman LaFalce. Right now you could just have one, or you
could have one plus three bad ones, but it is not required to have
all those lenders who want to be part of your system.
Mr. Tasker. I think it is an interesting process when we histori-
cally go back and review Citicorp's mortgage power. Citicorp set up
a process whereby the real estate broker could be paid a half a per-
cent or at much as a 1 percent fee for referring the loan into Citi-
corp.
At the time, I was running Weyerhaeuser Mortgage Co.'s oper-
ations across the country and we had an office in Long Island right
near a mortgage power office, and my manager brought me in the
price sheets and compared the price of a loan through Citicorp
versus a loan through Weyerhaeuser. We were more competitive
32
both in fee and interest rate. Yet the borrowers were steered into
the Citicorp mortgage power office because the realtor was paid a
kickback.
Chairman LaFalce. Whatever happened to that program at Citi-
corp?
Mr. Tasker. Citicorp developed the highest delinquencies of any
lender in the country and shut it down.
Chairman LaFalce. They were just too aggressive?
Mr. Tasker. It was evidence that if you have the realtor involved
in the credit process, the credit process will deteriorate.
Mr. Rowland. I think a distinction needs to be made that this is
the individual agent involved as compared to an owner of a real
estate company also being involved in a mortgage operation. That
is an important distinction.
Mr. Tasker. My background is 21 years in a real estate company
that started a mortgage operation. I can recall from years and
years and years, whether the manager was compensated because
the company was in the mortgage business or whether the agent
was compensated, it still affected the credit process so that the
credit deteriorated on the overall mortgage application.
Chairman LaFalce. If I go to this bank, are they going to charge
me a fee for using this computer?
Mr. Sims. No.
Chairman LaFalce. They are not?
Mr. Sims. No.
Chairman LaFalce. How are they going to eat the cost of this
computer? They just eat it somehow?
Mr. Sims. It would be similar to other loans, car loans, consumer
loans, whatever. I don't think they single out the $10 or $20 charge
on the process. If there are charges, I am unaware.
Chairman LaFalce. What about realtors that use computer loan
origination? For the most part do they charge fees?
Mr. Spera. They can charge fees.
Chairman LaFalce. OK, but for the most part do they?
Mr. Spera. Those realtors that are practicing that do charge fees,
yes.
Chairman LaFalce. Is it disclosed up front ahead of time that
they are charging a fee for this?
Mr. Spera. Yes, sir, that is correct.
Chairman LaFalce. Is there any type of remuneration going to
the real estate agents? Of course, the real estate agent doesn't have
the computer. It is the real estate broker that has the computer.
Mr. Spera. That is correct. That is the sequence, Mr. Chairman.
I may just for a moment go back to your illustration about your
pursuit of the American dream, and you found this house. Let me
speak at a very basic level about what a realtor would do in a bro-
kerage scenario. The disclosure that Mr. Rowland mentioned is
clearly important because initially the first point of contact dis-
closes who that agent would be working for, both in the procure-
ment of a property — traditionally, let's say, if they are working
for the seller, there is disclosure that the properties shown will be
clients.
Chairman LaFalce. I have always had a problem with that, be-
cause here I thought Mr. Rowland was my guy. Then I find out this
33
$200,000 house was listed through him by a friend of his that he
goes to church with. The fact of the matter is, I thought he was my
guy, but he is really the seller's guy. Is that right?
Mr. Rowland. That is not necessarily true. That is a whole other
area of law, the disclosure of agency, whether you are a agent for
the seller, dual agent, agent for the buyer.
Chairman LaFalce. I want to do a little reading on that and I
will come back to that issue in about 15 minutes. During that time,
I will call on some other Members. Mrs. Meyers, and then Mr. Bil-
bray.
Mrs. Meyers. Thank you, Mr. Chairman,
Mr. Bell, can you describe for the committee maybe specifically
what kinds of problems arose in Kansas that led to the State insur-
ance commissioner's concern?
Mr. Bell. Yes. In the Kansas City, Kansas area, there had been
a number of controlled business situations for a long time. The in-
surance commissioner received complaints, and as RESPA police
have found out, most of the complaints come from competitors, be-
cause they are the ones that find out about these arrangements.
There were five specific arrangements that the commissioner
looked at. One was the shell company arrangement I mentioned
earlier, where they didn't do any work at all and had no employ-
ees, but enjoyed the difference between the contract price — they
farmed out the work to a controlled title company for a reduced fee
— and the parties to the transaction were being charged the going
rate.
There was another arrangement where realtors were put on the
board of directors of the existing title company and were compen-
sated in direct proportion as they contributed and referred their
business to that title company. So it wasn't $100 a month for every-
body. It was $500 for you if you contributed that much, and maybe
five bucks for the guy that wasn't doing anything.
Third, there was an arrangement, another company that was ap-
proaching realtors to hire their closing help, we will pay your clos-
ing secretary, she will be our employee, we will pay your rent for
the amount of square footage her desk occupies, and therefore we
will provide you with in effect free closings supported by your
former employee that knows how you like to do them.
There was another company that leased space from a large
broker in the Kansas City area office space, at what the commis-
sioner termed greater than market value. Most of the space was
never occupied. It sat vacant during the term of the lease, but sur-
prise, surprise, the title company got that broker's business.
Last, there were two enterprising young men that formed a shell
title company in the area, and put the proposal in writing, which
was a little unusual for these arrangements, and had a joint meet-
ing with real estate brokers. The invitations went to brokers they
had a meeting of the brokers at which they announced they had
formed this title company and they were going to market shares of
ownership to brokers; that they were selling the shares for a dollar
a piece, and they guaranteed these brokers at the end of the first
year their income would be between $7,800 and $8,500 a share.
This income was derived from the profits of the shell which
charged the going published rates for title insurance, while they
34
bought their title commitments and policies at reduced rates in
return for the guaranty of business to that provider of title com-
mitment.
These were the five that were studied by the commissioner. This
was in August of 1987. These particular companies all signed let-
ters of consent. They denied their doing anything wrong, but they
agreed to quit doing it. That was the initial step toward controlled
business regulation. The commissioner felt that he had solved the
problem.
Then in January 1988, a lawsuit was filed by a home buyer
against a controlled business realtor who also had a building com-
pany, who also had a mortgage company. That hit the newspapers.
The commissioner decided he hadn't solved the problem. That is
why he appointed the committee I mentioned in my oral remarks,
with representatives from the mortgage bankers, commercial
banks, realtors, the controlled business owner, the Kansas Line
Title Association had a representative, and the insurance depart-
ment. Have I left out anybody? I don't think so.
This committee met, broke into subcommittees. I was not on that
committee. But they made a recommendation to the commissioner
what turned out to be House Bill 2502 that incorporated basically
the regulatory provisions regarding controlled business that was in
the National Association of Insurance Commissioners model title
act. That is where the — 20 percent provision came from. As I men-
tioned, that passed the Kansas legislature after considerable discus-
sion, particularly on the Senate Floor, 61 to 2.
Guardian Title, who had controlled business arrangements in the
Kansas City area, and Wichita Title Associates, which was a con-
trolled business entity that started in Wichita that was composed
of the three largest real estate operations in the county plus three
other very active real estate companies and two leading lenders
who had control of at least 60 percent of the total title business in
our county, they joined in this lawsuit claiming the legislation was
unconstitutional.
The district court agreed with them. The insurance department
appealed to the Supreme Court. Remember, it was their legislation.
The court in January of 1991 came out with a unanimous deci-
sion saying the commissioner was charged with controlling and
regulating insurance in the State of Kansas and if he felt the inte-
gration of real estate market was anticompetitive, they had every
right in the world to regulate it, and that was a unanimous deci-
sion.
Mrs. Meyers. Thank you very much, Mr. Bell.
I would like to ask one more question and then as I understand
it, Mr. Bilbray has to leave and would like to question, so I will
defer to him. But one more, and maybe some of the rest of you
could comment on this, too.
Obviously the recommendation that you can only obtain 20 per-
cent of your gross revenue from a controlled business is obviously a
compromise position. It allows these associations to take place, but
it controls the percentage of business. It is recommended by the
National Association of Insurance Commissioners, it has been
adopted by Kansas, and I believe some other States, I think — I am
not sure whether Minnesota adopted it or not. But I would like to
35
have Mr. Bell and then maybe Mr. Spera comment on, we have two
very opposing viewpoints here.
Is this a logical way to respond to this, or is this a response that
makes nobody happy and is not beneficial to the consumer? Mr.
Bell, you start, and then I would like to hear from Mr. Spera.
Mr. Bell. I think the obvious thing is, we want to maintain com-
petition in the title industry. That solves all the other attendant
problems. You can say that companies ought to adhere to certain
rates. They can say they don't charge over that but they can hide
it in other fees, closing fees, for instance. You can charge for docu-
ment preparation. One company can, and another company in-
cludes it in their published fee. You can charge for notary services.
There are all kinds of ways to go around pricing and filed rates,
and it appears you are charging the same rate as the guy down the
street when actually you are padding the bill. To try to regulate
those kind of arrangements we think is just impossible. We are all
very inventive and we will find a way around it.
The real way to do it, and the way business should be conducted,
in our opinion, in this country, is competition. Let it rain. What is
wrong with controlled business arrangements, particularly in the
title business, where you buy the house, the realtor walks away,
there is maybe some liabilities that hold over him, but — if the
basement leaks, that kind of thing. The appraiser walks away, the
surveyor walks away, the pest control guy walks away. The title
company is there forever.
As long as those people own the title of that company, that
policy we issued them is good, and you want to be sure that the
title — that is what you are buying when you pay your money.
That is what the lender is securing the mortgage with.
Chairman LaFalce. As long as you don't have too many excep-
tions in that contract, Mr. Bell. One of my problems is whatever I
want to get insured you won't accept. We will talk about that later.
Mr. Bell. I certainly agree with that. The policy gives it to you
and the schedule B takes it away. But we feel the only way — what
you need to do — come on into the title business. That is fine.
I have been in this business since I was 10 years old and I started
delivering abstracts for my father. We have competed with every
type of individual, organization you can think of. That doesn't
frighten me a bit. Come in, jump in, the water is fine. But what I
want to be sure of is those people are competing on the same basis
as I am competing.
We had good friends and customers form this title group, this
controlled business thing. From that day forward, we couldn't go in
their office. We had gone to sales meetings, made presentations
over the years, we had gotten business. From that day on, we were
frozen out.
Mrs. Meyers. Does the 20 percent solution work fairly well, or
not at all?
Mr. Bell. How the national association of commissioners, insur-
ance commissioners arrived at 20 percent, I don't know. I think
that is negotiable. I think it could be 70-30. The purpose is to force
everybody into the marketplace. That automatically makes sure
you are pricing your products the same because you have got to
compete for that business. It means your service is going to com-
36
pete with everybody else's, the quality of your policies and how
many exceptions you are taking to coverage. All of that and still
trying to follow the regulations and statutes, competition takes
care of it.
What you have got to ensure, particularly to ensure you are get-
ting the right kind of coverage, if it is a company that is going to
be there 20 years later when you need them, you have to be sure
they are competing and that they are able to stand up in the mar-
ketplace.
Mrs. Meyers. Mr. Spera?
Mr. Spera. Thank you, Mrs. Meyers.
A specific response to your question, no, the 20 percent threshold
is not a solution. Let me say parenthetically that the brokerage
business, the fees derived from the traditional brokerage services,
the showing of the house to the chairman and the sale of that
house, will be the primary source of income and revenue for those
real estate offices. We are talking about an expanded scope of di-
versified services that will better serve the public. Keeping in mind
that value received is clearly the true test of the worth and the
merit of this request of this proposal and this opportunity that
HUD has created, the consumer, the customer, the marketplace,
the dynamics of that marketplace are clearly what is going to at
the end of the day decide the value and the longevity of this serv-
ice.
Set fees, no. Fees are not set. They are discussed and agreed
upon. The customer service base is clearly what the real estate bro-
kerage business is looking for. It is value received. We have respon-
sibilities to our clients and we have fairness to our customers.
Mrs. Meyers. You think allowing 20 percent of gross revenues
come from controlled businesses would simply not allow those con-
trolled business arrangements to function properly?
Mr. Spera. Well, I think to set a specific finite percentage does
not allow the orderly flow of a business to take place. You may in
fact find some office that is very proficient and offers a variety of
lenders on their CLO screen and to limit to 20 percent, is in appro-
priate, your committee deals with small businesses, and the essence
of entrepreneurial skills in America is to go out there and meet the
challenge in a way that is legal, that creates a service for the
public.
So to mandate a set fee, a set percentage is inappropriate, I feel.
Mr. Tasker. One of the thoughts that occurs to me, I know the
companies represented here on both sides of the issue are very eth-
ical and have good programs that have been put together by
thoughtful legal process. The Mortgage Bankers Association repre-
sents 2,600 companies across the country. Over 55 percent of them
are small businesses, businesses that cannot compete with GE, with
17 lobbyists, PR firms, and some of the things they can put forth in
terms of a capital base.
So my concern is that we maintain the competitiveness of the
overall arena. In terms of how loan officers work, how the process
works, we fight hard at the MBA to provide education for our
membership. We have schools that put our loan officers in the fore-
front of technology and how to process loans. But it is a constant
battle to keep them updated and to keep them focused. Whereas a
37
realtor who is focused on selling the house and is going to do the
loan application process on a part-time or minimal basis can't hope
to maintain the integrity of the credit process. That is what con-
cerns me.
Mr. Rowland. Mrs. Meyers, I am not a title person, and maybe
it is not
Chairman LaFalce. I wonder, Mr. Rowland, if we could just put
you on hold for a second. I know Mr. Bilbray has some time con-
straints. I want to enable him — we will come back.
Mr. Rowland. It really sort of addresses the question. I am not a
title person and I think we all agree that competition is fine and
one of the benefits of competition is really bringing new entrants
into — allowing new people into the business and ultimately driv-
ing down the cost to the consumer.
In that same article that talked about cost savings, it actually
addressed the 1990 Kansas law and said that base closing fees filed
in Wichita counties by independent title companies jumped from
$125 to $200 after the law was enacted. I am not sure we saw the
consumer being served there. It may be something I just don't un-
derstand.
Mr. Bell. In the first place, it is wrong. The quotation says, di-
versified providers charged — I am sorry, I am on the wrong line
— that all the diversified title providers in the State of Kansas
closed down, and then that base closing fees filed of independent
title companies with the Kansas insurance commissioner jumped
60 percent, which sounds like every title company in the State of
Kansas raised their prices.
Let me tell you, we raised our prices. I think our company has
every right, when costs get to the place that we cannot support the
service, to either quit the service or raise the price.
Our closing fees did go up 60 percent. We were closing sales
transactions and new loans for lenders for $125, most of them were
saying, how in the world can you do it, that is too cheap. We knew
it was too cheap because we know what our closing service costs us.
We did this. The inference is the minute we got rid of the con-
trolled business situation, we had a monopoly and we increased our
prices.
The controlled business company that I mentioned in Wichita, I
think, understood you couldn't make any money on closings, be-
cause they did not perform closing services. They passed that off to
the title company that had organized them to start with. So there
was no competition between the controlled business company and
us on closing fees because they did not participate in it.
We raised our fees a year later after the Supreme Court decision.
We felt we were justified to do it. We lost some market share, but
at least now we are making some money in closing transactions,
and I think we have every right to do that.
Applying that increase to last year's closing volume, it amounted
to a 7.8 percent increase in our closing fees. We had not increased
them for 5 years. That is less than 2 percent a year. The consumer
price index went up 24 percent in that length of time. I think it
was entirely justified. It had nothing to do with controlled business.
Chairman LaFalce. Mr. Bilbray.
Mr. Bilbray. Thank you, Mr. Chairman.
38
I am sorry I have to be very brief on a couple of questions be-
cause I have an 11:30 appointment. I am just a little late.
One of the questions I had in trying to read through some of this
is, I noticed on August 7, 1992, HUD in a letter to the acting ad-
ministrator mentions the fact that the Department of Justice
Office of Legal Counsel has been asked to confirm the views which
it had related to compensation for affiliated companies. Nowhere in
the documents I can find is there any reference to what the De-
partment of Justice came up with and what their conclusion was.
Does anybody know how the Department of Justice has ruled on
the fact on compensation and this whole problem we are talking
about today?
Mr. Birmiel. I can tell you that in our lawsuit we have been
trying to obtain the response to the letter and have not been able
to obtain it yet.
Mr. Bilbray. Has anybody gotten a response to this yet?
Mr. Spera. I believe there was no specific figure for remunera-
tion coming from the Department of Justice. They were on a due
— diligence period that they were talking about capping fees, if
that is the nature of the question.
Mr. Bilbray. Yes.
Mr. Spera. That issue was not decided for capping of any fees,
but it was expressed that they would be fair and reasonable.
Mr. Bilbray. So in other words, nothing came down from the De-
partment of Justice, just by not answering — did they answer?
Mr. Spera. I do not believe we answered. We do have a RESPA
expert in the room from the National Association of Realtors, Ms.
Sally Sciacca. She can respond to that.
Mr. Bilbray. If she can just nod her head. Did we get an answer
or not?
Ms. Sciacca. As I understand it, at the Department of Justice,
there was a telephone call, probably someone from HUD answered
that. I think they were asked to rule whether HUD had the au-
thority to limit payments between employers and employees. I
think that is what the issue was about, rather than caps or any-
thins else.
Mr. Bilbray. Maybe down the line we can get an answer from
somebody that will answer that question, whether or not — what
does Justice determine, what they can really do and what they
can't. From what I understand in the letter, they were asking the
Department of Justice for an opinion on what was the correct view.
So hopefully we can get that testimony.
The other thing I noticed in Mr. Holstad's statement, which we
only have one copy up here, that Minnesota, they have capped a
percentage? Maybe somebody can answer?
I think Mr. Birmiel, you submitted his testimony for the record.
Does Minnesota have a percentage right now?
Mr. Birmiel. I believe that is what is in controversy, and what
the legislature is considering out there.
Mr. Bilbray. Is it my understanding the big dispute here is, one,
I would think, is the problem of full disclosure to the client of the
available services, or — versus not being able to do anything in-
house as to mortgages and to closings and so forth. Is that the ques-
tion?
39
In other words, if we had a provision or if HUD had a provision
that says, We must publish and give to the client not only three
people, but say, like, it comes out in The Washington Post every
week, a whole list of all the mortgage companies and what they are
paying in points, I presume that sheet that comes out in the Satur-
day edition says, this bank will make a loan 8 percent up to so
much for 2 points and so on.
If a client was given, and I think the Chairman pointed this out,
not only at the beginning but toward the end when he really has to
make his move and select his company and select the attorney, in
my State of Nevada you don't select an attorney, you select a title
company. But in Virginia where I bought my home I found out you
don't have title companies so you deal with attorneys, that what
you could do is if we had a provision that said here, you have to
give your client a list, and here is a list of 30, 40, or 50 attorneys
that do the closing fees, I don't know if you want to put average
costs that each one has, something like that, and on top of that
mortgage companies with the amount of interest and points they
charge, which would not limit the real estate company from having
a percentage of the business. They could have 100 percent if they
were more competitive and they had a better deal and they could
do it more expeditiously at less cost, I am sure the client would
pick them.
Would somewhere in between, would this handle the problem?
Mr. Birmiel?
Mr. Birmiel. The more disclosures you give the client, the more
he is going to turn to his agent in the face of all the information
and say, What is good for me, who should I use?
Mr. Tasker. The process is particularly true in first-time buyers,
low-income buyers. They don't have the expertise; they have not
been exposed to it. So it is much more possible for the real estate
broker to steer this person. That is the concern, that they be ex-
posed to the entire marketplace.
So giving him another disclosure, they have a stack of disclo-
sures, and there is no way, as the Chairman said, to absorb all the
language and read it all and understand it. It is trying to keep the
market open, keep an open playing field for everybody that is im-
portant to getting the best interest rate and the best fees.
Mr. Bilbray. What percentage of mortgage companies are doing
this all in-house? There are hundreds of real estate agencies out
there, or brokers. Do only the great big ones, the Long & Fosters
and, the Coldwell Bankers, are they the only ones doing it, or are
90 percent of the real estate people out there doing it the old fash-
ioned way?
Mr. Tasker. First of all, there are no statistics that can tell you
for sure. It is obviously more prevalent in the larger firms.
But I think another issue that concerns us is that I can take a
fax machine and stick it in a legal State office and call that a CLO,
and if a salesman avails themselves of the CLO with the buyer sit-
ting there, I can pay him a fee. That doesn't justify.
See, one of the problems with the HUD ruling is there is no clear
definition on these issues. It doesn't spell it out. So that leaves all
this gray area that we need to get resolved.
40
Chairman LaFalce. Four years ago they did have a definition of
aCLO.
Mr. Tasker. That is right. They started one. That was all thrown
out the door, for some strange reason that we have been unable to
figure out, what influence was brought to bear where that changed
that, November 2.
Mr. Bilbray. Does each individual State's real estate division en-
force this law, or does — who enforces it? Who goes in and actually
— unless somebody tells on you, who actually checks it out, moni-
tors this?
Mr. Tasker. For the most part it is HUD.
Mr. Birmiel. HUD has a small enforcement staff. I believe they
would be somewhat overwhelmed by the actual numbers. The num-
bers actually doing this throughout the country vary from region
to region. From southern California, Orange County, if you looked
at a letter from the a lady by the name of Debbie Faber, who is
closing her escrow company after 15 years because there are only
two realty companies in her area that do not have tie-ins with clos-
ing operations, she cannot get past the front desk of companies in
our area. Those two are now going under the new regulations.
They are taking a percentage interest in title companies, and she
just had no referral business. She closed on March 31.
This is the systemic problem that can arise now that the cat is
out of the bag and everyone in the country knows how they can set
up a title operation. All they have to do is refer the business. They
don't have to take the responsibility. They can own a piece of the
title company. The larger companies in some area, where they con-
trol large parts of the market and have these entities, they really
control large parts of the
Chairman LaFalce. This is a totally separate issue from the
computer loan origination.
Mr. Birmiel. Exactly. Controlled business issue.
Mr. Bell. Mr. Bilbray, speaking to disclosure, we had this con-
trolled business operation in Wichita. They were supposed to dis-
close, and I am sure some of them did, but a lot of them didn't. In
fact, we had a friend of my brother's who demanded — now, most
people don't know title companies, don't know they are involved,
have no idea what they do and think we charge too much money. If
they do know us at all, I would hazard a guess the members of the
committee do not know who insured the title to their property.
It is typical that the real estate salesperson is the one who has,
we think, a fiduciary responsibility to act on those matters for
their clients, and they are supposed to make the best choice based
on price, service, quality of the service that they have determined
in the community by virtue of being in the business.
We think when you introduce financial gain for anyone involved
in that equation, that is then corrupted. This friend of my broth-
er
Mr. Bilbray. Mr. Bell, didn't Mr. Spera say they don't compen-
sate, or somebody did, or Long & Foster, Mr. Rowland, they do not
compensate their employees for this referral?
Mr. Rowland. Independent agents. A real estate agent under the
RESPA regulation is prohibited from receiving compensation. They
have to be an employee.
41
Mr. Bell. I don't think that is quite right. I think they can com-
pensate their employees, and then the distinction is made between
an independent contractor — Mr. Birmiel mentioned, there are a
myriad of ways, other than handing some money. There are desk
charges, what they pay for advertising, the referrals they get for
the company listings.
Chairman LaFalce. A week's vacation to Hawaii.
Mr. Bell. Don't kid yourself. One way or the other the pressure
will be applied. But we had salespeople who were loyal to us, that
one-on-one sat down with their sales managers who said, Aren't
you going to be loyal to this company? The owners of this company
now have a title company, why aren't you doing business with us?
It got very personal.
Going back to this friend of my brother who asked for us, it was
in the contract, we were supposed to do the title work, and the con-
trolled business company got it. They didn't pay any attention to it.
Disclosure is great and it sounds wonderful, but to us you have
got to put the burden back some way on trying to make the agent
make the right decision for his clients. If you keep the title compa-
ny in competition with everybody else, then I think you have
solved the problem very easily.
Mr. Bilbray. Thank you.
Chairman LaFalce. Going back to my agent again, you work for
a broker.
Mr. Rowland. Yes.
Chairman LaFalce. Your broker owns a mortgage origination
company, right?
Mr. Rowland. Right.
Chairman LaFalce. What percent of the sales
Mr. Rowland. Market share?
Chairman LaFalce. No. Of all those people you found homes for
in the year 1992, what percentage of them got their mortgage from
your company as opposed to someone else?
Mr. Rowland. I am so glad you finally asked that question. We
do track that statistic. We want to know how effective — I mean, I
run the mortgage company. I am a mortgage guy. Of course my
answer would be, I would like to get it all. But we have to earn it
all.
I think this is a point that everyone at the table needs to under-
stand, that this the independent contractor, the real estate agent,
is very independent, and they don't care about desk fees if it costs
them a customer. So the point is, our company, we do a lot of busi-
ness, and we do 6 percent of Long & Foster's business, 6 percent. So
I would find it hard to find an example of where I might have dis-
advantaged a competitor who provided better service or better
costs.
Chairman LaFalce. Do we have any industry data where we
have a brokerage and a brokerage-owned mortgage company, to
find out what percentage of most brokers' agents' purchases are
being referred to that mortgage origination company?
Mr. Rowland. I am not aware of any.
Mr. Tasker. The Mortgage Bankers Association, Mr. Chairman,
doesn't have that information. We haven't even delineated exactly
which companies are affiliated and which are not. My concern is
42
that there are many small companies that have not competed on a
retail basis, that are seeing this change in the regulations as a way
to circumvent competition and competing on an open field.
Chairman LaFalce. One thing I am concerned about, we always
have a tendency to look to money. If there is a change of hands of
money, that is easily traceable.
What about something other than money, something of value?
Don't real estate brokers, automobile dealers, insurance companies,
you name it, have contests? Don't they say, If you sell X number of
a certain type of cars this month, you can qualify for a trip to San
Francisco or Hawaii or something like that? Does this same type of
activity go on within real estate companies, in banks, et cetera? I
am not just referring to a free trip; I am just talking about some-
thing of value other than money.
Mr. Tasker. If I was the manager of a real estate office and I
was compensated by my affiliate lender for each transaction I ran
through that affiliate lender, don't you think I would put some
pressure on my salespeople? Don't you think I could influence their
behavior to some effect? I mean, it would be important to me be-
cause I would be directly compensated if I put 10 transactions
through the mortgage company or if I put 100 transactions.
It also affects my career, my ability to progress up within that
company. You bet there are other methods.
Chairman LaFalce. Mr. Birmiel?
Mr. Birmiel. If I may refer to HUD's own regulatory impact
analysis in which they said up to 55 percent of the transactions
will involve controlled businesses, this is from HUD. In the same
breath they said it would have no effect upon small entities, no sig-
nificant impact on small entities.
Mr. Tasker. If you go back and talk to the staff at HUD today,
the staff that has been there through many different administra-
tions, you will find that they are very aware of this problem, and
that maybe they didn't even agree with the changes that were put
into effect November 2.
Chairman LaFalce. Sounds as if you are suggesting some politi-
cal skulduggery, Mr. Tasker.
Mr. Tasker. Not necessarily. I don't want to be quoted saying
that.
Mr. Sims. I call on these presidents of small businesses every
week all over the country now, and have been since the beginning
of the year, and the presidents of small banks, which is also a
small business, and I am a little confused, I guess, because I know
that the latest and the best technology is what we are using to con-
nect them for the first time to either retain their customer or give
their customer a better choice.
I just hope we don't mess with that. Because we are having great
success in areas that when I go through the door to the bank to sit
down with that president, he or she or their board, they tell me I
am the first person from a major corporation that has ever been
there, that has ever taken a look at connecting them in.
I am not talking about use technology or some of our old stuff. It
is the best stuff that we have ever developed, is what we are bring-
ing to the table. It is working.
43
Chairman LaFalce. The difficulty is, this is a difficult issue. If it
were not a difficult issue it wouldn't have been around so long.
There are competing truths working against each other. There are
competing interests working against each other, all of which have
validity.
I think the trick is going to be for HUD or for the Congress to
find the appropriate accommodation of these valid but competing
interests. I agree with you, we have got to take advantage of the
latest technology, especially in niche areas, underserved areas,
where maybe the competition and profits have just not been to the
advantage of the consumer.
By the same tone, the present rules, especially with respect to-
well, with respect to both, but especially controlled business ar-
rangements, are ripe for abuse, in my judgment. I am not saying
that we should permit certain type of activities, but it seems to me
they must be much more qualified.
I have come to no firm conclusion to this at all, because it is very
complex, and I have just begun to scratch the surface of this issue.
HUD wrestled with it for years and years and it still wrestling
with it as evidenced by the fact that they will be noticing a hearing
very, very shortly.
But I have got to get to the floor now. We are about to take up
that amendment. I have to bring today's hearing to a close.
I want to thank you. This has been an extremely interesting, ex-
tremely important, and extremely informative hearing, and I hope
it will help HUD, in their future deliberations, and who knows,
Congress, should it be necessary for Congress to have any future
deliberations on this issue.
Thank you very much.
[Whereupon, at 11:55 a.m., the committee was adjourned, subject
to the call of the Chair.l
44
APPENDIX
HEARING ON THE IMPACT OF IMPLEMENTATION OF THE REAL ESTATE
SETTLEMENT PROCEDURES ACT (RESPA) ON SMALL BUSINESS
OPENING STATEMENT BY
CHAIRMAN JOHN J. LaFALCE
The Committee will please come to order.
This morning's hearing concerns regulations issued by the
Department of Housing and Urban Development just prior to the
November 1992 election affecting various aspects of the real
estate industry under RESPA (the Real Estate Settlement
Procedures Act) . The regulations permitted certain activities
including the pooling of computerized information about mortgage
availability and, in some circumstances, remuneration for
referrals to providers of settlement services.
RESPA was first enacted by Congress in 1974 to protect
consumers from unnecessarily high real estate settlement charges
due to abusive practices. Among other things, RESPA prohibited
kickbacks or other fees relating simply to the referral of
business to providers of settlement services. Congress addressed
RESPA again in 1983, adopting certain amendments seeking to
clarify the statute and how it should be interpreted.
Over the years HUD has issued various informal opinions on
aspects of RESPA. In addition, HUD published proposed
45
regulations in May of 1988. By December of that year, HUD had
developed proposals for a final rule on referral fees under
RESPA. But the final rule was not promulgated, and then last
November, literally days before the 1992 election, HUD published
regulations concerning controlled business arrangements and
computerized loan origination systems, to become effective in
thirty days.
It is curious that it took literally years for HUD to
address these issues and then promulgated them only days before a
national election. Some have alleged that HUD was put under
considerable pressure to issue those regulations by then Vice
President Quayle's competitiveness council. I personally take no
position on that, one way or the other.
Proponents of the new regulations believe that they promote
efficiency and enable consumers to gain access to better, faster
service. They say that the regulations merely reflect the
changing nature of the real estate marketplace.
Opponents, on the other hand, say that the regulations
unfairly discriminate against small businesses which are
independent providers of settlement services. They maintain that
competition will be weakened and consumers will suffer if the
regulations are permitted to remain in effect.
46
There is some interesting news regarding this issue which I
would like to report at this time. Late yesterday we were
advised by HUD that very shortly they will be publishing a notice
for a public hearing to address a number of issues concerning the
regulations that were issued in November. This notice is on file
at the Federal Register and should be published by the end of
this week or early next. The issues to be addressed at HUD's
hearing include the exemption for employer/ employee referral
fees, the appropriateness of buyers making referral payments
under computerized loan origination systems, the provisions
relating to pre-emption of state laws in this area, and the
guestion of whether the provisions calling for disclosure of
controlled business arrangements adequately protect consumers.
While HUD's decision to hold a hearing on these issues is
one that was arrived at independently from this hearing, I am
pleased that, HUD appears to agree that the circumstances in which
the regulations were promulgated last year raise legitimate
questions about whether another look is appropriate. I hope that
today's hearing can help focus the issues to be addressed during
HUD's review of these matters.
The Committee will hear from a panel representing a variety
of groups on both sides of this issue, and I look forward to
hearing their views. Before introducing our witnesses, however,
47
does any other Member of the Committee wish to make an opening
statement at this time?
48
OPENING REMARKS OF THE HON. GLENN POSHARD
COMMITTEE ON SMALL BUSINESS
July 1, 1993
Mr. Chairman and members of the Committee, I am pleased to
be here this morning to hear testimony about the impact of
regulations under the Real Estate Settlement Procedures Act.
In November, 1992, the Department of Housing and Urban
Development published regulations concerning controlled business
arrangements and computerized loan origination systems. Also,
HUD has recently developed a proposal for a final rule on
referral fees under RESPA. I understand that the proponents of
the new regulations believe they will promote efficiency and help
consumers obtain more information regarding mortgages and other
costs associated with real estate settlements. The opponents
believe that the regulations will unfairly discriminate against
small businesses.
I look forward to hearing from the panel so that we on the
committee can have a better understanding of the diversity of
opinions regarding these proposed rules.
Thank you, Mr. Chairman.
49
Testimony
of
Howard A. Birmiel
on behalf of
CRISIS*
on
Anti-Competitive Impacts
of
Referral Fees/Kickbacks
&
"Controlled Business Arrangements"
in
Residential Real Estate Settlements
Submitted at the
House Small Business Committee's
Hearing on HUD's RESPA Regulations
July 1, 1993
"The Coalition to Retain Independent Services in Settlements'1
50
Statement
of
Howard A. Birmiel
on behalf of
CRISIS
before
House Small Business Committee
July 1, 1993
Mr. Chairman and members of the Committee, my name is Howard Birmiel, and I am
appearing here on behalf of the Coalition to Retain Independent Services in Settlements (CRISIS).
Accompanying me for the purpose of responding to questions from the Committee are Mr. Joel
Holstad and Mr. John Fanner, CRISIS members who are affiliated with the Independent Land Title
Association of Minnesota. We deeply appreciate your holding this hearing.
Today, I will explain how HUD's new RESPA rules— which allow so-called "controlled
business" firms to pay referral fees (i.e., kickbacks) to employees for steering settlement business to
an affiliated company— -will severely harm thousands of independent firms and will cause consumers
to be overcharged millions for "something for nothing" service fees. By sanctioning such kickbacks,
these RESPA rules guarantee that "controlled providers"— -which are primarily captive affiliates of
large, diversified firms — will have an unfair and insurmountable competitive advantage over
independent settlement providers who are prohibited from paying referral fees.1 Ironically, HUD's
rules sanction precisely the types of consumer abuses that RESPA was passed to prohibit. Prompt
action is needed by Congress and the Clinton Administration to correct this situation before large
diversified businesses are able to use the rules to dominate completely the settlement services
1 Common sense provides the answers to practical and policy questions, such as the following, raised by this controlled
business/referral fee issue:
(1) If an employee in a controlled business arrangement can receive a significant fee or other personal economic benefit for
referring business to an affiliated settlement service provider, but can not be paid anything for referring the business to
an independent provider, what will most employees do?
(2) If employees in controlled arrangements refer most of their business to captive affiliates because of such referral fees,
doesn't this mean independents will be unfairly cut out from a large segment of the settlement services market?
(3) Are consumers likely to be adversely effected if thousands of independent small business competitors are driven out of
business by these anti-competitive RESPA provisions?
(4) Are consumers' interests better served when a real estate professional makes a referral based on who will provide the
consumer with the best price and service, or when the referral involves an inherent conflict based on the economic
benefit (e.g.. a kickback) received by the referring party?
(5) When an employee of a controlled business recommends that a consumer use an affiliated title agency or other
controlled settlement provider is this a valuable "service" to the consumer that merits compensation, or are fees for such
recommendations really unjustified "something for nothing" payments that unnecessarily inflate consumers' charges?
(6) If referring consumers to settlement providers is considered to be a service for which a controlled business may pay its
employees compensation, should not independent providers also be allowed to pay such referral fees? Does this invite
a return to what led to RESPA in the first place?
51
marketplace. Reforms must include both regulatory changes by HUD and new legislative safeguards
to prevent controlled business arrangements from circumventing Congressional intent.2
I am a small businessman from northern Virginia. I employ eight persons. I have a title
insurance agency and provide legal services in connection with residential real estate closings. The
vast majority of settlement services in the Washington area and in many other parts of the country
historically have been provided through independent small businesses like my own.
CRISIS was formed to represent the interests of such small independent businesses that
provide the various discrete services needed in connection with residential real estate settlements.
These services include, for example: title insurance agencies; escrow services; mortgage brokerage;
mortgage lending; homeowners' insurance; surveys; appraisals; home inspections; and real estate
settlement legal services. Thousands of such small businesses exist throughout the nation. A large
segment of these independent firms would be forced out of business if pro-competitive, pro-consumer
reforms are not adopted.3
Let me make it clear that we independent settlement service providers compete intensely for
business on the basis of price, service and quality. We would be happy to compete with controlled
providers on that basis any day. Unfortunately, we can not do so if controlled business organizations
are allowed to pay something-for-nothing referral benefits. This distorts the market's natural
competitive forces. It makes referrals flow on the basis of the kickback to the real estate
professional instead of the price and quality of the product or service being provided. Such
self-referrals guarantee that "controlled businesses" ultimately will control the settlement business.
I. The "Controlled Business" Referral Fee Scheme
HUD's RESPA regulations which are of concern here became effective on December 2, 1992,
only 30 days after being issued.4 They contain the unexpected twist of allowing certain
companies— -primarily large diversified real estate brokers or mortgage lenders— -to pay referral fees
or other self-enrichment benefits to their employees for steering title insurance and other residential
settlement work to a captive or so-called "controlled" affiliate.5 While such payments for
1 As indicated by the two letters attached as Appendix "A", the House and Senate Banking Committees have expressed concern to
HUD over these RESPA rules, but have not yet scheduled hearings or taken legislative action.
1 CRISIS is joined in its efforts in opposing these RESPA provisions by the following organizations: National Association of
Mortgage Brokers ("NAMB")', Consumer Federation of America; Independent Insurance Agents of America ("IIAA"); American
Land Title Association ("ALTA"); California Escrow Institute ("CEI"): Savings and Community Bankers Association ("SCBA");
Mortgage Bankers Association ("MBA"); Florida Association of Independent Title Agents; Independent Land Title Association of
Minnesota; and H.F- Ahmanson Company.
' 24 C.F.R. Section 3500.14(g)(2)(ii). published in the Federal Register on November 2, 1992.
1 CRISIS has grave reservations with the Computerized Loan Origination ("CLO") provisions in HUD's new RESPA rules, as
well. However, for purposes of this hearing we shall defer to the Mortgage Banker Association to address this issue in its testimony.
Suffice it to say, for the main part, that we feel CLO's invite realty firms to take advantage of their special relationship with
consumers and steer their selection of potential mortgage providers to a limited group of favored and perhaps, affiliated, concerns.
52
self-referrals within these so-called "controlled business arrangements" are allowed, referral fees can
not be paid by independent providers to obtain settlement business. These new rules reverse HUD's
position against such self-enrichment schemes. They are an administrative attempt to rewrite the
RESPA statute and delete its safeguards against these types of unnecessary charges.
The following illustration shows how this referral fee/kickback scheme works:
R
"Realco"
(Large Diversified Real Estate Company)
Dividends
RE
("Realco's" Referring Employee)
Referrd
("Realco's" Controlled
Settlement Service Provider)
IP
"Conflict-Free Services Co."
(Independent Settlement Service Provider)
(Title Insurance)
(Mortgage Lending)
(Settlement & Escrow Firms)
(Homeowner's Insurance)
(Surveys)
(Home Inspections)
(Appraisals)
(Etc.)
"Realco" pays its employee referral fees/kickbacks whenever he or she refers settlement business to
"Realco's" controlled provider. The increased profits generated by controlling the ancillary settlement work
are then passed up as dividends to "Realco" which uses these profits to compensate for its paying kickbacks
to employees. It makes no personal economic sense for "Realco's" employees to refer any business to
small independent providers like "Conflict-Free Consumer Services Co." Therefore, "Realco's" employees
will refer virtually all settlement work to "Realco's" controlled provider and the independent providers have
no way to compete in this controlled business market.
53
III. History of RESPA's Prohibition on Referral Fees
Congress has recognized that most consumers rely on their real estate professional's
recommendations in selecting firms to provide the various services needed in connection with
residential real estate purchases. Experience has shown that such referrals are not likely to be made
in the consumer's best interest when real estate professionals are allowed to pay referral fees and
other kickbacks. In the early 1970's, exposes in the Washington Post, as well as a joint HUD-VA
study, disclosed that abusive and unjustifiable settlement charges, kickbacks and conflicts of interest
were rampant in the real estate settlement services industry. When Congress considered this issue
in 1974, it found:
"In a number of areas of the country, competitive forces in the conveyancing industry have led
to the payment of referral fees, kickbacks, rebates and unearned commissions as inducement to
those persons who are in a position to refer settlement business. • * * In all of these instances,
the payment or thing of value furnished by the person to whom the settlement business is referred
tends to increase the cost of settlement services without providing any benefits to the homebuyer,
• • • //// is the intention of [RESPA Section 8] to prohibit such payments, kickbacks, rebates,
or unearned commissions."
Congress acted to prohibit such abuses by passing RESPA with the overriding purpose, set
forth in Section 2(b)(2), of seeking "the elimination of kickbacks or referral fees that tend to increase
unnecessarily the costs of certain settlement services." Congress included an express prohibition in
Section 8(a) that:
"No person shall give and no person shall accept any fee, kickback or thing of value pursuant
to any agreement or understanding, oral or otherwise, that business incident to or a part of a real
estate settlement service involving a federally related mortgage loan shall be referred to any
person."
IV. 1983 "Controlled Business" Amendment
During the 1970's, several large national real estate brokerage companies established
affiliated firms that provided title insurance and other settlement services. The existence of these
"controlled companies" raised issues such as whether the parent brokerage firm could even receive
a dividend from its controlled affiliate because this might be deemed to be a prohibited "thing of
value" in violation of RESPA's Section 8(a). Congress examined this controlled business
development and sought in 1983 to clarify that such controlled arrangements were a permissible
method of doing business if certain safeguards were followed. It added a new Section 8(c)(4) which
states that Section (8) shall not be construed as prohibiting controlled business arrangements so long
as: (A) homebuyers receive disclosures of such arrangements; (B) homebuyers are not required to
use the controlled business services; and (C):
"the only thine of value that is received from the arrangement ... is a return on the ownership
interest or franchise relationship."
RESPA defines "ownership interests" narrowly as a "dividend" or "partnership distribution," and it
prohibits payments based on the mere fact or volume of referrals. Congress' intent to limit this
54
"controlled business" provision and to continue the application of Section 8(a)'s prohibitions was
clearly stated in the House Banking Committee's report:
"fTJhis provision is not intended to change current law which prohibits the payment of unearned
fees, kickbacks, or other things of value for referrals."
