Editor’s note: Join the discussion about reform of the federal Real Estate Settlement Procedures Act in the "RESPA Reform" group at the Inman Community site.
Penalties for violating the Real Estate Settlement Procedures Act (RESPA) are minimal, and until recently the Department of Housing and Urban Development has done little to enforce the law’s anti-kickback provisions, according to a study by a HUD researcher.
The study analyzes whether the heavy reliance on disclosures required under RESPA to create "sunshine" for consumers is effective in keeping settlement services providers honest and limiting the need for enforcement actions.
While the study does not claim to definitively answer the question it raises, its author suggests regulation of lender and settlement services fees might be better left to the states.
Federal lawmakers may have "implicitly chosen a low probability of detection" of RESPA violations, HUD researcher Mark Shroder said. From 1995 through 2000, "HUD issued no press releases announcing enforcement actions under (anti-kickback provisions) of RESPA," he said, although enforcement has picked up since 2003.
Under one academic theory regarding the enforcement of regulations, Shroder notes, a law may be sporadically enforced, but the few violators who are brought to justice are assessed stiff penalties as a deterrent to others.
"RESPA clearly breaks that rule: Nobody ever goes to jail for RESPA violations, and the maximum statutory fine of $10,000 has not been raised since 1974," Shroder concludes.
Assuming that RESPA relies on providing "sunshine" for consumers in the form of disclosures like the good faith estimate, or GFE, Shroder sets out to determine how effective that policy has been.
In order for "sunshine regulation" to be considered an "efficient and sufficient" regulatory strategy, Shroder said, four conditions must be met:
1. Lending and title fees must be large enough to be worth regulating;
2. The GFEs provided to consumers must be "an unbiased and consistent estimator of lending and title fees";
3. State law must have a "negligible effect" on fees; and
4. RESPA disclosures must strengthen the negotiating position of buyers and sellers, neutralizing the effects of personal characteristics on fees.
Although he does not claim to provide "satisfactory answers" to all of the questions he raises, Shroder concludes that the current RESPA regime is "a form of sunshine regulation implicitly founded on the proposition that the only problem in the market is consumer ignorance, solved by federal action. Consumer ignorance might not be the only problem in the market, and nonfederal action might be preferable."
In an examination of 146 cases of FHA home sales in June 1997, Shroder found that lending and title fees are not only large enough to be worth regulating — they averaged $2,060 — but varied considerably, ranging from $692 to $5,671. There was "wild variation" in the detailed fees charged, including credit reports — "a standard national, largely automated, service that typically costs about $50, but charges (ranged) from $25 to $100."
Although the GFEs Shroder examined were right "on average," many were "off by a lot … Many lenders seem to prefer small overestimates of the title and lending fees to make sure the buyer will have enough money on hand to close. More troubling are the minority of cases in which very large underestimates occur."
The sample of loans examined was too small to definitively answer whether state law has a negligible effect on fees, Shroder said, but common sense "would warn any analyst that title fees, in particular, are highly sensitive to state law, if only because the clarity of state law determines the clarity of the title that is being transferred."
The study found fees were higher than expected in New Jersey, where state law seemed to require more involvement by attorneys, and lower in Iowa, where "the state treasurer has assumed responsibility for title insurance."
When a home sale appeared motivated by a divorce, or if there was a substantial delinquency on property taxes, Shroder found lending and title fees went up by $1,000 to $1,100. Fees for new home sales averaged $400 less than fees for sales of existing homes, amounting to "an unplanned suburbanization policy — a differentially higher tax on existing homes," he said.
Shroder cited those examples of instances where "personal characteristics" seemed to be having an impact on fees that would not be present if disclosures were effective.
In another study released in May, former HUD Chief Economist Susan Woodward concluded that complicated loan arrangements raise the total costs to home buyers, and increase the variability of fees. That suggests lenders and brokers profit when transactions are complex and consumers have a harder time comparing alternatives, Woodward said. The study, which examined 7,500 FHA-backed mortgages originated between May and June of 2001, found borrowers who take out "no cost" loans offered by direct lenders pay $1,200 less for loan origination services (see story).
HUD’s proposed overhaul of RESPA might address some of the issues raised by Woodward, and by Shroder in his 2007 paper, "The Value of the Sunshine Cure: The Efficacy of the Real Estate Settlement Procedures Act Disclosure Strategy," which recently became available in an electronic database.
