“Fall in Wisconsin Fence Friday Edition” via Jim Bauer on flickr

When Americans make the monumental decision to purchase a new home, they must endure the complicated process of attaining a mortgage. Many factors are involved in this process. One of which is paying for the real estate settlement services that are involved in home buying. Examples of said services include real estate agents and brokers, mortgage brokers, attorneys, escrow agents and appraisers. Such costs may vary, depending on circumstances, but most homebuyers do not take them all into consideration when looking for a new home. In the past, corruption existed in these markets, so Congress established the Real Estate Settlement Procedures Act (RESPA) in 1974 to protect consumers from unnecessarily high settlement charges caused by abusive practices.

The act required that lenders provide greater amounts of information to prospective borrowers during the loan settlement process. Also, it prohibited the various parties involved from paying kickbacks, referral fees and fee splits between settlement service providers and any other person. This is done to encourage a competitive market and to limit costs of settlement services. RESPA has regulated this market for 36 years, up until the introduction of The Dodd-Frank Wall Street Consumer Protection Act (Dodd-Frank) in 2010, where the Consumer Financial Protection Bureau (CFPB) was introduced. This government agency was designed to oversee financial products and services offered to consumers with hefty regulatory burdens. CFPB was given the authority to enforce RESPA, and has challenged the standing practices of RESPA; complicating the lending process entirely, leaving lenders burdened with increased regulations, and borrowers vulnerable.

Analyzing RESPA Section 8 demonstrates the inconsistencies between the authority of RESPA and CFPB. Section 8 regulates relationships among settlement service providers, prohibiting kickback and referral fees, and permitting the arrangements to provide goods and services for reasonable compensation. The Department of Housing and Urban Development (HUD) oversaw this process until Dodd-Frank transferred RESPA’s authority from HUD to CFPB. The regulations and policy statements emphasized by HUD were the product of notice-and-comment rule making (or other processes that involved stakeholders). This process was successful for years, but typical of an autonomous government agency, the CFPB added additional “official commentary, guidance and policy statements.” These additions have had negative impacts, as they renounce the government’s understanding of what RESPA requires. Section 8(c)(2) of the statute provides that “nothing in [Section 8] shall be construed as prohibiting” (1) “bona fide” payments (2) “for services actually performed.” 12 U.S.C. § 2607(c)(2). The Order contravenes the text by erroneously relegating Section 8(c)(2) to a mere rule of construction, rather than treating that provision as the exemption to liability that it is.

The Consumer Financial Protection Bureau’s responsibility of regulating financial services is another example of how a government created agency with limited accountability has hurt lenders and consumers. It is of utmost importance that the CFPB surrenders its authority, and HUD reclaims it, to lessen confusion and improve efficiency. Creating an agency that regulates an already regulated market is counterproductive, costly and confusing. Considering the colossal number of Americans who depend on loans to buy homes, a better and more efficient system must be created and utilized immediately.

Exterior of the Consumer Financial Protection Bureau, Washington, DC USA