V. HUD Rule Changes After Last-Minute Intervention
Although the "controlled business" clarification was added in 1983, HUD failed to issue
implementing regulations until last November, nearly 10 years later. When these rules were finally
issued, HUD authorized "controlled business" firms to pay referral fees to their employees, in direct
contradiction of RESPA's plain meaning and primary purpose. HUD's stated rationale was that:
"[PJayments from an employer to its employee for referral activity are exempt from Section 8
because a business entity acts through its employees such that the action of the employees is not
sufficiently distinct from the action of the employer to provide the requisite plurality of actors
needed to violate Section 8 of RESPA."
In effect, HUD contended that Section 8's prohibition on kickbacks requires two separate
parties and that a company and its employees are not distinct so paying kickbacks in these
circumstances is not illegal.
The "controlled business" self-referral fee provisions in HUD's regulations were inserted at
the last-minute after intervention from several large diversified real estate firms. Proposed
regulations in 1988, and three draft final versions of these RESPA regulations, in 1988, 1990 and
1991, gave no hint that the controlled business concept would be used to authorize and encourage
steering settlement business to controlled providers by allowing self-referral fees and other benefits.
In fact, the draft rules expressly stated that such payments were prohibited (e.g., the "exemption ...
does not permit an entity to pay employees of an affiliated entity to refer business to the first entity, nor
an entity to pay its own employees to refer business to an affiliated party"). This theme was echoed in
several informal opinion letters issued by HUD's General Counsel's office between 1988-1991.
HUD's professional staff have confirmed, as was first reported in the Washington Post.' that
high-level forces took the matter out of their hands, and summarily reversed HUD's long-standing
policy against such payments. HUD then rewrote the rules to allow controlled businesses to pay
such fees and benefits. This bypassed the normal rulemaking process and violated proper
administrative procedures established by law.
* On October 31, 1992, The Washington Post quoted the Executive Director of Vice President Quayle's Competitiveness Council
as boasting that these RESPA changes were made after the Council intervened in this rulemaking. One of President Clinton's first
acts was to abolish this controversial group, staling that the Council had "enabled regulated industries to thwart Congressional intent
on key environmental and consumer protection laws."
55
VI. The White House Paper Trail and HUD's Letter
CRISIS and the Mortgage Bankers Association are challenging HUD's actions in lawsuits
filed here in federal District Court.7 In the course of the litigation, we obtained documents showing
the paper trail of involvement by OMB and senior White House staff in the closing days of the prior
Administration.
One of the most revealing documents unearthed thus far in this litigation is a fascinating
August 7, 1992 letter8 from HUD Deputy Secretary Alfred DelliBovi to OMB. That letter, which
our discovery confirms was faxed by OMB to the White House Counsel's office, disclosed that
HUD's own legal opinion was that paying referral fees to controlled businesses' employees was
illegal:
"[T]he General Counsel has determined thai employers may not compensate employees who refer
business to affiliated companies, because such referrals are prohibited under RESPA sections 8(a)
and 8(c)(2), even where the provisions of the "safe harbor" in section 8(c)(4) have been met."
In the late summer of 1992, after the White House staff obtained this HUD letter, things
changed substantially. HUD revised its rules 180 degrees to permit such fees. HUD also revised
its Regulatory Impact Analysis (RIA), which it issued October 30, 1992, just before the rewritten
regulations were published. The RIA purports to estimate the costs and benefits of the new
regulations. It appears to rely heavily upon data supplied by the National Association of Realtors
(NAR), many of whose members could benefit from referral fees (See, e^g, RIA at 8, referring to
NAR's "excellent data"). This RIA is premised on economically irrational assumptions and
unsupported suppositions.
Let me briefly illustrate the strange reasoning processes used in this document. The RIA
concluded that the seven largest realty firms, which execute 38% of all home sales, and some other
firms that have at least one affiliate settlement provider, together can soon be expected to refer 45%
(and at other times, it inexplicably says 55%) of the settlement business to their captive affiliates.
These estimates are far more conservative than what we expect to happen in the marketplace.
Nevertheless, even HUD's own percentages show that half of the market will soon be controlled by
controlled providers. Obviously, this will have a devastating impact on small independent businesses
that now provide the vast majority of such services in many market areas. Despite this fundamental
change in the market, HUD certified in the RIA that "this rule would not have a significant
economic impact on a substantial number of small entities." That makes no sense.
In addition, our co-plaintiff MBA uncovered an internal document on Sears Mortgage
Corporation letterhead, which apparently was sent to Coldwell Bankers' offices under the rubric of
' Amicus Curiae briefs supporting CRISIS and MBA have been filed by the Consumer Federation. IIAA; SCBA; CEI; and
NAMB. Ahmanson has advised the Court that it will be filing an amicus brief, also.
A copy of this letter is attached as Appendix "B."
56
"Winning Sales Ideas." The author suggests the wave of the future: Sales managers are advised to
discard independent lenders' literature and to freeze out real estate agents from getting new buyer
referrals unless they refer buyers to Sears Mortgage Corporation. They further attempt to capture
mortgage business for Coldwell listings by recommending that buyers' offers only be accepted by the
seller if the buyer first obtains pre-qualification from Sears Mortgage.' Such practices will only
proliferate now that controlled businesses can pay referral fees openly.
I will not take more time in my statement to recount further the serious flaws in HUD's
position. For purposes of clarifying the historical record of HUD's revision, I refer the Committee
to the pleadings filed in our lawsuit and to the October 31, 1992 article in the Washington Post.
reporting that the Competitiveness Council also claimed "credit," if it can be called that, for these
changes. And, to elaborate on the historical and legal implications of HUD's action, I will refer the
Committee to the attached declaration of Georgetown Law Professor William Eskridge, Jr., which
effectively shreds the RIA's manufactured conclusions of consumer benefits and limited market
impacts on small providers.10
VII. The Need for Consumer Protection
We are testifying today primarily from our perspective as small businesses. Therefore, we
have focused on the severe harm the controlled business referral fee rules will do to small
independent settlement service providers. However, we also feel compelled to point out that
consumers will ultimately suffer the greatest injuries if these misguided rules are allowed to stand.
Proponents of controlled business and referral fees are quick to try to paint a rosy picture of such
"one-way steering" arrangements providing consumers with "one-stop shopping," greater conveniences
and discounts on packages of services. Consumer groups have dismissed such fanciful claims. They
have given us the real world picture that shows the serious consumer injuries that will occur if these
controlled business schemes are allowed to operate on a tilted playing field.
The Consumer Federation of America (CFA), which consists of more than 240 consumer,
cooperative and pro-consumer organizations nationwide whose combined membership totals more
than 50 million persons, recently filed an amicus curiae brief. CFA strongly supports CRISIS' (and
the Mortgage Bankers Association's) position in our pending litigation with HUD. The Consumer
Federation's brief explains that referral fees and kickbacks inflate the costs of settlement services
without providing any commensurate benefit to consumers. Moreover, it points out that consumers
are adversely affected when referrals are based on kickbacks or other fees paid to real estate
professionals because such payments skew competition in directions that do not serve the consumer's
best interest. The following excepts from the Consumer
Federation's amicus brief in the pending litigation against HUD's new RESPA regulations clearly
describe why and how consumer injuries will occur:
"The real injury consumers suffer when kickbacks and other kinds of financial inducements are
allowed to influence the referral of the consumer's settlement business is not simply that such
• A copy of this document is attached as Appendix "C."
" A copy of the Eskridge declaration is attached as Appendix "D ."
7
57
payments by themselves inflate the cost of settlement services. It is the fact that such payments
fundamentally alter the nature of market competition to the detriment of consumers. Instead of
having settlement service providers competing in ways that serve the consumer's interest,
competition is channeled in directions that serve the personal financial interest of the real estate
professionals wlw are in a position to influence the consumer's selection or to make that choice
for him.
The purchase of settlement services confronts consumers with problems that they do not face in
most other areas where they have knowledge and ability to shop effectively on their own for the
provider who offers the best combination of price, quality, and service. Most consumers buy a
home only once or twice in their lives; they have little or no familiarity with the purchase of the
kinds of services needed in connection with the real estate transaction; and they frequently do not
have the time between the signing of the purchase contract and the closing to become
knowledgeable shoppers for services that they may never again need.
Given these factors, it is inevitable that consumers will look to and rely upon the
recommendations or referrals of their real estate broker or the mortgage lender. These
professionals have the knowledge and experience that the consumer lacks; these people are
involved in real estate settlements all the time and are in a position to know the quality and value
of the service providers in the market. Accordingly, in the overwhelming number of residential
real estate transactions the selection of a title company or other settlement service professional
is made on the basis of referrals from brokers, lenders and other real estate professionals.
If the broker's or lender's recommendation cannot be influenced by a referral fee or other
personal financial inducement to steer the business to a particular company, then referrals will
be made on the basis of which provider can best serve the consumer's interest. Competition
among settlement service providers - who know that they have to compete for the referrals of
these knowledgeable surrogate shoppers on the basis of the competitive merits of their products
and services - will thus be channeled in directions that serve the best interests of consumers.
It is this kind of competitive environment that Congress sought to foster in enacting section 8.
While the 1983 amendments determined that referrals to controlled business affiliates were not
violations of section 8 if certain prescribed conditions were met, Congress did not otherwise intend
that the basic consumer-oriented thrust of section 8 was to be altered. But this is precisely what
HUD's employer referral fee and CLO rules would do.
The employer referral fee rule encourages employees of brokerage firms and mortgage lenders to
steer the consumer to the employer's controlled business affiliate even if other firms can provide
better prices, quality or service. It is simply unrealistic to believe that allowing such payments will
not determine the direction of referrals. Moreover, the controlled business affiliate does not have
to compete on the merits for the recommendation of that employee when the affiliate knows that
the employee will be receiving a direct financial incentive from his employer to steer business its
way. As a consequence, consumers will not only end up having to pay for such fees, but the
entire dynamics of competition among settlement service providers becomes altered to the
detriment of consumers. Indeed, if controlled business arrangements continue to develop, and
employer referral fees are permitted to be paid to ensure that consumers get steered to the broker's
or lender's affiliate, there is a great danger that few if any consumers will be able to escape the
one-way highway of financially-induced referrals to captive affiliates."
58
We realize that the idea of referral fees-easy money-sounds good to various trade groups,
especially some of the realty associations. Yet before HUD opened the floodgates, such groups as
the Northern Virginia Board of Realtors, the largest local real estate trade association in the country,
were on record as opposing any types of referral fees, because they "inevitably creat[e] situations ripe
for conflicts of interests between real estate agents and their customers.""
VIII. Reports of Abuses Occurring
There is no shortage of reports of abusive "under-the-table" practices perpetrated by
controlled business-type entities, which have sought to pressure their real estate agents or loan
officers to steer business in-house, and HUD's new RESPA rules will only increase the problems.
CRISIS has received information indicating widespread patterns of anti-competitive practices that
threaten small business and, not coincidentally, lead to consumer overcharges.
For example, in the Minneapolis-St.Paul, Minnesota area, the two largest real estate firms,
Edina Realty and Burnett Realty, control over 50% of the residential real estate market, and have
formed mortgage and settlement affiliates. Joel Holstad, of National Title in White Bear Lake,
Minnesota, who is here today to answer any questions the Committee may have, has advised us that
he has had a substantial decline in business for several years because Edina and Burnett encourage
their staff to send the settlement business to their affiliates. For example, Edina reportedly
encourages persons to send closings to its controlled affiliate, Equity Title, by such practices as
paying commissions at the settlement table, without disclosing the tie-in relationship with its
settlement affiliate. Independents, such as Mr. Holstad, whose settlement prices average about $75
less than the Edina and Burnett controlled affiliates, cannot even gain access to the realtors' offices.
In addition, we have been told that Edina Realty has paid bonuses to sales managers to influence
its brokers to send business to Equity Title. Burnett also reportedly promoted salespersons into its
management-track progTam, with the condition that they use its controlled title company, First
Security.
Another illustration of the anti-competitive practices that are occurring is the situation
experienced by Debbi Faber of Niguel Escrow in South Orange County, California. Mrs. Faber has
already been driven out of business by controlled businesses. I urge you to read the attached letter
from Ms. Faber which explains how her business suffered at the hands of realty brokerages who own
or have a tie-in with an escrow company.12 These brokerages give incentives to send the settlement
business to the escrow tie-in, through lower or waived desk fees, advances on commissions, and
higher commissions for using the affiliates. In addition, only two firms in her geographic market do
not have a tie-in with an escrow company. She reports that most of these that have such
relationships, such as Coldwell Banker, have a "closed door" policy excluding the independents from
coming to their offices and introducing themselves and their service.
" A copy of this document is attached as Appendix "E."
u A copy of Ms. Fiber's letter is attached as Appendix "F."
9
59
Numerous other issues of concern are outlined in the attached excerpts from CRISIS'
Answers to Interrogatories that have been filed in our pending lawsuit against HUD.13 It is
apparent that we are only seeing the tip of the iceberg. Another indication of this comes from
HUD's recent announcement — claiming as a great consumer victory— -the simultaneous filing and
settlement of an administrative proceeding charging Coldwell Banker and its various affiliates with
wholesale steering violations of RESPA in New Jersey and Minnesota. The enforcement case, which
was brought after CRISIS filed its lawsuit, was settled by a "consent" order, in which Coldwell
Banker denied all allegations. Our general sense of the settlement market leads us to believe that
there is a great degree of truth in what HUD alleged in its May 17th news release: "[Firms] engaged
in practices to steer consumers to other affiliated companies and that they got kickbacks for the referral
of business, and they also received unearned fees." "
IX. Legislative Reforms Must Be Adopted
In closing, I want to emphasize that it will not be adequate to merely withdraw and reissue
these flawed HUD regulations with a prohibition on referral fees. To be sure, that would be
necessary and helpful step to prevent unfair competition and consumer abuses. However, HUD's
issuance of these rules eight months ago, and the ensuing publicity alerted firms as to how easy it
is to profit through controlled business arrangements. We have no doubt that such controlled
businesses in many cases will provide a ready vehicle for covert circumvention of RESPA's
prohibition on referral fees and other kickbacks. There are many undisclosed payments and
economic benefits that can be paid to real estate agents and lenders to refer business to an affiliate.
Policing such kickbacks will be extremely difficult, if not impossible, especially since HUD has only
a very small enforcement staff. California and several other states like Minnesota experienced many
of these problems well before HUD's controversial new regulations were issued.
Thus, CRISIS believes that the only effective way to protect against such controlled business
abuses is to pass additional legislative safeguards. Congress should impose limitations on the amount
of business that can be referred to a controlled affiliate and tougher penalties for violations of the
anti-kickback provisions. In addition, HUD's RESPA enforcement staff, which is quite dedicated
to preventing abuses, is quite small. Try as they might, this limited staff can not effectively handle
the large number of cases that are arising and will arise. Congress should significantly increase the
size and resources of HUD's RESPA enforcement office.
u This material is attached as Appendix "G."
" A copy of HUD's news release is attached as Appendix "H."
10
60
Appendix A
61
TOfMtH J DOOO. I
CMMSTOrNfA G
, ALAOAUA COKX'C
«JTH, git MIAW*«
MQ((I)T' IfNhrTT.
MOWABO A Mt NILu ftffUBUCAN I
lanital 3tates Senate
iH V COUENICI MEW MEXICO
COMMITTEE ON BANKING, HOUSING, AND
URBAN AFFAIRS
«r"2'«SSi"1 WASHINGTON. DC 20510-6075
March 1, 1993
The Honorable Henry Cisneros, Secretary
Department of Housing and Urban Development
451 Seventh St., S.W.
Washington, DC 20410
Dear Secretary Cisneros:
On November 23, 1992, we wrote former Secretary Kemp to express
concerns regarding the final HUD rule for the Real Estate Settlement
Procedures Act (RESPA). A copy of our letter is attached. The RESPA rule
issued on November 2, 1992, represented a significant change from the public
positions taken by the Department in testimony before the congressional
committees prior to that time. Moreover, the hasty manner in which the
revised final rule was promulgated and rushed to implementation suggests
that important issues of consumer protection may not have been adequately
addressed. Because of these concerns, we requested in our November 23rd
letter that then-Secretary Kemp delay implementation of the rule for six
months to allow for a review to take place.
Unfortunately, our request for delay in implementation was not acted on
before the rule went into effect. Nevertheless, the competitive and consumer
protection implications of that rule are still a concern. With this letter, we
urge you to undertake a thorough review of the final RESPA rule.
Thank you in advance for your attention to this matter. Please keep our
offices informed of your progress on this review.
Sincerely,
Congressman Henry*!?. Gonzalez
Senator Paul S. Sarbanes
70-043 0-94-3
62
n
finftd States Senate
WASHINGTON, OC 20850
November 23, 1992
The Honorable Jack Kemp, Secretary
Department of Housing and Urban Development
451 Seventh Street, S.W.
Washington, DC 20410
Dear Secretary Kemp:
On November 2, 1992, the Department issued a final rule revising regulations
for the Real Estate Settlement Procedures Act (RESPA). This final rule is
scheduled to become effective on December 2, 1992. For the reasons stated
below, we are writing to urge you to delay implementation of this rule until
April 28, 1993, the implementation date established by Section 908 of the
Housing and Community Development Act of 1992.
As you are aware, RESPA was enacted in 1974 to protect consumers from
unnecessarily high settlement costs arising from abusive business practices by
some in the real estate community. The November 2nd rule makes several
changes in Regulation X, including providing an exemption from Section 8 of
RESPA - which prohibits kickbacks or referral fees - for Computer Loan
Origination Systems (CLOs). The rule generally reflects HUD'S conclusion
that "there [are] potentially substantial consumer benefits in the utilization of
new technology.*
We are concerned about the adequacy of the consumer protections contained in
the November 2nd rule. In several significant respects, the rule represents a
departure from the Department's strong assurances on tins issue in the past
For instance, in testimony before the Senate Subcommittee on Housing on
September 19, 1990, HUD General Counsel Francis A. Keating expressed the
Department's intention "to allow for the introduction or expansion of CLOs,
subject to specific limitations and conditions and careful review." Mr. Keating
also noted that:
"Secretary Kemp has tried to look at this issue from the standpoint of
the potential users of the service - the consumer. We must remember,
after all, that it was for the consumer that RESPA was created. TJu
arguments of those Interest* which perceive tJiat thflT fTtTTrd ft °*{n ^
63
logo from one regulatory action or another most be secondary to thj
long-term interests of the consumers of the service." [emphasis added]
Mr. Heating's testimony went on to identify some of the consumer protection
provisions that would be included. He noted that;
"...we intend to propose that all realtors who offer computerized loan
originations be required to offer the products of multiple lenders.. .The
Department intends to assure that any system accessible from a
realtor's office would display loans from competing lenders, and that a
homebuyer who did not leave one particular realtor's office to obtain
\oam iafoaaatiaa ■■ apply '■" a Itaa wtuli haut aatvi tkim »«• lta.at*
from which to choose.
...In addition, we will require - permanently - that the realtor disclose
to the homebuyer that he or she will receive a fee for the CLO service
and further disclose that there are other lenders, not on the CLO
system, who may offer more favorable terms.
...The Department proposes to establish a limit on fees for CLO services.
We believe that the fee should be capped at a fixed dollar amount,
which would be set to reflect the reasonable cost of providing such a
service."
Mr. Keating made almost identical commitments to the House Subcommittee
on Housing and Community Development in his testimony before that
committee on September 18, 1990. These protections were also included in the
final rule "leaked" in January 1991, but never published.
Despite the Department's strong and definitive position regarding CLOs and
consumer interests in 1990, the November 2nd rule foils to include two of the
requirements cited above; namely the requirement that more than one lender
be listed on the CLO service and the cap on foes for CLO services.
Significantly, the final rule foils to provide any explanation for the
Department's decision to reverse its previously stated position on this issue.
Although the final rule notes that the Department believes that
"...well-informed choices by consumers do not require special protection under
RESPA," we are concerned that the rule does not provide sufficient protection
against the kinds of abuses RESPA was designed to prevent
Finally we must note the extremely short time frame that the Department has
set for implementation of this rule. Although the proposed rule was issued in
May 1988 it has taken more than four years for the Department to issue a
64
final rule. We believe that this underscores the complexity and seriousness of
thia issue and the other issues addressed in this regulation. Under these
circumstances, a longer time period prior to implementation would be more
appropriate.
Given these significant changes we urge you to delay implementation of the
final rule until April 28, 1993. This will allow the new Administration to
carefully review the consumer protection provisions of the regulation. It will
also enable the Department to promulgate one set of RESPA regulations,
including the CLO rules as well as those changes included in the Housing and
Community Development Act of 1992.
Sincerely,
Alan Cranston
8. Ssrfeanes
65
Appendix B
66
<D
a
U8. DEPARTMENT OF HOUSNO AND URBAN DEVELOPMENT
THE DEPUTY SECRETARY
WA8HW3TON, D.a KX1WXS0
Auguit 7, 1992
Mr. Tunei McRae
Acting Administrator and Deputy Administrator '
Office of Information, Regulatory Affairs,
Management and Budget
New Executive Office Building
'-:- 17th Street, N.W., Room 3236
. . .-.rngton, D.C. 20503
-car Mr. McRae:
I am trantmitting for your review a copy of the revised Regulation X, an Interim Role
implementing the Real Estate Settlement Procedures Act, 12 USC 2601 et teq. (RESPA).
The revised role has bees subjected to exhaustive review and deliberation by the top legal
and policy officials of this Deietuneal Despite this, there remain strong differences of opinion
over several provisions of the revised rule.
The role and preamble submitted reflects the General Counsel's position on what is
necessary to comply with the letter of the RESPA some, notwithstanding policy preferences to
the contrary. In particular, the General Counsel has determined that employers may not
<ywnppTnntfi employees who refer business to t?M»«*«i companies, because such referrals are
prohibited under RESPA sections 8(a) and 8(c)(2), even where the provisions of the 'safe
harbor* in section 8(c)(4) have been met. The interim rule reflects this legal position even
though it conflicts with our policy preference to encourage the growth of affiliated services.
The Department of Justice, Office of Legal Counsel, has been asked to confirm this view.
If the Department of Justice's opinion provides greater policy latitude than is contemplated in
■-=is rule, HUD win submit a revised package in Use with our policy objective*.
Given the long history of this rule's development, I believe that it is more prudent to
transmit the rule now rT^th'^T^ than further delay action until we hear from Justice. For the same
reason, we are tending you this role before we have completed a section addressing escrow
account issuet This section will be provided to you shortly.
Appropriate members of our staff will be available to brief you on any aspect of this rule.
I appreciate your m«<fw<* in reviewing this impuiuuit regulatory document.
Sincerely,
3 PLAiNnrrs
\ QtfLd.a.fSj0^&*.
67
March 30, 1993
MEMORANDUM
To: Secretary Henry Cisneros
From: CRISIS - The Coalition to Retain Independent Services in Settlements
Re: HUD's RESPA Rules Should Be Amended To Prohibit "Referral Fees" and New Safeguards
Should Be Adopted Regarding "Controlled Business Arrangements"
In the closing days of the Bush Administration, HUD issued final regulations' implementing 1983
Amendments to the Real Estate Settlement Procedures Act ("RESPA"). The drafts of these new RESPA rules
were changed at the last minute after political efforts by several large real estate firms through Vice President
Quayle's Competitiveness Council so as to reverse long-standing federal policy and in effect overturn RESPA 's
prohibition against fees and kickbacks for referring business incident to real estate settlements.2 The rules
adopt the perverse view that the statute's "controlled business" amendment passed in 1983 allows real estate
firms to pay their employees referral fees for steering residential settlement services work (like title insurance)
to a firm they control.5 Even HUD's General Counsel advised that this new position violated the statute, but
political pressures prevailed. (See DelliBovi letter copied on reverse.)
Such "something for nothing" self-referral fees are precisely the type abusive practice that RESPA was
passed to stop. If allowed to stand, these anti-competitive HUD rules will soon cause a fundamental change
in the market, costing consumers millions of dollars in unnecessary settlement fees while decreasing services'
quality and integrity and driving most smaller independent service providers out of business. Larger, vertically
integrated firms will be able to lock-up for themselves much of the residential settlement business.
The Clinton-Gore Administration should act now to ensure changes are made by HUD and safeguards
added to protect consumers from unjustifiable fees and small businesses from unfair competition from
"controlled" provider organizations. The new rules should be suspended, and Congress also should be urged
to pass additional limitations on "controlled business* arrangements.
1 24 CF.R. Sec. 35O0.14(g)(2)(ii), published in the Federal Register on November 2. 1992.
1 RESPA was passed in 1972 after investigations revealed that kickbacks, unmerited referral fees and similar abusive
practices were rampant in the settlement business. Section 8(a) of the Act provides that: "No person shall give and no
person shall accept any fee, kickback, or thing of value pursuant to any agreement or understanding, oral or otherwise, thai
business incident to or a part of a real estate settlement service involving a federally related mortgage loan shall be referred to
any person,'
1 1983 "Controlled Bullous" Amendment - A limited exception was added to RESPA in 1983 which changed Section
8(c)(4) of the Act to permit referral benefits to be paid or given under a "controlled business arrangement" structure.
These arrangements essentially involve real estate professionals (e.g., brokers, mortgage lenders) having an ownership
interest in title agencies or other settlement service providers to which they can steer their customers to purchase their
necessary settlement services from such in-house affiliates. Congress clearly intended the exception to be quite narrow — it
permitted payments in a controlled business structure only if (1) the affiliation is disclosed to the home buyer, (2) the home
buyer is not required to use the controlled provider, and most importantly (3) no monies or other benefits are passed between
the parties who make and receive the referral except for a return on an ownership interest in the business. An ownership
interest is defined as dividends or partnership distributions, and payments based on the mere fact or volume or referrals
are prohibited. Congress' intent to restrict this "controlled business" provision was clearly stated in the House Banking
Committee's report: '[Tjhis provision is not intended to change current law which prohibits the payment of unearned fees,
kickbacks, or other things of value for referrals."
68
Appendix C
69
- 187
== =SEARS
DATE: May 30, 1991 = = = W2*I$&93,„..
= ^= CORPORATION
TO: Field Distr Ibut pOn
FROM: J. Joseph Hoaian
RE: Coldwell Banker Mor i&a£« UsaQe
A copy of a letter dated May 7, 1991, from Robert J. Arrigoni.
Senior Vice President, Coldwell Banker Residential (CB) to the CB
Operating Officers will be provided in the Friday pouch. The
letter addresses the issue cf how CS will provide IPP credit to
their Managers for loans referred to Sears Mortgage Corporation.
The pertinent points are as follows:
.1. CB will give IPP credit to their Branch Managers for
ref i nances on a 2 for 1 basis (i.e., 2 ref i nance
applications will have the same value as 1 purchase money
mortgage).
2 Full IPP credit- will only be given where CB Is the seller
or lister. No -'IPP credit will be given for applications
that are Initially referred to SMC by CB and are
subsequently financed. by SMC but CB is neither the listing
or eel I ing broker .
It will not be necessary for individual SMC offices to report the
number of refinance applications to CB. A print out by referral
source code will be provided to CB in Miss ion Vlejo; however, in
order to report the number of refinance applications to CB, it
will be necessary to enter these into MLAPS using the proper CB
Referral Source Code. The official Usage Report will be adjusted
on a gross basis each month to delete refinances from the final
usage figures I.e., there will be a total adjustment for each
branch/sales office; however, the individual CB offices will not
be adjusted on the report. If you have any questions, please
contact your Senior Regional Manager.
JJH/sew
cc: B. Arr Igoni
A. Perr iei lo
A . R I ngwa I d
M. Uhlik
052291 .5
B202
70
= = = SEARS
= = = mortgage
===== corporation
clue December 9, 1991
TO Cincinnati Loan Officers, Ccldwell Banker Cincinnacl Managers
FROM Judy Kinser
SUBJECT QUESTIONS AND ANSWERS.
What are ways Sears Mortgage Corporation can help Coldwell
Banker sell more hones and get more listings?
* Competitive Rates, Costs and excellent service and an
open line of communication between all parties.
H"bw do you support Sears Hortgage Corporation in your office
both in actions and words?
* Utilizing the Loan Officer for training and constant
availability to agents.
* Give direction to the agents to use Sears Mortgage
Corporation's Products.
How do «we increase Sears Mortgage Corporation usage on
listings sold?
* The agent should ask the Co-op where the loan's going.
* Make the acceptance of offer contingent on the Buyer
getting pre-qualified by Sears Mortgage Corporation
and/or do approval 1st.
* Need an incentive program for the agent to give us the
opportunity (point system, etc.).
* Print up a card to include- with, acceptance of contract to
show buyer the benefits of using Sears Mortgage
Corporation-.
* Initiate a Reward Program for each agent, from Sears, not
just their Manager, on a weekly basis (lottery ticket,
etc.).
* Tell the agents at the beginning of the year what they
can win (trip to Las Vegas) so they can keep shooting for
increased % of yearly usage.
* The winners of prizes should get more publicity when they
win.
* Sears Mortgage corporation should sponsor a cocktail
party for the 18K drawing. B203
71
How do we get top and seasoned agents to use Sears Mortgage
Corporation?
* Stop letting other Loan Officers into the office. Let
then leave their rate sheets at the duty desk and then
pitch thes out immediately after they ao. The Loan
officer should be made aware oj. Sears Mortgage
Corporation to dissuade them from coming back.
* Talk about horror stories of other lenders and success
stories cf Sears Mortgage Corporation.
* Sears referral business should be routed thru Sears
Mortgage Corporation. You have to get them at least
pre-gualified if not approval let.
* Coldwell Banker must make the Loan Officer visible in the
office - own office , space, display area and etc.
* Loan Officers need to visit open houses to encourage the
agents.
* Sell the agents on: Sears Mortgage Corporation's Pro-Act.
* Need to wine and dine the agents just like ,a Loan Officer
from another company. Meed to play and have fun outside
of business.
How do you change agent behavior toward Loan Officer
competitors with whom they have long term relationships?
* Broadcast Sears Mortgage Corporation's successes and find
out what really happened on sour deals and advise the
Loan Officer to sell his or herself first and Sears
Mortgage Corporation second.
* Testimonials from successful agents "It's good business
because they are part of the family."
* Become competitive with better points and rates
and make Sears Mortgage Corporation more visible in the
agent's listing presentation.
* Increased combined advertising, i.e. showing rate
comparison in an inset ad.
* Stress Approval First and use S25.00 fee to their
advantage.
* Pre-gualifyinq interviews within 24 hours.
* Entertaining a $200.00 off Coupon.
cc: Joe Bealsc
B204
72
GATE
TO
FROM
SUBJECT
HOVEHBER 21, 1991
SALES STAFF
RICH KILFOIl>
SALES IDEAS
= = =5£ARS
= = EMORTCACE
=^=COHPORA7)ON
For your information, enclosed please find the sales ideas from the
Kiawah Island Conference. Please review.
73
WINNING IDEAS.„
How do yon market ApproralFirst to attract more buyer prospects?
Hold a buyer/seUer seminar -week with SMC featured on the agenda.
Conduct a f1*** mailing to- apartment dwellers about ApprovalFirst.
Conduct a telethon to offer ApprovalFirst.
Advertise ApprovalFirst with mail-back cards.
Have applications available at open houses and at all active listings.
Have the Sears Mortgage loan officer call prospects who attended open houses.
Provide co-brokers with applications when they pick up keys from the office.
The area manager, loan officer, branch manager and regional manager should hold
their own Mortgage Planning Meeting.
Educate sales associates on the benefits ApprovalFirst offers them (ie: a buyer loyalty
tool) and their customers and tram sales associates on how to sell the benefits of
ApprovalFirst to their customers.
Dedicate a page in the listing presentation book to ApprovalFirst.
Dedicate a page in the Best Buyer Guide book to ApprovalFirst.
Staple an ApprovalFirst form to the listing agreement.
Staple an ApprovalFirst form to the Agency Disclosure form.
Tell success stories at sales meetings.
Provide as a service to FSBO -it will 'help get' sales associate's foot in the door.
Highlight-sheets left at homes should include information about Sears Mortgage.
74
WINNING IDEAS-
How do yon increase Sears Home Mortgage usage on listings sold by other brokers?
■ Include SMC information in the presentation book. Two ideas: 10 reasons to me
SMQ ApprovalFirst passbook.
■ The manager should call after an agent completes a competitive market analysis
(CMA) visit to say "thank you for the opportunity to do a CMA" and to offer SMC
services to potential buyers. Follow up with a letter from the manager.
■ The listing broker or SMC loan officer can call the selling broker to offer SMC
services.
■ Because credit checks play such an important role today, market
ApprovalFirst, especially 'with multiple offers.
■ Market the fact that SMC can get credit information within hours and on weekends.
■ Communicate that Sears Mortgage stands behind ApprovalFirst and will "fix it if it
breaks."
■ Selling brokers should be educated that Sears Mortgage wfl] work just as hard for
their buyer.
■ Sell the fact that Sears, Roebuck and Co. and SMC stand behind their products and
pride themselves on customer service. The ability to share SMC services with outside
brokers will be benefit our entire industry.
■ Ask agents to share success stories with other brokers.
B207 25
75
WINNING IDEAS...
How do yon counteract a competitor's well-established loan officer relationship with a
Coldwell Banker office, especially when the SMC loan officer is new.
Removing entrenched competition:
■ Manage the office by having competitors leave flyers at the receptionist desk. Do not
give them access to mailboxes, desks or individual agents.
■ Meet with entrenched loan officer face-to-face to tell them you plan to support
SMC
■ Never allow the loan officer to participate in seminars, breakfast meetings, etc.
Establishing a new loan officer
■ Match personality of the loan officer candidate with the personality of the office,
■ Meet individually with the loan officer to set expectations for SMC services.
■ Put stickers on every phone with the loan officer's phone and pager numbers.
■ Suggest agents use ApprovalFirst on every loan as a way to get to know the loan
officer.
■ Give the loan officer his own desk, key, mailbox.
■ Insist that the loan officer attend every sales meeting, tour, social function.
■ Establish the loan officer as a "mortgage resource person."
■ Have the loan officer provide a completed Grand Open House Kit and visit the open
bouses.
■ Obtain an agent birthday list from Coldwell Banker and send cards or flowers.
■ Make it very dear to agents at every sales meeting how important it is to support
SMC and recognize agents' usage at every meeting.
is Broadcast success stories at every meeting.
« Have a Coldwell Banker/SMC display in the reception area that attracts agents' and
buyers' attention.
B203
Pao,
26 J
76
WINNING IDEAS..
How do you increase SMC usage by top agents who are often successful because of their
independent assertive style?
Meet with top agents one-on-one, ask them for their support and to give SMC a
chance.
Hold a business/social function, such as a brain-storming breakfast or winner's circle
lunch, during which the top producers can meet with the SMC loan representative.
Offer advanced financing classes taught by the SMC loan officer.
Appeal to the control that top producers thrive on. Suggest that they require listings
sold by other brokers to include an ApprovalFIrst application as a condition for an
accepted offer.
Have the loan officer offer to attend open houses and do joint highlight sheets.
Offer to do a joint farming program.
Give top producers a Winning Combination pin or plaque.
Have a monthly usage "honor roll" displayed in the office - top agents will want to be
on it
Have the Sean Mortgage representatives supply special beeper codes to top agents
to help them feel special.
E209
77
WINNING IDEAS...
How do you umcomt the relnctance of sales associates to us* your 'in house' mortgage
operation? (This question was directed to members of the Affiliates Choice Program.)
In the beginning use a subtle approach.
Hire quality mortgage people with the proper product knowledge and establish your
standards right away.
Hire mortgage loan officers that are successful with other mortgage operations -
agents are already loyal to them.
Broker/owner should review sales contracts to determine where agents are going for
mortgages and then encourage SMC usage.
"Utilize ApprovalFirst. The mortgage representative can push this product PRIOR to
the agent selling the house to the buyers.
Do not give buyer referrals to agents who do not use Sears Mortgage.
Communicate the "bottom line" profit side of business with agents to help them
understand "the big picture,"
Recognize agents when they use the mortgage company. Highlight the sale in a
different color on the production board.
Manage the managers. Ask them how many buyer-control sales did not go through
the mortgage company and why they did noL
Tell success stories at meetings.
Set up a good loan status system for agents so they know progress details at every
stage.
Show the steps that it takes to get a loan through SMC versus lender "X".
Let the agents know that SMC will "bend over backwards" to make the loan. Let
them know SMC management cares and Coldwell Banker can call any of the SMC
people.
Make sure in-bouse loan officers call on FSBO's.
Use ApprovalFirst when meeting with sellers at a listing appointment.
28 i
78
WINNING IDEAS*.
How do you avoid problems In a Coldwell Banker office with as SMC loan officer quits?
■ The manager of the. SMC office should call the Coldwell Banker manager first and
fast.
■ Preventative measures should be taken before the situation occurs. Loan officers
could develop a "buddy system" whereby the loan officer who covers an office
introduces a fellow loan officer as his replacement in case of sickness or absence. If
a loan officer leaves, the "buddy" is already known and can £11 in.
■ It's very important to keep the office covered! Either the SMC branch manager or
his/her best loan officers should take care of the affected office until a replacement
can be found.
m The Coldwell Banker branch manager should help recruit a new loan officer.
■ Build agent loyalty in SMC, not just the loan officer. When a loan officer leaves the
company loyalty wrfll stiU be .intact. Agents must be sold on Sears Mortgage.
■ Have, the new loan officer meet with agents right away and take over the existing
cases.
■ Inform agents who have transactions pending that their loans will stiD be handled
promptly and correctly and who is going to handle them.
■ The Coldwell Banker manager must "hold it together" and work hard to keep agents
loyal to Sears Mortgage.
■ An interactive group effort is needed from the SMC and Coldwell Banker branch
managers, the "stand-in" loan officer and the processor.
B21I ~
79
Appendix D
80
UNITED STATES DISTRICT COURT
FOR THE
DISTRICT OF COLUMBIA
COALITION TO RETAIN INDEPENDENT
SERVICES IN SETTLEMENTS (CRISIS)
Plaintiff,
HENRY CISNEROS
(in his official capacity
as Secretary, Department of
Housing and Urban Development)
Defendant .
CA 92-2700 (CRR)
DECLARATION OF PROFESSOR WILLIAM N. ESKRIDGE, JR.
I, William N. Eskridge, Jr., declare under penalty of
perjury pursuant to Local Rule 106 (g) :
1. I am a Professor of Law at Georgetown University Law
Center, where I have taught since 1987. I am a member of the bar
of the District of Columbia. From 1982 to 1987, I was an
Assistant Professor of Law at the University of Virginia School
of Law. From 1979 to 1982, I was an attorney in private practice
at Shea and Gardner. My curriculum vitae is attached to this
Declaration as Exhibit 1. My areas of academic specialization
are statutory interpretation by agencies and courts, civil and
administrative procedure, and the regulation of financial
transactions. Since 1980, I have developed a specific expertise
in the regulatory issues relating to home sales and loan
transactions. Among other things, I represented a national
81
homebuilder in an important litigation matter while at Shea &
Gardner, have written a lengthy law review article analyzing and
criticizing federal regulation of the integrated home sale and
loan transaction1 and testified as an expert before the Housing
Subcommittee of the House Banking Committee.2 My litigation and
academic experience have focused on the Real Estate Settlement
Procedures Act of 1974 ("RESPA"), codified as amended at 12
U.S.C. § 2601 ec seg. , among other statutes. I am also the co-
author of a casebook on legislation and statutory
interpretation. 3
2. I have been retained by CRISIS to provide expert
opinion about policy issues in connection with the above- •
captioned litigation, with particular focus on HUD's new
regulation allowing realty and other companies to pay employees
bonuses and commissions for referring homebuyers to their
affiliated settlement providers {"the employee bonus rule"). 24
C.F.R. § 3500.14(g) (2) (ii) , reported in 57 Fed. Reg. 49600, 49612,
(Nov. 2, 1992). The opinions expressed below reflect my
understanding of the academic and empirical literature on the
dynamics of the home sale and mortgage transaction and positions
1 See. Eskridge, One Hundred Years of Ineptitude: The Need for Mortgage
Rules Consonant with the Economic and Psychological Dynamics of the Home
Sale and Loan Transaction, 70 Va. L. Rev. 1083-1218 (1984) .
2 See Eskridge, "Call to ARMS: Protecting Consumers Who Enter into
Adjustable Rate Mortgages, ■ in Adjustable Rate Mortgages (ARMS) : Hearings
Before the Subcommm. on Housing & Community Development of the House Comm.
on Banking, Finance and Urban Affairs, 98th Cong., 2d Sess. 226-66 (1984).
3 See Eskridge & Frickey, Cases and Materials on Legislation: Statutes and
the Creation of Public Policy (1988) .
82
I have taken in publications during the 1980s (see sources cited !
in notes 1 and 2). The opinions also reflect my examination of
the following materials: RESPA and its legislative history,
including the 1983 amendment adding the controlled business
provision in RESPA § 8(c) (4), Pub. L. No. 98-181, § 461(b), (c) ,
Stat. 1231 (1983); HUD's first proposed regulation pertaining to
controlled businesses, reported in 53 Fed. Reg. 17,424 (May 16,
1988), as well as its "leaked" proposed final rule, reported in
Real Estate Settlement Procedures Act: Hearings Before the
Subcomm. on Housing and Community Development of the House Comm.
on Banking. Finance and Urban Affairs, 101st Cong., 2d Sess. 287-
319 (1990) , and another draft final rule which surfaced the
'! following year; several hundred of the public comments on HUD's
proposed regulation; HUD's final rule which went into effect on
December 2, 1992; HUD's justifications for the employee bonus
rule contained in the official commentary, reported at 57
Fed. Reg. 49,602 (Nov. 2, 1992); and HUD's Final Regulatory Impact
i Analysis, RESPA, 24 CFR Part 3500 (Regulation X), Docket No.
.1
! 1265.
i
3. By way of introduction, I will first review some of the1
] dynamics underlying RESPA and what my study teaches me it was
intended to accomplish. I do that not to supplant the Court's
i reading of these source materials but rather for the purpose of
providing a backdrop for my conclusions. After assessing the
| statutory framework, I will focus on the final Regulatory Impact
Analysis ("Final RIA"), wherein HUD sets forth assumptions
underlying the employee bonus rule. My conclusion, elaborated
83
below, is that the Final RIA is a significantly flawed analysis
resting on empirically unsound assumptions and poorly-structured
reasoning.
