of Congress. The House and Senate conferences, after recog-
nizing that HUD was not using its regulatory authority,
agreed to continue that authority for its deterrent effect.
According to the conferees, nothing in the Act was "intended
to preclude the Secretary's use of Section 701 authority at
any time he finds it necessary to curb abuses in specific
market areas." Once this issue was settled, the other dif-
ferences were adjusted easily. The advance disclosure
legislation compromise agreed to by the conferees was con-
curred with by both houses, and on December 22, 1974, President
Ford signed the Real Estate Settlement Procedures Act of 1974.1

The Amended RESPA

The Housing and Development Reporter (HDR) describes what happened to the original RESPA.

Shortly after RESPA became effective in June 1975, HUD and
Congress began receiving complaints from real estate pro-
fessionals and home buyers.

The main complaints centered around delays caused by
RESPA's requirement that lenders provide buyers with
the cost of each settlement service at least 12 days
prior to closing. Lenders also argued that filling
in the forms was costly and time consuming.

Following extensive hearings, the Senate passed a
bill suspending key provisions of RESPA for a year.
Both the House and Senate, however, later agreed on
a bill that repealed the most controversial provi-
sions of the Act and simplified the disclosure proce-
dure. 2

Specifically, the 12-day advance disclosure was repealed. Lenders are now required to provide home buyers with Good Faith Estimates (GFEs) of settlement charges within three business days of the loan application. Upon the request of the home buyer, the person conducting settlement is required to show the buyer the Uniform Settlement Statement one day prior to closing, to the extent that it is completed.

1 Ibid., pp. 377-378.

2

Housing and Development Reporter. Published by the Bureau of National Affairs, Inc. Washington, D.C., September 6, 1976, p.16.

these conflicting reactions, HUD never made its proposed
regulation final. 1

In summary, the settlement industry in 1972 was characterized by: (1) highly variable settlement practices; (2) wide regional differences in settlement costs; (3) certain noncompetitive practices on the part of providers; and (4) consumer ignorance and the need for more timely information. This, coupled with the publicity and controversy generated by The Washington Post articles, the HUD/VA Report, and HUD's abortive efforts to specify maximum settlement charges, set the stage for new legislation and the passage of RESPA.

THE LEGISLATIVE HISTORY OF RESPA

It was significantly
The intent of the orig-

RESPA was signed into law on December 30, 1974. modified in the amended RESPA signed January 2, 1976. inal RESPA was to ameliorate those conditions uncovered by The Washington Post and the HUD/VA Report of 1972. The 1975 amendments dealt primarily with the repeal or modificaton of: (1) the disclosure requirements of Sections 6 and 7; and (2) the exclusion from the prohibited practices in Section 8 of certain cooperative arrangements between real estate brokers and other settlement service providers.

The Original RESPA

After the controversy over HUD's efforts to set maximum settlement charges, the House and Senate intensified their debate about settlement. Stoppello describes the course of events leading to the original RESPA.

From 1972 to 1974, Congress considered numerous settlement
cost bills, which represented three different approaches to
federal settlement cost regulation: (1) HUD regulation of
maximum charges for settlement services for all federally-re-
lated mortgages; (2) payment by mortgage lenders of all set-
tlement costs attributable to the transfer and financing of
the property; and (3) advance disclosure of settlement costs.
In 1974, the House and the Senate passed similar advance
disclosure bills, although, as in 1972, they differed as to
whether or not to repeal HUD's authority to set maximum
settlement charges for FHA-insured housing. This question
had been the subject of heated floor debate in both houses

Diana

1

Diana Stoppello, "Federal Regulation of Home Mortgage Settlement Costs: RESPA and Its Alternatives," Minnesota Law Review, Vol. 63, No. 3, March, 1979, p. 377.

of Congress. The House and Senate conferences, after recog-
nizing that HUD was not using its regulatory authority,
agreed to continue that authority for its deterrent effect.
According to the conferees, nothing in the Act was "intended
to preclude the Secretary's use of Section 701 authority at
any time he finds it necessary to curb abuses in specific
market areas." Once this issue was settled, the other dif-
ferences were adjusted easily. The advance disclosure
legislation compromise agreed to by the conferees was con-
curred with by both houses, and on December 22, 1974, President
Ford signed the Real Estate Settlement Procedures Act of 1974.1

The Amended RESPA

The Housing and Development Reporter (HDR) describes what happened to the original RESPA.

