The federal government should have less control over home settlement services, the draft of a Department of Housing and Urban Development report recommends.
The report, which analyzes the success of the 1974 Real Estate Settlement Procedures Act (RESPA) in reducing home settlement costs and maintaining industry competition, was due in Congress Jan. 30, but has been delayed indefinitely, pending a full review by HUD policymakers. The draft could be revised substantially, officials say, as many of its recommendations reflect the views of the previous administration.
Proposals include eliminating some of the disclosures lenders must make to home buyers, and limiting HUD's authority to enforce RESPA. The report defers to state several issues federal official went aired, but which they feel are outside their own jurisdiction.
The draft suggests Congress solve the problem of "controlled business," which has produced a major struggle between HUD and the home sales industry. Controlled business is the referral of clients -- by brokers, lenders or attorneys -- to firms in which they have a financial interest. RESPA prohibits kickbacks paid for referrals, but HUD has never decided whether these include dividends a referrer receives based on his interest in another firm providing settlement services.
Companies operating without the benefit of referrals claim the self-serving referrals undercut their business. Several industry groups, including independent title insurers, have sought stronger HUD enforcement of RESPA's controlled-business prohibition. Last summer HUD rulled illegal kickbacks could include dividends brokers, attorneys or lenders receive from companies to which they refer clients, even if the income is not based on the amount of business they refer.
Most of the home sales industry criticized that rule for not specifying which dividend-related referrals are illegal and which are not.
The savings industry aruged that Congress never intended RESPA to prevent referrals by banks to their service corporations, and asked HUD to withdraw its ruling, until the issue could be studied further. In a compromise with the Federal Home Loan Bank Board, the prime regulator of the nation's savings and loans associations, HUD proposed a regulation allowing banks to make referrals to related corporations if the firms were included in a "neutral list" of at least five available providers.
The rule was withdrawn in January, when President Reagan place a freeze on all pending regulations. Department officials say it's not likely the neutral list rule will be revived when the freeze is lifted, as HUD Secretary Samuel Pierce has already said the rule is an unworkable solution to the controlled-business problem.
The draft report concludes that it may be impossible to resolve the controlled business issue without further congressional study and, perhaps, new legislation.
"We're giving Congress the opportunity to come to grips with the problem directly, rather than working within the constraints of the present legal structure," one official said.
Analysis of RESPA has sparked a heated in-house debate over whether HUD should revamp the settlement service industry. A study conducted for the Department by Peat, Marwick Mitchell & Co. and released last fall, found "a general lack of price competition" has kept home settlement costs "unnecessarily high." The current report's recommendations are based, in part, on these and other study findings.
Some Department economists take issue with the study's conclusion that industry referrals reduce competition and drive prices higher. According to one official, there is little evidence of excessive rates of return in any sector of the settlement industry and referrals may, in fact, be both necessary and cost effective. A separate market analysis by economists in HUD's Office of Policy Development and Research is included in the draft report.
Getting rid of kickbacks may drive settlement costs higher than they are now, the economists say. Without referral payments, referring companies would have to charge higher rates to home buyers to maintain their present incomes. Firms which no longer have to pay for referrals would have no incentive to reduce their rates, and would have to find other ways to attract clients -- which may be more expensive than present referral payments.
Some economists believe the packaging of settlement services by lenders is the most effective alternative to the present decentralized system, which by encouraging referrals, dampens competition. RESPA requires HUD to evaluate the lender-packaging idea in its congressional report.
Lenders would pay for the title search and insurance, private mortgage insurance and othe loan protections, passing the costs to home buyers in the loan interest rate. Buyers would know the exact amount of home settlement costs before they sign the loan contract, rather than receiving only cost estimates as they do now.
To offer lower interest rates, and so attract more buyers, lenders would be encouraged to shop for the most reasonably priced services and would tend not to require services for which they have no need, packaging proponents say. While many HUD officials believe lender packaging could cut settlement costs, few expect the new administration to recommend its implementation nationwide, given the present emphasis on government deregulation. The department may instead recommend incentives for voluntary lender-packaging.
In an effor to reduce federal control over settlements, the draft report asks that RESPA violations be decriminalized. This would free the Department of Justice and HUD from taking direct against offenders, and allow firms to sue each other in civil court for anti-competitive acts.
Of the several dozen complaints HUD has investigated in seven years, only one has gone to trial. Consumers may sue in civil court now, but few have the interest, resources or expertise to do that, officials say.
HUD would still have some enforcement role, but there's little agreement yet on what that should be. For a continuing problem, the department might be given the power to seek a court injunction, officials say, as a quick, but temporary solution.
The report suggests that states examine possible blocks to competition between real estate brokers, whose commission, the Peat, Marwick, Mitchell study found, tend to be constant nationwide. Brokers' separate legal responsibilities to home buyers and sellers are another area for states to investigate, the report says, adding that states should take a public share on brokers' prope roles. It is also recommended that states streamline their consumer complaint procedures, and probe attempts by the real estate industry to drive out "discount brokers" offering reduced commission rates.
The report asks states to reconsider rules requiring attorneys to perform certain settlement services. Some functions, such as writing title insurance contracts, or conducting closings, may not demand legal expertise and could be handled less expensively by a layman, the report says.
States are also asked to review their title-insurance rate ceilings. The report concludes consumers may better served by allowing the market to set rates instead, as ceilings frequently give firms an excuse to set rates higher than the actual costs of producing their policies.
The draft urges the Federal Trade Commission to publish its now nonpublic study or real estate broker practices, which provides the first detailed federal analysis of the industry and, officials say, makes important suggestions for improving broker competition.