4. Enacted in 1974, RESPA addressed the issue of "reverse
competition" in the home sale and loan transaction. Because
homebuyers relied heavily upon intermediaries (e.g., real estate
agents) for choosing lenders, title insurers, and other
providers, those providers tended to compete for market shares by
providing incentives (e.g., kickbacks and rebates) to the
intermediaries. They tended to avoid engaging in price and
service competition directly benefitting the consumer. It can
be, and has been, argued that reverse discrimination is not
necessarily bad for consumers, to the extent that kickbacks and
rebates might lower intermediary charges to the homebuyer.
Congress found that this potential benefit did not exist in the
home settlement market, however:
In a number of areas of the country,
competitive forces in the conveyancing industry
have led to the payment of referral fees,
kickbacks, rebates and unearned commissions as
inducements to those persons who are in a
position to refer settlement business. * * *
In all of these instances, the payment or
thing of value furnished by the person to whom
the settlement business is referred tends to
increase the cost of settlement services
without providing any benefits to the
homebuyer. * * * [I]"- is the intention of
section 7 [current nESPA § 8] to prohibit such
payments, kickbacks, rebates, or unearned
commissions.
84
S. Rep. No. 93-866, 93d Cong., 2d Sess. (1974), reprinted in
1974 U.S. Code Cong. & Admin. News 6546, 6551. Section 8(a) of
RESPA, 12 U.S.C. § 2607(a), provides that no "person" shall give j
or accept "any fee, kickback, or thing of value pursuant to any
agreement or understanding, oral or otherwise, that business
incident to or a part of a real estate settlement service
involving a federally related mortgage loan shall be referred to
any person . " i
5. In the 1970 's, several national real estate brokerage
firms established affiliated companies that could provide title
insurance and other settlement services for homebuyers . These
"controlled companies" raised an important interpretive issue:
Since the brokerage firm is a "person" under «RES PA § 3(5), 12
U.S.C. § 2602(5), its receipt of a dividend from its affiliated
title company to which it referred business might be considered
a "thing of value pursuant to any agreement or understanding"
that the title business should be referred to the title company,
in violation of § 8(a). In the early 1980 's, Congress
deliberated whether RESPA could tolerate the existence of
controlled title companies, hearing evidence of both the
possible efficiencies arising out of controlled businesses and
the possibility of consumer abuse.4 In 1983, Congress added a
new § 8(c)(4) providing that RESPA § 8 shall not "be construed
as prohibiting * * * controlled business arrangements so long as
4 See, e.g. Real Estate Settlement Procedures Act -- Controlled Business:
Hearings Before the Subcomm. on Housing and Community Development of the
House Comm. on Banking, Finance and Urban Affairs, 97th Cong., 1st Sess.
(1981) .
85
"(A) homebuyers receive disclosures of such arrangements, (B)
homebuyers are not required to use the controlled business
services, and "(C) the only thing of value that is received from
the arrangement, other than the payments permitted under [§
8(c)], is a return on the ownership interest or franchise
relationship." 12 U.S.C. § 2607(c)(4).
6. The 1983 amendment allows a realty company or lender
to set up an affiliated title or settlement company and to refer
business to that controlled company, so long as it meets the
foregoing requirements, including § 8(c)(4)(C)'s requirement
that the affiliated company provide only a return on investment.
Nothing in the 1983 amendment otherwise retreats from § 8(a) 's
mandate that "[n]o person shall give and no person shall accept
any fee, kickback, or thing of value" pursuant to an "agreement
or understanding" for referring real estate settlement business.5
Yet HUD's employee bonus rule now allows a "person" (an
employee, sales agent, loan officer or sales manager) to
"accept" a "thing of value" (a bonus or commission) pursuant to
an "agreement or understanding" for referring settlement
business to the firm's affiliated provider. As a student of
statutory construction, I believe that this rule on its face is
inconsistent with § 8(a) 's plain meaning.6
5 Congress' intent was that the 1983 amendment was "not intended to change
current law which prohibits the payment of unearned fees, kickbacks, or
other things of value for referrals." H.R. Rep. No. 98-123, 98th Cong., 1st
Sess. 75-79 (1983) .
6 HUD misses the point of § 8 when it says that "§ 8(c) (4) does not
authorize this type of prohibition on employee compensation." 57 Fed. Reg.
at 49,602. As I read the statue, a prohibition on employee bonuses or
commissions is based on the plain meaning of § 8(a).
86
7. Moreover, HUD's employee bonus rule is not, in my
opinion, consistent with RESPA's overriding purpose, which is to
seek "the elimination of kickbacks or referral fees that tend to
increase unnecessarily that costs of certain settlement
services." RESPA § 2(b)(2), 12 U.S.C. § 2601(b)(2) [emphasis
added] . This policy point reinforces the prior conclusion that
I draw from § 8(a) "s plain meaning. The remainder of this
i
Declaration addresses this basic policy issue, analyzing whether
HUD's Regulatory Impact Analysis is consistent with empirical
experience .
8. HUD's Final RIA (at p. 15) states that the potential
advantage of affiliated settlement companies is than they might
deliver an array of services more cheaply and with less
J
paperwork than non-integrated companies. The potential drawback
is that the affiliated company might be able to draw upon a
captive audience (the referring company's homebuying customers)
that would not shop around and, hence, would be willing to pay
higher-than-market prices. HUD poses the resulting policy issue
as follows: :
The mitigating force against market power
of the affiliated companies lies ultimately in
competition, both among the affiliated
companies and between the affiliated vs. non-
affiliated companies. This competition will
occur only if homebuyers will shop. Thus,
whether the integrated companies may hurt
rather than help consumers turns on whether
integrated companies can effectively
discourage consumers from looking elsewhere
for a better deal.
87
Final RIA at p. 16 (emphasis added) . Having framed Che issue in
this way, the rest of HUD's analysis ignores the documented
experience of referral incentives in the last 20 years, including i
the experience that directly led to the enactment of RESPA. I
will now review those points.
9. HUD's Final RIA at p. 16 says: "The companies that
already operate affiliated settlement service providers claim
that they can reduce costs of a settlement by several hundred
dollars," because of administrative savings and lower marketing
costs. I did not find any material documentation for this claim
in the Final RIA or the public record. To my mind, undocumented
statements by the very companies that stand to profit from HUD's
controlled companies rules should not be accepted blindly without I
substantial support in the record.
10. HUD's Final RIA at p. 16 also says: "Even if savings
are half this amount ($150 per transaction), the potential
benefits of the new rule could be large." HUD then asserts: "Now i
55% of transactions involve affiliated services, " another figure
HUD seemingly accepts upon the say-so of interested parties [see
Final RIA at p. 8]. Accordingly, "[i]f all these transactions
could result in net savings of $150 per transaction but prior to '
the new rule only half of these transactions did not involve cost !
savings because affiliated firms were inhibited by lack of
guidance on this issue, then the benefits would be $148.5 million i
annually * * *." Final RIA at p. 17. The suggestion that
affiliated firms "were inhibited by lack of guidance" seems
overstated. The 1983 amendment authorizing controlled businesses |
i
8
88
stated that realty and lending firms could refer title insurance j
and other settlement business to affiliated companies. The plain
language of the statute provided plenty of "guidance" to
affiliated companies, beginning in 1983. Therefore it is not
surprising that according to HUD (Final RIA at p. 8), none of the j
top seven realty companies even waited for HUD to issue
regulations confirming the 1983 amendment's effect. What was not j
clearly allowed by the 1983 amendment, what was also absent from
the 1988 proposed regulation and the draft "final" regulations,
and what I believe is contrary to § 8(a), is the rule of §
3500 . 14 (g) (2) (ii) , permitting Realtors or lending firms to give
their employees commissions, bonuses, and other economic
incentives to refer business to their affiliated companies (see
Final RIA at p. 15) .
11. Even if § 8(c) (4)' s authorization of referrals to
affiliated companies yielded social benefits of $148.5 million (aj
figure I question below), HUD has given no reason to believe that:
§ 3500. 14 (g) (2) (ii) 's employee bonus rule contributes anything to i
that social benefit. If affiliated companies offer cost savings .
and convenient one-stop shopping to homebuyers, is there any
consumer-protective reason to allow realty and other companies to!
I
pay bonuses and commissions to their own employees for referrals? !
Shouldn't the "good deal" sell itself? To my thinking, there is
no consumer-protective reason for allowing employee bonuses, but
there is an obvious interest group reason -- to make sure that
employees or sales managers or real estate agents or loan
officers steer consumers to the affiliated company, whether they
89
offer consumers any benefits or not. In short, I do not believe |
that any of HUD's projected $148.5 million social benefit can be
attributed to the employee bonus rule; if anything, the rule will
yield a net social loss, and perhaps a substantial one.
12. HUD admits that the claimed benefits of its controlled .
business rule might be swallowed up by higher costs that
affiliated companies might charge if they perceive consumers are
not aware of current market prices, i .e . . if consumers do not
"shop around" (Final RIA at p. 17). This, too, is a considerable'
understatement. As a matter of economic logic, if homebuyers do
not shop for title insurance and other settlement charges, there
is little or no reason for companies to pass on to consumers any
of the efficiencies HUD believes might arise -out of the
affiliated relationship. To the contrary, there is substantial
reason to expect the affiliated companies to charge higher-than-
market prices to at least some homebuyers. Moreover, HUD's
newly-minted employee bonus rule offers a strong temptation for
the most influential parties to the transaction (e.g., real
estate agents and/or loan officers) to steer prospective
i
homebuyers to their affiliated companies and thereby to
discourage those homebuyers from shopping around. Ironically,
therefore, the employee bonus rule not only threatens the goal of i
RESPA § 8(a) (the prohibition of kickbacks), but also of RESPA §
8(c)(4) (allowing referrals to controlled companies because they
might offer lower prices to homebuyers) .
13. My objections are not those of a casual observer. As
an occasional homebuyer (I've owned two in my life) , a former
10
90
representative of home sellers, and a published student of the
regulatory process, I have read extensively in the literature on
'! homebuyer behavior. See Eskridge, One Hundred Years, suora note
!l I
1, at pp. 1112-23. From the 1950' s onward, social scientists
have found it "surprising how lethargic and casual" most
homebuyers are in searching for the best price for a home and an
associated loan.7 There is a general consensus that many
homebuyers are intimidated by the complexities of the homebuying
process, and the consequent stress frequently induces homebuyers
to shorten the process and to slough off some of the decisions
completely. Because the focus of the process is choosing a
i| particular house, homebuyers are particularly likely to be lazy
shoppers for financial services, including the home loan itself; |
because title insurance and other settlement services represent a
small portion of the overall price and become most relevant only
at the end of the homebuying process (when many consumers just
want to get it over with and feel time-pressured) , homebuyers are
most likely to avoid any kind of shopping for those services.
Peat Mar-wick' s 1980 report to HUD on RESPA did the most thorough ,
empirical study of this phenomenon of which I am aware. The
i
report found that two- thirds of the homebuyers sampled did no
shopping at all for a lender and that over 80% did no shopping at
Norris, Processes and Objectives of Home Purchasing in Che New London
Area, in 1 Consumer Behavior: The Dynamics of Consumer Reaction 25 (L.
Clark ed. 1954). For more recent studies confirming this insight, see J.
Arndt, Consumer Search Behavior: An Exploratory Study of Decision Processes
Among Newly Married Home-Buyers (1972); FTC Los Angeles Regional Office, The
Residential Real Estate Brokerage Industry (1983); Hempel, Search Behavior
and Information Utilization in the Home Buying Process, in Marketing
Involvement in Society and the Economy 241 (P. McDonald ed. 1969).
11
91
all for any provider of closing services.8 And Peat Marwick
found chat only 11% of che interviewed homebuyers spoke to more
than one title company.9 Excerpts from the Peat Marwick study
are attached to this affidavit as Exhibit 2.
14. If the homebuyer is not shopping for settlement
i providers, how is she or he choosing? The theoretical literature
|i
'I suggests that shoppers tend to shift responsibility for hard
i! and/or less important decisions to someone else who has
expertise. This is precisely what has been found to occur in the
home sale and loan transaction. The Peat Marwick study found
that most homebuyers who did not shop for a mortgage relied on
the recommendation of the real estate agent or homebuilder, 10 and
that 65% of the homebuyers surveyed simply chose the title
Ij
insurer recommended by the real estate agent or the lender.11
These "experts" (the agent or lender) of course might have an
inherent bias toward steering the homebuyer to a particular
company, especially if that company is affiliated with the
agent's brokerage company or the loan officer's bank. This is a
ij risk inherent in controlled business situations. But the risk
becomes an all-but-certain occurrence when the referring employee
8 2 Peat, Marwick, Mitchell S. Co., Real Estate Closing Costs: RESPA § 14a
at XIV. 7 (1980) .
9 Id. at XII. 8. Peat Marwick further reported that most homebuyers believe
that title insurance services and prices are pretty much uniform, a belief
that is incorrect for most markets. Id. at XII. 9.
10 IcL at X.31
11 Id. at V. 24 (49% shift responsibility to agent, and 16% to lender;
another 17% shift responsibility to an attorney) .
12
92
or officer receives bonuses or commissions only if he or she
refers Che homebuyer to an affiliated company. In that event,
the employee's or officer's income depends in some part upon such
referrals.
15. The foregoing analysis turns HUD's Regulatory Impact
Analysis on its head: Any "potential" consumer benefit from
allowing referrals to controlled businesses is usually going to
be negated by consumers' disinclination to shop, because the
failure to shop creates a captive market willing to pay higher-
than-market prices. The only effective protection for the
homebuyer is the real estate agent's or loan officer's candor.
That candor is severely and needlessly tested by HUD's new rule
that permits employers to tie their employees" income to pushing
customers to the affiliated entities. The result is not only to
negate the potential savings from the controlled business, but to
create an overall social cost: Consumers will probably pay more
-- perhaps much more -- for settlement services.
16. My view on what likely will occur is not just a
theoretical concern. Study after study has shown that when real
estate professionals have incentives to refer settlement
business to companies controlled by their employers, they will do
so, and consumers will pay higher prices. Administrative
proceedings in California in the 1970s found that the escrow
company owned and controlled by Coldwell Banker charged rates 50%
13
93
higher than chose competitors.12 In the mid-1970s, the
Department of Justice's Antitrust Division conducted a study of
title companies affiliated with realty companies and concluded
that controlled companies charged higher prices than other
companies.13 The Peat Marwick study in 1980 found that "it is
simply unrealistic to assume that homebuyers will develop the
knowledge or expertise necessary to ignore a broker's referral,"
that the existence of this captive market only invites higher
prices, and that the Coldwell Banker phenomenon is the rule
rather than the exception.14 The same phenomenon was suggested
in a 1987 report to the Wisconsin Commissioner of Insurance.15
17. There should be nothing surprising about the
conclusions that homebuyers do not shop for settlement services;
homebuyers defer to the recommendations of agents, employees and
loan officers; and when those recommendations are skewed by
referral fees, homebuyers are systematically referred to
S_££ State of California, Dept . of Insurance, Findings of Fact etc.. In
re Guardian Title Co., File NLic. L-67, UTC LA-70 (Oct. 27, 1976), rev'd. 2
Civ. No. 55067 (Super. Ct . ) , rev'd and recommendation reinstated. 102 Cal.
App. 3d 381, 162 Cal. Rptr. 487, 491-92 (1980).
13 See The Pricing and Marketing of Insurance, A Report of the Department
of Justice to the task Group on Antitrust Immunities (Jan 1977), reprinted
in 1981 RESPA Hearings, supra note 4, at 212-83.
14
2 Peat Marwick Study, supra note 8, at XII. 55.
15 See Cleasby, Controlled Business Operation in the Title Insurance
Industry, in Report to the Commissioner of Insurance, State of Wisconsin
[J (July 31, 1987). See Also Palomar, Bank Control of Title Insurance
Companies : Perils to the Public That Bank Regulators Have Ignored, 44 Svt .
L.J. 905, 932-33 (1990) .
14
70-043 0-94-4
94
providers that charge higher-than-market prices. A HUD study 20
years ago made similar findings.16 Specifically, in 1972, HUD
found that the enormous price variation in settlement services
was due in large part to the dearth of consumer shopping. These
findings documented the main problem that Congress was trying to
solve when it enacted RESPA in 1974. A key element in Congress'
approach was the prohibition in § 8(a) against referral bonuses
and commissions. Yet in 1992, HUD's new employee bonus rule
offers to legalize the functional equivalent of the inefficient
and inflationary referral system that gave rise to RESPA in the
first place.
I declare that the foregoing is true. 'Executed at
Washington, D.C. this t^^dav of February 1993
William N. ^E^kridye\J Jr
Professor of
1^ See U.S. Dept . of Housing & Urban Development and Veterans Admin.,
Mortgage Settlement Costs, reprinted in Real Estate Settlement Costs, FHA
Mortgage Foreclosures, Housing Abandonment, and Site Selection Policies:
Hearings on H.R. 13337 Before the Subcomm. on Housing of the House Comm. on
Banking and Currency, 92nd Cong., 2d Sess. 735 (1972).
15
95
Appendix E
96
NORTHERN VIRGINIA BOARD OF REALTORS' INC
m.
Moiling Aaaress PC Box 586. N/lemi.ec -- 22116
Offices locaiec ci 84 ll Arlington Biva Fairfax VA
(703) 560-7352
June 28, 1988
HUD Office of General Counsel
Rules Docket Clerk, Rra 10278
451 Seventh Street, N.W.
Washington, D.C. 20410
On behalf of the more than 10,000 members of the Northern
Virginia Board of REALTORS (NVBR) , the largest local r.eal estate
trade association in the country, I would like to express serious
concern over the proposed change to the rule governing referral
fees as outlined in Section 8 of the Real Estate Settlement
Procedures Act (RESPA) .
NVBR is opposed to its members accepting any type of referr-al
fee, service fee, financial inducement or other thino -of v^iue
from mortgage lenders or brokers in conjunction with rtie placing
of, or securing of, a residential loan.
As the proposed rule change currently reads, a Lender would be
allowed to make payments to a mortgage broker as long as the
payments are fully disclosed and a service is rendered. We
strongly believe that this kind of arrangement runs counter to
the original intent and "spirit of RESPA". Furthermore, it would
establish an unhealthy precedent, inevitably creating situations
ripe for conflicts of interest between real estate agents and
their customers. We strongly urge you to reconsider.
Thank you for the opportunity to comment on the proposed changes.
, CRS.GRI
Proffssionalism is Our Hcniaat'
97
Appendix F
98
niguel escrow
301 10 crown valley pkwy • suite 1 07
laguna niguel, California 92677
714/495-4591 714/831-6066
Facsimile Transmittal
Date: 3/4/93
Jq. HOWARD BIRMIEL
Attn:
From: debbi faber
pe. KICKBACKS
Number of pages being transmitted after this cover: too manyto count;
Special instructions: Here are some things that I have been collecting with
permission of the authors to fax to you as well as Freedom Realtors newsletter to
their agents. Freedom is just the latest company in our area to do this! This
has been happening here in South orange County for several years, but now with the
new regs/ this makes it OK and these Brokers are now scrambling to do the 1% ownership
thing!
Our FAX number Is (714) 249-8985
99
TO WHOM IT MAY CONCERN:
My name ib Uehbi Faber and I am 39 years old. 1 am a single parent of a 23
year old son. My escrow career began in January J 972 when I was hired as a
recct'l loniat/girl Friday for a branch office of a large escrow company in
Thousand Oaks. California. I was soon transferred to Orange County and rose
throuqh the ranks to be an escrow officer. After 7 years. I left the
company for personal reasons (i.e. divorce, residence burnt down, etc.) and
after much thought. I decided to open my own escrow company in South Orange
County where 1 did not have a following.
On March 1. 1979, I opened Niguel Escrow. I have had 15 good and some not
so good years, but I have been able to weather the down turns in the real
estate market. I have earned the professional designation of "Certified
Senior Escrow Officer" as awarded by the California Escrow Association as
we] I as many awards from the local boards of realtors for my continued
support of their programs. I have given many educational seminars and
trained numerous escrow trainees. I am the past president of the Escrow
Institute of California and have been active in many efforts to stop this
growing trend in our industry, all to no avail. Is anyone listening? Does
anyone care? Most times I think not 1
My business has been doing poorly for a year or so. The refinance honeymoon
helped to prolong the inevitable and the economic climate has helped to
accelerate the inevitable I The real reason my business has been suffering
more in the last year than before is due to the fact that my client base
has rroded over the last few years because most of the agents here in this
area have gone to work for brokers who either own or have a tie-in of sorts
with a escrow company. If the agent has their closing done by one of these
companies, the agent recieves incentive. There are many different forms,
but some of them are that their E & O insurance is paid, their desk fees
are waived, their commission is a higher percentage or they can get a
portion of their commission advanced. These same brokers have
relationships with title companies, lenders, termite companies, home
protection companies, etc. and the list goes on and on. Most f>t these
brokers have a "closed door" policy which translates into the rest of us
escrow, title, lender, etc., not being permitted into their offices to
introduce ourselves and our companies. Is this not restraint of fair
trade???? These brokers were in heaven when the new RESPA regs came out so
what they have been doing all along was suddenly blessed. Hasn't RESPA
originally to help protect the consumer? I do understand the economics of
why the agents and brokers are doing what they are doing, but I am
prohibited by law from doing the same thing. My regulators call it
"KICKBACK" I.
In Southern California we have dealt with Coldwell Banker and Tarbell
Realtors for many years having this arrangement, but I now have only TWO
companies left in my area that do not have an escrow tie-in. TWOl The
Brokers are now telling me that they are in the process of becoming 1%
owners and that our industry is changing and I better get with the times I
I refuse to work for a company that has escrow business because someone is
paid to bring the escrow to them. What happended to the fiduciary
relationship that is so important to a real estate closing??
Do to the continued growing trend of Brokers paying their agents
"incentives" to take their escrows to certain companies, I refuse to borrow
money to try and "wait out" the economy because I do not know how I will
pay it back. I have no clients! I have chosen to close Niguel Escrow on
March 31. 1993 after 15 successful years here in the community.
I have several other peers who are literally just holding on month by month
who also refuse to borrow money to hold on. One of ray friends is 50 years
old and is isn't up for starting a new career 1 My closest competitor has
closed 2 of her offices. We are an endangered species!
What about free enterprise??
100
Appendix G
The material contained in Appendix G has been retained
in Committee files, and may be viewed there upon
request.
101
If
Washington. DC 2041O
U.S. Department ol Housing and Urban Development
Oflice ol Public AHai's
News Rels
HUD No. 93-27 FOR RELEASE
Michael Zerega (202) 708-0685 Monday
Bob Nipp (202) 708-0685 May 17, 1993
HUD PRESSES CONSUMER PROTECTION IN
$700,000 COLDWELL BANKER SETTLEMENT
HUD Secretary Henry G. Cisneros signed a settlement
agreement involving Coldwell Banker Residential Real Estate that
will protect American homeowners and home buyers involved in real
estate transactions.
"In something as complicated as a home sale closing, it's
important for consumers to know that HUD will enforce the law
that protects them in the settlement process," Cisneros said.
"Kickbacks and unearned fees are against the law. "
In the settlement agreement, HUD alleged various Coldwell
Banker affiliated companies engaged in practices to steer
consumers to other affiliated companies and that they got
kickbacks tor the referral of business, and they also received
unearned fees. HUD alleged that these practices violate the Real
Estate Settlement Procedures Act (RESPA) . Coldwell Banker and
its affiliates deny these allegations but agreed to settle.
102
HUD No. 93-27 -2
The settlement directly involves activities of the company
and its affiliates in New Jersey and Minnesota. Terms of the
settlement include payments of over $700,000 with half -a-million
dollars designated for consumer restitution and education
programs in New Jersey and Minnesota.
Under the agreement, consumers in New Jersey who were
referred by BorrowersChoice (an affiliated mortgage broker and
computer loan origination operator) to Coldwell's affiliate,
Sears Mortgage Corporation, in approximately 783 transactions
between October 29, 1992 and April 17, 1993, will receive refunds
of $500. HUD and the State of Minnesota will each receive
payments of $100,000. In addition, consumers nationwide will
receive greater disclosure of the controlled business arrangement
among Coldwell affiliated companies.
Under the settlement Coldwell Banker and its affiliates will
disclose to consumers in the future whenever the companies they
refer customers to are either direct or indirect affiliates and
that it "is in the financial interest of these companies or their
parent companies to refer business to each other."
Coldwell Banker agreed to a number of actions as a part of
the settlement:
- - Payments for transactions covered by RESPA must bear a
reasonable relationship to the value of services rendered or
goods or facilities provided.
-more
103
HUD No. 93-27 -3 - -
-- Coldwell Banker and its affiliates will provide clearer
identification of consumer and lender fees on listing agreements,
worksheets, HUD-l forms, and other fee disclosure forms.
-- Coldwell Banker and its affiliates will not require home
sellers or buyers to use one of their controlled businesses.
-- Coldwell Banker will distribute a memorandum nationwide
to employees and sales agents informing them that there will be
no quotas for referrals to affiliates and no penalty for
recommending an unaffiliated settlement service provider.
RESPA was first passed in 1974 and prohibits the payment or
receipt of referral fees and provides for disclosure of the
relationship between, and the costs charged by providers of real
estate settlement services.
The Minnesota investigation was conducted jointly with the
Minnesota Attorney General's office.
Copies of more detailed information and the agreement may be
obtained from HUD c/o David Williamson, RESPA Staff Director, at
202-708-4560.
104
Attachment to HUD No. 93-27 -4
$700,000 RBSPA SETTLEMENT REACHED BETWEEN HUD AND
COLDWELL BANKER AND ITS AFFILIATED COMPANIES
The Department of Housing and Urban Development today
announced a major settlement agreement involving Coldwell Banker
Residential Real Estate ("Coldwell Banker") and various
affiliated companies. The settlement culminates HUD's
investigations into alleged violations of the Real Estate
Settlement Procedures Act ("RESPA") in Minnesota and New Jersey.
Terms of the settlement include payments of over $700,000
with half-a-million dollars designated for consumer restitution
and education programs in New Jersey and Minnesota. Under the
agreement consumers in New Jersey who were referred to Coldwell 's
affiliate, Sears Mortgage Corporation, in approximately 783
transactions between October 29, 1992 and April 17, 1993, will
receive refunds of $500. HUD and the State of Minnesota will
each receive additional payments of $100,000. In addition,
consumers nationwide will receive greater disclosure of the
controlled business arrangement between Coldwell affiliated
companies .
The Minnesota investigation was conducted jointly with the
Minnesota Attorney General's office. In Minnesota, HUD and the
Xfefcorne} 'Gehe'ral investigated practice^ in whicn„nome sellers
105
Attachment to HUD No. 93-27
executing a listing agreement with Coldwell Banker agreed to pay
a $195 fee for administrative and closing services. Coldwell
Banker then entered agreements with closing agents to become
"approved closers." Under the agreements, the closers retained
$100 and Coldwell Banker received $95 to "defray administrative
costs. "
HUD alleged that the $95 charge was for services normally
covered by the real estate commission and wa6 an unearned fee not
commensurate with the value of services performed., Further, HUD
claimed that customers were not adequately informed of the exact
amount Coldwell Banker received, and settlement agents considered
the $95 fee to be a payment for the referral of business.
The Department also alleged that Coldwell Banker and Sears
Mortgage referred title business to an affiliate, Guardian Title
Services, Inc., through unaffiliated underwriters, without proper
disclosure to consumers of their relationship to Guardian and of
the arrangement with the underwriters. In addition, HUD charged
that under agreements with the underwriters, Guardian received
both a flat fee for services and 75% of the title insurance
premium.
In New Jersey, sales agents and employees of Coldwell Banker
106
Attachment to HUD No. 93-27
Schlott Realtors referred home buyers to their affiliated
company, BorrowersChoice, located in their offices, for
assistance in selecting a mortgage loan. BorrowersChoice held
itself out as providing information on loan products of various
lenders, including Sears Mortgage, on their computer loan
origination ("CLO") system. BorrowersChoice received
compensation from loan applicants and from lenders. HUD
initiated the New Jersey investigation after receiving complaints
that managers in the Coldwell Banker offices were threatening the
employees of BorrowersChoice that they would be fired unless they
steered a certain quota of business to Sears Mortgage. The
Department alleged that consumers were referred to Sears without
proper disclosure of the relationship between these affiliated
companies. These practices may have resulted in certain
consumers paying higher costs.
The New Jersey investigation also involved allegations that
lenders had to make payments to gain access to the
BorrowersChoice CLO system that did not reflect the cost of the
services provided (the CLO system consisted primarily of faxing
rate sheets) .
107
Attachment to HUD No. 93-27 - -7
In the settlement agreement, HUD alleged that the practices
of the various Coldwell Banker affiliated companies violated
RESPA's provisions which prohibit kickbacks for referral of
settlement business and retaining a portion of a charge other
than for services performed. The Department further alleged that
the companies did not meet the statutory exemption requiring
disclosure of controlled business arrangements. Coldwell Banker
and its affiliates deny these allegations.
As part of the settlement, the affiliated companies agreed
to disclose to consumers in the future that the companies were
either direct or indirect Sears subsidiaries, and that it "is in
the financial interest of these companies or their parent
companies to refer business to each other."
The settlement agreement also provides:
o Coldwell Banker and affiliates will not set quotas for
referrals by sales agents or the employees of the CLO to
affiliated companies. They will not penalize such persons for
referring consumers to unaffiliated settlement service providers.
108
Attachment to HUD No. 93-27 -8
o Coldwell Banker will distribute a memorandum nationwide
to employees and sales agents (to be included in training
materials) concerning the policy of no quotas for referrals to
affiliates and no penalty for recommending another company.
o Coldwell Banker will not require home sellers or buyers
to use a controlled business.
o Within 90 days, Coldwell Banker and affiliates will
revise their Controlled Business Arrangement (CBA) Disclosure
Forms nationwide to provide: clearer description of consumer
information regarding non- required use, ownership and financial
interests of affiliates, and charges of'a referred entity.
Coldwell Banker Schlott Realtors and BorrowereChoice in New
Jersey will change their forms within 30 days.
o CBA Disclosure forms will be provided at the time of
referral, or a reasonable period before the referral. This
includes referrals to an unaffiliated company which will result
in referral to an affiliated company.
o If BorrowersChoice operates a multi- lender CLO system,
it will either be lender-neutral or it will provide a clear
disclosure that particular lenders will be promoted.
109
Attachment to HUD No. 93-27 ~9
o Lender payments to BorrowersChoice will not be for
referrals of settlement business. Payments for RESPA covered
transactions must bear a reasonable relationship to the value of
services rendered or goods or facilities provided.
o Coldwell Banker and its affiliates will provide clearer
identification of consumer and lender fees on listing agreements,
worksheets, HUD-l forms, and CLO Fee Disclosure forms.
o Guardian will perform core title services to receive
title agent compensation .
o Coldwell Banker and its affiliates will notify all
employees, sales agents and franchisees nationwide of the terms
of the agreement,
o Coldwell Banker or its affiliates will pay:
$ 391,000 in refunds of $500 per transaction
in 783 transactions (or fewer,
depending on loans actually closed)
to borrowers in New Jersey.
$ 15,000 to the New Jersey Division of Consumer Affaire for
.consumer education in New Jersey.
^^SiSs&U -'■■•-- ■•■■-' ■■ ■■■■■ •
110
Attachment to HUD No. 93-27 -10
$ 95,284 for consumer education purposes in Minnesota.
$ 100,000 to the State of Minnesota.
$ 100,000 to HUD.
Total refunds and payments: $701,284.
o The Department agreed to terminate all pending
investigations of Coldwell Banker and it affiliates and not to
conduct any new RESPA investigation of them for 90 days so
Coldwell Banker can change practices nationwide to conform with
the agreement.
o The agreement is binding upon Coldwell Banker and its
affiliate's successors and assigns.
The parties to the Agreement with HUD are Coldwell, Banker &
Co. (the parent of Coldwell Banker Residential Holding Company,
BorrowersChoice Corporation and Sears Mortgage Corporation) ;
Coldwell Banker Residential Holding Company (the parent of
Guardian Title Services, Inc., and Coldwell Banker Residential
Real Estate); Coldwell Banker Residential Real Estate (the parent
company of Coldwell Banker Real Estate Services/- Inc.); Coldwell
^Banker Real Estate Services, Inc..,: .doing business in New Jersey
Ill
Attachment to HUD No. 93-27 -11
as Coldwell Banker Schlott Realtors; Guardian Title Services,
Inc.; and BorrowersChoice Corporation; together with their
affiliates, subsidiaries, employees, agents, successors and
assigns.
This settlement is the first major agreement since the RESPA
regulations were revised on November 2, 1992. The settlement
affirms HUD Secretary Henry Cisneros's commitment to enforce
RESPA and to protect consumers and lawful competitors in the real
estate industry.
112
Executive Summary - Oral Statement
Testimony
of
Howard A. Birmiel
on behalf of
CRISIS*
on
Anti-Competitive Impacts
of
Referral Fees/Kickbacks
&
"Controlled Business Arrangements"
in
Residential Real Estate Settlements
Submitted at the
House Small Business Committee's
Hearing on HUD's RESPA Regulations
July 1, 1993
"The Coalition to Retain Independent Services in Settlements"
113
Statement
of
Howard A. Birmiel
on behalf of
CRISIS
before
House Small Business Committee
July 1, 1993
Mr. Chairman and members of the Committee, my name is Howard Birmiel, and I am a
small businessman from northern Virginia. I own a title insurance agency and employ eight people.
Today, I am testifying on behalf of CRISIS, the Coalition to Retain Independent Services in
Settlements. Accompanying me for the purpose of responding to questions from the Committee are
Mr. Joel Holstad and Mr. John Farmer, CRISIS members who are affiliated with the Independent
Land Title Association of Minnesota.
CRISIS represents independent small businesses who provide the various ancillary services
needed in connection with residential real estate settlements.1 These services include: title
insurance; homeowners' insurance; escrow services; mortgage brokerage; mortgage lending; surveys;
appraisals; and the preparation and filing of legal documents. Thousands of these small businesses
actively compete to provide such services throughout the nation, and in many areas like metropolitan
Washington, they do the overwhelming majority of such settlement work.
We deeply appreciate your holding this hearing which will highlight both: (1) the anti-
competitive effects of the kickback fees that are sanctioned by HUD's controversial RESPA rules
issued last November by the prior Administration; and (2) the related problems that arise because
of inadequate legislative safeguards in the "controlled business" provisions in the RESPA statute.
As I will explain, if the Clinton Administration and Congress fail to promptly revise the
regulations and add new statutory protections then thousands of small independent businesses that
now provide settlement services will be severely injured and many will be forced out of business.
Consumers also will end up paying millions of dollars in unnecessary settlement charges.
I. How The "Controlled Business" Kickback Process2
Referrals Guide Consumer Purchases - It has long been established that most consumers rely
on the referral recommendations of real estate professionals- — typically, their real estate agent or
1 CRISIS is joined in its efforts in opposing these RESPA provisions by numerous other organizations, including: National Association
of Mortgage Brokers ("NAMB"); Consumer Federation of America; Independent Insurance Agents of America CIIAA"); American Land
Title Association ("ALTA"); California Escrow Institute ("CEI"); Savings and Community Bankers Association ("SCBA"); Mortgage
Bankers Association ("MBA"); Florida Association of Independent Title Agents; Independent Land Title Association of Minnesota; and
H.F. Ahmanson Company.
! See attached chart.
114
mortgage lender- — to select the firms from which they purchase title insurance and the various other
settlement services needed when buying their homes.3
HUD's Rules Sanction Kickbacks RESPA Sought To Prohibit - Even though RESPA was
passed expressly to prohibit referral fees and other types of kickbacks, HUD's new RESPA rules
specifically allow large, diversified real estate firms or mortgage lenders to pay their employees
referral fees for steering consumers to purchase settlement services from their affiliates.
Referral Fees Enable Controlled Businesses To Control The Market - These "one stop
shopping" schemes are aptly called "controlled business arrangements" because they are very effective
in controlling where the consumer buys settlement services. HUD's RESPA rules allow these larger
controlled business organizations to deny small independent settlement providers any meaningful
opportunity to compete for the consumer's business on the basis of the prices and services being
offered. Referrals ultimately will be based on the referral fee instead of an unbiased judgment of
who will give the consumer the best price and service.
Self-Referral Fees Are Anti-Competitive & Hurt Consumers - This "one-way steering" is anti-
competitive. Independent small firms will be cut out of a major segment of the market. Many of
us will be driven out of business. Moreover, consumers will end up paying millions of dollars in
unnecessary settlement charges.
Inherent Conflicts Engender Abuses - Common sense tells us — and experience has shown —
that settlement work referrals are often not likely to be made in the consumer's best interest when
the real estate professional is allowed to get referral fees and other kickbacks for making such
referrals. The real estate agent or lender who makes the referral has a clear inherent conflict of
interest if they get paid for steering the consumer to a particular provider. For example, in
comments filed during HUD's rulemaking on these RESPA regulations, the Northern Virginia Board
of REALTORS (NVBR), which is the largest local real estate trade association in the country with
more than 10,000 members, stated:
NVBR is opposed to its members accepting any type of referral fee, service fee, financial
inducement or other thing of value from mortgage lenders or brokers in connection with
the placing of, or securing of, a residential loan. . . . We strongly believe that this kind of
arrangement runs counter to the original intent and "spirit of RESPA." Furthermore, it
would establish an unhealthy precedent, inevitably creating situations ripe for conflicts of
interest between real estate agents and their customers.
II. How HUD's Controlled Business Rules Turned RESPA On Its Head
RESPA's Prohibition On Referral Fees & Other Kickbacks - After exposes in the early 1970's
revealed that abusive settlement charges and conflicts of interest were rampant, Congress passed
RESPA in 1974 to prohibit such practices and "something for nothing" charges. Section 8(a) of
RESPA provides:
No person shall give and no person shall accept any fee, kickback or thing of value
pursuant to any agreement or understanding, oral or otherwise, that business incident to
1 The attached excerpt from the Consumer Federation's amicus brief in our pending litigation against these HUD rules explains how,
as Congress has previously found, consumers hire settlement service providers based on the recommendations of real estate agents and
mortgage lenders. It also points out that allowing firms to pay referral fees to employees for steering business to controlled providers
is anti-competitive and harmful to consumers' interests.
115
or a part of a real estate settlement service involving a federally related mortgage loan
shall be referred to any person.
Controlled Business Limitations In The 1983 RESPA Amendments - In 1983, Congress
passed an amendment to clarify that RESPA did not prohibit real estate brokerage companies from
having affiliated firms (e.g., title insurance agencies) that provided settlement services. However,
Congress clearly recognized that abuses could readily occur if strict limitations were not imposed on
such so-called "controlled business arrangements." RESPA Section 8(c)(4) stated controlled business
arrangements were allowed only so long as:
. . . the only thing of value that is received from the [controlled] arrangement . . . is a
return on the ownership interest or franchise relationship.
Ownership interest was narrowly defined as a "dividend" or "partnership distribution," and
payments based on the mere fact or volume of referrals are prohibited under this provision.
Congress' intent to continue Section 8's prohibition was expressed in the House Banking
Committee's 1983 report:
fTJhis provision is not intended to change current law which prohibits the payment of
unearned fees, kickbacks, or other things of value for referrals.
HUD's Politically Based Attempt To Rewrite RESPA - For nearly 10 years, HUD failed to
issue regulations implementing the 1983 amendments. When these rules were finally issued in
November of 1992 by the outgoing Administration, HUD made a dramatic last-minute reversal and
allowed controlled businesses to pay employees referral fees for steering business to affiliated firms,
even though HUD's own legal interpretation was that paving referral fees to controlled businesses'
employees was illegal! This position was espoused in a letter from HUD's Deputy Secretary to OMB
in late August of 19924:
fTjhe General Counsel has determined that employers may not compensate employees
who refer business to affiliated companies, because such referrals are prohibited under
RESPA sections 8(a) and 8(c) (2), even where the provisions of the 'safe harbor" in
section 8(c) (4) have been met.
My full written statement, which is being filed for the hearing record, and our pleadings in
the lawsuit CRISIS has filed to overturn these regulations, provide extensive documentation
regarding how the rulemaking process was subverted. The new final rule purports- — contrary to the
earlier drafts of these rules, and clearly contrary to RESPA— -to allow controlled business firms to
pay referral fees as compensation to their employees for referring settlement business to their captive
affiliates.
HUD's Tortured Reasoning - In essence, HUD justified its new RESPA rule on the following
strained reasoning: (1) Section 8's prohibition on kickbacks requires two separate parties; (2) thus,
if a controlled business firm pays a referral fee to a third party (e.g., a real estate agent from a non-
affiliated company) for referring settlement work to its captive affiliate, this violates RESPA; but (3)
' See attached letter.
116
a company and its own employees are not separate parties, so paying kickbacks in controlled
arrangements is not illegal.
Mr. Chairman, I ask you, how could Congress have possibly intended such an absurd result?5
CRISIS believes that you and other Committee members will agree with our position that Congress
intended that no such referral fees be allowed, and we urge you to help us obtain regulatory and
legislative relief.
III. Reforms Must Be Adopted
My written statement details how many firms are already trying to exploit RESPA's weak
points and HUD's new regulation to control the settlement business by using controlled business
arrangements.6 Small independent service providers can not possibly compete in such unfair
circumstances where the work is steered away from them by paying fees for referrals to controlled
providers. This rule will destroy the competitive market for settlement services and thousands of
small independent businesses that now provide such services to consumers.
Legislative Reforms Are Needed - In closing, I want to emphasize that it will not be adequate
to merely withdraw and reissue these flawed HUD regulations with a prohibition on referral fees.
That would be a necessary and helpful step to prevent unfair competition and consumer abuses.
However, HUD's issuance of these rules eight months ago, and the ensuing publicity alerted firms
as to how easy it is to profit through controlled business arrangements. We have no doubt that such
controlled businesses in many cases will provide a ready vehicle for covert circumvention of RESPA's
prohibition on referral fees and other kickbacks. There are many undisclosed payments and
economic benefits that can be paid to real estate agents and lenders to refer business to an affiliate.
Policing such kickbacks will be extremely difficult, if not impossible, especially since HUD has only
a very small enforcement staff. California and several other states like Minnesota experienced many
of these problems well before HUD's controversial new regulations were issued.
Thus, CRISIS believes that the only effective way to protect against such controlled business
abuses is to pass additional legislative safeguards. Congress should impose limitations on the amount
of business that can be referred to a controlled affiliate and tougher penalties for violations of the
anti-kickback provisions. In addition, HUD's RESPA enforcement staff, which is quite dedicated
to preventing abuses, is quite small. Try as they might, this limited staff can not effectively handle
the large number of cases that are arising. Congress should significantly increase the size and
resources of this RESPA enforcement office.
