accounts, but also to accounts of state liquor stores, state tax accounts and the like. This business of earning on "float" type accounts can most strikingly be illustrated by considering a profitable source of bank loans. These, too, are only a very short term basis, and are at good rates of interest. Inquiry of the statistical section of the Board of Governors of the Federal Reserve System will show that the monthly average interest rates on call money for the twelve months ended February 29, 1972, was 5.5%. Applying this rate to the average daily balances in the tax and loan accounts indicates a gross income to the banks of $283,030,000 a year could be earned on these free accounts. Obviously, banks incur some expense in making loans, but broker's day loans come in relatively large amounts. When it is remembered that the Federal Reserve Bank of New York's Functional Cost Analysis of various banking functions indicate that the entire commercial and agricultural loan function of banks, in banks of over $200,000,000 of deposits operates at about 11% of income, and in the smallest banks, those of $50,000,000 in deposits and under, at about 15%, it can be estimated that the cost of the broker's day loan lending function will be below 10% of income thereon. This leads to the conclusion that there is over $250,000,000 a year in profit from the handling of tax and loan accounts.

Without having made any real cost analysis studies, certainly since a 1958 study was adversely commented on by the Comptroller General in December 1963. the Treasury still maintains that the government obtains a lot of free services from banks, as consideration for these free demand account balances. Any analysis of these claimed services must come to the conclusion that they are also performed in large part as a customer service. At any rate, I suggest that quite startling results will be obtained if the deposit accounts are put up for competitive bids by the banks. And I would have the terms of the bidding include commitments as to the amount of funds the bidding bank would guarantee to place in priority housing and other priority programs. Having seen, in my private practice, the lengths to which banks will go to obtain similar clearing accounts from state liquor control boards and the like. I believe this committee can be assured that the results of such an auction would, indeed, be startling. In addition such a process will be taking but one step further the program of linkeddeposits inaugurated in Illinois by Senator Adlai E. Stevenson, Jr., when he was State Treasurer of that State.

Then, too, such a program would eliminate the ugly rumors going around as to political favoritism in the establishment of these accounts, such as why the largest of U.S. banks, the Bank of America, N.T. & S.A., in 1963, ranked only sixth in such holdings with $93.2 millions and now ranks only second with $149.7 millions in balances, an increase of 60.6% as against an increase in the balances involved on the dates studied of only 43.06%, and an increase of only 10.6% in the total amounts held by the 50 banks having the largest deposits. Such a program would eliminate the question of why Equitable Trust Co. of Baltimore, which was not even in the top 50 in 1963 having only $3.4 million in balances, now ranks 39th, with $15.6 million, an increase of 358.8% as against balance differences of 43.06% and 10.6% in the top 50. Again, one can wonder why the National City Bank of Cleveland dropped in deposit ranking from 21st, in 1963 with $20.9 million to 40th in 1972 with only $15.5 million. If deposits were awarded as a result of competitive bidding, as other contracts with governmental agencies are awarded, such speculations would not arise.

Thus, legislation should provide that tax and loan accounts should be awarded within certain limits based upon the size of a bank's capital funds, or other proper yardstick for classification, based upon the bank's commitment to participate in certain programs of a high social priority, such as permanent financing of housing for those of low income and for the elderly, financing of small business minority enterprise loans, and the advancement of education for the disadvantaged. I suggest that no credit be given for construction loans by banks where made against a firm take out commitment of a permanent lender, as there is a sufficiently different risk element here that this traditional activity of commercial banks should not be counted as participation in a social priority program.

The banks would, of course, have to be divided into groups, based on size, so that the deposits of tax and loan account moneys would not be disproportionate to the capital funds of the bank, or other proper yardstick, and an appropriate weighting given to amounts pledged for each priority purpose with particular emphasis on housing.

Title IX of the bill proposes a most innovative program. I append hereto a memorandum suggesting certain technical drafting changes which, in my opinion,

will make the proposals more workable. I concur with regard to Title IX with some of the suggestions of Mr. Philip C. Jackson, Jr., President of the Mortgage Bankers Association of America in his statement on June 8, 1972, to this Committee. Specifically,

1. There should be a proper definition of "settlement costs" or fees for "title related services."

2. The bill should cover as many lenders as is constitutionally possible, using both "affecting interstate commerce" and the money power of the Congress.

