Old Compliance Laws Never Go Away

It's true. They never go away. In fact they hang around "forever" and just seem to get worse. One case in point is RESPA. When enacted, it was aimed at certain practices that were considered wrong - unfair to the consumer. The practices in question at the time included possible price fixing by settlement service providers and the ostensible use of middle-man service providers and services that were in fact not needed but lined the pockets of lenders and service providers.

There is so much scrutiny of the mortgage market today that there are fewer and fewer ways to conceal unjustified fees. Structuring a transaction to conceal fees is getting as difficult as laundering money - at least in the banking world. Also, the market is increasingly competitive. Customers have more ability than ever to shop and compare prices - if they are inclined to do so. So what does RESPA actually accomplish today?

HUD's RESPA staff tends to see big and bad in every part of the mortgage industry. Almost every question put to HUD comes back - after a very, very long wait - with the conclusion that no matter what the question is, the answer is that it violates RESPA. For example, consider HUD's position that a customer, entering a bank to inquire about obtaining a mortgage, must first be given the Affiliated Business Arrangement disclosure before being told that mortgage loans are made through the bank's mortgage lending subsidiary right down the hall. To give the customer a notice implying that the customer will be paying unnecessary costs simply for using the affiliate (which three weeks earlier had been part of the bank and charged the same fees and rates it is charging now) is neither constructive for the bank nor helpful to the consumer.

HUD has been so zealous in protecting consumers that RESPA now has a chilling effect on responsible lenders. Banks find themselves unable to offer many kinds of pricing advantages because the package somehow violates RESPA. Non-banks ignore the problem and do it anyway. They figure the odds and related costs of getting caught are outweighed by the profit they can make in the meantime.

Another case in point is HMDA. Some of us are old enough to remember that when HMDA was originally enacted, it was also sunsetted. It was to be in place and in effect for only three years. Supposedly, that would be enough time to learn what needed to be learned. That was about 25 years ago and HMDA is still with us - bigger than ever and threatening to grow again.

HMDA's original purpose was to determine whether or not certain neighborhoods were in fact redlined. The Congressional solution to the debate about redlining was simple in concept. Let's collect data for a few years and find out what is actually going on.

Over time, HMDA has become a tool for lots of things in addition to measuring redlining. It is a tool for fair lending analysis and for CRA evaluations. As one use gets added to the others, and as one additional data element is added, we grumble quietly and deal with the additional cost and effort. The latest proposal, driven by concerns about sub-prime and predatory lending, would greatly expand HMDA to provide information that government agencies might find useful in research on predatory lending. Banks will pay the biggest price for this research. Gathering the data is always the most expensive step to research.

Now that the Federal Reserve is proposing to add to the HMDA data elements and put HMDA to new uses, this is a good time to look not only at the additions but also at the whole. What good is HMDA? How much does it really cost? Do the benefits justify the cost? Or do we accept the cost simply because it is scattered, piece by piece, from bank to bank?

The same goes for RESPA. This is a good time - the beginning of a new century and a new Congress - to look at what is really needed in these laws. Banks should get out of the back seat and into the driver's seat. You can begin by commenting on the HMDA proposal. Then call your Senators and Representative and schedule a time to talk.

Copyright © 2001 Compliance Action. Originally appeared in Compliance Action, Vol. 6, No. 1, 2/01