Many prospective home buyers, often confused and harried by the time they go to settlement on a house, may also be victims of a shady practice that can cost them money in closing a sale, a congressional committee was told this week.
Some lenders and real estate agents have a financial interest in settlement agencies and may steer home buyers to these companies rather than to independent agencies which might charge them less, witnesses told a House Banking subcommittee.
In response to the alleged practice, the subcommittee is preparing legislation that would allow independent settlement agencies to sue brokers who steer business to firms owned by the brokers and away from others.
At settlement a buyer must pay for a number of services performed by a settlement agency -- including charges for title validations, insurance against losses from faulty titles and other fees to complete the sale.
Staff members of the subcommittee on housing and community development are working on a bill aimed at what Subcommittee Chairman Rep. Henry B. Gonzales (D-Texas) called the "predatory" practices of some "controlled businesses" of lenders and real estate agents.
A controlled business is a settlement service company affiliated with a lender, broker or real estate attorney. The term was coined by the American Land Title Association -- which was influential in arranging this week's hearing.
The administration proposed another way of dealing with the alleged controlled-business abuses, calling for lender packaging of settlement costs so consumers could compare costs easily among agencies. That proposal, submitted by E.S. Savas, assistant secretary of Housing and Urban Development for policy development and research, received heavy criticism from panel members and real estate professionals.
But most panel members and witnesses agreed that the current Real Estate Settlement Procedures Act (RESPA) does not adequately protect against the anticompetitive practices described.
Gonzales said that current criminal penalties against unfair broker or lender tie-ins with settlement firms are "anachronistic." He said allowing independent title firms civil recourse would give states flexibility and would take enforcement responsibility out of the federal government's hands.
Witnesses at the two-day hearing said the number of controlled businesses is increasing, especially since RESPA's enactment, which did eliminate the more extravagant kickbacks some settlement agencies were giving real estate agents in return for client referrals.
Independent title company officials contended that ownership of the title firm by the lendor or real estate agent is in itself "the most pernicious form of kickback we have yet seen" and charged that the controlled businesses hamper competition, lead to higher prices and lower quality -- all at the expense of the home buyer and, of course, at the cost of the independents' own business.
Charging that real estate brokers order and sometimes threaten their agents to steer clients to the brokers' own title firm, Clyda Guggenberger, president of Valley Title Company of San Jose, Calif., declared that "it is a farce to pretend the broker is giving his client a choice."
However testimony revealed little hard evidence of the alleged harm to price and quality from controlled business, with witnesses saying it is nearly impossible to determine which real estate brokers have a financial interest in title and other settlement companies.
Several witnesses, though, cited a 1976 California Department of Insurance study revealing that an escrow company owned by a California banking corporation charged settlement and document fees roughly 150 percent higher than its independent competitors in the same area.
But Savas said a HUD study showed "little or no evidence" of harms to the consumer from controlled businesses.
Thomas Vartanian, general counsel of the Federal Home Loan Bank Board said that about 83 of the country's 4,700 savings and loan companies have some ownership in title insurance agencies.