Closing Settlements: RESPA Packaging Regulations Flawed

An executive of the American Land Title Association states his arguments for why the Bush Administration should not move forward with the RESPA packaging regulations.

March 1, 2004

As almost everyone involved in residential real estate and mortgage financing knows, the U.S. Department of Housing and Urban Development’s “final” Real Estate Settlement Procedures Act (RESPA) regulations on packaging were sent to the Office of Management and Budget for review in mid-December. The OMB, which acts as the Administration’s watchdog over the policy initiatives of the various Executive Branch agencies, can take up to 90 days for its review, which can result in a green light for the regulations to be published or in the return of the regulations to HUD for further consideration.

The content of the regulations has been one of the most closely guarded secrets in Washington, as has OMB’s views on the regulations. What is known is that President Bush gave encouragement for the regulations during the December signing ceremony for the American Dream Downpayment Act. Since then, virtually every major trade association and group with an interest in real estate and mortgage finance (including the American Land Title Association and the NATIONAL ASSOCIATION OF REALTORS®) has communicated or met with OMB staff to express concerns with—and, in most cases, strong opposition to—the Administration’s plan to move ahead with the regulations at this time.

While the internal imperatives may have been strong for HUD to send final regulations of some kind to OMB, there is still time for OMB and the Bush Administration to consider the policy and political wisdom of giving a final green light to those regulations. Below is a summary of what ALTA believes are the significant points that the Administration should consider in making a final “go or no-go” decision. We have been encouraging ALTA members to make these points in letters to, and meetings with, members of Congress and the Administration. I know that the NAR has done the same (see below for how you can get involved).

  • First, there is no question that the packaging regulations would constitute the most significant—and potentially disruptive—change in the RESPA regulatory regime in the 30 years of RESPA’s existence. HUD’s preliminary regulatory impact analysis indicated that billions of dollars in revenues would be shifted from providers of settlement services to mortgage lenders because providers will have to offer discounts and rebates in order to be included in the packages of major lenders. The real estate and mortgage-lending sectors have been—and from all recent press reports continue to be—the healthiest areas of the economy. This is simply not the time for HUD to impose on these sectors the most significant and potentially damaging changes in the history of RESPA.
  • Second, virtually all industry and consumer groups, including many of the lending and consumer groups that initially encouraged HUD to consider packaging, have now made clear to OMB that they do not support moving ahead with final regulations, at least at this time. In great measure, this change of position is the result of more in-depth appreciation of the complexity of the issues and market ramifications, and their concern that HUD was not likely to resolve, in a satisfactory manner, key issues that were identified in the comments filed in the HUD rulemaking proceeding. Accordingly, if the Bush Administration moves ahead with its packaging regulations, it will only be serving the interests of a handful of major lenders who continue to support HUD action on packaging. It will not serve the interests of consumers or the millions of individuals and companies that provide real estate, mortgage, and settlement services.
  • Third, the regulations would have a particularly adverse effect on small businesses, including smaller lenders. The regulations would encourage the giving of rebates and discounts to large lenders who control a high volume of mortgage loan transactions. The real estate, mortgage, and settlement services industries traditionally have been bastions of opportunity for small business. But as the hearings before U.S. Rep. Donald A. Manzullo’s (R-Ill.) Small Business Committee have made abundantly clear, small businesses will not be able to compete effectively in such a competitive environment. Moreover, even smaller lenders will be placed at a competitive disadvantage—not because they are inefficient or unable to compete in making mortgage loans, but because they lack the clout that the major lenders have in obtaining discounts and rebates from third-party providers.
  • Fourth, as the comments to HUD and OMB have made clear, there are many provisions of state banking, insurance, and consumer law that also would have to be changed in order for the kind of packaging envisioned by the proposed HUD regulations to be successfully implemented. The major lender supporters of packaging have told OMB that HUD's packaging regulations will not work unless HUD preempts these state laws. A coalition of major consumer groups has responded that such preemption would “eviscerate” any consumer benefit. Accordingly, the Administration should appreciate that merely changing the RESPA rules will not change the numerous state laws that may limit the kind of packaging HUD envisions, and that the preemption issue poses the dilemma that either the HUD regulations will not work, or the purported benefits to consumers from the HUD packaging approach will be eviscerated.
  • Fifth, the market is already moving in the direction of bundling settlement services at guaranteed prices, without the rigidity and kickback exemptions that would be entailed in the HUD regulations. In recent months, many lenders and title insurers have established, or announced that they are establishing, programs to offer consumers a broad range of bundled services at guaranteed prices. This is being done without any exemptions from the anti-kickback provisions of RESPA. In light of this development, spurred in part by the attention HUD has given to the packaging issue, it would be far better for the Administration to give the marketplace an opportunity to develop these approaches before considering whether, and what, amendments to RESPA or the RESPA regulations are needed.
  • Finally, as ALTA has endeavored to make clear, there is no statutory authority for the sweeping changes that HUD has proposed. Indeed, HUD has been unable to point to any provision of RESPA that it would be implementing with its packaging regulations. Rather, HUD has indicated that its entire packaging regime rests on its authority to exempt transactions from RESPA. Whatever the merits of the HUD proposals, we do not believe that HUD can use its exemption authority to create an alternative regulatory regime that exempts lenders and settlement service providers from the statutory regime Congress adopted in RESPA. If a completely new alternative to the current RESPA regime is to become the law of the land, it can only be done by Congress through amendments to the RESPA statute. Federal agencies cannot and should not undermine federal legislation in the manner HUD is proposing to do. (The statutory authority issue is discussed in an extensive memorandum that is available on the ALTA Web site.) Thus, not only will publication of final regulations be widely opposed by industry and consumers, a successful challenge to the regulations will only add to the political embarrassment that the Administration will face.

In summary, I believe that HUD and the Administration have succeeded in highlighting the need for consumers to have earlier and more firm estimates of closing costs, and to avoid surprises at closing. The market is now clearly moving in that direction. For an Administration dedicated to market-oriented principles, and to the importance of small business to the fabric of American capitalism, it is difficult to understand why it would want to proceed now with regulations that have essentially no political support, and that can potentially wreak havoc on small businesses and one of the most important areas of the American economy.

James R. Maher is executive vice president of the American Land Title Association, which is the national trade association for the title industry, including title agents, underwriters, and abstractors.

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