Guest Post by Elizabeth Renuart, Assistant Professor of Law, Albany Law School, based on the forthcoming paper in Housing Policy Debate she co-authored with Jen Douglas (who served as project coordinator of the NMDR during data collection and received her master’s degree in public policy from the University of Massachusetts Boston), titled The Limits of RESPA: An Empirical Analysis of the Effects of Mortgage Cost Disclosures:
As noted in an earlier blog post, the revised RESPA GFE and Settlement Statement became effective in January, 2010. The new forms remain controversial and will get a second look over the next year. In the Dodd-Frank Wall Street Reform and Consumer Protection Act enacted in July 2010, Congress instructed the Bureau of Consumer Financial Protection to review and combine both the Truth In Lending Act and RESPA cost disclosures into a single, integrated form for mortgage loan transactions by the summer of 2012.
Congress passed the Real Estate Settlement Procedures Act in 1974 based upon documented instances of kickbacks between settlement service providers, unearned fees, and expensive and unnecessary closing fees paid by buyers and sellers of residential real estate. It opted for a disclosure strategy accompanied by few substantive prohibitions. Over the last thirty-five years, only a handful of studies attempted to measure the success of the mortgage loan disclosures by analyzing slices of the mortgage market. My co-author, Jen Douglas, and I used a uniquely rich database to examine this question in our working paper titled: The Limits of RESPA: An Empirical Analysis of the Effects of Mortgage Cost Disclosures.
Due to the lack of detailed public data, the National Consumer Law Center collected loan data from attorneys, state agencies, and housing counselors. In total, this dataset included 1,922 loans with either a GFE or HUD-1/1A, of which 779 loans had both a Good Faith Estimate (GFE) and a Settlement Statement (HUD-1/1A). These 1,922 loans were made in 28 states by 318 lenders.
From these loans, we found evidence that borrower closing costs as a percentage of loan amount increased by 418% and by 182% for a subset of purchase loans since 1972. Meanwhile, fee types doubled. The early cost estimates underestimated the final closing costs and projected cash to borrowers in a majority of cases, lending credence to complaints of baiting and switching.
We used our observations about the loans originated before the new forms became effective to opine upon whether the amended disclosure regime might improve or have no effect on specific problems we noted. We expect that the new GFEs will more closely match the HUD-1/1As than those in our collection. This should reduce the bait and switch concerns. Further, HUD’s requirement that certain fee types be bundled into one number should increase the standard placement of fees. Less clear is whether the changes will reduce the problem of fee proliferation, cryptic fee names, and similar concerns which we noted in our dataset. Lack of transparency is the trade-off, however, since the bundled charges are no longer itemized. Finally, we found important disclosure discrepancies occur when settlement agents chose to use the HUD-1, rather than the HUD-1A for refinance loans, a choice that HUD did not eliminate in 2010.
While HUD vetted the new forms with focus groups, the agency has not investigated the worth of its forms in relation to the statutory goals in any consistent or routine way since 1974. Our findings call into question the efficacy of the RESPA disclosure scheme. Further, they point to the need for detailed data collection, routine monitoring of whether RESPA is meeting its legislative directive, and rigorous debate about whether RESPA’s goals can be achieved more effectively by another strategy.