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Benefit of Loan Laws Dubious

A car manufacturer can send you a cash rebate in return for your business. So can a maker of electronics, or any other consumer goods company. A title insurer cannot.

Federal and state law prohibits a title insurer -- or anyone else who helps close a mortgage, such as an appraiser or escrow agent -- from paying anybody anything for getting business.

Kickback prohibitions are supposed to get borrowers a fair deal. But recent charges by regulators in California and Colorado suggest otherwise.

Title insurer First American of Santa Ana will refund $24 million to customers because it was purportedly divvying up profits with pals in the real-estate trade. Title insurance, required by lenders, guarantees that a property's legal ownership is correct.

Insurers "should be competing on price and service," says Doug Dean, Colorado's insurance commissioner, who forced First American's refunds.

"They need to compete on a level playing field." Folks breaking rules should be punished. And regulators strongly hint that First American acted much like its competitors.

But this latest scandal in the title insurance business raises the question: Who's protected by the rules?

Three decades ago, Congress enacted the Real Estate Settlement Procedures Act, called "RESPA" in the trade.

This 1974 law codified many processes you see when you get a mortgage, from the dubious "good faith estimate" of loan fees to limits on so-called "impound accounts" holding post-loan payments to anti-kickback statutes.

Certainly, many RESPA provisions got consumers better mortgages. But lending has changed since the 1970s.

RESPA really hasn't.

The U.S. Department of Housing and Urban Development tried three years ago to revamp rules and open the mortgage process to more competition.

Sadly, the idea was killed by real estate businesses that seemingly didn't want to upset a profitable apple cart. Trade groups claimed, among other things, that the planned changes would have damaged many small businesses that work to close mortgages.

Somehow it was also argued that cutting costs -- at the price of limited disclosure -- would lead to rip-offs.

Today's mandated and detailed list of mortgage fees does little to protect anybody from being overcharged.

I think the legal demand to be specific -- while not "kicking back" any savings -- costs consumers because the industry dutifully records and bills every last dime of closing costs.

In numerous other industries, minor price fluctuations are often absorbed by the manufacturer or retailer.

Imagine a simple one-fee closing cost, an expense that's guaranteed not to change.

You can come close to that today, but at a price. No-cost mortgages, for example, typically offer a higher interest rate. That compensates a lender paying for title, appraisal, escrow, etc.

The proposed RESPA reform offered an alternative.

Various institutions would have been allowed to legally amass rebates, discounts or other concessions from parties who close a mortgage. These savings -- currently defined as "kickbacks" -- could be passed along to consumers in the form of a one-price closing cost.

This revolutionary idea didn't sit well with industry. Dubious critiques were floated. Proposed rules might give lenders too much control in mortgage deals, cost jobs at closing-service providers or upset the housing market, a key economic engine.

What I think really upset the industry was that the reform would allow fresh players to enter this game and drive hard bargains from major retail discounters (say, such as Costco) to large consumer affinity groups (say, such as AARP.) HUD estimated RESPA reform might save consumers $700 per transaction.

Where'd that cash come from? Profits of an industry coddled by a 31-year-old law.

It's absurd how mortgage regulation works.

You choose someone or some institution to get you mortgage money. This direct lender or broker can make a largely unregulated profit off that transaction.

That same lender -- whom you've trusted to get you a good mortgage rate while making a profit -- is prohibited from making money by getting you a good deal on title insurance, appraisers or escrow services.

That's why price competition for mortgage closing fees barely exists. To be fair, we the people are partly to blame.

Many folks merely hope for the best when it comes to mortgage fees. For years, many borrowers didn't care.

Falling interest rates created cheaper loan payments. And our homes were appreciating by the minute.

So who'd quibble when an otherwise bargain deal contained a few extra fees?

That doesn't defend title insurers. If they want to compete honestly in California, they could lower their rates through a simple filing with state insurance regulators. Then they could run ad campaigns suggesting they're the cheapest choice.

Instead, they've historically fought for business behind the scenes with inducements to real-estate peers.

California regulators suggest that title-insurance profits are so fat that insurers chose a complex "reinsurance" plan to split consumers' premiums -- but not the modest insurance risks -- with key real-estate partners.

Michael Strumwasser, an outside attorney working on title issues for the California Department of Insurance, says state regulators may try to push title insurance rates lower if an ongoing probe finds that profits are too lush.

"Let's bring down the rates to where there's no money to kick back," Strumwasser says.

To get a sense how the current setup works against home buyers, look at a First American filing with the Securities and Exchange Commission.

It says, "Competition for title insurance business is based primarily on the quality and timeliness of service, because parties to real estate transactions are usually concerned with time schedules and costs associated with delays in closing transactions. In those states where prices are not established by regulatory authorities, the price of title insurance policies is also an important competitive factor." Aren't you glad that state insurance regulations protect you from price competition?

WHAT'S RESPA?: --Law: Real Estate Settlement Procedures Act Enacted: 1974 (revisions in 1976, 1982, 1992 and 1996) Enforced: By U.S. Department of Housing and Urban Development What's covered: Home purchase loans, refinances, loan assumptions, property improvement loans, equity lines of credit and reverse mortgages --Highlights: Mandates "good faith estimate" of costs to finish a mortgage Bans entities involved in closing a mortgage from offering any referral fees for the business Allows consumers the right to choose title insurers Limits what a lender requires a borrower to put into an escrow account for paying taxes, insurance and other charges. Source: U.S. Department of Housing and Urban Development.

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