My name is Joseph M. Parker, Jr. and I am President of the Parker Title Insurance Agency of Winston-Salem, North Carolina. I am appearing today on behalf of the American Land Title Association, the national association of the land title industry ("ALTA"). ALTA represents 2,400 title insurance companies, agents, abstractors, and attorneys across the nation who are involved in the searching, examining, and insuring of land titles.
I currently serve as chairman of the Abstractors and Title Insurance Agents Section of ALTA and a member of its Board of Governors. With me today is James Maher, Executive Vice President of ALTA. The issues being addressed by the Subcommittee today are very important to the members of our Association, and we appreciate the opportunity to present our views to you.
While the focus of this hearing is on both the Real Estate Settlement Procedures Act ("RESPA") and the Truth-in-Lending Act ("TILA"), the concerns of the land title industry relate primarily to RESPA. Others on this panel who represent mortgage lenders and consumers are in a better position to discuss the problems arising from the overlapping and sometimes confusing disclosure provisions of the two laws because they are the parties who provide and receive the disclosures of settlement costs required by those laws.
Our concerns relate to RESPA and primarily to Section 8 of RESPA, the provision that prohibits the payment and receipt of fees and other things of value for the referral of real estate settlement business. Before discussing those concerns, I would like to say that ALTA strongly supports the concept and, in general, the form of the HUD Forms 1 and 1-A, the Uniform Settlement Statements promulgated by HUD for use in real estate transactions governed by RESPA. While these forms may be less than ideal when used to provide estimates of settlement costs to mortgage loan applicants, they have become the standard forms used by all persons who handle real estate settlements for reporting on the disbursement of funds at settlement. These forms are well adapted to that purpose, numerous computer programs have been developed to make use of the forms, and settlement agents and consumers throughout the country have become accustomed to those forms. Any shortcomings in the forms can be (and have been in the past) corrected by HUD. Accordingly, we would hope that the legislative recommendations of this Subcommittee would not adversely affect the continued use of these forms as "settlement statements."
When RESPA was enacted in 1974, the title insurance industry was one of the strongest supporters of Section 8. As a matter of principle, it is difficult to oppose the basic objective of Section 8: that settlement service business should go to the companies providing the best products, services and prices, rather than to companies that pay the biggest referral fees to mortgage lenders and real estate brokers and salespersons who may be in a position to influence the consumer's selection of a settlement service provider.
But several things have happened since 1974 that have made it clear that Section 8 is not working as intended and is in need of fundamental reform.
First, there has been a dramatic growth in affiliated business arrangements, a development encouraged and sanctioned by the "controlled business amendments" to Section 8 adopted by Congress in 1983. Prior to the 1983 amendments, the underlying objective of Section 8 was to prohibit persons in a position to control or influence the consumer's selection of a settlement service provider from personally benefitting from those referrals. The 1983 amendments created a basic distortion and inequality of treatment for independent settlement service companies. Those amendments permitted controllers of business to obtain financial benefits from having ownership interests in settlement service companies to which they could refer business, but continued to prohibit independent providers of settlement services from competing with those affiliated companies by providing things of value to induce those controllers of business to refer business to them.
Second, the nature of the mortgage lending process, and the technology to facilitate that process, has changed dramatically in the two decades since RESPA was enacted. Faster turnaround times for loan applications and decisions, integration of the real estate and mortgage lending services, electronic data transfer, joint ventures and strategic alliances, and one-stop shopping have become the watch-words of the 1990's for the mortgage lending and real estate settlement services industries. In this kind of environment--an environment not contemplated in 1973--the distinctions between bona fide business arrangements among joint venturers or business partners, on the one hand, and unlawful payments for the referral of business, on the other, can become completely blurred.
Finally, the history of HUD regulatory and enforcement activity has been spotty at best, and nonexistent at worse. As a consequence, companies seeking to comply with Section 8's requirements find that there is frequently little regulatory guidance and, with the lack of effective enforcement, that they are place at a competitive disadvantage to other companies who, with little fear of sanction, walk close to or over the line.
These concerns have prompted our Association to undertake a comprehensive examination of whether the approach of Section 8 makes sense in light of current market realities and what other regulatory mechanisms would be more appropriate and effective in fulfilling RESPA's objectives. Late last year, a RESPA Task Force was created by the President of ALTA on which representatives from all sectors of our industry were asked to serve. The conclusions and recommendations outlined in this statement are drawn from among those contained in our task force report.