3. Much of Title IX should apply only to "protected parties”, a term for which I shall suggest a definition.

4. Costs not within the control of the lender, or fully factually ascertainable should be able to be furnished to the protected party from certificates furnished the lender under penalties for furnishing false information.

5. Disclosure of previous selling prices should be limited to houses sold in a finished state to a protected party.

6. It makes sense to permit lenders to publish and distribute the information booklets in a format approved by the secretary of H.U.D. This could also apply to the Uniform Settlement Sheet.

In a separate letter to Chairman Patman, I commented on Secretary Romney's suggestion that the rules as to maximum settlement charges be limited to F.H.A. and VA insured mortgage loans. I think such a limitation would not be in the public interest. The paper work involved today has already harmed those programs enough. Further restrictions applicable to these programs alone would restrict the programs even further. I believe this to be the thrust behind Mr. Jackson's request that the scope of title IX be widened, not restricted.

Secretary Romney's fear that he will have too big an enforcement problem is not well founded. As Governor Robertson of the Federal Reserve System has testified in the Truth-in-Lending oversight hearings "the most effective sanction" can be the consumer class action. Consequently, this Committee should take a leaf out of the Truth-in-Lending book and provide for class action recovery of overcharges of settlement costs. Enforcement by Governmental oversight could then be limited to random sampling and computer analysis of the copies of the Uniform Settlement Sheets received in various connections and pursuant to call, which the Secretary should be empowered to issue for reports from such areas and at such times as he might deem advisable.

Section 908 deserves special comment. First, the section should require the mortgage lenders to permit any "protected party" to pay his own taxes and insurance premiums directly as soon as he has built-up and agrees to maintain in account with the lender or under the lenders control with respect to withdrawals, an interest bearing savings account equal to one year's taxes and insurance premiums. Second, where this is not done, there should be a provision requiring the payment of interest on the balances in the escrow account from date of deposit to date of withdrawal at a rate of interest not less than the rate at the time prevailing for loans by Federal Reserve Banks by member banks in the district where the mortgaged premises lie, under Sections 13 and 13a of the Federal Reserve Act less three-quarters of one percent. At the rates shown in the May 1972 Federal Reserve Bulletin this would be a uniform 34% rate of interest. As an alternative, the rate could be set at not less than one half of the nominal rate set in the mortgage itself.

It is not without significance that a substantial savings and loan Association in Dade County, Florida, has voluntarily initiated a program of paying interest on escrow accounts, and other savings and loans have paid interest on these accounts in the past, so it is neither impossible nor too costly to do so.

The section (908) should also provide that where the person to whom the escrow payments are made is not a bank or savings and loan association or other person authorized to hold interest paying time or savings accounts, the escrow payments shall be deposited by such mortgage servicer in a common time or savings account with other escrow in a federally insured depositary institution, paying interest from day of deposit to day of withdrawal and the mortgagor shall be credited with the interest earned thereon less a service charge not exceeding three quarters of one percent a year on the average daily balances deposited in such accounts. No such common account shall be permitted to have a total balance therein in excess of the amount of any applicable federal insurance for the benefit of those interested in the application to their taxes and insurance of the escrow funds. Possibly, the legislation should provide that, for deposit insurance purposes, the common account should be considered the equivalent of

as many separate accounts as there are persons whose escrow moneys were deposited therein.

Such a provision is necessary, as mortgage bankers operating properly do not make use of escrow moneys in their own lending as financial intermediaries, do. By using demand deposits, however, they have been able to benefit by having such escrow accounts counted as "compensating balances" in their own lending operations. They, thus, in effect make a profit by using other people's money for their own benefit.

Subsection (2) of Section 908 needs one slight amendment, so that the subsection will begin by saying:

"Except as required to adjust for increases in taxes or insurance ascertained with due diligence after the start of an escrow period * * *"

It often happens that tax rates and assessments are raised after the start of a 12 month escrow period, and to make up in the remaining months, the sum to be escrowed must exceed one twelfth of the final period. Technically the language of lines 11 through 13 should read:

"ance which are to be paid at the end of the particular period for which the escrow payments are being accumulated. Such taxes and insurance shall be paid at such time as will insure that the mortgagor receives the benefit of the maximum discounts allowed by the jurisdiction to which or the person to whom such payments are to be made."

