Reg X: The Truth Is NOT Out There!

Word is leaking out that all of the bank regulatory agencies are now taking a strong and active stand on RESPA violations. This means two things. First, examiners are going to be looking harder (and harder and harder) for RESPA violations. Second, the agencies will begin to impose civil money penalties.

How bad can this get? It is one thing to impose civil money penalties for violations of a regulation such as Flood Hazard, where there is relative clarity in the regulation and relative certainty of findings with regard to flood hazard zones. At least with Flood, you can produce piece of paper that proves you did perform a flood hazard search and shows the finding.

With RESPA, however, we have an entirely different type of problem. RESPA was a murky law when written. It is still murky. Practices that were not clearly in or out of compliance back in the '70s are still not clear. Moreover, real estate sales and financing practices have changed dramatically and RESPA remains dramatically unchanged. RESPA may be the most non-evolutionary compliance law in existence. In Darwin's world, RESPA should have died out by now. Instead, it is now threatening to eat up banks with all the delicacy and finesse of a T-Rex.

What is happening? Regulators with heavy consciences are concerned that banks must carefully comply with the absolute letter of the law. Some regulators see threats to safety and soundness of banks in between every poetic line of RESPA. Their belief is that by actively enforcing RESPA, using all tools available, they will protect banks from worse harm. The civil money penalties are intended to communicate the seriousness of the message.

It has not been enough to worry about items that Congress never contemplated, such as whether the Good Faith Estimate is outside some imaginary tolerance when compared to the HUD-1. Now these worried enforcers see Section 8 threats behind almost every business deal. Any arrangement, regardless of purpose, cost, merit - or benefit to the consumer - will be subject to challenge and enforcement. Financial institutions will need to scrutinize every relationship they have with third party settlement service providers. And they will need to study every deal a customer brings to the bank to make sure there are no hidden, unearned fees. Whether or not the financial institution played a role in setting the terms, they will become responsible for the outcome.

The result is that financial institutions are being forced into the role of Lone Ranger. They must act alone, be above reproach (which has always been the case) and take steps to shoot silver bullets into anything that may be seen as violating RESPA. In playing this role, financial institutions are barred from entering arrangements that can help the consumer as well as those that can cost the consumer money.

What should be happening? RESPA was enacted with good intentions. There are plenty of players in the real estate world that take advantage of consumers. In fact, some settlement service providers do nothing but think up ways to charge consumers for doing what really amounts to nothing but is made to look good on paper. RESPA was enacted to put a stop to this. And that's a good idea. None of us want to pay for something we didn't get. And from the mortgage lending perspective, abusive practices add to the cost of the loan, thus limiting the availability of loans.

But it is time to take at least one of two steps. The first one is to modernize RESPA and make it work effectively in today's real estate market where shopping for loans and knowing the quality and availability of settlement service providers is a service of real value. The law should allow this activity to be compensated - without permitting abusive practices.

The second step is for regulators to get realistic and reasonable. The fanatical enforcement of a law that doesn't work as intended is going to harm both financial institutions and their customers. The enforcers are losing sight of what actually is in consumers interest. Consumer protection is being sacrificed to blind enforcement.

Copyright © 2001 Compliance Action. Originally appeared in Compliance Action, Vol. 6, No. 4, 4/01