There will be a quiz

"Sunlight is said to be the best of disinfectants; electric light the most efficient policeman." -- Louis Brandeis.

That quote helps HUD researcher Mark Shroder kick off a paper analyzing RESPA "as a regulatory strategy relying on federally mandated information disclosure."

In other words, if you arm the consumer with enough information, can you encourage companies to behave without spending a ton on enforcement?

When it comes to RESPA's anti-kickback provisions, Shroder theorizes, government may have "implicitly chosen a low probability of detection." He notes that "from 1995 through 2000 ... HUD issued no press releases announcing enforcement actions under Section 8 of RESPA" although enforcement has picked up since 2003.

If you're not going to do much enforcment, you hit people with big penalties to make up for it, according to an "economic theory of enforcement" postulated by other academics, Shroder says.

"RESPA clearly breaks that rule: nobody ever goes to jail for RESPA violations, and the maximum statutory fine of $10,000 has not been raised since 1974," he notes (although $10,000 in 1974 was worth $40,872 in 2006).

So, if RESPA mostly relies on "sunshine" (in the form of disclosures) to protect consumers, how effective is it?

In his paper, "The Value of the Sunshine Cure: The Efficacy of the Real Estate Settlement Procedures Act Disclosure Strategy" Shroder sets out to answer (or at least examine) "four essential empirical questions about the effects of RESPA" on social welfare:

Q1: Whether lending and title fees are large enough to be worth regulating.

Q2. Whether the Good Faith Estimate (GFE) is "an unbiased and consistent estimator of lending and title fees."

Q3: Whether state law has a negligible effect on fees (and therefore only national regulation is pertinent to the problem RESPA addresses).

Q4: Whether RESPA disclosures strengthen the negotiating position of buyers and sellers and "neutralize the effects of buyer and seller personal characteristics on the level of the fees."

Shroder thinks all of these things have to be true in order for "sunshine regulation" to be considered an "efficient and sufficient" regulatory strategy (his answers to the questions are below).

Although he does "not claim to provide satisfactory answers" to all of the questions he raises, Shroder concludes that the current RESPA regime is "a form of sunshine regulation implicitly founded on the proposition that the only problem in the market is consumer ignorance, solved by federal action. Consumer ignorance might not be the only problem in the market, and nonfederal action might be preferable."

A sunset clause for RESPA might make sense, he says.

"The law is inherently informational in character and the delivery of information in our era is undergoing revolutionary change," he says. "But lack of information does not appear to be the only problem in this market. The present ambiguous language of Section 8 of RESPA, which prohibits kickbacks and referral fees, neither allows for effective enforcement of violations nor offers sufficient deterrence to violation, although it may deter lender actions that would lower fees to consumers. Both buyers and sellers need transparency and simplicity, and neither is identical with disclosure."

The paper, originally published in 2007 but only recently available in an electronic database, is worth reading for the details Shroder uncovers in an examination of 146 cases of FHA home sales in June, 1997.

When a home sale appeared motivated by a divorce, or if there was a substantial delinquency on property taxes, Shroder found lending and title fees went up by $1,000 to $1,100. Fees for new home sales averaged $400 less than fees for sales of existing homes, amounting to "an unplanned suburbanization policy — a differentially higher tax on existing homes," he said.

Shroder also found no evidence that mortgage brokers credited borrowers for yield spread premiums paid on loans that carry above market interest rates (surprise!).

These, Shroder says, are all examples of instances where "personal characteristics" -- in this case the sellers' -- seem to be having an impact on fees which you would not expect to see if disclosures were effective.

There was also some "wild variation" in the detailed fees charged. "For example, the credit report is a standard national, largely automated, service that typically costs about $50, but charges range from $25 to $100."

Answers:

A1: Yes lending and title fees are large enough to be worth regulating -- in the study they averaged $2,060, and ranged from $692 to $5,671.

A2: "The GFE is right 'on average,' but many GFEs are off by a lot ... Many lenders seem to prefer small overestimates of the title and lending fees to make sure the buyer will have enough money on hand to close. More troubling are the minority of cases in which very large underestimates occur."

A3: "I believe this proposition is not true. Common sense would warn any analyst that title fees, in particular, are highly sensitive to state law, if only because the clarity of state law determines the clarity of the title that is being transferred." Shroder found that fees are higher than expected in New Jersey, which seems to require more involvement by attorneys, and lower in Iowa, where "the state treasurer has assumed responsibility for title insurance."

A4: Buyers’ and sellers’ characteristics "seem to lead to differences in fees for transactions of equal size. Lending and title fees paid for new home sales are notably lower than fees for existing homes, presumably because builders and developers can capture some economies of scale."