The U.S. Department of Housing and Urban Development estimates that the reform of the Real Estate Settlement Procedures Act would save the average real estate loan borrower $936 in settlement costs, but the potential cost savings could be much lower at about $225, according to The TowerGroup. Yet bundled settlement packages, whether by regulation or not, could make the mortgage closing process simpler for consumers.

The research company reached those conclusions in a recent study, "RESPA Reform and Guaranteed Mortgage Packages: The Impact on Lending, Mortgage IT and the Consumer." Although HUD withdrew its proposed changes to RESPA earlier this year, the agency has vowed to continue seeking reform of RESPA, which governs industry kickbacks and payoffs.

Among other changes, HUD’s proposal would have permitted the sale of guaranteed-price bundled packages of settlement services, or Guaranteed Mortgage Package Agreements, the element TowerGroup focused on in its report. HUD may introduce similar revisions again in 2005, senior analyst Craig Focardi wrote.

The original proposed RESPA changes drew criticism and opposition from within the real estate industry. Many argued that such changes could seriously impact the competitive dynamics of the industry and cooperation among companies.

But lenders may actually find such changes welcome, especially as they look for new revenue sources in the post-refinance boom, according to the TowerGroup.

Changes like those HUD originally proposed could concentrate settlement service purchase decisions with mortgage lenders, reducing the control Realtors, mortgage brokers and title companies currently have over the settlement process, Focardi wrote.

"This practice represents a tectonic shift in purchase control to loan originators … from Realtors and settlement service providers," Focardi wrote. "Large lenders with economic buying power have the power to negotiate lower volume-based wholesale discounts from settlement service providers yet still charge retail prices to loan applicants."

Wholesale settlement services pricing already exists at the business-to-business level between lenders and settlement service providers. Additionally, there are affiliated business arrangements, joint ventures and other contractual agreements among lenders and settlement companies.

"But RESPA reform would provide a legal safe harbor for loan originators without requiring them to set up an affiliated business arrangement with settlement service providers," Focardi wrote.

Lenders would find this attractive because affiliated business arrangements are expensive to set up and occasionally subject to legal challenges. If RESPA were reformed as originally proposed, consumers would have less legal recourse to prove allegations of overcharging by lenders.

Still, simplifying the process – by regulation or not – eventually would help create better competition and price transparency which would put downward price pressure on lenders. In the short run, however, most consumers are likely to be more concerned with simplifying the mortgage process and improving service rather than lowering cost, according to TowerGroup.

Some lenders are already moving in that direction, even without regulation in place. ABN AMRO, for example, offers OneFee, a bundled settlement service with characteristics similar to those in the original proposed RESPA changes. ABN AMRO’s focus on one bundled settlement services fee emphasizes cost certainty for the borrower, rather than simply a lower cost, according to TowerGroup.

E-Loan’s approach to settlement fees doesn’t bundle individual fees, but rather explains and discloses all fees. The company does not charge junk fees and often provides lower total fees than many lenders, TowerGroup said.

But, TowerGroup predicts, if such RESPA reform were passed, it would reduce but not eliminate the overcharging of consumers. In some cases, it would institutionalize overcharging by providing lenders with a safe harbor against lawsuits.

"Since some brokers and lenders squeeze additional revenue from each loan by charging unnecessary ‘junk’ fees, the risk is that GMPA will institutionalize one bundle of hidden fees at precisely the time that technology is enabling better and easier fee disclosure," Focardi wrote. "HUD’s strategy of relying on lender competition to result in lower total settlement costs doesn’t guarantee that this will occur, and it is a risky approach given the mortgage industry’s reluctance to lower consumer costs rather than lower only its own internal costs and increase its revenues."

Yet, TowerGroup recommends that lenders use settlement service bundling as a differentiator in both the retail and wholesale lending channels. Lenders that use ABAs to compete on price by lowering consumer costs as well as offering better service will garner the greatest market share, the research group said.


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