Conventional Finance and Lending Committee National Association of REALTORS® 2006 REALTORS® Conference & Expo Hilton New Orleans Riverside Jefferson Ballroom, Third Floor Friday, November 10, 2006 1:30 PM - 4:00 PM
Chair:John Veneris, Downers Grove, IL Vice Chair:Judy Weiss Ziegler, Palm Desert, CA Committee Liaison: Nic D’Ambrosia, La Plata, MD Committee Executive:Jeff Lischer, Lynn King, Washington, DC
I. Call to Order
II. Opening RemarksIII. NAR Conflict of Interest Statement1. When NAR has an ownership interest in an entity and a member has an ownership interest* in that same entity, such member must disclose the existence of his or her ownership interest prior to speaking to a decision making body on any matter involving that entity.
2. If a member has personal knowledge that NAR is considering doing business with an entity in which a member has any financial interest**, or with an entity in which the member serves in a decision-making capacity*, or wit, then such member must disclose the existence of his or her financial interest or decision making role prior to speaking to a decision making body about the entity.
3. If a member has a financial interest in, or serves in a decision-making capacity for, any entity that the member knows is offering competing products and services as those offered by NAR, then such member must disclose the existence of his or her financial interest or decision-making role prior to speaking to a decision making body about an issue involving those competing products and services.
After making the necessary disclosure, a member may participate in the discussion and vote on the matter unless that member has a conflict of interest as defined below.
Conflict of Interest Policy
A member of any of NAR’s decision makingbodies will be considered to have a conflict of interest whenever that member:
1. Is a principal, partner or corporate officer of a business providing products or services to NAR or in a business being considered as a provider of products or services (“Business:); or
2. Holds a seat on the board of directors of the Business unless the person’s only relationship to the Business is service on such board of directors as NAR’s representative; or
3. Holds anownership interest of more than 1 percent of the Business.
Members with a conflict of interest must immediately disclose their interest at the outset of any discussions by a decision making body pertaining to the Business or any of its productsor services. Such members may not participate in the discussion relating to that Business other than to respond to questions asked of them by other members of the body. Furthermore, no member with a conflict of interest may vote on any matter in which the member has a conflict of interest, including votes to block or alter the actions of the body in order to benefit the Business in which they have an interest. ________________________________________ *Ownership interest is defined as the cumulative holdings of the member, the member’s spouse, children, siblings and to any trust, corporation or partnership in which any of the foregoing individuals is an officer or director, or owns, in the aggregate, at least 50% of the (a) beneficial interest (if a trust), (b) stock (if a corporation) or (c) partnership interests (if a partnership).
**Financial interest means any interest involving money, investments, credit or contractual rights.
IV. Approval of Previous Meeting's MinutesV. Review of 2007 Committee GoalsTo develop Association policy on conventional mortgage finance and lending; to establish and maintain liaison with secondary market agencies, private mortgage insurers, trade associations, and other entities involved in regulating, providing, and maintaining conventional mortgage financing and lending. The committee is also the lead committee for issues regardingthe banking and financial services industry and their intersection with real estate finance.Chair:Judy Weiss Zeigler (CA) Vice Chair: Beth Peerce (CA) Liaison: Gary Thomas (CA)
Staff Contacts: Jeff Lischer,202-383-1117; Lynn King, 202-383-1156
Goal No. 1: Position the Association in Congress, with the federal regulatory agencies, and the administration to continue opposing banks brokering, leasing, or managing real estate.
Background:The Federal Reserve Board/Treasury Department published a proposed regulation that would permit financial holding companies and financial subsidiaries of banks to broker, lease, or manage real estate. NAR’s coordinated effort involves supporting legislation to block issuance of a final regulation, monitor and respond to the activities of federal regulators, and public relations efforts that involve REALTORS®, industry allies, and consumers.
Actions to be taken by Committee to AchieveGoal: Continue NAR opposition to the Federal Reserve Board/Treasury Department proposed real estate rule. Refine and implement current NAR policy, as needed, in all relevant arenas to keep banks out of real estate (including real estate development pursuant to OCC rulings).
