Closing-cost reform movement lives on
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