I have seen letters complaining of the failure of mortgage lenders to obtain discounts for the mortgagor. In a few instances the claimed justification was that the accounts were not sufficient, due to increases in taxes, until after the discount period had expired. Mortgage services know the areas in which the properties they service lie. Where the increase is due to a general rise in tax rates or a general readjustment in assessments, they should promptly move to adjust the escrows. The concept of due diligence should not make a servicer liable for changes in assessments, unless, as is often the case, he has the bills and tax notice sent directly to him.

Section 904 (c) provides for a delivery of the information booklets to the prospective borrowers "at the time such person makes" his application for a loan. Many lenders can meet this requirement by supplying loan originating offices with booklets to give out when the loan application form is delivered to a prospective applicant. This can also be done by other lenders at the time they mail out the application forms.

Section 905 (a) and Section 904 cover much the same ground. It must be made clear that the 10 day limit in Section 905(a) does not govern disclosures required to be made at earlier dates under the Truth-in-Lending Act as interpreted by the Courts. The lender should send his finance charge disclosures with his acceptance of an application, or even earlier if known, possibly with the booklet. Personally, if the booklet is furnished with the application form, I have some doubts as to the efficacy of a double delivery. Most protected parties will, I believe, read the booklet before filling out the application form, if they fill it out. The trouble is that the broker usually fills out all papers and forms. Relying on what he or she is told, the buyer we want to protect probably rarely reads his own answers, let alone, accompanying booklets. Yet a program of education to home buyers as to the availability of the booklets may bring about some diffusion of knowledge, with, as usual, the upper and middle income groups benefitting more than the poor. But an adequate counselling program, using the booklets, should prove of great value.

Legislative history should make it clear that a disclosure of a charge arising in connection with a settlement is "accurate" within the meaning of the section if disclosed as of a given date with a "per diem" adjustment figure for each day the settlement date is changed. This is the present practice for mortgage payoff statements and can be done for taxes and other pro-rated items. It is, of course, not possible for the lending agency to give a protected party any estimate of the utility charges to be incurred by the party as a result of his use of the utilities, but charges to be paid at settlement to insure that utility services will be available can be obtained in advance of settlement with accuracy. Industry disturbance over the wording may well be quieted by having the sentence read:

"With respect to charges, such as minimum deposits and prepayments payable at settlement with respect to utility services, if the exact amount of any such charge is not available such institution shall provide the buyer with a good faith estimate of such charge."

Section 7(b) (1) of the Revised National Housing Act provides for a three year warranty of substantial compliance with plans and specifications. This is needed badly in the housing industry. It should be made crystal clear that the warranty may not be disclaimed by contract. To do this I suggest the word “nondisclaimable" be inserted in line 23 of Section 7(b)(1), page 13, and further. in line 4 on page 14, after the period, a new sentence should be inserted reading: "No contract shall be effective to limit the amount of actual or conse quential damages recoverable for breach of the warranty."

In line 16, after the period, a new sentence might be inserted, providing that the term of any bond or other security required by the Secretary may be less than three years provided that the term of the warranty itself is not thereby diminshed, and provided that the warrantor continues in existence with assets at levels considered by the Secretary to give adequate assurance of performance by the warrantor of its warranty obligations. I note that on page 8 of his written statement, Mr. Jackson of the Mortgage Bankers Association of America, said that the effect of requiring the bonds, letters of credit or of maintaining escrows would be

"to drive MONEY (capitalization mine) builders away from HUD insured housing programs ***

I submit that the "MONEY" builders, i.e., the fast buck artists, are just the ones we want to drive away from HUD programs. Better quality and safety are needed in homes.

Finally, the term "protected party" should be defined. He (or she) should be one owning 1 to 4 dwelling units on a parcel of ground of three acres or less, one unit of which such person occupies or intends to occupy as his or her residence. There may be professional or commercial quarters in such premises in addition provided that the number of such quarters plus the number of dwelling units does not exceed six in the aggregate.

I thank the Committee for this opportunity to present a few points with regard to this most important legislation.

