CABO SAN LUCAS, Mexico — RESPA reform is coming again, but it won’t look much like the Department of Housing and Urban Development’s recently failed effort to reform that law.
That was the consensus of panelists discussing RESPA and related compliance issues last week at United General Title Insurance Co.’s “Mid-Winter Thaw” conference here on Mexico’s Baja peninsula.
RESPA, which stands for the Real Estate Settlement Procedures Act, was enacted in 1974 to provide for the advance disclosure of closing costs and to prohibit kickbacks and excessive fees in the home-buying process.
Intense opposition from most segments of the real estate industry killed HUD’s efforts to reform RESPA two years ago. The difference this time around, according to Philip Schulman, a partner in the Washington, D.C., law firm Kirkpatrick & Lockhart LLP, is that HUD officials are listening to the feedback they received from industry executives in a series of round table discussions last year. And what they heard, Schulman said, is that most of those groups don’t want any part of the “bundled” or guaranteed settlement services packages that represented half of the two-pronged reform proposal HUD had proposed.
“Industry trade groups made it clear that they don’t need bundling,” Schulman said. “They said if it will work and the market wants bundling, then the market will do it. There’s no need for a rule that will shift power and money from one side of the settlement services table to another.”
Given that feedback, Schulman predicted, “Bundling will be off the table in any proposed rule.” The focus, rather, he expects, will be on improving the good faith estimate by requiring more accurate estimates, closer to the actual closing costs, and imposing penalties when the gaps are too large. “This is where the battle lines will be drawn in the next six to eight months,” Schulman said.
Kenneth Harney, a nationally syndicated real estate columnist for the Washington Post, and managing director of the National Real Estate Development Center, agreed, predicting that HUD’s new proposal, when it comes, will amount to “RESPA reform lite,” the major change being a restructured good faith estimate “with minimal tolerances. There may be some regulatory relief along with it,” he said, “but that will be about it.”
Because agency officials have invested so much time and effort in the reform process, and promoted the bundling idea so heavily, they will have to say something about that, Harney said. His prediction: They will say the agency’s reform effort encouraged the industry to move in that direction on its own, so that regulations are no longer necessary. “They will salute the industry and declare victory,” Harney suggested.
While HUD has not said anything publicly about RESPA in recent months, Harney said he has learned the agency has sent its responses to industry and Bush Administration comments about the last proposal, along with a package of options, to the Office of Management and Budget (LMB). “That’s very significant,” Harney said, indicating that HUD is getting closer to issuing a new proposal.
He expects OMB will respond quickly, after which HUD can consider the comments, issue a policy statement indicating the general direction of its reform plan, and then propose a new rule before the end of this year. “There is a distinct chance of that happening,” he said.
Meantime, HUD has intensified its enforcement efforts targeting “sham” business arrangements that illegally skirt RESPA’s ban on referral fees, reported Robert Pratte, a partner in the Minnesota law firm Briggs & Morgan and a specialist in RESPA litigation. Rattling off a series of recent settlement agreements, with dollar amounts ranging from $80,000 to $40 million, he cautioned industry executives to pay close attention to RESPA compliance. “Do it right,” he said. “It’s very important.”
While RESPA enforcement efforts are intensifying, the volume of RESPA class-action suits has declined, Pratte said, mainly because the plaintiffs’ bar “made a big mistake” when it shifted its focus from attacking technical disclosure violations to challenging “yield spread premiums,” which, he said, represent “a core business practice.”
In earlier cases, lenders weighed the cost of settling the litigation against the cost of the fight, Pratte said; with the YSP suits, the cost of losing was “turning over the keys to the shop. So they fought to the death, and beat them to death. Nearly every one of these cases has disappeared.”
RESPA litigation hasn’t disappeared, however, and the new cases, challenging various disclosure issues, raise a key question, Pratte suggested: “How do you balance the push to disclose every minute detail against the push to simplify the closing settlement process, speed it up, and make it easier and less costly?”
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