Closing.com gets ready for RESPA reform

Submitted by Emmanuel Scanlan on June 26, 2009 - 4:22am.

There is nothing wrong with shopping around for a good price on anything that you do. However, if the intention of the new RESPA rules is to force a fee schedule for service providers that are selected by the lenders then how is this any different than the many incidents of illegal price fixing that have occurred over the years?? Oh, that's right it is only illegal if the government says it is!!

The RESPA rules will not apply to consumers who select their own service providers. For you professionals out their in the RE market how many of your people actually go through the process of selecting all of their own service providers when they are given the option? I'm talking about how many ignore your entire lists of "Preferred Providers" and find their own?

This is just another step in a negative direction for the RE industry to influence consumer decisions instead of forcing the decision on the consumer where it belongs!! An educated consumer makes better decisions and is more responsible for the transaction. An uneducated consumer makes bad choices and we already see what has happened with that route!

Oh Brother, BIG BROTHER!!

Emmanuel J. Scanlan
PS Inspection & Property Services LLC
www.psinspection.com
214-418-4366 (cell)
TREC License # 7593
International Code Council, Residential Combination Inspector #5247015-R5 (Electrical, Mechanical, Plumbing and Building)
Certified Infrared Thermographer (ASNT-TC1A Standards)
Texas Residential Construction Commission, Third Party Warranty Inspector #1593
Texas Residential Construction Commission, Inspector, County Inspection Program
Texas Department Of Insurance, VIP Inspector # 08507061016
Hayman Residential Engineering Services, Field Technician
CMC Energy - Certified Energy Auditor

Knowledge is power, but sharing knowledge brings peace!!

• Login or register to post comments

Submitted by Matt Carter on June 26, 2009 - 9:09am.

Emmanuel: I think HUD would say the new RESPA rule is not intended to "force a fee schedule" on settlement services providers, but to prevent last minute changes in the estimates provided to homebuyers when they are shopping for a loan. Settlement services providers will still determine their pricing (although title insurance rates are often regulated at the state level). They just can't change by more than 10 percent after they have been offered to the borrower, if the services are provided by a company selected by or identified by their lender. That, in theory, is supposed to help consumers get a true picture of what their overall costs will be -- for both their loan and all the associated settlement services. The intent is the opposite of price fixing. HUD is trying to create more competition in the pricing of settlement services because, as you suggest, consumers rarely shop around for these services themselves. The problem with the current system, HUD has said, is that if consumers only consider their loan terms, they may have a hard time picking the best deal. The loan with the best rate and terms may be packaged with settlement services that are not priced competitively, and therefore not be as good a deal as a loan that carries a higher interest rate or points but which provides settlement services at a lower cost or even a cash rebate (the infamous "yield spread premium") that can be applied toward closing costs. There's a tradeoff between the cost of the loan and the cost of settlement services, and HUD has said it's important for consumers to look at the entire picture. The new GFE is supposed to help people look at offers from different lenders, and see how they look once you factor in the cost of settlement services (see the tradeoff table on page 3 of the GFE). HUD has said it wants to see lenders use their negotiating clout with settlement service providers to drive down costs, and pass those savings on to consumers. If you didn't have the "tolerances" limiting changes to the estimated costs of settlement services provided through lenders, there might be an incentive for lenders to use "bait and switch" tactics in pricing settlement services to make their loan offer look like the best deal. That's the reason their origination charges can't change at all. The tolerance is zero. Zero tolerance is probably impossible to achieve with settlement services -- there have been many complaints that 10 percent is going to be tough to achieve. In issuing its final rule, HUD said lenders will have up to a month after a closing to correct any failure to achieve the tolerances for settlement services. The final rule gives loan originators 30 days to "cure" violations by reimbursing the borrower by the amount the tolerances were exceeded (see story). In other words, there is no punitive penalty on top of that -- which some would say isn't much of a deterrence. You say "The RESPA rules will not apply to consumers who select their own service providers." It's only the tolerances that will not apply when consumers select their own service providers. RESPA is mighty big rule and its other provisions will still apply. There are at least two possible reasons the tolerances will not apply when consumers choose the provider: there's less incentive for "bait and switch" when those services are not provided through lenders, and it would be hard to hold lenders accountable for the actions of companies they haven't selected. Maybe you could hold the settlement services providers accountable, but there may be legal issues with that and the complexity of enforcing tolerances would grow. That said, Closing.com's parent company, ClosingCorp Inc., seems to share some of your concerns about the fact that the tolerances do not apply when consumers choose their own settlement services. ClosingCorp is not thrilled with a disclaimer that's on the top of the page 3 of the new GFE. It's a warning from the loan originator to the consumer, stating, "Charges can change if you select your own provider and do not use the companies we identify." In commenting to HUD last year, ClosingCorp said the disclaimer could end up "frightening consumers into selecting the lender's recommended providers as the only way to control costs" (see story). ClosingCorp said the new RESPA rule will force lenders to establish relationships with third-party settlement service providers in an attempt to control the costs and avoid exceeding the tolerances. "If a lender can create a team of preferred settlement service providers, it can guarantee to its customers that the price of the preferred vendors' settlement services will never increase by more than 10 percent at closing," ClosingCorp told HUD (see letter). A borrower who is thinking about shopping for their own settlement services may be concerned if they believe they might be subjected to "unrestricted increases in settlement fees," ClosingCorp said. "It should be no surprise that a borrower, when faced with these two options, will decline to shop for his own settlement service providers and select the vendors recommended by the lender." But when it comes to consumers shopping for settlement services, what is the bigger issue: that most can't be bothered, or that they are scared they will be taken advantage of? You would think that consumers who are willing to shop around are probably not as easy marks for bait and switch tactics as those who are willing to let someone else choose those services for them. On the other hand, if lenders do use the new rules to flex their negotiating clout and drive down the cost of settlement services, consumers may find they have a hard time beating the packages offered by lenders. Note that Closing.com is also marketing itself as a service that can help real estate professionals shop for settlement services providers.

• Login or register to post comments