Thank you for hearing our concerns. I would be pleased to respond to your questions.
' As indicated by the attached letters, the House and Senate Banking Committees have already advised HUD of concerns regarding
these RESPA rules. They have not yet, however, scheduled hearings or taken legislative action.
* Recently, after CRISIS filed suit, HUD announced -claiming a great consumer victory -the simultaneous filing and settlement of
an administrative proceeding charging Coldwell Banker and its various affiliates with wholesale steering violations of RESPA in New Jersey
and Minnesota. The case was settled by a "consent" order in which Coldwell Banker denied all allegations. Our general sense of the
settlement market leads us to feel that there may well be some, if not a great degree of, truth, in HUD's attached May 17th news release
which alleged that firms were "engaged in practices to steer consumers to other affiliated companies and that they got kickbacks for the referral
of business, and they also received unearned fees."
117
self-referrals within these so-called "controlled business arrangements" are allowed, referral fees can
not be paid by independent providers to obtain settlement business. These new rules reverse HUD's
position against such self-enrichment schemes. They are an administrative attempt to rewrite the
RESPA statute and delete its safeguards against these types of unnecessary charges.
The following illustration shows how this referral fee/kickback scheme works:
R
"Realco"
(Large Diversified Real Estate Company)
Referral fees
i
RE
("Realco's" Referring Employee)
("Realco's" Controlled
Settlement Service Provider)
IP
"Conflict-Free Services Co."
(Independent Settlement Service Provider)
(Title Insurance)
(Mortgage Lending)
(Settlement & Escrow Firms)
(Homeowner's Insurance)
(Surveys)
(Home Inspections)
(Appraisals)
(Etc)
"Realco" pays its employee referral fees/kickbacks whenever he or she refers settlement business to
"Realco's" controlled provider. The increased profits generated by controlling the ancillary settlement work
are then passed up as dividends to "Realco" which uses these profits to compensate for its paying kickbacks
to employees. It makes no personal economic sense for "Realco's" employees to refer any business to
small independent providers like "Conflict-Free Consumer Services Co." Therefore, "Realco's" employees
will refer virtually all settlement work to "Realco's" controlled provider and the independent providers have
no way to compete in this controlled business market.
118
The following excepts from the Consumer Federation's amicus brief in the
pending litigation against HUD's new RESPA regulations clearly describe why and how
consumer injuries will occur:
"The real injury consumers suffer when kickbacks and other kinds of financial
inducements are allowed to influence the referral of the consumer's settlement business
is not simply that such payments by themselves inflate the cost of settlement services. It
is the fact that such payments fundamentally alter the nature of market competition to
the detriment of consumers. Instead of having settlement service providers competing in
ways that serve the consumer's interest, competition is channeled in directions that serve
the personal financial interest of the real estate professionals who are in a position to
influence the consumer's selection or to make that choice for him.
The purchase of settlement services confronts consumers with problems that they do not
face in most other areas where they have knowledge and ability to shop effectively on
their own for the provider who offers the best combination of price, quality, and service.
Most consumers buy a home only once or twice in their lives; they have little or no
familiarity with the purchase of the kinds of services needed in connection with the real
estate transaction; and they frequently do not have the time between the signing of the
purchase contract and the closing to become knowledgeable shoppers for services that
they may never again need.
Given these factors, it is inevitable that consumers will look to and rely upon the
recommendations or referrals of their real estate broker or the mortgage lender. These
professionals have the knowledge and experience that the consumer lacks; these people
are involved in real estate settlements all the time and are in a position to know the
quality and value of the service providers in the market. Accordingly, in the
overwhelming number of residential real estate transactions the selection of a title
company or other settlement service professional is made on the basis of referrals from
brokers, lenders and other real estate professionals.
If the broker's or lender's recommendation cannot be influenced by a referral fee or other
personal financial inducement to steer the business to a particular company, then
referrals will be made on the basis of which provider can best serve the consumer's
interest. Competition among settlement service providers ~ who know that they have to
compete for the referrals of these knowledgeable surrogate shoppers on the basis of the
competitive merits of their products and services -- will thus be channeled in directions
that serve the best interests of consumers.
It is this kind of competitive environment that Congress sought to foster in enacting
section 8. While the 1983 amendments determined that referrals to controlled business
119
affiliates were not violations of section 8 if certain prescribed conditions were met,
Congress did not otherwise intend that the basic consumer-oriented thrust of section 8
was to be altered. But this is precisely what HUD's employer referral fee and CLO rules
would do.
The employer referral fee rule encourages employees of brokerage firms and mortgage
lenders to steer the consumer to the employer's controlled business affiliate even if other
firms can provide better prices, quality or service. It is simply unrealistic to believe that
allowing such payments will not determine the direction of referrals. Moreover, the
controlled business affiliate does not have to compete on the merits for the
recommendation of that employee when the affiliate knows that the employee will be
receiving a direct financial incentive from his employer to steer business its way. As a
consequence, consumers will not only end up having to pay for such fees, but the entire
dynamics of competition among settlement service providers becomes altered to the
detriment of consumers. Indeed, if controlled business arrangements continue to develop,
and employer referral fees are permitted to be paid to ensure that consumers get steered
to the broker's or lender's affiliate, there is a great danger that few if any consumers will
be able to escape the one-way highway of financially-induced referrals to captive
affiliates."
120
Statement of
TERRY ROWLAND
Vice President and General Manager
PROSPERrFY MORTGAGE CORPORATION
on behalf of the
REAL ESTATE SERVICES PROVIDERS COUNCIL (RESPRO)
Before the
COMMITTEE ON SMALL BUSINESS
U.S. HOUSE OF REPRESENTATIVES
on the
REAL ESTATE SETTLEMENT PROCEDURES ACT (RESPA)
July 1, 1993
121
Good morning, Mr. Chairman and Members of the Committee. My name is Terry
Rowland, and I am Vice President and General Manager of Prosperity Mortgage
Corporation, a subsidiary of Long & Foster Cos., Inc. Our sister company, Long &
Foster Real Estate, Inc. provides real estate brokerage services through 132 offices
and 6300 agents in the states of Virginia, Maryland, Pennsylvania, West Virginia,
Delaware, as well as Washington, D.C.
Today, I represent the Real Estate Services Providers Council, called RESPRO, of
which Long & Foster Cos., Inc. is a member. Mr. Chairman and Members of the
Committee, RESPRO welcomes the opportunity to testify on the Department of
Housing and Urban Development's (HUD) final Real Estate Settlement Procedures Act
(RESPA) regulation.
BACKGROUND OF RESPRO
RESPRO was formed in 1992 by diversified real estate services providers throughout
the country- known as "controlled business arrangements" under RESPA- who
decided to unite to support a federal and state regulatory environment that allows
businesses to offer one-stop shopping for homebuyers.
Our membership is open to companies of all sizes offering a wide variety of settlement
services for homebuyers. Attachment I to my testimony provides a list of RESPRO's
members, which total twenty-two and are still growing. As you can see, our
membership is open to real estate brokerage companies, mortgage companies, title
companies and any other provider of "settlement services" as defined by HUD under
RESPA. But no matter what size the RESPRO member- and no matter what the
services it offers- we are united by one common bond: we strongly support a
regulatory environment that increases consumer choice, enhances consumer service,
increases competition and lowers costs by allowing companies to offer one-stop
shopping for homebuyers in a cost-efficient manner through affiliations, joint ventures,
and partnerships with companies offering related services. (See Attachment 2).
RESPRO believes that the current RESPA law and HUD's 1992 final RESPA regulation
provide such a regulatory environment. Our testimony today will discuss (1)
Marketplace changes since RESPA was enacted in 1974; (2) Consumer benefits from
diversification into related services; (3) Problems associated with the pre-1992
regulatory environment for diversified companies; (4) Benefits from HUD's 1992
RESPA rule; and (5) Benefits from a diversified company's ability to compensate
management for developing and implementing one-stop shopping programs for
homebuyers.
122
-2-
MARKETPLACE CHANGES SINCE RESPA WAS ENACTED IN 1974
As you know, Mr. Chairman, Congress enacted RESPA in 1974 for two purposes:
(1) to provide consumers with better and more meaningful disclosure of real estate
settlement service costs, and (2) to protect consumers against unnecessarily high
settlement service costs. To accomplish the second purpose, RESPA restricted the
ability of one settlement service provider to pay fees to another provider for a mere
"referral" of business.
After RESPA was enacted in 1974, three fundamental changes in the real estate
services marketplace have made it not only desirable but inevitable that real estate
service providers establish financial relationships ("controlled business arrangements")
with other settlement service providers in order to offer multiple products and services
for homebuyers.
First, homebuyers' demands have significantly changed since RESPA was enacted.
As you can see from Attachment 3, two-income households made up 38 percent of
the population in 1974. By 1990, it was 47 percent; the number is expected to make
up 52 percent of total households by 1995.
More two-income households means less time available to spend on the complex
home purchase transaction. It means homebuyers want more convenience. They no
longer have the time or the desire to go to a real estate broker for brokerage services,
a mortgage broker or mortgage lender for a mortgage loan, a title company for title
insurance, and so on down the line. Many homebuyers want the option to weigh the
qualities of each real estate service provider with the convenience offered by the
purchase of products and services from a single source.
A second major change in the marketplace has been the increasingly widespread use
of advanced technology in home and business. The availability of computers, hotlines,
FAX machines, and other technology enable real estate brokers, mortgage lenders,
mortgage brokers and aJi settlement service providers to expand their geographical
markets, lower their costs through increased efficiencies, tap into capital markets, and
increase the amount of information and product choices available to the homebuyer.
Finally, the competitive dynamics of the real estate marketplace have dramatically
changed since 1974. The maturation of the baby boom generation has increased
supply and decreased demand for residential homes, so that more providers of
settlement services are competing for fewer customers. As a result, settlement service
providers have one of two choices if they want to survive: they can either expand into
ancillary services and tap into new markets, or they can artificially maintain high profit
margins by restricting entry into their segment of the marketplace by new competitors.
123
-3-
CONSUMER BENEFITS OF DIVERSIFICATION
RESPRO members have chosen diversification to survive in today's marketplace. We
believe that this diversification, or "one-stop shopping', provides significant consumer
benefits:
Greater Consumer Choice: Instead of being forced to use a different
provider for each service, homebuyers would have the option of
obtaining all or part of the services at one time and place.
Better Service: Homebuyers could obtain faster, better and more
efficient service since providers of one service could better assure
the accountability of providers of ancillary services.
Greater Competition: By allowing companies to (1) diversify their product
offerings; and (2) enter geographical markets they normally would not
enter because of the costs of establishing separate branches and
personnel for separate services, the rule increases competition in the real
estate services marketplace.
Lower Costs: Studies have shown that when settlement service
companies are able to diversify into other services, it results in real cost
savings for homebuyers:
- A 1992 survey of title service costs in the Minneapolis-St
Paul marketplace found that diversified providers charged
approximately $13 less per closing for a market basket of
title services (buyer's closing, plat drawing, assessment
search, name search and record satisfaction) than
independent providers.1
- After all diversified title service providers in the State of
Kansas closed down due to a 1990 law pushed by
independent title companies that restricted the ability of
diversified providers to do business, base closing fees filed
in Wichita County by independent title companies with the
Kansas Insurance Commissioner jumped from $125 to
$200- an increase of 60 percent.2
'"Economic Issues Relating to the Title Insurance Industry In Minnesota: Would Further
Regulation Be Helpful?", February 1992, Anton Financial Economics, Inc.).
124
-4-
- Consumer savings from the elimination of state laws
restricting the amount of business a lender may do with its
in-house title company- and the resulting increased
competition from the elimination of such restrictions- axe
estimated at $50 per transaction and approximately $119
million for all homebuyers. based on the 1991 level of
mortgage loans in States with such restrictions.3
PROBLEMS WITH PREVIOUS REGULATORY ENVIRONMENT FOR DIVERSIFIED
COMPANIES
Unfortunately, companies have never been able to fully provide the consumer benefits
associated with diversification and one-stop shopping because of the confusing federal
regulatory environment over the last decade.
In the early 1980s, independent title and escrow agents attempted to prohibit or
restrict this new competitive force by urging Congress to prohibit or restrict so-called
"controlled business arrangements" under the 1974 RESPA law. Congress rejected
these attempts and instead established a "safe harbor" under RESPA for controlled
business arrangements as long as (1) the consumer is provided with meaningful
disclosure of any financial relationship between two companies and the normal range
of fees charged for the settlement service; (2) the consumer is not required to
purchase more than one settlement service from one company; and (3) the only fees
paid between providers within the same controlled business arrangement for referrals
of business be a return on ownership interest or return on franchise relationship.
RESPRO supports the statutory framework established in 1983 for controlled business
arrangements. The fault for the confusing regulatory environment for controlled
business arrangements over the last several years has not been with Congress, but
with HUD's failure to fulfill its statutory obligation to provide regulatory guidance under
RESPA since 1983.
For almost a decade, HUD stifled the ability of diversified companies to develop
innovative products and services for homebuyers by refusing to issue regulations to
implement the 1983 controlled business arrangement amendments to RESPA. Until
the December 2, 1992 final RESPA rule was issued, diversified companies were forced
to rely on a series of HUD opinion letters that often reached inconsistent and vague
conclusions about what diversified companies can and cannot offer their customers.
Because reputable companies did not want to inadvertently subject themselves to
RESPA's criminal or civil sanctions, they were reluctant to offer those products and
services that best met the changing needs of their customers and the marketplace.
Smaller companies that could not afford expensive legal opinions to provide them
Regulatory Impact Analysis of the Department of Housing and Urban Development' s Final
RESPA Rule. November, 1992.
125
•5-
comfort in offering new products and programs were at a particular disadvantage in
this unfair and uncertain regulatory environment
BENEFITS OF HUD'S 1992 FINAL RESPA RULE
In a 1990 Congressional testimony before the House and Senate, HUD announced it
intended to finally issue a final RESPA rule to implement the 1983 controlled business
arrangement amendments to RESPA, as well as to provide guidance on computerized
loan origination (CLO) fee arrangements. In this testimony, HUD indicated that the
final rule would recognize the consumer benefits associated with diversification:
"We believe that affiliations between companies involved in
different aspects of a real estate transaction can, in many
instances, benefit the consumer. If lenders affiliate with
other settlement service providers, and incorporate the
prices of these services into the interest rate on the loan, it
is easier for consumers to compare the "package deal" than
if they must shop separately for each service. I would add
that in some states, the title insurers and escrow agents are
tightly regulated, and can set monopoly prices through
regulation. In those states, competition for those services
can exist only if the services are part of an overall
package."4
HUD subsequently issued a final RESPA rule that became effective December 2, 1992,
which ended the decade of unclear and inconsistent regulatory guidance for diversified
companies as to what is and what is not allowed under RESPA.
RESPRO believes that this final RESPA rule recognizes 1983 Congressional intent to
allow companies to provide consumer benefits associated with diversification.
Significantly, the rule provides that:
Any settlement service provider may diversify its product
offerings by creating affiliations, joint ventures, or
partnerships with other settlement service providers
("controlled business arrangements").
A diversified company may offer its customers multiple
products and services at the point of sale ("one-stop
shopping").
A diversified company may offer consumer discounts or
rebates if the customer chooses to purchase more than
4Conoresslonal Testimony of HUD General Counsel Frank Keating. September 18, 1990.
70-043 0-94-5
126
■6-
one product or service from the company.
A diversified company may compensate its management
and non-real estate agent employees for developing and
implementing programs involving the cross-marketing or
multiple products and services.
HUD's final RESPA rule also follows Congress' intent to provide adequate consumer
safeguards against potential abuses when dealing with diversified companies:
Diversified companies must disclose in writing the nature of
any business relationship between any two providers, the
estimated charge of the settlement service being provided,
the fact that the customer is not required to purchase one
product or service to get another, and the fact that the
customer may be able to help to get the service at a lower
rate by shopping with other companies. A standard
disclosure form (Attachment 4) is provided in the rule.
A diversified company may not require the customer to
purchase one of its products or services in order to
purchase another product or service ("anti-tying" provision)
(Section 3500.15(b)(2)).
No affiliate in a diversified company may directly or indirectly pay another
affiliate for a mere referral of business (preamble discussion of Section
3500.15 (b)).
Any consumer discount on the purchase of "packaged"
services must be a "true" discount and cannot be made up
by higher cost elsewhere (Section 3500.2(11)).
Diversified companies cannot offer a product or service as
part of a "package" that it does not offer separately (Section
3500.2(11)).
Providers of multiple settlement services must perform
distinct services in return for each payment they receive
(Section 3500.14).
HUD's Regulatory Impact Analysis of the final RESPA rule estimated that the consumer
savings from allowing diversified companies to cost-efficiently offer and market multiple
products and services for homebuyers at the same time and/or place are estimated at
up to $150 per transaction and up to $148.5 million for all homebuyers. Attachment 5
to this testimony includes articles that summarize many other significant consumer
benefits that will flow from HUD's new RESPA rule.
127
■7-
MANAGEMENT COMPENSATION
One provision under the controlled business arrangement provisions of HUD's final
RESPA rule deserves further discussion because it has been so misinterpreted by
independent providers of services that fear competition from diversified companies.
Section 3500.14(g)(2) of the new rule provides that "RESPA does not prohibit..an
employer's payment to its own employees for any referral activities." The rule also
makes clear that such payments cannot be reimbursed by the party receiving the
referral or be made to non-employees. Thus, contrary to much of the publicity
surrounding this rule, this provision does not apply to real estate agents, which are
considered independent contractors, and not employees. We do believe, however,
that the ability to compensate managers of diversified companies, which is permitted
by the rule, is crucial to the continued existence of diversified companies in the real
estate marketplace.
A diversified company that wants to offer one-stop shopping to homebuyers will
naturally assign this responsibility of developing products and implementing programs
to its management Without the ability to compensate management in accordance to
their job performance, diversified companies would not be able to efficiently offer one-
stop shopping for homebuyers.
The ability to compensate management for developing and implementing cross-selling
programs is also consistent with Congressional intent Nothing in the legislative
history of RESPA suggests that RESPA was ever intended to prohibit companies from
compensating their management and employees for their oversight of marketing and
managing the delivery of real estate services. To the contrary, Congress' decision to
provide a safe harbor for controlled business arrangements was predicated upon
Congress" desire to permit consumers to enjoy the efficiencies that such arrangements
can bring to the marketplace.
SUMMARY
In summary, RESPRO strongly believes that today's homebuyers and real estate
marketplace require a regulatory environment that allows companies to offer multiple
products and services for homebuyers at one time and/or one place by establishing
affiliations, joint ventures, and partnerships with other companies. By finally providing
settlement service providers with a clear and consistent regulatory environment that
allows companies to diversify in the most cost-efficient manner possible, HUD's final
RESPA rule will increase consumer choice, enhance consumer service, increase
competition among providers of services for homebuyers, and lower the costs
associated with buying a home.
Thank you for the opportunity to testify. I would be glad to answer any questions.
128
Real Estate Services Providers Council 1747 Pennsylvania avenue, n.w • sum 850- Washington, d.c 20006 • (202) 833-5055
Membership
BAIRD & WARNER, INC.
BURNET REALTY
CENTURY 21 REAL ESTATE CORPORATION
COLDWELL BANKER REAL ESTATE GROUP
CORNISH AND CAREY RESIDENTIAL, INC.
DETROIT TITLE & INSURANCE AGENCY, INC.
EDINA REALTY
FOX & LAZO, INC.
F. C. TUCKER COMPANY, INC.
HOWARD HANNA FINANCIAL SERVICES
JOHN DOUGLAS COMPANY
THE KEYES COMPANY, REALTORS
LATTER & BLUM, INC.
LONG & FOSTER REAL ESTATE, INC.
NORWEST MORTGAGE, INC.
OLD RIVER ROAD REALTY, INC.
PAUL SEMONIN COMPANY
THE PRUDENTIAL REAL ESTATE AFFILIATES, INC.
SIBCY-CLINE REALTORS
TRIDENT FINANCIAL GROUP
WAUWATOSA REALTY COMPANY
WEICHERT REALTORS
129
REAL ESTATE SERVICES PROVIDERS COUNCIL
(RESPRO)
Mission Statement
An open and competitive marketplace which allows businesses to develop and
distribute products and services that best meet the needs and demands of consumers
has always served as a cornerstone in this country's economic growth by expanding
consumer choice and lowering long-term consumer prices.
Unfortunately, the ability of homebuyers and seders to shop for real estate-related
services (i.e., real estate brokerage, mortgage loans, title services, homeowners
insurance) has been threatened in recent years by excessive government interference
in the ability of businesses to improve cost efficiencies, customer service and
customer convenience by offering homebuyers and seders multiple products and
services at one time and/or one place.
This excessive government interference has taken form in Federal or State laws and
regulations that ban or restrict affiliated companies, joint ventures, or partnerships from
cost-efficiently offering and delivering multiple products and services for homebuyers
and sellers. Specific proposals have included percentage caps on joint marketing
among companies that share a financial interest, prohibitions on discounts or rebates
on the purchase of multiple products, and restrictions on the ability of an employer to
compensate its employees for marketing products of more than one provider.
The ^eal Estate Services Providers Council (RESPRO) supports a Federal/State
regulatory environment that enhances the ability of a business to cost-efficiently offer
and market diversified products and services to any homebuyer or seller through a
suosidiary, division, joint venture or partnership.
We will work to provide an agenda for reform that will assure homebuyers and sellers
a competitive marketplace, lower costs, convenience and more product choice.
We win work with Members of Congress, the SO state legislatures, and Federal/state
rulemaking bodies to accomplish these goals.
130
The Increasing Importance of Two-Income Families
r60
o
o
i5
1976
1980 1985 1990
1995
Source: Futures Group
131
49622 Federal Register / VoL 57. No. 212 / Monday. November 2, 1992 / Rules and Regulations
APPENDIX D TO PART 3500 -
CONTROLLED BUSINESS ARRANGEMENT DISCLOSURE
STATEMENT FORMAT
Notice
To: Buyer or Seller Property:
From: [Entity Making Date:
Statement ]
This is to give you notice that freferrino party! has
a business relationship with f provider! [Describe the
nature of the relationship between the referring party and the
provider, including ownership and financial interests.]
Set forth below is the estimated charge or range of charges
by I provider! for the following settlement services:
You are not required to use f provider! as a condition
for [settlement of your loan on] [or] [purchase or sale of] the
subject property. You may be able to get these services at a
lower rate by shopping with other settlement service providers.
A lender is allowed to require the use of an attorney, credit
reporting agency or real estate appraiser chosen to represent the
lender's interest.
132
JftE WASHINGTON POST
pggR^ARY21.1S93
JANE BRYANT QUINN
One-Stop Shopping
For a New House
New rules from the US.
government have opened the door
to the future for home buyers.
Real estate firms mijr now offer one-stop
shopping: House, mortpp appbeatioo,
title insurance and other bome-burmg
services, iB available from the same
office or wrapped in a one-price package.
To profit from this system, you'll hare
to be a well-informed shopper. You boot
want to stumble into a package that,
though convenient, is overpriced. If done
wefl. however, one-stop shopping
shouldn't cost any more than you
currently pay, and may cost leu.
The rata, from the Department of
Housing and Urban Development.
BjsBoypt to a clarification of uuieut
COMBmer protection legislation. Here'*
what real-estate brokenp firms wiD be
able to da:
a Install a computer terminal that
displays a variety of different mortpge
loans. Once you've chosen a house, you
can move to another desk in the firm and
shop for a mortpge on the spot In other
words, the firm wiD act as your mortpge
broker. Your loan application wiD be
handled electronically, through a system
known as *eomputenred loan
origination.*
■ Own an interest in other home-teiying
serviees that it recommends to you. such
as home ssspecoons. tale insurance and
The price youl be charged baa to be
sasclosed in wnong ■ advance, as does
the broker's -*"■«■—■ with the other
service firms. If you don't a? *e
broker's terms or fees, you nsust be free
to gfo tsORaCwiicre cbiv
Computemed loan onpniuon systems
have been m development for many
years. But for business and regulatory
. they nave ne
CoVsweO Banker Residential Real
Estate, a national real estate brokerage
company owned by Sean. Roebuck and
Co, offers a computerised
losD-orijmjooo service called
Borrower's Choice at some of its office*
n central and northern New Jersey,
itthottgh the system wiD be expanded.
Home buyers can check through the
loans of 12 to 25 lenders, including those
from Sears Mortpge. Bortoweis don't
pay for this service: aO the fees are
covered by the lenders, says Chandler
Barton, head of ColdweO Banker's
Residential Croup.
Prudential Real Estate Affiliates haa a
computerized loan origmsoon service,
bat is revaauwg a. Right now. it fists
just two naoanaJ lenders. Prudential and
Countrywide Funding. Bat Joe Bryant,
president of Prudential Real Estate
ServKcs. says that the system wiD be
expended. SaDy Soacca. a tepslaove
analyst for the National Association of
Realtors, expects new systems to be
unveiled that wiD give open access to any
lender who wants to peroapete.
That bring) up the nak of a
computeriaed loan service. Aa long aa
Hjy caa compare the costs of loans at
least eight or 10 leaden, youl probably
get a coaaaetaave rate. But what ■ your
, real estate broker offers loans only from
' a angle lender ? That can be hjcrauvt to
the broker, because tenders wu" pay
earn far eaiJusivuy. But chenu who
•sat once shop may he steered to a
snore expensive monpp than
ssscssassry. Even as nstdtateader systems,
one lender may be bvsred — because si's
■Skated with the broker or pays the
broker a higher tec
The Monpp Bankers Association of
America haa filed a lawsust to reverse
the guvejuiuuB's new rates, argumg
that they conn a re— the tew that
protects real estate buvexa from abuse.
It's unlikely that uncompetitive
single-tender systems can succeed today.
Home buyers are pretty sophisticated
about monpp rates, which are
published in newspapers. But that's not
to say that other lenders won't try.
Carolyn Weber, vice president of
Century 21 of the Northeast, says that a
number of basks have approached her.
wanting to set up single lender systems
far Century 21 onvri
services did become abusive, the
Development would have to act again.
But Idebcvi the nature lies as
crsriputf i ued mortpp shopping.
Eventually, you'll be able to tap into
dilshsses and apply for a mortpp
OsajjafaoH mortgages may be easy to
spot. But a* a hai'lt I for buyers to know ■
they re paying taniy for sneubsry
services such as title assurance. Good
real estate broken wfll be cooxpetstrve.
but you stiD need to check the price of an
csiliiisf company just to keep everybody
133
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134
2^JRto0fjOTgt0n£tittes
COMMENTARY
FRIDAY, DECEMBER 11, 1992
SAMUEL
BRUNEIXI
Broader
real estate
options
Imagine yourself the quarter-
back of a football team. You
think you've led your team
across the goal line for the win-
ning touchdown as the clock is tick-
ing down to end the game. It's been
a tough, grueling fight, but you've
won — until the opposing team tries
to persuade the referee that the goal
line ought to be moved.
That's probably just how Secre-
tary of Housing and Urban Develop-
ment Jack Kemp is feeling right
now. Like him or not. Mr. Kemp is a
man with real vision. A strong pro-
ponent of open and fair competition
in business and industry, a true be-
liever in the efficiency of the mar-
ketplace and no champion of those
who seek protection from competi-
tion behind the skirts of govern-
ment.
It's that vision that prompted Mr.
Kemp to battle the bureacracy and
special interests and issue, ,r. No-
vember, long-awaited rules that will
open markets, increase competition,
and spur innovation in the real estate
services industry The rules, which
went into effeci on Dec. 2. apply to
the Real Estate Settlement Proce-
dures Act (RESPA). which provides
consumers protection during the
settlement process of buying a
home.
The new rules would allow real
estate firms the opportunity to pro-
vide a wide variety of services —
such as mortgages, homeowners' in-
surance, title services, warranties
and others — which they have been
generally prohibited from providing
in the past.
By dramatically expanding the
number of potential companies in
the field, companies wll be compet-
ing for clients, price competition
will become a reality, and innovative
services to reduce costs and in-
creased consumer convenience will
be encouraged.
Sounds good, doesn't it?
Well, it's not so gold if you're a
member of the mortgage finance in-
dustry. These new rules will inject
something the mortgage bankers
and their allied interests have rarely
had to face in the past: competition
from companies outside their indus-
try.
So that's why those who oppose
the rules are lobbying the new Clin-
ton aJmiiustrjtion and Congress to
move the goal line back.
How did we get into this mess?
RESPA was passed by Congress
in 1974. and amended in 1983, to pro-
vide home buyers more meaningful
disclosure of real estate settlement
fees and protect them against unnec-
essarily high costs. In the Act. the
Department of Housing and Urban
Development (HUD) was created to
interpret RESPA through rulemak-
ing.
For nearly a decade. HUD played
a protracted game of cat and mouse
with the real estate industry about
what the rules woul<* be and what
they would mean. Indeed. HUD bu-
reaucrats issued private opinions to
those in the real estate industry —
opinions which have been confusing
and inconsistent. At the same time,
HUD threatened legal action against
companies who try tc offer innova-
tive services that could increase
consumer choices Asa result many
companies have backed off from de-
veloping new services for home-
buyers
Mr Kemp thought that consum-
ers were entitled to those choices. As
he explained when releasing the
rules, "By creating more competi-
tion in the marketplace, it I the rules I
will lower costs to homebuyers when
they make the most important pur-
chase of their lives, and it ensures
that consumers are fully informed
of all the fees involved in a real estate
settlement."
Last week, groups representing
the established mort gage finance in-
dustry unleashed a blitz on Capitol
Hill Their goal? Create enough con-
gressional pressure to overturn the
rules. The reason? Tb keep the costs
of buying a home — and the profits
— under their control. After all. if
consumers could get high nuality
services from more than one pro-
vider, they might just pick the least
expensive, which would hurt profits
in the established mortgage indus-
try-
Wouldn't that be terrible?
Of course not. Consumers should
be able to pick and choose real estate
services, just the way they can pick
and choose when they buy other ser-
vices. Competition and consumer
choice are key to ensuring economic
growth, which is vitally needed in
today's real estate services market.
Those who opposed the RESPA
rules should recognize that the
game is over. The touchdown was
scored and the nation's consumers
won. Those who opposed the RESPA
rules should quit trying to move the
goal line and begin preparing for the
next game — one in which t'..e com-
petition will be tougher, and more
beneficial, to the nation's home-
buyers.
Samuel A. BruneUi is Executive
Director of the American Legislative
Exchange Council (ALEC), a na-
tional bipartisan organization of
state legislators.
135
Reprinted from THE WALL STREET JOURNAL.
THURSDAY. JANUARY 7. 1993
0 1993 Dow Jones & Company, Inc. All Rights Reserved.
Good News for the Home Buy er— At Long Last
By Cassahma Chbjnb Moon
After nine years of waffling In negotta-
dons with the real-estate industry,
bankers and Congress, the Department of
Housing and Urban Development has fi-
nally laid down Its very long awaited rule
to make buying a house or condo simpler.
Tne ruling reveals what HUD considers to
be legal programs under the ISO Con-
trolled Business Amendment to the Real
Estate Settlement and Procedures Act (Re-
spa) of 1974. Clearly caution was Its watch-
word.
Passed to quell Interminable disputes
over the Interpretation of Respa. the
Controlled Business Amendment was to
allow the establishment of "settlement
service centers" to handle not only real-
estate sales but necessary adjuncts, such
as mortgage lending, title searches and
homeowners insurance. The Increased ef-
ficiency of "one-stop shopping" would al-
low the service provider to lower Its costs
and pass the savings on to the home buyer.
For the average consumer, streamlining
the settlement process would mean a wel-
come saving of time as well as money.
Instead of quickly issuing a rule to
encourage that streamlined process. HUD
consistently raised obstacles. A OSS draft
rule would have, in practice, prevented •
settlement service center from paying Its
employees commissions to oiler the prod-
ucts of affiliates. Disclosure of the ar-
rangement to the consumer would have
made no difference. Nor was it relevant
that an affiliate might be offering a loan at
very favorable rates and terms. The draft
rule all but prohibited discounts, a Mow to
the consumer.
Endless hours of negotiation between
the government and the real-estate In-
dustry resulted in a virtual stalemate.
Diversified companies hesitated to pro-
mote integrated settlement services that
would speed property transfers while low-
ering costs to the consumer for fear of
incurring heavy dvU and criminal penal-
ties. Without ^
^L^Z^l BBcmjgpHY
and the pricing of ««. -: ~ -_
services. HUD was free to conduct a fish-
ing expedition for supposed violators, and
It did so.
Late la i»i. It created Its Respa
Enforcement Unit, a six-man SWAT team
that doggedly tracked down alleged Respa
violators. It even encouraged compet-
itors to Inform on each other. By a year
later, capitalizing on the industry's confu-
sion about what exactly constituted com-
pliance and the willingness of competitors
to point an accusing finger, the unit had
Initiated roughly 200 Investigations.
Whether tbey benefited the consumer is
doubtful: that they cost taxpayers a bundle
Is certain.
Ironically, the HUD rule, which took
effect on Dec 2 after nine years of wran-
gling, underlined the safeguards outlined
In the 1983 amendment reinforcing the
original legislation: The existence of the
Controlled Business Arrangement and the
relationship between the firms must be
disclosed In writing-, the consumer is still
tree to obtain the services through nonaf-
filiated firms If those are cheaper or offer a
more attractive package of services. By
fostering competition, these rules will re-
sult in better buys. Moreover, as stipulated
by Respa in 19T4. there can be no kick-
backs: fees must be charged tor services
performed, rather than simply for the
referral of business. Over nearly a decade
Utile had changed but the blood pressure of
the negotiators.
Similar obstacles bedeviled expansion
of Cotnputented Loan Origination Sys-
tems (CLOsl. despite their substantial
benefits to the buyer. These computerized
displays installed la real-estate offices
could permit ageots to offer the services of
one or more mortgage lenders at the point
of talc. The potential bouuwei or the
mortgage lender would pay the agent for
processing a preliminary loan application.
a big time-saver. Despite these advan-
tages. Respa s lack of danty. combined
with HUD's unwillingness to let the mar-
ketplace set prices and its overbearing
drive to "protect" the consumer Iran
supposedly inflated prices, fueled lengthy
debate over payment.
The question of tees to be charged. In
fact laid bare HUD's price-fixing heart
During 1990 testimony before the House
Subcommittee on Housing and Community
Development. Francis Keating. HUD's
general counsel, proposed establishing a
limit on fees for CLO services. In the name
of consumer protection. Mr. Keating de-
clared "that the fee should be capped at a
fixed dollar amount ur inch would be set to
reflect the reasonable cost of providing such
a service. . . . /forever, we have not vet
determined what we would consider to be an
appropriate, reasonable fee. " (Em-
phasis mine.) Of course not: A freely
functioning market would set a "reason-
able fee," a charge based on the cost of
supplying information. It would reflect the
demand of consumers for the service and
Its profitability for the supplier.
Intent on controlling the marketplace.
HUD flunked the basics of Economics 101.
Fearful of supply and demand. It preferred
price-fixing mechanisms resembling those
of a socialist state. Its timidity seriously
Impeded the growth of the CLOs. hamper-
ing consumer ciwice and preventing the
borne buyer from enjoying a convenient
service and lower prices.
Happily the real-estate industry, by
emphasizing potential advantages to the
consumer, was able to counter not only
HUD's proposed restrictions on real-estate
brokers offering the system but the lobby-
ing of the Mortgage Bankers Association.
(The MBA had insisted that the CLO
charge represented the simple referral fee
long prohibited by Respa. rather than a
fee lor services performed.) In a victory for
the free market the rule as promulgated
allows real-estate brokers to charge what-
ever fee the broker determines to be fair
for the service, provided he or she dis-
closes the fee In writing to the consumer.
To be charitable, one could congratu-
late HUD on the final agreement But the
waste of nine years la time and money
gives the congratulations a hollow ring.
Ms. Moore is an adjunct scholar at the
Competitive Enterprise Institute.
DOW JONES REPAINT SERVICE • PCX BOX 300 • PRINCETON. NEW JERSEY 08543-0300
136
AMERICAN
LAND TITLE
ASSOCIATION
1828 L Street, NW
Washington, DC 20036-5104
202/296-3671
800/787-ALTA
FAX 202/223-5843
TESTIMONY OF ROGER N. BELL
PRESIDENT
THE SECURITY ABSTRACT & TITLE COMPANY, INC.
WICHITA, KANSAS
IMPACT OF REGULATIONS
UNDER THE
REAL ESTATE SETTLEMENT PROCEDURES ACT
ON
SMALL BUSINESS
on behalf of
THE AMERICAN LAND TITLE ASSOCIATION
before the
COMMITTEE ON SMALL BUSINESS
UNITED STATES HOUSE OF REPRESENTATIVES
JULY 1, 1993
137
My name is Roger Bell and I am president of Security Abstract and Title Company
of Wichita, Kansas. I am pleased to appear before the Committee today representing the
American Land Title Association, the national association of the land title industry, and an
association I was privileged to serve as president in 1978/79." I am accompanied by Ann vom
Bgen, ALTA's Legislative Counsel.
ALTA is pleased that the Chairman is holding this hearing to explore the effects
on small business of the regulations issued by the Department of Housing and Urban
Development on November 2, 1992, in implementation of the 1983 controlled business
amendments to the Real Estate Settlement Procedures Act ("RESPA"). These regulations directly
affect the members of ALTA, many of whom are sma: businesses engaged in the abstracting
and title insurance agency business. I am here representing the association because in a
number of regards the regulations encourage arrangements and practices that I and other small
businesses have had to face in Kansas. These are practices that our state insurance department
and legislature have addressed, but their solutions have been called into question by certain
aspects of the new regulations.
ALTA believes there are three major areas of concern with the regulations. First,
the new regulations make it even more difficult for independent small businesses, such as my
own, to compete with title companies owned by controllers of business, such as the large real
estate brokerage companies. Apart from encouraging the packaging of settlement services in
which independent companies have no real opportunity to become part of the broker's package,
- The American Land Title Association membership is composed of 2,000 members,
including title insurance companies and over 1,900 title insurance agents, abstractors, and
attorneys who search, examine, and insure land titles to protect owners and mortgage
lenders and others with interests in real estate against losses from defects in title. These
firms and individuals employ nearly 100,000 persons and ALTA members operate in every
county in the country.
138
the regulations authorize the payment of bonuses and other incentives by real estate brokers to
their employees as an inducement for those employees to steer the consumer's business to the
broker's captive company, rather than recommending the services of the company that will
provide the best combination of price, quality and service to the consumer.
Second, the new regulations purport to authorize the Secretary of HUD to preempt
state legislation or regulations that provide more restrictive limitations on controlled business
even though Congress made clear in the 1983 amendments to RESPA that more stringent state
limitations on controlled business arrangements were not to be affected by the RESPA
amendments. This aspect of the regulations has created substantial confusion among state
insurance regulators and state legislators who are being led to believe - contrary to Congress'
clear intent - that their legislation or regulations may be preempted by the HUD regulations.
Third, the provisions of the regulations that require title insurance agents to
perform certain 'core title services" are creating significant confusion because of certain
ambiguities regarding the parties to whom such requirements apply and the nature of those core
service requirements. These are technical issues that we hope will be addressed and remedied
by HUD in the near future.
Controlled Business Arrangements: The 1983 RESPA Amendments and the New HUD
Regulations
Because consumers purchase real estate so infrequently and are generally pre-
occupied with other matters between the signing of the purchase contract and the closing, they
inevitably look to and rely upon their real estate broker or lender for a recommendation or
referral in selecting a title company. Like many other types of settlement service providers, such
as mortgage bankers, appraisers, and surveyors, a major part of our business is based on
referrals from those parties. Section 8 of RESPA, which was part of the statute as originally
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139
enacted in 1974, prohibits the payment of kickbacks and referral fees as a means of influencing
those recommendations.
The years following the enactment of RESPA witnessed the growth of "controlled
business arrangements." These are arrangements where a person in a position to influence the
consumer's selection of a settlement service provider, such as the real estate broker, owns or
has a financial interest in a title insurance agency. Because of its ownership interest in the
captive affiliate, the controller of business has a significant financial interest in steering consumer
business to that agency. As a consequence, other independent title agents, most of whom are
small businesses, find themselves unable to compete effectively for the referrals of that broker
and, indeed, may be completely frozen out of the ability I :> compete for title insurance business
in transactions handled by the brokerage company or lender that has a captive title insurance
agency.
The 1983 controlled business amendments to RESPA were the culmination of
several years of hearings and deliberations by the Congress on the problems of controlled
business. One alternative Congress considered was to require that all settlement service
providers such as title companies obtain a certain portion of their business from the public,
rather than relying exclusively on referrals from the controllers of business that have an
ownership interest in the company. In the end, Congress decided not to go that far, but to
specify that controlled business arrangements would not be a violation of RESPA if certain
conditions were met (Le^, the nature of the arrangement was disclosed to the consumer, the
consumer was not required to use the captive company, and no other thing of value was paid
to induce the referral of business other than normal dividends or returns on the ownership
interest).
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140
The Employer/Employee Referral Fee Rule
Unfortunately, the new RESPA regulations go beyond what Congress prescribed
and have the potential to have a devastating effect on small, independent businesses that are
trying to compete for business on the merits of their products, prices and services. One of the
most significant problems for the title insurance industry is created by the provision of the
regulations that permits an employer to pay a bonus or fee to an employee for the referral of the
consumer's business to a settlement service provider affiliated with the employer. For example,
a real estate brokerage company can pay an office manager, or a mortgage lender can pay its
loan originator, an incentive bonus or fee to encourage that office manager or loan originator to
steer business to the controlled title agency affiliated with that brokerage company or lender.
Not only is this regulation contrary to the Congress' determination that no other thing of value
be paid or received in the controlled business arrangement (other than the payment of bona fide
dividends), but it permits the broker or lender to pay the type of referral fee that section 8
prohibits independent companies from paying. If an independent company tried to make a
similar payment to the office manager or loan originator, it would be subject to the criminal and
civil sanctions of RESPA.
In the absence of such referral fees and inducements to employees, independent
small businesses would at least have a fighting chance to persuade the broker's or lender's
employee that they can provide better service or quality or rates and to consider recommending
their companies to the consumer. In the face of such bonuses and referral fees, however, it is
hardly surprising that many independent providers find that they are completely unable to
compete for referrals and, in some cases, cannot even get in the front door to leave any
information about their services.
