The Real Estate Settlement Proceedure Act (RESPA)

By David Parker, Esq.

QUESTION: I have been reading in the newspapers about attempts to change the whole real estate settlement process, the lending process and the many disclosures and documents that have to be signed. I have read that the biggest problem seems to be that people are surprised at settlement with their closing fees. Also, I read that there have been attempts to consolidate the whole process so that the buyers goes to one place for a real estate agent, lender and settlement attorney. I am curious what your thoughts are about all of this.

ANSWER: Indeed, there has been much discussion in the news about the settlement process. Consumers often feel like they aren’t getting accurate information regarding closing costs. Also, real estate companies have been forming joint ventures with lenders and settlement companies in order to create “one-stop” shopping experiences. As a result, Congress and other governmental agencies have been talking about solutions to some of the problems which the “one stop” shopping has caused. The proposed changes are designed to address some of the problems resulting from the “one-stop” shopping and also from the inaccurate estimates for settlement costs. Keep in mind that under the current law, the estimates which are given to the borrowers traditionally came from the lender.

Quite frankly, the overwhelming majority of the problems could be solved with one minor change to the current system.. Certainly, the lenders should be able to accurately disclose their own settlement costs. Much of the confusion arises when the lenders attempt to disclose the settlement agency’s fees, as well as the state and local taxes. This problem could be solved by simply requiring the title agency/settlement attorney to provide the borrower with an estimate of the agency/attorney’s fees. This disclosure could be required within three (3) to five (5) days after the borrower retains the settlement entity. For some odd reason, Congress and/or the Department of Housing and Urban Development (HUD) haven’t considered this rather easy solution.

Instead, it has been assumed by HUD that it is in the best interest of the borrower to have the lender prepackage all title and settlement services. The proposal for prepackaging settlement services also assumes that Borrowers have absolutely no knowledge whatsoever regarding the pricing structures of the services, nor do they have the ability to shop and compare prices. These assumptions are offensive to every purchaser and borrower participating in a residential real estate transaction. In reality, what the “pre-packaging” of settlement services and/or some of the “one-stop” shopping situations do are to confuse the consumer and disguise otherwise distinguishable fees so that the borrower cannot ascertain what they are actually paying for.

In fact, in our area, consumers are extremely educated, price conscious, and will shop not only for the most competitive fees, but also for quality services. Under one of the often discussed HUD proposals, a lender would simply designate a “pre-packaged” settlement service provider and the Borrower would have no say in who that provider was. Borrowers would be quoted guaranteed closing fees, but only if they utilized the lender’s “chosen” settlement entity. This method would mislead borrowers into believing that the only way to obtain guaranteed settlement fees is to use the Lender selected closing entity. The fact is, borrowers could obtain guaranteed fees from any closing entity they select. They shouldn’t be fooled into believing that the only way to get a guaranteed closing cost package is to work with the lender’s “pre-packaged” business partner.

Also, simply prepackaging settlement services for the Borrower does not assure the Borrower that the fees are competitive. A “lump sum” or pre-arranged fee does not give the Borrower enough information to determine which specific fees are included in the lump sum and therefore hinders the borrower in comparison-shopping. To create a system which gives the borrower LESS information is hardly in the consumer’s best interest.

The new proposals would strongly favor the large, multi-state and/or national loan companies. In that the settlement service industry is often very local in nature, thousands of small businesses and locally owned settlement service providers and title companies would be forced out of business. Theoretically, they would be unable to compete with the national lending corporations, not because of their inability to provide comparable and competitively priced services, but because the inherently misleading “lump sum” program would exclude the smaller, locally owned companies from even entering into the competition for business.

Also, the new proposals would relax the anti-kickback provisions of the Real Estate Settlement Procedures Act (RESPA). This aspect of some of the proposals is even more offensive to the Borrower, in that it does not protect the consumers in any way, whatsoever. Instead, it allows lenders to receive a portion of the “prepackaged” settlement fee, thereby increasing the Lender’s profits at the expense of the consumer. It is eminently clear that when the consumers are allowed to participate in the free market of service providers, and comparison shop for quality services and competitive prices, the Borrower will benefit. Any regulations which encourage kickbacks or referral fees between large national lending corporations and settlement service providers would be detrimental to the consumer.

Moreover, it is the uneducated consumer who would suffer most under some of the current proposals. This particular consumer would assume that the Lender has found the best possible price and service and may not even realize that better prices are available. Certainly the uneducated consumer would not understand the referral fee/kickback aspect of the transaction which would inevitably be disclosed in the fine print of the many papers to be signed as part of a loan transaction.

It is the ability of the smaller settlement entities to provide consumers with a personal touch, at a competitive rate, that prevents the large national lending companies from monopolizing the industry. Of course, if Congress or HUD allows the large national lending companies to monopolize the lending AND settlement process, then they may solve one problem (the fees will presumably be guaranteed), but they will have created a newer, larger problem (non competition and exorbitant fees).

It is my position that it is in the best interests of all consumers to allow the smaller local businesses to participate in the settlement process. Not only will the consumers be better informed, but also they will have the ability to exercise their own free will and judgment in selecting the best, most competitively priced settlement service provider.