Shortly after RESPA became effective in June 1975, HUD and
Congress began receiving complaints from real estate pro-
fessionals and home buyers.

The main complaints centered around delays caused by
RESPA's requirement that lenders provide buyers with
the cost of each settlement service at least 12 days
prior to closing. Lenders also argued that filling
in the forms was costly and time consuming.

Following extensive hearings, the Senate passed a
bill suspending key provisions of RESPA for a year.
Both the House and Senate, however, later agreed on
a bill that repealed the most controversial provi-
sions of the Act and simplified the disclosure proce-
dure. 2

Specifically, the 12-day advance disclosure was repealed. Lenders are now required to provide home buyers with Good Faith Estimates (GFEs) of settlement charges within three business days of the loan application. Upon the request of the home buyer, the person conducting settlement is required to show the buyer the Uniform Settlement Statement one day prior to closing, to the extent that it is completed.

1 Ibid., pp. 377-378.

2

Housing and Development Reporter. Published by the Bureau of National Affairs, Inc. Washington, D. C., September 6, 1976, p.16.

Section 7, which dealt with the disclosure of the previous selling price of existing real property if not owned by the seller for at least two years, was repealed. Also, within Section 8(c) the following qualifications were added:

Section 8(c). Nothing in this section shall be construed
as prohibiting...payments pursuant to cooperative brokerage
arrangements between real estate agents and referral arrange-
ments or agreements between real estate agents and brokers,
or...such other payments or classes of payments or other
transfer as are specified in regulations prescribed by the
Secretary (of HUD)...1

In the context of this study, these are the most significant amendments. Other less significant changes were made in the Act. For a complete enumeration of all changes, see Appendix A.

PURPOSE OF STUDY

This section considers the focus of the present study in greater detail. The study itself has two basic goals:

to evaluate the effectiveness of RESPA in achieving its
objectives; and

to assess the feasibility and desirability of modifica-
tions and alternatives to the Act.

Under the first goal, we delineate the overall and general objectives of RESPA, and how the Act is to achieve these objectives. This includes a discussion of how RESPA, in terms of process, should work as well as a brief review of the specific requirements that are supposed to trigger this pro

cess.

The second goal involves a consideration of modifying RESPA to improve its effectiveness and an analysis of four broad strategies or policy alternatives to RESPA. These alternatives include:

minimal regulatory involvement in settlement markets; and

packaging settlement services at the most competitive point
in the market, i.e., Lender-Pay.

1

Real Estate Settlement Procedures Act, 12 U.S.C. 2607.

Evaluate The Effectiveness Of RESPA In Achieving Its Objectives

The primary objectives of RESPA are:

to eliminate what were considered to be abusive or anti-
competitive provider practices;

to better inform the consumer about settlement service
prices and product characteristics; and ultimately

to lower the cost of settlement services.

The success or effectiveness of RESPA is premised on its ability to develop active price competition in the settlement service markets. It seeks to do this by increasing consumer information regarding settlement service prices and product characteristics, and settlement service providers. In addition, RESPA prohibits kickbacks, referral fees, or an exchange of some "thing of value" for the referral of business from one provider to another. By both increasing relevant consumer information regarding settlement services and prohibiting what were regarded as anticompetitive practices, RESPA was intended to reduce the need for referrals. Its supporters expected it

to promote active price competition directed primarily at consumers rather than non-price competition for sources of referral.

In order to evaluate the effectiveness of RESPA, we must ask the following:

Are RESPA's disclosure requirements, information dissemina-
tion and other requirements implemented?

Do consumers use the available information to educate them-
selves about settlement?

Do consumers then use their acquired settlement knowledge to
shop for settlement?

Does the shopping affect the competitiveness of settlement
markets and are settlement prices reduced as a result?

An evaluation of the impact of RESPA on the cost, appropriateness, and quality of settlement services requires an in-depth understanding of the economic performace of the settlement servicer markets. This needs to be supplemented by an evaluation of the impact of the regulatory, legal, and other aspects of the institutional environment for settlement services as they can have a strong influence on not only the settlement process and settlement providers, but also on the nature and cost of services provided. This analysis, which comprises much of Volume II of this study, is also useful in developing and evaluating policy alternatives to RESPA, the principal objective in Volume III.