Enhance coalition activities on all committee issues, building on the foundation created with consumer, business, state and local government, and advocacy groups in the opposition to banks entering real estate and in support of all committee goals.
Expected outcome: Passage of federal legislation to block the proposed real estate regulation and a continuation of the effort to enact permanent ban on banks in real estate.
Goal No. 2: Position the Association to address to questions regarding competition in the real estate industry.
Background: Over the last two years, some policymakers, analysts, and media observers have alleged that the real estate industry lacks vigorous price competition and that there are significant barriers to additional competition from non-traditional real estate firms. NAR and the real estate industry have been the targets of a Department of Justice (DOJ) lawsuit, a Government Accountability Office (GAO) report, a joint DOJ/Federal Trade Commission (FTC) workshop, a House Financial Services Subcommittee hearing and a number of academic articles and reports charging the industry as anti-competitive and anti-consumer choice. NAR has vigorously defended the value that REALTORS® bring to the transaction, the MLS system, competition (including on price and service), consumer choice of real estate services, and state regulation of real estate.
Actions to be taken by Committee to Achieve Goal: The committee will be kept apprised of Congressional, regulatory, and private sector actions that challenge the competitive nature of our industry or undermine the substantial consumer benefits offered by the current real estate system. The committee will advise staff on the evolving nature of competition in the industry.
Expected outcome: A more aggressive, proactive campaign that will educate policymakers, analysts, and media observers who are critical of the real estate industry. This will include: initiating new research reports and data by NAR and credible third parties to examine competition within real estate markets; engaging experts and advocates to voice pro-competitive and pro-consumer choice messages; and providing our state and local associationsand REALTORS® with messages to defend the organized real estate system as both pro-business and pro-consumer.
Goal No. 3: Fannie Mae, Freddie Mac and Federal Home Loan Banks (GSEs) Regulatory Reform
Background: The 110th (2007-2009) Congress may consider legislation to create a new regulator for the housing GSEs. In the 109th Congress, the full House and the Senate Banking Committee have reported GSE reform measures but the chance of enactment in the 109th Congress is remote. The House bill contains a provision that will require the new regulator to establish regional conforming loan limits to address the shortage of conventional financing in high cost areas and it creates an affordable housing fund using five percent of GSE profits. The Senate bill takes a more draconian approach to reform and limits the GSEs loan portfolios. It also contains no affordable housing or conforming loan limits language. The Bush Administration is also tightening the regulatory constraints on the GSEs’ housing programs and operations under current law.
Actions to be taken by Committee to Achieve Goal: The committee will be kept apprised of congressional and regulatory actions that will affect the housing finance system.
Expected Outcome: Enactment of GSE reform legislation that ensures the financial stability of the housing GSEs while continuing their housing mission.
Goal No. 4: Position the Association to address predatory lending legislation and regulations.
Background: Predatory lending issues have gained public and government notice over the past several years. NAR has a three-pronged approach to combat abusive lending practices that includes public awareness, consumer education and support forstrong legislation and regulations addressing predatory lending.
Actions to be taken by Committee to Achieve Goal: The Committee will continue to offer guidance to staff in implementing the educational and awareness prongs of the policy. The Committee and Subprime Lending Work Group will monitor the actions of public policy makers and be asked to review or assist with comments on proposed legislation and regulations.
Expected outcome: Continuing enhancement of resources available onRealtor.org for REALTORS® to utilize in their efforts to educate consumers on potential problem loans. NAR consumer awareness campaign already using “Ask your REALTOR® first.” Issue consumer education brochures on how to shop for mortgages and avoid predatory mortgages. Any predatory lending legislation will contain provisions that NAR favors.VI. New Business
Post-Election Landscape
Consumer Report “Trigger” Issue
Many real estate professionals have complained about the practice of credit bureaus selling lists of recent mortgage applicants to so-called "lead generators" that in turn compile the information and resell it to third parties.