4-
141
I would point out that controlled business arrangements and employer/employee
referral fees not only threaten independent small businesses, they are also at odds with the best
interests of consumers. Recently, the Consumer Federation of America, one of the largest and
most respected consumer organizations in the country, filed a friend of the court brief in a lawsuit
challenging HUD's employer/employee referral fee rule. In that brief, CFA made clear the interest
of consumers in this issue when it wrote:
The employer referral fee rule encourages employees of brokerage firms and
mortgage lenders to steer the consumer to the employer's controlled business
affiliate even if other firms can provide better prices, quality, or service. It is
simply unrealistic to believe that allowing such payments will not determine the
direction of referrals. Moreover, the controlled business affiliate does not have to
compete on the merits for the recommendation of that employee when the affiliate
knows that the employee will be receiving a direct financial incentive from his
employer to steer business its way. As a consequence, consumers will not only
end up having to pay for such fees, but the entire dynamics of competition
among settlement service providers becomes altered to the detriment of
consumers. Indeed, if controlled business arrangements continue to develop,
and employer referral fees are permitted to be paid to ensure that consumers get
steered to the broker's or lender's affiliate, there is a great danger that few if any
consumers will be able to escape the one-way highway of financially-induced
referrals to captive affiliates.^
Another problem that is of concern to independent small businesses is the fact
that the final regulations encourage real estate brokers and lenders to package settlement
services and to include only controlled business affiliates in that package. While we have
significant doubts about the consumer benefits of packaging, if such packaging is encouraged
it is important that companies other than the broker's or lender's controlled title company have
a fair opportunity to compete to be included in the package. The new regulations fail to ensure
that these competitive opportunities are kept open to all companies.
- Amicus Curiae Brief of Consumer Federation of America, Coalition to Retain Independent
Services in Settlements v. Cisneros, U.S.D.C.D.C., Civil Action No. 92-2700 (CRR) at 20-21
(May 20, 1993).
142
HUD's Purported Preemption of State Controlled Business Provisions
When Congress enacted the controlled business amendments to RESPA in 1 983,
the House Banking Committee was aware that the National Association of Insurance
Commissioners was considering recommending to the states the adoption of more stringent
limitations on controlled business arrangements (i.e., requiring that controlled title agencies
obtain a significant portion of their business from sources other than referrals by their owners).
To avoid any ambiguity that such state laws or regulations would not be preempted by the
RESPA amendments, the Banking Committee included an amendment to section 8(d)(6) of
RESPA unequivocally stating that:
No provision of state law or regulation that imposes more stringent limitations on
controlled business arrangements shall be construed as being inconsistent with
this section.
This language was part of the 1 983 RESPA amendments approved by Congress.
The Banking Committee explained in its report on the amendments that "the controlled business
amendments to Section 8 of RESPA should in no way inhibit the individual states in which
controlled business may be a significant problem from adopting those additional measure that
they [the states] believe will protect consumers and competition."-'
The statutory and committee language was directed at the kind of controlled
business legislation that my state of Kansas enacted in 1989, a matter I will discuss in a moment.
What is critical here is that the new RESPA regulations completely pervert the meaning and
intention of what Congress had decreed. Section 3500.13(b)(2) of the regulations suggest that
only if the Secretary of HUD determines that state controlled business provisions give more
protection to consumers and competition would the state provisions not be preempted.
- Report of the House Committee on Banking, Finance, and Urban Affairs on the Housing
and Urban-Rural Recovery Act, H.R. 98-123, 98th Cong. 1st Sess. (1983) at 77.
6-
143
This aspect of the regulations has received quite a bit of publicity in many states
and is being used to frighten state legislators and regulators into believing that the RESPA
disclosure provisions preempt more stringent state legislation or regulations. Indeed, this view
was urged upon the Insurance Department in Kansas shortly after the RESPA regulations were
promulgated. Fortunately, we were able to convince the Department that this regulation was
clearly contrary to the RESPA statute and the Banking Committee report.
Our experience in Kansas demonstrates the problems with this aspect of the
regulations and the importance of ensuring that the states continue to have the freedom to limit
controlled business arrangements when they believe that such action is in the best interests of
their citizens. In 1 986 the Kansas Insurance Commissioner became concerned about controlled
business arrangements that had developed in a number of areas in our state. He concluded
that, while these arrangements violated the spirit and intent of Kansas' anti-kickback statute, they
did not violate the letter of the law. He appointed a study group, composed of representatives
of the lending, real estate brokerage and title insurance industry, to consider what should be
done. Based on the committee's recommendations, the Commissioner proposed legislation to
the Kansas legislature that would limit the amount of controlled business any title company could
engage in. This legislation was enacted in 1989 and was immediately challenged as
unconstitutional by two controlled business companies affiliated with major real estate brokerage
companies. In January of 1991 the Supreme Court of Kansas unanimously upheld the
constitutionality of the statute.
The Kansas controlled business legislation has played an important role in
preserving competition in our state and in ensuring that independent title insurance agents, such
as myself, have a fair opportunity to compete for business. Other states, such as Minnesota, are
currently considering similar legislation to deal with the controlled business problem in their
states. Unfortunately, the HUD regulations are being cited in those states to argue that any
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144
legislation the state enacts will be for nought because RESPA has preempted the field. ALTA
has brought this problem to the attention of the new administration at HUD and we are hopeful
that they will make clear that state laws in this area are not preempted.
Core Title Agent Services
The core title agent services provisions in the new regulations represent an
attempt to define the basic services that a title insurance agent must perform to avoid his
compensation or commission being viewed as a violation of RESPA section 8. It is intended to
address the situation where title insurance agents, frequently those involved in controlled
business arrangements, obtain commissions or compensation for being a "full service agent"
even though they do not perform or assume responsibility for the types of services that full
service title insurance agents typically perform. While the primary purpose is to ensure that
consumers do not pay unnecessarily high fees for services that are not rendered or are
duplicative of other services the consumer is already paying for, the core services requirement
also helps ensure that controlled business title agencies will have to provide the same level of
real and valuable services as an independent title insurance agents must provide. In this regard,
the core services requirement helps assure a more level playing field between independent and
controlled title companies.
There are, however, certain shortcomings in the current language of the
regulations that we have brought to HUD's attention. If HUD is able to refine the regulations so
as to better define the types of core services that must be provided, and to reflect the variations
in settlement practices that take place in different parts of the country, we believe that the core
services requirement will be of value in ensuring that all title insurance agencies have to provide
real and valuable services.
8-
145
Conclusion
As the House committee charged with responsibility for the well-being of small
business in America, we appreciate the fact that this committee is so vitally concerned about the
continued growth of anti-competitive controlled business arrangements in the real estate
settlement industry. We recognize, of course, that the 1983 RESPA amendments did not
proscribe such arrangements. Nevertheless, we hope that the members of the committee
express their concern about the HUD regulations in implementation of those amendments that
permit or encourage practices engaged in by controllers of business that exacerbate the
difficulties of independent small business entities in competing for settlement service business.
Accordingly, we urge the members of the Committee to encourage HUD to
reconsider and revise its regulations on employee referral fees and the preemption of state
controlled business provisions. Should Congress choose to revisit the approach to controlled
business adopted in the 1983 RESPA amendments, we suggest that consideration be given to
the type of approach that has been adopted in Kansas to ensure that all companies must
compete in the marketplace for their business.
On behalf of ALTA I thank you for the opportunity to present our views and
concerns. I would be happy to answer any questions.
-9-
146
Statement of the
NATIONAL ASSOCIATION OF REALTORS*
The voice for Real Estate™
THE WORLD'S LARGEST TRADE ASSOCIATION
TESTIMONY OF
PALL SPERA
BEFORE THE HOUSE SMALL BUSINESS COMMITTEE
OF THE
U.S. HOUSE OF REPRESENTATIVES
JULY 1, 1993
147
TESTIMONY OF THE
NATIONAL ASSOCIATION OF REALTORS*
BEFORE THE
HOUSE SMALL BUSINESS COMMITTEE
OF THE
U.S. HOUSE OF REPRESENTATIVES
JULY1, 1993
INTRODUCTION
Mr. Chairman, Members of the Committee, my name is Pall Spera. I am a REALTOR® from
Stowe, Vermont and the 1 993 Chairman of the Public Policy Coordinating Committee of the
NATIONAL ASSOCIATION OF REALTORS® (NAR). I am the President of a real estate brokerage
firm with twenty REALTOR® Associates and two appraisers and am representing the 750,000
members of the Association. I would like to thank you and the Members of the Committee for
this opportunity to present the views of our members on the Department of Housing and Urban
Development (HUD)'s final rule implementing the 1 983 amendments to the Real Estate Settlement
Procedures Act (RESPA). Of particular concern to the real estate brokerage industry are
REALTOR® involvement in the mortgage process through computerized loan origination (CLO)
and the continued ability for our members to participate in diversified financial services
companies known as "controlled business arrangements" (CBAs).
My testimony will provide (1) a general statement of support on behalf of the NATIONAL
ASSOCIATION OF REALTORS® for the Department of Housing and Urban Development (HUD)'s
final rule, effective December 2, 1992; (2) an overview of recent trends in the real estate
brokerage industry and the implications of those changes for the continued profitability of our
industry; (3) a discussion of computerized loan origination and REALTOR® involvement in same;
(3) consumer benefits derived from point of sale delivery of mortgage-related services; (4) a
legislative history of the intent of Congress in addressing the issue of CBAs in 1 983 and HUD's
successful implementation of that intent in the final rule; (5) a summary of NAR's development
of policy with respect to RESPA; and (6) concluding remarks as to the kind of legislative and
regulatory environment that is needed to bring the mortgage process into the 21 st Century.
Because the focus of this Committee is small business, I will attempt to frame the issues in terms
of the benefits that HUD's final rule, if left unchanged, will bring to the thousands of small
business men and women who represent the majority of NAR's membership. The 1 990 median
income of brokers is $31 ,400 while the median income of salespersons is $22, 500.'
NAR Support for the HUD Rule
The NATIONAL ASSOCIATION OF REALTORS® commends HUD for issuing a rule that is a
victory for consumers. It removes the artificial boundaries between different types of real estate
148
services associated with the sale and purchase of a home and allows real estate professionals
to join forces with other providers of settlement services to offer multiple services for homebuyers
and sellers at one time/or in one place. While we do not expect our members to abandon real
estate brokerage as their primary source of revenue, we believe in the right of all independent
business men and women to choose how they wish to grow with the industry. Had the final
regulations curtailed these rights, the industry and consumers would have borne the cost.
Putting aside the industry turf battles of the last decade and fears about "potential" abuses that
seem to invariably be associated with change, our testimony will examine the more meaningful
issue of how the role of real estate professionals is changing, the forces driving that change and
the competitive tools needed to survive the transition. The primary focus is technology and the
real estate brokerage industry, but similar arguments could be presented for other settlement
service providers as well. The answer for them is the same as for us. We will have to change
some of our old ways of doing business to meet consumer demand for versatility and better
service. Real estate firms, in particular, will have to diversify as their clients and customers
become more conversant with the realm of the possibilities available because of technology.
The Changing Real Estate Brokerage Industry
The world of the REALTOR* is changing. Technological innovations are accelerating at a rapid
pace. With the advent of integrated technologies, voice, data and video, traditional delivery of
real estate information is being replaced with new services. In many cases, these new
technological applications to real estate data offer an efficient, cost effective and highly organized
exchange of information. Let's take a simple example - nothing fancy required - just a touch
tone phone and $5.95 and home buyers and sellers can access the Home Price Line and get
all the most recent sales on their street or neighborhood thereby establishing with a fair amount
of accuracy the current value of their home. Of course, they can get the same service from a
REALTOR* should they choose, but the technology is in place to do it themselves.2
At least at this juncture, consumers believe there is value added in using a real estate licensee
to gather and evaluate information about real estate markets. According to a recent NAR
publication, most consumers believe real estate agents provide important and useful services.
Over three quarters (78 percent) agree that agents can show them a better selection of homes
than they could find on their own. Almost three quarters (74%) agree an agent saves time, and
70 percent agree an agent makes buying/selling much easier. On a less favorable level, more
than half (57 %) of those surveyed feel that agents are preoccupied with making money rather
than serving consumer needs. Intuitively, one can conclude that as consumers become
increasingly familiar with cost effective technology that allows them to access and evaluate
information more easily, real estate brokers and agents are going to have to enhance the unique
services they can bring to buyers and sellers just to preserve consumer belief that the services
of a real estate broker are needed.
Business Activity of Firms
Real estate brokerage, especially residential brokerage, will continue to be the most important
revenue producer for real estate companies in the future. That is not to say that broker/owners
will not offer other real estate services, like CLO, but these additional services are not expected
to provide more revenue than brokerage services enhanced by computer technology.
Nevertheless, it is critical that real estate firms be allowed to provide a full range of real estate-
149
related services. The average profitability of residential brokerage companies has fallen in recent
Income, Expense and Profits Studies conducted by the Association. As business costs continue
to escalate, real estate firms will be required to achieve profitability through cost containment and
diversification.3
Technology and the Multiple Listing Service (MLS)
Computerized Multiple Listing Services (MLS) changed traditional brokerage business practices,
converting closely held real estate listing information into readily available business data,
accessible by all REALTOR* members. Emerging telecommunication systems coupled with rapid
assimilation of personal computers by American households presents both challenges and
opportunity: the challenge to stay current as the comprehensive source of real estate information
and new opportunities to provide easier access to that information. Currently, the MLS is the
prime source of property information for REALTORS*; however, competitive market forces are
introducing substitute systems that draw on broader technological capabilities, including
multimedia and interactive touch screen features to take advantage of real estate information
databases. The 1990s will witness the complete networking of the business world with
consumers; the critical issue facing the real estate industry is adopting technological change
while concurrently benefiting both real estate professionals and consumers." Technology is
rapidly facilitating the home search process in other ways. MLS listing databases can
incorporate Geographic Information Systems (GIS) to include area maps and specific house
locations. MLSs now utilizing GIS include Puget Sound (Washington) Multiple Listing
Association, Newport-Mesa (California) Board of REALTORS*, and the San Fernando (California)
Board of REALTORS*. Working with a REALTOR* through the MLS, customers geographically
compare house locations with community facilities, employment centers and other specified sites.
MLS as a Networked Telecommunications System
In its traditional configuration, MLS is a stand alone main frame computer operated and housed
in a board office or separate board/private MLS location; no two MLS systems are connected or
talk to each other. The new telecommunications approach allows information to be distributed
across and between networks; MLS delivery in the future could offer integrated real estate
information databases throughout large geographic regions as well as across the country, if
desired. The State Associations of Vermont and Maine are currently investigating a new
information and delivery system offered by NYNEX, the New England regional phone company.
The jointly controlled/owned MLS database, as well as other computerized Board functions, are
distributed from a centralized NYNEX computer located in the New York metropolitan area. With
a fully networked NYNEX local distribution system, system access is treated as a local calling
area. Local MLS systems join the state wide system but continue to control access to the
database and manage the overall system.
The rapid development of new transmission technologies such as fiber optics, video dial tone
and digital switching creates a multimedia MLS system capable of offering many more services
to real estate professionals and their clients and customers. The Central Maryland MLS has
started a brand new service employing networked technologies to assist Commercial and
Investment (C&l). Through an independent subsidiary of the MLS, Atlantic Systems and
150
Programming, C&l subscribers who are REALTOR® board members can hook into a number of
real estate related databases. These databases include public records, such as property
transfers, tax records, building permit information as well as census data and a computerized
mapping option; the system also includes an e-mail feature for subscribers to communicate with
each other about their properties. Networks can turn MLS systems into information shopping
malls of real estate information.
These new approaches to real estate information are quickly transforming how consumers
receive real estate information including home sales availability, the characteristics of the home
and supporting real estate transaction information. At the same time, these technological changes
have the potential to alter the traditionally accepted business relationship between brokers/agents
and home sellers and buyers. Technological innovation could set the stage for new definitions
of the role of and the services offered by real estate practitioners of the future.
The competitive business climate of the 1 990s and the more rapid integration of technology in
everyday activities, may well catapult these systems to full industry penetration by the end of the
decade. Each system discussed here is offering a new approach to real estate information
access and dissemination, pivotal elements in the selling and buying of real estate. These
systems are stand alone information databases that currently operate in addition to established
MLS systems in respective real estate markets. In the majority of cases, real estate brokers or
their agents are a key source of the information but not in all cases. They are relevant to this
discussion because they reflect the dramatic nature of the changes affecting the real estate
industry at all levels. Opponents of HUD's rule would like you to believe that there is no need
to adapt to what is essentially a new world. In the past, consumers were forced to accept the
inefficiencies of a paper intensive mortgage process. Today, they know that there are
alternatives. There is no turning back.
The following examples are but a sampling of what is out there and are primarily targeted at the
residential real estate market. Commercially oriented systems do exist but they are less likely
to be open to users beyond the members of a particular commercial real estate organization.
HomeView - A Realty Search Service
Introduction
HomeView is a real estate brokerage company located in Needham, Massachusetts utilizing
interactive, touch technology to present prospective home buyers information on houses for sale
in the Boston metropolitan area. The business is structured as a broker membership company.
Broker membership is free and carries with it the right to input a broker's listing information into
the company's computerized information system. Broker members are required to sign a
contractual agreement with HomeView that all buyers that are introduced to a house through the
HomeView system will be considered HomeView customers. If a sale occurs, HomeView will
receive from the member broker a negotiated portion of the final sales commission similar to a
cooperating broker fee.
By mid 1993, HomeView broker members number over 400 small to mid-sized brokerage firms
in the Boston area. Currently, HomeView has three office locations in the Boston area as well
151
as 13 kiosk locations, including kiosks at Logan Airport and in the Boston subway system. In
the Boston market, HomeView estimates that approximately 1700 realty firms represent the
majority of listings in the Greater Boston Board of REALTORS8. These are the firms targeted by
HomeView to be broker members of their system.
The exclusive interactive, touch screen technology used by HomeView was designed by the
company founder, Bob Norton. Mr. Norton has an extensive background in technology
applications but no real estate background, other than the purchase of his own house.
Essentially, Mr. Norton postulated that technology could substitute as the selling sales associate
and successfully out compete other selling agents, particularly in a market place in which 70
percent of the transactions are co-brokered.
The HomeView system relies on the integration of computerized data base technology with the
addition of information visualization and touch screen features. The imaging technology uses
photographs as its basic picture. The screen can be touched to make initial selections about
house criteria such as neighborhood, bedrooms and other amenities; the program can filter
essential selection criteria, such as no pool from desired items. Once buyers input their criteria,
the program selects all the matching listings.
The computer screen then becomes a window on the house; the system displays front yard and
back yard views plus views of up to 7 rooms in the house. Additional features of the system
include a geographic program to pinpoint specific street locations of selected homes as well as
area maps to highlight the general house location in the town and the distance to Boston. The
system can also compare rooms of two houses on the screen simultaneously. Buyers can do
room to room comparison shopping without committing all the room details to memory.
HomeView represents sophisticated use of technology applied to the real estate business. It has
been up and running since late 1991 ; in September, 1992 an equity position in HomeView was
acquired by IBM. Prior to IBM's investment, HomeView literature cites approximately 5 million
in start-up costs. Currently brokers and buyers use the system free of charge and HomeView
participates in the selling side of the commission.
HomeView attracts prospective home buyers through kiosk locations, T.V., radio, billboard and
print advertising. To recoup initial investment, HomeView needs to pursue dual strategies of
capturing a majority of home buyers in the Boston target market and to prepare a franchising
expansion plan on a national scale.
The current HomeView strategy works well in a real estate market such as the Boston
metropolitan area where cooperating brokerage predominates. However, in real estate markets
where listing brokerage firms also capture a high percentage of the selling side transactions,
HomeView may find it more difficult to compete.
In its capacity as a brokerage firm, HomeView has recently joined the majority of Boards of
REALTORS* in the Boston area in order to have access to non-member broker listings. With its
distinct combination of technology and brokerage services, HomeView represents one model of
state of the art real estate practice.
152
Home-Link
Home-Link is a computerized 1 -800, touch-tone phone system that faxes listing information to
a caller. The system creator is William Raveis, Broker/Owner REALTOR* of William Raveis Real
Estate in Fairfield, Connecticut, the largest independent real estate firm in the State of
Connecticut. The system is currently used only for William Raveis Real Estate listings; however,
it is the company's intent to market the system to other real estate firms throughout the country
and in Canada. Listing agents pay the cost of the entry through an input subscription fee plus
the cost of each incoming call requesting information. Agents receive the immediate benefit of
warm prospects who are interested in their listings.
The system was introduced in January, 1992 and has resulted in substantial productivity
improvement. William Raveis Real Estate secured 500 exclusive corporate relocation listings
attributable to the introduction of the system. In addition, Mr. Raveis credits the system with
reducing the time on market from the area average of 1 50 days to 51 days for homes in the
Home-Link system.
One important operating premise is that fax on demand is perceived as a value added service
by both sellers and sales agents. The value added aspect of the system therefore justifies
charges to the agents to input into their company system and to the seller through a higher sales
commission.
Home-Link utilizes the simple linkage of computers to telephone lines to access data then
transmit the data by fax. The system required writing a personalized program to meet the
specific parameters set forth by William Raveis Real Estate, exclusive owner of the system. The
Home-Link computer sorts the listing data base by the callers criteria, sends the information to
the caller and creates a daily log of all callers, including name, address, phone number and
specific information requested. The agents are quickly relayed new prospects and immediately
institute follow-up calls.
As designed Home-Link emphasizes the use of technology to foster direct contact between
buyers and the LISTING FIRM. The computer acts as a surrogate for the listing broker/agent.
Through the computer, buyers interact directly only with the listing broker/agent to learn for sale
information, thus bypassing referral networks and possibly eliminating the need for a cooperating
broker. Also the buyer self selects many of the features of the desired home, thus shortening
or eliminating the time consuming task of matching buyer needs with available products.
In addition to Home-Link, William Raveis REALTORS* has given 1 000 agents laptop computers.
The laptop computers have contact management software installed, are programmed to perform
Comparative Market Analysis (CMA), and contain a complete daily updated MLS listing database.
Raveis REALTORS* is one of the first major brokerage firms in the Northeast to incorporate
extensive technology into their daily business practice.
CompuHome
CompuHome is offered exclusively by Grempler Realty, Inc., a Baltimore, Maryland real estate firm
with 1 7 offices and 1 ,000 agents. At the present time, Grempler Realty, Inc. has one other real
estate brokerage firm that subscribes to the system. CompuHome is an online, menu driven
computerized bulletin board service available to anyone with a computer and modem. In addition
153
to providing comprehensive listing information, the system also provides information on current
mortgage interest rates, a sellers' net sheet program that computes expected net proceeds from
the sale, an open house schedule and related real estate business topics, such as education
courses.
CompuHome is a straightforward use of phone lines and computers. Grempler Realty, Inc. which
began computerizing real estate information in 1968, has an extensive database program
accessible to anyone calling their computer. The computer technology utilized by Home-Link
and CompuHome is virtually identical; the difference is that CompuHome users access
information from computer terminals while Home-Link users obtain information across phone lines
to a fax machine rather than computer screen. It is true that users of the CompuHome service
are more likely computer literate and comfortable with an interactive computer environment while
callers to Home-Link need only know how to dial a touch-tone phone and listen to directions.
Grempler's CompuHome system offers a relatively low cost alternative for brokerage firms to
enter the world of high technology. Grempler Realty, Inc. must bear the cost of designing a user
friendly program but in many respects, it is a very cost effective extension of their own in-house
listing data base. Modem users pay any cost associated with the phone call and printing of the
information off their printer.
Perhaps, the real key to Grempler's system is that it is more than a listing information service.
Since it utilizes computer to computer communication, it can provide a variety of information to
the prospective home buyer on their computer screen, including detailed financial information on
each house right down to the monthly payment. Important information can be selected by the
caller to be printed at their computer terminal.
Virtual Reality
A technology which is actively being researched, virtual reality extends multimedia to an even
greater interaction with the human senses, including touch and smell. Current versions often
involve wearing a special helmet which covers your eyes and, for example, changes what you
see as you turn your head. Using this technology, it may be possible for a buyer to 'lour" a
home without ever leaving the broker's office.
These systems represent some of the advances in the field of real estate information services.
It is a finite list and does not pretend to include either all systems or all technologies that already
exist or are about to be introduced to the marketplace. They represent new technologies offered
to the real estate community and the home selling or home buying consumer; their impact on
the practice of real estate in the future is yet to unfold. What is known is that technology's
impact on the real estate industry is here today and will be an even more significant aspect of
the practice of real estate in the future.5 A recent article in the Washington Post is included on
virtual reality as an attachment to the testimony.6
The Evolution of the Mortgage Delivery System -Computerized Loan Origination
A computerized loan origination system (CLO) involves the placement of a computer terminal in
a broker's office. It provides information about the loan products offered by one or more lenders.
It can also be used to pre-qualify borrowers and transmit mortgage applications. Buyers are
154
assisted in the application process by the system operator. Today, there are a few national
systems, but as the technology becomes less costly, regional and local systems will emerge
tailored to the specific needs of individual real estate markets. The CLO systems of the future
will be open to as many lenders as the system can accommodate, which essentially is unlimited.
The only reason for excluding lenders will remain negative experiences with a lender's
performance during the funding process or in the servicing of the mortgage loans.
The market development of CLO systems is similar to the development of Automated Teller
Machines (ATMs). In the early stages of the ATM market, several area banks started independent
systems which only the bank's customers could access. In a short time, the area banks entered
into joint ventures or agreements with other area banks so that a bank's customers could use
any ATM in the system, not just the ATM machines operated at the customer's bank. If the
market for CLO systems is permitted to take a natural evolutionary process, we believe the same
multi-institution access will develop.
Computerized loan origination systems extend the concept of multiple listing services for houses
to the realm of mortgage finance. They forge new links between home buyers and mortgage
originators. They enable real estate brokers and their agents to keep up with the literally
hundreds of basic combinations of loans available to fulfill the needs of their clients and
customers. This information can be changed instantaneously in response to minute-to-minute
changes in the mortgage markets which lenders must make to remain competitive. This is a far
cry from "the old days" when mortgage lending rates and products were fairly standard for
months and years at a time.
CLO systems provide rural areas served by one, perhaps two, financial institutions with the
mortgage products of national lenders, bringing much needed competition to these markets and
increased choices for consumers. They are also useful during periods of high interest rates
when lenders are less willing to negotiate mortgage rates and, in fact, withdraw from certain
markets altogether. This was the experience in Ohio, where the CLO system developed by the
Ohio Association of REALTORS® in the early 1 980s increased mortgage competition and lowered
rates.
Computerization enables lenders to turn around loan applications in as little as a few days when
the average time a homebuyer waits for a decision on a loan processed manually is more than
30 days. The introduction of streamlined processing has forced all lenders to improve upon their
turn-around time. For consumers, for whom a simple, fast process is of tantamount importance,
the "coming of age" of the mortgage delivery system has been long overdue. Streamlined
processing lowers transactional costs of obtaining a mortgage through reduced points, fees,
interest rates, or some combination of these. A reduction of a quarter point in these transaction
costs, which is a reasonable estimate of consumer savings, translates into approximately $6,000
over the life of the loan.
CONSUMER BENEFITS THROUGH REALTOR* INVOLVEMENT IN CLO SYSTEMS
The list of benefits to consumers as a result of the computerization of the mortgage process is
extensive:
155
o Real estate brokers and agents who use CLO systems can create competition among
lenders. CLO systems allow real estate brokers to access mortgage markets outside
their own geographic area. Local lenders are forced to compete with national lenders
which can mean lower mortgage rates for consumers.
o Consumers benefit from the efficiencies of a computerized mortgage process.
Streamlining the process has forced all lenders to accelerate the application process
in order to remain competitive. Being able to receive quicker commitments from
lenders relieves a considerable amount of the stress consumers normally experience
with the mortgage process. Speed of processing enables real estate licensees to take
the information necessary for the mortgage application, input it into the computer and
immediately transmit it to the lender.
o CLO systems provide borrowers with up-to-date information on interest rates and
programs of various loan products. Unlike rate sheets, which may be provided weekly,
the CLO can provide up-to-the minute and accurate information.
o If the buyer does not obtain a mortgage commitment from the lending institution to
which he initially applies, under a CLO, he is more likely to be able to submit a second
application within the mortgage commitment time period without forfeiting the sale.
o Under many CLO systems, the buyer can submit applications to multiple lenders
simultaneously thereby increasing the odds of receiving a commitment.
o CLO systems decrease the cost of the mortgage application process through
economies of scale. Uniform application forms result in a time savings in filling out
forms and multiple applications can be generated at a lower cost than is possible filing
separate applications.
o CLO systems enable real estate brokers to track the mortgage application more
readily.
o CLO systems may be able to reduce lender bias. Computers cannot determine race,
creed or color. It would be quite difficult for a lender to practice discrimination
observing computer generated data.
Perhaps the greatest consumer benefit of having a REALTOR* assist in mortgage origination is
that the cost of these services is often less than the cost incurred when a mortgage broker
charges for these same services. Typically, a mortgage broker will receive one-half of a point.
Further, the amount varies depending upon the type of mortgage loan he sells. Consumers are
rarely informed that there is a difference in the amount a mortgage broker receives, a fact that
may influence the types of mortgage product being offered.
RESPA and Controlled Business Arrangements (CBAs)
In 1983, Congress amended RESPA by adding provisions dealing with "controlled business
arrangements". A legislative history prepared by the NATIONAL ASSOCIATION OF REALTORS*
is included as an attachment to NAR's testimony.7 After much deliberation, Congress passed
legislation that, while not favoring CBAs, did acknowledge the potential consumer benefits to be
156
gained by the economies of scale offered by diversified financial services firms. HUD's rule
conforms to Congressional intent in that discounts for bundled services are permitted for
consumers who choose to use affiliated providers of settlement services. Of course, the basic
premise of the original legislation is upheld -- full written disclosure of the affiliation and charges
associated with the services to be rendered and the consumer is free to choose any provider of
a particular settlement service. While this provision is typically portrayed as benefiting large firms
rather than small businesses, a significant number of "Mom and Pop" shops benefit because of
the 1% ownership threshold set by Congress in 1983. There are countless REALTORS*,
mortgage brokers, and insurance agents who can join forces and compete with the "big guys"
by delivering personal service at a competitive price. As we speak, these alliances are being
formed. After all, who knows a local customer base best -- a real estate firm or mortgage banker
who operates as an integral part of the community or a national corporation?
We would urge those who are protesting that they are being squeezed out of the market by
larger firms to trade on their strengths and the personal and professional network that has served
them so effectively. There are anti-trust laws to curb monopoly abuse. Let these serve as the
"watchdog" for the industry.
NATIONAL ASSOCIATION OF REALTORS* DEVELOPMENT OF RESPA POLICY
Background
In September of 1988, NAR President Nestor Weigand appointed the Real Estate Settlement
Procedures Act (RESPA) Task Force to examine the issues raised by the proliferation of loan
1 eferral arrangements, computerized loan origination systems, controlled business arrangements
and other questions raised by the RESPA regulations.
At the time NATIONAL ASSOCIATION OF REALTORS* had policy on RESPA as follows:
"That the NATIONAL ASSOCIATION OF REALTORS* oppose all legislative and regulatory efforts
to prohibit or limit the payment of additional compensation for real estate-related services
accorded buyers and sellers, including mortgage finance, insurance and other related items,
provided such compensation is fully disclosed to the buyer and seller."
This policy supported the payment of fees for real estate related services provided that all such
fees are made known to and accepted by the customer prior to settlement. NAR's policy was
of long-standing, however, and, needless to say, was being challenged by market arrangements
that did not exist at the time of its formulation. In light of new forms of prequalification, point of
sale financing and the relationship of some members with national programs like Citicorp
Mortgage Power, the Task Force was asked to consider what corrections, modifications or other
changes need to be made in Association policy on RESPA. These recommendations were to
be made within the context of currently proposed regulations, pending legal actions and potential
legislation.
Key to the task force discussions was HUD's language in the May, 1 988 rule permitting payments
for "bringing the borrower and lender together". There was concern that these could be
construed as "naked" or "simple" referral fees. The goal was to clarify NAR policy about fees
10
157
received for participation in national loan programs and payment for referrals within controlled
business arrangements.
Task Force Conclusions
(1) The Task Force concluded that computerized loan origination programs which allow real
estate brokers/agents to provide homebuyers with mortgage-related services are a positive
development for all parties concerned. They enable real estate brokers to provide consumers
with point of sale financing at what is often a cost savings for consumers. Fees charged for CLO
services offset costs incurred by brokers for installing and operating the systems. If real estate
agents receive fees in connection with a lender program, they must be based on actual work
performed for the borrower rather than the referral of the borrower's business.
(2) Within controlled business arrangements, as statutorily defined, the Task Force upheld its
policy recommendation in opposition to payment for simple referrals within this corporate
structure.
The Final Policy
Adopted by the Board of Directors, February 6, 1 989:
Where a real estate broker/agent provides services in addition to or different from those
he/she is obligated to provide by his/her agency agreement, that broker/agent is entitled
to remuneration for these services, provided that full and written disclosure is made to
and accepted by all clients and customers to the transaction in advance of undertaking
to perform such services. The NATIONAL ASSOCIATION OF REALTORS* is opposed to the
acceptance of fees by real estate brokers/agents for the simple referral of customers or
clients to mortgage lenders and providers of other settlement related services, (emphasis
added)
In controlled business arrangements, as defined by the RESPA statute, the NATIONAL
ASSOCIATION OF REALTORS* believes that brokers/agents are entitled to remuneration for
the delivery of real estate related services provided that written disclosure (which is not unduly
burdensome) is made to and accepted by all clients and customers to the transaction; and
there is no required use of these services.
The NATIONAL ASSOCIATION OF REALTORS* is opposed to legislative or regulatory efforts to
limit the payment of remuneration for these additional services.
Legislative/Regulatory Changes Needed
The NATIONAL ASSOCIATION OF REALTORS* does not support further legislative changes to
RESPA but would recommend some clarification at the regulatory level. Specifically, it would be
helpful to add definitions of computerized loan origination and a bona fide employee. We believe
this would end some of the controversy surrounding referral fees to independent contractors and
additional fees for computer information services that are typically provided free of charge by
brokers/agents representing sellers. NAR would be happy to work with HUD to develop these
11
70-043 0-94-6
158
definitions. We would also be willing to prepare compliance materials (seminars, pamphlets) for
REALTORS*. We have included the RESPA Compliance Kit distributed at NAR's Legislative
Meetings as an attachment to the testimony.8
Conclusion
Mr. Chairman, the real estate industry is growing and requires a revolution in mortgage lending
to handle that growth. By the year 2001 , there will be a demand for $1 .4 trillion in mortgage
money. Seven to ten million more people will be buying homes. The preferences of these home
buyers will also increase the need for alternative mortgages and for real estate brokers/agents
who can take the buyer quickly and knowledgeably through every step of the real estate
transaction.
In our view, we can no longer afford to put a stranglehold on the mortgage delivery system
because of an "alleged" turf war between competing interests. I say "alleged" because the very
members who make up some of the trade associations opposing this rule have already moved
ahead. Consider the program of a mortgage banker in Portland, Maine (see attachment). In this
case, an independent mortgage banker has employed a staff of real estate licensees to represent
consumers who are interested in purchasing a home and financing it through this particular
company. The real estate agents are buyer brokers and paid by the lender. A second
attachment offers a real life example of a diversified financial company that offers a complete
array of financial services and products. It is perfectly legal - all federal and state licensing laws
have been met, and it could be the prototype for the future. Incidentally, this is a small business
where the firm has a limited number of independent contractors in each of the service areas (1 3)
who each bring a client base of 200 individuals to the corporation.
Denial of the inevitable can be deadly. We have spent too much time fighting each other when
we should be joining forces to bring the real estate industry into the 21st Century.
Thank you for the opportunity to address the Committee. I will be happy to answer any
questions you may have.
12
159
Endnotes:
1 The NATIONAL ASSOCIATION OF REALTORS*. Real Estate Horizons: A Look to the 21 st
Century. January, 1 992. Page 9-4
2 Vandevanter, Peter. "Guide to the Home Price Line", the Washington Times. June 1 8, 1 993.
Pages H23-26.
3 The NATIONAL ASSOCIATION OF REALTORS*. Real Estate Horizons: A Look to the 21st
Century. January, 1 992. Chapter 9
5 Meany, Cole, Deem, Reed and Wallis: 'Technology in the Real Estate Business: Future
Trends & Policy". April, 1993
5 Lehman, H. Jane. "REALTORS* Grip on Home Data in Danger". The Washington Post.
June 26, 1993. Pages E1/E8, Col. 1
6 Lehman, H. Jane. "Virtual Reality Systems May Revolutionalize Search". The Washington
Post. June 26, 1 993. Page E8
7 Gallagher, Henry T. "Real Estate Procedures & Controlled Business Arrangements". 1991.
Pages 1 -25
8 The NATIONAL ASSOCIATION OF REALTORS*. "Real Estate Settlement Procedures Act
Compliance Kit". April, 1993
13
160
Guide to the Home Price Line
H.
Home Guide
P
OME r RICE J^INE
L
SPECIAL SECTION OF THE WASHINGTON TIMES
H You snould
regularly cneck ihe
value of your biggest
single investment. 99
— Rufus 5. Luik III
Now you can find home sales
for 5 years with a simple call
Appltcabonl:
Finding trw saiw pne» of a soaerttc house
PETER YANDEYANTER
^mtHom Buyer "A Bona 6«uer
aixn« » -^ Horn. ^"^ (or ,„„. u„w »ou u »«J,,S^B """ "^
icTaaMr icui U»» SUD"*i^„ .x. moaem consumer uua fj?°" " "^n"
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probably not very accu-
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is subject to so many
changes, from overall
market effects to par-
the last property you
heard about sold for
depending on wnethei
your house is bigger
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««n using rt accu^. -•» ^ give you aa a
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=i»e LSI exvenaiiure 01 >?f ~ am me ana
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TO ACCESS
~all 800/788-4444
ON-UNE HELP
f vou nave a Drooiem getting
•he house record vou want,
call 800/793-0852.
_-E Z/aShinG'Cn TIMES
„.. — many
i afl poeaiDie
iB possible to
I weioome
i Lusk III Burr
eisnborhood s
Thar»n_
ind tor si -r i,«— ■
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5. charged a
lit card iMasEercaro. Visa i
U the most recent sales on -
a meteor esublish fairly
lCapnoi Hill (which
house. Right*
a bouse appraisal -
which is a report
written by experts
analyzing the value
after sut months'
Thats how quickly
things change when
you get down id the
neighborhood level
Perhaps your
value of your prop-
erty is slightly
more or slightly
paid for it
enough-
lost investors wi Q
weekly." savs Rufus
ilue ot your biggest single i
s NOT for sale curm
d call 800/788-4444
Next the voice asks for the street. You punch in C toy 2:
Because the 2 key represents A-B-and-C. the wnoe comes
back and asks if you mean A5" You say no ipunch key 2) "B1"
No (punch key 2) '"C" Yes ipunch kev 1 )
Next the voice asks for a quadrant Vou punch SE (the 7 and 3
Next the voice asks for the address; You punch 9-0-9
Then the voice beans searching, saving. ^Searching 1993
Searc rung 1992 Yes. the voice savs. ;he property sold in iy92
:or$173.0O0"
Then the voice asks if vou want to keep searching. You say yes
ipunch the 1 key)
-Searching 1991 " the voi
1989 Searching 1988 Yes.''
S170,0O0inl988"
Ureka Two sales in hve vears It appears t
'lelp you i
Application 2:
Saarcrnnq wnoia streets tor sakts htatortas
Tiis is the application that I founa the most fascinating
Having just moved into a new neighborhood. 1 was verv
saeer to run the numoers on all the houses and go around
The street 1 moved into was Mosbv Street in Alexandria
'.Mien 1 called and asked for the saies, the Home Price Line gave
•ne 1 1 sales in the past nve vears January 1993. 2811 Mosby St.
M35 000 March 1993. 2~06 Mosby St. S166.000.Apnl 1902
-300 Mosbv St. $150000 ;«000 i96.00O S133.000
ilia.000 ::44.000 :S0.000 S33.000 il^.000
Holly Street Next. 1 ran those numbers Apnl 1993. 3104 Holly
St .S245 000. AprU 1993. 3407 HoUv M S424.000 . March 1992.
3.06HoUevSt S277 000 S440.000 S433.000. S433.000
S402.000 5270.000 S626.000 SS25.000 SS40.000
5523,000
Lets say I was mildly shocked bv these numbers
The difference in prices between tne two streets was snock-
ng After all. they were all houses built in the 1920s
Grantee. Holly Street has larger, better renovated housesJiut
i see PRJCEUNE. page H26
.UNE 18 1993 H2S"
161
Guide to the Home Price Line
What to expect when you call the price line
Be prepared
= otvourSS9Sononeca
Hint, hint
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ses cv searenmg pnee
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i acooemaiiv n
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i. accoramg io inphc
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nearest Si .000
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S162.499 has oecome S162.000
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21 The caller s reouestrg an area trial is not on t
a $163 000 Howww aoorowa »st Please cnecu me isi Oslo* io mane si
area »u v*ant io searcn s n tne data oase oeiore y
you are iisaenffig io airecnons a
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Don't volunteer extra letters
FOR HELP, CALL 1-800/7934852
if you call between 8 a.m. and 6 p,m_ a person nam* and telephone number and a representative possible, la interested In discovering the bugs m
will Held the call to answer your question or finish will call you back the next working day. the system and getting your impressions on the
the date base search tor you. INPHO. which Is the Boston -based company product The company believes that if you paid
tt you call at any other time, you can leave youi whose technology mskes the Home Price Une your money, you deserve the information.
Areas you can phone-search by name
Accokeek. Md
Adelohi. Md.
Alexandra, Va.
Annandale. Va.
Annapolis. Md.
Annacous Junction. Md
Aauasco. Md.
Arlington. Va.
Arnold. Md.
Ashton. Md.
Baltimore. Md.
Bamesville. Md
Bealisviiie. Md.
Beltsvilie. Md.
Bethesda. Md.
Bladensourg, Ma
3owie. Md
Boyas. Md.
Branavwine. Md
Brentwood. Md.
Bnnkiow. Md
Brooiieville. Md.
Burke. Va
3urtonsville Md
CaDin jonn Md
CaDitoi Heignts. Ma
Catnarom Va.
Centreline Va
Chantjllv. Va
Cheitennam. Md
Make sure you match your area of interest
s svatabte lor database searmes o
ePncsLne lnomef«
3etore you ca» y
IVPB tt • ALEUT 1
a. So A you warn to searcn west Sonnofieia. M» tfi *SPRIN* tor
tne orcceny s r SomgheW or West Somgtwo
n Ananona That « not on me let either But Ananona
Cheverly. Md.
Chevy Chase. Md.
Churcnton. Md.
Clarksburg, Md.
Clifton. Va.
Clinton. Md.
Coiesviile. Md.
