EXPLANATION Amendment No. 4 would amend the Home Owners' Loan Act of 1933 to increase to $10,000 from $5,000 the amount of an individual loan a Federal savings and loan association could make in both secured and unsecured loans for such purposes as home improvements, home equipment and vacation homes and other new structures for residential use. Since the $5,000 limit was inserted in the statute, the forces of inflation have made it inadequate to serve the intended needs. AMENDMENT NO. 5 Section 5(c) of the Home Owners' Loan Act of 1933 is amended by adding at the end thereof the following new sentence: "Without regard to any other provisions of this subsection, any such association whose general reserves, surplus and undivided profits aggregate a sum in excess of 5 per centum of its withdrawable accounts is authorized to invest in, to lend to, or to commit itself to lend to any State housing corporation incorporated in the State in which the head office of such association is situated, in the same manner and to the same extent as the statutes of such State authorize a savings and loan association organized under the laws of said State to invest in, to lend to, or commit itself to lend to such State housing corporation, but the aggregate amount of such investments, other than loans and loan commitments, of any such association outstanding at any time shall not exceed 4 of 1 per centum of the total assets of such association, and uninsured loans and commitments of any such association outstanding at any time shall not exceed 1 per centum of the total outstanding loans made or purchased by such association." EXPLANATION Amendment No. 5 would amend the Home Owners' Loan Act of 1933 to authorize Federal savings and loan associations to invest in or make loans and loan commitments to State-chartered State housing corporations on conditions similar to their present authority to perform these functions with reference to State-chartered business development credit corporations. An example of the type of State housing corporation that could benefit from the provisions of this amendment is one contemplated under a legislative proposal passed by the Florida legislature. Aimed at producing housing for primarily low- and moderate-income families, the initial capital would be supplied by stock purchases by financial institutions in the State. Under the amendment only Federal savings and loan associations having general reserves, surplus and undivided profits in excess of 5% of their savings accounts would be permitted to make use of this investment and loan authority. The limit on their stock investment in all such corporations would be 4 of 1% of their assets. The limit on their uninsured loan investment (including commitments) in all such corporations would be 1% of their loans. Adoption of this amendment should provide one more tool for tackling the problems of adequate housing by pooling the resources of private financial institutions. To the extent that this method of financing is used, it decreases the call for direct expenditures for housing purposes by government. AMENDMENT NO. 6 Section 403 (b) of the National Housing Act is amended by adding at the end thereof the following new sentence: "As used in this subsection, the word 'reserves' shall, to such extent as the Corporation may provide, include capital stock, subordinated debentures and other items, as defined by the Corporation." EXPLANATION Amendment No. 6 would amend the National Housing Act to define the word "reserves" as used to measure the mandatory reserves that must be built up by savings and loan associations having savings accounts insured by the Federal Savings and Loan Insurance Corporation. Section 403(b) of that Act presently requires FSLIC by regulation to require a buildup of reserves to 5% of all insured accounts within a reasonable period. That period has been fixed at 20 years as a normal test, but may be extended to as long as 30 years under limitations prescribed in the statute. The amendment would define "reserves" in such a way as to include the proceeds of sale of capital stock by State-chartered stock savings and loan associations. It would also include the proceeds of sale of subordinated debentures by all savings and loan associations. Further it would include other items to be defined by FSLIC, which would also be empowered to define “capital stock” and "subordinated debentures". Adoption of the amendment would afford both stock savings and loan associations and mutual savings and loan associations additional means of obtaining capital that would qualify for use in meeting reserve requirements. (The letter of May 30, 1972, referred to in Mr. Roessner's statement regarding the National League of Insured Savings Association's views with reference to title IX of the Housing and Urban Development Act of 1972 as set forth in the committee print dated May 11, 1972, follows:) NATIONAL LEAGUE OF INSURED SAVINGS ASSOCIATIONS, Hon. WRIGHT PATMAN, DEAR MR. CHAIRMAN: Pursuant to your invitation, the National League offers the following observations regarding Title IX of the Housing and Urban Development Act of 1972 as set forth in a Committee Print dated May 11. We understand that this print constitutes the bill to be recommended by the House Subcommittee on Housing