Here is how the process works. A buyer makes an application for a mortgage. The loan officer begins the process of opening the application by making a credit inquiry. The credit bureau notes the inquiry and usually within 24 hours generates a list of recent mortgage applicants. This process is called "prescreening" and is used for a number scenarios including credit card offers. The credit bureau sells the list to lead generators or other interested parties. The parties then contact the mortgage applicant and make some kind of offer or counter-offer based upon little more than what is presented in the prescreened list.
In a number of cases, this practice leads to a variety of negative scenarios for real estate agents, brokers, mortgage originators, other real estate professionals and their clients. In some cases, the client erroneously thinks the original mortgage company has sold their information often leading to tension at a minimum. In others, the client is presented with unrealistic terms and either wastes time with the second mortgage company, goes through the process with the second company only to find the terms change, goes through with the deal and pays more than they would have with the original company or sees the deal fall apartbecause the new company can't provide the credit at the originally presented terms or at all. While a bad outcome is not necessarily the case, the practice has become frustrating to a number of real estate professionals who see deals jeopardized and clients hurt by the practice.
The practice of prescreening is permitted, with some limitations that may be applicable to practices described above, under the Fair and Accurate Credit Transactions Act (FACT) and is regulated by the Federal Trade Commission. One existing remedy for consumers is to "opt-out" of prescreening for all unsolicited offers of credit that come through credit bureau screens. This can be done online and fairly quickly at http://www.optoutprescreen.com or by calling 1-888-567-8688. The opt-out takes five days to become effective and can be established for a five year period or permanently.
Address Discrepancy Guidelines
On September 15, 2006, NAR submitted comments to the FTC and the federal banking regulators on their proposed rules on Identity Theft Red Flags and Address Discrepancy Guidelines required by the Fair and Accurate Credit Transactions Act of 2003 (FACT Act). The purpose is to combat identity theft.
When a consumer reporting agency (CRA) sends a notice of address discrepancy to any user of a consumer report (i.e., a credit report), the user would be required to confirm the accuracy of the consumer's address. If the user can identify the consumer, has a continuing relationship with the consumer, and regularly furnishes information to the CRA, the user would also furnish the confirmed address to the CRA. The rule would apply to members of NAR who use consumer reports, such as those who manage rental property or are also mortgage brokers or lenders.
The Identity Theft Red Flags guidelines would apply to financial institutions and creditors. They do not appear to apply to real estate brokers or agents, but theNAR comment letter asks the agencies to confirm that there is no intent to apply the guidelines to those who simply refer consumers to creditors. The guidelines will apply to lenders, including mortgage lenders.VII. Unfinished Business
House-passed and Senate Banking Committee-passed billspending in Congress would create an independent single regulator for the housing government-sponsored enterprises (GSEs) -- Fannie Mae, Freddie Mac, and the Federal Home Loan Banks (FHLBanks). Differences over how to control the growth of GSE portfolio of assets and on establishing a fund to set aside 5 percent of Fannie Mae and Freddie Mac profits for affordable housing have created a partisan stalemate and held up further consideration of reform legislation in the Senate.
NAR supports strengthening GSE financial safety and soundness regulation through an independent agency that recognizes and facilitates their unique corporate structures and public missions that assure stability and liquidity in the nation's housing finance system. NAR alsosupports the affordable housing and community development programs of the FHLBanks that provide alternative financing for Bank member credit unions, banks, and thrifts. REALTORS® also support the House provisions providing for regional adjustments toconforming loan limits.
The GSEs' combined activities represent a significant federal subsidy that supports housing and homeownership. Proposed severe restrictions on GSE portfolio growth could limit their shareholder profits and affect theirroles in providing liquidity and stability in the supply of mortgage credit to homebuyers. The proposed affordable housing fund could address home buying in that sector of the housing market, but the final shape of the fund is unresolved in the Senate. Should the GSE presence in the secondary mortgage market shrink, their funding replacement might be the largest banking institutions whose reliability in a down housing economic environment is unknown. Effectively, the federal housing subsidy would shrink,potentially raising the cost of homeownership.
