Posted on Thursday, December 31, 2009
The Real Estate Settlement Procedures Act (RESPA) was enacted in 1974 primarily as a consumer protection measure to keep costs down including by avoiding kick backs and mandate the accurate disclosure of certain information.
Though some benefits are acknowledged, RESPA has been long know in the industry for its ambiguities and application with seeming ignorance of the realities of real estate closings.
Chief among the new changes are revisions to the Good Faith estimate requirements intended to make them standardized and hence easier to compare so borrowers can shop around more effectively for the best mortgage pricing. But there are several problems with that. First, the real problem is bad guy mortgage brokers who TRY to trick borrowers with the illusion of a good deal. Not that all mortgage brokers are bad guys - obviously. The effort is better spent raising the bar to enter this profession in the first place, creating more disincentives for the bad guys (fines, penalties, better enforcement, etc), and better mechanisms for monitoring and reporting them. Trust me, mortgage fraud is the crime that never sleeps. The bad guys will find ways around new rules and forms faster than we can ever enact them.
In his article "Rules to Clarify Costs of Mortgages," WSJ writer James R Hagerty note another change to RESPA, namely the prohibition against actual fees change by nemore than 10% from the Good Faith estimate to closing. One well known "trick" the bad guys play is to deliberately under price everyone isles fee estimates (the surveyor, title company, etc) on their Good Faith Estimate. When the borrower discovers these fees are acetabuli much higher than they'd be told, the mortgage broker simply blames these other service providers. The new rules may be a step in the right direction, but they will do very little to prevent this, and other most common problems in residential real estate closings. Rather, they are adding to the cost and confusion for lenders and title and settlement companies alike. Already some of the more reputable service providers have decided that the cost-benefit of keeping up with new regulatory requirements and are exiting this are of the business, leaving the field more open to less desirable service providers. The new rules will also no doubt add fodder for lawyers preying on innocent slip-ups and technicalities to make a living as folks in the industry struggle to implement and fully understand the new rules.
Finally, the new rules require a new form settlement statement at closing comparing the projected Good Faith Estimate Costs with the actual costs at closing so borrowers can insure not more than a 10% variation. That regulators believe discovering a difference of greater than 10% at the closing table will be of any benefit to home buyers. After all, by that late in the game a buyer has no choice but to close or risk being in default under their purchase contract and losing their deposit or worse. I liken this to the long standing RESPA requirement that all buyers be provided a copy of the settlement statement 24 hours in advance of their closings. The reality is that since the advent of electronically submitted closing packages, oftentimes lenders do not provide the figures needed to complete the settlement statement until moments before the scheduled closing time making it IMPOSSIBLE for the borrower to be provided a copy of the settlement statement 24 hours in advance. At the end of the day the new RESPA rules are nothing more than more of the same.