The Limits of RESPA: An Empirical Analysis of the Effects of Mortgage Cost Disclosures

Abstract

Congress passed the Real Estate Settlement Procedures Act (RESPA) in 1974 based upon documented instances of kickbacks between settlement service providers, unearned fees, and expensive and unnecessary closing costs paid by buyers and sellers of residential real estate. It opted for a disclosure strategy accompanied by few substantive prohibitions. Over the last thirty-five years, only a handful of studies attempted to measure the success of the mortgage loan disclosures. This article uses a uniquely rich database to examine this question.

We find evidence that closing costs increased since 1972 and fee types proliferated. The early cost estimate underestimated the final closing costs and projected cash to borrowers in a majority of cases, lending credence to complaints of baiting and switching. These observations call into question the efficacy of the RESPA disclosure scheme. Further, they point to the need for detailed data collection, routine monitoring of whether RESPA is meeting its legislative intent, and rigorous debate about whether RESPA’s goals can be achieved more effectively by another strategy.

This article is particularly timely because Congress instructed the new Bureau of Consumer Financial Protection to combine RESPA and related Truth in Lending Act disclosures into a single, integrated form over the next year.

Keywords: Mortgage, Disclosure, RESPA, Real Estate