College Park. Md
Crotton. Md.
Crownsville. Md.
Damascus. Md.
Davidsonville. Md
Oeaie. Md.
Derwood. Md
Dickerson, Md
District Heights. Md.
Dunkirk. Md.
Dunn lonng, Md
Edgewater. Md.
Fairfax. Va
Fairfax Station. Va
Falls Church. Va.
Fort Belvoir, Va.
Fort Meade. Md.
Fort Washington. Md
Fnendship, Md.
Gaithersburg. Md
Galesville. Md.
Gambnlls. Md.
Garrett Park. Md.
Germantown, Md
Gibson island. Md
Glen Bumie. Md
Glen Echo. Md.
Glenn Dale. Md.
Great Falls. Va
Greenbelt. Md.
Hanover. Md.
Harmans. Md
Harwood. Md
Hemdon. Va.
Hyattsville. Md
Jessup. Md.
Kensington, Md.
Kropper, Md
Landover, Md
Lanham. Md.
Laurel. Md.
Unthicum. Md.
Lorton. Va
Lothian. Md.
Mayo. Md
McLean. Va
Memfield. Va
Miiiersvme Md.
Mrichellville. Md
Mount Rainier. Ma
Newington. Va
North Beach. Md
Oakton, Va
Odenton. Md
Olnev. Md
Owtngs. Md
Oxon Hill, Md.
Pasadena. Md
Pooleswlle. Md
Potomac. Md.
Reston. Va.
Reston, Va
Riva. Md
Riverdale. Md.
Rockville. Md.
Sandy Spnng. Md.
Severn. Md.
Sevema Park, Md
Shadyside. Md.
Sherwood Forest. Md
Silver Spnng. Md
Spnngfield. Va
Sterling. Va.
SuitJand. Md.
Takoma Park. Md
Temple Hills. Md
Tracys Landing. Md
jpper Marlboro. Md
Vienna. Va.
Waldorf. Md
Washington. DC
WasnmgtonGrove Md
West Bethesda. Md
.Vest River. Md
Wheaton. Md
"he WASHINGTON TIM-
162
Guide to the Home Price Line
The HOME PRICE LINE SEESESSS
A New Friday Home Guide Service
In Five Easy Steps Find the Price Any Home Sold For!
Call the Washington Times Home Price Line, an essential service for
nome buyers, home owners thinking of selling or refinancing, and the
just plain curious.
Get the prices that homes in the neighborhood sold for. and use them.
You can estimate the value of your house. You can compare recent sale
prices to the home you want to buy — is the price too high? All you
need is a touch-tone phone.
Follow these five easy steps to instant information on the last five years
of home sales in Washington. Northern Virginia and Suburban
Maryland. Only S5.95 a call.
Call 1-800-788-4444
Call costs $5.95 for five minutes. Information includes pnces of residential properties
sold in Washington. D.C.. Northern Virginia (Alexandna City. Fairfax and Arlington)
and Suburban Maryland (Montgomery and Prince George s) since I988. Information
is updated weekly. Transactions are available 4-6 weeks after a sale is recorded.
Service is available 24 hours a day.
i — The Five Easy Steps —\
i you would
1 . Dial 1-800-788-44A4 on your toucn-tone
' pnone When promoted enter your
Mastercard. Visa or Amencan Express c
i numDer and expiration aate
' £. Tvoe tne tirst five letters c
*e ro nna nome saies m using tne key paa or
. our toucn-tone onone fou do not need to
:oeatv tne state for example, for Washing-
■on 0 C .ouwouiarvpe
j. Choose in
" to searcn
A S H I
type oi searcn vou want to con-
oamcuiar address Dress
C..U.G street, press 3" to
pnce range within a city or town
'"' " listing of ail homes
s tne street you live
4. TvDe the tirst five, letters of the street name vou
are looKing tor for example for Foxnaii Roaa.
press 2'
5.WMI
0 X H A
ie miormation as n is read to vo>
le i'ou wni hear the actual sale
a aate or orooemes on the siree
last tor uo to live minutes ana
lie to do searcnes tor the entire
lee ot S5 95.
CURIOUS?
Rnd out what your new neighbors oaid for
their house. Find out how much your ooss
paid for his or ner house. All you need is the
address and a touch-tone phone
HOME SHOPPERS
Be an educated home shopper. Check out
the pnces that homes have sold tor Call
about a house you saw while dnvmg
through a neigh bo rhood. find out what the
owners paid for it. find out how much, other
houses m the area sold for. Then call vour
Realtor Drepared with information
REFINANCERS
Before you take advantage ot the low interest
■ates. checK out the vaiue of your house.
Call the Home Price Line and learn what
other homes nave soid for in your area. Get
an idea ot what your nouse is worth, and how
much eouity you nave, then call the bank.
HOME BUYERS
Call the Home Pnce Une and learn what
other houses in the neighborhood sold for
Compare the houses and pnces to the one
you are buying and determine your bid A
call could save you thousands of dollars
W/im. Reliable Information.
mmmi
E PRICE LINE
Questions7 Call 1-800-793-0852
i service ot Rufus S. Lusk & Son, Inc. and (Ehe ISashingtrm Climes
"Hg WASHINGTON TIMES
163
Guide to the Home Price Line
What if the house sold more than 5 years ago?
I vou call (he Home Price Line and the
house vou are seeking sold more than trve
years ago. you have one other option.
"he Washington Times Fnday Home Guide
s ortenng. to a limned numoer of people, a
price searcn that goes oeyond five years.
"he first 10 callers each week, (starting at fO
a.m. Friday) can reauest the sales pnce. date
of sale and assessed value of any house in the
Washington area, no matter when it last sold.
But remember, it you are not one of me
lucky callers, you can always ask your
Realtor for the Information.
Here s how it works:
Call 202/636-3223
^irst. give this information:
vour name:
Your address:
City.
Stale
ZIP:
'our teiepnone numoer. _
I Work):
i Home):
Next leave the following information
about the property:
Community.
Address (Important please spell out):
Condo numoer.
City
Stale.
(If you know) Tell us whether it's:
J Town nouse or aetacneo home
J Approximate numoer of bedrooms
J Approximate sauare footage
J Sold witnm last 2 months? Or previously'
Finally, would you please tell us now you got
the Home Guide: dv subscription, direct mail or
newsbox.
Also, what do you plan to do with the infor-
mation that you receive9
Thank you.
The Washington Times will get the sale
pnce. date of sale and assessed value for you
and mail il to you.
Remember You have to be one of the first
10 callers on Fnday. starting no sooner than 10
a.m. Call 202/636-3223.
Happy hunting
.ZIP Code:.
PRICE LINE
i szxy 1300.000 n
I never would have eipcaed
such i discrepancy
Do you >rmly know your neieh-
AppCfc*bon3:
Honestly. this application does
not wort very weii
Ideally it's a great
idea. CaU i
Home
Price
addresses cannot be understood
well enough to be able to recognize
streets you've never heard of
Impfoverneno will be made.
Herri what I tried Alexandria.
S3X .000
Out of the fira 12 recent sales in
Alexandria far $200,000 I could
i djdnt recognize those streets so
at least right off the bat the search
did not give rne much tt> work
with. 1 could have kept requesting
streets but things could have got-
ten worse instead of better.
If I bad requested SI million plus
COMING JUNE 25
Home Guide to
ALEXANDRIA
A Guide to the Real Estate Market
in Alexandria. Virginia
A puiiout special section in the FHIDAY Home Guide.
Publishes: Friday, June 25, 1993
Advertising Deadline: Noon. Tuesday, June 22.
The problem is that the data-
base breaks up me Washington
htm into about 1 30 areas, which
means that each area is soil very
large lb speofv any pnce range,
except those either very low or
very high. wuJ give you too many
jsungs.
Thea
enough List -
butl might not be
able to understand the addresses.
If you know Alexandria Like the
back of four band you may under-
Tsm1 it* uliln 1 1 But, chances
are, tf route trying n move into
an area, you dotrt know the
addRSwes. Than a classic Catch •
22
For more information or to reserve your
space contact: Lon Terry (Alexandria)
202-636-3115. Mane Fereinger(N. VA>
202-636-3 108. or Mike Uanis (New
Homes) 202-636-3075.
33|C f&QQitXUtlpBU ZbnarQ
THS WASHINGTON TlMI
164
UJ-Cki^"'^' O"
Jj.<\C _*>.
EX
Realtors' Grip on Home Data in Danger
Entrepreneurs Outside Industry Challenge Use of Multiple-Listing Services
By H- Jane Lehman
The reaJ estate industry's lock on informa-
tion about homes for sak is slipping, threat-
ened by more technologically sophisticated
ways of bringing home buyers and sellers to-
gether.
Several entrepreneurs outside the real es-
tate field are challenging the role once filled ex-
clusively by the mu)upl;Misting services (MLS),
computerued databases of homes for sale that
are controlled by local offshoots of the National
Association of Realtors (NAR).
The powerful real estate trade group is mar-
shaling its forces to fight off the upstarts, in-
cluding System of Multiple-Colored Images for
Internationally Listed Estates Inc.. SureFind
Classifieds by Telephone and Home View Real-
ty Search Centers.
Regardless of whom prevails, the outcome
should bring largely good news for the home
buyer. The first step in the home search—
eliminating unsuitable options — is destined to
become easier and less time-consuming.
/. .d the same innovations that allow buyers
to narrow their searches work to sellers' ad-
vantage by exposing their properties to a wider
array of purchasers, industry analysts said.
The typical home search usually starts with
a buyer contacting a real estate agent to learn
what properties are for sale. The agent can
search the local MLS database by location,
price, number of bedrooms or other features to
produce a list of homes for consideration.
But such a process is outdated, said Gerald
Matthews, executive vice president of the Flor-
ida Association of Realtors and head of an in-
dustry task force studying how to improve the
competitive position of MLS agents.
Although no one is ever going to buy a home
without first seeing it. "we can save a lot of
shoe leather and tires in this country by first
searching electronically," Matthews said.
High-tech challrnorrs to agents providing MIS database ac
Page EW
A recently released NAR study found that in
1991 the average buyer spent 16 weeks and
visited 19 homes before reaching a decision.
However, a series of technological innova-
tions could radically alter the way buyers scout
homes. Some companies are offering access to
listing information from a home computer, by
phone and fax or through kiosks located in air-
ports or other public settings.
Other firms are encouraging buyers to nar-
row their search bst by color computer images
of homes for sale. Taken to its technological
extreme, that may some day mean "louring" a
home by way of a computer operation known as
virtual reality.
Also within the realm of possibility are
searching for homes nationwide or internation-
ally, collecting other information pertinent to
the sales transaction and checking out homes
sold by owners on the same systems as homes
listed by real estate agents, an idea that partic-
ularly grates on the real estate sales industry.
Meanwhile. NAR is trying to hold onto its in-
SeeMlAEACoLl
165
MLS Competitors Offer Buyers
Information by Computer, Fax
MLS, From El
formation franchise. Earlier this
spring, NAR President William S.
Chee, a Honolulu residential broker,
warned association members that the
organization will be cut out of the in-
formation dissemination business with-
in the next few years*
"Even if we implemented the best of
plans today, we might still be too late.
1 personally think we have less than a
50 percent chance" of saving NAR's
hold on the information business, Chee
said-
One reason so many MLS systems
have failed to stay competitive in the
information game, said Denver-based
realty consultant Stephen H. Murray,
is that the MLS operations often subsi-
dize other local Realtor board activi-
ties. Murray said he is aware of one
board, which he declined to identify,
that recently siphoned off $1 minion
for other purpose* "instead of krvest-
ing in MLS improvements."
MLS turf fights leading to sharply
splintered markets also contribute to
the problem, Murray said. For exam-
ple, a buyer searching for a home in
the area bounded by Howard, Freder-
ick, Charles and Prince Wflham coun-
ties would have to work through seven
different MLS systems.
Chee agreed that fragmentation is a
problem, likening it to a "few Chihua-
huas fighting over a bone, unaware that
a hungry bon is corning over the bffl."
Matthews, though, said be behevea
the NAR can strike a deal to gain the
technological upper hand with a Targe
partner that has this as their business*
without incurring great cost to the or-
ganization.
Murray also discounted the efforts
of the MLS challengers, unless the
companies can pour vast sums of capi-
tal into the endeavors. "Even $8 mil-
lion [the amount one venture has in-
vested to date] is not enough money to
change the habits of buyers and sellers
to go around the real estate communi-
ty," he said.
The NAR stands to suffer substan-
tial membership and revenue losses if
it is dethroned as the primary source
of for-sale information, sari Thomas
W. Dooley, a Chicago-based real es-
tate consultant. "A lot of real estate
agents only belong to the Realtors to
get MLS access," he said.
Although Matthews sari the infor-
mation-sharing function represents a
"major piece of our value" to NAR's
members, be predicted the organiza-
tion will remain viable as a provider of
educational and legislative services.
The loss of the MLS information
lock also couW exert downward pres-
sure on estate sales commissions,
Murray sari. "A broker's job consists
of knowledge and personal service but
do one has ever priced those two parts
separately," he sari.
What's more, he sari, the ease with
which buyers and sellers may someday
find each may well deprive brokers of
some business at any price. These
changes slowly but surely chip away at
whatever percent of the marketplace
prefer to do without an agent in the
selling of their properties," he sari.
Matthews agreed, but only to a
point "The value a Realtor brings is
the ability to market a property, not to
say here is a list of homes for sale. Or,
when working with sellers, the value is
knowledge of the market and how to
carry off the transaction and avoid the
pitfalls."
166
jj^s>
^ \ Yc^ ->t-_^T
E8 Sati-rd4V,Jl>e26, 1993
Virtual Reality Systems
May Revolutionize Search
Think of it as a view with a room.
That's the promise of crossing the
futuristic technology known as virtual
reality with the home-selling process.
Imagine experiencing the sensation
of walking through a home in all its
three dimensions while remaining
seated at a computer screen.
Using a cursor or mouse, a pro-
spective buyer could "walk" down the
hallway of a house under consider-
ation, turn the corner and realize the
view out the living room window will
ndt do.
Skipping to another home, the
viewer could visit each room, look up
to see how high the ceilings are, open
a cabinet and glance behind a closed
door to get some sense of storage
space and perhaps decide that this
one deserves a real visit.
Then it's off to cruise other candi-
dates found in the computerized in-
ventory of homes for sale that other-
wise resembles the two-dimensional
multiple-listing services underpinning
the realty sales efforts in most mar-
kets today.
"A prospective buyer would get the
feeling of navigating a house in a way
that is not possible on videotape," said
John Latta, president of 4th Wave, an
Alexandria-based technology consult-
ing organization. The effect is they
are walking through the house. They
control it, not the cameraman who
made a video recording."
Although the scenario sounds far-
fetched, several virtual reality ex-
perts were unwilling to discount the
possibility of of such a system.
"It is a future application waiting
for its time," said Michael Benedikt,
professor of architecture at the Uni-
versity of Texas at Austin and a
virtual reality expert.
Latta said he is "surprised we have
not seen this kind of tool emerge yet.
It would be particularly useful for
out-of-town buyers who could not get
to homes easily, but have to make
decisions quickly."
For the moment, though, no for-
ward-thinking realty concern or tech-
nology firm has married the two, even
though an MLS-like application could
be accomplished without the "total
immersion" of virtual reality created
by suiting up the viewer in a $25,000
headset and electronic glove, said
Sandra Helsel, editor of Virtual Reali-
ty Report, an industry newsletter
published in Tucson.
"You can get the feeling of maneu-
vering in virtual reality through the
window of a computer screen" of a
desktop personal computer, she said.
— H. Jane Lehman
167
I. THE REAL ESTATE SETTLEMENT PROCEDURES ACT OF 1974
AND CONTROLLED BUSINESS ARRANGEMENTS
Comment. In 1983 Congress amended the Real Estate Settlement Procedures Act of 1974
(RESPA) by adding provisions dealing with "controlled business arrangements." The amendments
added a definition of a "controlled business arrangement" (CBA) and then provided conditions
under which it could operate without violating the anti-kickback provisions (Section 8) of RESPA.
The 1983 legislative effort focused on what some CBA critics charged was a "loop hole" in the
original 1974 statute, namely the use of the CBA as a means of evading the Section 8 anti-
kickback provisions. Led by the American Land Title Association (ALT A), the critics first sought
a complete ban on the CBA. Failing this goal, they were able to obtain, in a 1982 bill, a
limitation or partial restriction on the operations of the CBA. When the 97th Congress did not
act on the measure, a similar bill was introduced in the 98th Congress in 1983. However, the
CBA limitation provision was struck from the committee print in exchange for additional
consumer disclosure requirements. The following is a brief recitation of the legislative process
which led to the 1983 amendments, with particular emphasis on the role of, and impact on, the
real estate agent as one of the statutory "settlement service providers" participating within a CBA
context.
Backeround
In 1974, the Real Estate Settlement Procedures Act (RESPA) was passed by Congress to
provide a degree of consumer protection to home buyers in the real estate settlement process.
One of the stated objectives of the law was to eliminate what Congress found to be
"unnecessarily high settlement charges caused by certain abusive practices" in the industry. In
particular, Section 8 of the Act was designed to prevent kickbacks and such other payments made
for referrals between various settlement service providers. Entitled "Prohibition Against
Kickbacks and Unearned Fees," it expressly prohibits "any fee, kickback, or thing of value" from
being paid in return for the referral of "business incident to or part of a real estate settlement
service" in connection with a federally-related mortgage loan. However, in order to permit a
payment to be given (or accepted) for legitimate work done in connection with a referral,
Congress allowed for such efforts to be compensated, provided services were actually performed.
1
168
In the statute (amended in 1976), examples of such "allowable" or exempt payments appear in
Section 8.1
Controlled Business Arrangement (CBA)
The focus of Section 8 of RESPA is on the referral of business by or to a service provider
incident to a settlement. In the two- to three-year record of Congressional hearings on kickbacks
and unearned fees leading up to the 1974 enactment, the testimony addressed the conduct of
unrelated entities brought together, prior to any specific settlement transaction, solely as
participants in the settlement process. Little if any attention was given to the activities of those
settlement services providers who joined together to operate more than one business engaged in
the process. Although this phenomenon of ownership of multiple or ancillary service providers
in the settlement industry existed before the enactment of RESPA, many charged that the number
of real estate broker-owned title agencies grew dramatically after RESPA — as a device to
circumvent the Section 8 prohibitions. They alleged that the 1974 statute contained a loophole
through which the CBAs could "internalize" the referral payment, free from scrutiny. The
1 After 1976. the following payments in connection with a real estate settlement service were exempt under the
"kickbacks and unearned fees" prohibition of Section 8:
(1) the payment of a fee (A) to attorneys at law for services actually rendered or (B) by a tide
company to its duly appointed agent for services actually performed in the issuance of a policy of
title insurance or (Q by a lender to its duly appointed agent for services actually performed in the
making of a loan, (2) the payment to any person of a bona fide salary or compensation or other
payment for goods or services actually performed, or (3) payments pursuant to cooperative
brokerage and referral arrangements or agreements between real estate agents and brokers, or (4)
such other payments or classes of payments or other transfers as are specified in regulations
prescribed by the Secretary, after consultation with the Attorney General, the Administrator of
Veteran's Affairs, the Federal Home Loan Bank Board, the Federal Deposit Insurance Corporation,
the Board of Governors of the Federal Reserve System, and the Secretary of Agriculture.
169
egality of a Section 8 "referral" of "business incident to or pan of a real estate settlement
service" in the context of a jointly-owned or controlled provider came into question. Many real
estate brokers who expanded their customer services by creating joint ventures, partnerships or
iffiliation with mortgage companies, title companies, or other real estate service providers in fact
vere participating in a form of "referral" activity within and among their various combined
ownership interests. Critics charged that such referrals occurring within a commonly-owned
nultiple service provider were subject to RESPA prohibitions on "kickbacks and unearned fees."
TTie American Land Tide Association (ALTA) argued that these arrangements simply created the
;ame problems that were caused by outright cash kickbacks and were in effect a means of
;vading the statute.
In an attempt to respond to the growing debate over the CBA as a permissible entity
under RESPA, HUD issued an interpretive ruling (July 1980) entitled "Effect of the Real Estate
Settlement Procedures Act on Certain Practices Known as Controlled Business."2 The regulation
stated that the existence of a controlled business relationship (as to service corporations) may be
i violation of Section 8 because, among other things, a dividend was a "thing of value" and thus,
■vithin the prohibition.
In an effort to resolve the issue of the controlled business mechanism and referrals within
such a context, Congress once again examined RESPA in the fall of 1981.
2An industry observer noted that the term "controlled business" was coined by ALTA to describe a "settlement
service company affiliated with a lender, broker, or real estate attorney."
170
Congressional Hearings (September 1981)
Hearings were held by the Housing and Community Development Subcommittee of the
House Banking, Finance and Urban Affairs Committee (97th Congress; 1st Session) at which
various government, industry and public witnesses presented their views.
The testimony soon revealed a wide range of positions and attitudes toward RESPA itself
— well beyond the issue of controlled business, or in some measure, because of it. Once again
there were pleas to repeal the statute altogether or, to reallocate disclosure requirements; there
were proposals that the settlement transaction be bundled together by the lender and offered to
the consumer as a "one stop" service.
The Subcommittee Chairman, Henry B. Gonzales (D-Tex.), opened the hearings by
framing the issue:
As we all know, whenever a person buys a home there are a number of
essential steps involved for closing or settling the transaction. Among these
essential steps is the procurement of title insurance. Real estate professionals
include brokers, mortgage lenders, attorneys, and builders. These professionals
are in a unique position to influence the buyer's choice of title insurance and other
elements essential to real estate settlement The typical home buyer is not an
attorney, broker, or otherwise acquainted with the varied and complex details of
real estate settlement. Like the physician's patient, the buyer depends very
heavily on the recommendations of the professional. Buyers might not be aware
that title insurance companies can be controlled by the parties that recommend that
title insurance be bought from a certain offeror. Buyers might not even be aware
that they have a choice in the matter.
Whenever the buyer is faced with a situation in which a real estate
professional steers him into a title insurance in which that professional has an
interest, that buyer is faced with a controlled business problem. The buyer
probably will be unaware of the fact that he is being steered into a controlled
business. He has no way of gauging the soundness of their business and probably
will not be aware that he might do better by shopping around. Therein is the
problem (emphasis added).
171
Governmental Witnesses (September 15)
The Subcommittee first turned to HUD for its recommendations. The witness, Dr. E.S.
Savas (Assistant Secretary for Policy Development and Research), while acknowledging the 1980
HUD opinion that such arrangements may violate RESPA, went on and voiced both sides of the
argument:
We have found, however, that a controlled business arrangement may be
the cheapest and most efficient provider of that service, and referral to a controlled
business saves the consumer time and money in searching. Indeed, we would
argue that referral fees may lower the total package price to the consumer. It is
equally true that the controlled business also can be inefficient and costly, but can
remain in business because of referrals from its parent company. In a settlement
market, however, we have discovered that consumer shopping and awareness are
minimal; therefore, no natural market forces will ever correct this inefficiency.
After a brief recitation of the process that occurs when a consumer prepares to buy a home,
Savas stated that RESPA should be replaced with a mechanism called "lender packaging," a
concept which, he urged, "eliminates the concern about controlled business and kickbacks or
referral fees." The lending institution would be required to offer a package of all the applicable
settiement services, including tide insurance, as a part of the loan transaction for one quoted
price. HUD's position on controlled business was then put forth. The witness reconfirmed his
department's recommendation contained in its recently submitted report to Congress (September
10) on RESPA. If Section 8 is not repealed entirely, in favor of lender packaging, it should be
amended to prohibit any referral by one settlement service provider to a wholly or partially
owned subsidiary providing another settlement service. The HUD report itself stated that "we
believe that a prohibition against kickbacks and unearned referral fees must logically and legally
include a prohibition against controlled business arrangements" (emphasis added).
172
In contrast to the HUD position, the witness for the Federal Home Loan Bank Board,
Thomas P. Vartanian (General Counsel), alluded to his industry's service corporations in
connection with RESPA.
He admitted that "due in part to RESPA's ban on compensated referrals, service providers
such as real estate brokers and lenders have acquired an ownership interest in other settlement
providers and automatically make referrals to the controlled entities." However, in an attempt to
protect the interests of lenders who establish such ancillary providers (service corporations), Mr.
Vartanian argued that there was no justification in the legislative history of RESPA to indicate
that Congress intended that payments other than those directly related to the referral itself should
be prohibited. (Although his remarks were directed to a lender's involvement in ancillary
services, the argument could apply to other types of CBA participants as well.) He continued:
Additionally, had RESPA been intended to include dividends as a fee, kickback,
or thing of value, it would almost certainly have addressed a number of issues
raised by HUD's [interpretive rule]. For example, dividends from a corporation
are not contingent upon the association's referral of business to the service
corporation, but on overall profitability of the service corporation as an entity
(emphasis added).
The Bank Board witness followed that it was difficult (if not impossible) to trace or identify the
varied components of a corporate dividend in an attempt to determine which ones were generated
from controlled business referrals. Service corporations, he remarked, often render settlement
services to customers referred from sources other than their parent and often engage in non-
settlement related efforts, activities all of which influence the corporate bottom line. How could
the controlled business portion or element of its services be carved out and assigned a value?
RESPA, he stated, simply "was not intended to address payment of dividends to parents
by service corporations." The language of the statute (Section 8) was too ambiguous to infer that
6
173
a payment of a dividend could somehow be considered the same as the payment of an unearned
fee or kickback, both clearly direct remuneration arising from a referral of business. "Legislative
history and other considerations provide extremely strong evidence that the statutory ambiguity
in Section 8 must be resolved to exclude dividend payments from coverage."
Finally, Mr. Vartanian reminded the Subcommittee that to include controlled business
referrals in Section 8 would be inconsistent with HUD's own findings in its just-released report
to Congress, as well as with the conclusions of an outside consultant to HUD, wherein both, he
said, rejected "as unpersuasive ALTA's contentions that controlled business arrangements lead
to higher prices and poor quality title insurance work." The HUD report, he stated, found that
"elimination of controlled business would not necessarily benefit consumers and [quoting the
report] 'there is reason to believe such relationships are, in fact, economically efficient.'"
The witness from the Federal Trade Commission, Thomas H. Stanton, (Acting Director,
Office for Policy Planning), focused directly on the economic benefits derived from the conduct
of real estate settlement services through controlled businesses and urged that such arrangements
be encouraged. He stated that settlement costs should go down and praised the concept of
combining related settlement services, cautioning that "artificial restrictions on the sensible
bundling of goods and services should be looked at with a jaundiced eye." He concluded his
testimony to the Subcommittee by commenting on the most extreme of the legislative proposals
before it:
A prohibition [of the CBA] is the most restrictive of all the
remedies considered here, and there are therefore solid grounds for
requiring stronger evidence that the practice is on balance harmful
before that remedy is imposed. At a minimum, a flat prohibition
should not be adopted without first considering the other, less
restrictive options.
174
And, judging from some of the questions submitted to the witnesses by members of the
Subcommittee, options to outright prohibition were being considered. Most of the suggested
alternatives focused on consumer education and disclosure.
Nevertheless, panel members continued to probe the allegations of unfairness. From
Chairman Gonzalez:
Mr. Stanton, . . . your recommendations seem to be in
contradiction with the antitrust policy of the Attorney General of
the United States. I quote from "The Pricing and Marketing of
Insurance -- a Report of the Department of Justice to the Task
Group on Anti-Trust Immunities" . . . The study states:
To sum up the major evils of controlled title companies where a real estate
settlement producer is able to direct the purchaser of a title insurance policy to a
particular title company and at the same time that producer owns the title company,
the purchaser is likely to end up, one paying unreasonably high premiums; two,
accepting unusually poor service; or three, accepting faulty title examinations and
policies from the controlled title company (emphasis added).
How do you reconcile that?
Mr. Stanton. Let me start with the Justice Department study
of 1977. I have read it carefully. We simply contend that one
must not only look at the price of, say, title insurance but also at
the total price of the total package, say, interest rates plus title
insurance. One must make a pragmatic examination, is that overall
price lower than, say, where an independent lender and an
independent title company offer the same services?
It is simply analytically not valid to look only at the price
of title insurance in both cases.
In connection with continuing allegations of "high premiums" and "poor service" within a
controlled business context, two of the government witnesses responded. From Mr. Vartanian:
Overall, the [HUD commissioned] study still concluded that
there was insufficient empirical data to establish whether or not
controlled business arrangements have an adverse effect on
settlement prices.
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Additionally, HUD's report to Congress on RES PA
explicitly labeled this argument unpersuasive and found that
generally, the prices of title insurance have remained constant at
the same uniform percentage level, regardless of whether the
insurance was sold through an independent or "controlled" title
company. HUD also found that there was reason to believe that
controlled business relationships are economically efficient and
could lead to reduced costs for consumers if freely allowed.
d, from HUD's Savas:
I submit that the anecdotal evidence submitted by the title
insurance industry to the Committee does not prove that controlled
business arrangements necessarily raise consumer costs.
While the Subcommittee members and the witnesses from the government agencies may
e considered the various options available in an attempt to resolve the controlled business
ae within a RESPA context, witnesses representing independent tide insurers wasted no time
mating alternatives — they wanted an absolute prohibition of controlled business arrangements.
le Industry Witnesses (September 15)
Witnesses from the tide insurance industry spoke of the ills brought about by controlled
;iness activities in their areas of the country. This time the focus turned directly to the real
ate broker.
One independent insurer (Clyda Guggenberger) complained that "[w]e lost our customers
;might, not because [the competitor] offered better services, but because real estate brokers
an outrageous violation of the agency principle were steering their customers to their own
row companies and title entities."
She remarked that many real estate agents in her area would have preferred to continue
iding customers to her company but their supervising broker, who owned a "tie-in-entity,"
176
iirected "his salespeople to take every transaction to his company [or rather] forces,
mands, harasses threatens, and even 'fines' are more accurate descriptions of the kind
exerted by the brokers" — all, she added, at higher prices for the service,
witness representing ALTA, James L. Boren, joined in the criticism of the controlled
-angement. He spoke of the need for the consumer to obtain the disinterested advice
te professionals in a transaction. Such is not possible if the professionals have a
terest in the selection of title insurance services; they "invariably steer their clients
ers to that provider, irrespective of the competitive merits of the services and rates
Dther title insurance providers." Mr. Boren went on to list the "major anticonsumer
npetitive consequences" caused by the controlled title insurance agency: (l)"no
: pressures to maintain the quality of its services or the reasonableness of its charges,"
ious competitive disadvantage placed on the independent company or agency," (3) the
asing financial benefits" offered to the professionals who have financial interests in
ind (4) the serious conflicts between the interests of the owners of a "controlled" title
he interests of the consumer and title insurance underwriter.
ALTA witness agreed with others that most consumers do not shop for title insurance
not have the time, knowledge, or incentive to shop the market in order to select the
title insurance services which offers the best combination of price, service and policy
. . it is inevitable that the great majority of consumers will continue to look to the
lations of their broker, lender, or attorney in selecting a source of title protection."
Boren urged that the direct kickback or referral fee recognized and prohibited by
in 1974 was not the only form of financial benefit unfairly influencing the
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ammendations of a referring party. Other "arrangements," he said, have proliferated since the
i- 1970s, whereby professionals who steer their customers or clients to controlled title insurance
npanies have been unfairly enriched. Moreover, whether such benefit from the arrangement
n the form of a dividend or capital appreciation of stock, often the financial gain even exceeds
'. amount which, in an earlier time, came from the direct kickback or referral fee.
As did many witnesses, he cited the 1977 Department of Justice report (noted by
iirman Gonzalez above) alleging the three "major evils" of high premiums, poor service, and
Ity title examinations arising from the operations of the CBA.
In the report, the culmination of an 18-month study of the insurance industry, the
artment had offered its views in an effort to "stimulate comment by all interested parties and
courage] consideration of the issues by regulatory and legislative bodies at both the state and
eral levels." The study cited the controlled business issue and noted a problem area left
ittended by the 1974 RESPA legislation:
While [RESPA] is designed to close the front door to
rebates and kickbacks in the title insurance business, a loophole has
appeared which may ultimately cause a problem worse than
outright kickbacks. This loophole is the title company affiliate of
a real estate agency, which we will refer to herein as the
"producer's affiliate" or "controlled title company."
Title companies controlled by producers have been steadily
increasing in number since the passage of RESPA. They possess
several anticompetitive features. One is that they encourage, on a
new level, the type of activity sought to be eliminated by RESPA.
This controlled placing of settlement services has a definite
tendency to increase the price paid by the consumer.
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After citing the report, the ALTA conclusions and recommendations were put forth to the
subcommittee:
Under our private enterprise system, consumers are best served
when competitors are required to compete on the merits of their
prices and services, and when all competitors have a fair and equal
opportunity to compete. Because of the strategic role played by the
real estate professional is assisting the consumer in selecting a
provider of title insurance services, it is essential for all providers
to have a fair and equal opportunity to compete on the merits for
the favorable recommendation of these real estate professionals.
This opportunity is effectively foreclosed when the real estate
professional is permitted to benefit personally from his
recommendation to the consumer. If such financial interests are
permitted, fair and effective competition on the merits will be lost.
And the ultimate loser will be the consumer.
Accordingly, on behalf of the American Land Title
Association, I urge this subcommittee to introduce and to act
favorably upon legislation that would clearly and comprehensively
prevent real estate professional who are in the position to influence
the consumer's selection of a provider from benefitting financially
from that selection.
By the time the industry witnesses ended their presentations, a consensus had generally
been delivered to the Subcommittee that the controlled business entity was such a threat to the
consumer (and to them) that nothing less than a federal legislative ban was necessary.
However, when pressed for evidence of high rates, poor service and faulty title
examinations, the witnesses at best provided anecdotal references to consumer disservice. Often
in response to a question seeking such clear-cut evidence, a witness would reply not with an
example, but with an expansive warning. For example, one witness (Boren) stated:
ALTA believes that focusing on whether any particular controlled
title insurance agency is currently charging more - or even less -
than other title insurance agencies may cause members of the
Subcommittee to fail to focus on the primary, long-term issues that
should be of concern to the Congress: whether the interests of
consumers will be served if markets are allowed to develop in
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which real estate brokers or mortgage lenders refer the customer's
business to captive title insurance agencies and where independent
tide insurance companies are effectively foreclosed from competing
for the recommendations of those real estate professionals, or
whether, in contrast, the interests of the consumers will be served
if markets are allowed to develop in which the real estate
professional has no conflicting financial self-interest in making
recommendations to the consumer regarding the title insurance
provider that offers the best combination of price and service.
Most of the concerns of the independent tide insurance agents and the title companies
who testified against the controlled businesses concept were similar to those highlighted by the
ALTA witness.
One independent agent (Gerald Peck) spoke of the inherent conflict of interest present
within the controlled business device, a mechanism that presented (or threatened) the exercise
of sound and independent judgment. A controlled tide insurance agent
which may be nothing more than a small shop, a one- or two-man
operation, can be pressured to close and ignore title problems
because of the economic pressure brought to bear by the person
controlling that company who is a party in the transaction. His
boss, for all intents and purposes, is the broker who is anxious to
get his deal closed and will oftentimes press inordinately to have
title questions passed over (emphasis added).
Agencies controlled by savings and loans or a real estate broker,
for example, are inherently subject to pressure to short cut their
search and examination operations or to ignore title problems that
if disclosed might jeopardize or slow down the consummation of
the transaction (emphasis added).
Another land title witness (Richard Bossard) did, in fact, cite examples of faulty title work
brought on by the pressure to overlook possible defects in titles within a controlled business
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atmosphere.
Real Estate Witnesses (September 16)
Witnesses representing the real estate industry followed with their views, some voiced in
general terms, stressing the economic and market benefits of the CBA on the whole, others in
more specific terms in the manner of a rebuttal of earlier comments of the critics. And, their
remarks were directed more to the witnesses from the insurance industry rather than to the
government spokespersons.
A witness from the National Association of Realtors (Donald H. Treadwell) noted that the
overall concern from the point of view of his industry was the ease and economy of transfer of
interests in real property. He urged that the question should be whether or not the actions of
those involved in controlled businesses resulted in "either diminished service or increased costs
to the consumer." In a criticism of the independent insurer he charged that many broker-title
insurance relationships exist and are developing solely for the purposes of "efficiency rather than
profit," remarking that it is the company that provides the best and fastest service that will
survive.
A witness from the savings and loan industry (Barry Tate) reminded the Subcommittee
that existing antitrust laws and bank rules prohibit forced steering or "tie-ins," i.e., conditioning
the sale of one product on the sale of a second product. He suggested that the whole issue of
controlled business should be considered in the context of the nation's general antitrust laws —
laws which "contain long standing and well understood restrictions regarding monopolization,
conspiracy to monopolize, attempts to monopolize, and so on."
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The witness cited numerous examples in companion industries wherein parent entities
make referrals to subsidiaries or affiliated bodies and no allegation of illegal or inappropriate
conduct is raised; auto dealers, appliance retailers, and hospitals all use a form of referral to their
own repair, service, or professional branches without argument from independent or unaffiliated
service providers. "Setdement services are not distinguishable from any of these examples."
One particular company invited to testify as part of the group from the so-called "real
estate professional sector" had been singled out by the critics of controlled business because it,
according to them, exemplified the combining of settlement services through wholly owned
service companies. When the time came to present its testimony, the remarks of the witness were
as much directed to the specific charges as they were addressed to the controlled business issue
in general.
The witness, Stanley M. Gordon, was testifying on behalf of a broker (Coldwell Banker
& Co.) which provides various ancillary settlement services within its corporate structure. He
responded to the ALTA charges. First, as to steering, he noted that his company's title agents
were independent contractors and were not required to send their business to the parent — and
often did not Moreover, its own real estate brokers were similarly under no such requirement.
He stated that "they [the brokers] are unimpressed by the fact that we have a tide agency and we
only obtain business from them after demonstrating good service."
To allegations that broker-owned title agencies charge higher fees, Mr. Gordon cited both
a State of California-sponsored report refuting such claims and the HUD study (noted above)
which contained similar findings. As to charges of inferior title service he reminded his audience
that under state law his company has an indemnification responsibility to the title insurer, thus
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discouraging efforts to ignore or gloss over title defects.
Another witness, also testifying on behalf of Coldwell Banker (Charles R. Hilton),
challenged his critics by asking for the underlying data justifying the oft-repeated allegations:
We have been fighting against nonfacts for five years,
regarding title hearings, kangaroo court-type hearings. We fought
nonfacts and found findings of facts where there were no facts. I
haven't heard any facts at this hearing that would lead anybody to
the conclusions that real estate brokers who have a controlled
ancillary service charge higher fees - maybe I missed it -- or that
they offer poor service, or that they write defective policies. That
is the most ludicrous thing that I think anyone could ever say: that
a real estate broker, for a small or large commission, would write
around a defect in the title, which would cost them many times
over the amount of their commission.
Finally,
I suggest to you that ALTA is asking for protectionist
legislation based upon a potential evil. And they can't say it's
anything but potential. But the potential exists, with or without
controlled business.
Now, the surveys that I have observed in - questions to
clients indicate that the real estate broker, who is the direct point
of contact in normal situations with the buyer and seller - they
expect the real estate broker to walk this transaction through to
conclusion, which means that the real estate broker is put in a
position of some responsibility in connection with each of the
services offered ~ be it survey, or title, or loan; whatever - and to
help that buyer and seller through the maze that they are
confronted with.
I suggest to you, Mr. Chairman, that if the real estate broker
has responsibility for those services, they should be entitled to then
be involved where they can offer the finest service available.
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Public Witnesses (September 16)
The remaining grouping of witnesses testifying before the Subcommittee were categorized
as "public witnesses" and came with diverse views on the controlled business issue.
A former HUD official (Thomas C. Collier) stated that "controlled business arrangements
provide a sophisticated camouflage for the payment of kick-backs simply for the referral of
settlement service business." He defended the value of anecdotal evidence in the absence of
clear proof to show that controlled business arrangements did cause prices to increase, and he
called for their prohibition entirely.
Another former HUD official (Robert R. Elliot) took a different approach and noted that
outright prohibition of the CBA would contradict established antitrust policy which treats a parent
and its subsidiary as one entity — a composite of one which can't give itself & kickback. He went
on to demonstrate the awkward situation that would exist if HUD allowed a corporation, through
its subdivision, to render more than one settlement service to customers because it has "control"
over the subdivision (to whom it "referred" business), but would not so allow an entity to make
referrals to a provider in which it had an equity interest which interest fell short of the requisite
"control." He concluded by urging that the anti-tying policies and regulations already in place
should be sufficient warning to prevent consumer abuse. Notwithstanding such consumer
protections, he charged that
the proponents of a so-called "controlled business" prohibition wish
to go a step further and stamp out all competition from such
subsidiaries where they refrain from such tying. I cannot agree that
such an anti-competitive step is desirable, when alternatives are
available which will increase competition.
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eeislation Introduced.
There was no more formal legislative activity on the controlled business issue in the
louse until a housing bill was introduced (H.R. 6296) seven months later (May 6, 1982) in the
;cond session of the 97th Congress. The bill, part of a lengthy measure entitled the "Housing
nd Urban-Rural Recovery Act of 1982", contained an amendment to RESPA which dealt with
le controlled business arrangement.
The proposal first defined a "controlled business arrangement" by setting forth its two
rerequisite components — the qualifications of a "person" (or "associate") in a position to refer
usiness to a settlement service provider and the fact of a referral to that provider. Once such
vo conditions were satisfied a controlled business arrangement exists.
Given then the presence of the arrangement, the bill allowed that a person in such a
ontext could make a referral without violating Section 8 of RESPA if three conditions were met.
Tius, while the controlled business critics in 1981 favored the ALTA "solution" and wanted the
loop-hole" in the 1974 statute closed with a complete ban on such arrangements, the legislation
vhich was finally presented rejected such an extreme measure and conditionally permitted them,
lbeit with percentage limitations.
The proposed amendment approved of referrals within controlled business arrangements
o long as:
(1) the nature of the ownership interest is disclosed at the time of the referral;
(2) no unreasonable restrictions are imposed on the buyer's or seller's selection
of the settlement services provider for which the buyer or seller bears the cost;
and
(3) the only thing of value that is received from the arrangement is the return on
such ownership interest (emphasis added).
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ese three operational conditions of a controlled business referral transaction were further
yject to an administrative condition placing a percentage limit on such transactions:
A title company, private mortgage insurance company, or escrow services
company may participate in any transaction involving a controlled business
arrangement for that company if such arrangements are permitted [as noted above]
and if in any calendar year the total number of such transactions does not exceed
twenty percent of all transactions in which that company has participated; . . .