We understand that other industry groups are also considering longer-term solutions to the problems of Section 8 and possible regulatory alternatives to the kinds of prohibitions contained in that section. At this stage, we do not believe it is advisable for the Congress to direct HUD or the Federal Reserve Board to undertake a study of the possible alternatives. We believe that more time needs to be allowed for the various ideas and concepts to percolate within the industry groups and to allow for further discussion among the industry and consumer groups about the possible alternatives. Perhaps the Subcommittee might consider holding a hearing on the possible alternatives to Section 8 sometime in 1998. This would serve to catalyze the discussions among the affected groups to see if some consensus can be developed.
Apart from the longer-term consideration of alternatives to Section 8, there are two shorter-term recommendations for amendments to the current provisions of Section 8 that ALTA would urge the Subcommittee to adopt.
Section (8)(c)(1)(B) of RESPA currently provides that nothing in Section 8 shall be construed as prohibiting the payment of a fee by a title insurance company to its duly authorized agent for services actually performed in the issuance of a title insurance policy. Our first recommendation is that 8(c)(1) be amended so as to make clear that the exemption also encompasses other "things of value" that may be provided by the insurer to its agent, and that such payments are exempt even if they include compensation for the solicitation of title insurance business.
While title insurance agents provide substantive services in the issuance of title insurance policies, one of their primary functions, as is the case with any insurance agent, is to generate insurance business for the insurer. Because the current language of 8(c)(1)(B) refers only to compensation for services rendered in connection with the title insurance policy, it has been interpreted to mean that no part of the compensation paid by the insurer to the agent can be for the generation of title insurance business. The amendment we would like to see adopted would provide express recognition that the commission or other compensation arrangements between insurers and their bona fide agents can include compensation for the solicitation of business.
Section 8(d)(1) of RESPA currently permits a consumer to recover three times the amount of any charge paid for a settlement service where there has been a violation of Section 8. There is no need for the consumer to prove damages in order to obtain the recovery. With increasing frequency, such recoveries are being sought in the context of class action suits involving thousands or tens of thousands of consumers. The potential liability for defendants who are unfortunate enough to be the targets of such suits could be staggering.
Where there are blatant violations of clear rules, such potential recoveries may be appropriate. But as noted above, many of the hottest issues in connection with Section 8 do not relate to unambiguous violations of clear statutory or regulatory standards, but involve situations where there are no or very murky regulatory provisions, or where technology or market conditions have blurred the distinctions between bona fide business behavior and technical violations of Section 8.
In this context, ALTA believes that two changes must be made to the penalty provisions of Section 8.
First, the criminal penalties contained in 8(d)(1) should be eliminated. Criminal penalties are a totally inappropriate sanction for the kind of economic behavior that might give rise to violations of Section 8. Moreover, because of the potential for criminal penalties HUD has been reluctant on certain occasions to provide needed regulatory advice or guidance on the meaning of the statute.
Second, allowing for recoveries that are fixed at three times the amount of the settlement service charge involved (and not merely three times the amount of the illegal referral fee or split) can become a hunting license for treble damage attorneys -- particularly when no showing of damages is required. This kind of liability provision encourages class action suits where recoveries are sought for technical violations and where the amount of potential liability (together with the cost of defending against the suit) can be greatly disproportionate to the seriousness of the violation, the "guilt" of the defendant, or the damages suffered by the plaintiffs.
ALTA urges that Section 8 be amended to provide a needed measure of discretion to the courts to determine the appropriate amount of recovery, up to a maximum of three times the amount of the charge for the settlement service. The amendment ought to specify certain factors and considerations that should be taken into account that would be relevant to the culpability of the defendant and the amount of liability that should attach to his or her actions. These factors might include whether the defendant had a reasonable basis to believe that his or her action or practice was not in violation of this section; whether the violation involved a business practice that was approved by or known to state regulatory authorities; whether the consumer was aware of the action or practice at the time he or she decided to purchase the settlement service; and the amount of damages, if any, actually suffered by the plaintiff.
Because RESPA does not require any showing of damages in order for consumers to
obtain recoveries, this amendment is needed so as to ensure that settlement service providers do
not become easy targets for class action lawyers seeking liability judgments that are
disproportionate to the guilt of the defendant or the wrong done to consumers.
We appreciate the Subcommittee's consideration of our views and are prepared to answer
any questions the members may have.
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