Closing-cost reform movement lives on
By Holden Lewis • Bankrate.com

It looked for a while that the federal government was going to force the mortgage industry to guarantee closing costs and simplify the loan process for consumers. But the industry's big guns shot down the housing department's reform proposal. A few lenders offer guaranteed closing costs anyway.

In late March the federal Department of Housing and Urban Development withdrew a proposal to reform the way it enforces RESPA (the Real Estate Settlement Procedures Act), the law that governs how mortgages are sold to consumers. Under the RESPA reform proposal, lenders would have been forced to stick to their good faith estimates of closing costs. Alternatively, lenders could have sold "guaranteed mortgage packages" in which interest rates and closing costs would be guaranteed and lenders could take advantage of volume pricing from suppliers.

HUD had estimated that the proposal, if approved, would have saved consumers an average of $700 for each mortgage.

The RESPA reform proposal had been under review for 19 months. It was intended to tackle one of the biggest complaints that consumers have about the mortgage process: that lenders initially estimate one set of closing costs and then, the day before closing, announce that the original estimate was wrong, and that the true closing costs will be hundreds or thousands of dollars more. By then, it's usually too late to find another lender.

"After agreeing to the price of a house, too many Americans sit down at the settlement table and discover unexpected fees that can add hundreds, if not thousands, of dollars to the cost of their loan," Mel Martinez, then the housing secretary, said when he introduced the proposal.

RESPA helps, RESPA harms
The problem with RESPA is that, in protecting consumers from abuses, it drives up prices. It prohibits kickbacks and referral fees. That helps consumers by preventing, say, appraisers from overcharging and giving some of that money to mortgage brokers, enriching both at the consumer's expense. RESPA harms consumers by making it difficult, if not impossible, for lenders to arrange volume discounts. Because of the anti-kickback rule, a lender could get in trouble for promising to give an appraiser all its business in exchange for a discount on the appraiser's usual fees.

The RESPA reform proposal would have relaxed the anti-kickback rule for lenders who assured their rates and all the closing costs in guaranteed mortgage packages. For lenders opting not to offer guaranteed mortgage packages, the proposal would have required them to honor the good faith estimate of closing costs, with just a little wiggle room.

Housing agency backs down
Mortgage bankers and brokers, title companies, appraisers, builders, Realtors, members of Congress and even consumer groups objected to the reform proposal, often for different reasons. HUD received more than 40,000 comments, and almost all were critical. When HUD indicated that it planned to go ahead with the proposal anyway, the industry lobbied Congress vigorously, and Acting Secretary Alphonso Jackson, eager to be confirmed to the Cabinet post, withdrew the proposal under congressional pressure. Congress quickly confirmed his nomination. Jackson says he might propose it again someday after consulting with industry groups.

Most groups complained that the proposal would be difficult to implement. Brokers protested that they would have to disclose their fees but bankers wouldn't; appraisers, title companies and some consumer groups grumbled that the proposal would favor big companies and drive small firms out of business. Call it the Wal-Mart effect, where consumers get lower prices but small businesses go broke. HUD's estimate of $700 in savings on a typical mortgage ain't chump change, but the effect on businesses was deemed more important.