When it was enacted in 1974, the law designed to clean up the real estate settlement industry and lower costs for home buyers was hauled by congressional reformers as a tough piece of much-needed consumer legislation.

Today, five years after its passage, the same law is being labeled by many as a consumer fraud.

This is the story of the Real Estate Settlement Act of 1974, a law that exacerbated many of the problems it was intended to correct, according to a two-month investigation. It is classic example of reform gone awry -- a measure drafted in part by the industry it was supposed to regulate, crippled by ambiguous provisions and, in the end, never enforced.

In the last five years, a settlement network has emerged in the Washington area in which middlemen earn huge commissions on title insurance premiums paid by consumers, lending institutions steer borrowers to settlement lawyers who have business ties to the lenders, and the home purchaser is guided through a maze of settlement companies owned by the same people.

"The law just doesn't do the job," concluded Sen. William Proxmire, (D-Wis.), who said he plans to hold hearings on the settlement industry next year before the Senate Banking, Housing and Urban Affairs Committee. "As long as you have a situtaion where buyers have to go through a complex system like this, they're going to be victimized."

Even the title insurance industry, which lobbied so hard for the compromise legislation that ultimately passed, now acknowledges that the law has spawned some monopolistic business practices "more pernicious than the direct kickbacks" the statute was designed to abolish.

The history of the Real Estate Settlement Procedures Act dates back to 1972 when newspaper articles and government studies disclosed a settlement industry that fostered high and unnecessary costs and paid cash kickbacks for the simple referral of business to title insurance companies.

For the next two years, Congress was at odds over the best way to correct the highly publicized abuses. The issue was one of the heaviest lobbied in years, drawing consumer groups against the powerful settlement industry -- title insurers, lawyers, mortgage bankers and real estate brokers.

Initially, the debate was framed by a pair of proposals sponsored by Proxmire in the Senate and then representative Leonor K. Sullivan (D-Mo.) in the House. The first would have directed lending firms to pay for any service they required to home buyers, such as title insurance.

The second measure would have authorized the Department of Housing and Urban Developmet to set maximum prices for settlement services provided on conventionally financed homes. A few years earlier, HUD was given such power to regulate settlement costs on federall-insured mortgage loans.

Both measures were strongly opposed by the title insurance industry, which came up with an alternative proposal by 1973. The industry-backed bill not only opposed extending HUD's regulatory power, it sought to repeal its authority over federally insured loans.

Working with then-representative Robert G. Stephens Jr. (D-Ga.), sponsor of the industry measure in the House. Finley helped draft a much weaker and more ambiguous anti-kickback provision that eventually became law and resulted in many of today's problems.

Instead of the flat prohibitions on commissions to lawyers, the Stephens proposal merely banned referral fees. Title companies could still pay commissions "to duty appointed agents for services actually performed" in issuing title insurance policies.

"The view at the time," recalled Finley, who was lobbying on behalf of more than 20 title insurance companies, "was that legitimate commissions were objectionable. We made suggestions to Stephens that he adopted."

The industry bill also contained new provisions to keep consumers better informed of settlement costs and was described by its sponsor, then-senator William E. Brock III (R-Tenn) as a "truly pioneering piece of consumer legislation."

For several months, debate centered on the question of HUD's regulatory authority, obscuring what later would become the most important part of the law -- the section outlawing fees, commissions and kickbacks for simple referrals of title insurance business.

Proxmire and Sullivan included in their bills a blanket prohibition on referral fees, and more significant, a ban on the payment of insurance commissions to lawyers who handle the legal aspects of real estate settlements. c

At that point, Tom Finley, the title insurance industry lobbyist, stepped in, proposing a method to preserve what was then the revered way title companies competed among themselves for customers -- the payment of commissions to attorneys who referred their clients.

While Proxmire, Sullivan and other congressional reformers were fighting to preserve HUD's regulatory powers, the Stephens anti-kickback approach quietly became the accepted course.

In the end, the Proxmire-Sullivan forces won the battle but lost the war. They succeeded in preserving HUD's regulatory control over federally backed mortgage loans -- an authority that has never been used, but acquiesed in the passage of a weak kickback ban that contained large loopholes for future abuses.

Although the law eliminated 25 percent kickbacks to lawyer-title agents who had been merely referring customers to the title insurers, it resulted in a new system in which the agents reaped an even greater slice of the middleman pie.

Now for simply refering customers and performing basically clercial tasks, the lawyer title-agents are receiving commissions of up to 70 percent of the premium in addition to a whole series of other financial and social inducements.

Another business practice has emerged in recent years that is viewed as a dodge to the kickback ban. Mortgage bankers, settlement lawyers, developers and real estate brokers have set up companies to sell title insurance and then channel their customers to them for their insurance work.

Instead of receiving fees for what amounts to simple referrals to their own companies, these so-called stock-holders earn "corporate dividends" at year's end that are made up of the commissions title insurers pay for issuing their policies.

"The statue has been an inducement to change the face of compensation for settlement services," said James Maher, a HUD lawyer who helps administer the law. "Before it was blatant kickbacks. Since the law was passed, (the title companies) are doing the same thing and putting a legitimate mantle on it."

The law has never been enforced against a settlement middleman for a variety of reasons, said Maher. A primary reason has to do with the way the law was drafted, especially its vague prohibition against "excessive" compensation for lawyers who perform clerical title insurance work.

Maher said the more definitive regulations were never issued because "unless you completely prohibit commissions, you really can't define clearly enough what is reasonable. What one person considers excessive may be reasonable to another person."

The best way to strengthen the law and remove crippling ambiguities, said Maher, is to subject it to court tests. He said HUD's inspector general has investigated at least 25 possible kickback violations and recommended them to the Justice Department for prosecution.

In every case, according to Maher, the Justice Department's criminal fraud division declined to prosecute or failed to respond to the housing agency's recommendations.

"The statute isn't crystal clear," said Maher, "but we feel we can work with the ambiguities if we had stronger prosecution.