MEMORANDUM ON DRAFTING SUGGESTIONS FOR THE COMMITTEE PRINT OF MAY 11, 1972 OF THE HOUSING AND URBAN DEVELOPMENT ACT OF 1972

1. The defined term “title services" is not used until Section 912(a) where the bill may be conferring powers on title insurance companies which they do not have under applicable state law. In many areas the bill uses the term "settlement costs" which are not defined or delineated. Since the bill delegates to the Secretary of HUD the power to fix maximum limits, there should be a careful limitation on the scope of this power. I suggest, therefore, that the definition of "title services" be expanded as follows and be used also as the definition of settlement costs:

"(3) the term "title services" or "settlement costs" includes any or all of the following, whether performed by the same or different persons:

(A) the performance of title examinations;

(B) the furnishing of title abstracts. title reports, or similar documents; (C) the review of record title evidence and the determination of the state of the title therefrom;

(D) the furnishing of opinions as to the status of a title;

(E) the preparation of any or all necessary documents pertaining to the conveyance of title:

(F) the furnishing of surveys or other verifications of the legal description of a parcel or parcels of land:

(G) the conducting of escrow or other closings of sales of, or loans on the security of, real estate;

(H) specifying evidence necessary for the removal of objections to title as shown on preliminary title reports; and

(I) the furnishing of title insurance or other guarantee of title for the protection of a lender, a homeowner, or both.

This act takes no position as to which of the foregoing services may involve the practice of law under the law of the state where the land is."

2. I suggest that the term commission be broadened to include splits or kickbacks paid to a real estate broker, as this is a very large area where a great deal of the title insurance "commission expenditure" goes. This would result in having the definition read as follows:

"(4) the term "commission" includes any portion, split or percentage of any or all charges for title services paid to an attorney-at-law or to a real estate broker, except that such term does not include

(A) as is
(B) as is

(C) the usual and customary commission for effecting the sale of real estate paid by the seller thereof."

3. I would change the term "title company" as I understand that in some areas the guarantee of the accuracy of a title report is not considered as insurance, so that it should read:

"(5) the term "title company" means any organization which performs any title services and is authorized to issue policies of title insurance or make guaranties of the title to real estate, directly or through its agents and also refers to any authorized agent of a title company who performs other than mere soliciting and referral services."

This last addition is necessary since in many areas the custom is to license a real estate broker as an agent with the state insurance department so that he can be paid a greater referral commission than is given to brokers who have a lesser volume of business. Even with my language there will be loop-holes as the title company will arrange for the broker to allow settlements to occur in the brokers office conducted by a roving settlement clerk, and this will be the excuse for giving the broker as much as 45% of the title insurance fee charged by the company.

4. Amend Section 902, lines 4 and 5 to read:

"Board, shall fix the maximum amounts of the charges against the buyer and the seller for title services incident to"; insert "title" in front of services throughout the section and in lieu of the word "settlement costs". 5. Same section, Galley 192, lines 3-6 inclusive, amend to read:

"as between different areas of the United States on the basis of differences in methods of maintaining title records, in cost levels, in legal and administrative requirements imposed by state law in connection with real estate settlements, urages of trade and other factors deemed relevant by the Secretary, but they shall be consistent within any such area (except to the extent absolutely"

Areas is a better word as it will relate to standard metropolitan statistical areas, and in fact, region connotes a broader area such as federal reserve region which is too broad a concept. In the five county Philadelphia area certain practices and procedures are common but are handled quite differently in the outer rings of the more rural counties.

6. Add at the end of the section 902 (a) the following:

"Nothing herein contained shall empower the Secretary to alter, in a sales transaction any rule of law or usage of trade as to which charges shall be paid by the buyer and which by the seller."

To some extend this is a policy question, not a drafting matter, but if it is intended that the Secretary have this power, then in view of the recent District Court decision as to the rule making power of the F.T.C. (National Petroleum Refiners Association v. Federal Trade Commission, et al. D.C. Dist. Ct. Civ. No. 1180-71, April 4, 1972) the power had best be explicitly stated affirmatively. Hence the issue should be raised.

7. Section 902(b) Galley 192, line 2 of subsection, change to read:

"related mortgage loan on real estate in any area unless it is established in accord—”

and the last line on the galley should read:

"not exceed the applicable maximum amounts fixed for such area" The concept of these two changes is to use the word "established" in the sense of vertifying a factual situation and the word "fixed" for the rate ceilings promulgated by the Secretary.

8. Section 902(b) Galley 193, lines 4 and ff, change to read:

"or agency of the Federal Government unless it is so established that the charges for title services imposed in connection with such mortgage loan are within the maximum amounts applicable to such area. The financial organization making any such loan shall obtain such information and assurance from all persons who impose or intend to impose charges for title services, which information and assurances shall be in such form as may be prescribed by regulations of the Secretary."