On October 26, 2005 the House passed H.R. 1461 by a vote of 331-90. The bill would create a single, independent regulator to oversee the activities of Fannie Mae, Freddie Mac, and the Federal HomeLoan Banks. It contains several REALTORS®-supported provisions, including an increased regional conforming loan limit for high cost areas, no statutory limitation on retained mortgage portfolios, and a streamlined program approval process. The bill would still require the new regulator to define mortgage origination and the secondary mortgage market. The GSEs would be prohibited from participating in any activity not considered a secondary market activity. The bill did exempt existing automated underwriting, consumer education, and counseling programs from this definition. It also creates a new extremely low- and low-income housing program, mostly to build rental housing that is funded by 5 percent of the GSEs after-tax profits.
The SenateBanking Committee reported its GSE reform bill, S. 190, the "Federal Housing Enterprise Regulatory Reform Act of 2005" on July 28, 2005 on a straight party-line vote. This bill takes a more draconian approach to GSE reform with severe limitations on GSEportfolios. It does not contain regional conforming loan limit language or affordable housing funds.
The prospect of enacting GSE reform legislation during the November 2006 "lame duck" session is uncertain. The Administration has signaled someflexibility on the portfolio issue.
Implementation of Subprime Lending Work Group Report
Bank in Real Estate SummaryIn early 2001 the Federal Reserve and the U.S. Treasury Department proposed rules to expand the powers of national bank conglomerates. The agencies proposed allowingnational bank conglomerates to engage in real estate brokerage and management, reclassifying these activities as financial in nature. NAR strongly opposes the proposal, arguing that the Bank Holding Company Act of 1956 and the Gramm-Leach-Bliley Act (GLBAct) of 1999 do not authorize banking firms to provide real estate brokerage and property management services, as these are nonfinancial activities. NAR strongly supports enactment of the Community Choice in Real Estate Act, H.R.111/S.98, which removes the powers of these agencies to regulate these real estate activities. NAR believes the potential problems would occur in the context of national mega-bank conglomerates and has not taken a position against the limited real estate activities, authorized bylaw, engaged in by a few state banks, credit unions, and thrifts.
REALTORS® policy supports the separation of banking and commerce. If permitted to engage in real estate brokerage and management, national bank conglomerates would have an unfair competitive advantage and inherent conflicts of interest would result.
Congress is not likely to act on H.R. 111/S. 98 this year. On June 14, 2006, the House [again] approved a one year prohibition in the Transportation-Treasury-Housing and Urban Development Appropriation bill prohibiting the Federal Reserve and Treasury Department from finalizing the rule allowing bank conglomerates to engage in real estate brokerage. On July 20, the Senate Appropriations Committee [again]approved a permanent prohibition as part of their Transportation-Treasury-Housing and Urban Development Appropriation bill. Later this year, the House and Senate will come together to negotiate the differences between the two Appropriation bills includingthe one-year (House) versus the permanent (Senate) provisions blocking banks from engaging in real estate. Last year, everyone agreed to the permanent ban provision until the House Leadership insisted on its removal during the final hours of the conference.OCC Rulings Summary:In December 2005, the Office of the Comptroller of the Currency (OCC) expanded the authority of national banks to engage in real estate development by issuing rulings that allow banks to develop luxury hotels; to develop multi-use projects including office and retail space, a hotel, and condominiums for immediate sale to make the rest of the project economically feasible; and to take a 70 percent equity stake in a windmill farm. The new rulings represent the latest step in the OCC's continued efforts to dramatically expand the powers of national banks into real estate and are inconsistent with the national policy against mixing banking and commerce.
REALTORS® are strongly opposed to the OCC actions Permitting national banks to engage in real estate activities undermines the long-standing, Congressionally-mandated separation between banking and commerce. Mixing banking and commerce inevitably leads to conflicts of interest, an unleveled playing field, and risks to the financial system.
