The Trouble With RESPA

And why the 1974 law badly needs updating

November 1, 1997

Broker Nick D'Ambrosia has a problem with the federal law known as the Real Estate Settlement Procedures Act, or RESPA. “It doesn’t reflect the realities of today’s marketplace,” he says.

D'Ambrosia, who's general manager of Coldwell Banker--Stevens in metropolitan Washington, D.C., would like to improve his company's profit margin by offering his customers one-stop shopping for houses. RESPA, however, makes it hard for D'Ambrosia to provide that service, even though that’s what customers want.

“We need to wipe the RESPA slate clean and start over,” says D'Ambrosia, whose company has 23 offices and more than 1,000 practitioners. The law is 23 years old, and the market conditions that existed when it was written have changed.

D'Ambrosia's experiences illustrate why brokers throughout the country need to be concerned about RESPA. Recently, the NATIONAL ASSOCIATION OF REALTORS® stepped up its campaign for a congressional overhaul of RESPA, joining with a coalition of real estate settlement providers and consumer groups to draft a new RESPA for the 21st century. The coalition's proposal will be presented to Congress at the end of this year.

D'Ambrosia, who started his real estate career 25 years ago as a salesperson, says the business environment was different in 1974 when RESPA was enacted. Broker overhead was lower. Typical realty offices were equipped with desks, telephones, and video terminals connected with the local MLS. Brokers split their commission fees 50-50 with their salespeople.

Times changed. As realty companies grew, they gave a bigger share of the commission split to salespeople--the ultimate example being the 100 percent commission. The broker had to invest in expensive new computers as well as support staff to remain competitive.

By the mid-1990s, company profit margins had shrunk to virtually nothing. Brokers today are trying to restore the bottom line through ancillary businesses, affiliations, or controlled business arrangements, according to D'Ambrosia.

In his market area, D'Ambrosia says, almost all brokers are moving in the same direction, essentially toward one-stop shopping. Unless they move, “they won't survive.” His own company, Coldwell Banker--Stevens, in recent years has added mortgage, title, and insurance affiliates.

The problem is that RESPA imposes barriers to one-stop shopping. Some obstacles are vague--and that’s part of the problem, he says. “HUD has rarely been willing to answer specific questions about what’s permissible and what isn’t.”

Adding to this problem is the threat of criminal penalties for violations of RESPA. This has had a chilling effect on business innovations involving affiliated business arrangements that offer consumers one-stop shopping.

Another problem is the prohibition against referral fees. In a 1992 regulation, HUD said it was OK to pay incentives to salaried employees, such as managers, but not to salespeople. A proposed 1996 regulation would extend the prohibition to managers who do a specified amount of sales themselves. (HUD recently agreed to postpone the 1996 regulation.)

Some brokers have forged ahead in setting up one-stop shopping arrangements in the face of ambiguous guidelines from HUD. But that leaves those, like D'Ambrosia, who want to be certain they’re playing within the rules, at a competitive disadvantage.

D'Ambrosia emphasizes that he doesn’t have a problem with everything in RESPA. Required settlement cost disclosures are good and should be kept, he says. What need to be modified are the undue restrictions on the way brokers operate their business--restrictions that don’t help the consumer and serve only to stifle competition. “Let’s give the ability to compete back to the broker,” he says.

Walt Albro is a former senior editor for REALTOR® Magazine.

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