Paying for Protection: The High Cost of Reform

Last week, the EPA announced a national contest for videos promoting the notion that federal regulation makes life good. The rules of the contest explain that regulation touches every part of American life and that there are approximately 10 federal regulations for every law that Congress passes. Each video must contain the phrase, "Let your voice be heard." The winning entry will receive a $2500.00 cash award.

It's too bad that nobody is sponsoring a contest to describe the ways in which federal regulation makes life worse. The government would certainly have many more entries to choose from, and we small business owners who have had our livelihoods trampled on by excessive government regulation could surely use the prize money.

The government may not want to hear the other side, but in the interests of a fair and balanced debate, I wanted to devote a little space to ways in which regulation is cumbersome and expensive. Maybe if all of the rest of us let our voices be heard, we would see some real hope and change.

For instance, in January of 2010, long anticipated changes to the Real Estate Settlement Procedures Act, which governs all residential real estate transactions in the United States, went into effect. The government started working on these reforms in July of 2002. As the president of the El Paso Association of Mortgage Brokers at that time, I worked over a long period of time lobbying against this piece of rule-making by the Department of Housing and Urban Development (HUD). HUD argued that the changes would save consumers hundreds of dollars in unnecessary settlement fees by allowing consumers to shop more effectively for a loan. Our argument was that the provisions of the new act were anti-competitive for small businesses and tilted heavily to favor large banking institutions. In retrospect, both of us were wrong. Consumers shop most effectively for a cheaper loan when they have plenty of choices available to them, and they save money when they close their transactions on time. As for us, the forms are not anti-competitive; they are completely unintelligible. It's hard for the consumer to know what he's paying for when no one in the transaction can understand the estimate he has been provided.

So what does this mean in real life? Prior to January 1, 2010, if you went to a loan officer to get a loan, you received a one page good faith estimate that listed all of the anticipated costs on your loan. This included the origination fee, junk fees, any points you were paying, escrows for taxes and insurance, etc. At the bottom of the page on the left was a column that showed how much cash you could expect to bring in if you were buying a house, and at the bottom of the page on the right was a breakdown of your anticipated monthly payment including your taxes and insurance. You signed and dated the form on receipt. If you wanted to negotiate a fee with the loan originator, you could do so by looking at the form to see how much each individual fee was and negotiating to reduce or eliminate it.

The new form is three pages. The fees are lumped together, so that you no longer see what your originator is making or what junk fees are included. Some of the fees are not yours--they are the sellers. Some of the fees no one is actually going to be paying at all, unless you really want a home inspection for that house you have already lived in for twenty-five years that you have decided to refinance. But by federal law, all are listed as an expense. In addition to the three page form, there is a fourth page that lists the various companies whose fees were included on the estimate in case you want to shop for a different vendor. Be sure to ask your loan originator what your monthly payment is--that is nowhere on the form, so if you fail to ask you could be surprised at closing. You do not sign the new form--signing the new form is considered "defacing a federal document". Instead, you sign an additional page which states that you have reviewed the good faith estimate. In addition to the good faith estimate and the other attachments, you receive a 45 page booklet prepared by HUD explaining to you how to read the good faith estimate. So we now have 5 pages of documentation and a 45 page booklet which give you less information than the 1 page form we used before January 1.

The new forms are a binding contract with the buyer, so you cannot get your appraisal started until you have reviewed the good faith estimate for three days. The lender is completely responsible for any charges on your final documents that do not appear on the good faith estimate, so they have to carefully review everything before your loan can go to underwriting. And they have to review it again before closing.

Two months ago, I closed a purchase loan for a very prominent executive here in El Paso. He had refinanced his home in December to take advantage of extremely low interest rates, and then a couple of months later, he decided to buy a new house. He is highly paid, very well educated, and has very little personal debt and credit scores over 800. Further, he has considerable savings in investment accounts and was making a 20% down payment on the new home. After we packaged the loan and sent it in to the lender, the lender had to first review all of the new estimates, and then they had to decide whether they wanted to make him a loan at all. Concerned that maybe he got a loan he really did not deserve in December when he refinanced his house (why did he care about getting a better interest rate on the home he already owned if he were thinking about moving?), the lender was prepared to correct the situation by not giving him a loan he clearly deserved in February. It took them four days to decide to go forward with the loan.

When we finally got through underwriting and were ready to close, it was Thursday. My borrower had taken the week off from work to get some items packed, and he had movers scheduled for Friday morning. Prior to January 1, we would have sent a request to the lender asking them to prepare the documents so that he could close and get his keys Friday morning. Since it takes about 2 hours to prepare documents, we would not have had any problem closing right on time. Not any more. We were informed that the new policy is that we have to wait 48 hours after loan approval before the closing department can start preparing the documents. The new regulations require more time. Unfortunately, my borrower had to be out of town for work related travel starting the following Monday.

In the end, the borrower signed a lease agreement on the house he was moving into with the seller to lease the house for five days at a cost of $440.00. By the time that all the delays were finished, we closed the following Wednesday. When he asked me to explain the reason for the delay, I simply told him, "The government has introduced new regulation to protect consumers. Because of that new regulation, there are a lot of new delays because the lender has to have plenty of time to check and recheck the documentation to make sure it is correct, and for this reason they cannot close you until next week. Do you feel protected?" Do you?