The lessons learned from the savings and loan scandal of the 1980s and the sluggish Japanese economy, where banks are intertwined with real estate and commercial enterprises, are two dramatic examples of negative consequences of mixing banking and commerce.
Federal subsidies give banks access to cheap sources of capital, which gives them an unfair advantage over REALTORS® and others involved in real estate development. Expanding the authority of banks to develop real estate could lead to the OCC giving banks the authority to broker real estate as well.
Allowing banks into real estate development lets them compete unfairly with real estate professionals. For example, a bank could take a real estate professional’s application for financing to develop a piece of property and use the information to develop a competing proposal that cuts out the real estate professional.
Investing in real estate can be a risky venture as markets change. The OCC should not expand the authority of banks to invest in real estate development because it creates the risk that, as in the savings and loan scandal in the 1980s, REALTORS® and all other taxpayers will beforced to bail out the banks.
NAR has raised its concerns about the OCC rulings with OCC Comptroller John Dugan, Chairman Ben Bernanke of the Federal Reserve Board, Treasury Secretaries John Snow and Henry Paulson, and FDIC Chairman Sheila Bair. NAR is also communicating its strong objections to Members of Congress, urging Members to communicate their objections directly to OCC, and suggesting that Congress take action to rein in the inappropriate expansion of banks into real estate development. OCC has not issued any more interpretive letters responding to bank requests to engage in real estate development. On September 27, 2006, the House Government Reform Subcommittee on Government Management, Finance and Accountability held an oversight hearing on the OCC's December 2005 decisions authorizing national banks to invest in commercial real estate projects. President Tom Stevens testified on behalf of NAR and Cynthia Shelton (FL) testified on behalf of the REALTORS Commercial Alliance. Other witnesses for the hearing included the OCC and the American Bankers Association.
On July 25, 2006, NAR President-Elect, Pat Vredevoogd Combs testified at a House Financial Services Subcommittee on Housing and Community Opportunity hearing entitled, “The Changing Real Estate Market.” The first panel consisted of the witnesses from the Department of Justice (DOJ), the Federal Trade Commission (FTC) and the Government Accountability Office (GAO) who were questioned for approximately 2 1/2 hours, a rarity for federal bureaucrats at a congressional hearing. Their testimony was predictably consistent with their public criticisms of MLS rules, state minimum service laws and state anti-rebate laws. It generated some hard questions by committee members and tough conclusions regarding the purpose of the hearing.
The second panel consisted of representatives from Consumer Federation of America (CFA), Texas Discount Realty, Lending Tree, RedFin Corp., Re/MAX, and NAR. The critics on the second panel focused on an alleged unfairplaying field in real estate marked by perceived “intimidation” by competing agents and alleged barriers to MLSs. Redfin’s CEO was the target of a lot of committee member questions because he advocated for federal intervention to forcethe MLSs to have open membership rules, free to the public, and allow members to post commentary information, such as how long a house has been on the market, on broker Web sites.
Pat Vredevoogd Combs reiterated REALTORS’® position that competition is thriving, the price for real estate services varies, and consumers can access more property and transaction information through the Internet, thanks to REALTORS®. Vredevoogd Combs also debunked the myth that MLSs discriminate against alternative business models by explaining to Congress, “participation in an MLS is readily available to all real estate professionals, operating all kinds of brokerage business models.” The Prince William County, VA. Board of REALTORS®and the Northern Virginia Board of REALTORS® bused in about 20 local REALTORS® to attend the hearing and show REALTOR® support on this important issue. Additionally, the Texas Association of REALTORS®, the California Association of REALTORS®, and the Missouri Association of REALTORS® sent letters to the committee, which were submitted for the record.
As expected, House Financial Services Committee Chairman Mike Oxley (R-OH) and Committee member Rep. Richard Baker(R-LA) were anti-NAR. They were the only anti-NAR members among the 15 members of the housing subcommittee who spoke. A number of members of the subcommittee were very helpful to NAR during the hearing, including Chairman Ney (R-OH), Ranking Member MaxineWaters (D-CA), Representatives Miller (R-CA), Brown-Waite (R-FL), Neugebauer (R-TX), Davis (D-AL), Cleaver (D-MO) and Sherman (D-CA).