(emphasis added).
e 20% limitation did not apply in certain circumstances — in a county with a population of less
ji 25,000 or in an instance where there is negligible ownership in a service provider by its
ferrer."
As thus proposed, the amendment created two tests, one containing the three mandatory
ments of the referral and transaction itself, and the other, a numerical limitation on such
nsactions. The latter test was being applied to ensure that entities participating in controlled
siness arrangements could survive and flourish in the industry without reliance on their
aaranteed" sources of business. Therefore, according to the Banking Committee, in any
endar year, title companies and other recipients of business from "real estate professionals"
•Ji whom they have an affiliation "would have to obtain a predominant percentage of [their]
siness (80 %) from sources other than referrals by those persons."
The 1981 hearings had devoted little, if any, attention to such an unexpected treatment
the controlled business issue. The witnesses variously had urged either a complete prohibition
the arrangement or a pragmatic acceptance and encouragement of it, not a hybrid. However,
i Committee stated its belief that,
in light of the unique nature of the services provided by these types of entities,
permitting these companies [title, mortgage insurance or escrow services] to obtain
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all or a significant portion of their business from referrals by real estate brokers,
mortgage lenders, builders, or attorneys that may have ownership relationships
with them will enable these companies to be insulated to a great degree from
having to compete on the merits of their prices and services for their business.
In addition, significant conflict of interest problems may arise when these
companies are owned or controlled by parties who have a direct interest in the real
estate transaction.
he Housing and Urban-Rural Recovery Act of 1982, the major housing bill in which the RESPA
mendment was a minor inclusion, did not pass in the 97th Congress. However, much of its
ubstance was carried over into the 98th.
Sth Congress: RESPA
On January 3, 1983 a successor bill was introduced in the House (H.R.I) which was
ubstantially similar to the 1982 measure, including the RESPA controlled business amendment,
md again the proposed language to be included in Section 8 of RESPA would allow referrals
d be made within a controlled business arrangement if the three conditions of:
1) disclosure
2) no required use ("ami-tying"), and
3) thing of value
re met and, additionally, if such referred business is limited to 20% of the total transactions of
tie service provider for any calendar year. The percentage restrictions caused a great deal of
oncem for companies in the industry which had either fully integrated as multi-service
orporations or which had affiliated themselves with other settlement service providers. To some
)bservers the limitations constituted the functional equivalent of a ban on controlled business
irrangements; the proposed legislative language became known as the "shut town" provision.
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House Markup
In April 1983, at the Housing Subcommittee markup on H.R.I, the issue of the percentage
limitations was raised and debated. An amendment was offered by Representative Barney Frank
(D-Mass.) whereby he proposed that the restrictions be removed from the Subcommittee print,
and that another disclosure requirement (written estimate of charges) be added to the list of
conditions. He remarked:
Mr. Chairman, I think we should be protective of consumer interests.
I have listened and read and talked to people, and it does not seem to me
that there is damage being done to consumers by allowing this newer form of
business. I say newer because it's a form of business, the controlled business, that
has grown up relatively recently.
My amendment does say that anyone who has a controlled business would
be required to disclose the fact that he or she or his entity owned the business to
which referral was being made; that a written estimate of the range of charges
would have to be offered; and that there could be no requirement of a tie-in; and
also that the only charge for the service for the controlled business would be the
normal and customary charge of the controlled business. There would be no
referral fee...(emphasis added).
I do not see that a major interest is served or even that a minor interest is
served by preventing these controlled businesses. They have grown up in the
normal course of business. I think they respond to the market. There are
obviously different forms. There are title insurance companies that are
independent; there are title insurance companies that are owned by real estate
brokers. To them I say may the best company win.
....I don't see that any consumer interest is harmed, and I think that we otherwise
interfere with some established business relationships. To require that someone
at the end of the year have only had 20 percent of his business from one place is
a little bit like telling you to get off the subway stop before I do. It's kind of
hard to figure that out and make the decision before you have all the information.
Mr. Frank's amendment to the Subcommittee print also did not preclude a state from enacting
more stringent restrictions on controlled business arrangements. He noted that his measure "does
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not propose to preempt state law. If a state sought to impose tighter restrictions with regard to
controlled businesses nothing in this would preempt the state from exercising further regulatory
power if it thought that that was necessary."
At the markup, as a counter to the Frank proposal, Representative Jerry M. Patterson (D-
Cal.) offered his amendment which retained restrictions, but to a lesser degree. He proposed to
place the percentage limitations solely on arrangements involving title companies (rather than
controlled arrangements of other service providers) and then at a more lenient level of 50%, i.e.,
a title company participating in a transaction involving a controlled business arrangement for that
company would have to obtain only 50% (rather than 80%) of its business from referrals outside
that context. Mr. Patterson also stated that his proposal would provide for injunctive relief as
a remedy in place of the harsher penalty of treble damages to be paid by the violator. He sought
support for his amendment:
The 50 percent public business requirement will ensure that all of the
customers will be purchasing title insurance from an entity that has demonstrated
it can compete successfully in the marketplace.
If you eliminate the 50 percent or the 80 percent which is in the bill you
will in essence open it up for every lender or every realtor that wishes to dictate
in a sense, and while I think the disclosure goes in the right direction, I'm not at
all sure that it would accomplish totally what we want, and that is to have the
consumer able to purchase title insurance wherever they want to as opposed from
a recommended source.
Mr. Frank responded:
Again, there has been no showing anywhere that there is a consumer
penalty if a title company is owned by a real estate company rather than if it is
not, and that seems to me ought to be the touchstone which is necessary for us to
get into the field.
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189
So the difference between the gentleman's amendment [Patterson's] and
mine is that he would continue the restriction on controlled companies, he would
lessen it a little bit I still think it becomes very awkward. Being subject to a 50-
50 requirement as to where your business comes from at the end of the year can
be kind of a difficult situation if you are not sure where your business is going to
come from.
I think the gentleman has explained his amendment clearly and I think the
difference continues to be that I do not believe that the evidence shows that
consumers are penalized. If the consumer has to be told what the price will be,
told that there is a tied relationship, a controlled relationship, [and that he] cannot
be required to use their service, then the consumer is free to shop.
I think there is a certain artificiality, as all of us would agree, in the notion
of people shopping for title insurance. The poor consumer buying a house is
lucky if he remembers to buy a rug the week after, he is so busy with all this
stuff.
But for those who are able to go out and shop this preserves their freedom
and preserves the right of the states to go beyond that.
Representative Bill Lowery (R-Cal.) added his remarks in support of the Frank amendment:
The premise on which both ... the subcommittee print and the amendment
by [Patterson] is based is that controlled business, . . . leads to higher prices and
inferior service and is thus anticompetitive. Yet from the date of the hearings in
September of 1981 until now, a period of a year and a half, no evidence has been
produced by the proponents of this provision that shows that these problems do
in fact exist.
The Subcommittee took a vote and defeated the Patterson substitute amendment which was
designed to retain a degree of percentage limitations. It then passed the Frank amendment
eliminating the restrictions altogether.
In May 1983 the House Committee on Banking, Finance, and Urban Affairs passed the
bill as amended by the Subcommittee and submitted its report on H.R.I to the House.
In its report, the Committee, in resisting the effort to prohibit controlled business
arrangements (or even to limit them), stated that it was amending RESPA
23
70-043 0-94-7
190
to clarify that controlled business arrangements in federally related
mortgage transactions are a permissible method of doing business so long as a
good faith effort is made to disclose the existence of the controlled business
relationship at or prior to the time of referral, a written estimate of the range of
charges generally made by the provider is given, and no person is required to use
a particular service provider (with exceptions to protect the lender's interest and
to allow attorneys to act as title agents in certain circumstances), and the only
payment received from the arrangement is a return on the ownership interest or
franchise relationship.
After a description of what constitutes a "controlled business arrangement" the Committee stated
that such types of business activities should be allowed in the industry:
The issue of controlled business has been explicitly considered and the
Committee has adopted language which establishes that controlled business
arrangements do not violate RESPA so long as certain conditions are met. In
doing so, the Committee evaluated the evidence presented on both sides of the
issue and determined that controlled business referrals should not be prohibited.
The conditions to their acceptance were then set forth (disclosures, "anti-tying" and "thing of
value"). The obvious omission of the condition sought by the title insurance industry — the
percentage limitations, was explained by the Committee:
Although consideration was given to imposing a percentage limitation on
the amount of controlled business that could be transacted by a controlled title
company, the Committee concluded that at the present time such limitations
should not be imposed at the federal level and that the disclosure and anti-
coercion provisions of [the bill] might prove sufficient to remedy the problems in
this area.
However, the report alluded to the provision in the legislation which was to become the signal
for subsequent state activity:
The [amendment] also permits the states to impose more stringent
limitations on controlled business arrangements should they so choose. . . .
Certain states have already adopted laws that impose stricter limitations.
The provision reflects the Committee's view that, while the disclosure and
anti-coercion provisions contained in the bill may be the proper approach for the
Federal Government to take ... in the context of Section 8 of RESPA, individual
states may conclude that more stringent limitations, particularly in connection with
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the problem of controlled business in the area of title insurance, are needed. Thus,
the controlled business amendments to Section 8 of RESPA should in no way
inhibit the individual states in which controlled business may be a significant
problem from adopting those additional measures that they believe will protect
consumers and competition.
House and Senate Passage
After acceptance by the Senate of the House language, the RESPA amendment was
included in H.R.I which in turn was folded into an even larger piece of legislation which passed
on November 30, 1983 and became law on January 1, 1984.
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REAL ESTATE SETTLEMENT PROCEDURES ACT
COMPLIANCE KIT
April, 1993
Prepared by the NATIONAL ASSOCIATION OF REALTORS*
193
RESPA
COMPLIANCE KIT
INTRODUCTION
The Real Estate Settlement Procedures Act (RESPA) was enacted in 1 974 to provide consumers
with disclosure about closing costs and to prohibit unearned fees (kickbacks/referral fees). It
was amended in 1983, (The Housing and Urban Recovery Act of 1983), to include Controlled
Business Arrangements (CBAs) - diversified real estate companies that offer more than one
settlement service.
The final rule revising the regulations for RESPA, effective December 2, 1 992, conforms to section
461 of the Housing and Urban-Rural Recovery Act of 1983 (HURRA). With this rule, the
Department of Housing and Urban Development (HUD) addresses the application of RESPA to
Controlled Business Arrangements (CBAs), Computerized Loan Origination (CLO), and clarifies
certain matters which were previously only covered by informal legal or program advice.
Following is an overview of those sections affecting the majority of real estate licensees with a
particular emphasis on Sections 3500.14 and 3500.15. Boards of REALTORS* are authorized
to duplicate this kit or portions thereof for distribution to members, and for inclusion in Board
newsletters. Relevant definitions and a list of resources are included at the end of this kit.
SECTION 3500.14 - Prohibition against kickbacks and unearned fees.
Commonly referred to as Section 8, this is the heart of RESPA and consumer disclosure is the
soul. Section 8 pertains to referral fees, kickbacks and unearned fees. The key language,
unchanged since 1974, is: "No person shall give and no person shall accept any fee, kickback,
or other thing of value pursuant to any agreement or understanding, oral or otherwise, that
business incident to or a part of a settlement service involving a federally-related mortgage loan
shall be referred to any person..." (Federal Register, Volume 57, No. 212, on November 2, 1992)
Much of the RESPA controversy during the last four years was generated by allegations of illegal
referral fee arrangements between lenders and real estate brokers. Examples submitted to HUD
were advertisements/flyers from mortgage brokers offering to pay real estate brokers/agents for
the referral of business and reports of demands from real estate brokers to lenders for referral
fees for placing mortgage business.
These practices have been prohibited by Section 8 of RESPA since 1 974, however it became
clear in the investigatory process that few in the industry understood that to be the case. In
response to the real estate industry's demand for more rigorous enforcement, HUD Secretary,
Jack Kemp, established a special unit to investigate reports of violations of the kickback
provisions in Section 8. As of April, 1993, there are hundreds of complaints filed with HUD.
In summary, paying or receiving a fee or thing of value for the referral of business related to
settlement without rendering a service is a violation of RESPA. Examples of how HUD is
interpreting this provision include the following: (1) referrers have been supplied with computer
equipment and fax machines that can be used to communicate with the providers, but also may
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be used by the referrers for their own purposes. HUD has taken the position that providing "non-
dedicated" equipment violates Section 8; (2) real estate brokers accepting a portion of a title
agent's premium or excessive fees from mortgagees for taking a credit application have been
required to end these practices; (3) real estate brokers who rent space to other settlement
service providers must be sure that the amount of the rent is not adjusted based on the number
of referrals between the two entities (no rental rebates allowed).
While the "anti-kickback4* provisions have been in place since 1974, the debate in recent years
was over CLO payments to real estate licensees. Critics of arrangements between real estate
brokers and lenders to provide consumers with mortgage services contend that payments for
CLO services are indirect referral fees and, therefore, a RESPA violation. The CLO provision of
the final regulation was debated at great length publicly and privately over the last four years and
was the subject of Congressional hearings in both the House and Senate in 1 990. The final rule
recognizes the legitimacy of CLO payments and allows mortgage information/origination systems
provided the borrower pays the fee and the provider of the service provides the disclosure set
forth in the rule (attachment A).
Section 8 of RESPA permits: (1) payments pursuant to cooperative brokerage and referral
arrangements or agreements between real estate agents and brokers; (2) payment to any person
of a bona fide salary or compensation or other payment of goods or facilities actually furnished
or for services actually performed; (3) an employer's payment to its own employees for any
referral activities (new) and (4) any payment by a borrower for CLO services, so long as the
'disclosure set forth by HUD is provided the borrower (new).
The employer/employee exception from Section 8, listed as (3) above, is intended to be narrow.
For example, a manager of a local office of a large real estate company may receive cash
bonuses or other compensation if home buyers obtain their financing through an affiliated
mortgage banker, or have their title and settlement work done at an affiliated company. If real
estate agents are viewed as "employees" of a broker and the CBA provisions in the rule are
satisfied, a real estate broker could pay its sales associates a fee for referring applicants to a
mortgage or title company affiliate. The final rule makes it clear that the recipient of the referral-
the affiliated provider of services-may not pay a fee or thing of value to the source of the referral.
The final rule indicates that providers of multiple services must perform distinct services in return
for each payment they receive. As an example, the regulation indicates that an attorney
representing a party in a real estate transaction may not also receive a fee as a title agent unless
the attorney independently performs "core title agent services" and has liability for these services.
These services include: evaluating the title search to determine insurability of title; clearing
underwriting objections; issuing policies and, where customary, issuing title insurance
commitments, performing title searches, and conducting closings.
Section 3500.15 - Controlled Business Arrangements (CBAs)
A controlled business arrangement is a diversified company created to package real estate
related services. A long standing issue under RESPA is whether a Section 8 violation exists
when referrals are made between affiliated entities, but the provider of the settlement service
does not make a direct payment to the referral source. Section 461 (b)(3) of the Housing and
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Urban-Rural Recovery Act of 1983 ("HURRA") amended RESPA to clarify that the prohibition on
kickbacks and unearned fees should not be construed as prohibiting these arrangements as long
as certain requirements were fulfilled.
Under the final regulation a CBA is permitted if the following conditions are satisfied:
• the referring party provides a Controlled Business Arrangement Disclosure Statement (see
Attachment B) on a separate piece of paper no later than the time of referral;
• the nature of the relationship (ownership and financial interest) between the referring party and
the provider of the settlement service is disclosed; and
• an estimated charge or range of charges generally made by the provider of settlement services
is provided.
The final rule allows consumer discounts for the use of affiliated service providers. Investigations
to date have focused primarily on real estate brokers who own an interest in a mortgage banking
company or title agency. In these instances, HUD has been particularly tough when consumers
have not been informed of the affiliated relationship or of the true costs charged by the affiliated
entity. (Phillip L Schulman, Esquire, "RESPA Enforcement - A Report from the Front")
HUD is also concerned that CBAs not be simply "sham companies"- a group of settlement
service providers joining together to form companies that do little or no work yet receive
excessive fees. Earlier versions of the rule indicate that HUD believes the very existence of a
CBA implies a potential RESPA violation.
State laws ooverninq CBAs will be viewed as inconsistent with, and hence preempted by. RESPA
if they do not give more protection to consumers and/or competition.
CONSEQUENCES OF NON-COMPLIANCE
Any person or persons who violate Section 8 of RESPA (1 2 U.S.C. 2607) 3500.1 4 or 3500.1 5 shall
be fined not more than $1 0,000 or imprisoned for not more than one year, or both, for each
violation.
Section 3500.17 - Escrow
Section 1 0 of RESPA relates to the escrow account maintenance provisions which were enacted
to prevent lenders from requiring that excessive amounts be maintained in escrow accounts for
the payment of taxes and insurance.
Although confusion has arisen regarding acceptable accounting methods for purposes of Section
1 0, the December 2, 1 992 final rule did not address Section 1 0. Therefore, on January 21 , 1 993,
HUD issued RESPA Interpretive Rule 1993-1 which states as follows:
"Both individual (or) single item analysis" and "aggregate (or) composite analysis" are acceptable
escrow accounting methods under sections 10 (a) (1) and (2) of RESPA for determining the
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maximum amounts which may be accumulated in escrow accounts for purposes of this Section
(Federal Register, Vol. 58, Number 12, January 21, 1993).
COMPUANCE CHECKLIST
DO continue to offer consumers choices when recommending lenders
and other providers of settlement services. In the past, when real estate
brokers have placed most of their loan business with a single lender,
problems have occurred because of the appearance of a RESPA
violation. When that lender's competition believed itself to be
disadvantaged, the likelihood of an investigation by HUD's Enforcement
Unit increased.
DO provide consumers with full written disclosure as to the fees you are
receiving (HUD has provided suggested forms for the CBA and CLO
provisions.)
PONT try to circumvent the rule, ft is not worth it to try to hide referral
fees. HUD's decision to allow CLOs to develop without unnecessary
regulatory restrictions is an opportunity that should not be abused. As a
real estate licensee, be sure that the fees you are receiving for CLO
services are based on tangible services rendered.
PONT underestimate the RESPA Enforcement Unit. It has conducted
several hundred investigations in its first few years. Most of these
investigations were initiated because of complaints from within the real
estate industry itself.
PONT demand referral fees from mortgage brokers/lenders for directing
mortgage business. Reports from the field indicate that some real estate
brokers/agents believe that RESPA permits this practice. The final rule
continues to prohibit referral fees between settlement service providers.
PONT accept "any thing of value" from mortgage brokers/lenders for
loan referrals. You are just as guilty if you receive fees or other
incentives for referring business. Just as in the previous example,
reports from the field indicate that mortgage brokers are offering to pay
referral fees for business.
PONT charge excessive fees for CLO and other settlement services, it
is clear that HUD intends to try to keep settlement costs down for
consumers. Charging too much for a computer link-up or charging
duplicative fees for title work is a red flag to the RESPA Enforcement
Unit.
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OTHER CHANGES
The RESPA final ru!e incorporates a number of other changes. Among other items, the revisions:
• Define the making of a mortgage loan as a settlement service (new language);
• Extend coverage of RESPA to refinancings (new language);
• Permit compensation to be paid by lenders to their agents or contractors (mortgage
contractors) but require disclosure of such compensation (new language);
• Limit the retention of commissions and fees by title agents to situations where designated "core
title agent services" are performed (a clarification);
• Outline HUD's investigatory authority and procedures;
• Provide model disclosures for good faith estimates, CLO fees and CBAs.
EXAMPLES CLARIFYING THE RULE
Appendix B of the final regulation includes examples Indicating that:
• Providing discounted or free services to a person in a position to refer
settlement business violates Section 8 of RESPA.
• Receipt of title premiums by an entity that performs no substantial
services violates Section 8 of RESPA. Moreover, receipt of title premiums
by an attorney representing a client In a transaction is prohibited unless
the attorney also performs "core title work".
• Sales of loans closed in the name of a correspondent and funded with
the correspondent's own funds or through an advance to the
correspondent on a warehouse line are secondary market transactions
and therefore exempt from scrutiny under RESPA Section 8.
• Payments by an employer to its employees for referrals to an affiliate
do not violate RESPA Section 8, and discounts by affiliates for a package
of mortgage, title and escrow services are permissible provided the
controlled business arrangements are met.
• Mortgage broker fees, and other compensation such as servicing
release premiums or yield spread premiums, must be itemized on the
good faith estimate and HUD-1 . (Summary source: Phillip Schulman et
al., Brownstein, Zeidman and Lore)
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RESPA
QUESTIONS AND ANSWERS
At the request of the NATIONAL ASSOCIATION OF REALTORS*, the law firm of Weiner, Brodsky,
Sidman & Kider in Washington, D.C. has prepared the following "Questions" and "Answers" to
assist REALTORS* in complying with certain requirements which may be applicable to them
under the federal Real Estate Settlement Procedures Act, as amended (RESPA) and the
regulations interpreting it (Regulation X) issued by the U..S. Department of Housing and Urban
Development (HUD) on November 2, 1992.
RESPA is a difficult federal law. Nevertheless, it is very important for REALTORS* to comply with
its provisions. A violation of its anti-kickback provisions can be a serious federal crime. Other
adverse consequences also may follow its breach. It is also very important that REALTORS*
follow applicable state law requirements.
These RESPA REALTOR* Questions and Answers assume a working knowledge of Regulation
X. Not all Regulation X requirements are covered. Accordingly, only a full reading of the
regulation itself will provide a comprehensive understanding of the obligations it imposes.
The Answers are as short as possible. They do not include the "whys" or the "buts," either of
which could change the Answers in any particular situation. These Answers were prepared in
early April, 1993. This area of the law is volatile and controversial. The Answers may change
as HUD interpretations or other formal advice about the meaning of RESPA and Regulation
published.
The Answers are offered only as general guidance. They are not intended to provide legal
advice. REALTORS* are urged to secure particular, current, legal advice applicable to their
specific situations before they act or rely upon this general guidance.
Referral Fees/Required THIe Companies
Q: Can a fee paid to a REALTOR* still violate RESPA, even if it is fully disclosed?
A: Yes. If the fee is not permitted under RESPA (a kickback for the referral of settlement
service business, for example, disclosing the payment of the fee will not help either the
payor or the payee (although it will help the regulators). Fees not permitted to be paid
or received under RESPA are not legalized by disclosure.
Q: Can REALTORS* still split fees or commissions with other REALTORS*, without violating
RESPA?
A: Yes, if the fees are split pursuant to a cooperative brokerage and referral arrangement
or agreement between real estate agents and brokers.
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Q: Is there any way under RESPA for a REALTOR* or independent real estate agent to be paid
a fee by a lender for the referral of mortgage loan business to it?
A: Generally, no. REALTORS* or agents may be paid by a borrower (not by the lender)
if the CLO RESPA rules (see below) are followed. REALTORS* or agents may receive a
return on their investments in a lender (but not for the referral of loan business) if the CBA
RESPA rules (see below) are followed.
Q: May a REALTOR* rent space to (and collect rent from) a lender for the lender's use in
making loans to the REALTOR*'s customers?
A: Yes. However, the rent must reflect the fair market value of the space, without regard
to the value or number of loans made through the use of that space. Affiliated
REALTORS* and lenders also may need to follow the CBA rules (see below). FHA
mortgagees also need to comply with special rules.
Q: May a property seller require a buyer to use a particular title company? Are REALTORS*
affected by RESPA restrictions in this area?
A: No to the first question; yes to the second. The better practice is for REALTORS*
acting as sub-agents for the seller not to change the title company designated by the
buyer, or complete such a designation for a buyer, without the buyer's knowledge or
approval.
Computerized Loan Originations (CLOs)
Q: Is there a limit imposed by RESPA on the amount of the CLO fee that may be paid by the
borrower?
A: No.
Q: May the borrower-paid CLO fee be financed? Be paid only if the loan closes? Be a percentage
of the loan amount? Be paid to an independent real estate sales associate?
A: Yes, to all questions.
Q: May a lender or mortgage broker pay the CLO fee?
A: No. Only the borrower may pay a CLO fee. If the fee is financed, it is the borrower who
is paying the fee from the loan proceeds, not the lender.
Q: Does a real estate agent need a license to charge a CLO fee to a borrower?
A: State law may require a mortgage broker or other license, or may prohibit or limit such
a charge. RESPA is not a licensing law.
Q: Does RESPA require the owner of a real estate brokerage to permit its independent real
estate agents to charge CLO fees to borrowers?
A: No.
Q: May a lender or mortgage broker that lists its loan products on a CLO system give that
system [for example a computer, modem and software] to a real estate broker or sales associate
for free or at a discount?
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A: No.
Q: May a REALTOR* that purchases or establishes its own CLO system impose upon a lender
or mortgage broker that lists loan products on that system a reasonable cnarge to be listed?
May that charge be levied only for loans that close?
A: yes to the first question; no to the second.
Q: Does the CLO fee need to be disclosed on the HUD-1 , in addition to the CLO disclosure
form?
A: Yes. If the fee is paid in cash by the borrower before closing, disclose the fee as a
"CLO Fee", or with words of similar import, that is "paid outside closing" (POC). If the fee
is financed or paid in cash at closing, disclose the fee as a charge to the borrower, using
the same words.
Q: May a CLO system provider limit the loan products it touts, through the system or otherwise,
to those of a single lender or mortgage broker?
A: Yes. State law may provide otherwise, however, and a failure of a CLO system provider
to advise borrowers about more competitive loan products may give rise to claims by
borrowers against the CLO provider.
Controlled Business Arrangements (CBAsj
Q: If the required, written CBA disclosure of affiliate relationships is given, may referral fees be
paid between affiliated companies?
A: No. Only a return on ownership or franchise investment (or other form of compensation
expressly permitted by RESPA) may be paid or received.
Q: May a real estate broker rent space in his office to a mortgage broker? May the mortgage
broker close loans for that real estate broker's clients and customers? Does it matter whether
the real estate broker and the mortgage are affiliated?
A: Yes, to all three questions. The rental payment must be the fair market value of the
space and should not be related to the dollar amount of loans that close. Merely renting
space from or entering into a business arrangement with another company (but not
having an ownership, franchise or control relationship with that company) will not bring
the two companies into a controlled business arrangement.
If, however, the real estate broker and mortgage broker are affiliated through ownership,
franchise or control as RESPA defines those terms, the real estate broker would need to
provide its customers and clients with a written, CBA disclosure of its relationship with the
mortgage broker and would be subject to the "required use" limitations of RESPA. These
limitations generally say that a real estate broker cannot require a customer or client to
use an affiliated company for mortgage, title or other settlement services.
Q: What percentage of ownership creates a controlled business relationship under RESPA and
triggers CBA requirements, such as disclosure?
A: More than 1 %.
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Q: How flexible may the ownership and investment relationships between controlled business
entities be, without running afoul of the "return on ownership" limitations?
A: Very. Any bona fide dividend, capital or equity distributions between business
affiliates that are related to ownership interest or franchise relationship, and bona fide
business loans, advances and equity contributions between affiliates, are permissible.
Any such payments that are related to anticipated or actual referrals are not permitted.
Q: May the CBA disclosure be combined with any other required disclosures?
A: No. The regulation requires that CBA disclosures be made on a "separate document".
Affiliated companies may combine their CBA disclosures, however, in a single, separate
document, and additional statements describing the attributes of affiliation may be
included in the document, as long as the statements do not interfere with or undermine
the required disclosures.
Q: Is a partnership the best form for a CBA between a REALTOR* and another settlement
service provider, such as a lender, title company, or escrow company? Should the CBA be
described in writing?
A: No to the first question; yes to the second. There is no "best" form. Partnerships,
limited partnerships, corporations, or limited liability corporations, among other
arrangements, may make the most business sense, under various circumstances. No
particular business form of the CBA is required by RESPA. However, careful written
documentation of the terms of the arrangement is important to help avoid
misunderstandings about the nature and basis of the contributions made and profits
distributed as a result of the arrangement.
Q: Can a REALTOR* require the use by its customer of a lender or other settlement service
provider with which it has a CBA? Can such a REALTOR* offer a discount in its commission to
encourage the customer also to use such a lender or other settlement service provider?
A: No to the first question; yes to the second. However, a REALTOR* offering such a
discount or "package" price for its services must assure that its customer has the option
to use the REALTOR*, at the non-discounted price, without also using the lender or other
settlement service provider. The REALTOR* also must assure that the package price
represents a true discount below the prices for the individual services otherwise generally
available and is not made up by higher costs imposed upon the customer elsewhere in
the settlement process.
Q: May a REALTOR* pay its employees for the referral of settlement service business to others,
whether or not the REALTOR* has a CBA with such settlement service providers?
A: Yes, if the Employer-Paid Referral Fee Exemption RESPA rules are followed (see
below).
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The Emplover-Pald Referral Fee Exemption
Q: Under this Exemption, are independent real estate agents considered to be "employees" of
the real estate brokerage companies they represent? May they be paid referral fees by such
companies?
A: They are not considered to be employees; they may not be paid referral fees under
this Exemption.
Q: Must an employee work full-time for the employer making the payment?
A: No, but there must be a bona fide employment arrangement.
Q: Is there any RESPA limit to the amount of the employer payment? Need it be disclosed?
A: No, to both questions.
Q: Is there any requirement under RESPA that the employee do any work for the borrower, other
than make the referral, in order to be paid the referral fee? Need the referral be limited only to
businesses affiliated with the employer?
A: No, to both questions.
Q: Has the Exemption been challenged?
A: Two federal lawsuits are pending challenging HUD's authority to include it in the
RESPA regulation.
Q: If a REALTOR* pays its employee branch managers for the referral of borrowers to the lender
with which it has a CBA, may the lender reimburse the REALTOR* for the costs of making such
payments? May the lender make the payments, itself?
A: No, to both questions.
RESPA and Conflicting State Law Requirements
Q: Does RESPA replace (or pre-empt) inconsistent state laws applicable to REALTORS*?
A: Yes. However, inconsistent state laws or regulations are affected only to the extent
of the inconsistency, and, in any event, even if inconsistent, such state laws will continue
to be applicable if they are determined by HUD or others to give "greater protection" than
RESPA to consumers and/or competition.
Q: Will HUD determine whether specific state laws, such as those prohibiting the ownership by
REALTORS* of major interests in title companies or other settlement service providers, are pre-
empted as inconsistent with RESPA?
A: Yes, if requested to do so.
Enforcement
Q: Are criminal prosecutions likely for kickback violations?
A: Yes.
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Q: Is the RESPA Enforcement Unit active?
A: Very. It has arranged for the issuance of scores of investigational subpoenas in the
mid-Atlantic area, and in Florida responding mostly to competitor complaints. It has
established close working relationships with state law enforcement personnel. It is
bringing, and settling, cases.
Q: Are private enforcement suits likely?
A: Yes. In addition to escrow account litigation, RESPA violations are being combined
with other claims, such as anti-trust violations, to secure expanded relief for plaintiffs.
Q: What are the "hot' areas of RESPA enforcement activity? What areas are next?
A: Today: Responding to competitor complaints, title agent relationships, real estate
agent and mortgage broker payments, impermissible CBA returns and failures to give
required CBA disclosures. Next: Impermissible employer-paid referral fees and failures
to give required CLO disclosures.
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DEFINITIONS
For purposes of the final rule, the term 'required use" applies when a person is "required"
to use a particular provider of settlement service, whenever use of such provider is a
condition of the availability to such person of some distinct service or property and the
person will pay for the settlement service of such provider or will pay a charge attributable
in whole or in part to such settlement service. The offering of a package, or combination
of settlement services, or the offering of discounts or rebates to consumers for the
purchase of multiple settlement services does not constitute a reguired use. Any package
or discount must be optional to the purchaser. The discount must be a true discount
below the prices that are otherwise generally available and must not be made up by
higher costs elsewhere in the settlement process.
The term "settlement service" means any service provided in connection with a
prospective or actual settlement, including but not limited to, the following:
(i) The origination, processing or funding of a federally-related mortgage loan;
(ii) The rendering of services by a mortgage broker (including counseling, taking of
applications, obtaining verifications and appraisals, and other loan processing and
origination services, and communicating with the borrower and the lender);
(iii) The providing of any services related to the origination, processing, or funding of a
federally-related mortgage loan;
(iv) The providing of services involving hazard, flood, or other casualty insurance or
homeowners warranties;
(v) The providing of services involving mortgage life, disability, or similar insurance
designed to pay a mortgage loan upon disability or death of a borrower, if required by
the lender as a condition of the loan.
This is a partial list of settlement services covered by RESPA. Those that have been in
place since the 1974/76 legislation are not listed. Some of these are: title services,
services provided by an attorney, the rendering of inspections and the rendering of
services by a real estate agent or broker.
The term "controlled business arrangement" is an arrangement in which an individual
has more than a 1 % ownership interest in more than one settlement service provider and
directly or indirectly refers such business to that provider or affirmatively influences the
selection of that provider. The statutory definition of a CBA is meant to be broad
capturing even informal arrangements the intent of which are to refer business between
settlement service providers. While the referral activity itself is not a RESPA violation,
payments to shareholders or "affiliated" parties based on referrals generated are a
violation. Section 8 prohibitions apply to franchises as well.
The term "secondary market transaction" is defined as a bona fide transfer of the loan
obligation in the secondary market. Mortgage broker transactions commonly called "table
funding" is not considered to be a secondary market transaction. As a result, fees paid
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to loan origination companies in "table funded" transactions would be subject to RESPA
and fees would have to meet the "work performeducriteria of Section 8.
The term 'computerized loan origination" (not formally defined by HUD) is a
computerized system for delivering residential mortgage loan offerings of one or more
lenders to customers at real estate offices. A "complete" CLO is one that allows a loan
counselor in a real estate broker's office to do at least the following: (a) receive complete
and timely information on loan prices and other terms; (b) counsel a customer with regard
to loan and lender selection and qualify the customer according to lender requirements;
(c) take the borrower's application on the computer and transfer it electronically to the
lender; (d) automatically print out all the documents that must by law be given to the
customer plus all those requiring the customer's signature; and (e) obtain electronic
status updates on any loan at any time. (Source: GHR Systems)
The term "federally-related mortgage loan" now includes refinanced loans and second
mortgages.
The term "referral" includes any written or oral action directed to a person which has the
effect of affirmatively influencing the selection of a particular provider of settlement
services for which a "thing of value" is paid. Thing of value" is broadly defined and
includes, among other things, services of all types at special or free rates or lease or
rental payments based in whole or in part on the amount of business referred.
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This op-ed article was prepared to assist you in your efforts to educate other REALTORS*
and the public in general about the concept of computerized loan origination systems. You may wish
to submit it in its current form for publication in the editorial section of your local newspaper, or you
may wish to format it in the form of a letter to the editor. Feel free to submit it under your name,
or the name of the local board representative you feel would be the most appropriate.
'ONE-STOP SHOPPING": THE FUTURE FOR THE REAL ESTATE INDUSTRY
Being successful in today's real estate marketplace means being diverse. It means giving
consumers what they want when they want it A real estate broker's ability to provide a wide variety
of services, including finding a buyer for the seller and matching the buyer with a mortgage to
complete the sale, represents the future for the real estate industry. This type of "one-stop shopping"
is part of an evolution in home buying, triggered by sophisticated consumers who want the process
to be quicker and more streamlined.
One-stop shopping, available through electronic technology, certainly is not new to the
services industry. It has long been applied in other industries, such as the travel industry. However,
in home sales, this concept is made possible through computerized loan origination (CLO) systems.
These systems enable a real estate broker to offer information on financing options and move the
mortgage loan application through its initial processing.
CLO systems provide instant affordability analysis, loan comparison and loan tracking services.
They directly beneGt buyers by providing an option to wrap several steps into one. They indirectly
benefit sellers by offering them a mechanism to get their homes sold.
In most circumstances, a real estate broker or sales associate is the home buyer's first point
of contact. As a result, buyers have long relied on brokers and associates to compile a listing of
mortgage financing that suits their needs. They want help in figuring out monthly payments and
determining how much they can afford - and most of them don't want to wait until they visit a
mortgage broker to get this information.
It should be pointed out that point-of-sale financing is not just buying advice that real estate
brokers suddenly decided not to give free anymore. Providing the most up-to-date mortgage
information available to home buyers - information they expect - requires the installation of
computerized networks. This installation costs money. As a result, it is perfectly reasonable for real
estate brokers to collect a fee to cover the costs for providing these services. It is essentially the same
type of fee that a consumer would pay a mortgage broker. The only difference is that the middleman
- the mortgage broker - is eliminated.
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The National Association of REALTORS* (NAR) firmly opposes the payment of fees based
solely on simple referrals. However, the association believes real estate brokers are entitled to
remuneration for all services performed in the sale of a home, provided the fees are fully disclosed,
and that use of the services is not required.
The ability of real estate brokers to fulfill consumer demand for mortgage location services,
and their right to collect a fully disclosed fee for doing so, was discussed in a recently published
federal regulation implementing the Real Estate Settlement Procedures Act (RESPA).
The regulation was released by the U.S. Department of Housing and Urban Development
(HUD), the department charged with RESPA enforcement. NAR is very pleased that HUD
reinforced the association's position on CLO systems. HUD correctly backed our contention that the
systems can benefit consumers by providing a wide choice of mortgages, interest rates and loan terms
- all in the convenience of the real estate broker's office. Facilitating the use of CLO systems in real
estate offices is a progressive response to what is clearly a consumer issue. Home loan choices will
be opened up, not stifled.
HUD's action put an end to the regulatory vacuum that imposed unnecessary restraints on
the ability of businesses to compete freely in the marketplace. In the RESPA regulation, HUD
ratified the fees-for-services payment to real estate brokers using CLO systems. RESPA prohibits
payments for simple lender referrals. However, the law clearly allows the collection of fees for actual
services rendered; and HUD's regulation affirms this.
The RESPA regulation will allow CLO systems to progress as dictated by consumer needs.
As a result, regional and area CLO systems likely will emerge. In fact, it is quite possible that
localized systems will evolve that serve individual housing markets in a manner similar to multiple
listing systems. Such systems could be tailored to specific needs of individual real estate markets. The
consumer can only benefit.
Opponents of our position have erroneously charged that real estate brokers tend to refer
buyers only to lenders who pay the highest fees, regardless of quality of product or service. This
simply is not true. The more options provided, the sooner a buyer can obtain financing that best suits
his needs, and the sooner a transaction can be closed. It serves no one's interest for a broker to
restrict buyers to lenders on a CLO system. The systems are for use by consumers only if they choose
to do so. Real estate brokers want buyers to come back when they're ready to sell. Sales commissions
are worth a lot more to brokers than collecting a nominal fee for CLO operations. No real estate
15
208
agent is going to sacrifice a future commission by trying to persuade a buyer to use a lender on a
CLO system.
Opponents of expanded CLO systems have also claimed that the collection of fees from
buyers for mortgage assistance creates a conflict of interest for agents contracted by sellers. Again,
this is completely false. A broker who helps a buyer obtain financing to buy the seller's home is
helping to close a transaction. No seller is going to object to that. Full, written disclosure of all the
services and fees involved in a transaction, issued in advance to all parties, provides adequate
protection from conflict-of-interest problems.
Today's consumers are short on time. Home buyers don't want to run around to a real estate
broker to see listings, to a mortgage company to get a loan, then to a title company for title
insurance. Multiple-service, diversified real estate offices provide an easier, faster way to sell a home.
In short, CLO systems give consumers what they want when they want it.
###
16
209
LIST OF RESOURCES
NATIONAL ASSOCIATION OF REALTORS*
Library in Chicago
312-329-8292
The Department of Housing
and Urban Development (HUD)
RESPA Enforcement Unit
Office of the General Counsel
202-708-4560
202-708-9985
NATIONAL ASSOCIATION OF REALTORS*
Sally Sciacca, Government Relations
Steve O'Connor, Government Relations
Robert Nickens, State Information
Mary Stark-Hood, Legal Affairs Department
202-383-1078
202-383-1117
202-383-1201
312-329-8374
CLO Vendors (NAR Library)
312-329-8292
17
210
ATTACHMENT A
211
Attacnment A
redgTBi Rfrtigrer t Vol. 5'. \o, ;:i .' Monaav. Novemoer i. :?92 / Rules ana Recuiauons :9623
APPENDIX E TO PART 3500 -
CLO FEE DISCLOSURE
Instr::::cns: whenever it is anticipatea that s fee will be
paid by the borrower tor CLO access ana reiatea services, a
disclosure tors cust be fully completed and delivered to the
borrower itemizing the services provided ana the specified fee to
be charged as well as the other information set forth below. The
form must provide a place for the purchaser to acknowledge its
receipt. The disclosure format set forth below is satisfactory
to the Secretary.
CLO FEE DISCLOSURE
To: [Potential Sorrower] From: [Person Making Disclosure]
NOTICE: I am proposing to charge you a fee in the
amount of S for the following services:
[ ] Displaying a variety of mortgage loans and rates
which may be available to you.
[ ] Counseling you regarding the different types of
loans available and the relative rates in a fair and equitable
manner.
[ ] Relating your personal housing need6 with avail-
able loan programs; and assisting you in deciding which, if any,
loan meets your needs.
[ ] Entering information regarding you into the
Computer Loan Origination System (CLO) .
[ ] Other_
THIS IS TO INFORM YOU THAT YOU ARE PAYING THIS FEE
DIRECTLY TO fPerson or Company Making Disclosure! .
-89624 rcdtni R tester / Vol. IT.
212
/ Monaav. Xovemoer Z. :?}2 I Fules ana Resuiauons
.,.,, SDMO„I°U ^ ADVISED THAT YOU MAY AVOID THIS FEE ENTIRELY IF
Se^SSSgJ SK^nS" y-°RTGAGE BR°KER EIRE^-Y. ADDITIONALLY^
QTOFR «nR£^ t^TES °R 0THER ^^ FEES *** EE AVAILABLE FROM
SYSTEM LENDERS WHO ARE NOT LISTED ON THIS COMPUTER
I hereby pay [commit to pay] a CLO Fee in the amount of
Borrower
Received by:
•■"•« COW OW-T7 <
ageJSror^eai^Li3 requirin* an attorney, credit reporting
paragraph SSiS'S^gSt"" t0 r6PreSent itS **«!*•. A.
213
ATTACHMENT B
70-043 0-94-8
214
Attachment B
49622 "edera Recster / Vol. £r. No. Z'.Z ! Monaav. Novemoer 2.. :392 / Rules ano Rewiauons
APPENDTX D TO PART 2500 -
CONTROLLED BUSINESS ARRANGEMENT DISCLOSURE
STATEMENT FORMAT
Notice
To: Buyer or Seller
Property:
From: [Entity Making
Date:
Statement I
This is to give you notice that
a business relationship with f provider]
f referring party)
has
[Describe the
nature of the relationship between the referring party and the
provider, including ownership and financial interests.]
