RESPA's missed opportunity
Essay: Changes may still leave consumers 'clueless'
By Inman News, Monday, September 28, 2009.Editor's note: This guest essay, submitted for a "Settling the score on settlement services" essay competition, explores whether pending changes to the U.S. Real Estate Settlement Procedures Act will actually benefit consumers.
By ANTHONY FARWELL
"The core problem (with the closing process) is that too many Americans sign a mountain of documents they don't understand and pay thousands for services that they've probably never heard of," said Brian Montgomery in 2001, when he was the U.S. Department of Housing and Urban Development's assistant secretary for Housing and Federal Housing Commissioner.
He was commenting on an Urban Institute study that found significant disparities in closing costs even among borrowers with identical credit scores, loan terms and mortgages: "This report proves that the more informed you are, the less you pay. Our common goal should be to increase competition and transparency, and to help take the mystery out of buying a home."
There are positive things to be said for the Real Estate Settlement Procedures Act reforms that take effect Jan. 1. The new good-faith estimate will produce numbers that will be closer to the actual costs consumers will pay. Buyers will get a better picture of costs earlier in the transaction process.
But the new RESPA will leave consumers almost as clueless as they were when Montgomery so aptly described exactly what was wrong with RESPA eight years ago.
When it comes to the value consumers are getting for their closing dollars, there has been a wholesale lack of transparency for consumers and real estate professionals alike. The new RESPA gives consumers a peek at what they are really going to pay, but not enough to achieve the kind of information Montgomery envisioned. ...CONTINUED
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Submitted by Jillayne Schlicke on September 28, 2009 - 7:03am.
It's not the job of the government to "educate" your client. This is the job of the Realtor or loan originator.
If you want the government to do your job, be prepared to accept way less fee income.
There's nothing in the final changes to RESPA that does NOT encourage the consumer to shop for services outside those recommended, such as the services the author's company provides.
Submitted by Todd Ewing on September 28, 2009 - 9:28am.
Mr. Farwell is correct in his assessment. What he politely omitted was the fact that the new regulations are acutally ANTI-competitive. With the new rules, most consumers will "play it safe" and elect to choose the settlement service provider from the lender's required short list. It is likely that the lender's short list will consist of the lender's affiliated settlement company ("legal kickback" company, a.k.a., an ABA)or the referring real estate agent's affiliated company. As a result, the consumer is discouraged from shopping for settlement services in which they could save upwards of a thousand dollars. The new regs do not encourage shopping for settlement services; instead they further enable the Affiliated Business Arrangements that have been the subject of numerous unfair trade practice complaints. HUD has indeed missed another opportunity.
Submitted by Anthony Farwell on September 28, 2009 - 10:10pm.
Indeed, Realtors have the most important role in educating and advising their clients with with residential real estate transactions.
The purpose of this "essay" was to respond to Inman's invitation to comment on whether HUD's new rules will be successful in providing any consumer benefits.
In announcing their new rules, HUD made bold assertions that their new reform would promote shopping for closing services and save consumers hundreds of millions of dollars each year. By nearly all accounts, their reform does nothing to promote shopping, in fact, as Todd Ewing noted in his posting on this article, it serves to inhibit it. HUD completely ignored the outcry from closing service providers complaining that the reform would discourage shopping for regional and local providers who will likely be excluded, en masse, from any list provided by large lenders. In fairness, lenders will understandably seek to recommend companies with the broadest service coverage (easier to manage) and the ability to offer uniform rates (easier to quote); which rates, would necessarily be HIGHER since a recommended provider has to cover a broader geographic area and wider set of circumstances in order to deliver a simple uniform rate. Accuracy of provider rates is more important than a competitive rate. Lenders have little to no interest in recommending, nor guaranteeing the rates of, home inspectors, pest inspectors, land surveyors, and other providers typically recommended by their real estate agents; but, if required to do so as they are under RESPA's new rules, there is no incentive to have a lengthy list of providers. The longer the list, the higher the liability. As one large lender put it, "we are being called upon to extend our brand to providers for which we have had no prior substantial relationship." Who could blame lenders for not wanting to deliver a long list of providers? Lenders, along with enlightened consumer groups and the real estate industry have largely objected to HUD's approach to handling of closing service recommendations. Had HUD simply required lenders to meet certain overall GFE accuracy standards while also incenting lenders to provide their borrowers a "reasonably comprehensive" list of national, regional and local closing services (which list would be exempt from any accuracy tolerance requirements), it would have benefited (i) consumers and their professional advisors, (ii) lenders and (iii) closing service providers.
In the end, HUD's shortcomings in this area won't make much of a difference. Savvy consumers and their agents will use the Internet to create transparency, efficiency and savings. Services like Closing.com and others will fill-in where HUD clearly failed to adequately facilitate shopping for closing services.