to the Committee on Banking and Currency. Title IX consists of 14 sections dealing with closing costs and settlement procedures in federallyrelated mortgage transactions. This letter will comment on each section separately. SEC. 901-DEFINITIONS Sec. 901 (1) defines a "federally-related mortgage loan" as one involving residential real property that meets any of the following tests: a. it is made by an institution insured by the Federal Savings and Loan Insurance Corporation or by the Federal Deposit Insurance Corporation or any other financial institution whose deposits or accounts are insured by a Federal agency. b. it is made by a financial institution that is regulated by a Federal agency. c. it is made, insured, guaranteed, supplemented or assisted by any Federal officer or agency. d. it is made, insured, guaranteed, supplemented or assisted in connection with a housing or urban development program administered by any Federal officer or agency. e. it is eligible for purchase by the Federal National Mortgage Association (FNMA), the Government National Mortgage Association (GNMA) for the Federal Home Loan Mortgage Corporation (FHLMC). f. it is eligible for purchase from any financial institution from which it could be purchased by FHLMC. Because most of the restrictions in Title IX apply to "federally-related mortgage loans", the definition of that term is very important. The apparent aim of the restrictions is to protect borrowers who do not possess enough financial sophistication to protect themselves adequately in the opinion of the sponsors of the provisions in Title IX. While "residential real property" is not defined, it contrasts with the provisions in section 701 (a) of the Housing and Urban Development Act of 1972 (S. 3248) as passed by the Senate that confine their closing costs limitations to 1- to 4-family houses. Borrowers that engage in multifamily mortgage transactions should possess financial sophistication to a degree not expected to be found as often in borrowers who take part in 1- to 4-family housing mortgage transactions. We suggest that it is unnecessary for the Congress to extend special legislative protection to mortgage transactions that involve property larger than 4-family housing. Presumably the provisions of Title IX look for validity to the Constitutional authority of the Congress to regulate interstate commerce under Article I, section 8. A statement submitted for the National League to the Subcommittee on Housing with reference to this legislation commented that a local transfer of land title does not constitute commerce among the several States (Part 1, Hearings on H.R. 13337 before the House Subcommittee on Housing, pages 706 to 708, February 22 to 24, 1972). It recommended that the Congress bear in mind the Constitutional limitations on its authority, the existence of Federal laws on price controls and the existence of other statutory and administrative sanctions against abuse of authority by persons involved in loan closing transactions. If nevertheless the Congress decides to depart from past practice of leaving land title transfer matters to State scrutiny, it would seem that the Congress would want to base its action on transactions that have the closest ties to the Federal government. Such a course of action in this case would confine the scope of Title IX to mortgage loans subsidized by the Federal government either directly through appropriation of Federal funds or indirectly through a pledge of the full faith and credit of the United States behind an obligation that benefits the mortgage loan. Application of this principle would result in retention of only item c and part of item e in items a through f above. Under item c the loan is made, insured guaranteed, supplemented or assisted by a Federal officer or agency. Item e would establish a relationship between settlement costs and purchases of a mortgage loan by GNMA, which does have access to Federal Treasury funds. Such direct access is not available either to FHLMC or FNMA. Even GNMA's Federal connection touches a mortgage loan only if GNMA is involved in a transaction concerning that loan. We would therefore suggest that if the Congress is determined to legislate on settlement costs, it confine its definition of a federally-related mortgage loan to the types mentioned in the preceding paragraph, namely loans made, insured, guaranteed, supplemented or assisted by a Federal officer or agency or a loan actually offered for sale to GNMA or receiving the benefit of a pledge of full faith and credit of the Federal government given by GNMA. SEC. 902-MAXIMUM SETTLEMENT COSTS This section directs the Secretary of Housing and Urban Development (HUD) to establish maximum settlement costs to buyers and sellers in connection with financing housing constructed, purchased or rehabilitated with assistance of a federally-related mortgage loan. If confined to such a loan as is proposed to be defined above, the essence of this provision could be retained consistent with the idea that the Congress intends to impose restrictions on settlement costs as a price for Federal aid. But the provisions of section 902 that impose administrative obligations on lenders that are financial institutions should be deleted. Administrative duties could well be limited