Better consumer education about shopping for home settlement services could keep those "unnecessarily high" costs down, a study released this week by the Department of Housing and Urban Development contends.

The $1 million, three-year study by the Peat, Marwick, Mitchell & Co. accounting and consulting firm maintains that the cost of closing home sales remain high, despite substantial changes in settlement practices over the past five years.

A "general lack of price competition," rather than monopoly of the settlement industry by a small number of settlement facilitators, keeps prices high, the report says. The consultants recommended that HUD improve present cost disclosure practices and strengthen the enforcement of federal regulations covering settlements.

The 1974 Real Estate Settlement Practices Act (RESPA) requires lenders to disclose settlement costs to purchases before the day of closing. Congress assumed that, given a list of providers' charges, consumers would shop around for the best prices in title and mortgage insurance, home appraisal or termite inspection.

HUD officials admit, however, that most consumers take the advice of their real estate agents or mortgage lenders when selecting service firms.

Many home buyers are afraid their loans won't be approved if they don't choose the title insurer recommended by the lender. Others won't take the trouble to compare costs, officials say.

Some critics of the advance disclosure approach have called for full federal control of settlement service costs. Others suggest a "lender-pay" approach, in which the bank or savings and loan association packages the settlement charges and passes the cost on to the borrower through a greater interest rate or other frontend fee.

Lender pay advocates say lenders are in a much better position to bargain for service costs than most consumers and could obtain services at lower prices. The financing industry complains, however that current interest rates are already high and are knocking many buyers out of the market.

Both the lender-pay and rate control alternatives were considered in the HUD study, which surveyed eight markets. The consultants interviewed home buyers, sellers, public officials and settlements providers and analyzed more than 18,000 standard closing forms in a national sample.

Most lenders comply with RESPA's disclosure requirements, the report noted, but only 4 percent of home buyers surveyed said they had shopped for settlement services. Most cost comparisons were for mortgage financing terms.

The report does not compare shopping rates before and after RESPA went into effect.

The average settlement cost, minus broker commission and property transfer taxes, was $1,600 for the 1975-78 period analyzed by the report. This is equal to 3 percent of the average home sales price of $54,800. This cost was lowest in Delaware, at 2.3 percent of the sales price, and highest in Oklahoma, at 5.2 percent.

The consultants found that brokers, title insurers and settlement attorneys are least competitive in pricing their services, while mortgage lenders "deliver their primary product efficiently and at a reasonable cost."

But lenders "are often too rigid and insensitive to the cost to the consumer" in requiring or providing other settlement services, particularly title and mortgage insurance, escrow services and legal help, the report says.

Brokers' commissions, falling constantly at 6 or 7 percent of the sales price in most areas, averaged more than $3,000 and represented the largest single settlement cost. Although there are many brokers and strong competition for clients, there is still little active price competition, the report says, which stems in part from the recently broken tradition of broker trade associations fixing or recommending an industrywide commission rate.

The National Association of Realtors said the accusation is "demonstratively false," since member boards abolished mandatory commission rates in the 1950s and prohibited recommended rate schedules in 1971.

The report does not recommend additional federal regulation of real estate brokers, but suggests stricter enforcement of present federal antitrust laws, to prevent broker multiple listing services from excluding "discount brokers" who offer lower commission rates. It urged HUD to publicize the rights of buyers to negotiate commission rates with sales agents, as part of a larger program to improve home buyer education.

In general, title insurance charges "depend on historical and customary practices, and on state regulations in a particular area," the study found, rather than reacting to competition and consumer demand. Charges varied by more than 100 percent between the markets surveyed, and did not seem to be directly related to an insurer's operating costs.

RESPA fails to encourage price competition between service providers because many providers vie for referrals by brokers and lenders, rather than competing for customers, the study said. This eliminates the need to use low prices to attract home buyers, most of whom are unaware of the variety of providers from which they can choose the study finds.

Referral competition is "widespread" in the title insurance industry, the report adds, but there does not seem to be any relationship between "controlled business" referrals and overly expensive insurance premiums.

Controlled business is the referrals of clients by brokers, lenders or attorneys to firms in which they have a financial interest. The practice has been a major battleground between HUD and the home sales industry.

Independent insurers claim the self-serving referrals undercut their business and have asked HUD for stronger enforcement of RESPA's controlled business prohibition.

The law now prohibits kickbacks for service referrals. A recent HUD ruling found that kickbacks could include the dividends brokers, attorneys or lenders receive from companies to which they refer their clients, even if the income is not based on the amount of business they refer.

The ruling was widely criticized for not specifying which dividend-related referrals are illegal. The National Association of Realtors said the omission subjects to legal question every settlement involving such a relationship.

Other industry representatives said prohibiting referrals could actually decrease competition, by allowing the large providers to control the market.

The U.S. Lague of Savings Associations argued that Congress never intended to prevent referrals by banks to their service corporations, and asked HUD to withdraw its ruling until the controlled business issue could be studied further.

A compromise made recently between HUD and the Federal Home Loan Bank Board, prime regulator of the nation's savings and loan associations, would allow banks to make referrals using a "neutral list" of available providers.

The proposed regulation would require lenders to present home buyers with a list of at least five title insurers, termite inspectors or escrow agents, one of whom may be a subsidiary of the bank. The rule would not apply to hazard insurance, which HUD and the Bank Board feel is sufficiently price competitive.

HUD is preparing its own neutral list rule to extend the use of a neutral list to brokers, attorneys and other service providers covered under RESPA. Congress must clear the rule, however, before it can take effect.

Although the HUD study supports the use of a neutral list, it finds that further restriction of controlled business referrals would only be a "bandaid solution" to the lack of price competition between service providers. Other types of referrals would continue to discourage price rivalry, it says.

The American Land Title Association, which represents independent title insurers, says the study's conclusions "do not reflect the full dimension of the controlled business problem and the need for stronger federal legislation."

When the financial interest is eliminated, ALTA President Mark Winter says, other referrals would be based more often on service price and quality.

The report opposes national use of the lender-pay option, given the variety of real estate markets and state-imposed interest rate and insurance requirements.

It recommends that HUD experiment with the procedure using demonstration projects in several local markets.

Tom Collier, HUD's deputy assistant secretary for regulatory functions, said the new report "in no way indicates our position on all the issues," and is only one of many sources HUD will consider in recommending legislative changes to Congress in January.

The department has also solicited public comment on RESPA and held two public hearings on the act's effectiveness last month. It will receive reports from several federal agencies involved in RESPA enforcement, including the Department of Justice, the Council on Wage and Price Stability, the Federal Trade Commisssion and the Federal Reserve Board.