HUD proposes simplifying the GFE, which it says will make it easier for consumers to compare different loan offers and packages of settlement services.
HUD would require lenders to lock in the loan fees offered on the GFE, and cap increases in title insurance and other settlement services at 10 percent when they are selected or offered by loan originators (see story).
HUD’s RESPA reform proposal includes incentives for lenders to package settlement services with loans, in the belief that loan originators will negotiate volume discounts with settlement services providers and pass savings along to consumers in an attempt to compete for their business.
To save time and money, lenders and settlement service providers would also be permitted to charge consumers an average cost for some less expensive settlement services instead of calculating their actual cost for each loan. HUD also expects those savings will be passed along to consumers.
HUD’s proposed packaging incentives are less clear cut than a more sweeping rule change put forward in 2002 to enable packaging. That plan was ultimately withdrawn in the face of industry opposition, and the current proposal faces similar obstacles (see story).
HUD’s latest attempt at RESPA reform relies more heavily on revised disclosures to help consumers shop around for the best deal. The combination of improved disclosures and incentives for packaging would save consumers about $8.35 billion a year, HUD estimates.
Some critics of the title insurance industry say that consumers often pay too much for title insurance and other settlement services because they don’t shop around. Since consumers don’t seek out the best deal for title insurance, settlement service providers have primarily marketed their products and services to real estate professionals including real estate agents, mortgage originators, and builders. Those marketing efforts may violate RESPA if they involve payments for the referral of business.
First American Residential Group Inc. claims it backed out of a $600,000-a-year marketing agreement with RE/MAX International Inc. last year after Colorado regulators raised "the potential illegal nature of such agreements" (see story).
In a forum for discussion of Shroder’s study in the Inman Community group RESPA reform, Diane Cipa, a Ligonier, Pa.-based title agent and general manager of The Closing Specialists, said that the problem of kickbacks paid by settlement services providers to real estate professionals for referrals was "bad enough" before affiliated business arrangements (AfBAs) were permitted under RESPA. The "finely woven referral net" in existence today "is nothing short of awesome," Cipa wrote.
According to the Real Estate Services Providers Council, Congress amended RESPA in 1983 to allow for the creation of affiliated business arrangements in which real estate brokers, builders and lenders could hold ownership interests in a settlement service provider — as long as that interest was disclosed to the consumer, and consumers were not required to use the service. HUD issued additional guidance for AfBAs to comply with RESPA in 1992, and defined prohibited "sham" affiliated businesses in a 1996 policy statement.
An industry-sponsored study released in 2006 concluded that title insurance and other title-related settlement services don’t cost more when they are provided by companies with ties to real estate brokers, lenders and builders (see story).
But Cipa, who supports HUD’s current RESPA reform proposal, said the "anti-consumer referral network" in place today has "become a sort of real estate revenue sharing entitlement program and embedded in the industry culture to the extent that players cannot imagine life without it."
Undoing it "is a Herculean task," Cipa wrote. "It will take the fortitude of real statesmen to stand against the behemoth of the Realtor, mortgage and title insurance establishment. Whether we have individuals with the right stuff — good guys with guts and brains — in place in state and federal regulatory and legislative positions remains to be seen."
Affiliated businesses may include companies formed to "reinsure" title insurance policies — a practice regulators say is often no more than a method of funneling kickbacks.
HUD’s recent RESPA enforcement actions include settlements totaling nearly $5 million with 11 home builders to settle charges that payments they received under captive reinsurance schemes amounted to illegal kickbacks (see story).
States including Colorado, Washington, Minnesota and California have aggressively pursued allegations of illegal kickbacks paid by title insurers.
But California has rolled back until 2011 plans to cap title insurance rates in order to allow the industry time to shift its marketing efforts from real estate professionals to consumers.
California Insurance Commissioner Steve Poizner has lauded a consumer-facing Web site backed by the California Land Title Association, TitleWizard, as an example of the kind of action he would like to see from the industry (see story). The developer of TitleWizard, ClosingCorp Inc. of La Jolla, Calif., also plans to roll out a site where consumers can shop for settlement services, Closing.com.
Other sites that help consumers shop for title insurance and settlement services include FairClosingCosts.com (see story) and myClosingSPACE.com.
Read a related post by Inman News reporter Matt Carter, "There will be a quiz," at the Inman Community site.
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