It's Time To Fix RESPA
RESPA has been the bane of many compliance officers' existence. It has never been an easy law or regulation to understand. And it has absolutely never been a law that lends itself to clear and comprehensible practical applications. In fact, RESPA has always been a bit of a nightmare and now is a nightmare of monstrous proportions. It rates up there with the most nightmarish concoctions of Stephen King.
There are two parts of the RESPA nightmare: the technical disclosure requirements and the anti-kickback provisions. The most common violations reported by examiners involve technical violations of the disclosure requirements. Errors on the HUD-1 are at the top of most violation lists. In many cases these disclosure errors do not mislead or misinform the customer. But they "violate" the regulation.
An even worse measure of the so-called violations is that, if disclosed "correctly," they wouldn't really provide better information to the consumer. For example, failure to name the appraiser on the HUD-1 is a violation, even though the disclosed cost is correct. Does not knowing the name of the appraiser harm the customer? No, because the consumer knows the name of the appraiser anyway if they requested a copy or were given a copy or the appraisal under Regulation B. This is simply disclosing information that is otherwise available.
The same goes for the credit report. If the credit application is approved, the consumer probably doesn't care who issued the credit report that supported their application. But if their application is denied, they may indeed care. And they are told. The adverse action notice provides the consumer with the name and address of the credit reporter - more information than they would have gotten on the HUD-1.
And when a customer used a mortgage broker, why do they need to be told who the mortgage broker that they selected was?It is time for regulators to get outside their boxes. The previous review of RESPA and Truth in Lending came to an end - really a slow stop - because both HUD and FRB staff couldn't deal with changing the basic concepts to their disclosures. HUD staff claims that the HUD-1 is mandated by RESPA and FRB staff came to a similar conclusion about Truth in Lending's Federal Box and APR.
Both agencies overlooked the fact that when the HUD-1 and the Federal Box were invented it was the regulatory agencies that gave them form and life. Those same regulatory agencies can work changes. Yes, RESPA calls for a settlement sheet that discloses the costs of settlement. And yes, truth in lending calls for an APR (which is defined) and disclosures grouped together in an organized disclosure. But this does not mean that the disclosures have to look precisely as they look right now. In fact, they could look a lot better and be much more useful to consumers. All it takes is a little thinking "outside of the box."
And then there are the anti-kickback provisions of RESPA. When enacted, Congress thought that the provisions made sense. There were, in fact, consumer harms from the way business was being done. But in today's real estate market, these specific provisions and the way they are interpreted no longer make as much sense. Worse yet, they do more harm than good.
Busy customers often choose to use a mortgage broker because the simple act of shopping for the right loan takes time the customer would rather pay for than spend. Customers are willing to pay for expertise rather than build their own learning curve. True, there should be no place for and no tolerance for abuse. But it is clearly time to reevaluate RESPA with an eye to what it really does and does not do.
Copyright © 2001 Compliance Action. Originally appeared in Compliance Action, Vol. 6, No. 3, 4/01
First published on 04/01/2001