The hearing ended with the shared sentiment among the subcommittee members that there does not appear to be acompelling case for federal intervention in the regulation of the real estate industry.
In 2006, in response to applications from Wal-Mart and Home Depot to become owners of industrial loan companies(ILCs), REALTORS®, bank trade associations, and many others voiced concerns with the Federal Deposit Insurance Corporation (FDIC) about mixing of banking and commerce through the ILC statutory loophole that permits commercial firms to own this type of federally insured state bank. Congress is considering amending the Bank Holding Company Act to close the ILC loophole. An ILC is a special type of federally insured state-chartered bank (Utah has chartered about half of all ILCs).
REALTORS® support amending the Bank Holding Company Act to tighten or eliminate the exception that permits commercial firms to own ILCs. REALTORS® oppose FDIC approval of any commercial company's application to acquire an existing ILC or to obtain federal deposit insurance for new a ILC. REALTORS® believe that Congress should tighten or eliminate the ILC loophole to make ILC authority consistent with the national policy against mixing banking and commerce.
Banks must be “honest brokers” of financial services and not be swayed into making credit and other business decisions based on their affiliation with commercial firms. When commercial firms are allowed to engage in banking, the bank functions under an inherent and irreconcilable conflict of interest. The bank’s commercial parent will be tempted to use the bank in a manner that furthers its own corporate objectives, which may be at odds with what is in the best interests of the bank subsidiary, customers, competitors, REALTORS®, and our financial system.
NAR has been very active in the ILC debate on the Hill, including most recently submitting testimony for the July 12, 2006 House Subcommittee on Financial Institutions and Consumer Credit hearing (Chaired by Rep. Spencer Bachus) entitled, “ILCs—A Review of Charter, Ownership, and Supervision Issues.” NAR has also sent a letter to the full House encouraging Members to co-sponsor H.R. 5746, the “Industrial Bank Holding Company Act of 2006,” which, among other things, prohibits the FDIC from granting new charters to commercial companies seeking to start or acquire ILCs. Congress is not likely to act on H.R. 5746 this year.
On the regulatory front, NAR hastestified to the FDIC against an application by Wal-Mart to create an ILC and submitted comments against a Home Depot proposal to acquire an ILC. In late July, the FDIC announced a self-imposed moratorium on all ILC applications. The FDIC has also published 12 questions related to ILC issues and invited the public to comment, and NAR submitted comments in October. Whether FDIC will extend the moratorium past January 31, 2006, or resume processing of ILC applications on February 1, 2007, is not known.
On September 29, 2006, the federal banking regulators issued final guidelines on nontraditional mortgages (including interest-only and payment option ARMs). They apply to banks, savings associations, and credit unions (and their affiliates and subsidiaries). The guidelines explain how lenders should tomake nontraditional mortgages to assure they are "safe and sound" and how to clearly disclose their risks to consumers.
NAR submitted comments on the draft guidelines in March 2006. NAR also submitted written testimony for the Senate Banking Committee's September 20 hearing on nontraditional mortgages which echoed our comments to the federal banking regulators. The comments and testimony praised the agencies for applying the guidelines to the affiliates and subsidiaries of the federal institutions and for setting high standards for educating consumers about how the mortgages work. NAR is pleased that these elements remain in the final guidelines.
While NAR recognized that the agencies were responding to real and serious risk to lenders and consumers, the comment urged the agencies to address the problems without eliminating this type of lending as an importance source of home financing.
The final guidelines retain extremely tough underwriting standards, including a requirement that lenders qualify borrowers based on a fully index rate, assuming full amortization and maximum potential negative amortization. This requirements could significantly reduce the availability of nontraditional mortgages and careful monitoring willbe required to determine if they have unintended consequences.
