May 25, 2010

Real Estate Settlement Procedures Act: Proposed Rule to Simplify and Improve the Process of Obtaining Mortgages and Reduce Consumer Settlement Costs

Proposed Rule

Score: 41 / 60

Additional details
Department of Housing and Urban Development
Regulatory Identification Number
Agency Name
Department of Housing and Urban Development
Rule Publication Date


This proposed rule presents HUD’s proposal to simplify and improve the disclosure requirements for mortgage settlement costs under the Real Estate Settlement Procedures Act of 1974 (RESPA), to protect consumers from unnecessarily high settlement costs.


There are twelve criteria within our evaluation within three broad categories: Openness, Analysis and Use. For each criterion, the evaluators assign a score ranging from 0 (no useful content) to 5 (comprehensive analysis with potential best practices). Thus, each analysis has the opportunity to earn between 0 and 60 points.

Criterion Score


1. How easily were the RIA , the proposed rule, and any supplementary materials found online?
The link to the RIA is four clicks from the home page, but the reader must look under "HUD A–Z" for the acronym "RESPA," then look under links for "Industry" to find the proposed rule materials. The RIA is not on However, the proposed rule can be found using the RIN or a keyword search, and the rule directs the reader to HUD's RESPA home page. So, the RIA can be found either way but it is somewhat awkward.
2. How verifiable are the data used in the analysis?
Data are extensively sourced, though not always with web links.
3. How verifiable are the models and assumptions used in the analysis?
Models and assumptions are sourced, and the study has an extensive bibliography.
4. Was the analysis comprehensible to an informed layperson?
Technical terms are explained, and acronyms are minimal. This RIA is quite thorough. If anything, summarization is excessive, which probably adds 10–15% to the length; each chapter seems to have its own executive summary and there is a large amount of pointing back and forth to results in other sections. The analysis includes way too many repetitive assertions about what the problem is and how the regulation will solve it. The level of detail and writing makes it difficult for a reader who is not an economist or other type of specialist to understand.


5. How well does the analysis identify the desired outcomes and demonstrate that the regulation will achieve them?
Does the analysis clearly identify ultimate outcomes that affect citizens’ quality of life?
The analysis identifies reduced settlement charges to borrowers.
Does the analysis identify how these outcomes are to be measured?
They're measured mostly in dollars. The RIA also estimates a possible increase in homeownership and refinancing activity resulting from lower settlement charges, and time savings.
Does the analysis provide a coherent and testable theory showing how the regulation will produce the desired outcomes?
Clearer and more accurate disclosures will help consumers to better understand the costs of settlement services and facilitate consumer comparison shopping. Allowing settlement service providers to negotiate quantity discounts will reduce costs. Permitting average cost pricing will reduce costs.
Does the analysis present credible empirical support for the theory?
Consumers who are better educated, more informed, or pursue simpler shopping strategies tend to get better deals. Proposed changes to good faith estimate form were subjected to iterative rounds of testing on consumers. But there is one crucial weak link: the savings the changes would produce are estimated starting with just a speculative, if conservative, percentage.
Does the analysis adequately assess uncertainty about the outcomes?
It includes some sensitivity analysis.
6. How well does the analysis identify and demonstrate the existence of a market failure or other systemic problem the regulation is supposed to solve?
Does the analysis identify a market failure or other systemic problem?
Complexity and lack of information by some borrowers allows mortgage providers to price discriminate; less knowledgeable borrowers pay higher charges. Regulations that prevent settlement providers from negotiating bulk discounts raise costs.
Does the analysis outline a coherent and testable theory that explains why the problem (associated with the outcome above) is systemic rather than anecdotal?
See above. An insightful discussion explains how the economic profits might be dissipated: salespeople who are good at inducing less informed consumers to overpay end up earning higher salaries and incurring higher marketing expenses, so the firms might not earn supracompetitive profits.
Does the analysis present credible empirical support for the theory?
Several consulting and government studies have found that consumers with less education, no counseling, or more complex shopping strategies tend to pay more for loans and settlement services, and that the full amount of yield spread premium is not passed back to borrowers. However, a study showing a larger percentage of YSPs is passed to borrowers is only mentioned in a footnote.
Does the analysis adequately assess uncertainty about the existence or size of the problem?
Sensitivity analysis was performed for consumer cost savings.
7. How well does the analysis assess the effectiveness of alternative approaches?
Does the analysis enumerate other alternatives to address the problem?
Different variations of disclosures were "field-tested," and different treatments of fees on required forms were also considered.
Is the range of alternatives considered narrow (e.g., some exemptions to a regulation) or broad (e.g., performance-based regulation vs. command and control, market mechanisms, nonbinding guidance, information disclosure, addressing any government failures that caused the original problem)?
The alternatives are usually narrow, such as different required disclosures or which GFE fees should be zero tolerance vs. 10% tolerance. The decision not to allow packaging was a moderately different approach if packaging is interpreted as an alternative to the revamped disclosures.
Does the analysis evaluate how alternative approaches would affect the amount of the outcome achieved?
The required disclosures went through multiple changes and iterations of testing to determine how to convey the information to consumers most accurately. Most other discussion seems cursory in rejecting options.
Does the analysis adequately address the baseline? That is, what the state of the world is likely to be in the absence of federal intervention not just now but in the future?
The baseline is selected to represent a "normal" year. Calculations assume there would be no changes in the marketplace that would accomplish some of the regulation's goals.
8. How well does the analysis assess costs and benefits?
Does the analysis identify and quantify incremental costs of all alternatives considered?
Only for the chosen option.
Does the analysis identify all expenditures likely to arise as a result of the regulation?
The analysis dentifies transfers and compliance costs.
Does the analysis identify how the regulation would likely affect the prices of goods and services?
Yes, but based on a speculative assumption.
Does the analysis examine costs that stem from changes in human behavior as consumers and producers respond to the regulation?
It estimates an increase in homeownership and refinancing activity, but does not monetize it.
If costs are uncertain, does the analysis present a range of estimates and/or perform a sensitivity analysis?
The analysis does not address this topic.
Does the analysis identify the alternative that maximizes net benefits?
Only of the option chosen.
Does the analysis identify the cost-effectiveness of each alternative considered?
Results in the RIA could be used to do this to some extent.
Does the analysis identify all parties who would bear costs and assess the incidence of costs?
It assesses differential effects on small businesses, on lenders vs. mortgage brokers, and on different types of settlement service providers.
Does the analysis identify all parties who would receive benefits and assess the incidence of benefits?
The RIA recognizes that savings would be unevenly distributed, since more informed consumers will benefit less. But there are no calculations showing how different groups of consumers will benefit differentially.


9. Does the proposed rule or the RIA present evidence that the agency used the analysis?
HUD altered disclosures after doing market research to determine the most accurate way to communicate the information. Revised disclosures were extensively tested with consumers to ensure that they allowed 90% or more of consumers to correctly identify the loewst-cost loan. Particular changes were either accepted or rejected based on this research.
10. Did the agency maximize net benefits or explain why it chose another alternative?
Net benefits were not calculated for various options. However, the RIA's discussion of alternatives suggests several instances in which HUD rejected alternatives because it believed they created costs or risks to consumers without providing any additional benefit.
11. Does the proposed rule establish measures and goals that can be used to track the regulation's results in the future?
No, but measures and goals could be established given the RIA's results.
12. Did the agency indicate what data it will use to assess the regulation's performance in the future and establish provisions for doing so?
No, but the studies cited in the RIA suggest what kinds of data could be gathered and how the regualtion could be evaluated.
Total 41 / 60