to the Secretary of HUD, who would promulgate the schedule of maximum permissible charges. Sanctions for violation of that schedule (preferably only in cases of willful violation) in the form of civil penalties proposed in section 902(c) (1) could be relied upon to induce adequate observance of the schedule's limits. Those sanctions, however, should apply only to those particular persons who commit the violation by receiving above-schedule charges, not to others who find themselves parties to the loan settlement transaction. Lending institutions do not preside at all loan closings. If they offend against the maximum schedules, they would become liable under the above suggestion; otherwise they would not be subjected to liability. Some rewording of the section is required anyway to avoid a result that is surely not intended for exceeding the maximum amounts established under section 902 (a). Under the requirements of section 902(a), maximum amounts are to be set for both the seller and the buyer. Yet under section 902(c) (1) the monetary penalty for violating any of those maximum amounts runs only in favor of the buyer against the financial institution. The penalty for any offense that harms the seller should benefit the seller, not the buyer. Moreover, the forfeiture penalty prescribed by section 902(c) (2) may harm innocent parties to the settlement transaction. That penalty would excuse the buyer from liability to any person for services incident to or part of the settlement, if the loan is refused because of a breach of the maximum settlement charge schedule. If a party to the settlement other than the lender has violated that schedule, this penalty imposes a burden on all others who happen to be involved in the settlement, even though they be innocent of any wrongdoing. Presumably an appraisal fee paid to the lending institution would have to be refunded to the buyer, even though the fee has been paid by the institution to an appraiser who performed the appraisal services. Provisions such as this that upset the certainty of business transactions have a tendency to impede them. The more accepted Anglo-Saxon principle is to punish the guilty for offenses, not the innocent along with them. References to "making" loans should be removed from the section. The section aims at the settlement transaction rather than the making of the loan and should direct its thrust to the settlement activities. SEC. 903-UNIFORM SETTLEMENT STATEMENT Section 903 directs the Secretary of HUD to develop a single standardized form for a settlement cost statement to be used in all transactions in the United States that involve federally-related mortgage loans. The form is to itemize conspicuously and clearly the settlement charges imposed on both the buyer and the seller. It is also to indicate that part of a title insurance premium which insures the mortgagee's interest and that part which insures the buyer's interest. The provision does allow minimum variations in the settlement charge form in order to reflect unavoidable differences in legal and administrative requirements in different areas of the United States. This provision seems to proceed on the fallacious assumption that standardizing forms will cure evils, even though it is the substance, rather than the form, of the transaction wherein the evils lie. For example, the Internal Revenue Service tries to use standardized forms throughout the nation, but that fact has not resulted in a tax return system free of fraud or criminal violations. Land title transfer in the United States still reflects the variety of differences in practices emanating from different legal systems. If the Congress intends to do more than pay mere lip service to the dual system of Federal-State government upon which our Constitution is founded, it should allow leeway differences in practices among States to be recognized. If the Congress wants to try to force all settlement forms into a uniform mold as to more restricted federally-related mortgage transactions discussed earlier, it is free to make the attempt. But it will probably find the hoped-for uniformity difficult both to be made acceptable to users and to enforce. It will also create a new incentive to develop transactions of a type that will escape coverage by the Congressional edict. SEC. 904 SPECIAL INFORMATION BOOKLETS Section 904 directs the Secretary of HUD to prepare and distribute special booklets to help residential real estate mortgage loan borrowers better to understand the nature and cost of real estate settlements. The booklets are to be given to all financial institutions that make federally-related mortgage loans. The institution is to pass out the booklets to every such loan applicant twice-once when he applies for the loan and once when settlement charge disclosure is made to him at least 10 days before settlement. The Comptroller General is to police the Secretary of HUD's performance of his booklet duties periodically and report to the Congress. Again, if the Congress wants to increase HUD expenditures further by mandating it to prepare settlement cost booklets, that is its prerogative. But their use should be mandated only as to the more restricted federally-related loans discussed earlier in this letter. If a borrower doesn't take the time to read