RESPA Amendments

What HUD Has To Say

In the report RESPA, Regulatory Impact Analysis and Initial Regulatory Flexibility Analysis, FR-5180-P-01, Proposed Rule to Improve the Process of Obtaining Mortgages and Reduce Consumer Costs, here is what the U.S. Department of Housing and Urban Development, Office of Policy Development and Research has to say about the regulatory impact to small title and settlement firms of the proposed rule amendments to RESPA:

Excerpt: Executive Summary, III.E. Market and Competitive Impacts on Small Businesses from the Proposed Rule [Page XVI]

Small Title and Settlement Firms. The title and settlement industry -- which consists of large title insurers, title agents, escrow firms, lawyers, and others involved in the settlement process -- is expected to account for $1.79 billion of the $2.47 billion in third-party transfers under the proposed GFE. Within the title and settlement group, small firms are expected to account for 38.1 percent ($0.68 billion) of the transfers, although there is some uncertainty with this estimate.¹⁸ Step (8) of Section VII.E of Chapter 3 conducts an analysis that projects all of the consumer savings in third-party costs coming from the title industry; evidence suggests there are more opportunities for price reductions in the title industry, as compared with other third-party industries. In this case, consumer savings in title costs ($150-$200 per loan) ranged from $1.88 billion to $2.50 billion. To a large extent, the title and closing industry is characterized by local firms providing services at constant returns to scale. The demand for the services of these local firms will continue under the proposed GFE.

Section VIII.C of Chapter 3 summarizes the key competitive issues for this industry with respect to the proposed rule. As noted there, the overall competitiveness of the title and closing industry should be enhanced by the RESPA rule. Chapters 2 and 5 and Section III.E of Chapter 3 provide evidence that title and closing fees are too high and that there is much potential for price reductions in this industry. Increased shopping by consumers, as well as increased shopping by loan originators to stay within their tolerances, will reduce the revenues of those title and closing companies that have been charging non-competitive prices. ¹⁹ Excess charges will be reduced and competition will ensure that reduced costs are passed through to consumers.

The title industry argued that greater itemization was needed in order for consumers to be able to adequately comparison shop among estimates. HUD’s view is that the consolidated categories on the proposed GFE form provide consumers with the essential information needed for comparison-shopping. Itemization encourages long list of fees that confuse borrowers.

It is important to emphasize that the services of the title and closing industry, as well as other third-party industries (appraisers, surveyors, and pest inspectors), are local in nature and are performed near or at the site. Local firms have advantages of knowledge and networks of clients, as well as transportation cost advantages. As explained in Chapter 3, these advantages of small, locally based firms will not be negatively impacted by the new Good Faith Estimate. In fact, RESPA reform should open up opportunities for efficient third-party firms to expand their operations.

^18. Section IV of Chapter 5 describes the component industries and estimates the share of overall industry revenue going to small businesses.

^19. The reasons why the proposed GFE and its tolerances will lead to improved and more effective shopping for third-party services by consumers and loan originators has already been discussed, and need not be repeated here.