Set forth below is the estimated charge or range of charges
by f provider 1 for the following settlement services:
You are not required to use f provider) as a condition
for [settlement of your loan on] [or] [purchase or sale of] the
subject property. You may be able to get these services at a
lower rate by shopping with other settlement service providers.
A lender is allowed to require the use of an attorney, credit
reporting agency or real estate appraiser chosen to represent the
lender's interest.
215
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Mortgage company finds a way
to stand apart
As anyone who has shopped
recently for a mortgage knows, ihere
isn't a whole lot of difference in
mortgage rates from one company to
the next. That's because mortgage
rates are market driven and therefore,
fairly uniform.
That leaves mortgage companies
scrambling to distinguish themselves
from the pack. Edward van Loenen.
president of First Portland Mortgage,
says he's found a way, offering
brokerage services to home buyers.
By doing so. van Loenen has turned
ihe traditional relationship between
brokers and lenders upside down.
Typically, brokers match buyers to
homes and then refer them to a
lender.
With van Loenen's Portland
company, the lender qualifies the
buyer for a mortgage and then brings
the buyer to the listing broker. Once
negotiations begin. First Portland's
loan officers/real estate agents will
represent the buyer's interests.
Van Loenen says this new
arrangement was made possible by a
change last year in the federal real
estate settlement procedures an which
now permits real estate companies to
become lenders and lenders to act as
agents.
216
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217
Mortgage Bankers u2sisthstreet.Nw. The National Association
Association of America "fS^o005'2766 of Real Esta,e Finance
n
MBA!
STATEMENT OF
Herbert B. Tasker, CMB
Chairman of the Board & C.E.O.
All Pacific Mortgage Company
on behalf of the
MORTGAGE BANKERS ASSOCIATION OF AMERICA
before the
COMMITTEE ON SMALL BUSINESS
UNITED STATES HOUSE OF REPRESENTATIVES
Hearings on
RESPA--The Real Estate Settlement Procedures Act
Implementation of Computerized Loan Origination Systems and
Controlled Business Arrangements
July 1, 1993
218
Mr. Chairman and Members of the Committee, I am Herbert B. Tasker, Chairman of the Board
& C.E.O. of All Pacific Mortgage Company, located in Concord, California. I am also currently
serving as President of the Mortgage Bankers Association of America (MBA).1 Accompanying me
today are Michael J. Ferrell, MBA's Senior Staff Vice President and Legislative Counsel, and
Sharon M. Canavan, MBA's Deputy Legislative Counsel.
MBA appreciates the opportunity to appear before you today to testify with respect to the Real
Estate Settlement Procedures Act (RESPA) and the growing proliferation of referral fee programs
via computerized loan origination (CLO) systems and controlled business arrangements (CBA).
These activities were authorized by regulations issued by the Department of Housing and Urban
Development (HUD) that became effective on December 2, 1992, pursuant to regulations published
just prior to the election on November 2, 1992. Because others on the panel are addressing the
issue of controlled business arrangements, MBA is focussing its comments on computerized loan
origination systems.
RESPA is a housing issue and RESPA is a consumer issue. MBA is deeply concerned over the
proliferation of mortgage referral fee programs that are undermining the integrity of the mortgage
lending process and adding to the cost of housing. People are paying too much for their homes
when unnecessary referral fees are built into closing costs or are added to the lifelong cost of a
mortgage.
Mortgage lending has become a highly complex, sophisticated, and competitive business. Lenders
across the country can offer programs with many new features that create significant benefits to
homebuyers and borrowers. Both referral fees paid by borrowers for CLO services and controlled
business arrangements, as permitted under the December regulations, will undermine that
competitive environment by introducing inducements into what should be an open process.
Inducements in the form of fees to real estate brokers/agents lead to the steering of potential
borrowers to a single lender or set of lenders who are participating in computerized loan origination
programs where real estate agents/brokers charge borrowers directly for unspecified loan/financing
services. Steering that is motivated by a fee means that the borrower may not be getting the best
advice about financing. And allowing that fee to be paid at closing rather than when the service
is provided allows the fee to be "hidden" in the myriad of other fees paid at closing.
1 The Mortgage Bankers Association of America is a nationwide organization devoted
exclusively to the field of residential and commercial real estate finance. MBA's membership
comprises nearly 2,500 mortgage originators and servicers, as well as investors, and a wide variety
of mortgage industry-related firms. Mortgage banking firms, which make up the largest portion
of the total membership, engage directly in originating, selling, and servicing real estate investment
portfolios.
Members of MBA include:
- Mortgage Banking Companies - Mortgage Brokers
- Commercial Banks - Title Companies
• Mutual Savings Banks - State Housing Agencies
- Savings and Loan Associations - Investment Bankers
- Mortgage Insurance Companies - Real Estate Investment Trusts
- Life Insurance Companies
MBA headquarters is located at 1125 15th Street, N.W., Washington, D.C. 20005; Telephone: (202)
861-6500.
219
Real estate brokers/agents are in a unique and controlling position, with considerable influence
over the homebuyer's financing decision. Their recommendation should be based on the best
combination of interest rate, terms, and services--not on the potential to earn a referral fee paid
by the borrower.
Perhaps the most alarming aspect of the regulation is that what precisely constitutes a computerized
loan origination (CLO) system and what service must be provided are undefined. A fee can be
charged to the borrower even if the real estate broker/agent has a prearranged agreement to refer
borrowers to a limited list of lenders or even a single lender. The borrower who pays for this
service is not assured of receiving objective advice.
Prior to the enactment of RESPA many real estate transactions involved non-competitive practices.
The payment of kickbacks and referral fees in order to steer customers to a particular mortgage
lender, title search or insurance firm was commonplace. RESPA was enacted to eliminate these
practices.
But the recent HUD regulation has reopened the door to paying referral fees. As the practice of
paying referral fees spreads, many lenders feel they have no choice but to participate in the CLO
programs that many real estate brokers/agents are demanding, if the lenders want continued access
to customers.
As a direct result of the publication of these regulations, there has been a proliferation of kickback
programs. Furthermore, there has been a dramatic increase in real estate brokers/agents
demanding blatant kickbacks for referral of business, which are a clear violation of RESPA, because
the HUD regulations are not specific regarding what precisely constitutes a CLO system.
Legislative Background
The Real Estate Settlement Procedures Act was enacted in 1974. (Attachment A provides a
chronology of RESPA legislative and regulatory actions). It provides among other things a
prohibition against certain kickbacks and unearned fees in real estate settlement transactions.
The Act has two major purposes in this regard:
1. To inform consumers about settlement costs and services, and
2. To protect consumers from excessive settlement costs and, when possible, reduce
settlement costs. Section 2 of the Act, "Findings and Purpose" states the following:
(a) The Congress finds that significant reforms in the real estate settlement
process are needed to ensure that consumers throughout the Nation are
provided with greater and more timely information on the nature of costs of the
settlement process and are protected from unnecessarily high settlement charges
caused by abusive practices. (Emphasis added.)
Prior to the enactment of RESPA many real estate transactions involved non-competitive practices.
The payment of kickbacks and referral fees in order to steer customers to a particular firm for title
search and insurance, and other services was commonplace in some parts of the country. Section
8 prohibits giving or receiving a "fee, kickback, or thing of value" for referring a borrower to any
particular settlement service provider.
220
Nowhere in RESPA or its legislative history is there any indication that Congress believed that a
referral fee, direct or indirect, can be acceptable if it is disclosed. To the contrary. Congress
created RESPA's Section 8 to eliminate all kickbacks or referral fees because such payments "tend
to increase unnecessarily the cost of certain settlement services" (Section 8(b)(2)). It should be
noted that Congress did not require that a payment to be prohibited must in fact be one that
increases settlement costs. All such payments are prohibited because they "tend to" increase
settlement costs.
These principles are as important today as they were in 1974. We believe that any new mortgage
origination programs should be encouraged as long as they adhere to these principles. Our concern
is that HUD has approved programs that violate these basic consumer protection principles.
HUD's Actions
Beginning in 1986 HUD approved certain specific referral fee programs, mainly through the
issuance of "private opinion letters." The HUD-approved programs were of two basic varieties:
(1) Borrower Pay. Even though the real estate brokers/ agents have a pre-arranged
relationship with lenders, HUD has stated that real estate brokers/agents can collect
fees from borrowers for referring them to lenders. It is not required that loan
processing or other work be performed by the real estate brokers/agents.
(2) Lender Pay. HUD stated that lenders can pay real estate brokers/agents fees for
services rendered and expenses incurred (known as "work performed"). Specifically,
concerning computerized loan origination systems, HUD approved the payment of
fees to cover computer costs. These fees can be paid based on the volume of loans
referred without regard to the actual computer service cost.
HUD published on May 16, 1988 proposed revised and amended RESPA regulations for comment.
This proposal was published after five years of delay, to implement Congressional amendments
enacted in 1983. Those amendments involved "controlled business arrangements" and did not
address referral fees outside of that context. In the proposed regulations, HUD went beyond
responding to the 1983 amendments and included a "borrower pay provision" that would allow fees
to be paid by the borrower to a real estate broker/agent for a pure referral to a lender. HUD
received over 2,000 comment letters in response to the proposal. Most of the comments on the
borrower pay provision strongly opposed it.
A draft final rule dated December 7, 1988 was prepared and became widely circulated. That draft
changed the position HUD had taken previously both in "private opinion letters" and in the May
1988 proposal. On the issue at hand, the preamble to the December 7 draft stated in relevant part:
"Eight hundred and forty commenters opposed the borrower pay provision. The borrower
pay provision was strongly opposed by virtually every trade association, such as the Mortgage
Bankers Association, U.S. League of Savings and Loan (sic) Institutions and the National
Council of Savings Institutions."
"In response to the comments received, the borrower pay mortgage broker concept was
reviewed in detail by the Offices of the FHA Commissioner and the General Counsel. It
was decided that a borrower should be able to seek out an independent entity, uninvolved
in the settlement transaction, to assist the borrower in locating a lender and obtaining
financing. It was concluded, however, that the arrangement (previously approved by
221
HUD)...materially altered this straightforward borrower pay mortgage broker concept. ...the
person receiving the.. .fee from the borrower.. .was often a real estate broker who was also
receiving a sales commission from the seller. As a consequence, the Realtor was placed in
a conflict of interest situation in which he was able to shape the terms of the sales contract,
particularly the financing terms, to assure the expeditious closing of a real estate sale, in
order to earn a sales commission, and to exert influence to direct the use of one lender over
another, as well as potentially generating a referral fee paid by the borrower. The borrower
had not in actuality voluntarily chosen to be assisted by an independent party to obtain a
mortgage loan but rather was in a position of being influenced by the Realtor to choose a
particular lender in part to serve the Realtor's own purposes. It was further recognized that
under such a borrower pay arrangement, the parties could easily manipulate points and
charges in such a way as to disguise referral fees; the borrower after all, was the sole
funding source for all charges in the closing transaction."
"For these reasons it was determined that to preserve the legislative intent of RESPA to
prohibit referral fees, HUD would withdraw the overbroad borrower pay mortgage broker
provision set in the proposed rule and return to the original concept of an independent
mortgage broker uninvolved in the settlement transaction..."
In the controlled business portion of the regulation, HUD also added language, which had not been
in the proposed rule, to make it clear that "an entity [may not] pay its own employees to refer
business to an affiliated entity."
This final rule, though it was drafted and approved by HUD staff and apparently was recommended
for publication by the Assistant Secretary for Housing and the General Counsel, was never
approved for publication by former Secretary Pierce.
When HUD Secretary, Jack Kemp, took office in 1989, he was confronted with a number of
problems and did not place a priority on the RESPA regulations. However, the HUD staff
continued their work and prepared a number of drafts of a final RESPA rule under the direction
of the new General Counsel, Frank Keating.
The Kemp administration seemed to be in general agreement with the December 1988 draft rules
and Frank Keating even went further than the draft rules when he testified before Congress in
September 1990, articulating HUD's position. He stated that, in order to balance the benefits of
CLOs against their potential for harm to consumers, HUD would require that all real estate agents
who offer CLOs (i) be required to offer the products of multiple lenders; (ii) disclose to borrowers
that they will be charged a fee for the CLO service; and (iii) disclose to borrowers that there are
other lenders not on the CLO system that may provide more favorable loan terms. HUD would
also require that fees, if any, be capped at a fixed dollar amount set to reflect the reasonable cost
of providing CLO services.
On January 3, 1991, HUD prepared another draft final rule that was widely circulated. That rule
embodied much of the December 1988 draft and the General Counsel's testimony. It also proposed
a specific cap on CLO fees of $250.
On November 2, 1992, HUD issued a final RESPA rule. Without warning or explanation, HUD
reversed itself on both the CLO provisions and the payment of fees to employees in a controlled
business arrangement. The regulation expressly permits "[a]ny payment by a borrower for computer
loan origination services" so long as disclosure is made. HUD provides no definition of a CLO, no
cap on fees and no requirement that the CLO be open to more than one lender. The regulation
also expressly permits an employer in a controlled business setting to pay its employees a bonus
when the employees refer settlement business to an affiliate.
222
Problems with Mortgage Referral Fee Programs
HUD's own staff text, quoted above from the draft final regulation, captures well the inherent
conflict of interest in allowing real estate brokers to receive a mortgage referral fee either from the
lender or the borrower. It is fundamentally wrong for a real estate broker, who is receiving a
substantial commission from the seller of a home, to have a financial interest in where the buyer
of the home gets a mortgage. More specifically, referral fees add to the cost of housing, are
unnecessary, distort the market and should be prohibited.
MBA urges Congress and the Department of Housing and Urban Development (HUD) to adopt
an interpretation of RESPA that would combat current and future abuses of the consumer
protection provisions in that statute by taking a position that would prohibit the payment of referral
fees by borrowers or by lenders, in connection with the making or processing of a mortgage, to a
person who is receiving a commission premised upon the sale of the real estate which is the subject
of that mortgage, whether or not work is performed by that person.
At a minimum, if fees are allowed to be paid by borrowers to real estate agents/brokers for
computerized loan origination services, the service should cover products offered by multiple
lenders, the fees should be paid at the time that the service is provided, not at settlement, and the
fees should be capped at a reasonable level, such as the $250 suggested by HUD at the time of
General Counsel Francis Keating's testimony before Congress in 1990.
If lenders are allowed to pay fees in connection with a CLO, the fees should be strictly limited to
actual work performed, should be directly related to the value of the service rather than the value
of the referral of business, and should not be paid to anyone receiving another fee in the
transaction.
Why Referral Fees Should Be Prohibited
1. Referral fees discourage competitive mortgage pricing.
Lenders traditionally get business through referrals from brokers/agents. As a result of the
December 1992 regulations, brokers/agents are developing exclusive or limited arrangements with
lenders, who will participate on CLO systems that permit the real estate agent/broker to charge
fees to borrowers.
Of particular concern to MBA are instances where brokers/agents have refused to accept
information from independent lenders or provide information to borrowers about other lenders who
may provide better financing terms for buyers.
With the spread of these programs, market forces are distorted because the fee payment becomes
the overriding consideration in the mortgage selection process (instead of a lender's pricing, quality
of service, reputation). When non-CLO system lenders are denied open access to the buyer, that
buyer does not have adequate information about better alternative services. Regardless of the
competitiveness or attractiveness of a lender's rates, fees, or the quality of its service, buyers may
be steered only to those lenders participating on the CLO system.
As fees escalate, becoming a payment for the referral rather than for actual work performed, and
more lenders are forced to pay fees to compete, larger lenders have the financial and technological
capacity to dominate CLO systems, and many smaller lenders will be unable to compete and will
be driven out of the business. Once this occurs, the marketplace will be considerably less
competitive and borrowers will have fewer financing options.
Referral fee programs close markets and reduce competition. All lenders should have open access
223
to the market and to borrowers, and this access should not be based upon whether or not a fee
is paid to the real estate agent/broker for providing financing information or completing an
application form.
2. Referral fees raise quality control concerns and the risk of mortgage defaults.
The major source of compensation to a real estate broker/agent is the sales commission paid at
loan closing. In order to expeditiously close the loan, the temptation is there for the broker/agent
to present information in ways that make it more likely that an unqualified borrower will be
approved for financing and more likely that the broker/agent will receive his commission sooner.
Allowing individuals who already have a vested interest in seeing a loan closed to become involved
in the mortgage origination process seriously compromises the lending decision. History has taught
the industry an expensive lesson from problems associated with fraud and abuse in the loan
origination process.
Federal policies should not support practices that include inherent conflicts of interest that could
undermine the stability of a financial institution. If the institution is insured by the Federal Deposit
Insurance Corporation or the loan is federally guaranteed, the Federal government is affected by
those increased risks.
3. Referral fees are not payments for work performed or services rendered.
Some argue that a fee is warranted because there has been "work performed" or "services rendered."
MBA believes that this argument serves as a simple guise to justify the payment of referral fees.
The disclosure statement in the regulation even permits payment of fees for simply typing in
information on an application.
First, lenders need to reverify any information (such as salary, income, bank accounts, credit
reports, debts, etc.) provided to them by third parties when making the underwriting analysis, in
order to prevent fraud and ensure appropriate quality controls. Information collected by individuals
with a vested interest in the closing of a loan should be verified independently to protect the quality
of the lender's underwriting decision.
Second, the function provided by the real estate agent in most cases is largely clerical (inputting
information into a computer terminal), because the real estate agent provides neither the
underwriting analysis nor a willingness to stand behind the information provided as true and correct.
Real estate agents are not willing to indemnify a lender in the event that the loan enters default.
Indemnification in mortgage lending is required to ensure against either an error in the information
provided or even outright fraud that might lead to faulty underwriting and ultimately a default.
FHA, FNMA, and FHLMC aggressively pursue lenders to indemnify losses where underwriting
errors have occurred or fraud has been committed.
Third, a computerized listing of lenders, rates, and mortgage products may be of some value to the
consumer, but is of little added value more than is now provided for free in the form of rate sheets
made available by lenders at the real estate broker/agent's office. The ability and legal
responsibility to stand behind the information as true and correct is the service that deserves
compensation. The clerical function of completing the application form warrants little, if any,
compensation.
4. Referral fees raise the cost of housing.
Fees paid by borrowers to real estate agents for locating financing are unnecessary. These services
have traditionally been regarded as one of the services brokers/agents provide in order to
consummate a transaction. Work performed by a real estate agent in helping a buyer obtain
224
financing is work performed for the benefit of the real estate agent's sole client, the seller. Indeed,
in the typical presentation that the real estate agent makes to a prospective listing seller, pre-
qualification of prospective buyers and helping the buyer obtain financing are usually services
specified to justify the commission. To charge the borrower for this assistance, as well as the seller,
merely raises the total cost of housing.
5. Referral fees encourage adverse steering.
Allowing referral fees to be paid will increase the real danger that referrals will be made only to
lenders participating on the computerized loan origination system. Instead of helping the borrower
find the best financing arrangement as part of their service to the seller, real estate brokers/agents
will be encouraged to steer borrowers to lenders participating on the system.
Most unsophisticated buyers rely heavily on referrals made by real estate agents and can easily be
manipulated to benefit the real estate agents. This is particularly troubling, because of the close
working relationship that develops between the potential borrower and the real estate agent who
has helped to find a home.
6. Referral fees pose a conflict of interest for the real estate broker/agent
When a buyer uses the services of a real estate broker/agent, the real estate broker/agent's
fiduciary duty is to the seller, not the buyer. The real estate broker/agent fulfills part of his or her
fiduciary obligation to the seller by assisting the buyer in obtaining financing in order to facilitate
the sale of the seller's home. Thus, the provision of information to buyers about a lender's loan
products should be viewed as the normal type of service that real estate brokers/agents provide.
This service may or may not be in the best interest of the buyers.
If a buyer (or lender) pays a fee to the real estate broker/agent for assistance in locating financing,
this fee raises an inherent conflict of interest because the real estate broker/agent then has a dual
obligation to act for both the seller and the buyer (or lender). In many instances, the best interests
of both parties may conflict. For example, because of the seller's desire to close quickly, a real
estate broker/agent would be motivated to find a lender with the fastest processing, even though
the terms of the loan are not in the buyer's best interest (or the broker/agent could present
information to the lender in ways that make it more likely a marginal buyer will be approved for
financing).
The Realtors' own Code of Ethics recognizes the need to address this kind of conflict when it states
in Article 7:
In accepting employment as an agent, the REALTOR pledges himself to protect and
promote the interests of the client. This obligation of absolute fidelity to the client's
interests is primary, but it does not relieve the REALTOR of the obligation to treat fairly
all parties to the transaction.
The obligation to be fair to all parties surely must be strained when the broker/agent is accepting
a fee from more than one of them. As one who refused to participate in a kickback program was
quoted as saying: "This is not just a legal issue, it's a moral issue."
7. Referral fees are unnecessary for technological innovation or rapid loan processing.
Some have argued that referral fee programs are a part of modern-day mortgage delivery
technology. By involving real estate brokers/agents in the mortgage application process and
compensating them accordingly, it is possible, some argue, to streamline processing and shorten
the time it takes to make loan commitments and close loans.
225
We disagree. For decades, real estate brokers/agents have provided assistance to homebuyers in
shopping for a mortgage without asking for additional compensation. Today, highly sophisticated
and successful computerized loan origination systems are in use by many firms and computer
technology is an integral part of all modern mortgage lenders' business. Many lenders can provide
computerized information on types of loans available and their costs. They can also provide rapid
underwriting and loan approvals for those needing this service, and they can perform many of these
functions at a borrower's home or in the offices of real estate brokers/agents. These services can
be and are being provided by reputable firms without the payment of additional fees.
MBA is not opposed to computerized loan origination systems where a borrower is offered a choice
of loan programs on a computer screen. However, that choice should not be restricted to programs
offered by lenders who are willing to participate in a referral fee CLO program. That is the illusion
of choice. Borrowers who are referred to these lenders, unless they read and fully understand the
disclosures, are unaware that other lenders outside this closed system may be offering more
competitive rates.
The use of computerized loan origination systems is a time-saving innovation that can result in
lower costs. These cost savings should be passed on to consumers and not used as an excuse to
add another layer of costs by paying real estate agents/brokers an extra fee for functions that
should be undertaken by trained underwriters who are accountable for loan quality.
There is a clear danger that CLO systems will choke off the access of lenders to consumers. If
this happens on a widespread basis, independent lenders who have not developed exclusive
arrangements with real estate brokers/agents or who do not participate in schemes to provide those
real estate brokers/agents payments in addition to their sales commission fees, will not get referrals.
Without referrals, those businesses will close and will no longer be a competitive force to keep
mortgage rates and real estate settlement costs competitive.
Computers have brought great conveniences to modern day life. Yet they should not be used as
excuses to increase expenses, but as devices to expedite loan selection and processing. Because a
computer makes a process more efficient it should result in lower costs, not another layer of costs.
As a practical matter, real estate agents have long used "rate sheets" dropped off by mortgage
companies at the real estate office. It is no more complex, in fact, it is arguably more convenient
for the real estate agent to use a computer screen to select various products than to flip through
a file folder of rate sheets.
Thus, the point could be made that while computerized loan origination systems hold the potential
for reducing consumer search costs and increasing competition by stimulating the flow of
information, past experience has shown that they also hold the potential for seriously harming the
interests of consumers through uncompetitive practices.
If CLO systems are established which provide open access to all lenders and are an effective tool
in assisting homebuyers to shop among lenders, there may be a justification for the homebuyer to
pay a fee for this service. However, the fee should be disclosed and paid at the time the service
is rendered and the homebuyer should not be required to use this service in shopping for a loan.
The fee should also be capped by HUD regulation to assure that unsophisticated consumers are
not charged excessive fees for this service and that the fees actually reflect the value of the work
performed and the cost to provide the service.
8. Referral fees are prohibited for FHA-insured loans.
Referral fees are prohibited on Federal Housing Administration (FHA) insured loans. HUD has
226
taken this position to protect the generally unsophisticated borrowers who use the FHA insurance
programs and to keep the costs low on home financing. HUD, in its own FHA home mortgage
insurance programs, prohibits certain referral fees. HUD Handbook 4000.2 REV-1 states:
7-5 Prohibited "Kickback" Payments By Approved Mortgagees.
(a) A mortgagee is not permitted to pay any fee, kickback, compensation or thing of
value, including a fee representing all or part of the lender's origination fee:
1. To any person or entity other than for services actually performed.
2. To any person or entity for referral of the loan or as a "finder's fee."
3. To any person or entity as a gift or gratuity over and above items that are
customarily distributed in the normal course of advertising or public relations
operations or as a general promotion device.
4. To any person or entity which has received or is to receive any other payment
or consideration for services related to the transaction, except a commission
in connection with the sale of a hazard insurance policy at the request of the
mortgagor.
5. To any person or entity for assistance in the preparation of the FHA
mortgage insurance application if such party owns, is owned by, or is under
common ownership with the builder or a person or entity which has received
a real estate commission in connection with the transaction.
Because HUD has recognized the need to limit practices that add unnecessary costs to home
purchases, it prohibits such fees in its own programs. But the Department has not prohibited them
for consumers in the conventional home loan market.
MBA's Position
Many lenders are considering implementing fee programs in order to remain competitive in local
markets. Once referral fees become a widespread practice, lenders will have to participate to remain
competitive, and the consumer will pay in higher fees and interest rates. Ultimately, the heaviest
price to be paid, if referral fees are sanctioned, would be reduced competition. The field would be
left to the oligopoly of a few big players--an unfortunate scenario for homebuyers.
MBA's members and leadership have given RESPA issues an unprecedented amount of attention
over the past 5 years. We have held numerous meetings on this subject in each of our major
residential committees, our Legislative Committee and established special RESPA Task Forces to
research the issues and their impact on consumers and the industry. Our Board of Governors on
repeated occasions has established firm Association policy. Our consistent position for the past
five years and shared by an overwhelming majority of our members is as follows:
MBA supports the concepts of prohibiting referral fees and requiring full and timely disclosure of
costs of a real estate settlement transaction. In this connection, MBA believes the making and
processing of a mortgage constitutes a settlement service in the framework of RESPA. MBA
opposes the payment by borrowers or lenders, of any fees in connection with the making or
processing of a mortgage, (1) to a person who is receiving another fee in the transaction, whether
or not work is performed by that person, and (2) to a person who does not perform work in the
transaction. RESPA regulations should allow the payment of fees to a person who is a bona fide
mortgage broker.
10
227
MBA supports the disclosure of information relating to any referral. Such disclosure of information
should include a description of the relationship, if any, between the parties to the referral
transaction and the amount of fee paid, if any. This disclosure should (1) occur at the time, or
before, the referral is made and (2) be on a standard form. To the extent that a fee is paid, the
fee must be paid voluntarily.
MBA believes that this is an issue that can and should be addressed quickly and effectively by the
new HUD leadership. Secretary Cisneros should immediately undertake a thorough review of
RESPA issues, focused particularly on the November 2, 1992 regulations and the abuses already
beginning to arise from their implementation.
Working within the framework of the November 2, 1992 regulations, HUD should issue
amendments to those regulations which would:
1) Revise the computerized loan origination network provisions to:
♦ provide a detailed definition of a CLO which would specify that it must be an
interactive system which provides open access to multiple lenders;
♦ require that borrowers be notified of any fee before the service is performed and
notified that the service is not required;
♦ require that borrowers pay the fee at the time the service is performed to assure
that the fee is not hidden from borrowers in the settlement process;
♦ place a cap on the fee paid by borrowers which is commensurate with the work
actually performed; and
♦ prohibit the payment of fees from lenders to anyone receiving another fee in the
transaction.
2) Prohibit companies with controlled business relationships from paying their employees
for the referral of business to affiliated companies.
If HUD does not move expeditiously, the Congress should take action to amend RESPA to assure
that consumers are protected.
Summary
MBA strongly believes the payment of referral fees or fees for duplicative mortgage origination
activities by borrowers or lenders to real estate agents should not be sanctioned. RESPA was
enacted to prohibit the payment of referral fees and this practice should not be allowed to
resurface. Allowing referral fees will: create ethical problems where conflicts of interest exist;
exacerbate the potential for fraudulent documentation where persons other than the lender collect
financial information; reduce marketplace competition; and add another unnecessary layer of fees
to real estate transactions at a time when mortgage affordability is an increasing concern.
MBA appreciates the opportunity to testify before this Committee and will provide answers to
questions or requests for additional information, as requested, for inclusion in the hearing record.
228
Attachment A
REAL ESTATE SETTLEMENT PROCEDURES ACT (RESPA):
A CHRONOLOGY
1974 RESPA Enacted.
RESPA Section 8 designed to provide consumers involved in real estate settlement
transactions with timely information regarding the nature and costs of the settlement
process.
Intended to protect consumers from unnecessarily high settlement costs caused by
certain practices, such as kickbacks or referral fees.
Section 8, a. "No person shall give and no person shall accept any fee, kickback, or
thing of value pursuant to any agreement or understanding, oral or otherwise, that
business incident to or a part of a real estate settlement service involving a federally
related mortgage loan shall be referred to any person."
b. "No person shall give and no person shall accept any portion, split or percentage
of any charge made or received for the rendering of a real estate settlement service
in connection with a transaction involving a federally related mortgage loan other
than for services actually performed."
1983 Department of Housing and Urban Development v. Graham Mortgage Company
The U.S. 6th Circuit Court of Appeals overturned a lower court decision in Michigan
and decided that given the ambiguity in the statute, for purposes of criminal
prosecution the making of a mortgage loan was not a settlement service, so providing
a thing of value for the referral of a loan was not a violation of the anti-kickback
provision of RESPA. -
HUD disagreed with the Court's ruling that the making of a mortgage loan did not
fall under the purview of RESPA as a settlement activity. Outside of the 6th Circuit
(Kentucky, Michigan, Ohio, Tennessee), HUD continued to consider mortgage loans
as settlement activities under RESPA and barred kickbacks, fees or the receipt or
giving of things of value for the referral of loans.
1984 HUD Informal Opinions
Lender Pay Programs
First informal opinion rendered by HUD permitting lender payments
to real estate brokers involved in computerized loan origination
systems (CLOs). These programs are also known as "lender pay
programs."
HUD determined that in the case of computerized loan origination systems,
lenders paying fees to the real estate brokers for referring loans through the
system was actually for "work performed," the use of computer time, and was
permissible, even if, as MBA asserted, the fee paid bore little resemblance
to actual cost of computer time.
12
229
1986 HUD Informal Opinion
Borrower Pay Program
The HUD General Counsel issued an opinion that fees paid by borrowers to real
estate agents for referral to lenders did not violate RESPA even where the real
estate agents had pre-arranged agreements to make referrals only to a specified
lender or lenders.
1988
May HUD Publishes Proposed Amended RESPA Regulations for Comment
The proposed regulations
Addressed the Graham decision by specifically noting that the making of a mortgage
loan was a settlement service.
Reaffirmed its earlier informal opinions that "borrower pay" and "lender pay"
programs were acceptable under RESPA.
Considered an expanded exemption for payments by lenders to persons who have
brought the borrower and lender together.
July MBA Issues Comment Letter to HUD. Key Points Include:
Real Estate agents should not be allowed to receive a fee related to a mortgage
application or origination. Real estate agents should not have a financial interest
in where borrowers get a loan.
The proposal to exempt mortgage brokers from RESPA's Section 8 prohibition of
borrowers paying fees to those bringing borrower and lender together, as well as a
1986 opinion by the HUD General Counsel effectively allowing real estate agents
to charge borrowers referral fees, should be rejected.
RESPA prohibits all referral fees, and that regardless of who is paying and who is
receiving, such fees will cost borrowers more.
July HUD RESPA Regulation Comment Period Ends
HUD receives more than 2,000 comment letters.
October HUD Approves Policy Asking Congress for Legislation
Policy resolution calls for federal legislation to clarify RESPA prohibition of referral
fees.
December HUD Develops Proposals for Final Rule on RESPA and Referral Fees. Major
Points Include:
The making of a mortgage loan constitutes a settlement service covered by RESPA.
A person or party otherwise involved in the transaction (for example the real estate
agent) may not receive a fee to bring the borrower and lender together.
13
230
A mortgage broker may receive a payment from a lender or borrower for assistance
in bringing the lender and borrower together, provided that no other fees are
received as a result of the closing transaction. Fees paid to a mortgage broker
under this mortgage broker exception must be described on both the good faith
estimate and the HUD-1 Uniform Settlement Statement.
CLOs are permissible under the rule. The owner of a CLO may be compensated
by the lender or borrower; however, a real estate agent receiving another fee in the
transaction may not receive a fee for assisting the borrower in using a CLO system.
1990 HUD Testifies Before Congress on RESPA Referral Fees
August HUD General Counsel testifies before House Housing Subcommittee and advocates
a regulation that would allow a borrower to pay a fee up to a HUD-imposed limit,
so long as the disclosures were made at the time the service was rendered and the
fee would be paid by the borrower at that time as well.
1992 HUD Publishes Regulations on CLOs and Controlled Business Arrangements
November Immediately prior to the 1992 Presidential election HUD publishes a final regulation
for effect in 30 days, which: 1) allows borrowers to pay fees for utilizing
computerized loan origination systems and 2) provides for compensation by an
employer to an employee in controlled business arrangements.
December HUD regulation published in November becomes effective.
1993 Congress Asks New Administration to Review RESPA Regulations
March Chairmen Gonzalez, Riegle, and Sarbanes sign letter to HUD Secretary Cisneros
requesting a review of the RESPA regulation published at the end of the previous
Administration.
14
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232
Testimony of GE Capital Mortgage Corporation
House Small Business Committee
July 1, 1993
Mr. Chairman, I am Ray Sims, Senior Vice President of GE Capital Mortgage
Services—Residential Express Division of Cherry Hill, New Jersey. My company is a
subsidiary of GE Capital Mortgage Corporation, which is involved in many aspects of the
mortgage business. My career has been as a mortgage banker, and GE Capital Mortgage
has been an active member of the Mortgage Bankers Association of America. I am
pleased to be here to testify on the implications of technology and the Real Estate
Settlement and Procedures Act rule.
As you know, the isolation of neighborhoods and the segregation of people from
the mainstream of communities is an important aspect of our problem of distressed
neighborhoods. Many families in urban and rural areas do not have access to the kinds of
services— including financial services- that the rest of us take for granted. Often we have
found that underserved neighborhoods are not connected to the mainstream mortgage
community as well. At the same time, there are resources in underserved neighborhoods-
community groups, non-profits, churches, real estate agents, financial institutions that can
act as ready and willing partners for mainstream participants.
What has GE Capital done as a corporation? GE Capital Mortgage is acting as a
principal link between the neighborhood and the mainstream mortgage system, and we are
bringing substantial private sector capital to residents of underserved neighborhoods and
communities. In doing so we have sought to utilize the latest computerized loan
origination technology. Indeed, CLO capability is an essential link in our outreach
program, and a principle reason why I am here today is to illustrate for you how CLO's
can be used to bring mortgage services to urban and rural communities which are currently
underserved.
We are in the business of helping people buy homes-- particularly those who
cannot afford a large downpayment. The heart of GE Capital Mortgage is one of our
country's largest mortgage insurance companies. In that business, we insure lenders in the
233
2-
event that borrowers who buy homes with a low downpayment do not repay their
mortgage. Without us, many of these families could not qualify for a mortgage.
Our affordable housing initiatives have been developed in four critical areas:
• Helping families in urban and rural neighborhoods buy homes with low
downpayments;
• Making mortgage money available to minority and community financial
institutions;
• Rehabilitating and selling foreclosed and abandoned homes;
• Sharing the risk of mortgage defaults with local and state housing
programs.
We have developed a number of innovative mortgage products, working in
partnership with community and non-profit groups, lenders, secondary market agencies,
minority real estate agents, and minority and community financial institutions.
Our Community Home Buyer's Program began with a five city demonstration and
led to the successful national program designed for creditworthy borrowers who might not
otherwise qualify for a loan.
Under this program, GE agrees to insure loans originated by lenders under more
flexible underwriting guidelines, and Fannie Mae and Freddie Mac agree to purchase the
loans in the secondary market.
For homebuyers, the program reduces the income and downpayment needed to
qualify for a mortgage. With a downpayment of only 3 percent from the buyer's own
funds, the remaining 2 percent may be financed by a government agency or non-profit, or
a cash gift from a family member. The usual cash reserve requirements are waived and
borrowers may establish their credit through non-traditional methods of credit verification
such as records of rents and utility payments.
234
The key to the program's success is the required homebuyer education course
which was developed originally for GE by non-profits and community groups. The
program is offered in English and Spanish and is constantly being reviewed and enhanced
by GE Capital Mortgage Corporation.
To date, GE Mortgage Insurance Company has insured $1.5 billion in loans to
over 15,000 lower income families and currently there are 550 financial institutions active
in the program. This product is performing well and is one of the best investments our
mortgage insurance company has made.
As my colleagues at GE have worked in urban and rural neighborhoods, they have
identified other resources that we can bring to expand the availability of capital.
Early this year, we introduced Residential Express, a mortgage network for loan
origination. Residential Express provides a full range of support services to assist
minority-owned and community financial institutions to offer competitive and flexible
mortgage products to their customers. It offers state of the art loan origination
technology and software. This allows the bank to counsel its customers on the best
possible mortgage options available to them.
We unveiled the program to the National Bankers Association ("NBA") late last
year. As you know, the NBA has almost 60 minority member banks located in over 30
states, with assets of $6 billion, servicing over one million depositors.
We have 17 members of the Residential Express network, 14 of which are minority
or woman-owned, including African- American, Hispanic, Native American, Asian, and
East Indian institutions. Most of these are smaller banks that were not making residential
mortgage loans one year ago. If they were making loans, they had a very limited product
offering that required at least 20 percent downpayments. Most of these institutions were
not connected to the mainstream mortgage system or the secondary market because they
lacked the resources and/or the expertise.
Of the 17 banks already active in the network, 12 of them have already registered
loans for sale to GE. The banks that have joined the network move quickly to serve the
235
unmet needs in their communities. The remaining institutions are awaiting our training
program.
Residential Express provides a source of fee income to the lender while helping to
retain their customers and potentially expand their customer base. These are important
economic considerations for community and minority lenders.
Here is how Residential Express works. When a financial institution joins, GE will
train the lender's staff at their site on the use of the loan origination software. The
computer program performs almost every function you can imagine. It electronically
provides loan prequalification, application analysis, immediate feedback on underwriting
considerations, and daily mortgage rate information. It provides a tremendous variety of
mortgage information to homebuyers on interest rates, points, downpayments and
repayment schedules. It even allows the lender to pull a credit report right off the screen
for the borrower to review. It allows the lender to discuss with the borrower what he or
she needs to do in order to qualify for a mortgage.
While the processing and underwriting may be performed by GE, the loan is closed
in the name of the institution and owned by the institution. Loans may be held in portfolio
or sold to GE for secondary market sale.
Equally as important, homebuyers are provided access to all of GE's conventional
mortgage products, including the Community Home Buyer's Program, and other low
downpayment programs. It is critical that underserved neighborhoods have access to all
types of mortgage products, both conventional and government-insured.
236
-5
For example, City National Bank, a small minority-owned bank in Newark, New
Jersey made only 3 mortgage loans in all of 1992. Since entering the Residential Express
Program on March 1st, they have registered 25 loans: eight in the first three weeks of
June.
I am very excited about Residential Express. Although the program only began in
February, it is growing at a geometric rate. It has averaged a growth rate of 1 12% a
month in mortgage activity. Mortgage loans of $15,000 and $20,000 have been made
while customers who need larger conventional loans up to $200,000 are also being served.
Residential Express meets the full spectrum of the community's needs.
We have entered the rural market as well. In Glasgow, Montana and Hulbert,
Oklahoma, we are the first to bring the national mortgage market to rural homebuyers and
Native Americans. At Valley Bank in Glasgow — a town of 4500 residents and over 4
hours from the nearest metropolitan area — 7 loans were registered in the past month,
totaling over $500,000 dollars. Without the latest technology, these markets could never
be effectively served by the variety of desirable mortgage products and services.
I believe that programs like Residential Express and Community Home Buyer's
that rely on new technology and build on institutions already serving the community, are
the kind of partnerships which should be encouraged by Congress and the Administration.
We at GE Capital Mortgage are aware that controversy has developed concerning
the rules for operating computerized loan origination systems. I am not a lawyer or a
RESPA expert, but rather a business man and mortgage banker. And we have not been
involved in the forefront of the regulatory debate regarding RESPA and CLOs. This is
not to say we are not interested in how these issues are resolved, but until now our focus
has been on the development and application of new technology.
237
From our own experience, I can tell you that this technology has the potential to
bring immense benefits to many homebuyers in all areas across the nation. This is
especially true in underserved urban and rural areas. CLOs can provide homebuyers the
means to access the national mortgage credit capital markets in ways which are as
sophisticated as any available to homebuyers in upper income neighborhoods. Our
experience leads us to believe that this may be a significant piece in the community
reinvestment puzzle which the Congress and we in the private sector have been trying to
put together for a long time.
It is important that this technology not be prematurely circumscribed by rules
which may be designed to protect against abuses more imagined than real. We think that
HUD was correct when it stated in the preamble to its RESPA regulations that there are
"....potentially substantial consumer benefits in the utilization of new technology. Further,
the technology was in flux and represented, at most, no more than one to two percent of
mortgage originations annually. Considering all of these factors HUD concluded that it
would issue a CLO exemption.... which would have the effect of eliminating possible
regulatory inhibitions on the development of this technology."
We are now reaching out to underserved markets through Residential Express
services available at minority-owned and community banking financial institutions. But in
the future, we may utilize this technology with nonprofits groups, or majority or minority-
owned real estate companies. Please don't close off these avenues to bring mortgage
services to innercity and rural families and indeed to all homebuyers. We believe that the
speed, convenience and cost savings associated with computerized loan origination are too
important to be lost in an intramural turf battle among settlement service providers.
Mr. Chairman, our experience has taught us three important lessons. First, no
single entity can provide the entire solution to the problems of these underserved
communities. It takes the collective strength of all of us — government at all levels, non-
profits, community groups and the private sector, working in partnership.
Second, it is essential to link underserved neighborhoods to the mainstream
community. We at GE have been a link — providing knowledge, the latest technology,
and access to capital.
238
Third, in order to be successful, these programs must be good and profitable
business. Only commercially viable efforts will sustain the large infusion of private sector
capital - the big dollars -- needed over the long term.
If we apply these lessons to residents and businesses in economically underserved
communities, I am confident that we will makes good progress in bringing these
neighborhoods into the economic mainstream of society.
Mr. Chairman and members of the Committee, I appreciate the opportunity to
testify on these important programs and would be pleased to answer any questions you
may have.
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