the booklet he receives when he applies for a loan, it is difficult to believe he will pay any more attention to it upon receiving it a second time along with a settlement cost disclosure statement. The first distribution would seem to be all that is logically needed. Automatically duplicating the distribution seems wasteful of Federal funds. Presumably the borrower could receive a second booklet upon request if he is really interested in making use of it. SEC. 905-ADVANCE DISCLOSURE OF SETTLEMENT COSTS Section 905 requires a financial institution agreeing to make a federallyrelated mortgage loan to give the buyer at east 10 days before settlement a "standard" HUD settlement form disclosing the exact cost of each item in the settlement transaction (except that an estimate of utility costs may be made if the exact amount is not then available). The same disclosure is to be made at the same time to any Federal agency that proposes to insure, guarantee, supplement or assist the loan. The burden is placed on the lending institution to obtain exact information as to settlement costs from every person that will make a charge for settlement services. Failure to provide the buyer with the required disclosure on time subjects the financial institution involved to a civil penalty to the buyer unless it shows that the violation was an unintentional and unavoidable error. Many protests have been voiced that exactitude in settlement costs is not available at least 10 days before a settlement. A good faith estimate (as allowed in the case of utility charges under stated circumstances) would seem to satisfy the needs of disclosure in the case of all costs. Imposing a 10-day advance notice requirement, it has been pointed out, will prevent accommodating borrowers who want to settle the transaction within less than 10 days after the loan commitment is made. Finally, serious objection is raised to requiring the lending institution to act as inquisitor of all persons that happen to be involved in a settlement transaction. If the institution were the Chairman of closing in all cases, the objection might not be as valid. But closings are not always handled by lending institutions. Yet this provision would impose upon them the duty of prying into financial affairs of others involved in the settlement and would make them liable to civil penalties if the information given to the financial institution proves to be erroneous. Financial institutions, unlike Congressional committees. lack the power of subpoena to compel disclosure of information and cannot be certain that the information given to them in accurate or will be adhered to in connection with the settlement transaction. The financial institution's rightful role in a mortgage loan transaction is to advance the committed funds to the borrower upon conditions that reasonably assure their repayment. It in turn has a fiduciary responsibility to savers and others who have made those funds available for lending. Protection of the borrower in the expenditure of the funds he borrows is a different matter. In selfinterest, many borrowers seek legal counsel for that protection. The lending institution should not be forced by legislation into a conflict of interest situation in which it is compelled to expend time and money to defend the borrower at the expense of the saver and other suppliers of the loan capital. The Congress, if it decides to place a burden upon parties involved in settlement transactions, should place that burden where it belongs, on each of the respective parties. It should not try to hold the lending institution hostage for the errors of others involved in the transaction. SEC. 906-PROHIBITION AGAINST KICKBACKS Section 906 makes it a Federal misdemeanor for any person connected with a settlement involving a federally-related mortgage loan to receive or give anything in connection with an agreement for steering settlement business to that person. The language is so all-encompassing yet vague in a criminal statute as to cast doubt on its enforceability. For a reductio ad absurdum, the Secretary of HUD receives an FHA insurance fee for every settlement transaction involving an FHA-insured mortgage. Yet he steers the business of handling those mortgages only to FHA-approved mortgagees. If he were not immune as a Federal official, would he and the mortgagee therefore become subject to a fine up to $10,000 or imprisonment up to 1 year under this section 906? Or suppose a hazard insurance company proposed to be used by a borrower proves unacceptable to the lending institution risking the mortgage loan? Is that institution in danger of criminal prosecution for referring insurance business at closing to any of a class of insurance companies that meets its standards of acceptability? Or if the lending institution insists on being represented at the settlement by an attorney in whose ability it has confidence, does it become vulnerable to prosecution under section 906? SEC. 907-PROHIBITION AGAINST RECEIPT OF TITLE INSURANCE COMMISSIONS BY CERTAIN ATTORNEYS Section 907 prohibits any attorney in a settlement involving a federally-related mortgage from receiving a "commission" (as defined in section 901 (4)) in connection with issuance of title insurance on any property involved in the settlement. |